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«Pioneering versus Following in Emerging Markets The Case of the Automotive Industry in China and Brazil DISSERTATION der Universität St. Gallen ...»

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Pioneering versus Following

in Emerging Markets

The Case of the Automotive Industry

in China and Brazil

DISSERTATION

der Universität St. Gallen

Hochschule für Wirtschafts-,

Rechts- und Sozialwissenschaften (HSG)

zur Erlangung der Würde eines

Doktors der Wirtschaftswissenschaften

vorgelegt von

Oliver Kabuth

aus

Deutschland

Genehmigt auf Antrag der Herren

Prof. Dr. Li Choy Chong

und

Prof. Dr. Hellmut Schütte

Dissertation Nr. 2716 Difo-Druck GmbH, Bamberg 2003 Die Universität St. Gallen, Hochschule für Wirtschafts-, Rechts- und Sozialwissenschaften (HSG), gestattet hiermit die Drucklegung der vorliegenden Dissertation, ohne damit zu den darin ausgesprochenen Anschauungen Stellung zu nehmen.

St. Gallen, den 10. Dezember 2002

Der Rektor:

Prof. Dr. Peter Gomez This thesis is dedicated to Helga and Hanna Acknowledgements First of all, I want to thank my two professors Prof. Dr. Li Choy Chong (University of St. Gallen) and Prof. Dr. Hellmut Schütte (INSEAD) for accepting me as their doctoral student. They successfully created a stimulating and balanced environment of scientific support and academic freedom.

I am also deeply indebted to Wolfgang Widlewski who made it possible to materialize this PhD project and to Bernd Rüfle and Paul Otto who provided me with the necessary infrastructure to carry out the field studies in China and Brazil.

I would not have been able to accomplish this project without the help of the many executives, consultants, and professors who shared with me their rich experience in numerous highly exciting talks. I am particularly proud of having spoken to some representatives of carmakers who truly wrote automotive history in China and Brazil.

It was very impressive to learn from them about the birth of the industry in Brazil and China. They also contributed greatly to my comprehension of what it really means to pioneer an emerging market. My special thanks go to Don St. Pierre, Pierre de Montgolfier, Dr. Martin Posth, Dr. Wolfgang Sauer, André Beer, General Aldebert Queiros, and Ben van Scheik.

I would like to thank Dr. Xiaozhi Liu, Dr. Alexander Riess, Hidesato Nakamura, Nelson H. Yoshimura, Shih Swee, André L. Criscione, and Prof. Glauco Arbix for their extraordinary patience and help.

I also want to highlight the invaluable support of Yaosheng Luan, Jiao Shao, Dr.

Wayne J. Xing, and Cláudia Banus who patiently answered all my questions, helped to establish contacts to interview partners, and provided me with countless data.

Of course, I am also grateful to the many other interview partners that are not mentioned by name for their great help to this research project.

Eventually, I wish to thank my mother and my girl-friend for accepting my long absence from home and their infinite patience during the final stage of the thesis.

They greatly encouraged me during the downs that a PhD project usually entails.

Therefore, I dedicate this thesis to both of them.

With so much support, it is hard to believe that this book could still have any flaws or omissions, but it probably does. Although cross-checking with alternative sources has eliminated most erroneous data, I apologize for any mistakes that might still be present and bear the responsibility for them.

–  –  –

Summary of Contents 1 Introduction

2 Theoretical Framework

3 Research Methodology

4 The Automotive Environment in Brazil

5 The Automotive Environment in China

6 Discussion

7 Conclusion

8 References

9 Appendix

Table of Contents

Executive Summary

1 Introduction

1.1 Research Focus

1.2 Structure of Thesis

2 Theoretical Framework

2.1 Relevant Definitions and Conceptual Issues

2.1.1 First-mover

2.1.2 Follower

2.1.3 From First-mover Opportunities to First-mover Advantages

2.1.4 Follower Advantages

2.1.5 Sustainability of First-mover Advantages

2.1.6 Direct versus Contingency Perspective

2.1.7 The Model of Order-of-entry Advantages

2.2 First-mover Advantages

2.2.1 Economic Factors

Scale and Experience Economies

R&D and Patents

Marketing Cost Asymmetries

2.2.2 Pre-emptive Factors

Cost Asymmetries in Factor Inputs

Spatial Pre-emption

Early Profits

2.2.3 Technological Factors

Product and Process Innovations

II Organizational Innovation

2.2.4 Behavioural Factors

Switching Costs

Prototypicality and Dominant Design

Network Economies

Information and Consumption Experience Asymmetries

2.3 Follower Advantages

2.3.1 Economic Factors

Scope Economies

Insufficient Investments

2.3.2 Exploitative Factors

Free-riding Effects

Imitation Effects

Incumbent’s Inertia

Learning From the First-mover’s Mistakes

2.3.3 Technological Factors

Resolution of Technological Uncertainty

Shift in Technology and Transformation of the Distribution Systems.............. 28 2.3.4 Behavioural Factors





Resolution of Market Uncertainty

Shift in Customer Needs

2.4 The Life Cycle Model of the Automotive Sector

3 Research Methodology

3.1 Research Objectives

3.2 Demarcation of Research

3.3 Research Design

3.3.1 Research Strategy

3.3.2 Research Method

3.3.3 Research Reporting

3.3.4 Research Objects

3.4 Conceptual Framework

3.4.1 Propositions

3.4.2 The Three Dimensions of OEAs

3.4.3 Types of Influence Factors

3.5 Data Collection

3.5.1 Outcome of Field Work

3.5.2 Questionnaire

III 3.5.3 Interviews

Comparison of Evaluations by Country

4 The Automotive Environment in Brazil

4.1 Brazil in Figures

4.1.1 Demographic Indicators

4.1.2 Economic Indicators

4.1.3 Transportation Indicators

4.2 The Automotive Industry in Brazil

4.2.1 Overview of Brazilian carmakers

4.2.2 History of the Automotive Industry in Brazil

The 1920s-1950s – First Automotive Operations by MNEs

The Late 1950s – The Birth of the National Automotive Industry

1964-1985 – The Automotive Industry under the Military Regime.................. 61 The 1990s – Brazil’s Market Opening

4.2.3 Development of the Parts Industry

4.2.4 Trends in Human Resources

4.2.5 Development of the Labour Unions

4.2.6 Development of the Distribution System

5 The Automotive Environment in China

5.1 China in Figures

Demographic Indicators

Economic Indicators

Transportation Indicators

5.2 The Automotive Industry in China

5.2.1 Overview of Chinese Carmakers

5.2.2 History of the Automotive Industry in China

The 1950s – First Automotive Activities by SOEs

The Late 1970s – The Open-door Policy

The Early 1990s – Takeoff of the Domestic Car Industry

The Early 2000s – Further Consolidation and Deregulation of the Industry.. 102 5.2.3 Development of the Parts Industry

5.2.4 Trends in Human Resources

5.2.5 Development of Labour Unions

5.2.6 Development of the Distribution System

6 Discussion

6.1 First-mover Advantages

6.1.1 Economic Factors

IV Proposition 1: Economies of Scale

Proposition 2: Product Localization

Proposition 3: Marketing Cost Asymmetries

Proposition 4: Prolongation of Product Life Cycle

Proposition 5: Automotive Prime Location

6.1.2 Pre-emptive Factors

Proposition 6: Special Government-conferred Status

Proposition 7: Manufacturing Licence

Proposition 8: Choice of Best Suppliers

Proposition 9: Choice of Best Distributors

Proposition 10: Early Profits

6.1.3 Technological Factors

Proposition 11: Product & Process Innovations

Proposition 12: Market Knowledge

6.1.4 Behavioural Factors

Proposition 13: Information & Experience Asymmetries

6.2 Follower Advantages

6.2.1 Economic Factors

Proposition 14: Partner Selection

Proposition 15: Site Selection

Proposition 16: Labour Union Relations

6.2.2 Exploitative Factors

Proposition 17: Experienced Government at National Level

Proposition 18: Experienced Government at Local Level

Proposition 19: Improved Automotive Infrastructure

Proposition 20: Recruiting Qualified Staff

Proposition 21: Contracting Qualified Suppliers

Proposition 22: Contracting Qualified Dealers

Proposition 23: Learning from the Incumbent’s Mistakes

Proposition 24: Incumbent’s Inertia

6.2.3 Technological Factors

Proposition 25: Safety & Environmental Regulations

Proposition 26: Shift in Technology

Proposition 27: Shift in Supply

Proposition 28: Shift in Distribution

6.2.4 Behavioural Factors

Proposition 29: Shift in Demand

V

6.3 Summary

7 Conclusion

7.1 Findings on Business Performance

7.1.1 Firm Survival

7.1.2 Market Share

7.1.3 Sales Growth

7.1.4 Profitability

7.2 Practical Implications

7.2.1 Requirements to Early and Late Entrants

7.2.2 Recommended Resources and Skills For Newcomers

Supply

Production

Distribution

Marketing

Management

Human Resources

7.2.3 Strategic Recommendations

Timing

Product Offering

Entry Mode

Partner Selection

Site Selection

The Step-by-step Strategy

7.3 Limitations of This Research

7.4 Suggestions For Further Research

8 References

9 Appendix

9.1 Empirical Research on Order-of-entry Effects

9.2 Results of the Questionnaire Surveys

9.3 Brazilian Questionnaire

9.4 Profiles of Interviewees

9.5 World-wide Vehicle Production and Sales

9.6 Historic Milestones in Brazil and China

9.7 Brazilian Production, Sales, Imports, and Exports

9.8 Production, Sales, Imports and Exports by Brazilian Carmaker

9.9 Chinese Production, Sales, Imports, and Exports

9.10 Production, Sales, Imports and Exports by Chinese Carmaker................ 315 VI

9.11 Automotive Exports from China in 2002

9.12 Product History in Brazil and China

9.13 Import Tariffs in Brazil and China

9.14 Domestic Tax Burden on Brazilian Cars

9.15 Major Platforms of Brazilian and Chinese Carmakers

9.16 LC Requirements under the Kubitschek Administration

9.17 Localization Rate of Chinese Cars (1984-2000)

9.18 Pioneer Advantage based on Localization

9.19 Price Development of Major Chinese Models

9.20 Major Criteria for Site Selection

9.21 Commercial Start and Location of Brazilian Carmakers

9.22 Brazilian Incentive Packages in the 1990s

9.23 Intra-governmental Relations in the Chinese Car Industry

9.24 Share of Alcohol-driven Cars

9.25 Average Fuel Consumption of Major Models

9.26 Employment in the Brazilian Automotive Industry

9.27 Unionization at Brazilian Carmakers

9.28 Educational Matters in the Brazilian Automotive Industry

9.29 Expatriates in Chinese JVs

9.30 Distribution Networks by Chinese Carmakers

9.31 Dealer Performance by Brazilian Carmaker

9.32 Profit Data of Pioneers and Followers

9.33 Sales of Pioneers and Followers

VII List of Tables Table 2.2-1: Overview of OEAs

Table 3.3-1: Clusters of market entries of Brazilian carmakers

Table 3.3-2: Clusters of market entries of Chinese carmakers

Table 3.4-1: Types of influence factors of OEAs

Table 3.5-1: Outcome of the field study in figures

Table 4.1-1: Brazilian key demographic data

Table 4.1-2: Brazil’s population from 1960 to 2000

Table 4.1-3: Economic indicators for Brazil (1960-2000)

Table 4.1-4: Development of Brazilian car and vehicle density

Table 4.1-5: Length of Brazilian roads and share of paved roads

Table 4.1-6: Passenger transportation as share by means of transport in persons.

. 55 Table 4.1-7: Freight transportation as share by means of transport in tons.............. 55 Table 4.2-1: Brazilian carmakers at a glance

Table 5.1-1: Chinese key demographic data

Table 5.1-2: China’s population from 1970 to 2000

Table 5.1-3: Education of Chinese by degree

Table 5.1-4: Economic indicators for China

Table 5.1-5: Development of car and vehicle density of selected countries.

............ 91 Table 5.1-6: Length of China’s roads and share of paved roads

Table 5.1-7: Passenger transportation as share by means of transport in persons.

. 92 Table 5.1-8: Freight transportation as share by means of transport in tons.............. 92 Table 5.2-1: Chinese carmakers at a glance

Table 5.2-2: Impact of China’s WTO entry on the domestic automotive industry.

.. 103 Table 5.2-3: Automotive and part investments in China (1981-1994)

Table 5.2-4: Most common types of car distribution channels in China.

................. 111 Table 5.2-5: Comparison between the traditional and modern distribution system. 111 Table 5.2-1: Example of an evaluation sheet

Table 6.1-1: Production milestones of the Brazilian Big Four

Table 6.1-2: Brazilian PC production by carmaker in 2001

Table 6.1-3: Chinese PC production by carmaker in 2000

Table 6.1-4: LC and import policies in Brazil

Table 6.1-5: Value-based LC by selected model

Table 6.1-6 : LC and import policies in China

Table 6.1-7: LC development by selected models (1984-2000)

Table 6.1-8: Advertising cost per vehicle by brand in 2000

Table 6.1-9: Advertising cost per vehicle by model (1999)



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