Toyota's Globalization Strategy in China (2013 PDF)

2013 International Conference on Advances in Social Science, Humanities, and Management (ASSHM 2013) A Case Study of Toyota's Globalization Strategy while Entering Chinese Market Gao Guowei State Grid Energy Research Instit...

2013 International Conference on Advances in Social Science, Humanities, and Management (ASSHM 2013) A Case Study of Toyota's Globalization Strategy while Entering Chinese Market Gao Guowei State Grid Energy Research Institute, Beijing 100052, China Abstract tential, foreign carmakers invested huge- ly in the China market. Chinese market is very important for multinational auto manufacturers, and a In terms of the JVs, Chinese govern- multinational’s practice of entering Chi- ment knew clearly if the Chinese side nese market is a good case for globaliza- partners cannot learn the core technology tion strategy. In this paper we review from their foreign side partners, the JVs Toyota’s strategy of entering Chinese au- would not be truly helpful to upgrade and to market, to evaluate the cooperation boost the Chinese auto industry. However, form, geographical distribution, and cus- the potential market gave Chinese gov- tomization production. Toyota’s strategy ernment a strong leverage set up the regu- in Chinese auto market is relatively suc- lation and rules which are a bit favorable cessful and a more aggressive goal is be- to Chinese side partners in the forms of ing implemented. JVs with foreign investors. Keywords: globalization; multinational; In 1994, the Chinese government de- strategy creed a related Auto Policy to emphasize that the automotive industry will be one of the major pillar industries in the future. At the same time, a series of regulations 1. CHINA AUTOMOBILE MARKET and rules related to the FDI were lunched to improve and protect the domestic auto In the late 1980s, because of the open industry. Because having less competi- economy policy, the demand of automo- tiveness, the domestic manufacturers biles increased. However, by then China were accordingly under the protection didn’t have sufficient technology to en- made by the Chinese government. The hance the production and quality. In order protection included the limited imported to compensate the gap between the lim- quotas and higher tariff around 80% ited technology and the increasing de- to100% on both the CBU vehicles and mand, Chinese government has put a lot parts and components. Besides, another of efforts in raising high technology. On important protection is to require 40% the other hand, the automotive industry LCR. was not mature yet and Chinese govern- ment, in order to meet the domestic de- In 2001, China successfully attended mand, began to encourage establishing the World Trade Organization (WTO) the JVs, which was an important ap- whose principle is to ensure that global proach to modernize the automotive in- trade can move freely and fairly. One of dustry. In terms of the future market po- the very important measurements is to reduce the barriers for international trade. © 2013. The authors - Published by Atlantis Press 797 Based on the agreement, China is needed tablish various functional entities which to modify its regulations and rules to assume the job of materials storage and comply with the principle and, on the distribution of logistics in order to other hand, WTO provided a certain peri- achieve multiple purposes such as short- od functioning as the buffer to give Chi- ening the suppliers’ delivery time, im- nese manufacturers sufficient time which proving the supply chain, or building a was 5-year period for protection, to alter more effective system. its management to meet the WTO re- quirements. Within this 5-yearperiod, After entering WTO in 2002, Chinese Chinese government should reduce the auto parts industry was highly trans- import tariffs of cars to 25% as well as formed. In 2006, the total value of auto the parts to 10% gradually. After the 5- parts sector reached 67 billion in 2006. year protection, the quota on the import- This figure is 2.5 times growth in just 4 ed cars should be cancelled out. years. The main factor for the booming was the fast growing demand from the In 2004, in order to totally comply with automobile manufacturers in China. The the WTO agreements and enhance the policy that assisted the growth of auto current industry structure, new Auto Pol- manufacturing was very effective, both icy was published. The 2004 Auto Policy domestic and foreign manufacturers in- unwound many constraints on the basis of vested huge money and energy in hope of 1994 Auto Policy, to favor the foreign the future benefit. investors who accordingly could enjoy more benefit from the WTO agreements. Furthermore, the increasing automotive Besides, because of the issue of environ- demand also benefited the parts suppliers ment protection, the 2004 Auto Policy which made use of the huge advantage in also encourages the development of the China’s labor lower cost, favorable poli- ecological compact cars. cies and the large market demand. How- ever, there are still some problems in In Chinese auto market, JV is the only Chinese auto parts market. First of all, the way to enter this industry by foreign car auto parts sector in China is small-sized makers. Generally speaking, in this form and fragmented geographically. Second, of cooperation, the foreign side partners the quality of the local produced parts as provide higher advanced technologies compared to the foreign counterparts is and the Chinese side partners is respon- relatively worse and only very limited sible for providing the local strategy and number suppliers are able to earn the con- knowledge and public relation. tract with the major foreign carmakers. However, in order to gain more ad- However, with the Chinese auto de- vantages in the JV formed cooperation, mand increasing, more and more foreign foreign side partners would implement car makers introduced their own suppli- some ways to keep its controlling stance. ers outside China to directly invest in This most common way is to leverage by Chinese market. Moreover, because the its advanced technology. Usually, those JVs in China need to meet the required foreign side partners only provide basic 40% LCR, more and more foreign car- technology to the JV but keep the latest makers will expand their technology and ones. Moreover, because the reduction of investment and the parts suppliers in Chi- imposition of the quota and tariff, direct na can expect a more optimistic market import become another alternative. Last- growth in the future. ly, foreign carmakers may choose to es- 798 2. TOYOTA IN CHINA MARKET Because FAW acquired Tianjin Auto Group in 2002, Toyota and FAW signed In the Chinese auto market, Crown was another agreement in May 2002; thus the earliest export Japanese cars. At the Tianjin FAW Toyota Motor was renamed early stage, Toyota had the intention to for Tianjin FAW Toyota Motor (TFTM). cooperate with local car producer; how- Under current situation, China has a law ever, the unstable politics prevented from which allows any MNC to form JV with a further development. In the 1980s, the at most two Chinese Corporations. In or- Chinese market roused the first wave of der to preserve the flexibility to cooper- JV; Chinese government also pushed the ate with other Chinese Corporation, progress by issuing a series of industry Toyota asked FAW to acquire SFTM. policies in hope of exchanging for ad- This adjustment gave the room for Toyo- vanced vehicle production technology. ta to form another JV with Guangzhou However, by then Toyota wanted to pre- Automobile Industry Group (GAIG) in serve its technology and the market was 2004. yet mature in China; Toyota suspended the JV plan. Instead, Toyota provided 2.2 Geographic Strategy part of the skill to help the local vehicle producer, Tianjin Automotive Industry Initially Toyota expanded the market (TAIC, Now is Tianjin FAW Xiali Au- from northern cities such as Tianjin and tomobile) to produce Xiali by Toyota’s Changchun; however, Toyota didn’t ig- subsidiary, Daihatsu Motor. nore the importance of the South China. In 2004, Guangzhou Toyota Motor 2.1 Form of JVs Company (GTMC) was established by Toyota and GAIG. GTMC was another In June 1993, Toyota in Beijing estab- base to expand the South China market. lished its Toyota Motor (China) Ltd. Af- In 2004, Toyota and GAIG formed an- ter that Toyota constructed its own parts other parts manufacturing corporation production line and many suppliers fol- called Guangzhou Toyota Engine (GTE), lowed to establish the parts factories to which can produce 300 thousand engines assist Toyota’s production. In 1996, and export to Japan. Toyota declared the JV of Tianjin FAW Toyota Engine (TFTE) with Tianjin Auto In 2006, GTMC began producing Group. This company was to produce the Camry with a capacity of 100 thousand engines which Toyota needed in produc- units. By then Toyota planned to occupy tion. 10% share of the China auto market, which means over1 million vehicles In 1998, Toyota and First Automobile sales, and obviously Toyota’s strategy Works (FAW) formed Sichuan FAW was geographically to cover the coastline Toyota Motor (SFTM) to produce the lo- cities to expose more lucrative market cal vehicles and SFTM is the first local between North and South China. production line in China. In June, 2000, Toyota and Tianjin Auto Group formed In addition, the JVs in the south and another JV called Tianjin Toyota Motor, the north respectively manufacture differ- which began to produce Vios in 2002. By ent products. In 2005, TFTM released then, Toyota’s launch of production in Crown in China market; in the following China was 15 years slower as compared year, in 2006, GTMC published Camry. with VW and 5 years as compared to Although they are the same type of prod- GM. ucts, both products target different levels 799 of customers. This is the first time Toyota the auto’s brand, functions and personal- implement this strategy. In late 2006, ization and customization can serve the Vios was introduced by TFTM; however, kind of function and this implementation because of focusing on the sale of Camry, gradually influences the other auto manu- GTMC published the similar product, facturers, including the domestic produc- Yaris, until 2008. er, Chery. In 2009, TFTM and GTMC, almost the Although relatively Toyota came to same time, introduced their products, China markets lower than other major RAV4 and Highlander. Basically Toyota producers, it has unparalleled and com- assigned different product to both sides. petitive advantage, which is the rich On one hand it is to reduce the phenom- globalized experience and the particular enon of cannibalization; on the other TPS, to catch up with them. With Toyo- hand, this strategic, to some extent, com- ta’s parts suppliers entering directly to plement the two companies mutually. China and the integration of the Explicitly the products of the two compa- knowledge-based and geographically- nies can transmit the image that Toyota based strategies, Toyota has large confi- has a well rounded productions portfolio; dence in the future development of China implicitly, this strategy can avoid any se- market. Therefore, Toyota’ sin-house es- vere competition and have the two JVs timation reveals a very ambitious target become good strategic units in facilitating that as of early 2010 Toyota will have Toyota’s market strategies in China. vehicles sale above one million units. 2.3 Customization Production 3. CONCLUSION In the perspective of production, Toyo- Internationalization strategy of Toyota ta brought the JIT concept into the pro- has changed during the first half of the duction process, so the strict requirements 1980s from export-orientation to the lo- of suppliers in terms of cost, quality, and calization-orientation, excepting for early delivery are very critical. As followed the SKD assembly in some countries and establishment of JVs of Toyota, Toyota’s small localized production in Brazil. The suppliers swamped to China to setup re- enormous change was incurred by local search or manufacturing plant as well. governments' protectionist policy, which Toyota’s major parts suppliers include is the biggest driver to force Toyota DANSO, AISIN, Toyota Boshoku, change its strategy despite of its prefer- JTEKT, etc. ence to export due to the sake of TPS, which presumably is not transferable. The As the China auto market is becoming trade conflicts from the 1970s made by mature, customers’ needs become diver- the voluntary restraint of export between sified as well; accordingly Toyota has the U.S. and the Japanese government been adopted the customization sale in triggered Toyota to realize its foreign China market. The feature of the custom- production, and this trend was signifi- ization is that it can satisfy the customers’ cantly reinforced by its “New Global preferences in terms of color or even Business Plan” from 1994. brand of parts. In the current China mar- ket, according to the survey, the middle Due to the TPS effect, Toyota needs to class becomes the major force of the ve- train their suppliers in order to get ad- hicles consumption. One of the charac- vances towards achieving the best goal. It teristics of this level is that they focus on can be seen that Toyota paid more atten- 800 tion on the suppliers’ training and that therefore the recent corresponding behav- those suppliers enjoy the advantages for iors of those auto giants, especially their being provided improved product design, strategies in China, are worth studying technology innovation, and services. In and would create new empirical addition, Toyota reinforced its ties with knowledge. The possible generalization group companies by setting up its holding of the firms we study could be helpful not company which was mainly used to mon- only for the whole automobile industry, itor its group companies. Moreover, but also for all the MNCs of other indus- Toyota has controlled the quality of the tries in China. automotive components by mainly invest- ing their own suppliers, such as Daihatsu Toyota’s strategy, after formed the JVs and Hino. with FAW and GAIG, is obviously serv- ing China market from north and south to Based on the trend of environment pro- cover the coastline market which is rela- tection, new technology needs to achieve tively lucrative. Furthermore, the suppli- further breakthrough. In order to maintain ers following Toyota to invest in local the advantage of technology and to get China market can largely support Toyota closer to local demand, Toyota formed to implement its TPS in China. As the strategic alliances. The best example was China’s auto market is getting mature, that Toyota cooperated with Matsushita Toyota’s ambition is to reach 10 million or with PSA Peugeot Citroen and invest- vehicles in China market in 2015. ed in the ecological vehicles research, as it was shown by the launch of the Prius and Aygo. REFERENCES On the other hand, in order to strength- United Nations Industrial Develop- en the self-reliance of those foreign pro- ment Organization, The Global Au- duction bases, Toyota launched the IMV tomotive Industry Value Chain: project. Toyota captured the respectively What Prospects for Upgrading by geographical advantages of those markets Developing Countries, Sectoral and further cut the cost. Besides, the es- Studies Series, 2003 tablishment of GPC mitigated the prob- Tetsuji Kawamura, Potential of lem of communication and laid the foun- Asian Economic Integration: A Per- dation for Toyota's IMV project. spective from the Strategy of Japa- nese Enterprises. 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