Outline Justify Why Perodua Should Enter Chinese Market Economics Essay

Perodua, as a Malaysian automobile manufacturing company, is well-positioned to enter the Chinese auto market given China’s strong trading relations with Asian nations (just under 50% of China’s total foreign trade partners are Asian) (Tian, 2007: 6). Moreover, China’s fast-paced economic growth over the last twenty-five years and its average annual GDP growth rate of approximately 9% (Tian, 2007, 1), despite a slight fall to 8.7% in 2009 (US-China Business Council, 2010a), make it attractive to Perodua which is invariably attempting to profit off rising average wages, quality of life and new Chinese consumerism. In fact, “relatively high economic growth rates … still prevail in several developing countries (e.g. China, India)” (UNCTAD, 2009: 5), making China an attractive prospect for Perodua given its resistance to the recent economic downturn (UNCTAD, 2009: 24). FDI inflows into the “world’s fastest growing economy” increased by 8.7% in January 2010 (as opposed to the previous year), reaching US$8.2 billion, though this is lower than the US$12.2 billion of December 2009 (Euromonitor International, 2010: 3). However, FDI in the manufacturing sector fell by 11.6% (Euromonitor International, 2010: 3). Though this at first seems disheartening for an auto manufacturer such as Perodua, perhaps this FDI fall presents an opportunity for Perodua to move at this time when FDI inflows are lower than before, perhaps representing fewer competitors or less investment rivalry, as reflected in the sharp (over 500) fall of FDI contracts signed (see Chart 1, below).

From: Euromonitor International, 2010: 3

However, despite this, it comes as no surprise that the “list of the 15 most favoured investment locations continues to be topped by China, followed by the United States [and] India” (UNCTAD, 2009: 38), especially for manufacturing TNCs over the coming three years according to a survey by the Japan Bank for International Cooperation, given that China and these developing nations provide “long-term potential growth of their markets and, to a lesser extent, availability of cheap labour” (UNCTAD, 2009: 38). This is in line with Perodua, whose Malaysian cheap labour force mitigates their potential gain from FDI in China but whose driving motivation is the potential growth in China’s auto market and specifically the low-end, budget-priced vehicle lines for the emerging middle/ lower-middle class. This rise in average incomes and therefore potential customers is reflected in China’s GDP per capita of based on purchasing-power-parity (PPP) (in current international dollars) of 7,239.912 in 2010, up from 6,567.002 in 2009 (International Monetary Fund, 2010). When compared to India, for instance, whose same GDP is estimated at 3,176.154 in 2010, up from 2,940.736 in 2009 (International Monetary Fund, 2010), it is clear to see that China’s economic activity, growth rate and standard of living are rising at a greater rate to this rival developing nations. Thus, while China represented approximately 12.524% of the world’s total GDP (based on PPP) in 2009, India only represented 5.059% (International Monetary Fund, 2010). This sets the precedent for the emerging world’s rise in its share of global GDP (PPP), which is expected to reach 51% in 2014, mirrored in last years’ rise in global consumption by emerging markets which has reached 34% versus the United States’ 27% (The Economist, 2010b). As such, China’s comparatively high GDP (PPP) per capita rise is reflected in the 12.4% rise in Chinese urban consumer spending (accounting for over two-thirds of China’s consumer expenditure) in December 2009 (Euromonitor International, 2010: 5). Furthermore, China’s comparatively cheaper manufacturing labour costs, approximately 1,169 RMB/ month (today $171), than Malaysia, 631 RM/month (today $198) and the absence of Malaysia’s 48 hour work-week cap makes China even more attractive for economies of scale in production (Worldsalaries.org, 2005; MIDA.gov.my, 2005). Note that I have used 2005 figures for unskilled manufacturing wages in both nations (semi-skilled are both respectively slightly higher) and though these are likely to have risen the disparity should persist. Thus, China as a nation, clearly presents the FDI, economic and population factors that are conducive to Perodua’s potential success but what about the Chinese auto market?

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In 2009, China introduced “a series of measures, including tax cuts for automobile and property purchases as well as subsidies” to stimulate domestic consumption (Euromonitor International, 2010: 5). These measures are reported to have boosted auto sales by “52.9% year-on-year to 10.3 million units in 2009, with sales surging 88.7% in December from a year earlier” (Euromonitor International, 2010: 5). As Chart 4 (below) shows, the retail sales of consumer goods in China, overall and in urban areas, was at an all-time high by the end of 2009.

From: Euromonitor International, 2010: 5-6

This is a good presage for Perodua, whose strategy relies on taking advantage of this new urban wealth, the subsequent rise in consumerism and the consequent desire for low-cost vehicles from “undemanding, cost-conscious consumers” (The Economist, 2006). In fact, in 2009, the per capita disposable income of Urban Residents in China is estimated to have been 17,175 RMB (a 9.8% year-on-year rise) and their per capita consumption expenditure was estimated at 12,265 RMB (a 10.1% year-on-year rise) (National Bureau of Statistics of China, 2010). However, Perodua faces stiff competition from local brands such as BYD, Chery, Great Wall Motor and Shuanghuan. These local brands are all able to produce and sell vehicles at costs far lower than those of foreign entrants as shown by the Shanghai Maple which sols for only $6,500 in 2006 (Stanford GSB, 2007: 2, The Economist, 2006). This estimated 10,000 RMB fall in prices per year invariably entails a compromise of quality for cost advantages with faults per 100 cars made in China rising to 338 in 2006 (The Economist, 2006). This, however, provides Perodua with an opening to compete on price and quality with local rivals as “perceived brand foreignness (PBF)” (Zhou et al., 2009: 1) could work in their favour with foreign brands being perceived as being of higher quality and social status as studies in other Chinese markets have attested (Zhou et al., 2009: 2). However, as Zhou et al. point out, Chinese markets have faced a “growing backlash” against foreign brands as the distinction between local and foreign brands has grown less and less clear, with local perceptions of poor quality transferring to similar-looking foreign rivals (2006, 3), especially in China where “80% of the world’s fake goods are thought to be produced” (The Economist, 2010a). In fact, several foreign auto companies have faced Chinese manufacturer imitations over the last five years with Toyota unsuccessfully filing a patent dispute against Shuanghuan Auto, Fiat a lawsuit against Great Wall Motor over its ‘Panda’ design and General Motors (GM) a lawsuit against Chery Automobile (Lam and Tsui, 2009: 533). Regardless, if Perodua markets itself as low-cost, high quality then it can essentially fill the existing quality void in the Chinese auto low-cost auto market. Moreover, the fact that Perodua’s MYVI (for instance) in Malaysia and the UK sells for the equivalent of between $12, 000 and $10,000 USD places it in a more premium cost bracket than local Chinese competitors, although economies of scale could drive down Perodua’s unit costs and therefore selling price to rival those of local manufacturers at their same higher quality (Perodua Malaysia and UK, 2010). However, Perodua could potentially fight on equal price footing with Chinese manufacturers as its ViVA 660 BX sells for as low as $7,800 USD equivalent and potentially even lower if locally produced with cheaper labour (Perodua.com.my, 2010). As such, the state of China’s economy, its greater consumerism, retail spending and GDP per capita (PPP) than India, and the state of its auto market and the future potential for a low-cost, high quality foreign vehicle make the Chinese auto market an attractive market to enter despite the fierce local competition, whose weakness is the quality-price trade-off.

Appropriate Entry (or Expansion) Strategy and Justify Recommendations

There are several factors to consider when determining an appropriate foreign market entry strategy including, “[l]ocation costs, internalization factors, financial variables, cultural factors, such as trust and psychic distance, market structure and competitive strategy, adaptation costs (to the local environment), and the cost of doing business abroad” (Buckley and Casson, 2000: 66). However, the first thing for Perodua to consider when entering the Chinese auto market is China’s strict FDI policy for car manufacturers. China requires foreign auto manufacturers seeking to enter China to enter into joint ventures (JVs) with domestic automobile companies (Long, 2005:334). Moreover said foreign investors (or foreign investment enterprises, FIEs) in such JVs are to own “no more than 50 percent in total shares and [must] … transfer technology to their domestic partners” (Long, 2005:334). As such, it would have been advantageous for Perodua to utilize its links with its pre-established part-owner, Daihatsu, to enter into the Chinese auto market, integrating its production with that of the existing company’s JV in China. However, in January 2010, Daihatsu announced the dissolving of its JV with FAW Jilin Automobile Co., Ltd. (FAW Jilin Auto), the FAW Daihatsu (Jilin) Body Parts Co., Ltd (FDJB) and transfer its 50% stake to FAW Jilin Auto (Daihatsu.com). This closes this FDI integration route for Perodua to unite with Daihatsu but the potential to ally with former JV partner FAW, a leading Chinese auto manufacturer, still remains (FAW.com, 2010).

The current dominance of Equity Joint Ventures (EJVs) as a type of Chinese FDI, with 23,435 in 2009, despite the high number of Wholly Foreign-Owned Enterprises (WFOEs), with 18,741 in 2009, signals that there is perhaps more to Chinese JVs than just government policy (US-China Business Council, 2010b). This is because Perodua, though Asian, lacks knowledge of the Chinese auto market, manufacturing and operations, and therefore a JV with a local auto company is more than just a legal requirement, it provides better management, better decision making, a lower (shared) risk, and a local knowledge of culture and operations which are indispensable to a new entrant (Devonshire-Ellis, 2010; Buckley and Casson, 2000: 68). All of these coupled with the sharing of operational responsibilities between partners provides the impetus for Perodua and the local partner, in this case potentially FAW, to support each others’ activities with Perodua essentially taking the place of Daihatsu (Devonshire-Ellis, 2010). Economically this JV also makes sense, as Perodua could potentially acquire or take advantage of what was Daihatsu and FAW’s manufacturing site in Jilin City, China, making this a Brownfield rather than a Greenfield investment, reducing set-up costs as Perodua would benefit from the existing facilities and infrastructure (Ietto-Gillies, 2005: 22-3). The fact that FAW Jilin continues to have a technology licensing agreement with Daihatsu means the business partners are still on good terms and such a guanxi (interpersonal relationships) could facilitate a potential JV with Perodua given its importance to business relations in China (Su and Littlefield, 2001: 208). FAW is no stranger to Sino-foreign joint ventures either as they currently have JVs with Volkswager and Toyota (FAW.com, 2010). Though Buckley and Casson see acquisitions a “‘quick fix’ route to globalization” they also acknowledge the role of such cooperative arrangements in international joint ventures (IJVs) when “barriers to full integration”, in this case Chinese policy requiring a JV, prevent Perodua from establishing a WFOE (2000: 61-2, 65). This would allow Perodua to engage in production activities in China, avoiding paying duties on the importing of parts or vehicles, despite new rulings on China’s ‘Measures Affecting Imports of Automobile Parts’ (Cooney, 2006: 22; WTO, 2010). The distribution activities could be left to FAW’s existing network in China. In fact, with the relaxation of China’s former policy favouring local content requirements (LCR), Perodua would enjoy greater flexibility with its choice to locally source or import certain auto parts from Malaysia (Qui & Tao, 2001: 101-102; China.org.cn, 2008). LCR does not necessarily have to be a hindrance for Perodua, however, as potential JV partner’s FDJB currently focus on auto parts manufacturing, allowing Perodua to potentially source parts locally from them, permitting cheaper production costs (cost per unit will be lower) and therefore lower retail prices to rival cheap domestic manufacturers while avoiding potential taxes on imports and the transport costs of exporting (Buckley and Casson, 2000: 68). This is practical and realistic for Perodua’s manufacturing activities as FDJB’s body assembly and parts plant in Jilin City is operating under-capacity, with actual production output at 9,540 sets of parts from May 2007 to July 2009 being well below their production capacity of 30,000 sets of parts per year (Daihatsu.com, 2010). Even if Perodua were unable to acquire Daihatsu’s former production site, such advantageous infrastructure and the potential location, experience (local knowledge), cost, production and existing distribution network benefits posed by forming a JV with FAW would justify Greenfield FDI in production facilities in preferably their Jilin production base but if not one of their many others in China (FAW.com, 2010).

In conclusion, Perodua, as a hugely successful Malaysian compact car manufacturer and a company which is only beginning to internationalize its small and cheap product range, it could stand to benefit from internationalization in China. The Chinese market’s growth rate, the domestic consumption and retail-concerned, undiscerning and price-oriented customers with larger disposable incomes than ever before, the cheap labour and the great potential for finding a willing JV partner make the PRC an ideal location for Perodua’s international expansion into a new auto market. Despite the outlining and justification of Perodua’s entry into the Chinese auto-market, issues of branding, marketing and the financial state of Perodua are overlooked for the hypothetical sake of our strictly-FDI and expansion-oriented analysis. If Perodua were actually to go ahead with such internationalisation in China then these issues would invariably have to be considered before any investments are made and a JV is formed. Regardless, if Perodua were to adopt this entry strategy and the right alliances were successfully formed with the desired outcomes then internationalisation in China could prove to be more than just a market-seeking venture but a long-term strategic base for Perodua’s future internationalisation.