Case study on Dongfeng Motor Corporation

姚明月

Introduction

Dongfeng Motor Corporation （DFM） was one of the top three companies in Chinese motor industry， which was founded in 1969. It started to enter global market and became a company with international competitiveness. This essay uses the theory of international business strategy and entry mode to analyze the experience of DFMs entering foreign markets from the perspective of market selection， strategic planning， modes of operations and opportunities and risks.

1. Foreign market selection

1.1 Literature review

The selection of foreign partner is important for the success of foreign entry （Luo， 1998）. Brouthers and Wilkinson （1995） implied that the company should pay attention to the complementary competence and cooperative cultures as well as the risk level of the partner.

1.1.1 Country attractiveness

According to Pangarkar （2008）， host country attractiveness is characterized as market demand and growth and low risk. In addition， Luo （1998） indicated that strategic traits， organizational competence and financial state are three categories of the country attractiveness.

1.1.2 Environmental scanning

Wu， Costa and Teare （1998） defined that environmental scanning is the process of using or absorbing the information of events， trends or relationships about the external information of an organization. Furthermore， Dymsza （1972） highlighted that analysis of environmental scanning includes economic forces， political and legal forces， socio-cultural and environmental factors， technical factors and competitive forces.

1.2 How did DFM select its foreign markets

Based on the theory above， DFM selected the foreign market by exploring the country attractiveness and using environmental scanning model. This essay chooses two countries， one is Japan and the other is Russia.

In terms of country attractiveness， Japan has several attractive points. The demand of the market is an essential factor. Japan was one of the biggest trade partner of China.

In terms of environmental scanning， it is analyzed from four perspectives. First， economic forces include the impact of the favorite environment of entering the WTO. After entering the WTO， DFM can utilize the technology， capital and market and learn from foreign countries. Second， the political and legal environment can promote the development of industry. Third are socio-cultural and environmental factors that provide the company with advantages. The car culture emerged and people had increasing demand on family cars. Forth， in terms of technical environment， foreign technology can spill over to DFM.

2. Strategic planning & Modes of operations

Corporate strategy covers the overall scope of the companys activities influenced by competition， currency and country （Young etal.， 2014）. For DFM， corporate strategy options are joint venture and establishment of overseas subsidiaries.

2.1 Joint venture

According to Petersen and Welch （2002）， there are five modes of international combination which includes exporting， joint venture， licensing， subsidiaries and manufacturing. Joint venture， the most common mode， is used by DFM.

2.1.1 Literature review

Harrigan （1988） defined that joint venture is business contract created by two or more owners to become a separate entity. Additionally， joint venture may stabilize the profits and it can change structure in vertical integration and expand technological scales （Harrigan， 1988）. Furthermore， Blomstrom and Zejan （1991） demonstrated that joint ventures between home and foreign countries are better choice for less developed countries because joint venture can transfer technology to developing countries with lower costs.

2.1.2 Case of DFM VS Nissan

In 2002， DFM signed the long-term partnership agreement with Japanese Nissan in which both DFM and Nissan decided to set up a 1：1 joint venture to produce motor products. The joint venture company came into operation on July 1st in 2003. The results showed that the activity promoted the performance of both sides and expanded the market quickly.

2.2 Subsidiaries

Subsidiary is one of the entry modes which refers that companies may have an overseas subsidiary that can directly deal with remanufacturings， wholesalers or retailers （Young etal.， 2014）.

2.2.1 Literature review

In the research of Hill， Hwang and Kim （1990）， subsidiary has the lowest risk of dissemination because internal organization facilitates the congruent atmosphere in terms of goals and values between subsidiaries and headquarter. In addition， Petersen and Welch （2002） suggested that local subsidiaries can undertake specialized processes with labor-intensive or cost-efficient production line to minimize tariff payments.

2.2.2 Case of DFM subsidiary in Russian

In 2011， DFM established a subsidiary in Moscow called Dongfeng Motor Russian Corporation which was the first subsidiary of DFM in overseas market.

3. Opportunities and Risks analysis

3.1 Opportunities of joint venture

The mode of joint venture has several opportunities for the company. First， the joint venture may take advantage of the low-cost labor resource in Chinese manufacturing and compete with global market. Second， the process of internationalization of Chinese companies promoted the scale of overseas market and attracted amounts of capital and client resources （Jiang， 2007）. Moreover， the spillover of technology and knowledge such as management skills and other information can benefit for both home and host country （Dymsza， 1972）.

3.2 Challenges of joint venture

Challenges associated with joint venture should not be ignored. First， the fierce competition from domestic market makes joint ventures hard to survive （Jiang， 2007）. Second， Gale and Luo （2004） argued that the external environment could influence performance of joint venture. For example， the price of oil tends to affect the sales of motors. Third， the political factors may determine the orientation of the joint venture. Forth， the cultural difference can influence the efficiency of the joint venture. As for DFQ and Nissan， they must deal with these issues efficiently.

3.3 Opportunities of subsidiaries

According to the theory of Dunning （1998）， the first opportunity of subsidiary is the location advantage which stresses country-specific advantage. In this case， DFM can take advantage of the Russian market. The internationalization theory （Dunning， 1998） shows that the second opportunity is ownership advantage or firm-specific advantage. In this case， the subsidiaries can pursue their self-interested profits. Dunning （1998） argued that internalization can decrease transaction costs， which can be the third opportunity of subsidiaries. As for DFM， the subsidiary in Russia can enjoy the three advantages above.

3.4 Challenges of subsidiaries

Challenges of subsidiaries can be concluded as the issue of cross-culture management， legal risk and foreign competition. First， cross-cultural management of human resource includes the management of expatriate managers， local managers， local employers and the relationship with local labor union （Hill， Hwang and Kim， 1990）. Second， different countries have different legal system. Finally， the competition of foreign market could restrict the development of the industry （Petersen and Welch， 2002）.

4. Suggestions

How to develop competitive advantages in the foreign markets is an essential factor to be considered. First， DFM should explore the different requirements of domestic and foreign market and formulate different strategies. Second， DFM should establish customer archives and strengthen the management of clients to increase the customer satisfaction in foreign countries. Third， DFM can focus on the labor in China and technology from Japan to maintain core competence.

Conclusion

In conclusion， the internationalization experience of DFM can be three steps. First is to select the target countries， so Japan and Russian have been chosen because of the potential market and favorite condition for motor industry. Second， the modes of operation DFM used were joint venture and establishment of overseas subsidiaries. Finally， the opportunities and challenges of the international business strategies are required to be analyzed.

Reference：

[1]Blomstrm， M.， & Zejan， M. （1991）. Why do multinational firms seek out joint ventures. Journal of International Development， 3（1）， 53–63.

[2]Brouthers， K. D.， Brouthers， L. E.， & Wilkinson， T. J. （1995）. Strategic alliances： choose your partners. Long Range Planning， 28（3）， 18-25.

[3]Dunning， J.H.（1998）. Location and the multinational enterprise： A neglected factor？ Journal Business Studies， 29（1）， 45-66.

[4]Dymsza， W.A. （1972）， Multinational Business Strategy， McGraw-Hill， New York， NY.

[5]Gale， A.， & Luo， J. （2004）. Factors affecting construction joint ventures in china. International Journal of Project Management， 22（1）， 33-42.

[6]Harrigan， K. R. （1988）. Joint ventures and competitive strategy. Strategic Management Journal， 9（2）， 141–158.

[7]Hill， C. W. L.， Hwang， P.， & Kim， W. C. （1990）. An eclectic theory of the choice of international entry mode. Strategic Management Journal， 11（2）， 117-128.

[8]姜坤. 中外合資制造業(yè)企業(yè)海外發(fā)展的形勢(shì)分析[J]. ，中國(guó)集體經(jīng)濟(jì)旬刊，2007，（9）.

[9]Petersen， B.， & Welch， L. S. （2002）. Foreign operation mode combinations and [10]internationalization. Journal of Business Research， 55（2）， 157-162.

[11]Pangarkar， N. （2008）. Internationalization and performance of small- and medium-sized enterprises. Journal of World Business， 43（4）， 475-485.

[12]Wu， A.， Costa， J.， & Teare， R. （1998）. Using environmental scanning for business expansion into china and eastern europe： the case of transnational hotel companies. International Journal of Contemporary Hospitality Management， 10（7）， 257-263.

[13]Young， M. N.， Tsai， T.， Wang， X.， Liu， S.， & Ahlstrom， D. （2014）. Strategy in emerging economies and the theory of the firm. Asia Pacific Journal of Management， 31（2）， 331-354.