assignment of ib

8/8/2019 Assignment of IB

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Institute of professional education & research

PGDM-2009-11

Assignment on

ENTRY IN INTERNATIONAL MARKET

(AUTOMOBILE SECTOR)

SUBMITTED TO:- SUBMITTED BY:-

Prof. Raveendra desai Praveen Mayar(21)


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Introduction

The market of iper international ltd entry despite the global tendency for the significant fall ofcar sales there are certain car segments which experience dynamic gro wth. According toDatamonitor (2006b) the sales of commercial vehicles and port utility vehicles were veryhealthy. Windecker (2005) stresses the influence of socio -cultural forces which formed the

increased preferences towards more fashionable, sport -type, SUV equipped cars. Theextremely high growth of SUVs was identified in Russia,US and UK.

The focus of iper international market entry will be Russia. There were several reasons forselecting Russia as the target market. These favourable factors were the status of India asthe favourable economic agent, Russia Car market dynamics and potential, languagesimilarity. The other countries which were considered as potentially attractive were: the USA the largest market size in the world, the UK emerging market with significant salespotential. The option of the russia as target market was declined due to extremely highquality requirements and other non -tariff barriers which make it hard for a new entrant toenter this market. Besides, this market is highly mature and experiences extreme level ofcompetitive pressure. With regards to UK, there were several unfavourable factors whichmade it less attractive then the Russia the uncertainty of the further economic state, highentry barriers and no well developed dealership network.Analysis o f External Environmentof the russian market. But due to various limitations (time, word limit), the factors will beoutlined, whereas the major focus will be made on several sub -factors only (according to thePareto Principle, it is likely that about 20% of the factors will represent 80% of the potentialeffect on the business (Wit & Meyer, 1998).

Political factors,Political and legal factors play the role on the development of the industry.These factors shape the rules of competition, operational costs and supply chainrequirements.Oil prices resulting from international instability The special attention shall begiven to oil prices and its affect on the market requirement. According to Mintel (2006) theincrease of oil prices has created a strong tendency towards small engines, hybrid enginesand diesel engines. Current high level of oil price increase the strain on the sales of luxury

and premium cars, the majority of w

hich

are equipped with

large -size engines (more th

entwo litres).Administrative barriers (quality controls and operations requirements) (KPMG,2004) Administrative barriers need to be seriously concerned as various requirements forsafety standards and emission level might increase the costs of producti on and reduce theoperating profit margin.Car parc legislation According to Mintel (2006) the Russianexperience the threat of high overcapacity with the excessive traffic load of roadnetworks.The political relationships between countries of operations (regimes offavourability/protectionism) (Hill, 2002) India cooperates with the Russia within the regimeof favourability which implies the certain benefits as reduced tariff and non -tariff barriers.

The foreign ownership regulations (The market expansion mode (Hill, 2002) At the presenttime the Russia is considered as one of the most pro -FDI country. The large number ofindustries, including automotive one, are deregulated. It means that foreign regulation

provides foreign companies with flexibility of choosing between all possible entry andexpansion modes.Economic factors .One of the major location choice determinants is thecurrent and future demand conditions as they will affect the market gro wth potential, pricingstrategy and operations margin and the potential of the return on investment.The targetmarket size According to Mintel (2006) since 2001 there has been a steady market growthby size and value.

The maturity of the target market The Russian market is viewed (Mintel, 2006) as highlymature. The current maturity causes overcapacity issue and significant sales fall of particular


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car segments.The growth potential of th e target market The overall russian marketexperiences negative growth due to the maturity issue. Nevertheless, certain the sales ofcertain car segments have significant growth potential due to the impact of socio -cultural andtechnological factors.PDI According to Mintel (2006) the strong growth of GDP (10%between 1998-2005), personal disposable income (PDI) (19%) and consumer expenditures(18%) reflect the high level of consumer confidence. Mintel (2006) claims that in terms of thepurchase of new cars consumer confidence has significantly fallen. By the present momentRussian consumers have been reluctant to take out new debt and instead are choosing toservice their existing debt. Additionally the levels of mortgage equity withdrawal havedeclined, what indicates that russian consumers do not seek alternative fun ds to buyexpensive items like cars.

Competitor Analysis

Russians have dismissed the purchase of an apartment as a dream and instead are eyeingcars. The market of foreign brands has grown 50% in the first half of 2006. The second handmarket is estimated to be three times bigger.

The 50% increase means 418,280 brand new machines have hit the streets. More than100,000 are assembled on joint ventures and foreign plants built on the Russian territory.Plus 45,699 Daewoo and Lanos brought over from Uzbekist an and Ukraine respectively.

The figures do not include 325,000 AvtoVAZ models, Russian leader in the industry, andsome 80,000 VOLGA models of the GAZ corporation.

y Of course, the cheap price for AvtoVAZ still draws most of the consumers. But thetrend is changing. Growing income and frustration about mortgage schemes forcepeople to invest in mobile property of high quality and price. 13% of the populationare said to be able to afford expensive products . Furthermore, banks are strugglingto keep up with the pace and join dealers to issue winsome loans. Sometimes, youdont even need the first installment to be able to buy a car.

y South Korean Hyundai tops the 1H 2006 rating, with 47,370 cars sold by Russ iandealers. It is a 12% hike on last years results. Not a big advantage, and won mainlyby Accent, while Elantra is on the wane. The summer might see a new wave ofinterest following the presentation of the new Elantra and Verna, worth less than$20,000.

y Trailing behind is Chevrolet, with 44,760 machines, up 47%. Mainly, due to theRussian breed of Niva. At the same time, the company has seen increasing demandfor Chevrolet DAT series, including Aveo and Lacetti. The latterhas a good price asfar as station wagons go.

y Japanese Toyota (40,839 cars) ranks third with its hits Corolla and Yaris. They arenot the cheapest in this group, but enjoy an everlasting love with Russians forreliability and simplicity. Toyota has earned the fame with its second -hand right-wheel cars brought to the Russian Far East straight from Japan.

y Ford, a potential leader with 36,826 cars sold, has encountered some problems. Itcame up with such an attractive offer that the dealers were simply besieged withpeople willing to buy the stylish Ford Focus II. Now waiting for a Ford might be likewaiting for a child to be born cars which will be produced within this yearhave beensold out. Applications are accepted only for the next years supply. Ford haslaunched heavy advertising for other models, like C-MAX, Fiesta, and a new minivanS-MAX.


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y Mitsubishi is fifth with 33,982 machines. Its top hit is sedan Lancer, the price startingfrom under $15,000.

y Daewoo is losing its audience (32,300), with old Matiz and Nexia delivered fromUzbekistan.

y Renaulthas come to stay at a Moscow plant which used to produce Russian makes.Sales have soared 194%. Out of 30,864 Logan model makes up 21,115. Moscow

mayorh

as been urging th

e corporation to increase its assembly capacity, but Renaultdoes not rush to do it. Previous model Symbol has fallen out of favour.y Nissan is keeping up with the times and does not wait till customers turn to other

brands. It constantly reminds them of Nissan with innovations. As soon as Almerastarted getting out of focus, it reinforced the line with Almera Classic. It also hasTeana and Nissan Qashqai.

y Kia boasts Spectra made at Izhevsk plant, which earlier produced Russian Odamodel. If it kicks off Kia Rio II with a discount, it might scrape into the Top 5.

y Mazda is the last in Top 10, although the whole Moscow is teeming with Mazda cars.Mazda 3 is extremely popular with women, but is also like by young men. Mazda 6 isgood for family trips.

Main parameters

After China, Russia is one of the fastest -growing auto markets in the world. Between 2004and 2014, the study claims, each year will see 100,000 more new vehicles registered thanthe previous one. The total will rise from 1.3 m new vehicles in 2004 to 2.3 m in 2014 (6%p.a.). More and more Russians are switch ing to Western car marques: while Russian carmakers currently cover 70% of demand, 60% of new cars bought will be manufactured byforeign makers by 2014. Of these, 700,000 will be imported, 800,000 assembled in Russia.The number of Russian new cars, on the other hand, will fall from 900,000 in 2004 to800,000 in 2014.

"The Russian car industry is on the verge of a major transformation," says Jrgen Reers,Partner at the Automotive Competence Center of Roland Berger Strategy Consultants.

"Market structures, processes and, not least, vehicles, will fall in line with Westernstandards. German and international makers can profit from this particularly. As Russianconsumers earn more, they will start expecting more from their cars in terms of comfort andsafety. But, even so, if you want to succeed in Russia, you need to have the vehicles themarket wants at attractive prices now."

1. Prospects for suppliers

Automotive suppliers can also benefit from the booming car market in Russia. At present,the top 20 suppliers worldwide have around 150 production sites in Eastern Europe; butthere are just six companies with eight locations between them in Russia.

According to th

e study, car makers will involve th

eir suppliers more in creating value infuture. Between 2004 and 2010, suppliers' share in creating value for Russian vehiclemakers is set to rise from 26% to 43%. Amongst international car makers, this proportion isalready high, at 66%, but even this is set to rise to 70% by 2010.

And international car maker s are set to triple their procurement from local suppliers to meetRussian demand. This will send local content soaring from 12% in 2004 to 36% by 2014.

According to the study, as international makers expand in Russia, they will draw a high -performance supplier industry behind them by 2014.


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2. Modernizing Russian car companies

This transformation in the industry also offers new opportunities for Russian car makers andsuppliers too. But local car makers and suppliers must rigorously modernize their processesand products. Here, joint ventures with foreign companies offer suppliers an excellentopportunity of locking into international standards quickly. Of the companies surveyed, 72%

believe Western companies have to take a stake to modernize the Russian suppli er industry.These joint ventures could benefit both sides: Russian suppliers can adopt Westerntechnology, will find themselves integrated in more efficient production processes and canintroduce quality management to today's standards. Their internationa l partners will getaccess to Russian customers, local authorities and existing market structures.

The Russian automotive sectorhas to modernize across the board. This is evident from thelevel of investment in Russia compared with other countries. German y invested EUR 2,343for every car made in 2002, while Russia invested just EUR 465. Other countries in EasternEurope also invested much more: the Czech Republic put in EUR 1,922 per vehicle, PolandEUR 1,606, Slovakia EUR 1,190. "While Russian manufactur ers spend less than 1% of theirsales on research and development, international makers here spend 5% of their sales ormore," says Dr. Uwe Kumm, head of Roland Berger Strategy Consultants' office in Moscow.

Russia is catching up fast, though. As the stud y shows, it is set to establish itself not just asa fast-growing market, but also as an attractive place to produce .

3. Russian politicians must act

But Russia cannot connect to the world car market unless its economy improves still further.Factors survey respondents mentioned here include reducing import duties on componentsfor assembling vehicles and modules. It also needs to tighten its technical standards up toraise product standards. Russia also needs to attract more foreign investment, throughinvestment agencies or special economic areas, for example.

"Russian economic policy needs to act here," says Dr. Klaus Mangold, Chairman of theGerman Business Eastern Committee. "It can act quickly to make its domestic automotiveindustry more competitive long-term. This would boost the Russian economy as a whole."

According to the study, a modern, internationally competitive automotive industry in Russiawould create around a million jobs.

Barriers in entry

Foreign companies investing in Russia face h igh transaction costs, enter in long discussionswith their partners (domestic car makers, local and federal government, banks) is necessaryin order to set up their cooperation. Being a strategic sector, the government is concerned

that suc

hdirect deals are no t enoug

hto modernize t

he sector and t

hat some kind ofhorizontal and sectoral industrial policies should be implemented. That is why the Russian

government sets the rules, and to some extent expresses the wishes of the strong lobbies ofthe industry.Main Russian carmakers have been discussing with foreign car makers and partsuppliers to encourage their investment in new joint -venture in Russia. The negotiations areabout jointly producing new models or revamp and sell existing Russian models. In othercases joint-venturing concerns supply of parts, engines and other components that areintroduced in order to upgrade existing models . A few carmakers consider directly buildingforeign models from greenfield investment (generally without the collaboration of local


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makers), as Ford (Focus) and Renault (R19,Mgane), which have turndown a strategicalliance with AZLK Moskvich .

Mode of entry

Withhigh transaction costs and high barriers to entry, four entry modes are possible for

foreign carmakers. All four are alternative but also sequential:

1. Importing cars to sell on the Russian market (buying market shares):Mercedes, Peugeot,Toyota.

2. Importing cars and/or parts to be assembled in Russia with the prospect to develop furtherinvestments to attain 3 and 4: Renault. Foreign carmakers follow two strategies forassembling cars. First, a complete knock down (CKD) and semi knock down (SKD)assemblylines with limited capacity importing almost 100 percent of components (BMW inKaliningrad, GM in Yelaguba and Renault in Moscow),

3. Negotiating cooperation deals with local makers, on some segments,without going furtherin the cooperation ( no equities in the main business): GM and AvtoVAZ.

4. Creating a joint venture or a greenfield investments (Ford, Ren ault),using local assemblylines utilizing at least 50% of domestic content (Ford) to produce foreign brands in Russia.

Iperian international ltd decided to go with the joint ventures for first five years with one of theplayer in Russian market for five years and then analyse the results,if results are positive interms of sales and profits then we go for establishing our set -up in Russia.

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