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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATINOAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAMM

MASTER THESIS

making automotive companies from emerging countries more competitive: the case of china's automobile industry

Student

Kristina Pogosbekyan

Research advisor

Olga Klochko

Ph. D. Professor

Moscow, 2016



• Table of contents
• INTRODUCTION
• CHAPTER I. THEORETICAL ASPECTS OF AUTOMOTIVE COMPANIES' COMPETITIVENESS IN EMERGING COUNTRIES
• 1.1 concept, theories and modern issues of competitiveness
• 1.2 FACTORS OF INTERNATIONAL COMPETITIVENESS FOR AUTOMOTIVE COMPANIES
• 1.3 specific factors influencing international competitiveness in emerging countries
• CHAPTER II. CREATION OF COMPETITIVE EXPORT-ORIENTED AUTOMOTIVE COMPANIES IN EMERGING COUNTRIES: THE CASE OF THE CHINESE COMPANY SAIC
• 2.1 chinese automotive market: development and dynamics
• 2.2 SHANGHAI AUTOMOTIVE INDUSTRY CORPORATION: DETERMINANTS OF SUCCESS
• CHAPTER III. APPLICATION OF THE CHINESE EXPERIENCE ON THE RUSSIAN AUTOMOTIVE INDUSTRY
• 3.1 russian automotive industry overview
• 3.2 problems of automotive clusters in Russia on the case of the sollers company
• 3.3 RECOMMENDATIONS FOR RUSSIAN AUTOMOTIVE COMPANY SOLLERS
• CONCLUSION
• REFERENCES


INTRODUCTION

Currently, in a globalized economy, the question of creating and sustaining competitive advantage is of particular importance. It should be noted that the principles of competitive strategy on the domestic and foreign markets largely coincide. In addition, according to the founder of the modern theory of competition - Michael Porter, eventually, the leaders on the market are firms, not the countries. So, in order to understand the role of a particular country in this process, one should pay attention to the way the individual firm creates and retains a competitive advantage.

The automotive industry is one of the most successfully developing sectors of the Chinese economy. It is hard to imagine, but almost 50 years ago the production of cars was only a few thousand machines. Today, China produces millions of cars per year and rank one of the leading automotive countries in the world.

The key question is still how China could not only become the largest demanding auto markets in the world, but also how it became global in such a short period of its development. The experience of China is very important, and using the main governmental and managerial strategies, one could provide the recommendation for less successful emerging markets, like Russia, how to obtain the international level of recognition and enter the global markets.

So the key purpose of the master thesis is to determine the ways to increase the competitiveness of the automotive companies in emerging countries on the example of the well-known Russian company Sollers. In order to deal with the mentioned purpose, we should consider several objectives of the study:

· to explore the definition of competitiveness and describe the modern issues arising through globalization by generalizing contemporary theoretical and empirical research papers

· to determine the factors specific to the competitiveness of the automotive companies and analyze the automotive industry in different emerging markets through the given framework

· to identify the main factors of Chinese automotive company's success on the global market and reveal the relationship between government regulation and management of the company

· to apply the Chinese experience on a Russian automotive company

Hence, the object of the study is the automotive industry in emerging countries, while the subject covers different ways to improve the competitiveness of companies in emerging countries. It is of no secret to anyone, that the government contributed a lot to the success of the fast-developing export-oriented automotive industry in China. However, little is known about the internal efforts of the companies in this tough fight for competitiveness and global recognition.

This leads to the hypothesis of the paper, which states that export-oriented automotive industry in China was not only achieved by the governmental support, but also by the efforts of the internal management strategies in the companies.

The academic novelty of the paper consists in deterring the factors of the competitiveness of automotive companies not only by the means of the government support, but also by the efforts of the companies and, further application to one of the Russian well-known car manufacturer.

The study can be practically applicable because of the following reasons:

· the rapid pace of technological innovation and the dissemination of information, raising the standard of living around the world, reducing trade barriers, which was most notably in the automotive industry.

· the importance of emerging markets in many industries, especially automotive, became apparent

Due to the popularity and vastness of the topic, plenty of different sources were explored. First of all, as it was essential to define the certain theoretical background of international competitiveness, a set of research papers by such scholars as Barragan (2005), Bell (2005), Porter (1990), and Warmers(2009) was examined. Afterwards, due to necessity of automotive companies analytics, different foreign materials provided by consulting firms, such as PWC and McKinsey, were used. Moreover, in order to cover the case studies of the given companies, we browsed the companies' public documents, such as the annual reports, the strategy of development etc. Moreover, different online resources were used, because the media and news agencies on the Internet broadly observe the most part of companies' events and news.

Concerning the structure of the paper, the first part is dedicated to the previous works about competitiveness, determining main factors in automotive industry and analyzing the specifics of emerging countries export-oriented production development. The second chapter is about the Chinese automotive industry with a more deep insight into the case of the company. The final chapter is the overview of the Russian automotive market conditions and application of the observed factors and patterns on a given company.

Keywords: competitiveness, automotive industry, cluster, emerging countries, export-oriented production



CHAPTER 1. Theoretical aspects of automotive companies' competitiveness in emerging countries

1.1 Concept, theories and modern issues of competitiveness

There are plenty of definitions regarding competitiveness at different levels. The main point is that competitiveness is the ability of a firm, sector or a country to outperform its competitors using advantages.

Competitiveness becomes of a more complex issue under the pressure of globalization, where the importance of MNCs and integration cannot be neglected.

Thomas Friedman Thomas Friedman «The World is Flat». Retrieved on February 10, from

http://www.sdcexec.com/article/10289694/impact-of-globalization-in-creating-sustainable-competitive-advantage noted that companies from developing countries, like China and India, spread and become part of a global network. The importance of the companies' supply chains was neglected some time ago, because the base of competition was the product itself, not the “process”. Nowadays, it is obvious that companies can achieve success only by collaboration and promoting innovation.

Competitiveness of the industry is usually based on the definition stated by Michael Porter. It focuses on emphasizing criteria for assessing the level of competitiveness in the world economy. The other point of view argued by the authors V. Ivanets, A. Reznik is that instead of competing industries, we deal with competing products based on macro-technologies (technologies, allowing to produce large industrial products are characterized by high capital intensity) [23].

The same industry can have very different levels of competitiveness depending on the country and the functional aims, which are to be achieved. Thus, the Russian automotive industry products are not always competitive on the markets of Western Europe, the USA, Japan, but are more attractive in Latin America, South Africa due to the fact that evaluation is performed according to different criteria. For Latin America, South Africa the competitiveness of automotive production (technology) is determined by the parameters of ease of operation, allowing the use of low-skilled, cheap labor.

Competitiveness of an industry depends in a single firm's competitiveness.

Competitive advantage at a firm level indicated the ability of the company to produce and promote the products superior to competitors in quality, price level or innovation. Because of the globalization, not only firm and industry specific factors are to be analyzed. Country-specific factors also can affect the performance of an industry, and consequently, a single firm in the industry. Competitiveness on different levels interacts as a sole system: factors of a country's competitiveness will also affect the competitiveness of a firm on the international level.

In general, companies of the same industry and the same country of origin, going, face the same advantages and obstacles while entering the global market.

Competitiveness was measured by different scientists applying different models starting from Adam Smith in 1776, when the main factor, influencing the ability of a country to trade was the possession of absolute advantage to produce greater quantity of a product using the same resources comparing to the other country.

Since that time, evolution of international trade theories showed that most of them were based on factors of productions, comparative efficiency of using which provides a country with a right to specialize on producing a specific good.

Classical, or country-based, theories (Smith, Ricardo, Heckscher-Ohlin) are mainly based on free trade between two countries. Smith argued that international trade should not be restricted or controlled by government intervention - trade occurs according to market forces - and specialization is strictly determined by the level of efficiency of production using only one factor of labor. A country possesses comparative advantage if it is able to make the product better and more efficiently than it produces other goods in contrast to Smith's absolute advantage. Both Ricardo's and Smith's theories assumed that free trade determines which country can produce which good more efficiently.

Model proposed by two Swedish economists, Eli Heckscher and Bertil Ohlin (HO), is based on factors of production and their availability in a certain country.

Theory stated that countries would specialize and export goods requiring factors of production, which are abundant for the country, thus cheaper. For example, India and China have cheap labor, so they should specialize in labor-intensive industries, like apparel manufacturing.

However, HO theory was in contradiction to the research made by American economist Wassily W. Leontief, who found that the United States, the country which is affluent in capital, was importing capital-intensive goods. All of the classic theories analyze trade without government intervention. The presence of such contradictions suggests that international trade is complicated and influenced by various changing factors.

There is world accepted definition for the free market as it is, because most the time trade is not possible without government regulation, especially when it comes to foreign companies' activities in the home country.

International trade theories evolve and every time there is a new attempt to explain such an ambiguous process. Since the mid-twentieth century, theories have been more concentrated on explaining trade from the firm perspective rather than country level. All of the ideas proposed by scientist and professors of modern schools made their contribution to the research of competitiveness.

Modern, or firm-based, theories are considered superior to the classical ones due to several reasons. Old models are based on the labor theory with several addition brought by Ricardian theory and subsequent Hecksher-Ohlin model of factor endowments, whereas modern theories regard innovation as the key to development of competitiveness and export strategies. With the recent growth of multinational companies different firm-based theories evolved.

In contrast to country-based theories, modern theories can explain the intra-industry trade - trade between two countries producing goods from the same industry.

Good example of intra-industry trade is automotive industry: Toyota from Japan is exported to Germany and imports Mercedes-Benz automobiles from Germany.

Modern theories are wider; they include factors of other products and services, customer loyalty and technological development. Steffan Linder tried to explain intra-industry trade through country similarity theory which was based on consumers' preferences: countries with similar development level would have same consumer preferences, so companies can export goods to the destinations where the markets are the most similar to their own in demand and preferences.

Global strategic rivalry theory, the work of Paul Krugman and Kelvin Lancaster, was about global firms rivalry, how MNCs can obtain competitive advantage in their industry. They consider barriers to entry as a critical way for the firm to possess competitive advantage. The barriers to entry refer to some that a new firm may face when entering a new market. For example, R&D, economies of scale, some unique business processes etc.

International trade theory continued to evolve, and the next step was the theory presented by Michael Porter from Harvard Business School in 1990 Porter, M. E. (1990). Competitive advantage of nations. New York: Free Press.. He proposed a new model to explain national competitive advantage. According to his work, the national competitiveness of the industry depends on the willingness to innovate. His theory allows us to determine why some countries are more competitive in certain industries. In fact, Porter combined and developed the ideas and theories, which were derived before by different economists. Earlier works by, for example, Raymond Vernon in his product lifecycle theory explained competitiveness through technology adaptation, which is similar to the point of advanced factors stated by Porter. According to Caves (1982), there is a transfer of knowledge gained between countries: it helps to reduce some startup costs. He also stated that the proper combination of factors of production can lead to a good competitive position of the industry. (1) Porter's concept of firm-specific advantages was also noted by earlier work of Hymer (1976), where he stated that companies possess specific comparative advantage that helps them to offset the foreign competitors. However, only Porter made all these factors work in his diamond model. If we look through international business research papers, Porter's model is the one that definitely shows what factors define competitiveness of an industry.

Theory of competitive advantage of nations, also called Diamond model, is based on four factors, which affect local firms' ability to develop a competitive advantage based on utilizing the country's resources. So the factors are:

-factor conditions

-demand conditions;

-related and supported industries;

-firm strategy, structure, and rivalry.

Two additional factors emphasized by Porter were government and chance.

The model looks at new level of competitiveness - cluster level, where the success of the company on a global arena depends on the performance of the whole value-added chain. A cluster is formed by networks among all stages of production chain (raw material extraction, marketing, sales). According to Porter (1998), such clusters of industries would bring strong capacities and contribute to the overall industry competitiveness. Clusters can be established in industry sectors based on a macro-technology; on the basis of investment attractiveness, which can be measured as direct investment in manufacturing in the resource-based (mining and processing of raw resources), cost-oriented (production with high added value), market-oriented (strategic investments). Bell (2005) found that firms inside a cluster have the ability to quickly implement innovations than the ones outside. This can be explained by the fact that clusters provide with better communication between business and government as well as more efficient supply chain management leads to better technology creation processes. For example, Russian economy structure allows using all the advantages of clusters to increase competitive advantage of industries.

Many scholars have criticized the Porter's model for being narrow and insisted on the crucial role of MNEs and government in affecting the competitiveness of the industry. [Di Wu, 2004]

Since globalization, competitiveness became more integrated issue than before. Dunning (1993) suggested using some international determinants in the model. The change was actually given birth to by Rugman And D'Cruz: they proposed extended model - Double Diamond model, where the international dependence also matters. As for the emerging countries with planned economies like China, governmental protectionism and MNCs should be regarded as one of the main drivers of competitiveness.

1.2 Factors of international competitiveness for automotive companies

competitiveness chinese automotive market

Through the analyses or the research papers dedicated to the automotive industry, we noticed that most of them are concentrated on the Porter's Diamond model and its extensions. Most of the scholars (Barragan (2005), Dunning (1980), Dixit, Joshi (2011)) based their research papers on Porter's Diamond through the cluster framework. So it is more reasonable to concentrate on cluster level analysis when evaluating the competitiveness of the automotive companies.

Porter emphasized the role of clusters in the process of internationalization. Porter considers cluster an important element in the process of becoming a major player on a global competitive scene. Porter's (2008) definition of cluster “geographical concentration of interconnected enterprises, specialized suppliers of services enterprises from related sectors and networking institutions that compete, but also work together." He proposed that companies, governments and other institutions like universities, research centers should cooperate for the purpose of developing a powerful cluster, which enhances productively, stimulates innovations and give a solid base for competitiveness improvement.

Nowadays, automotive industries have been shifting from separate national industries to a complex system of integrated clusters.

The automotive cluster includes the following companies and organizations:

1) Assembling production of cars

2) Production of auto components and materials

3) Research and technological organizations

4) Financial organizations that provide credit policy, insurance and financial aid Goryunov I. Cluster approach: strategic planning is vital for the development of enterprises 2005

For example, automotive cluster in South Carolina consists of 125 producers, suppliers, supporting companies. Moreover, the South Carolina Automotive Council collaborates with the Upstate SC Alliance and takes part in controlling of the cluster that makes sales around $29 billion, as well as it helps to attract world level firms and specialists into the region. [32]

Sally Sledge (2003) tested the Porter's model in the sense of global automotive industry and the results showed that there is empirical evidence in favor of application of Porter's Diamond for automotive industry.

According to the Diamond framework with four main factors, the author proposed 4 hypotheses. First one is about demanding consumers and their positive influence on global competitiveness. Second - more advanced factors of production can enhance the development of a global firm. As for the related and supporting industries, she suggested the direct dependence between strong and dynamic network with success on global market. And finally, greater rivalry was expected to improve competitiveness. The dependent variable was the performance of the company, measured by Returns on Assets (ROA).

It was found that factor conditions affect the national competitiveness in the automobile industry. Actually, this factor is not directly concerned to the firm that is why the coefficient was found to be significantly small.

The paper confirms that demand parameter is significant, moreover, twice as large as the influence of factor conditions. So, they consider that sustainable demanding consumers could increase the global competitiveness of the country. According to Boudette (2003), automotive producers tend to introduce their products in most demanding areas to support the competitiveness

Automobile industry is strongly dependent on supporting industries, so this factor approved the well-known fact: firms cannot become global without having a network.

However, the final factor does not show any significance. It means that domestic competitiveness would not necessarily mean success on global market. There might be several reasons for that. One of the reasons is that such companies spend most of their efforts counteracting local competitors. The other reason is that domestic industry structure may not play a significant role in firm competitiveness due to the fact that nowadays industries tend to be global.

The competitiveness of the enterprise in foreign markets as well as the level of investment attractiveness and the degree of customer loyalty is largely determined by the level of competitiveness of the state (or industry) as the guarantor of creation of attractive conditions for entrepreneurial activity and investment.

So, governmental role in obtaining competitive advantage in the industry on national level is obvious; moreover, it is supported by numerous findings. In fact, many developed nations resorted to modern business infrastructure and focus on innovation through the proprietary intellectual property with automotive leader firms. Both governmental efforts and private business development to improve infrastructure brought to global competitiveness. This is significant and should be considered by nations trying lo improving or maintaining their global rankings in business.

1.3 Specific factors influencing international competitiveness in emerging countries

When it comes to considering emerging countries in automotive production, one will definitely mention such countries, as India, China, Mexico and Brazil. Marketline's research on countries' with developing auto industry shows that the top 5 comprise the main emerging economies in the world: Brazil, China, India, Mexico and South Africa and they made around $332,800.2 million contribution in 2011, while the annual growth rate was estimated as 11.1% in four last years. Automotive Manufacturing Top 5 Emerging Markets:

http://www.marketline.com/blog/automotive-manufacturing-top-5-emerging-markets-china-leading-the-way/

Graph 1. Top 5 automotive manufacturing emerging countries industry, 2006 - 15 Marketline. Retrieved on March 9, 2016 from: http://store.globaldata.com/market-reports/publishers/marketline

Following the Porter's model, the strengths of Brazilian market are domestic demand potential ad increasing middle class population. Government is very interested in industry protection as well macroeconomic factors are stable. As in all of the emerging economies, government contributed a lot for automotive industry in Brazil by creating GEIA (Gruppo Executivo da Industria Automobilistica), which was planning the policies for sustainable development. Government also stimulated investment flows for the infrastructure and source industries, such as steel production, electricity and roads. The efficiency of joint ventures in the Brazilian market (General Motors Gravatai's and Camacari fords and VWs Resende Plant) is connected with the creation of a major cluster in ABC region. The industrial region in Brazil consisting of three cities - Santo Andrй, Sгo Bernardo do Campo, and SгoCaetano do Sul. (source: wikipedia)

More or less the same story was in India. In India the automotive sector is quite large, it constitutes almost 22% of the country's GDP whereas 13% jf the production is exported. One of the most important factors of such a jump in several years is government regulation. Indian production was supported by government policies and foreign direct investment which is 100% permitted. There are also tax incentives so there can be free export. Government also contributed to research and development. The newly formed Automotive Component Manufacturers Association of India (ACMA) is a governmental organization that provides local companies with technological and research support. However, there is also a private source of research taken by Mahindra and Mahindra for electric vehicles.

We cannot neglect the stability of economy and inflation rates, which can change the vector of automotive development in India through the demand conditions.

The last but not least important is that India's market size is significantly large and it is increasing with local demand being more sophisticated, as income per capita is expected to grow.

Main drivers of Indian automotive clusters pointed out in the work of Shailja Dixit and Manoj Joshi (2011) are growth in income level, free ways of financing, launching of new products, and, definitely, overall economics growth and such policies as lower custom duties and tax rates. In the framework of Porter's diamond, India's factor conditions are relatively good. Cheap and skilled labor force and large expansion investments. India can be described as highly demanding market, with increasing middle class population, income per capita and rapid urbanization. Moreover, the competitiveness is enhanced by strong network of related industries. Governmental role is very important due to liberalized policy regime, and decrease of custom duties on materials by 5%. Moreover, auto production in India is concentrated in four main clusters, which enhanced the efficient development and rapid expansion of production and sales.



Graph 2. Automotive clusters in India http://www.slideshare.net/amitkapoor/india-city-competitiveness-report-2012

In South Korea the automotive market is regarded as developed one in contrast to BRICS economies. Government tried to protect the home industry from the beginning. Despite the fact that the Asian Crisis forced the government to retreat due to the liberalization policy, government still plays an important role in industry development through financial support.

According to Avinandan Mukherjee and Trilochan Sastry (1996), Korean automotive industry success was due to several factors. Firstly, government support level cannot be neglected. The industry born to become export-oriented and a large amount of investment were made into the research and development process. Korean example can be distinguished from Indian and Brazilian, because they tried to develop capabilities, while the latest took advantage from the powerful foreign partner (MNCs).

The automotive industry in Mexico is also one of the leading industries in the country. Based on the UPAEP analysis of the automotive industry on the example of Puebla, Mexican state Conteras, H., Nuno, P. etc, Generating an Industrial Cluster, Mexican University IEs map strategy for automobile sector, it was pointed out that cluster formation is crucial point for competitiveness in developing markets. Of all the 14 states in Mexico, Puebla demonstrates almost 30% contribution to GDP, definitely due to the large investments of the Volkswagen Company. According to the UPAEP analysis, based on Porter's diamond framework, the region possesses prosperous factors for creation of a competitive automotive cluster. First of all, the location means a lot. Secondly, abundance of highly skilled labor force.

Porter emphasized that specific factors form the possibility of a cluster to survive in a particular area. According to UPAEP, Puebla can be regarded as a suitable place for a successful industrial cluster. From the governmental side, Puebla can stand for stable macroeconomics conditions and open foreign investments. One of the obstacles is that innovation adaptation is not so good, which can slow the process in times. The research emphasized the importance of research and development in cluster. The innovation should be supported by state universities and research centers.

Porter regarded government as an exogenous variable in his Diamond Model. However, based on research papers, which assess the competitiveness of industries from emerging countries, we see that government should be included into the model as it affects all of the factors. A good example taken by Marc Sardy and Marc Fetscherin (2009) is about China's automotive industry, which became more competitive right after the entry into World Trade Organization (WTO) in 2001.

In this paper, the researchers conclude that Double Diamond Model is more useful for evaluating the competitiveness of companies from emerging countries, like China and India. When comparing the latest with a developed car industry in South Korea, the author shows that Chinese market is not so far from that. The main factors emphasized are lower costs of labor, flows of inward and outward FDI. Moreover, the presence of joint ventures with foreign companies provide with technological expertise. In emerging countries domestic market grows very fast, which is proven by examples from India and Brazil.

The proposal about using Double Diamond model was supported by Barragan (2005). He stated that Diamond model is a solid base for identifying the factors of international competitiveness for the industry. But in the case of countries with emerging economy, the case is challenging and need some adjustment such as “Double Diamond” model (Rugman and D'Cruz, 1993).

Double Diamond model adds two major factors to the model: multinational activities and government. The standard Porter's model regarded it as an exogenous variable. The research made in the field of application of Diamond model showed that it is mainly focused on home-based activities and does not fit for assessing international competitiveness, especially in emerging markets, where the role of the government is the key to successful internationalization.

“ It has three important extensions to Porter's single Diamond Model. (1) The model clearly incorporates multinational activities; (2) the model is able to operationalize the competitiveness paradigm. A comparison of the sizes and shapes of the domestic and international diamonds shows major strategic differences; (3) it includes government as an important variable which influences the four determinants of the Diamond Model. It combines the domestic diamond and international diamond as shown in the following Figure 1.”[Sardy&Fetscherin, 2009]

According to Porter (1990), country can attract MNEs that are looking for opportunities to shift the production due to the progressive sources provided by the host country. Researchers noticed that Mexico's infrastructure could be enhanced by the MNEs involvement. Porter stated that MNEs could be a good start for a developing country, which is only entering the free market to create a cluster where local producers can grow and become competitive. So the Puebla cluster development was substantially because of the MNE Volkswagen presence in the country. Mexican cluster promoted development of technology and expertise among the automotive companies.

Obviously, the auto sector in Mexico is becoming more international competitive. Despite the fact that mainly manufactures belong to a foreign MNC, Mexican automotive industry offers several benefits to its host: a developing industrial infrastructure, qualified workers, the free trade agreement that has positioned the country as a stable export platform, as well as appropriate technology and low cost. According to Barragan (2005), such a development is a significant step towards international competitiveness.

It is possible that other countries can pick up similar paths of development in the international arena. In the case of China, we can see how an emerging production is moving from simple assembling products with the cheap labor to more advanced production while keeping low cost of sales.

On the demand side, manufacturers of Chinese cars can benefit from emerging market customers with growing incomes. As for the role of related and supporting industries, the automotive clusters in China consists of smaller companies that produce less complex goods, and to spend some R&D themselves. Chinese companies are trying to compensate for this through cooperation with MNCs. The automotive industry in China is still mostly owned and managed by major state enterprises. However, there are also private companies, which are evolving and obtaining experience in the sense of technology. Both, state-owned corporations and private firms face high level of competition in the domestic market. The development industry would not have been possible without significant participation of the state Company created by the joint ventures under the control of the state had immediate access to capital, technology, state protection and support. China was able to provide automotive manufacturers with developed infrastructure, qualified human resources and research and development innovations.

Thus, on the example of emerging markets, especially Mexico, we conclude that the country with developing economy can make future progress if it develops in three main points. Firstly, the legal basis needs to work for attraction of FDI.
Policy makers should work with industry to increase and improve programs of supplier development within the auto industry such as that described at VW above.

Secondly, the creation of industrial cluster could increase operational efficiency and productivity, enhance innovations and allows to take advantages of the broaden network. And last point is to work on a long-term basis and create joint research projects between universities and industries. «The government should also provide financial incentives to invest in R&D for firms and universities in order to transform the Mexican export platform into a more innovative industry.» (Salvador Barragan, 2005)



CHAPTER 2. Creation of competitive export-oriented automotive companies in emerging countries: the case of the Chinese company SAIC

2.1 Chinese automotive market: development and dynamics

The history of the automobile in China is significantly different from the characteristics of the evolutionary development of other industries of this country, associated with mass production. The fact is that most consumer goods, China began to export when domestic market was quite small. Car production in China, by contrast, began to develop intensively only in the last decade and a half, in the face of rising incomes and increasing domestic demand from the population for cars. In 2015, China has produced more than 24 million cars and has overtaken the United States Japan and Germany. [30]

In addition, the automotive industry continues to show high growth rates that are higher than the growth of GDP (in 2013 the growth of car production was 14%, while GDP growth is only 8.3%). http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG It is obvious that the success of the automotive industry linked to the favorable economic situation in the country. However, as indicated in studies at such high growth rate of automobile Corporation of China were not interested in entering the competitive markets of the US and EU stagnating in recent years. Moreover, unlike Japan and South Korea, Chinese cars are both local and all brand of cars produced abroad. The latter accounted for over 70% of sales.

China is both a demanding market and a low-cost base of suppliers and manufactures. Sales of vehicles in China rose five fold during the decade from 2005 to 2015, so China remains the leading auto producer in the world. Analysts found that the year-to-year growth rate with be around 6% percent through 2020. China is expected to outperform Europe in sales figures to 2020. [29]

Graph 3. China Vehicle Sales 2005-2015 China's automotive market: How to merge into the fast lane with consumer and digital marketing insights, (2013), Accenture.

The global economic crisis has not weakened, but rather enhanced the car production of China in 2008 first place in production vehicles, the number of which amounted to 17.2% of the total number of produced cars in the world. [30] In addition, we can see that situation even got better in 2009 (Graph 2).



Graph 4. Growth rate of automotive sales in China from 2008 to 2014. (Source: Statista) Source: Statista, 2015

In order to stimulate local market, government adopted some measures such as the provision of discounts on the purchase of vehicles, decline of fuel taxes and cancel purchase tax for small cars, subsidizing interest rates on car loans, started the recycling programs for used cars and their replacement by new ones.

But at the beginning of 2011 one of the largest car producers in the world significantly slowed the growth speed due to the local authorities measures for preventing hard traffic. In April of last year, the Chinese government raised the excise tax on fuel and increased from 7.5% to 10% sales tax of small cars. http://www.gazeta.ru/auto/2012/01/11_a_3959817.shtml

According to the Chinese Association of automobile manufacturers (CAAM) CAAM [6], the national market increased in 2011 by 2.8%, which is the lowest China's auto growth rate over the past 10 years. After that, we see the gradual revival of growth rate, and to 2014, the sales volume reached above 23 mln. units sold.

The Chinese auto market consists mostly of joint-stock companies, some of which are fully private companies such as Great Wall Motors Ltd., others represent the partnership, between the private and state in the face of the regional authority or state companies such as Brilliance China Auto, Chery Automobile. Some businesses are under full government control. Exactly the same are FAW and Shanghai Automotive Industry Corporation (SAIC), which occupy a leading position in terms of production.

Graph 5. Chinese Top-10 Car Manufacturers and their market shares, 2014 (Source: CAAM)



Graph 6. The leading Chinese Car Manufacturers, 2015 (Source: Statista)

The leading positions on Chinese automotive market are held by SAIC with sales about 2,8mln units in 2014 and Dongfeng with almost 2mln units. They are following by FAW. SAIC has two JVs with the world's leading corporations, GM and VW. Dongfeng holds almost 20% of market share in China and is in partnership with Asian leaders like Nissan and Honda.

Most of the enterprises are equipped with high-tech machinery, which was equipped supplied from abroad, but it gradually is replaced by the local produced equipment but with the technology of leading manufacturers. The company recruited immigrants from southern and Central agricultural

areas seeking in the industrial regions. Low degree of skill and technical culture of the workers was offset by their excess number and low level of social query. Engineering staff was taken from the companies of the first plants that is true to this day for small businesses located in the Central parts of the country.

Thanks to foreign automotive production experience on Chinese factories, the personnel requirements were improved. There were implemented the foundations of corporate ethics under European and Japanese standards; workers and engineers took courses of improvement of qualification, increased the proficiency of English language in the documentation. Most of the companies were forced to pass the assessment of the management quality under the requirements of International Organization for Standardization.

Attracting foreign investment and increasing production capacity of the automotive industry helped in creating partnerships with world leaders of industry components -- Cummins, Bosch, Michelin, Dana, Siemens, TRW and etc., which was the impetus for the development of local manufacturers of components, assemblies and parts.

Most of the automotive factories are situated in the Eastern provinces of the country due to developed infrastructure, effective transportation networks, the presence of seaports and overall decent level of urbanization, which allows the effective trading environment.

Many experts supposed that in China, the country with a relatively low level of automotive development, short history, and a population of more than 1.3 billion people, the domestic market would be the only consumer of the local automotive production, even despite the high potential of further development. However, to the surprise of most, China quickly became one of the largest exerting countries in the world. Undoubtedly, government measures have been taken to develop export strategies. Export was allowed only to those enterprises that were not connected to foreign partner with licensing restrictions on exports.



Graph 7. Number of vehicles exported from China, 2009-2014 (Source: Statista, 2016)

From the graph above we can see that export from China was gradually growing from 2009 to 2012, however the rise was followed by slight downfall in 2013 and 2014. This can be explained by the appreciation of the Chinese Yuan and protectionist measures in foreign markets.

China exports to Africa and Asia, where the main demand factors are the simplicity of design and low the cost, and the consumer do not require compliance the high level of international standards. In fact there are around 180 countries importers, among which are Sudan, Pakistan, the Albania, Ghana, Guatemala, Saudi Arabia, Syria, Malaysia, Zimbabwe, Kuwait. The main advantage of Chinese products is the low price, as well as consistently cheap national the currency by which goods from China are competitive in foreign markets. Russia also refers to the number of countries importing machines from China. For developed countries the Chinese cars are of no interest due to the fact that today it is difficult to provide consistent quality products while maintaining appealing to consumers prices.

The growth of the Chinese automobile industry is a good example of an effective economic policy held by the Chinese government, which largely determined the pace and extent of development of the industry of the state.

2.2 Shanghai Automotive Industry Corporation: determinants of success

The case of SAIC Corporation can give a clear picture of the automotive joint ventures created in China, because it is one of the leading and most successful examples not only in the domestic country, but also in other emerging markets.

Shanghai Automotive Industry Corporation (SAIC) is the 10th largest automotive producer in the world according to ForbesRetrieved on April 26, from: http://mezgil.com/auto/forbes-nazval-10-krupnejshix-avtoproizvoditelej-2014-goda. During 5-6 years the sales volume increased from $18 in 2005 to almost $70 in 2011 billion and $101.7 billion in 2014.

SAIC remains the leading automotive manufacturer in the domestic market. It outperformed the major Chinese auto groups FAW and DFM in growing rate by around 3% in 2014. In 2015, SAIC exported over 85 thousand cars, showing a 20% decrease in contrast to 2012-2013, however it keeps 2nd place of export sales in China automotive industry. (SAIC, 2014)

SAIC group consists of not only companies manufacturing cars, motorcycles and buses, but also the suppliers of equipment and parts. The corporation had established over 50 JVs with other car and parts producers. [Depner, Bathelt, 2005]

As a result, the Shanghai Group was intended to attract as many partners as it was possible in order to create the leading and the most advanced automotive cluster in China.

In mid 70s, the SAIC was mainly aimed at the Chinese local demand of passenger vehicles. In 1979, Volkswagen conducted an assembling experiment at SAIC with CKD for Santana model. [2] At that time, the company was not allowed to manufacture its own brand cars. The Chinese government wanted to create auto-manufacturing center in Shanghai with the help of SAIC and foreign partners. The establishment of international JVs would help to get the foreign partners' knowledge and transfer technology to Chinese production. As a result, in 1984 SAIC established joint venture with VW, Shanghai Volkswagen Automotive Co. ltd (SVW), gave a chance to upgrade the technology using foreign experience. “This joint venture was divided as follows: 50% by Volkswagen, 25% by SAIC, 15% by Bank of China Shanghai trust and consultancy Corporation, and 10% in China National Automotive Industrial Corporation.” [2]

In the following decade, SAIC increased production ten-fold to 300,000 units per year, establishing the SAIC Motors as one of China's leading auto companies. [27] With the significant aid from the Shanghai government, the company built a modern automotive cluster. At the beginning, cars were built from CDK from Volkswagens, which were imported from Germany, however the Chinese government insisted on creating local production of auto parts, and in the mid 90s Shanghai became the major contributor to the national output of automotive parts.

In continuing effort to encourage the transfer of technologies, SAIC went for the second alliance with General Motors in 1998. Shanghai General Motors Co. Ltd (SGM) was established, and from 2000 to 2005 the company managed to double the sales volume. At that time, the cooperation with SAIC seemed highly predominant due to the fact that the government had entrusted the company a responsibility of the main producer of passenger cars in the country, providing appropriate support. During the last 10 years the market share of GM in China has increased from 2.7% to almost 14% with the annual sales of above 2mln units. GM China Manufacturing, Retrieved 7 April, from: http://www.amcham-shanghai.org/NR/rdonlyres/73F016E2-0E5F-4BC0-9B99-AC028BD9EA16/17095/JuanCarlosJimenez.pdf

Joint Ventures with GM and VW were a step forward for SAIC and allowed the company to double the sales volume since the beginning of 2000s. In 2004, the production growth rate was about 57% (SAIC, 2004). The figures for 2015 showed that SAIC reached 60th rank in Fortune Global 500, with $102.25 billion1 revenue in 2014, which proves that the company continues to grow and is intended to become one of the largest automotive companies in the world by 2020. http://www.saicmg.com/english/news/content-158-1-17.html,

Retrieved on April 7, 2016

In fact, the JVs with General Motors and Volkswagen constitute the leading part of the total group's operating activities. Figures for 2015(company source) show that SVW and SGM contribute the major parts to sales volume, each one almost 30%.

Graph 8. SAIC Sales volume(units) by groups, %. (Source: SAIC website,2015)

Moreover, SAIC has expanded to foreign markets by obtaining 48.9% of South Korean's Ssangyong Motor. The company participated (10% stake) in the acquisition of Korean automaker GM Daewoo. In 2004, SAIC took control of almost 50 percent Korean automaker SsangYong. «While later that decade it also acquired MG Rover, after an ownership battle with another Chinese manufacturer, Nanjing Automobile, which eventually saw SAIC take control of that company as well.» [42]

Corporation SAIC could serve as good example of automotive industry cluster development, especially where the role of the government was definitely significant. The government has sought to international standards of production, as evidenced by the establishment of a joint venture with VW. The Chinese government focused on the export and localization of production resources.

Efforts of SAIC and Shanghai government was closely related, because government was the shareholder and possessed some management roles in SVW.

However, some conflicts started with the issue of auto parts production.

In the early years SVW was importing production components from abroad, including from Germany. However, this situation did not suit the Chinese government. They threatened quotas on production if the company does not increase the localization of production resources. The agreement was found due to the joint work of the Chinese government and VW, about 70 percent localization of joint ventures of auto components producers while maintaining a high level of technologies.

According to Porter's Diamond framework, the joint efforts from government and the company allowed to enhance the efficiency of production process (quality of human resources, advancement of equipment, adaptation of technologies). Moreover, the supported and relative industries were continuing to increase in numbers, which lead Shanghai to become the major industrial center in China. The most important in case of SAIC, like in other emerging locations in the world was the government policy. (Cannot be regarded as an exogenous variable, because it directly influenced all four determinants in «diamond»)

International manufacturing company of auto parts also benefit from cooperation with local suppliers due to access to cheap resources. For Example, Ford established a joint venture with a Chinese partner to produce various kinds of
glass for cars in 1992. “Bosch, together with a group of Chinese companies has created the largest joint venture company (total investment of $2.7 billion US dollars) in 1996”. (“Shanghai GM.”, 2005)