export managament - mercedes

Business Dissertation Andreas Hirschbrunn

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Investigation into the Mercedes Heavy Duty Truck

operation in the Chinese commercial vehicles

market: Is exporting outdated and is the proposed

international joint venture with Foton an adequate

market entry mode to overcome Socio cultural and

legal barriers?

Analysis and Recommendations

Autumn Semester 2007

European Business school London, UK

By

Andreas Hirschbrunn

Supervisor: Oscar Soler-Canela


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Acknowledgements

Writing the dissertation completes four years of a very special learning experience. The

author would like to use this opportunity and thank those people who made these four years

an experience never to be forgotten.

First and foremost, the author would like to express immense gratitude to his parents who

gave him the opportunity to study at EBS London and provided unconditional support during

these times. Besides this the author would like to seize this opportunity to thank Tatiana

Turck, Thomas Doering and Dr. Wolfgang for their support of my work providing giving me

the chance to interview them. Additional gratitude to Mrs.Traub for establishing the contacts

and helping me with the networking.

In addition, the author would like to thank his other interview partner Dr. Hans Moritz, who

dedicated his valuable time and input to the project. Last but not least, the author highly

acknowledges his tutor Oscar Soler-Canela for his interest in the topic and the steady support

during the progress of writing the dissertation.


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Executive Summary

The Chinese market for commercial vehicles in the heavy duty truck segment has

demonstrated significant growth rates and the demand for this type of vehicle is estimated to

be 500 000 units over the next three years. This dissertation focuses on the Mercedes truck

group’s heavy duty segment. Mercedes currently using an export mode as market entry

strategy sells on average 1500 units a year. They have engaged into a Joint Venture with the

Foton to build a joint product on the Amuna platform with Mercedes motor technology in the

initial phase. In the next phases this collaboration theoretically should evolve further with

joint production facilities and non technical knowhow exchange. The prime objective is the

market leadership and to use this position in the third phase to export the joint product

globally. At this moment in time these objectives are far away from the reality of a joint

venture which struggles even to fulfil the first phase. A thorough analysis has depicted that

exporting must be continued, whilst establishing a Joint Venture to enter the Heavy duty

truck mass market. This type of entry mode is more suitable then the wholly owned

subsidiary, because it involves less risk, bureaucracy and gives a better chance to cross the

cultural barriers posed by the Chinese society. The external analysis has shown that there is a

strong need to create a joint venture. Both of the companies are confronted with competitors

who engage in similar partnerships and threaten to outperform Mercedes and Foton. The role

of the Chinese government as a driving force behind the changing automotive industries

environment has been identified and its impact analysed. Mercedes and Foton have

complimentary value activities, but they must engage in a proactive dialog on how to solve

problems which threaten the success of the joint venture. The key areas of concern identified

in this early stage are of a cultural nature. In particular the clash of a formerly publicly

controlled and product output orientated company versus the private and profit orientated

company proofs to be a significant problem. The socio-cultural and legal barriers of the

Chinese market are also part of the Joint Venture operation. In particular the legal constraints

which where supposed to be avoided via this entry mode are still in place. The ministry of

commerce proves to be the most obstructive force to the joint venture. Mercedes-Foton must

diffuse the cultural differences. The management has to initiate, foster and direct a unique

Foton-Mercedes business culture. To succeed in this a diplomatic approach to change

management has to be applied. This process is fairly difficult as the Chinese government; the

main stakeholder asserts a serious influence on the joint venture which is in adverse relation

to the modernization efforts introduced by Mercedes.


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Table of Contents

1.1. Company background ...................................................................................................................... 9

1.2 Objectives........................................................................................................................................ 10

2.1. Expectations of the Chinese automotive market .......................................................................... 11

2.2. The Chinese automotive industry .................................................................................................. 11

2.3. Joint Venture .................................................................................................................................. 12

2.4. Cost/Benefit analysis ...................................................................................................................... 12

2.5. Joint venture as an entry mode ..................................................................................................... 12

2.6. Setting Joint Venture Objectives .................................................................................................... 13

2.6.1. Entering new markets ............................................................................................................. 13

2.6.2. Reducing Manufacturing Costs ............................................................................................... 13

2.6.3. Developing and diffusing Technology ..................................................................................... 13

2.6. Reasons why foreign and Chinese firms establish Joint ventures ................................................. 14

2.7. Selecting partners .......................................................................................................................... 14

2.7.1. Establishing a desired partner profile ..................................................................................... 14

2.7.2. Identifying Joint Venture Candidates (Hollensen, 2002) ........................................................ 14

2.7.3. Screening and Evaluating possible Joint Venture Candidates ................................................ 15

2.7.4. Choice of Partner .................................................................................................................... 15

2.7.5. Develop a Business Plan .......................................................................................................... 15

2.7.6. Negotiation of the Joint Venture Agreement ......................................................................... 15

2.8. Matching foreign investors and Chinese companies expectations from a Joint Venture ............. 16

2.9. Performance appraisal ................................................................................................................... 18

2.10. Problems with International Joint Ventures ................................................................................ 18

2.11. Why do Chinese Joint Ventures fail? ........................................................................................... 19

2.12. Managing Change and Overcoming Resistance in a Joint Venture ............................................. 20

2.13. Planned change ............................................................................................................................ 20

2.14.H.R.M. ........................................................................................................................................... 21


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2.15. The transfer of technical knowhow versus non technical know how ......................................... 22

2.16. Business Modules and Frameworks ............................................................................................. 23

2.17. Value Chain .............................................................................................................................. 23

2.18. Porters Five Forces Model ....................................................................................................... 23

2.18. PESTEL Analysis ........................................................................................................................ 23

2.18. Stakeholder mapping ............................................................................................................... 23

2.19. High and low context cultures ................................................................................................. 24

2.20. The contextual continuum of differing cultures ...................................................................... 24

2.21. Hofstede four plus one dimensions model .............................................................................. 24

3.1. Research question .......................................................................................................................... 26

3.2. Research design ............................................................................................................................. 26

3.3. Research Philosophy ...................................................................................................................... 26

3.4. Positivism ................................................................................................................................... 26

3.5. Interpretivism............................................................................................................................. 27

3.6. Realism ....................................................................................................................................... 27

3.7. Deductive approach ................................................................................................................... 27

3.8. Inductive approach .................................................................................................................... 28

3.9. Research Strategy .......................................................................................................................... 28

3.10. Data Collection Methods ............................................................................................................. 28

3.11. Analysing Data ............................................................................................................................. 28

3.12. Credibility of research findings .................................................................................................... 28

3.13. Reliability ...................................................................................................................................... 29

3.15. Research Limitations .................................................................................................................... 29

4.1. Exporting ........................................................................................................................................ 30

4.2. Spot business ................................................................................................................................. 30

4.3. Distribution .................................................................................................................................... 31

4.4. Determine the export modes viability ........................................................................................... 32

4.5. The wholly owned subsidiary ......................................................................................................... 33


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4.6. Quanxi ........................................................................................................................................ 33

4.7. Foreign Production......................................................................................................................... 33

4.7.1. Licensing .................................................................................................................................. 33

4.7.2. Franchising .............................................................................................................................. 34

4.7.3Local Manufacturing ................................................................................................................. 34

4.8. Analyse whether the IJV is the most suitable market entry mode for Mercedes ......................... 34

4.9. Which type of a joint venture in which strategical context? ......................................................... 34

4.10. Porters five forces Model applied ................................................................................................ 36

4.11. SWOT Analysis of the Joint Venture between Foton and Mercedes. ...................................... 37

4.12. Key Drivers of change for the Chinese automotive industry ....................................................... 37

4.13. The Partner selection ................................................................................................................... 38

4.14. SWOT of Mercedes H.D.T. ....................................................................................................... 39

4.14. SWOT analysis of Foton ........................................................................................................... 40

4.15. Foton and Mercedes analysed with the Value Chain .................................................................. 41

4.16. Value Chain of the Initial Phase ............................................................................................... 41

4.17. Second Phase Value Chain ....................................................................................................... 42

4.18. Stake holder mapping .................................................................................................................. 44

4.19. Ministry of foreign commerce ................................................................................................. 46

4.20. Legal System............................................................................................................................. 46

4.21. The challenges of the Joint Venture ............................................................................................ 47

4.22. Cultural Poles ............................................................................................................................... 47

4.23. Hofstedes 4+1 dimensions model ................................................................................................ 47

4.24. Analysis of 100 cross regional JOINT VENTURES ......................................................................... 49

4.24. The H.R.M department’s problems in creating one culture ........................................................ 49

4.25. Personnel ................................................................................................................................. 50

4.26. Recruitment ............................................................................................................................. 50

4.27. Dismissal and Remuneration ................................................................................................... 51

4.28. Labour and Managerial Skills ................................................................................................... 51


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5.1. Recruitment .............................................................................................................................. 52

5.2. Training ..................................................................................................................................... 52

5.2. Continuity .................................................................................................................................. 53

5.3. The Chinese Government ......................................................................................................... 53

5.4. Performance Appraisal ............................................................................................................ 53

5.5. A new approach to change implementation ........................................................................... 54

5.6. The exchange of non technical know how .............................................................................. 54

6.0 Conclusion..............................................................................................................................................................55

Bibliography

Appendices


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Abbreviations

H.D.T. Heavy Duty Trucks

J.V. Joint Venture

I.J.V. International Joint Venture

P.R.C. Peoples Republic of China

M.N.C. Multi National Corporations

M.o.f.com. Ministry of foreign commerce


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1. Introduction

1.1. Company background To engage more actively in the market a Joint venture with Foton has been agreed on.

However this Joint venture is far away from delivering the expected outcome. The

international Joint Venture is in the initial phase and there are various problems faced on the

way to become a successful operation. Like any other major truck producer Daimler is very

interested in expanding its share of the Chinese market. The H.D.T. segment is the core

product of the truck business (Daimler.com, 2007). H.D.T.s define themselves as lorries

which carry 40 tons of load. They are built for heavy duty and succeed customer demands for

quality. In particular their reliability is the unique selling point which enables Daimler to sell

1500 units yearly in china. However this is a spot business (Doering, 2007). This means that

Mercedes lorries are rarely sold in large quantities to customers with specific needs for heavy

duty trucks. Those are found in sectors like mining and highway construction. The main area

where the trucks are used is the so called golden triangle (Daimler.com, 2007 A). The profit

margin on the trucks sold is at the top end of the range. The management is very keen on

increasing the quantity sold, although production capacity is already reached. The problem is

that with a quantity of roughly 1500 units a year Mercedes only covers a fraction of the

market which is estimated to be 500 000 lorries over the next 3 years(Mercer,2006). The

existing customers are extremely valuable. Being able to buy trucks which cost 250 000

Euros a unit in large quantities makes it clear that they are attractive and that a relationship to

the customers should be kept. The quality of the trucks themselves and more over of the

excellent packages sold and the unique after sales service could result in significant organic

growth which would increase the quantity sold and coherently the profit made. Mercedes

heavy duty trucks are currently a niche product only bought by the most demanding

customers for specific needs. The joint venture could enable Mercedes to penetrate the

Chinese HDT mass market.


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1.2 Objectives This dissertation analyses to what extent the exporting entry mode is viable anymore. It

analyses the various market entry modes for their suitability. Furthermore the two partners

Foton and Mercedes will be analysed regarding their suitability for a Joint Venture. The

various phases of the joint venture will be explained and possible problems during them shall

be analysed. The stakeholders influence will be determined and their influence shall be

explained. Furthermore the key challenges to the management to make the joint venture work

in practice shall be analysed.

Investigation into the Mercedes Heavy Duty truck operation in the Chinese commercial

vehicles market:Is exporting outdated and is the proposed joint venture with Foton an

adequate market entry mode to overcome Socio-cultural and legal barriers of the

Chinese market?

The objectives therefore are to:

Determine the export modes viability

Identify the export modes weaknesses and strengths for Mercedes.

Recommend on the future of the exporting mode

Analyse whether the IJV is the most suitable market entry mode for Mercedes

Identify to what extent Foton and Mercedes do have complementary activities which

make them suitable partners for a Joint Venture.

Identify Key sociocultural and legal problems of the initial phase and comment on the

issues which will arise during the second and third phase.

Recommend on how to satisfy stakeholders and solve cultural diffusion.


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2. Literature Review-Section I

This part shall provide the author with the theoretical framework to write this dissertation.

Besides this it will provide me with the necessary ammunition to carry out adequate primary

research.

2.1. Expectations of the Chinese automotive market In this section the author will take a look at the importance of the Chinese market for

Mercedes and any other car producer from an external economical point of view.

“CHINA has begun to enter the age of mass car consumption. This is a great and historic

advance.”(Economist A, 2005) In 2002 demand for cars in China increased by 56%.”The

next year growth quickened to 75%, before slowing in 2004 (when the government tightened

rules on credit for car purchases) to around 15%. In a sluggish global market, China's demand

remains mesmerising (economist a, 2005).” According to the economist car sales are

expected to increase by 10-20% annually for several years to come. With 5m car in 2004,

China is the world's third-largest car market, after America (17m) and Japan (5.9m). “China

is going to become the second-largest market in the world sometime over the next two or

three years,” says David Thomas, head of China distribution for Ford (economist A, 2005).

Between 2010 and 2015, it should become the biggest automotive market, exceeding both

Japan and America. At the same time, the Chinese government spent billions into expanding

its highway network. “By the end of 2004, China had 34,000km (21,000 miles) of

motorways, more than double the 2000 figure (17 years ago, it had none)”.(economist

A,2005) The Chinese road network is already the 2nd largest worldwide. “1.8m km, with

44% of it built in the past 15 years. Nor will it stop there. By 2020, China plans to double

again the length of its motorways.”(Economist A, 2005)

2.2. The Chinese automotive industry This section analyses the current state of the Chinese automotive industry outlining key

strengths and weaknesses which might affect the Mercedes operation.

“Car making is more capital-intensive than labour-intensive” (economist,2005 M) The author

refers to the cost of fixed assets employed. “The logic that is driving other manufacturing

industries to move production to China—skilled but very cheap labour—therefore does not

apply”(Economist.com,2005M). Besides this the author points out that china has the worst


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cost structure for the automotive industry, because “Supply chains are inefficient and

distribution systems are fragmented” (Economist.com, 2005) furthermore he describes a VW

problem which is significant in its impact on all carmakers in china “two-thirds of the

replacement parts for VW's Santana are pirated, and a “VW” headlight retails at about a tenth

of VW's official price tag” (Economist.com, 2005 M). The car manufacturers are missing out

on the highly lucrative after sales market. The expected synergies with the Joint Venture

partners are effectively not happening “There is not a single car plant in China, says Paul

Gao, a consultant from McKinsey's Shanghai office, that has economies of

scale.”(economist.com, 2005 M) Local production is in a stage where the automotive industry

is anything else then ready to reap profits from the Joint Ventures. The prenatal state of the

operations will need lot patience until it develops into the market expected by analysts. Mr

Gao recommends the foreign car makers to concentrate on after sales service, providing

finance to Chinese car buyers via loans as well as marketing car designs and brands, whilst

completely outsourcing the assembly to the Chinese. He strongly beliefs this would enable

rapid and sustainable long term growth. (economist.com, 2005 M)

2.3. Joint Venture “A joint venture or strategic alliance is a partnership between two or more parties”

(Hollensen, 2006) “International Joint Ventures with companies based in two countries are

far harder to manage” (Hollensen). “Many multinational corporations (MNCs) gain access to

markets and/or resources through the formation of international joint ventures (IJVs). Joint

ventures are formed to achieve synergy through combining complementary partners”

(Griffith, 1998).

2.4. Cost/Benefit analysis Investigating the Joint venture it must be ratified to what extent the Joint venture was

appropriate. The Cost/benefit analysis is basically evaluating the Joint Venture entry mode

option with others, and determines whether a specific entry mode might enable the company

to achieve it s objectives quicker or more effective. (Hollensen, 2002)

2.5. Joint venture as an entry mode Some people might think that the JV is the only way to do business in china. In reality wholly

owned subsidiaries are possible, but foreign investors dislike them because as Maher points

out they do not provide them with a sufficient platform to do business in china. “The wholly


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owned subsidiary affords no realistic means of establishing a successful presence in china

and overcoming the formidable language and cultural barriers involved” Wong emphasises

that the “quan xi” policy is the strongest advocate for JVs, because the Chinese prefer to do

business through personal connections with mutual trust. Although the consequences of the

“quan xi” policy are catastrophic when applying western standards it is inevitable part of

Chinese culture. In this environment foreign investors need Chinese partners. This factor is so

important that it outweighs any benefit which is provided by a wholly owned subsidiary.

(Wilson/Brennar, 2002)

2.6. Setting Joint Venture Objectives The objectives decided on by Mercedes of the JV are very similar to the reasons of other

foreign investors in China. They have in common that the Chinese partner has

complementary reasons for the collaboration. In this section the practical reasons to seek a

joint venture are contrasted with the theory. The relation between Chinese and foreign

objectives is of particular interest to the author.

2.6.1. Entering new markets New markets, in particular if entered the first time are complicated. Therefore a local partner

with the necessary marketing skills combined with the product development skills is a very

good and quick way to serve the foreign market (Hollensen, 2002)

2.6.2. Reducing Manufacturing Costs Joint Ventures may allow companies to pool capital or existing facilities to gain economies of

scale. Thereby production costs are reduced. Being an importer, Mercedes has strong interest

to produce locally to avoid tariffs and gain a larger market share. (Hollensen, 2002)

2.6.3. Developing and diffusing Technology Joint ventures can be used to work together in the development and research of products

which would normally not be possible due to the limited capability of the companies acting

independently. Mercedes is an upstream producer with high quality, whilst Foton is a

downstream producer with highly competitive prices. A joint product with high end

Mercedes technology and quality, manufactured jointly with Foton using their expertise in

cheap production and their local expertise is the solution for both companies. (Hollensen,

2002)


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2.6. Reasons why foreign and Chinese firms establish Joint ventures Wilson and brennan researched the joint venture opposed to the wholly owned subsidiary

entry mode. In this table they identify the main reasons to establish a joint venture.

Foreign firms Chinese Firms Chinese market potential Government objectives to attract foreign capital

Possible advantage of being “first in” Access to technology and skills

Competitor pressure Learn modern management skills

Business portfolio diversification Export opportunities

Global environment pressure to enter markets Increase market share

No need to spend time building guanxi Access to marketing expertise

(Wilson/Brennan, 2002)

The market potential is undeniable as it was demonstrated in the abstract about the future of

the Chinese market. On the contrary the suitability of the JV into the business portfolio,

including the risk involved with sharing technology is outbalanced by the potential revenue.

The competitor’s pressure to enter the market is an important factor to consider.

2.7. Selecting partners Partners are matched via similar expectations. Perfect JVs crave for synergies resulting from

their collaborative effort. Hollensen uses a five stage model of how partners are found and

screened for suitability. His model will be explained with links towards the relevancy for

Mercedes and Foton.

Due to the stringent political system and its implications in combination with the competitive

environment Mercedes selection of JV partners was limited.

2.7.1. Establishing a desired partner profile

Hollensen established a framework; the author will use it to determine which of these factors

are desired by Foton and Mercedes. According to Hollensen companies search for one or

more of the following resources in a partner. (Hollensen, 2002):“Strategically critical

manufacturing capabilities”, its “brand/reputation” and “financial support”. “Sales expertise”,

“low cost production facilities”, “expertise”.

2.7.2. Identifying Joint Venture Candidates (Hollensen, 2002) Hollensen, 2002 criticises that prospective candidates are often predetermined by the

executive’s personal network, rather than doing an in-depth analysis and investigation of all

possible candidates. According to Hollensen this is the main mistake made in the early stages

of a Joint Venture. Rather than this reactive approach companies should proactively search


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for joint venture candidates. These are generally found in one of these groups:

Competitors/Suppliers/Customers/Related industries/Trade association members

Mercedes had only a limited choice, mainly due to being the last to establish its presence in

the market. Foton must be classified as a competitor.

2.7.3. Screening and Evaluating possible Joint Venture Candidates

According to Hollensen relationships get off to a good start if partners know each other well.

The negotiations for the Joint Venture have taken a long time. I would expect four years to be

enough to get to know Foton. However this will point needs clearance via the primary

research to be carried out. (Hollensen, 2002)

2.7.4. Choice of Partner “The partner must bring the desired strength, ideally it should be complimentary to the

company” The goal is to create synergies between the contributions of each partner resulting

in a win win situation (Hollensen, 2002) Besides this it is imperative to choose a partner who

shows strong commitment to the Joint Venture. This must be both financial and

psychological.

2.7.5. Develop a Business Plan Issues which must be negotiated determined before the establishment of the Joint Venture.

The Corporate points are the Ownership split, the Management which includes the board

composition and directors as well as the organization. The other organizational level is

composed of the Production, the installation of machinery and training of staff (Hollensen,

2002) The Marketing and exchange of non technical knowhow is a particularly interesting

point which will be discussed further in a separate part of this literature review.

2.7.6. Negotiation of the Joint Venture Agreement

With respect to Hollensen the respective bargaining power of each partner is the most

decisive factor to be taken into consideration. The more power one partner has the more he

will influence the final agreement and contractual terms. Due to Mercedes being the minority

owner with a 24% share its influence on this agreement was limited.


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2.8. Matching foreign investors and Chinese companies expectations

from a Joint Venture I am analysing literature on this topic because it will enable me to determine later on in my

analysis how many expectations have been meet in which way and in favour of which side.

Table 1

Different Expectations between foreign investors and Chinese partners

Expectations Foreign investors Chinese partners

1 Open Chinas market for its products Adopt advanced production technology

2 Overcome trade barriers Improve R&D capability

3 Take advantage of low cost labour

and Materials

Open more information channels

4 Expand existing techniques from

home facility

Looking for allies for international

competition

5 Reduce financial risks Add new financing source

6 Protect copyright for intellectual

products

Increasing firm reputation from famous brand

7 Reduce capital input in investment Utilize current and available resources

8 Access natural resource Reduce operational risks

(Yang/Lee, 2002)

This table demonstrates the result of a survey carried out in 800 joint ventures located in the

golden triangle to investigate the different expectations from foreign investors and the

Chinese partners. Yang and Lee have compiled a very interesting set. They use the

expectations before a possible Joint venture and match them in the next table where they

combine the need of each side.

Factors Foreign investor needs Chinese partner needs

Advanced

Technology

Promote its technology

Protect copyright

Introduce new technology Upgrade

current equipment

China’s market Overcome Market barrier

Increase Market Share

Increased demand from continuous

growth

Labour resource High skilled labour with low cost

good ethics

More employment and job

opportunities

Capital resource Investment diversity

high return options

More capital for facility

technology upgrading

Information

Channels

Have established global information

channels

Need connection with global business

information network

Global alliance New partners to expand to expand

international network

Initialize toward globalization


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Incentive policy Gain tax and all other governmental

incentives

Support from governmental incentive

policies

Global Market Expand new market and improve

competiveness

Enter international market and become

more competitive

Reduce risk Diversify Investment and share

potential risk

Improve management system and

control investment risk

Increase profit Invest in fast growth area for high

returns

Experience fast growth and profit

recapitalisation

(Yang/Lee, 2002)

The survey results revealed that those different expectations have a compensatory positive

effect on both sides. Yang and Lee point out how interlinked expectation 1 and 2 are, they

emphasise that the upstream/downstream relation is positive and matches Chinese and

foreign partners perfectly. However they do not mention at all that the second point, to

overcome the trade barrier and to successfully open the market for its product is a homemade

Chinese speciality. Basically the compensatory effect appreciated by yang and lee is only

existent because foreign investors have to bypass the Chinese regulatory body via a joint

venture. The positive effect for point 2 is definitely on the Chinese side. The third point is

relatively far off from being a positive effect on the automotive industry as the motors

provided by Mercedes are produced by highly sophisticated machinery which relies on robot

technique. The labour involved is concentrated on the machinery supervisors. The fourth

point is valid for the automotive industry as well as others which have a cutting edge

production technology. Lee and yang point out that the lifetime of the production facilities is

extended due to the prolonged competiveness whilst reducing the financial risks. According

to the authors of this study the financial risk reduction is a result of the diversification of the

production into different worldwide locations. In the compensatory factor for the Chinese

side in point number 4 yang/lee underline that the search for global allies is particularly

strong because of the need for a partner with high financial resources. Expectation number

four is the last one covered by yang and lee. Point’s five to eight could have used some

further elaboration to enhance the readers understanding of them. In particular the

compensatory affect in between “reduce financial risks” and “add new financing sources”.

First of all every expansion into a market abroad is expensive and a Joint venture involves

high risk as the initial investment is high, whilst the outcome and failure rate is high as

well.(Hollensen)A other point where further elaboration would be useful is the “protect

copyright for intellectual products” and “increasing firms reputation from famous brand”


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point. Because as Griffith” points out the foreigners loose the copyright to the Chinese whilst

the Chinese gain from the enhanced reputation.”(Griffith,2006)

2.9. Performance appraisal This point is critical to every JV. The evaluation of tangible and intangible results is crucial

for the development of the Mercedes-Foton JV.

“Partners sometimes have different views on how successful their IJVs are, because they use

different criteria to evaluate their performance (luo, 1995). Chinese partners focus on long

term objectives such as the technology transfer, exports and managerial learning. In contrast

to this foreign partners use profitability and market share to evaluate performance.(Yan and

gray,1994) Yan and Grays statement on the performance appraisal is principally true, but

other writers such as Hollensen at least recommend to be patient with IJVs and evaluate their

performance not like the one demonstrated by a internal division(Hollensen,2003). Kotler

recommends that both partners to find common measurements on how to evaluate

performance

Different evaluations come to conclusions about the effectiveness of the operation. Key

problems are identified thereafter. The problem is that these areas might be subjected to the

point of view of the respective partner. A problem area for Mercedes might be of less interest

for Foton and vice versa.

2.10. Problems with International Joint Ventures Lohin and Goffin name three key areas of trouble in IJVs in the manufacturing sector to

which Mercedes and Foton belong. First of all there will be “conflicts on the sovereignty of

technology transfer between partners or between partners and the host government”(1999),

secondly” a loss of competitive advantage which may result if the decision making process

between partners is slow”. Finally they name the “relative inexperience of managers in

running IJVs” as an area of concern and potential conflict. The heart of Goffin and Lohins

research was about the IJVs problems on an operational level. They basically reinforce their

thesis with exploratory research and identify the operational level as the least studied area,

whilst being the level where most problems arise. The solution to this problem might be

“People in a hurry in China do not succeed” (Griffith, 1996) this statement validates Goffin

and Lohin who recommend to take time, skill and in particular patience to make a

manufacturing IJV work.


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2.11. Why do Chinese Joint Ventures fail? In 1998 two thirds of all joint ventures where running a loss (Pamell,2002). According to

pamell there are three main reasons for the losses:

“No possibility to exploit economics of scale due to the plant sizes”. Not only plant

size but also a inefficient supply chain and mediocre operational management which

links into.(pamell,2002)

“Bad planning”. Which is a result of the reluctance to change by the Chinese caused

by the foreign partners strategy to change.(pamell,2002)

“Competition too strong” .The competition grows strong if companies do not utilize

on economies of scale and fail to realize expected JV synergies. Therefore this point

must be considered a result of the former two.(pamell,2002)

The difficulties in the JVs reality (pamell, 2002):

Availability and education of workers/managers

Problems with the distribution network

Infrastructure problems

Product quality

Supply of raw materials

Servicing and maintenance of machinery

Further difficulties arose over (pamell, 2002):

Market potential proving lower than initially expected

Insufficient productivity and labour morale

The differing goals of the collaborating partners-indeed this latter factor (according to

59 percent) along with false expectations (63%) was/were the main reasons for

ventures to fail.


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This section has demonstrated the key problems faced by the JV operation. In the next

section the main problems will be discussed further in respect to strategies and tools to

overcome them. If these strategies are applied from the start of the operation there is a

chance to avoid the problems described above. However the implication of these

strategies might prove extremely complicated.

2.12. Managing Change and Overcoming Resistance in a Joint Venture “Many Sino foreign joint ventures are set up by acquiring existing state enterprises” In this

type of Joint Venture the foreign partner is expected to transfer its routines to the Chinese

partners to make it more profitable and competitive. Tsang points out the importance of the

restructuring process, because otherwise the tremendous investment of funds, technology and

new machinery is not worthwhile. (Tsang, 2002). “This is because the foreign partner usually

adopts a strategy of dismantling and restructuring the existing state enterprise and

implementing its own system on the other hand.” Tsang warns that this is change is necessary

and that it needs to be implemented properly because otherwise the Joint Venture might fail

or run poorly. “Resistance to change from Chinese staff is often encountered”. The toughest

restructuring efforts have to be done in formerly state run enterprises. This was already

observed in the privatization process of European companies which where formerly run by

the state. In china it is even worse as the means of communicating the necessity for change

are more complicated.

2.13. Planned change According to Dunphy there are four strategies along two dimensions: Incrementalism versus

Transformation and Collaboration versus Coercion. The first dimension refers to timing,

whether the change is implemented continuously, in small steps or in a large discontinuous

manner. The second dimension considers staff involvement. Basically whether employees are

invited to participate in planning and implementing change.

In Sino-Chinese Joint Ventures there is often a very tight schedule for the implementation;

therefore Tsang classifies the change as radical and discontinuous. The level of staff

participation is very limited due to two factors. First of all the lack of time and the tight

schedule, secondly the fear by the foreign investors that local staff might demand substantial

modifications.(Tsang, 2002) According to dunphy and Staces(1990) this approach is


21

transformative and coercive, they refer to this strategy as dictatorial transformation. Due to

the low level of participation substantial resistance from local staff can be expected. The

problems which arise are apparent on every level. Both managerial and on the factory floor.

First of all the Chinese stick to their old routine although having agreed to the

implementation of change. This in turn leads to poor performance and a low level of mutual

trust which furthermore complicates the relationship and leads to the failure of the venture.

2.14.H.R.M. Tsang summed up all the factors of HRM which are a problem in a Joint Venture. He used

these factors and outlined possible solutions. According to him the solutions are rather hard

as the “Chinese partner frequently maintains that the personnel is an internal matter and shall

therefore be off limits to foreign scrutiny” (Tsang,2003). Additionally there might develop a

mix up of management styles if the foreign and Chinese partners assert equal influence on

HRM matters.

Table: H.R.M. Problems and Causes

Problems Institutional/ Cultural Causes

Recruitment A.: Shortage of managers and professionals Damage inflicted by the cultural revolution.

Under deployment of higher education

B.: Difficulty of transferring new recruits Administrative planning; Social Control

C.: Pressure of overstaffing Marxist ideology.; benevolent government

policies

Dismissal A.: Difficulty of firing staff Legacy of lifetime employment system

Remuneration A.: Cost of providing numerous subsidies Social welfare requirements

B.: Egalitarianism Avoidance of income polarization

C.: Seniority-Based promotions Respect for elders/ emphasis on seniority

D.: Equal pay for both Chinese and expatriates “Equal pay for equal work” principle

Labour

Discipline

A.: Poor discipline Legacy of lax management in Chinese

enterprises

B.: Reluctance of local managers to enforce

discipline

Avoidance of confrontation/ Interpersonal

relationship harmony

Managerial

Skills

A.: Shortage of modern managerial skills Legacy of being pure production facilities

B.: Unwillingness to take risks on an individual

basis

Severe punishment for mistakes and little

reward for achieving merits/Group decision

making/Group orientation

A.: Conflict of management styles Differences in management


22

practices/Cultural misunderstandings

Training A.: Heavy training cost Similar to the recruitment problem A.:

B.: Danger of losing well trained staff Intention of the Chinese government to use

joint ventures as a training ground/More

dynamic labour market.

Trade Union Danger of a powerful and uncooperative trade

union

Powerful workers congresses in Chinese

enterprises

Adapted from (Tsang, 2003)

2.15. The transfer of technical knowhow versus non technical know

how

Foreign investors cannot avoid to transfer technical knowhow in whole or partly because it is

necessary for the manufacturing process. According to sheriff they might find little or no

reason to transfer their costly and carefully developed expertise in areas such as marketing,

sales techniques, analysing product cost and determining price, identifying customer

preferences, increasing customer loyalty, developing advertising strategies,etc.(Sheriff,2002)

This author points out that the analysed Joint Ventures appeared to him like completely

separate entities. There was apparently only moderate or minimal transfer of non

technological knowhow apparent. “On the whole the companies had a general but superficial

and incomplete acquaintance with the principles of strategic management.”The author hereby

refers to the Chinese partners, not the foreign managers. He states that the general overview

acquired by the Chinese is rather a coincident caused by the interaction with the foreigners.

The only successful company exhibited a conceptual management approach. There was

evidence that the conscious pursuit of a strategic management model improved the company

on both the corporate and operational level. (Sheriff, 2002)

Company Type Nationality of

foreign partner

Year of

establishment

Interviewee

position

Transfer Level

Brake US 1997 General manager minimal

Glass US 1994 Managing director Not evident

Carpet fabric Germany 1999 General Manager Moderate

Department

store

Hong Kong 1993 Assistant general

manager

Moderate

Soft drink US 1990 Assistant general

manager

Minimal

Maher, 2002

The companies analysed by the author are not exactly the perfect match for a comparison

with the Mercedes/Foton joint Venture. On the contrary they show the illnesses of a lot of


23

IJVs in China. A separated culture inside the companies where know how exchange is not

happening due to cultural reasons. Management could take influence, but due to a lack of

strategy and frameworks and mechanisms which might encourage the exchange a lot of JVs

do not exceed the primary function for which they where set up. (Maher, 2002)

2.16. Business Modules and Frameworks

2.17. Value Chain The author has to analyze the capabilities of each partner in the Joint Venture. Therefore the

Value Chain will be applied

The value chain analysis is a tool to analyse strategic capabilities.”It analyses how value is

created or lost in an organization in terms of activities undertaken”(Scholes,2006).The cost of

value activities and the value they deliver determine whether best value products are

developed.(Scholes,2006) In an joint venture the core competences of each other are

evaluated by the value chain. The final outcome should be complimentary value activities.

2.18. Porters Five Forces Model Provides a useful framework to analyse the competitive forces which affect an industry. The

model does not address interdependencies and synergies in one operation (Fleisher, 2003),

but besides this limitation it is a good analytical tool to determine the factors which affect

every player in the Chinese commercial vehicles industry.

2.18. PESTEL Analysis This framework allows for a structured overview of Economical, Socio-cultural,

technological, legal and environmental factors affecting the Chinese commercial vehicles

industry. The author will focus on the most important aspects, rather then creating an endless

list of factors which might only have a limited influence on the industry.(Keegan,2005)

2.18. Stakeholder mapping Identifies stakeholder expectations and their respective power. It basically determines each

stakeholders expectations and how much power they have to reinforce their respective

interest. It helps to analyze which stakeholders should be repositioned and whether this is

feasible. “Stakeholder groups are not usually homogenous, but contain a variety of subgroups

with somewhat different expectations and power. Power is the ability of individuals or groups

to persuade, induce or coerce others into following certain courses of action” (Scholes 2002)


24

2.19. High and low context cultures “Low context cultures rely on spoken and written language for meaning. The senders expect

that the receiver encodes the words accurately to understand the intended message. High

context cultures use and interpret the elements around a message.”In high context cultures the

social importance and knowledge of the person add extra information and will be perceived

by the message receiver”. Vice versa the sender in a high context culture will expect the

receiver to decode in the same way.

2.20. The contextual continuum of differing cultures

HIGH

Context

LOW

Messages HIGH

At one extreme are the low context cultures of northern Europe and on the other end are the

high context cultures of the Arabian and Asian world. “The greater the context differences

between those trying to communicate, the greater the difficulty in achieving accurate

communication”. The relation between agents and their networks is critical for the success of

operations in high context cultures. , (Solberg, 2002)

2.21. Hofstede four plus one dimensions model This model will enable the author to identify familiarity with the most pervasive cultural

differentiators (Hollensen, 2002). The strengths of the model are that it is based on a sample

of 116000 employees; the four dimensions make significant comparisons between national

cultures and dig deep into cultural values. The main weakness of the model is that it is limited

Swiss

Germans

North-Americans

Spanish

Arabs

Chinese


25

to national territory, neglecting the fact that one country might have a variety of different

cultures. Besides this Hofstedes model is based on one industry. Besides this the definition of

the dimensions might be different from culture to culture. An other limitation is that the

model neglects entrepreneurs and focuses on the corporate world.


26

3. Research Methodology

3.1. Research question All research starts with a question to be answered. It was imperative to ask this question in a

clear and objective way. However, during my research this question was expanded, modified

due to the exploratory nature of the research. The final research question is

Investigation into the Mercedes Heavy Duty Truck operation in the Chinese commercial

vehicles market: Is exporting outdated and is the proposed international joint venture with

Foton an adequate market entry mode to overcome Socio cultural and legal barriers?

3.2. Research design Extensive primary and secondary data will be gathered and used to analyse the findings and

compare and evaluate these results with the literature review. Different research approaches

will be used depending on the specific area of the dissertation. Finally this will enable me to

establish a conclusion and answer to the research question.

3.3. Research Philosophy In the following paragraphs the author will analyse the different research philosophies and

determine which one of them is most suitable to answer my research question. No

philosophical research approach is better or worse, but some are more suitable to answer the

research question then others.

3.4. Positivism This philosophy is also referred to as the traditional scientific approach to research (this

approach is very useful because it is a very objective way to conduct research with

quantifiable data. A positivist researcher will use a “highly structured methodology” to

enable exact replication of the research (Saunders 2003). It leaves no error margin because it

is supposed to be done in a “value free manner” and is therefore extremely reliable in

theory(Saunders,2003).Positivism is criticised for leaving a very low possibility for errors, it

assumes that the data accumulated is completely valid and neglects the business

environments subjectivness. Both can have a significant influence on the research outcome.


27

I will limit the use of positivism because of the low availability of objective resources from

Foton and the dynamic macro environment of the Chinese economy. The analysis of the

situation in a cross-cultural joint venture is subjective. Therefore little use of positivism will

be made in this dissertation.

3.5. Interpretivism This philosophy is the opposite of positivism. It advocates a more subjective approach to

research. It believes that the world, in particular socio-cultural issues cannot simply be

analysed with an objective approach. The advantages of interpretivism are the subjectivity

which focuses on the different interpretations of a business research. Depending on

experience and background these might differ substantially. On the other hand interpretivism

might ignore the relations of power, because an interpretist does not aim to explain the topic

in terms of laws or institutional structures.

A high proportion of this dissertation is based on the interpretation of authors, other

researchers and in particular personal primary data collected from interviews with respective

management. This type of data cannot be quantified. Therefore the author will mainly use

interpretivism, because of the complex nature of a Joint Venture.

3.6. Realism Saunders defines it like this: “the essence of realism is that what shows us as reality is truth”

(Saunders, 2003) Realism must be divided into critical and direct realism. Realists belief that

researchers can only understand situations if they analyse the macro environment of society,

in particular the social structures. Generally speaking human beings are far too complex to be

studied in a purely scientific way. My report is based to a large extent on interviews. This is

the reason why a subjective view must be taken as well. To a certain extend realism is a

mixture of positivism and Realism. In this dissertation the author will apply a variety of

research methodology

3.7. Deductive approach In this approach a research strategy is used to test the validility of the developed theory or

hypothesis. Deduction is linked to positivism, because it is a generalisation. As this

dissertation is more interpretivism and as this approach does not allow for alternative

explanations. Deductivism will not be used for this dissertation.


28

3.8. Inductive approach

Being the opposite of deductivism theory arises from the collected data and not the other way

around as in the deductive approach. Inductivism relies on data which is qualitative and

subjective. It allows the researcher to adjust the emphasis of the research during the process

(Saunders, 2006)

For this dissertation mainly interviews and qualitative data have been the main sources to

establish a theory. Therefore an inductive research approach has been selected by the author.

3.9. Research Strategy This section will explain the applied research strategy used to answer the research question.

This research was focused on exploratory studies. There are three different ways to conduct

exploratory research:

Interviews of experts, to guarantee quality.

Adequate literature

Exploratory research is highly flexible, allowing the researcher to start from an open minded

and broad perspective, change and adapt the direction from there onwards as new insights are

found. (Saunders, 2006)

3.10. Data Collection Methods I will carry out interviews with three German executives from Daimler about the Joint

Venture. One interview will be done with a corporate solicitor to determine the legal

environment.

3.11. Analysing Data The literature review will be the foundation of my interviews. Thereafter the primary research

will be fused into the analysis with respect to the literature review carried out beforehand.

The analysis will enable me to derive a conclusion and recommend solutions for problems

which might exist in the Mercedes-Foton Joint Venture.

3.12. Credibility of research findings The literature to be used for this dissertation will be from respected business journals,

academic research papers and business books. The credibility will be enhanced by the use of


29

contemporary writers which include the latest research into their work. The primary

researches quality will be guaranteed by the quality of managers interviewed. Tatiana Turck

is the director of corporate controlling for the Daimler holding. She used to be in charge of

strategic planning in the Chinese market until November 2006. Thomas Doering is the

director in charge of the strategic planning commercial vehicles division of Daimler. He is an

expert of the Joint venture and has accompanied the negotiations for the last five years. Dr.

Wolfgang is a recently retired personnel director whom I interviewed for cultural and HRM

issues. Dr. Moritz is a corporate trade lawyer who specialized on Euro-US transatlantic

contractual negotiations.

3.13. Reliability Although my interview partners are experienced professionals in the segment, they are

human and therefore subjective. Besides there are compliance issues which will prevent my

interview partners to address problems freely. I will try to circumvent this via detailed

questions and guided interviews.

3.15. Research Limitations The research is based to a large extend on primary research. The availability of secondary

data for this specific joint venture was very low. This is most likely because of the early stage

the joint venture is in and the secretive manner in which such strategical operations are

conducted.


30

4. Findings-Section II

In this section the author will apply a variety of business modules via the use of the primary

data acquired during the interviews. The result of this section shall be used to derive

appropriate recommendations in concordance with the literature reviews background.

4.1. Exporting For the investigation it is necessary to analyse the entry mode strategies for their suitability

and determine the advantages and disadvantages of the current strategy. This part of my

investigation will identify the reasons as to what extent a change of the market entry mode

strategy is necessary.

The exporting mode which is currently the only way Mercedes serves the HDT segment in

China has various advantages and disadvantages which will be analysed. Centrally

manufacturing enables producers to make full use of economics of scale; the additional

quantity of products exported into other markets (Henessy, 2001) like china enables a

marginally high profitability of the exports as volume is simply added to the existing

production facilities in Germany(Noonan,1996).

Mercedes uses direct exporting in collaboration with local distributors. These distributors are

either tradesmen who sell directly to the customers in spot businesses or they own multiband

saloons in which they present and sell the Mercedes truck range (Doering, 2007).

In the next section it will be analysed how effective these channels are.

4.2. Spot business Spot businesses are carried out on the spot; basically they are a onetime transaction between

the seller and buyer. One example is a Chinese trade delegation which travels to Germany.

On their trip together with politicians they meet a German delegation which includes a

Mercedes representative. A deal is set up and the transaction is made resulting in the delivery

of the trucks. However this is an exception, in 80% of the sales independent Chinese

tradesmen negotiate the deal and sell the product (Doering, 2007). They are aware that the

key to their continuous success is being a good middleman. But they do not transmit the


31

customer information to Mercedes. Most likely cause they are afraid of losing future business

once Mercedes established a close relationship (Doering, 2007).

Due to the simple nature of the transaction and the complexity caused by the middleman

there is almost no way to implement contemporary strategies such as relationship marketing.

(Doering, 2007)

4.3. Distribution There are currently five saloons selling the HDT line of Mercedes. Sadly their core business

are the vans and MDTs. As described beforehand the most profitable segment is dominated

by spot business and respectively of the middlemen who dominate this market (Doering,

2007). Not even the distributors have a permanent relationship with the buyers. During the

interview the enquired how this could be possible, because you would expect customers to

have their maintenance done at the mechanics enclosed into the distributor. The answer was

that it is a homemade problem, because of the nature of the product and the included sales

and infrastructural barriers (Doering, 2007). Due to only having five repair shops Mercedes

early on offered the flying doctor service known from the outback in Australia. The only

difference is that they are not using planes. They are located at strategical positions in the

golden triangle. Once needed they are on site in a matter of a few hours (Doering, 2007).

These people have personal contact with the driver, but not the owner/repurchaser. The

second problem is more of an infrastructural problem. The sheer size of the country in

combination with the enormous complexity of an actros leads Mercedes to the principle of

selling a mechanic together with the trucks (Doering, 2007). Certainly not one mechanic a

truck. However large customers, which the actros customers usually are can send a mechanic

to Germany where he receives a 10month long training and returns to service the trucks for

their product lifetime. (Doering, 2007). So basically the largest customers don’t need a direct

line to Mercedes anymore because they have an in-house mechanic with all the necessary

equipment.

Successful marketing depends on the viability of the relationship between the company

exporting and the local distributor and/or importer (Henessy, 2001). In the next section the

author will assess the relationship between Mercedes and the intermediaries in China.

The regulations and obligations are against marketing objectives. For instance the sale of

Mercedes trucks in multi brand saloons is negative in regards to the separate identity of

Mercedes (Kotler, 2006). On the other hand there is given proof that competitors cut their


32

margins and give higher commissions to the multi brand dealership (Turck, 2007). This

practice encourages the dealerships to over sell a certain brand due to the higher profit margin

achieved, whilst neglecting the sale of other brands in the saloon. This is a legal practice and

can only be tackled via matching the offered commissions. The problem is that this is done

secretly (Turck, 2007). Therefore it takes time and the in-depth analysis of sales figures to

realize the competitors advance. An intermediary with integrity would at least inform

Mercedes of this situation and offer them the chance to match it (Turck, 2007). The Chinese

partners of Daimler do not adhere to this part of western business culture.

The European and North American automotive distribution intermediaries are in an awkward

situation. Customers demand discounts whilst the producers reduce commissions (Doering,

2007). Their margins are shrinking and the main revenue is generated from repairs and

maintenance, not from the actual sale. Chinese distributors are overpowered due to the

partnership agreements necessary to open up a business. Therefore the control asserted by

Mercedes on its distribution partner is rather limited. Mercedes is seen to be rejective of

distributor’s demands and there are a few problems which have aroused in the past and will

continue to happen if the Chinese government is not willing to implement an objective and

fair legal system (Doering, 2007). For instance a distribution partner has apparently dumped

Mercedes for another brand with a completely unreasonable justification, although the

contract in place was supposed to be running for another three years (Doering, 2007).

Mercedes did not even try to take its former partner to court as they analysed the chances of

winning as to low, in particular together with the possibly generated negative publicity and

almost certain unwillingness to pay compensation from the former JV partner. This is

certainly an exception and not the normal business practice, but it happens in a significant

quantity Mr Doering did not want to specify due to confidentiality issues.

4.4. Determine the export modes viability The situation with the Chinese intermediaries is not satisfactory. Besides this the sales figures

of on average 1500 units per year (2002-2006) have not increased. The markets value is

estimated to be 500 000 trucks for the next three years (mercer, 2006). The Mercedes market

share is small and there is no way to capitalize on the future demand of the Chinese market.

Exporting is therefore outdated, at least in the existing format. Although there are various

problems with the exporting mode it should be continued under any circumstances as there is

demand for the Mercedes Actros line and production capacity in Germany which needs to be


33

filled (Turck, 2007). Mercedes rather seeks a strategy to enhance its position in the Chinese

market and to get a larger share of it via a different entry mode.

4.5. The wholly owned subsidiary Wilson and Brennar researched this method and came to the conclusion that it is unsuitable

due to the limitations posed by the language and cultural barriers. Besides this Wong points

out the importance of “Quanxi”. Mr. Doering agreed with this thesis and in particular with

the quanxi problem. Out of his perspective a wholly owned subsidiary is absolutely

unsuitable and does not enable long term growth and a serious increase in market share. He

pointed out that such an approach could even worsen the already mediocre relations to the

active intermediaries resulting in a decrease of the sales figures. Besides this the

establishment of a wholly owned subsidiary would be very expensive and risky (Doering,

2007). In particular because of the bureaucracy and regulations. Mr.Doering expressed strong

concerns about the willingness of the government to allow a wholly owned subsidiary.

Theoretically they would allow it, but practically they would cover the operation in so much

red tape that the process would be delayed for a substantial amount of time (Doering, 2007).

4.6. Quanxi is the term describing a system in which social networks determine business

success. It is a favour doing system. The longer people have been involved with each other

the more trust they share. Quanxi is essential for Chinese businesspeople, building it up takes

a lot of time and patience. It is very difficult to be obtained by foreigners. In particular as

bribes are not possible anymore due to corporate social responsibility regulations Mercedes

accepted to adhere to. (Turck, 2007)

4.7. Foreign Production

4.7.1. Licensing

A company assigns the right to a patent (products, technology or process) or a Trademark

(which protects the name) to another company in China for a fee or royalty. The advantage is

that Mercedes could gain market share without equity investment (Henessy, 2001). This

method is unsuitable due to the complexity of the product and copyright issues. According to

Mrs.Turck an actros truck is far too complex; besides this she was concerned about the

copyright as there is no protection of intellectual property in china. At least not as in the

United States or Europe. Therefore Licensing is not a viable option.


34

4.7.2. Franchising

This option is not possible due to the product nature. Franchising might be appropriate for

food or cosmetic chains, but in the automotive sector they make less sense.

4.7.3Local Manufacturing Contract manufacturing and assembly could work in theory as long as the owner of the plants

is Chinese, however as analysed beforehand the complexity of the product as well as

copyright issues are against this entry mode. The Full-Scale integrated production requires a

substantial investment (Henessy, 2001). Mr. Doering identified a missing supply chain as the

main problem to establish this type of local manufacturing.

4.8. Analyse whether the IJV is the most suitable market entry mode

for Mercedes The exporting mode is convenient to fill the productions capacity with a fairly low risk.

Various problems with the Chinese intermediaries and the wish to profit from the strong

demand of Chinese customers call for a new strategy to conquer a larger share of the market.

The wholly owned subsidiary and the foreign production entry modes are not suitable due to

the complexity of the product, copyright issues and the political framework of the P.R.C...

The main factors opposing the wholly owned subsidiary are the Cultural barriers, in particular

the language and “quanxi”.

4.9. Which type of a joint venture in which strategical context? The only option left is a Joint Venture with a Chinese company. Besides being the only

option left it has special characteristics which are favourable for Mercedes. Other points are

unfavourable. In this section the author will analyse the Joint venture framework for it s

suitability for Mercedes.

Chart adapted from Hollensen

There are three major types of joint Venture. In an upstream based JV company A and B

collaborate on Research & Development. They might include production as well (Hollensen,

Parent Firm A Parent Firm B

Joint Venture C


35

2006). This type is not suitable for Mercedes as they do have upstream competences

(Doering, 2007), but according to Mrs Turck there are no suitable upstream partners available

in the Chinese market. In a downstream based JV company A and B collaborate on

marketing, distribution, sales and service. This type of Joint venture is unsuitable for

Mercedes, because the Actros line in itself has a “product mix” which is yet unsuitable for the

H.D.T. mass market in China. It is too expensive in production. Therefore Mercedes seeks an

upstream/downstream coalition in which company A and B carry out complementary tasks.

These three types of joint venture are according to Mrs. Turck not possible in the Mercedes

practice.

Collaboration possibilities for company A and B in the Value Chain

Upstream Downstream

1 3 4 2

Upstream Downstream

Adapted from Hollensen, 2004

X and Y Coalitions

According to porter, 1986 1 and 2 are y coalitions where partners share one or more value

chain activities. In the short run Mercedes wants to build up a joint production and share

technology with its Chinese partner. In the long run this collaboration shall be extended to all

areas of the value chain (Turck, 2007). Points 3 and 4 represent an X coalition in which value

chain activities are divided amongst the partners focusing on the respective core

competences. In the short run Mercedes will provide most of the R&D know how whilst the

Chinese partner does the marketing of the joint product. (Tuerck, 2007)


36

4.10. Porters five forces Model applied

Bargaining power of suppliers:

Fairly low as the components of a Foton are easy to copy, besides this there is no intellectual

property to speak of which would enhance the level of bargaining power. An other factor is

the fragmentation of the supplier industry.

Potential Entrants

Can be described as fairly low as the Chinese government sees Foton/Beiqi as some sort of

national champion. Besides this the automobile industry needs economies of scale and the

capital requirements to enter the market are fairly high, something a new entrant couldn’t

achieve at least initially. Therefore the threat of a new Chinese competitor is rather low.

Substitutes

The substitute is the railway system. China is investing strongly in the rail work network

(anderlini, 2007). The threat is low.

Buyers

The Chinese customer is spoiled by choices. However they are not very differentiated and the

demand for trucks is expected to grow significantly. Therefore their power is medium.


37

Competitive rivalry

At the moment the industry growth rate is solid enough, therefore competitors see less need

to take market share of each other. The high fixed costs of the automobile industry make

capacity fill a prerogative which therefore leads to more competition. The main reason for the

Joint Venture is the competitive rivalry, because each Chinese truck corporation is either in a

joint venture with a foreign investor or plans to do so in the proximate future. Volvo and

MAN-Scania have already entered joint ventures and thereby increase the peer pressure on

Mercedes which has been last in a JV (Reuters.com, 2006). The competitive rivalry is high.

4.11. SWOT Analysis of the Joint Venture between Foton and Mercedes.

Strengths (Doering,2007) Weaknesses(Doering,2007)

Guanxi

Finances

Product Development

Production

Organization

Double management/Culture

Legal conflicts

High Staff turnover

Opportunities(Turck,2007) Threats(Turck,2007)

Finally exploit synergies

Become domestic leader in the

H.D.T segment.

Export the joint product globally

National Champion policy is

dangerous for the JV’s as

producers with no foreign partner

are subsidized by the state.

Competitors could advance at a

faster pace and be the first to

drive a global expansion with a

Sino foreign product.

The JV is in its initial phase. Therefore the analysis has shown significant problems in the

micro environment. The craved synergies are not yet in line of sight. This SWOT is simply

there to give the validility for the following value chain analysis.

4.12. Key Drivers of change for the Chinese automotive industry

These two drivers will shape the Chinese automotive industry in the next decade. They have

been derived from the PESTEL analysis in appendix number1 and Porters five forces model.

Enhancing the quality to compete not only locally but globally with products which are

adapted rather than standardized. This process is instigated by both the local Chinese

competitors as well as the foreign companies investing in China.


38

Government objectives to establish national champions will conflict with the aim to

rebalance the slowly overheating economy via fiscal and monetary measurements. The

governments influence is and will continue to be very dominant in every aspect of the

Chinese automotive business.

4.13. The Partner selection

To manage these key drivers of change there is a strong need to select an appropriate partner

to work together with. The change faced by both foreign and domestic automotive companies

is a driving force to engage into a joint venture.

The Chinese partners for a joint venture are limited, in particular considering that Mercedes

main competitors Man Scania and Volvo (Reuters, 2007) have entered into the market at an

earlier stage. Thereby they have limited the choice for Mercedes down to Foton. Foton is part

of the Beiqi group with which Mercedes already produces C and E class sedans. In the next

paragraphs the author will analyse how Foton and Mercedes fit together and what they expect

from each other.Hollensen used this factors as the main driving forces for IJVs. In practice

they are split like this:

Foton desires Mercedes “Strategically critical manufacturing capabilities”, its

“brand/reputation” and “financial support”. Mercedes desires Fotons “Sales expertise”,

more specifically the distribution network. Besides this Mercedes has a strong interest into

the “low cost production facilities”, in particular the low labour costs. Finally Mercedes

wants to gain “market access” which is only possible via a Chinese partner and profit from

Fotons China “expertise”.

More specifically both partners have needs which they hope the other partner could fulfil

(Yang and Lee)

Factors Mercedes needs Fotons needs

Advanced

Technology

Promote the use of its superior

technology whilst protecting

intellectual property.

Introduce new technology and upgrade

its current products and processes

China’s market Overcome Market barrier posed by

cultural forces and Increase Market

Share

Increased demand from continuous

growth

Labour resource High skilled labour with low cost More employment and job


39

opportunities

Capital resource To diversity its global investment

portfolio.

More capital to improve facilities and

technology upgrades

Information

Channels

Establish itself in the Chinese market Need connection with global business

network

Global alliance A partner in China and operations in

other emerging markets

Globalization expertise

Incentive policy Gain tax- and other governmental

incentives

Support from governmental incentive

policies

Global Market Expand more deeply into the Chinese

market and improve competiveness

Enter international market and start

competing on a global scale.

Reduce risk Diversify Investment and share

potential financial risks

Improve management system and

reduce investment risk

Profit Expand the share of the Chinese

market and increase profit

Experience fast growth and profit

recapitalisation

Foton needs substantial investment into its production facilities (Turck, 2007). It needs to

enhance its existing product range with new technology and it wants to improve its

management applying adequate strategies to compete on a global scale (Turck, 2007).

Mercedes needs to enlarge its market share in the Chinese market, due to various factors

identified in previous sections there is a need for a partner with the distribution system, low

cost labour and expertise in the Chinese market. Mercedes primary objective is to

successfully enter the local market, whilst Fotons key objective is the restructurisation of its

operations. Both have in common that its competitors who are doing the same assert a level

of pressure to do likewise.

4.14. SWOT of Mercedes H.D.T. This analysis will clarify the Mercedes heavy duty segments internal environment and how

they are prepared to meet an externally changing environment with regards to the key drivers

of change and the competitor’s analysis.


40

SWOT of the Mercedes H.D.T in China

Strengths(Doering,2007) Weaknesses (Doering,2007)

Financial resources

Product Development

Reputation/Quality/Brand

No Guanxi

No production facilities

Limited knowledge of the market.

Import reliant

Opportunities(Turck,2007) Threats(Turck,2007)

Use the financial resources

together with the reputation to

find a suitable Joint Venture

partner whose competences have

the opportunity to erase

weaknesses such as Guanxi and

the market expertise.

Staying a niche provider, limited

to roughly 1500 units a year,

whilst the competition closes in

on the gap to the premium

segment and ultimately drives

Mercedes out of the Market.

4.14. SWOT analysis of Foton

Strengths(Doering,2007) Weaknesses (Doering,2007)

Guanxi

Chinese market expertise

Distribution Network

Expertise in low cost production

of standardized vehicles.

Product development

No global experience

Limited Financial resources

Limited Managerial Skills, in

particular in marketing.

Opportunities(Turck,2007) Threats(Turck,2007

Export to markets with similar

conditions and demand as the

domestic market, such as India.

Recruit foreign personnel to

institute change and overcome the

problematic weaknesses.

The focus on standardized

products might not fulfill the

expectations of the Chinese

customers growing sophistication.

Right now the Chinese domestic

market with its double-digit

growth is an excellent

marketplace. However if the

Chinese economy is hit by a

slump this exposition to one

market will cause serious

problems.

Competitor’s Joint venture

operations could give them a

cutting edge and synergies which

in the long run outperform Fotons

domestic operation.


41

4.15. Foton and Mercedes analysed with the Value Chain Now that the reasons for a joint venture have been explained and compared to the

expectations the author will analyse the suitability of both companies for a joint venture.

The aim of the HDT group is to collaborate on both up and downstream activities, in

particular in the long term strategy for the Chinese market and the expansion thereafter into

markets such as India and Russia. (Turck, 2007). However in the short run they will have an

asymmetric relationship where Mercedes takes significant influence in the production

processes and provides the technological knowhow, whilst Foton distributes and assembles

the product. For the next five years the Value Chain would look like this if each partner sticks

to his core competences. This value chain demonstrates the initial phase.

4.16. Value Chain of the Initial Phase This is the start phase where initial objectives of the business plan are realized. As it marks

the beginning of the relationship it will be very difficult to fuse a new culture out of the two

existing ones. Therefore the operations are limited and parent company specific.

Besides this there are Support activities such as HRM, which is rather underdeveloped in the

first stage due to the cultural diffusion. The firm infrastructure will not be joined as the main

production facilities of Foton will be used while a new plant is built (Doering, 2007). The

Minor influence

in the

production After Sales

Service

State of the art

high R&D

Distribution

network

production

facilities

Low cost base

production

facilities

Minor influence

in Global

marketing

Minor influence

due to Chinese

market specifics

Local know how

of the Chinese

market specifics

and learning


42

technological development is limited to motor technology, not the whole product. The

procurement will be dependent on the organizational planning. (Doering, 2007)

This value chain shows that the planned initial phase will be an X-coalition where each

partner focuses on his core competences whilst learning from each other. The final result will

be a new product in the H.D.T. segment. A Foton Amuna truck with a Mercedes motor which

is qualitatively similar to the Actros yet far cheaper and with low cost components. An area

which will be targeted directly is the Sales and Service sector where Foton seems to have the

largest deficits. In particular as a Mercedes motor will be impossible to be repaired by

unqualified staff. The decision to supply Foton with Actros similar motors, but not the

original derives from the fact that they too complicated and expensive in production. Besides

this there are copyright concerns and the mutual trust is not yet established to such a high

extend.

4.17. Second Phase Value Chain In the second phase the value chain will change significantly as Mercedes wants to assert

more influence on the joint operation

In the second phase the joint product will be enhanced significantly. Expertise in other fields

of R&D will be shared with Foton and incorporated into the product. According to

High tech

production

methods After Sales

Service

State of the art

high

technologyR&D

Distribution

network

production

facilities

Low cost base

production

facilities

Global

marketing

expertise

Local know how

of the Chinese

market specifics

and learning

Minor influence

due to Chinese

market specifics


43

Mr.Doering these will incorporate modifications necessary to enhance the performance of the

trucks. Due to confidentiality issues he would not specify them to the author. However the

idea is to basically create a whole new truck instead of supplying motors and building them

into the “Amuna”. This new product shall be the key to conquer the Chinese market and

expand the joint operations to markets with similar demands such as India and Russia

(Doering, 2007). To succeed with this they must improve the production methods

significantly whilst still maintaining the low cost basis. Therefore Mercedes will improve the

value chain via improving the production methods with adequate technique and processes

(Doering, 2007). On the other hand they have to improve the marketing, which lacks

significantly, in particular for the global expansion wished for by Foton. Besides this a joint

new product needs significant alterations to the marketing mix to succeed. The firm

infrastructure will be enhanced significantly through the joint new plant. The procurement

will be better due to the introduction of principles such as just in time management (Doering,

2007).

In the third phase Mercedes will exchange non technical know how to improve the whole

operation in exchange for more influence (Doering, 2007)? Whether this influence is

tolerated will depend on the stakeholders involved.


44

4.18. Stake holder mapping The suitability of Foton and Mercedes is given, now the stakeholders will be analysed to

determine what influence they have and to determine their key concerns

High power

Keep Satisfied Manage Closely

Monitor

Keep informed

Low power/interest

High Interest

Low power and interest

The small share- and bondholders of are no influential stakeholders as the operations scale is

limited seen in contrast to the corporate activities of the parent company. The Chinese side

has only one shareholder, the Chinese government; the influence will be discussed by the

author separately.

High power and low interest

The financial markets do not expect much from china joint ventures, as the past failure rate

has been high.But if significant company resources are employed into a continuously loss

Small shareholders

Chinese

Government/Major

Shareholder

Media

Large shareholders

Suppliers

Major suppliers

Employees

Bond holders

Financial Markets

Senior management

team

Main board

Workers congresses


45

making operation they could react by downgrading ratings and other measures which have a

strong effect.Therefore Foton-Mercedes must keep them satisfied.

Low power and high interest

Large shareholders, the media and suppliers have a higher interest, but their power is

limited. In particular the Chinese media which is controlled by the government. Suppliers

only have power if they own unique intellectual property (Dr.Moritz, 2007). However due to

the simple nature of the product and the low level of legal copyright protection they have

only a limited short term power. In terms of enhancing the relationship Mercedes-Foton must

keep them informed.

High power and high interest

Major suppliers are in this group as they are not as easy to replace as the small ones due to

the extent of the operation. Therefore they can assert pressure on management and must be

managed closely. Employees are a very interesting group as they are the backbone of the

joint venture. Therefore the success depends largely on them. However as the core part of the

employees is Chinese it will be very interesting how they work together with the Mercedes

staff. The author will discuss this topic separately later on in the text. The Main Board of

Daimler is supervising and controlling a lot of operations which are more important then the

china joint venture (Dr.Wolfgang, 2007) as it is in the initial stage. However should it

succeed and the planned global expansion of Foton-Mercedes works out this might change.

The Chinese government/76% shareholder has the highest interest and power in this

operation. This is underlined by the fact that the whole Chinese senior management are either

party officials or involved with it (Turck, 2007). Although the liberalisation driven by the

WTO membership should limit the governments influence in theory at least. This is not the

case; the Chinese government influences the business in a decisive way. Even now after the

joint venture agreement there are daily changes and amendments to the existing contracts

which are directed by mofcom, party officials and other regulatory bodies (Turck, 2007).

Even decisions by senior management are reversed as terms of them do not suit the

regulators. This environment is harmful to the whole operation and the resulting process

delays are harmful to the whole joint operation (Turck, 2007).Therefore a repositioning of

this stakeholder into the keep informed segment is desirable, yet not possible due to the

ownership structure.


46

4.19. Ministry of foreign commerce

The ministry of foreign commerce (Mofcom) is the single regulatory body which makes

business in china complicated. It covers both the domestic partners and foreign investor into

red tape and a bureaucracy of immense dimensions (Turck, 2007). Contractual negotiations

are worth nothing until a government official from mofcom has accepted them (Turck, 2007).

In roughly 90% of all cases they demand alterations, which are usually in Chinese favour.

The main problem is the time lost, even more so then the unfavourable terms amended.

Mofcom makes even simple negotiations fairly complicated.

4.20. Legal System This is the view of all the interview partners: The law is against the foreign investor and the

Chinese partners know that they can rely on the government’s legal aid

(Turck,Doering,Dr.Wolfgang,Dr.Moritz,2007). The main problem is that the legal system is

the backbone of an economy. It is the guarantor which reinforces mutual confidence into the

fairness of the business(Dr.Moritz,2007)Certainly there are always contractual terms in

favour of one or the other party, but these terms are written in stone and can be reinforced in

court. This is even the case in bilateral legal disputes (Dr.Moritz, 2007). For instance the

French law is different from the Spanish or German law; however they are all based on the

Roman law foundation which holds up the same principles (Dr.Moritz, 2007). The English

and American law systems are matched by the Indian law which has been implemented

during colonial times and is highly appreciated in the Indian society for its reliability and

fairness (Dr.Moritz, 2007). Both the roman and case law are reasonably fair based on logic

and the past. Although there is a fair bit of protectionism involved, in particular considering

industries of strategic importance it is overall fair and a foreign investor will be treated fairly.

It is a matter of national interest and part of being an evolved society to entitle both the

foreigner and domestic citizen with a reliable legal system. On the contrary the Chinese legal

system is like every official body closely involved with politics. Chinese entrepreneurs have

close relations to politicians, otherwise they wouldn’t even get the permissions and

concessions to do business (Dr.Wolfgang, 2007) Mercedes is exposed to this system in both

the popular copyright violation cases and smaller legal disputes with the distributors (Turck,

2007). This is extremely annoying in particular with respect to the property rights issue. The

legal systems problems will become dramatic once the joint venture operation should enter

into a problematic change phase in which bargaining power shifts and initial contracts are

doubted and questioned by the respective parties.


47

4.21. The challenges of the Joint Venture As identified in the value chain there are brilliant opportunities for this Joint Venture. In

particular the third stage and its global expansion. The problem is that Mercedes, although

being the minority owner with 24% wants to assert significant influence on the Chinese

majority partner. This is wished for to a certain extent to modernize Foton, but the success

will depend largely on the way change is implemented. A unique challenge thereby is to

overcome the immense cultural barriers between the partners. This section will provide the

reader with the key differences between the cultures.

4.22. Cultural Poles Mercedes and Foton delegations communicate only via translators, even if the Chinese speak

English they prefer this method to avoid uncertainties. (Turck, 2007) This form of

communication is not only time consuming but also very uninteractive and therefore

impersonal. The manners and customs are completely different from each other. Even long

term expatriates face difficulties with the diffusion of the Chinese culture (Dr.Wolfgang,

2007). The same likewise for the Chinese side confronted with the western culture. Due to

the fact that the Chinese managers come from a rather political background there are lacks in

managerial knowledge as it is applied by the western delegations (Dr.Wolfgang 2007). This

gap is responsible for mistrust and miss communication. Further enhanced by the fact that the

Chinese side has a collectivistic approach whilst the Mercedes delegation has an

individualistic background. This means that even after month long discussions there is no

mutual trust between the delegations. This is the main reason why the JV negotiations took

up a total of five years before the final signing (Turck, 2007).

4.23. Hofstedes 4+1 dimensions model The way people in different cultures interpret their world varies along four plus one

dimensions:

Power Distance

China has a high power distance. The inequalities in between the ones who assert power and

the ones on the receiving end are very high. The ones on the receiving end accept this and

follow orders, the result is that decisions are made by a few and the autonomy level of mid

management is fairly low as they have to double check everything with top management

(Doering, 2007).


48

Uncertainty avoidance

China has high uncertainty avoidance. Individuals don’t want to take risks, because the

punishment for failure is higher then the merits of succeeding. This sharply contrasts with the

Mercedes manager’s sharp and self-conscious use of their span of control (Doering, 2007)

Individualism

The Chinese side demonstrates a high level of collectivistic behaviour whilst the Mercedes

side comes from an individualistic background. The Chinese have a group mentality and they

are interdependent on each other. Hey have high levels of loyalty to their organizations and

the country. (Hollensen.2006)

Masculinity

In masculine societies values such as achievement, performance, success and money exceed

the feminine values such as quality of life, warm personal relationships and preserving the

existing. China has a rather masculine society; however the collectivistic belief reduces the

extent to an acceptable level. (Hollensen.2006)

Time Perspective

This dimension considers the perspective of the future. Long term versus short term

orientation. Principally Asian countries have a core focus on the long run whilst Europeans

and northamericans have a short term orientation. (Hollensen.2006)

Considering these cultural differences there is a tremendous task ahead to manage this joint

venture and to implement change.


49

4.24. Analysis of 100 cross regional JOINT VENTURES A clear cultural impact can be seen for cross-regional projects

Japan

Europe

America

China

Africa

Africa China America Europe Japan

In this internal paper the failure quota was analysed. 40 out of 100 euro-sino joint ventures

and 48 out of 100 US-Sino joint ventures collapsed in the first three years. European and

Chinese Joint Ventures have a very high collapse quote. There are no apparent problems in

between sino-japanese operations. Interestingly enough there is fairly high quota of collapsed

joint operations in between the Japanese and American/European partners. The largest the

cultural difference, the larger the collapse quote.

4.24. The H.R.M department’s problems in creating one culture The author has analysed the various cultural aspects and identified the key problems. The

HRM department’s mission is to diffuse and provide solutions for them. However in practice

the department faces problems and constraints which will be analysed in this section.

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50

4.25. Personnel

Training personnel is extremely expensive and time-consuming. The cultural factor is the

most complicated aspect as there are rarely people experienced in modern sales techniques

(Dr.Wolfgang, 2007). The training of a German sales representative is done in 3months time.

Including a few short courses and practical experience in the saloon (Dr.Wolfgang, 2007). In

china the situation is different. Training is far harder and longer. It takes up to a whole year

before a sales representative meets the Mercedes standard expected by both the company and

customer. The situation worsens when looking at car mechanics. Quality cars need quality

mechanics. The educational level in the west is not yet matched in China (Dr.Wolfgang,

2007). Potential car mechanics are an investment which takes up both time and money. The

worst thing is something observed by Daimler in the past two years. Experienced mechanics

and sales representatives are lured away to other European or American competitors with

more attractive sales packages (Turck, 2007). Thereby the unnamed competitors save

themselves the time and money needed for training. This strategy strengthens the competitor

whilst weakening Daimler. Another serious problem which is interlinked to the low level of

loyalty is the salary policy. Only minor wage increase offers from competitors or the

knowledge of colleagues who earn more cause disloyalty. The Chinese workforce will either

take any competitor’s offer which is slightly higher or demand increase of salary without any

justification (Dr.Wolfgang, 2007). At Daimler the Chinese senior manager in charge of

competitor analysis left the company from one day to the other without even mentioning the

reason or giving Daimler the chance to match the competitors offer. She did this after seven

years in the company, where she was according to Dr.Wofgang extremely satisfied. The low

level of loyalty is a serious problem both in the white collar and to a certain extent in the blue

collar sector as personnel know how is lost to the competitor and all the tangible and

intangible investment into the person is gone forever(Dr.Wolfgang,2007).

4.26. Recruitment There are two key problems with the recruitment. First of all there is a shortage of qualified

managers and workers (Dr.Wolfgang, 2007). This is the result of the under deployment of

higher education in the P.R.C. and the long term result of the damage inflicted by the cultural

revolution initiated by Mao(Tsang,2003). Secondly there is pressure to overstaff the joint

venture due to Marxist/Maoist/communist ideology and their respective government policies

(Tsang, 2003).


51

4.27. Dismissal and Remuneration

It is basically impossible to fire inefficient staff due to the lifetime employment system

implemented and caressed by the government (Tsang, 2007). There are four problems with

the remuneration; first of all there are tremendous subsidies to be made to the government to

pay for social welfare benefits. Making the labour more expensive then expected

(Dr.Wolfgang, 2007) Secondly there is egalitarianism in place which means that employees

should be paid equally no matter how efficient they are (Tsang, 2003). This is in sharp

contrast to the bonus payment scheme applied in the western hemisphere which gives special

financial incentives to the ones who work the hardest. The next problem is directly

interlinked with this. It is the income polarization between expatriates and Chinese managers.

The Chinese are upset that foreigners earn roughly 10 times more than they do for the same

work. This problem is unsolvable as the expatriates wouldn’t work in china without receiving

as much as they do at home plus the extra financial incentive (Dr.Wolfgang, 2007).

4.28. Labour and Managerial Skills Some of the Chinese show a low level of discipline and the local managers do not reinforce it

as they are avoiding confrontation (Dr.Wolfgang, 2007). There is a tremendous shortage of

modern managerial skills which seems to be a legacy of the Chinese companies being pure

production facilities (Tsang, 2003). Besides this the Chinese seem to be unwilling to take

risks on an individual basis. This is the result of a culture where there is severe punishment to

be expected for mistakes, whilst receiving little reward for achieving. The group orientation

and decision making processes are another area of concern for the H.R. department as the

processes suffer an enormous time lag. The clashes of the western and eastern managerial

styles are another area of concern. The main reasons for them are the cultural differences

(Dr.Wolfgang, 2007).


52

5. Recommendations

As analysed beforehand there are two separate cultures at work. The collaborational efforts

are undermined by a “them vs. us” atmosphere. It is necessary to remove this sentiment and

replace it with one joint culture. It is therefore imperative to diffuse both the Foton and

Mercedes culture and provide the employees with a new framework which shall take

influence on their mindset and encourage a new way of thinking. In this section the author

will give practical solutions on how to overcome the difficulties. These recommendations

shall serve as a base on how to implement a joint culture with one identity.

5.1. Recruitment The Joint operation needs fresh and young minds with a sophisticated education. There is a

strong need for young people as their minds have not yet been pressed into an organizational

framework. The origin of these recruits should be 50/50% Chinese and international. It is

imperative that these recruits have been exposed to various cultures during their formation, as

this will increase the speed with which they adopt to the new Sino-international

organizational culture. The Chinese recruits must be fluent in English, whilst the international

recruits should have at least a basic understanding of mandarin, the official language. These

basic language skills would already underpin the effort made to engage into the Chinese

culture. The practical problem is that this type of graduate is hard to find and that the

international competition for these individuals is tremendous. Resulting in high employment

costs in respect to the salary and a high staff turnover due to competitors offering even better

pay packages and opportunities.

5.2. Training The existing managers should be sent abroad for extensive training programmes where they

learn modern management principles and get a feel for the joint venture partner’s culture.

This training should also be done with new recruits to provide an extra incentive to start

working for Mercedes-Foton. Training of managers in an environment abroad might be one

of the best, yet very costly actions to undertake to enhance the mutual trust and knowledge.


53

5.2. Continuity

In the last five years the director of the Mercedes China division was changed three times. In

the Chinese culture where personal relationships are valued tremendously it is imperative to

enhance the relationship with the Chinese stakeholders via one top management team with

long term visions of the Chinese market and the expressed will to stay for a long period of

time. Rotating expatriates must therefore come to a stop. Only a long term relationship

between Chinese and Mercedes executives will encourage mutual trust which is decisive to

overcome the difficulties of double management. Only a united effort will lead to a

successful cooperation.

5.3. The Chinese Government Is not only the largest stakeholder, it is moreover the controlling force and one of the two key

drivers of change for the automotive industry. It is imperative to build up Guanxi with a wide

range of politicians without breaking the international corporate social responsibility

regulations. Ten years ago it was possible to buy Guanxi, or respectively the people who

owned it via bribes. However this practice was not legal and Daimler faces serious charges

due to the historical misconduct. Therefore it is a necessity that Daimler engages the Guanxi

issue in a different way. Guanxi is a harmonious relationship between businessmen. It can be

fostered via various social activities and projects carried out together. It is imperative to

approach the Chinese government as a partner. Reliability, trust and diplomacy are essential

to succeed with the politicians. Mercedes must establish itself as a friend of the Chinese

people through various Corporate Social Responsibility programs. These should include

models to fight poverty, build up infrastructure and adequate relations to trade unions who

can help with the direction of these activities.

5.4. Performance Appraisal The Joint Venture will need time and careful management to succeed. It is imperative to be

patient with the financial assessment. Neither the Foton side, nor the Mercedes side should

analyse the performance with their standard point of view. More particular Mercedes not

profit- and Foton not production output wise. The Joint Venture must be evaluated with

regards to its special position and the long term objectives to be realized rather than short

term profit or market share objectives.


54

5.5. A new approach to change implementation

Rather than using the transforming and coercive strategies, where change is implemented in

an abrupt and disruptive way there is a necessity to apply a more diplomatic approach.

Mercedes might have more know how in the business, but this must be included into the joint

venture in a non autocratic manner. Otherwise the Chinese managers will become frustrated

and reject any positive influence at all.

5.6. The exchange of non technical know how The Chinese side’s primary objective is to obtain new technology and update their production

facility. In the long run they want to modernize their management system as well to become

more competitive on a global scale. If Mercedes keeps its influence on the management low

in the first stage and the joint product succeeds mainly because of the superior technology by

Mercedes there will be far more trust in the partnership. This trust must then be used to

exchange non technical knowhow such as marketing, sales techniques, analysing product cost

and determining price, identifying customer preferences, increasing customer loyalty,

developing advertising strategies,etc.(Sheriff,2002). The openness to this change will be far

more open due to the success of the initial phase in which Mercedes kept a low profile.


55

6. Conclusion

The exporting entry mode used by Mercedes has reached its limit. Various problems with the

intermediaries and the expressed motivation to enter the Chinese market in a large scale make

the joint venture as an entry mode a necessity. Other entry modes have been analysed, they

are not adequate due to various limitations, cultural and legal barriers. The suitability of

Mercedes and Foton has been proven through the value chain analysis and the key drivers of

change for the Chinese automotive industry gave further evidence for the necessity of a joint

venture. Foton will gain technological knowhow in the initial phase, production facility

updates in the second and finally non technical expertise for the global expansion in the third

phase. There are various concerns about copyright caused by the high R&D input of

Mercedes. These shall be limited via the use of slightly adapted technology which shall

guarantee that an Amuna truck will never have the same product sophistication as an actros

truck. The main benefits for Mercedes are that they get a local partner with extensive

knowledge of the Chinese market. Besides this they gain a strategic alliance in the Asian

market which might be decisive for the future of the Mercedes truck operation all over Asia.

However this vision proves difficult to be achieved as there are various problem areas which

delay processes and make it very complicated to realize the objectives. The collaboration

between Foton and Mercedes is very complicated due to cultural factors. In particular the

language, managerial background and the decisively different societies make it extremely

complicated to get the partnership on a profitable base. The results are miscommunication

and mistrust. This is further enhanced by a Chinese government which in its role as the main

shareholder asserts a high level of control and pressure on management. Mercedes executives

have to satisfy various stake holders. In particular the political stakeholders prove to be

disruptive of the joint operation and demand changes to existing contracts, thereby causing

substantial time lags.

The JV is not an adequate market entry mode to overcome the cultural and legal barriers of

the Chinese market, at least not in the initial phase. But of all the possible modes it is the best

one for Mercedes at this moment in time. In the long run these difficulties might be overcome

and the Joint Venture is a great success or they become more serious which will ultimately

cause a collapse.


56

The joint venture is in its initial phase, therefore the performance evaluation must be carried

out once the operation is running. At this early stage it cannot be determined whether it will

be a success or failure. The most important task for management is to implement change in a

diplomatic manner. Mercedes must be careful not to overload the Chinese partner with

western style management techniques as the Foton executives will need time to adapt to the

new corporate culture. The key areas of concern identified are in HRM. The way the

personnel are managed will be decisive for the success. The main objective at this early stage

is the implementation of a common organizational culture. The author recommends a very

determined recruitment process in which young talent that can grow into the new corporate

culture is employed. The continuity of service for the Joint Venture by Mercedes expatriates

is imperative, both for adapting to the culture and building up the necessary relationships

with the key stakeholders of the operation. The author recommends following a very

diplomatic approach to manage the change necessary to succeed not only in the Chinese, but

also in the global market.


57

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of October

http://www.ft.com/cms/s/1/9566a176-7561-11dc-b7cb-0000779fd2ac,dwp_uuid=07c92c3a-757f-11dc-b7cb-0000779fd2ac.html

http://www.ft.com/cms/s/1/9566a176-7561-11dc-b7cb-0000779fd2ac,dwp_uuid=07c92c3a-757f-11dc-b7cb-0000779fd2ac.html

http://www.ft.com/cms/s/0/cb8d3138-907e-11dc-a6f2-0000779fd2ac.html


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Daimler.com

Available URL: www.daimler.com

Date viewed 6th

of October

Economist.com,( 2007 X) “Economic data:Country Briefing China”

Available URL:

http://www.economist.com/countries/China/profile.cfm?folder=Profile%2DEconomic%20Data

As viewed on the 7th of November

Economist.com,(2005 Y)”Shanghaied”

Available URL: http://www.economist.com/business/displaystory.cfm?story_id=E1_PRJJDGR


Economist.com,(2007 Z)“Governing China:caught between right and left, town and country”

Available URL:

http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=8815195


Economist.com,(2007 W) “Chinas economy: How fit is the Panda?”

Available URL:



Economist.com, (2002 B)” Is there any point in manufacturing cars in china? Leave it to the locals!”

Available URL: http://www.economist.com/business/displaystory.cfm?story_id=E1_TDRDPRP


Economist.com(2005 M),”Dreammachines”

Available URL:http://www.economist.com/world/displaystory.cfm?story_id=E1_QDPNRQN

Date viewed: 16th of October

http://www.daimler.com/

http://www.economist.com/countries/China/profile.cfm?folder=Profile%2DEconomic%20Data

http://www.economist.com/business/displaystory.cfm?story_id=E1_PRJJDGR



http://www.economist.com/business/displaystory.cfm?story_id=E1_TDRDPRP

http://www.economist.com/world/displaystory.cfm?story_id=E1_QDPNRQN


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Finfacts.com (2007)”world Bank China update-Short term macro challenges are manageable”

Available URL:http://www.finfacts.com/irelandbusinessnews/publish/article_10008039.shtml


Reuters.com

Available URL:http://uk.reuters.com/article/basicIndustries/idUKL1284537520070212

Date viewed on 20th

of October

Song, Lijun.(2004)” educational inequality at the macro level in China”

Available URL: http://www.allacademic.com/meta/p110064

As viewed on: 23rd of October

Journals

Brennan,R.,Wilson,J.(2003),Market entry modes for western firms in China, Asia-pacific

journal of Marketing and Logistics, Volume 4,issue 2, pg, 3-18, Barmarick Publications

Dunphy D., (1997) “Organizational learning as the creation of corporate competencies”,Journal of

management development, Volume 16, issue 4, Page 232-244

Goffin,J., Lihong Z. (1999), Joint venture manufacturing in China: an exploratory investigation”

International Journal of Operations & Production Management, MCB UP Ltd, Volume: 19 Issue:

5/6 Page: 474 – 490. MCB UP Ltd

Griffith, D., Chen, H. (2006). The influence of liability of foreignness on market entry strategies. An

illustration of market entry in China.International Marketing Review. Emerald group publishing Ltd.

Volume 23, issue 6, page 636-649.

http://www.finfacts.com/irelandbusinessnews/publish/article_10008039.shtml

http://uk.reuters.com/article/basicIndustries/idUKL1284537520070212

http://www.allacademic.com/meta/p110064


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Maher,T.,Sheriff,T.K., Wong j. (2002) The hesitant transfer of strategic management knowledge to

international joint ventures in China: greater willingness seems likely in the future, Volume: 25

Issue: 1 Page: 1 – 15, Barmarick Publications

Tsang, W.K.(2003), Resistance to restructuring in Sino-foreign joint ventures: toward a preliminary

model, Volume: 16 Issue: 2 Page: 205 – 222, Journal of Organizational Change Management, MCB

UP Ltd

Parnell,M.(2002) Doing business in China – the modern German experience, Volume: 14 Issue: 5

Page: 351 – 363, European Business Review, MCB UP Ltd

Yang,J. Lee,H.(2002), Identifying key factors for successful joint venture in China, Industrial

Management & Data Systems journals, Volume: 102 Issue: 2 Page: 98 – 109, MCB UP Ltd


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Appendices


62

Appendice A: PESTEL Analysis

PESTEL Analysis of the Commercial Vehicle industry for China

Political

“Regulations on car loans increased instead of decreased.” “Create national chinese car champions” “Expand the Golden triangles economy into the east” “The central government is spending more on education: 54 billion yuan last year, an

increase of more than 39%. This means less than 2.3% of GDP—“significantly lower” than the international average, according to a UN report in 2005.” (Economist.com,2007 Z) The shortage of qualified staff will enforce a higher spending by the automotive companies to train workers and managers alike.

“The budget presented to the NPC calls for a nearly 18% increase in military spending this year to 347 billion yuan. Most analysts believe this is far less than China's true spending.” (Economist.com,2007 Z) The military sector is of particular interest to the comercial vehicles sector. Further growth can be expected.

“Protectionism: military equipment, electric power, oil and petrochemicals, telecommunications, coal, aviation and shipping.” The protection of these sectors, in particular the military equipment, could lead to the exclusion of sino-foreign products. (Economist.com,2007 Z)

“New law on property rights which is mainly intended to reassure the country's fast growing middle class that their assets are secure.” (Economist.com,2007 Z) Important law to encourage consumer spending.

Freeze until the end of 2007 on a wide range of government-controlled prices, such as oil, electricity and water. (Economist.com,2007 W) Short term stability for the enegy needed for production.

Economical

“Low interest rates compared to growth. Higher interest rates expected”(finfacts.com,2007) The cost of money Hill increase over the long run. However the rates are still favourably for the automotive industry at present.

“Inflation eased back from August's decade-high levels in September. Overall low in comparison to other economies with similar growth.” (Economist.com, 2007 X) Low inflation encourages consumer spending in both the B2C and B2B sector.


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“China's trade surplus in January-September, at US$185.8bn, was up by 69% year on year”. (Economist.com, 2007 X)

“Real GDP growth is forecast to ease to 10% in 2008 and 9.3% in 2009. The forecast for 2009 is marginally higher than the 9.2% forecast last month.” (Economist.com, 2007 X)

“Real growth in exports of goods and services is now expected to reach 14.7% in 2008, down from last month's forecast of 16.4%, owing to weaker global demand”. (Economist.com, 2007 X) As the chinese automotive industry is not yet in a state to export on a large scale, the lower global demand is a low risk factor.

“Appreciating Yuan gradually against the dollar”. (Economist.com,2007 W) Exports into the US, aswell as Europe will become slightly more expensive, whilst the imports price will decrease gradually.

“In August consumer-price inflation jumped to 6.5%, up from 1.3% a year earlier and its highest for more than a decade. Food prices responsible due to supply shortages.” (Economist.com,2007 W) If essential goods increase in price they cause fear amongst consumers and therefore reduce spending

“Share prices have risen by 400% in just over two years. This bubble might burst. Chinese firms have invested in other Chinese companies' stocks, a slump in share prices could directly hurt their profits and hence their investment just like in the 90s in japan.” (Economist.com,2007 W) Depending on the amounts of investment this can cause serious problems for the comercial vehicle automotive sector because of its dependency of B2B customers.

“The chinese road network is already the 2nd largest worldwide. 1.8m km, with 44% of it built in the past 15 years. Nor will it stop there. By 2020, China plans to double again the length of its motorways.”(economist A,2005) The more extensive the road network, the higher the demand for trucks Hill become as new zones are connected and invested in.

Socio Cultural

Educational inequality(Lijun,2004) The one child policy leads to significant changes in the agestructure. The present generation

will be the largest ever. (Economist.com,2007 W) Income disparities between rural and urban areas fosters the move of population towards

the east and into the cities. (Economist.com,2007 Z) corruption is rampant. (Economist.com,2007 Z) Ideological battles between free-marketeers and left-wingers threaten to impede reform.

(Economist.com,2007 Z) Excluding food, inflation is only 0.9%. This does not mean that food is unimportant: it

accounts for one-third of the inflation basket, and rising prices could trigger social unrest. (Economist.com,2007 W)

Equities account for less than 20% of Chinese households' total financial assets. (Economist.com,2007 W)

China's fragile and inefficient banking system is certainly a drag on its economy, but the risk that a banking crisis could bring down the economy seems small. China has huge foreign-exchange reserves available to protect its banking system. (Economist.com,2007 W)

Technological

Technological gaps are closed via copying and buying foreign technology(Economist.com,2005 Y)


64

Rather then Capital intensive production methods with robots, Chinese producers rely heavily on labour as it is cheaper. average wages have risen by around 15% over the past year, but labour productivity in manufacturing has risen even faster. (Economist.com,2007 W)

Environmental

Water scarcity The problem is not China’s environmental laws, many of which are copied in their entirety

from European legislation and are some of the best in the world. The fault lies in a lack of enforcement at all levels. (Anderlini, j. 2007)

The government neglected the environmental and health implications of rapid economic growth until recently(Anderlini, j. 2007)

The economic costs of toxic growth are huge but hard to calculate. The World Bank report estimates the health costs of pollution at about 6 per cent of gross domestic product in 2003, or Rm781bn, but that does not include clean-up costs or the future costs to industry of current unsustainable development. (Anderlini, j. 2007)

Having decimated much of its own environment through economic growth at all costs, the Chinese government has introduced some policies in recent years that essentially export the problem abroad. (Anderlini, j. 2007)

Legal

“A record US$45m judgement for patent infringement was awarded against a French firm, Schneider Electric, in favour of a Chinese one. Schneider is appealing.” (Economist.com,2005 Y) The chinese legal system is still not demonstrating the same level of sophistication as the European and even US law. The result are ongoing legal disputes about patents and contracts.

“Chinese banks are officially not allowed to lend to investors to buy shares, but anecdotal evidence suggests that households and firms have taken out loans disguised as mortgages to buy shares. If so, the effect of the Stockmarket bubble bursting could be larger than the direct impact on consumers' wealth.” (Economist.com,2007 W). If the middle classes wealth is in danger, this will ultimately lead to lower spending. Lower demand for consumer goods will lower the demand for transportation and therefore reduce commercial vehicle demand.

“Product piracy destroys margins for aftersale market” (Economist,2002 B) Both domestic and foreign commercial vehicle producer can not capitalize on the highly profitable after sales market.


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Apendice B: Interviews

Dr. Hans Moritz

Karl Eugen Weg 7

70599 Stuttgart

Tel.:00491727372929

Tradelawyer experienced in Euro-US bilateral tradeagreements with extensive

knowledge of international trade law.Open interview and discussion about the Chinese,

Roman and English legal systems and the transition problems in bilateral trade

agreements.

Thomas Doering

Director of Strategic planning of the commercial vehicles unit of the Daimler

plc.Guided 90 minute interview about the Joint venture operation in China.

Tatiana Turck

Director of corporate controlling, formerly stationed in China for four years of time

negotiating the terms of the Joint VentureGuided 60 minute interview about strategic

marketing in China.Aspects covered included Long and short term strategies, Entry

modes, Objectives, Threats and opportunities,

Dr. Hans Wolfgang

Walter-Flex-str.38

70519 Stuttgart


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Tel.:00497114790544

Retired member of the board of Daimler Chrysler was responsible for the personnel

department.Guided 120 minute interview about HRM, Socio cultural aspects and

change management. Aspects covered in the interview incorporated

Recruitment,Training,Chinese workforce, German workforce, legalities, Cultural

barriers, Motivational aspects, salary policy, Expatriates

export managament - mercedes

Documents