Similarities and differences of entry strategies of automobile producers in Russia and China by the example of Volkswagen group

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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

MASTER THESIS

Topic: “Similarities and differences of entry strategies of automobile producers in Russia and China by the example of Volkswagen group”

Student

Sofijan Stanojevic

Research Advisor

Arkadiy Vershebenyuk

Moscow 2018

Table of content

Introduction

1. Foreign market entry strategies

1.1 Types of entry strategies

1.2 Specificity of entry strategies in emerging markets

1.3 Types of entry strategies used by automobile producers into Russian market

1.4 Types of entry strategies used by automobile producers into Chinese market

2. Volkswagen group foreign market entry

2.1 Volkswagen group: retrospective overview of the company establishment and the development of foreign expansion aspect

2.2 Volkswagen group entry strategy in Russia

2.3 Volkswagen group entry strategy in China

3. Entry strategy of automobile producers into Russian and Chinese markets

3.1 Similarities and differences of entry strategies of automobile producers into Russia and China

3.2 Comparison between findings in chapter 1 and 2

Conclusion

Bibliography

strategy automobile market producer

Introduction

In globalization conditions, foreign market entry has become one of the most crucial conditions for maintaining the leading positions in different spheres of businesses. If we can say that in European countries market entry can be conducted according with proven experiences, in countries with emerging markets (such as China and Russia) with relatively young observed industries the entry strategies are carrying a variative character, hindering the decision making process for foreign market entry type. However, the potentials of above-stated markets are so huge that companies are daring investing substantial sums, invading foreign markets fundamentally for the sake of future prospected incomes.

To launch a successful business in a new country the company needs a thought out entry strategy. Even an affordable product of high quality should not carry a prior success on a new market. Market researches on early stages are essential if it comes to foreign entrance, because the behavior, wills, purchasing power, political environment within the foreign country is special; good market research will not only determine how well company will enter the market, it will also ordain its future successful existence.

In this master thesis we will consider Russian and Chinese market entry by automobile producers, examining similarities and differences; special attention we will pay to Volkswagen Group market entry into Russia and China.

The relevance of the thesis is conditioned with the fact that in a modern world successful foreign market entry with further presence on it is one of the main factors of the development of company. In automobile industry itself, international market presence issues as well as market entrance are standing especially strong, because when choosing automobile the consumers are paying attention not only to price and to quality, but also to brand image with its history and country of production. That way, entering new markets enterprises are expanding the consumer pool, spreading the name internationally; that is why it is important to establish the corresponding form of foreign market entry, which would relate riskiness with the return.

The object of the master thesis - entry strategies.

The subject of the master thesis - entry strategies of automobile producers into Russia and China.

The goal of the master thesis is to define similarities and differences of the entry strategies used by the automobile producers into Russia and China.

In order to achieve the goal several tasks have been set:

1. Review the main foreign market entry strategies and identify their peculiarities.

2. Analyze the experiences of market entry by foreign automobile producers into Russia and China.

3. Explicitly examine Volkswagen Group foreign market entry policy development, as well as market entry case into Russia and China.

4. Uncover the differences or similarities in market entry of Volkswagen Group into Russia and China.

5. Compare paragraph (2) and (4).

6. Answer the reason for similarity or difference of market entry in Russia and China by automobile producers.

During the research special attention will be dedicated to the annual Volkswagen Group investment releases and documents such as annual report on the activity of the company in different countries and certain products. In terms of theory certain attention will be paid to the works of P. Kotler, Roland Helm, P. Buckley and J. Dunning; alongside with С. Lymbersky, M.C. Casson, A. Ross, R.W. Westerfield, J. Jaffe, Professor Alexander Roberts, Dr William Wallace, Dr. Peter Moles, as well as the reports of consulting firms KPMG, EY, and numerous of electronic statistic sources such as OECD.stat, statista.com etc.

Master thesis consists of introduction, main part and conclusion. Main part consists of three chapters.

In the first chapter we will consider the main possible options of foreign market entry, as well as their advantages and disadvantages. Within the first chapter we will also consider theory on practice - concern the way biggest automobile producers entered the markets of Russia and China, as well as try to systematize the phases of that very market entry.

The second chapter will be dedicated to rather narrow research of Volkswagen Group market entry in Russia and China, as well as the historic aspect of company becoming with the development of foreign market expansion aspect. We find it crucial for further conclusions to see how Volkswagen Group blends its strategy of foreign market entry in comparison with other global companies.

In the third conclusive chapter, we state the similarities and differences of entry strategies of automobile producers into Russia and China. Alongside with this we conduct a comparing contrast based on the deductive method carried out in first and second chapter, answering how the market entry of Volkswagen Group into Russia and China differs from the market entry performed by their main competitors and the market entry scheme into the observed markets as a whole.

In the conclusion, we will generalize the main results of the undertaken research.

1. Foreign market entry strategies

1.1 Types of entry strategies

The question of how to enter the foreign market usually occurs the companies that are to expand the borderlines of the business activity. As seen during the research, the question of market entry has been studied by many scientists from different point of views; in this research work it has been decided to consider the main approaches based on works of famous scholars such as P. Kotler, Roland Helm, P. Buckley and J. Dunning; С. Lymbersky, M. Casson, A. Ross, R.W. Westerfield, J. Jaffe, Professor Alexander Roberts, Dr William Wallace, Dr. Peter Moles, S. Spinelli Jr., R. Rosenberg, S. Birley etc. When the country-object of the expansion is well analyzed from the point of view of its macroeconomic indicators as well as its competitive environment etc., it is all about finding the suitable entry strategy. As such, there are several main types of global foreign market entry strategies: export strategy that separates into indirect and direct ones, joint ventures (that consists of licensing, franchising, contract manufacturing, management contracting and joint ownership), as well as direct investment (the sense on which lies in fundamental approach towards business organization abroad). (Philip Kоtler 1984)

Starting with the export strategy, the first thing to say is that that one is considered to be the most commonly used by foreign expansion oriented companies, and it splits as above said in indirect and direct export. The definition of indirect export means that the firm itself does not act as an exporter, on the contrary, that firm appeals to a third party within the country and only then that third party company (acting rather as intermediary) sells the goods to customers abroad. (Philip Kоtler 1984) That intermediary role played by third parties is quite useful for an original producer company due to the fact, that there is no need for searching the consumers, aligning the agreements and distributing the product itself; basically the producers are released of any need of action in the foreign country. (Andrei Panibratov 2017) Such type of entry strategy is least risky, because another company practically takes all the risks that are to appear on the foreign market. However, to apply that type of entry mode the original company is to look up for a very reliable distributors - as a rule it's a wholesale company that is usually buying a huge amount of products reselling them to a small ones. (Lymbersky, C. 2008) If we speak about direct export - in that case company acts as an exporter itself using the contract based delivery and trade representatives of its own; for that reason, unlike in indirect export, the establishment of export division is necessary as well as sales office, supply chain, legal department etc. Both of those types of export are applicable to companies that are in the beginning of starting their business activity in the region and are uncertain of the potential sales volume.

The next strategy is known as joint ventures - the one that embodies the cooperation of the parent company with the representatives on the local market. Following types of that partnership are licensing, franchising, contract manufacturing, management contracting and joint ownership. (Philip Kоtler 1984) The mentioned types of partnership are interconnected with the law of the concrete government both domestic and foreign one, so that the option for deciding which partnership to choose lies not only within the legislative norms concerning the foreign manufacturers and their products, but also in the level of the required control in actions of the local representatives.

Starting with the licensing it is to be said that according to it the original company gives to a local company the right to manufacture the product using the same unique technology as well as label from the moment of agreement. In this case such terms as licensee and licensor are to appear, where licensor initiates an agreement with a licensee on a foreign market, offering the last the abovementioned right to use the same trademark, patent, technology of production etc. with the payback in a form of royalties or substantial fees. (Robert Goldscheider, Alan H. Gordon 2006) The advantages of entering the market that way according to Philip Kotler lies mainly within the fact, that licensor enters the market with the minimum risk, whereas a licensee doesn't have a need to begin the business from scratch, receiving on the early stage the production experience, well-known brand name or a product. However, disadvantageous fact is that during the process of licensing, the original company does not receive the full supervision over the activity of the local company partner; more importantly, possible incomes are also to be received by licensee, where on the other hand, the licensee carries the probable upcoming losses. Licensee is also deprived of the right of participation in current developments. (Robert Goldscheider, Alan H. Gordon 2006)

The second similar to a previous joint venture type is franchising. It is considered to be rather comprehensive, than licensing and the agreement itself relates to a whole business, including all intellectual property rights and the development updates. (Stephen Spinelli Jr., Robert M. Rosenberg, Sue Birley 2004). Both of so far described joint venture types allow entering the foreign market with the very low investments. The one thing that stands for issue is the level of control over the business activity of foreign partners; apparently, when there is a need for it to be high the original company is to address to direct investment, which we will concern later on. Speaking of automobile industry, the two described joint venture types are to be witnessed in case of car service plants.

Contract manufacturing (CM) is the next joint venture type, main idea of which lies within contract agreement between the original company and a local manufacturer in the production of the goods on the foreign territory. (Philip Kоtler 1984) The weak point of entering the market with CM is once again the low level of production process control, which will definitely influence the income level later on. Nevertheless, CM embodies the appearance of the first grave move towards cooperation with the local manufacturers, or even their buyout, in case the partnership is productive; at the same time the original firm is released of the need of building any costly production facilities abroad, that will positively affect the risk level of entering the new market. Helm, Roland (1997) That type of joint venture is once again very common on practice for automobile production, because an order for a production of any part of the car abroad for assembling is usually a good way how companies are managing to influence the costs.

Subsequent joint venture type is called management contracting. It is dedicated rather to a service industry, because the essential idea lies in handing over the governing system of the company and the local company funds the necessary capital by itself. As before mentioned types of joint ventures, this type of entering the market is least risky too, however, it requires high experienced personnel at the place, in order to provide the proper organization. (Philip Kоtler 1984)

Joint ownership as the last type of strategy within joint venture scheme that introduces the creation of jointly owned (by both domestic and foreign investors) company. Variation like partial buyout of the already existing company is also possible. Such form of business alliance is usually connected with the shortage of i.e. finances to accomplish the plan. (Buckley, P. J., & Casson, M. C. 1998)

Structure of the market is unique in every country of the world, due to that a particular approach to every single one is extremely necessary. What can happen is the confrontation between the partners, based on different views of how to research and invest in certain market. If we consider Russia and China for example they might be close geographically but the principles of doing business, mentality and the overall interaction of the components on the market are quite distinct. Thus what might seem definite for one side, might look quite wrong in the eyes of, say, foreign partners; that brings us to the point where timing is to be questioned, because the above described fact complicates management solution, stretching it within the drastically changing international markets. (Jean-Franзois Huchet, Xavier Richet, Joel Ruet 2007)

Direct investment stands as the most risky and expensive, because the return on it is considered to be long. According to it the company invests in a creation of a new business from the base (i.e. building a new facility; buying interesting assets suitable the needs) not only for the economic returns with deep market penetration from that perspective, but also to have intergeographical influence and cover wider disseminated consumer base. (Eric Thun 2006) In terms of direct investment such definitions like greenfield and brownfield are also to be concerned. In our case both of those definitions relate to so-called industrial park formation (focused on automobile production), namely, greenfield - industrial park created on an undeveloped land plot, with no ready infrastructure, whereas brownfield means an old production plants modernization. (Anja Lorenzen 2007) Obviously a proper market research is vital for that type of entry strategy, as when the company enters the market with a bad note that directly affects the reputation on a global level; whereas when the direct investment is successful, the company acquires the highest control over the production process itself, as well as its distribution.

In order to properly enter the market investing directly, the company needs to assess the possibilities of market adaptation very prudently; to consider the structural and cultural differences first. (Buckley, P. J., Casson, M. C. 1998)

Once again, time factor is very important in business; stretched market ingoing process is very adverse. To enter the new market company can use its own resources, as well as those of the local company. However, entering the market solitary with own capital that includes massive construction, registration procedures according to the law of the foreign government, search for the clients etc. is quite time consuming. In order to avoid the business establishment from the ground, and to shorten the time gap with the above noted adaptation period, the entering market companies usually are either merging or acquiring the local companies; taking into account that this fact might impact the case of this study, it is important to consider the main definitions and kinds of those mergers and acquisitions (M&A). (Patrick A. Gaughan 2002).

Undoubtedly, the prevalence of M&A cases nowadays are indicating the globalization of the business. However, both of those investment strategies are considered quite risky, time consuming, and above all expensive. At the same time, the logic of the union of both foreign and local capital delivers the situation to a such breakpoint, where the scale of the business activity brings additional positive return not only to the foreign country in terms of spare workplaces etc., but to the original company as well in terms of international proliferation, brand dissemination. Speaking about automobile industry, M&A is the fastest way to start the production in the foreign country. (Manfred Grieger, Markus Lupa 2014).

“Merger is when two organizations agree to join together to achieve one's goals at the expense of other's resources in addition to the expense of the predecessor's resources. Mergers usually occur in two ways: absorption and consolidation. Merger through absorption is when an acquiring firm retains its name and identity and acquires all of the assets and liabilities of a target firm that ceases to exist as a separate firm, whereas merger through consolidation is when two or more companies have jointly agreed to terminate their own legal existence and then wish to create an entirely new business entity. Acquisition happens when an acquiring firm holds a significant ownership interest in the target firm by buying the target's assets or equity. It generally occurs through tender offers, public offers made by an acquiring firm to buy the equity of a target firm” (S.A. Ross, R.W. Westerfield, J. Jaffe 2003)

There are such types of M&A like horizontal, vertical and conglomerate:

· Horizontal M&A means the union of the companies from the same industry, more often those that make the same products and usually are competitors on the market. Evidently, deals like that find place because one of the players is trying to conquer the bigger market share. In order not to let newly formed company become a monopolist, in many countries of the world such deals are limited to some certain extent, defined by the antimonopoly legislation. (Professor Alexander Roberts, Dr William Wallace, Dr Peter Moles 2003)

· Vertical M&A means the union with the company (-ies) that is/are involved in the process of production as a whole. Companies are usually trying to cut as much costs as possible, even considering buying the company that will replace the most wasteful part of the production cycle. (Professor Alexander Roberts, Dr William Wallace, Dr Peter Moles 2003)

· Conglomerate M&A means the union of companies that do not correlate in terms of business sectors, rivalry or any other possible means but they do, however, split into three subtypes: 1) Product-diversification conglomerate - means union with the scope of diversification in terms of products in a more or less similar industries, thus the head company becomes more competitive 2) geographic-diversification conglomerate - merger of a companies that produce similar products in different countries; in this case the deal works on increasing the international presence and consumer base 3) Conglomerate merger - union of a companies, products of which do not correlate at any point. It is to be said that such deals are accomplished with an aim to diversify business activity and decrease the risks of operating in one industry. (Professor Alexander Roberts, Dr William Wallace, Dr Peter Moles 2003)

Every of the described method is applicable internationally. In case when time factor plays leading role and there is a need for building certain i.e. factory to produce physical goods, the fastest way of entering the market is usually accomplished using M&A deals. At the same time, the companies that are to enter the new market can use several strategies according to the need; feasibility depends on many factors such as financial condition of the company as well as several criteria's (Helm, Roland 1997):

1. Strategic purposes of foreign market entry;

2. Velocity of foreign market entry;

3. The amount of capital investment;

4. Distribution of capital investment and management between the countries;

5. Risk level;

6. Legal grounds for foreign business activity accomplishment;

7. Status of foreign market entering object.

1. Strategic purposes of foreign market entry. The long-term purpose of the company in the market economy is the growth of its value. From that considerations firm thrives to maximize its revenues conducting business actively; increasing its competitiveness. By entering the foreign market, companies set the goal to have an access to: resources, sales market, different types of preferences and discounts beneficial for business, economic effects (such as s synergetic, economies of scale etc.)

2. Velocity of foreign market entry. The time of foreign market entry decision making till the real appearance of the business abroad (in any form) may differ depending on the entry strategy chosen as said before. If in case of indirect export the foreign market entry is deliverable within a month, in other strategies like direct exports and direct investment the entry can stretch up to a year. Time factor can be crucial while choosing the strategy.

3. The amount of capital investment. While choosing the institutional type of presence on the foreign market long-term decisions are also to be considered; they may be capital-intensive both on domestic and foreign markets.

4. Distribution of capital investment and management between the countries. While choosing the strategy of foreign market entry, it is not only important to concern the required amount of capital investment, but the managerial issue too (operational and strategic management). Management affects the question of control of the business abroad. Schematically, according to Roland Helm it can be depicted as on graph 1 (Helm, Roland 1997)

Graph 1. Interdependence of market entry types and managerial/capital investments

5. Risk level. The risks that the entering companies are facing on the foreign markets are numerous. Among the most important ones are financial, currency, investment and production risks.

6. Legal grounds for foreign business activity accomplishment. The chosen strategy of foreign market entry defines further development process of the company in terms of its legal framework, required for business conduction. Companies can enter foreign markets and do business within sales or supply contract; services provision contract; contract agreement; license agreement; franchise agreement etc.

7. Status of foreign market entering object. Depending on the chosen strategy the subject that enters the foreign market can either be importer, contractual partner or investor.

1.2 Specificity of entry strategies in emerging markets

Due to the fact, that the object of the study will further concern two countries Russia and China - classified as the emerging market members, it is extremely important to emphasize the peculiarities, influencing entry strategies and overall business operation in that type of markets; entry strategy scheme in emerging market country may differ from the one in developed market, because the peculiarity of emerging markets implies the existence of institutional uncertainties. (Andrei Panibratov 2017)

Institutional uncertainty is a phenomenon of formal, legislative and regulatory base insufficiency (especially on early stages), required for business operation support. All together, they raise the risk level for international companies, increasing their costs on transactions in such markets. (Eric Harwit 1995) Western scholars claim that for successful business operation international companies are to assess risks and norms of local legislation in the emerging market countries, because the business conduction and contractual relation differs from ones existing in the developed markets. However, International companies can influence institutional uncertainties by the increase of foreign direct investment. Such influence mirrors in economy liberalization of the emerging market countries, meaning development of the regulatory and legislative base, necessary for international operation of the foreign companies. (Eric Thun 2006)

If we speak about market entering automobile producers, the above-mentioned economy liberalization in its sense is quite advantageous for them, obviously due to the formation of business attractive environment. At the same time local automobile producers do not benefit from that type of policy, requiring protection of their own interests before the international players, provoking governments of emerging market countries initiate rather proactive (i.e. Chinese case as seen in chapter 1.4) protectionism policy. However, in the period of active globalization processes in the world - economies liberalization is inevitable, as well as the growing presence of global automobile manufacturers in the countries of the emerging markets. (Jean-Franзois Huchet, Xavier Richet, Joel Ruet 2007) Especially important is also the scale of the foreign market involved company, as the business share of those global automobile companies is significant for the particular region, whereas in comparison with global turnover it is relatively modest.

Theoretical approach towards emerging market entry strategy justification in case of this research work can be viewed with the works of P. Buckley and J. Dunning. Based on Dunning's eclectic theory and derived OLI paradigm, it is claimed that company conducts the investment in foreign markets in regards with three crucial factors: 1) Ownership advantage, 2) Location advantage, 3) Internalization advantage. Theory considers internationalization issue from the point of view of investment reasonability. This theory could also answer the question why automobile producing giants are addressing the phase of own production within the foreign country so carefully and what role the emerging markets play. Initial sales through foreign dealer network, with the deepening concentration of main production units in several key countries: country of origin and countries with the highest sales market, alongside with low production costs - crucial criteria's tolerated by Chinese and Russian markets. Localization advantages decrease the logistic and transport costs of automobile producers; alongside with this there is also an advantage of tax preferences, offered to the foreign investors. The listed factors determine the advantages of owned by the automobile producers production plants on the territory of the emerging market country. As for the Chinese market specifically - it stands as the today leader among the emerging countries in terms of macroeconomic indicators (i.e. real GDP, GDP PPP etc.), amount of population (potential consumer base) and cheap labor - unconditionally stands as the potential leader in production localization scope. Steady development and legislative improvements held by the governments of emerging market countries are only stimulating the attraction of production localization by the international automobile producers, determining one extra factor in a form of custom duties on imported automobiles. (Keller, William W. and Thomas G. Rawski 2007) The application of the above-mentioned theory will be overviewed in the further research chapters as well as rather detailed in concluding chapter 3.2

1.3 Types of entry strategies used by automobile producers into Russian market

It is a fact that the importance of how effective companies elaborate their foreign business expansion has grown in today's condition of constantly changing system of international business operation. The term “business globalization” does not make sense if there is no sequential balanced foreign entry strategy. Speaking about countries like Russia, the one that has been sealed during USSR period for foreign business to come, it is quite interesting to know what strategies foreign automobile producing companies used to enter the market when there was such an opportunity, and how those strategies evolved within the time.

During the study we found out, that there are some several main foreign market entry strategies, used by automobile companies within a certain time span on the Russian market (Table 1).

Table 1 (consolidated by author based on empirical study)

1. In the beginning of 1990 the first shipment of foreign automobiles has been established, however, until the beginning of year 2000, official auto dealers were obliged to compete with the excess of cars, imported through the unofficial channels. On the early stage of presence of all foreign automobile producers, the situation was such that players usually preferred to conclude partner agreement with Russian distributors; that actually gave the companies the possibility to enter the market fast and avoid huge investments. Sales through the local intermediaries were running until the middle of 1990. (J. Diehlmann, Professor Dr. Joachim Haecker 2013)

2. With the development of the dealer's network and the required sale goals hit, the majority of foreign automobile producers started rejecting their partnership with the local distributors, reorienting towards opening representative offices or even own distributor units responsible for imports. The reason for that was not only the will to earn more but the fact that with growing demand, foreign players were interested in widening their presence within Russia - due to that it is important to interact with the market directly. This so to call subsidiary import scheme was common for majority of foreign automobile producing companies in Russia, excluding Mitsubishi - the one that keeps exporting through local partner “ROLF”. Also curious is the fact that part of automobile producers keep selling on the market only imported cars, however, even those that have production based in Russia are forced to import those models, that are not produced locally in order to cover the need of particular customers. The number of imported cars sold is around 30%, that percent in the structure is prospected to be stable due to the fact, that the models assembled in Russia are unable to cover the demand and at the same time the low demand on a specific range of automobiles make their assembly and production in Russia unprofitable. (Andrei Panibratov 2017)

3. Speaking of contract manufacturing (abbreviated CM / or contract assembly in our case), closer to year 1996-1997, alongside with the import enlargement, several automobile producers started making movements towards the organization of assembling facilities in Russia (S. Radosevic, Bert M. Sadowski 2004) Back in the days, BMW and KIA started the work on a huge assembling project that took place in Kaliningrad on Avtotor factory. The agreements were attractive because Kaliningrad was appointed as a special economic zone from 1996. That allowed foreign auto producers to import almost complete vehicle set free of duty, using the service of low difficulty level assembling (called SKD - Semi knocked down). TagGAZ factory (designed according to Daewoo Motors technology) was the second example for contract assembling, where Daewoo cars were assembled based on the license agreement. It is also to say that older versions of Hyundai are until now being assembled there from year 2001, however, today Hyundai already has the assemble facility of its own for newer versions. Another rather later example of Russian assembling plant is the company called “Sollers”, that since 2005 assembles SsangYong SUV's and LCV FIAT; alongside with that, “Sollers” acts not only as the assembly plant, but as the main partner of SsangYong in Russian Federation in terms of car service support and dealers net developer. Company also had same contract agreement with FIAT until year 2011. As of later years from 2011-2013, foreign automobile producers once again addressed towards CM with the assembling on a local plant: huge agreement between GAZ and Volkswagen Group Rus with the arrangement on certain models to be assembled in amount of 110 thousand pieces a year on GAZ's plants. (S. Radosevic, Bert M. Sadowski 2004) The contract was quite attractive for Volkswagen due to the fact they had an option to increase production capacity with reasonable investments in a short period of time, without a need to search for qualified staff. Same agreement with GAZ on assembling was concluded by General Motors and Daimler AG in 2013. According to the outline above, we can conclude what companies went for choosing CM as the model of foreign market entry.

4. As mentioned above the next step of the entry allotted to joint ventures with the local manufacturers. One of the first was managed in 1995 between ELAZ-General Motors, where from 1996 companies established the assembling of Chevrolet SUV's (Blazer), it is to say that the assembled cars were characterized as the low quality ones and have as the matter of fact damaged the reputation of GM. As a result the company had to cancel the assemble organization due to the violations of the assemble process itself and a couple of trials later on. (S. Radosevic, Bert M. Sadowski 2004) The next case is the creation of Nizhegorod Motors in 1997, joint venture between FIAT and GAZ, however, after years of negotiations, the decrease of the volume of investments from almost 900 mil. of dollars to almost 500 mil. of dollars, the contract was cancelled; the reason for that was a default in 1998, that acted as an indicator for Italian investors to exit the market. At the same time as said before FIAT decided to come back to Russia, finding a new way of partnership with “Sollers” company. The first successful joint venture, that is active since 2001, is General Motors - Avtovaz. Together the companies created affordable and comfortable Chevrolet Niva all road, the one that according to International Organization of Motor Vehicle Manufacturers is among top ten most selling cars in Russia from 2004-2011. (International Organization of Motor Vehicle Manufacturers 2018) The great example of both way profiting alliance: Russian part received the modern technology and the American - a solid market share. GM-Avtovaz joint venture is considered to be the only successful example in passenger car segment from 2001 till 2011. However, “Sollers” company concluded agreement on joint venture “Sollers-bussan” with Toyota on production of Land Cruiser Prado as well as two others JV “Ford Sollers Holding” and JV Mazda-Sollers; all of them became active since 2011. Though the first partnership “Sollers-bussan” was terminated in late 2015, being defined as not economically practical anymore. As we can see numerous of foreign automobile producers are interested in partnership with “Sollers” company - they are positioned as the dynamically developing company on the market, that seeks forward to the leading positions. Apart from passenger automobile segment, they also had a successful experience in LCV sector in JV with Isuzu. Speaking of LCV, another memorable event as of 2011 was the JV of Daimler-KAMAZ. According to the interview with the representatives of automobile industries in Russia we have found out that in spite of all the advantages of JV (such as fast access to the market, investment retrenchment, ability to benefit from complementary competences) it does not appeal as the prevalent between foreign and local companies in automobile industry in Russia. Considering the fact that overall the amount of direct investment prevails, it is probable that the issue lies within the bilateral cooperative work with local partners, meaning, that the aims of both companies might differ. Russian parties are not attractive for JV because they are not interested in long term partnership; another issue is low quality control resulting in bad products. (Andrei Panibratov 2017)

One of the first own assembly plants in Russia was organized by Renault with the administration of Moscow in 1998 called “Avtoframos” (in 2012 fully bought out by Renault and since 2014 renamed to “Renault Russia”). After that, another plant was started by Ford in 2002 - de facto the first fully owned by foreign part production in Russia. Those two were the first to see the potential in growth of the Russian market, deciding to organize the local assembly plants, in contrast to increasing the imports. Nevertheless, until 2005 the volume of their production was very small, comparing to domestic automobile producers.

The point of drastic change that made the majority of foreign automobile producers reorient towards opening the plants of their own was the adoption of the resolution of the Russian Government (dated on 29 march 2005 numbered 166) on the car components imported to the Russian Federation. The new resolution introduced term “industrial assembly” that dictated from now on active conditions on concluding the investment agreements in the industry; at the same time, it has been decided to increase customs duties on car imports (up to 35%). As for the “industrial assembly” novelty: it considered a gradual transit towards CKD - complete knock-down (instead of SKD semi knock-down), letting the companies import auto components with discounted customs rates (0-5%), in return, foreign companies were to increase the production localization (narrow meaning of that - the % of the Russian components in the produced cars; broad meaning - the salaries, water, electricity etc.). Gradual transit according to the agreement means that during the following 7 years the auto producers are responsible for creating a production that would include welding, coloring, assembling in a volume not less than 25 thousand cars a year, and to decrease the list of imported car components by 30%. Influencing the industry by legislation, the measure mirrored in mass plant foundation of such companies like General Motors in 2006, Toyota and Volkswagen in 2007, Nissan in 2009, Hyundai in 2010. In LCV segment companies Scania, Volvo, Mercedes-Benz Trucks Vostok (JV with KAMAZ). But it would be incorrect to say that only due to legislative means the production of automobiles was reasonable. Another motive would presumably be the distance to the market, that allows to know the customer better and adopt to changes faster.

5. The main target of the resolution numbered 166 was to increase the localization level, in order to affect the added value of the automobile. That automatically would involve qualitative development of the industry of Russian auto parts. (Annual report 2015 Volkswagen AG RUS 2018) However, on practice the situation was different, because the majority of factories of the foreign automobile producers were simply using the duty preference on auto parts imports, without significant increase in localization level (those very local auto components). Due to that in the end of year 2010 some corrections were added in the resolution number 166, namely, the condition to increase the production from previous 25 thousand cars to threshold 300-350 thousands a year, as well as localization of the production by 60% during the six year from the date of concluding the agreement. The document considered even higher preferences in terms of customs duties on auto components. This has been done in order to provoke auto producers localize the main car components - engine and transmission. The change of the resolution entailed the shifts within the industry, because in order to hit the proposed production norms companies started uniting in a production groups, signing strategic partnership agreements: contract assembly agreement on GAZ plant of Volkswagen and Skoda (being a member of group of companies) and JV Ford-Sollers. Another consolidation example is the alliance of Renault-Nissan-AvtoVAZ, where already today Nissan company has the control stake. However, after Russia joined World Trade organization, the discussions about resolutions on the Russian governmental level on any further conclusions of “industrial assembly” stopped.

To conclude all the above described entry strategies of automobile producers in Russia in their evolution aspect, lets briefly summaries the most remarkable ones, used by the leaders of the industry: General Motors, Hyundai - KIA alliance, Renault-Nissan-AvtoVAZ alliance and JV Ford-Sollers. Beginning with the first one - GM takes the most consolidative position, so to say, in terms of combination of the local strategies: JV General Motors-AvtoVAZ; own production General Motors-Auto in Leningrad province; contract manufacturing (Semi knocked down) on Avtotor plant and contract manufacturing (Complete knock-down) on GAZ plant. That way, General motors diversifies the production capacities and the volumes of the production in Russia.

The following representative in the industry, that consists of alliance and follows the same ideology is Hyundai-KIA (as of 2017 Kia Rio takes the first place in sales in the region among other competitors, 4-5 position is after models of Hyundai Solaris and Creta accordingly). From year 1996 KIA assembles the cars on Avtotor plant, however, from 2005 to 2009 the company conducted a parallel assembling of the cars on the licensed grounds on IzhAVTO plant. Automobiles of Hyundai Company are made on TagAZ plant as said before since 2001. In 2010 Hyundai launched plant of their own in Leningrad province, at the same time assembling on TagAZ plant was not stopped. Interesting is the fact that IzhAVTO and TagAZ plants till the end of 2009 were oriented by South Korean auto producers for production of the old models as well. Considering the fact that their release was not suspended through the years, it is probable that the old versions of the cars were well demanded and they did bring some additional profits. After shutting the production on IzhAVTO in 2010, KIA launched the production of the model RIO on the plant of Hyundai - filling their plants production capacity, and supporting the partner.

Renault-Nissan-AvtoVAZ another strategic partnership, the sense of which lies with two-sided benefit: on the one hand Renault and Nissan are getting the access to the portion of strategically important market, and on the other AvtoVAZ gets the modern technologies and European quality control standards. Herewith the partnership occurs in many different spheres from scientific researches till the very after sale service - that all together gives a synergetic influence that brings both sides the desired target. The move towards the partnership with AvtoVAZ is considered to be very wise, because its seen to be the leader on the Russian market, that produces cars in a demanded budget segment; being a major shareholder of AvtoVAZ - that's the other reason for Renaults interest in the partnership and a second certain move towards market entry after “Avtofarmos” foundation

Ford company same as Renault was the first to enter Russia with the establishment of own production. The further development Ford decided to conduct together with the strong local partner - “Sollers” company. It is a Joint Venture and it is also very diverse, as it is in a previous case: beginning from the making an accent on scientific researches, the new approach and adopted for the region products of which would go along with the global strategy of Ford, ending with joint service and distributors net. (S. Radosevic, Bert M. Sadowski 2004)

That way, the picture of intension of foreign automobile producers to foothold the position on the Russian market, entering it with every step rather deep becomes clear. They take an initiative position, thriving to expand their production capacities, giving the new technologies, experiences in return, and developing the regional market to a new level. It is not enough to have own assembling plants - to succeed and take a prevalent competitive position on the market it is obviously necessary to push extensive partnership with the players on it.

1.4 Types of entry strategies used by automobile producers into Chinese market

Unlike in Russia, Chinese automobile industry is relatively young - its birth is dated with July 1956 with the first constructed FAW (First Automobile Works) factory in Changchun, that would in the beginning mainly produce LCV's, based on Russian models. (Keller, William W. and Thomas G. Rawski 2007) Overall, the main role in Chinese automobile industry becoming was devoted to the closest strategic ally USSR; FAW factory was actually constructed under strict governance of soviet experts. Further going in state expansion, mirrored in additional factory constructions and adoption of passenger car production, brought auto industry in China to the point, where the experience in it all of a sudden acquired an entrenched manner, without any need for council of Russian experts - so that in 1965 the party of Mao Zedong rejected further assistance of the soviet allies. As a result, due to ideological reasons, the production of passenger cars completely stopped, and the production capacities of factories were from that point rather service oriented for a long time.

The point of drastic change happened in 1978 under the governance of Chinese Communist Party headed by Deng Xiaoping: the series of structural reforms named “Chinese economic reform”, focused on revival of the Chinese economy. (Jean-Franзois Huchet, Xavier Richet, Joel Ruet 2007) The solution to solve the economic demise (in example ineffective use of production capacities etc.) lied within protectionism measures and the engagement of foreign investment. In our case it is creating such conditions for the foreign automobile producers, that would prove the reasonability of creating the joint ventures (alas with the local companies only). Due to the fact that no average inhabitant in China was allowed to have private automobile vehicle before the series of openness reforms, the first movements towards market entry were held in the middle of 1980, when mass media resources announced the first usual citizen - owner of private auto, even though officially it was allowed from the beginning of year 2000, closer to the year of inclusion of China in the World Trade Organization; that all together positively mirrored on the boomed production (diagram 1) (OECD.stat 2018)

Diagram 1

The foreign auto producers were offered, on the one hand, high customs duties on the imported products (that in some cases would reach up to 200%), and on the other hand - vast consumer base with ridiculously cheap labor in excess. Other condition was the limit of imported automobiles in amount 30 thousand of cars per year. The newly formed companies were free from paying certain taxes from 3-5 years; however, the necessary condition was the share holding of the Chinese partner not less than 50%; that way the level of government involvement and control was visible. The level of production localization was set to be 40% during the first year of operation, up to 80% during the following three years. However, the above-interpreted conditions were not one side dictated; in return, foreign automobile producers would propose their requirements limiting the exports of vehicles, produced in China - thus international producer's intension was to hold the inflow of Chinese automobile units on foreign markets, due to their low price and potential attractiveness for western world. (Eric Thun 2006)

Strategies of foreign investors while entering the market were principally different in terms of participation share. (Eric Harwit 1995) Some of them, in example the pioneers of entering the Chinese market - Volkswagen, managed to conclude equal 50-50 share ownership. Creating in 1984 together with local company Shanghai Automotive Industry Group the first joint venture called Shanghai-Volkswagen (known nowadays as SAIC Volkswagen Automotive), and then the second JV called FAW-Volkswagen in 1990. That gave the company the possibility to have the influence on the operation of the company. The first model of the car sold Volkswagen Santana was so popular, that it even became a national automobile. Another example of French giant Peugeot, and newly formed JV “Guanzhou-Peugeot” in 1985 in contrast had only 25% of shares owned - practically deprived of the possibility to hold on to the own corporate strategy on the Chinese market, as well as make the local partner follow it. Due to series of cultural conflicts and profit losses Peugeot decided to sell their stake in JV in march 1997 - as a result Guanzhou plant managed another venture later on with Honda, whereas Peugeot brand entered the market once again jointly with Dongfeng through sister PSA Peugeot Citroen in 2002. Almost in every case government influenced the development of business within the industry through the regional regulations as well as credit policy etc. as shown in Table 2. (Jean-Franзois Huchet, Xavier Richet, Joel Ruet 2007)