Honda-International Business-Honda In China

Essay by pinkzpatel80University, Master'sA, May 2009

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Honda, one of the largest automobile manufacture in the world, has its companies all over the world. The scale of the company increases day by day. Honda took many successful steps to enter into the global market. China is a huge market that attracts many multinational corporations to invest in it. Honda is one of the successful companies in the Chinese market. Why did Honda choose the Chinese market? How did they enter into the Chinese market gradually? What is the implication of its entering? All this fields will be analyzed in this report.

Introduction of HondaHistoryHonda Technology Research Institute Company, Limited was established by Soichiro Honda (1906-1992) in Hamamatsu, Japan, in 1946. Then Honda Motor Company was founded two years later in 1948. Honda is a multinational corporation today which is headquartered in Minami-Aoyama Nichome, Minato, Tokyo, Japan. It has subsidiaries and joint venture manufactories all around the world such as American Honda Motor Co.,

Honda Canada Inc., Honda of Canada Manufacturing in North America, Honda Siel Cars and Hero Honda Motocycles in India, Honda Atlas in Pakistan, Guangzhou Honda and Dongfeng Honda in China. Honda also created a luxury brand Acura for North America.

Honda's Philosophy"The power of dream." is the slogan from Soichiro Honda. Honda's basic concepts are respect to people and "Three Joys" (Joy of Selling, Joy of Buying and Joy of Creating). The statement of mission of Honda is "Maintaining an international viewpoint, we are dedicated to supplying products of the highest efficiency, yet at reasonable prices, for worldwide customer satisfaction." Moreover, there are five operation principles: 1) Keep your dream in mind and youthful spirit. 2) Recognition to theories, originality and time. 3) Devotion to work and recognition to communication. 4) Create harmony and methodical working process. 5) Keep doing research and endeavour.

Financial Situation and Sales Honda's key people are as follows, Soichiro Honda (Founder), Satoshi Aoki (Chaiman),Takeo Fukui (CEO), Takanobu Ito (CEO). Its shares trade on the Tokyo Stock Exchange and theNew York Stock Exchange. Up to March 2008, Honda's market capital is 58.74 billion USdollars, Its revenue is $119.801 billion, operating income: $9.5123 billion, net income: $5.989billion, total equity: $45.356 billion, employees: 167,231. (Appendix 1)With the high fuel price and under the financial crisis in 2008, almost all the automobile giants reported a two digit losses in 2008, including the Detroit Big Three (Ford, GM & Chrysler) and Toyota, but Honda still reported a one percent sales increase. And the Civic and the Accord model were two of the best sold cars in North America. Especially for Civic, it has been the top-selling car in Canada for eleven years. Compare with Toyota and Nissan, Honda has less car models, but almost all the models it produces are sold well. One of the reasons is that the Honda can catch the balance point of quality, price and performance of car, and especially the fuel-efficiency.

Products & TechnologyHonda mainly produces automobiles, motorcycles, engines, robots, jets, power products, and other general products and so forth. It also provides financial service.

First, Honda is the largest engine maker in world; it produces engines for cars, boats and other various kinds of products. Its CVCC engine is the first engine, which meets the US Clean Air Act in 1970.

In the automobile and motorcycle field, Honda has been the largest motorcycle producer in the world and its products has dominated the MotoGP for a long time. Honda's cars are famous for their fuel-efficiency. There are several famous models such as Civic, Accord, Fit, Odyssey, CR-V, and two high performance sport cars - NSX and S2000.

Now, Honda has stepped into the Airplane field. HA-420 HondaJet is Honda's product on which Honda's newest technology is applied. Compare with other small business jet, HA-420 has less drag and more aerodynamics and fuel efficiency, which can reduce operating costs.

When talking about Honda's technology, we have to mention Honda's i-VTEC engine technology and its famous robot ASIMO. I-VTEC is widely use in Honda's engines, because it can reduce emission and increase engine performance and fuel-efficiency. Now, Honda is developing Hybrid technology as well as Toyota. ASIMO is a part of Honda's Research & Development robotics program. It is the first robot in the world, which can ascend and descend stairs independently, which requires high AI and advanced walking technology. It shows the technology strength of Honda.

Drivers for InternationalisationThere are many reasons for companies to engage in foreign direct investment. Major categories of internationalization drivers that motivate firms to establish themselves abroad are: market, strategic resources, efficiency and seeking motives.

We could further divide the Motives into two categories: one is network-seeking motives: starting new collaborations and staying close to main client or supplier, the other is market-seeking motives: reaching new markets and limitations of the home market.

Market and ResourcesChina has the largest population in the world. The population was 16,740,000, 74,380,000 and 46,770,000 in Shanghai, Jiangsu and Zhejiang, respectively, for 137.8 million people in the region as reported in 2006. The population of these areas is vast, and the economic level is the highest in China. This means that the actual and average disposable income is the highest in China.

The Financial Times noted that "China has been the world's largest economy for 18 of the past 20 centuries", while according to The Economist, "China is not only the largest economy for much of recorded history, but it also has the highest income per capita (GDP (Purchasing Power Parity)-$7.8 Trillion (2008)) and is the world's technological and manufacturing leader." In 2009, China's GDP is more than half that of the US and its auto sales and shipbuilding industry also surpassed the US. Whereas, Japan had GDP of $ 4.8 trillion (2008). Japanese households used to be among the world's biggest savers and, as a result, the country ran a massive trade surplus. But no longer. They now save less of their income than American households, and Japan's trade balance moved into deficit last year (see left-hand chart). A long-overdue--and painful--economic rebalancing is under way.

Most of international companies are attracted towards china by low-cost manufacturing and cheap labour. Moreover, for years china is known for its manufacturing efficiencies and cost leadership. Considering these facts, Economic growth in China for next year is predicted to be at about 8% or 9%. Looking to these remarkable resources to companies point of view, china is the long-term potential market to earn more market share and efficient use of resources.

As more and more people have piled in looking for the specialised labour they require, the cost of labour has gone up, so people have started to look further afield where wage costs are still cheap. So China as a cheap production platform has been overtaken by other places, but that's not a measure of China's failure - that is a measure of its success as it has pushed up the value-added chain and attracted more high-tech companies. Thou, other countries like Brazil, Russia and India are the potential markets for companies like Honda, china has competitive advantage of labour and efficiency.

Moreover, to help rev up demand for cars, China last month introduced lower vehicle taxes for cars with engines smaller than 1.6 litres in a bid to encourage sales of lower-emission vehicles and said it would cut retail prices for gasoline and diesel. Honda being leader in making fuel-efficient small car, china has more added reasons to become potential market.

Free Flow of Information and Trade (APEC) Asia-Pacific Economic Cooperation (APEC) is a forum for 21 Pacific Rim countries (styled'member economies') to cooperate on regional trade and investment liberalisation and facilitation. APEC's objective is to enhance economic growth and prosperity in the region and to strengthen the Asia-Pacific community. Members account for approximately 40% of the world's population, approximately 54% of world GDP and about 44% of world trade. Japan and China being members in APEC can benefit from international trade.

Technology ChangeAdvancement in technology has narrowed boundaries between countries like Japan and China. Supply chain management and Operation management has become the easiest job to handle across countries to carry international trade.

With intimate access to this type of information technology, here are the attributes that an IT enhanced software can offer manufacturers who want to sell into foreign markets:- Internet marketing capabilities through websites- Consultative international selling capabilities- Niche market specialization in overseas markets through market research database system- Intelligence gathering through expert systems- Helping manufacturers clearly define exporting goals through tools like ERP- Training of manufacturer's international department - Setting up industry specific email and fax subscriptions - Straight, fee-based international marketing researchMotivesOne of the motives of Honda to target china market was the purchasing power parity of the large population. On the other hand, it is also known as a leader in manufacturing industry, which Honda saw as the potential benefit to their company for the low cost efficient production of cars.

Japan being a smaller country did not have this competitive advantage over china. Moreover, due to the increasing demand in the emerging markets of Asia, the focus of auto players is now on this region.

Honda has many competitors in its home country, which affects it market share in Japan and most of among them are leading manufacturers in the world. Therefore, for Honda Japanese market is more saturated with more competitors and limited potential customers. The top competitor of Honda, Japan-based Toyota is the largest automobile manufacturer in Japan. Toyota engages in the design, manufacture, assembly and sale of passenger cars, recreational and sport-utility vehicles, minivans and trucks and related parts and accessories.

Another key competitor of Honda, Nissan Motor Co Ltd (Nissan), headquartered at Tokyo, Japan, is a leading manufacturer of cars, buses, trucks and other related products. Nissan is one of the leading automobile manufacturers worldwide with a strong product portfolio and a wide customer base. The company is the second largest automobile manufacturer in Japan, behind Toyota and ahead of Honda. The company is engaged in the planning, development, manufacture and sale of passenger vehicles, the manufacture and sale of industrial trucks, marine vehicles, specially equipped vehicles and vehicle parts, import and export of automobiles.

According to CEO of Honda: In China, the scope of what foreign car manufacturers can do subject to many constraints. For example, it is our understanding that our current production limit there is 50,000 cars a year, according to our arrangement with the Chinese government. But in fact it takes a lot of negotiation and such. It's hard to say about the long-term.

Considering this fact, political environment of china is the major concern for companies like Honda. Joint venture with the local company is the best option, as it makes the entire process much easier for them.

Honda has two Chinese Joint Ventures. Guangzhou Honda, its joint venture with Denway Motors, sold 123,512 cars in the first half of 2006, up 16% on production a year earlier, while Honda's sales through its joint venture with Dongfeng Motor Group rose 73% to 20,007. Dongfeng Honda Automobile Company is a joint venture between the Dongfeng Motor Corporation and Honda Motor Company. It produces the Honda CR-V for sales in China.

These joint ventures allow Honda to control their name in the Chinese market and offer a cheaper place to manufacture cars in Asia.

Market EntryChina is a large market with huge population and thus it gives an attractive impression to the multinational corporations. Many foreign companies enter into Chinese market in different modes. For example, McDonald's and KFC entered into China use franchising which is a specialized form of licensing. The franchisees in china buy the intangible property and follow the rules how to run the business. Other multinational corporations use exporting, turnkey projects, licensing, joint ventures with a host-country firm, new wholly owned subsidiary in the host country or combing two or more above.

When Honda first came into China, they chose a local firm in China and then sold the technologies of manufacturing automobile to the local firm. Honda was famous with manufacturing automobiles. In this case, it put all the efforts on the automobile market. In 1982, during the period of Reform and Opening-up policy in China, the barriers of Foreign Direct Investment (FDI) was reduced and Honda seized this chance to enter into Chinese market. Honda cooperated with China Jialing Industrial Co., Ltd.. In May, 1981, China Jialing Industrial Co., Ltd. raised one million yuan and then bought advanced detection and processing equipments from Hond. On December 10, Jialing signed Technology Transfer Contact on JH8101 with Honda Co., Ltd, Japan. Because of the Reform and Opening-up policy, FDI was increasingly absorbed on the fundaments of new policies setting by Chinese government.

Although Honda could not take the first mover advantage, it also seized the chance to open a new market in China. However, to most of the multinational corporations, many factors in the Chinese market were uncertain and unfamiliar at that time. Therefore, the best way to enter it was to find a partner in the same industry. This partner could provide all kinds of important and useful information to assist Honda to enlarge its market share in China. For example, historical problem was an inevitable reason for Honda to adopt this step. Because of the role Japan played in World War Ⅱ and the war between China and Japan, goodwill and impression of Japanese products were not good enough. As a result, in which mode Honda entered into Chinese market was fatal. In this situation, if there was a partner who was willing to buy the technologies from Honda and cooperate with it in some fields to help it get access to the Chinese market, that would help it gain large market share as soon as possible.

In 1992-1993, Honda successfully established three joint ventures of automobile in China which was in an amazingly fast speed. The three new companies located in Guangzhou--Wuyang-Honda Motors (Guangzhou) Co., Ltd., ChongQing--Jialing-Honda Motors Co., Ltd. and TianJing--China Tianjin Honda Motors Co., Ltd.. The reasons why Honda took these actions are as follows, first, automobiles were popular at that time, while cars could not be afforded by most of the Chinese. In this year, China's economic reform has gained momentum, fuelled by further liberalization outlined during the former Chairmen Deng Xiaoping Southern Tour speech. Mr. Deng's speech triggered a new round of opening to the foreign market. Since then, in the situation of lacking of technology for innovation and development, a new strategy was announced by Chinese government: using the technology in exchange of market share. FDI played an important role in the economic development in China. In this prosperous environment, Honda enlarged the market share without any hesitation and set up the three joint ventures in China.

However, in the late 1990's, two big changes happened in the Chinese automobile market. First is a bunch of domestic automobiles manufactories could make automobiles in deeply low cost, which deadly influenced Honda. Second, the market gradually extended to suburbs but Honda did not notice this change and still concentrate on the urban market. Without consideration the two main changes above, Honda lost a large percentage of the market share. In addition, the supply of the automobiles in the Chinese market was heavily larger than demand. With higher price than rivals' and without any new products to the market, Honda took some measures to change the worse situation. Honda began making parts of cars in 1996. Based on this issue, Honda established a new joint venture - Guangzhou Honda in the Chinese car market July 1st, 1998. Guangzhou Honda is a joint venture set up by Guangzhou Automobile Group and Honda Motor Co., Ltd. with 50:50 investment proportion for a period of 30 years. To enlarge the market share in China, Honda took some measures to make it more localization. In everyday development, Guangzhou Honda insists on the principle of "product introduction in step with the world market" to promise the Chinese customers with the newest and advanced products. In March 1999, American Accord was put into the Chinese market, with changes in the models that fit the Chinese customers' demands. This American Accord was just launched into the American market in 1998, which stood for the newest products of Honda at that time. Honda also had a smart price strategy that took care of the Chinese customers acceptant. Together with other useful tactics, Honda distinguished itself with other rivals and gained the loyalty from the Chinese customers.

Honda Motor Co., Ltd. established a new motorcycle production joint venture with Sundiro Holding Company in China - Sundiro-Honda Motorcycle Co.,Ltd.. Sundiro and Honda each owned a 50 percent stake of the joint venture, which was founded in 2001, with a registered capital of 1.3 million US dollars. Sundiro Honda was established as the result of a merger of China Tianjin Honda Motors Co., Ltd, Hainan Sundiro Motorcycle Co., Ltd, and their motorcycle related subsidiaries. The annual sales target of the new company for 2002 is one million units.

Honda President and CEO Hiroyuki Yoshino attended the foundation ceremony and said: "This new company has begun with big dreams in the world's largest motorcycle market, where the economy is growing at a tremendous rate. I am excited by the energy displayed by this new company. It reminds me of the spirit we at Honda experienced in our early days. I am convinced that this new joint venture will provide customer satisfaction in China by offering a wide range of motorcycles that reflect the ingenuity of all three partners."The four reasons of the joint venture are;1. Honda's technological expertise and global network.

2. Sundiro's experience and expertise in the Chinese market, enhancing the model lineup in the mid-price range.

3. Sundiro's procurement network, which strengthens its competitiveness due to reduced costs.

4. Sundiro's current sales/marketing network, which allows a more active pursuit of business.

In 2003, Toyota Motor started all-round cooperation with China's largest automakers - the First Motor Co., Ltd. (Jilin Province). Face to the Chinese Automobile market competition Gradual intensification, Honda also began planning for the establishment of new joint venture. Honda Motor Co., Ltd. has begun a new automobile production joint venture with Dongfeng Motor Corp. in China - Dongfeng Honda Automobile (Wuhan) Co., Ltd. - for the production of the Honda CR-V. Honda currently produces the Accord and Odyssey at Guangzhou Honda Automobile Co. in Guangzhou. The new company will upgrade an existing plant in Wuhan, Hubei to serve as the production site for the CR-V, with production slated to start during the first half of 2004. The annual production volume has been set at 30,000 units. For the new joint venture company, Dongfeng Honda Motor (Wuhan) Co., Honda has assumed 50% of the shares of Wuhan Grand Motor Co., Ltd., which owns the vehicle production plant in Wuhan, Hubei. The equipment at this plant will be upgraded and enhanced for the 2004 production start-up, with a total investment of approximately 44 million U.S. dollars. Employment will total approximately 600 associates. In 1994, Honda and Dongfeng Motor established a joint venture automobile parts production company, Dongfeng Honda Automobile Parts Co., Ltd. (Huizhou, Guangdong). In 1998, Honda and Dongfeng Motor established Dongfeng Honda Engine Co., Ltd. to produce engines for the Accord and Odyssey models produced by Guangzhou Honda.

July 19, 2007, Guangzhou Honda set up a research and development affiliate of the Guangzhou Honda Automobile Co., Ltd. This is the first independent investment by the joint venture to an independent legal entity operating the automobile research and development institutions, which has included conceptual design, vehicle testing and parts of the vehicle independent development capability.

With an additional investment of around 2 billion R.M.B. or approximately 30 billion yen the new Honda subsidiary, Guangzhou Honda Automobile Research & Development Co. Ltd. will build an automobile R&D facility with a full-scale high-speed test score. The main objective of the R&D facility is to develop a new automobile product, which will be marketed as an original brand of Guangzhou Honda with expected sales to start in 2010.

To market the new vehicle, Guangzhou Honda plans to use an original Guangzhou Honda brand which will be distinct from the Honda brand. This will be the first time that a joint venture company of a foreign automaker will create and market a product under an original brand of the joint venture company in China.

Starting the production in 1999, Guangzhou Honda has been steadily establishing a business foundation in China through various efforts such as expanding production capacity that is consistent with increasing sales, increasing local content, and strengthening its network of dealers.

The establishment of an R&D center in China displays the company's commitment to gain greater freedom in the area of R&D that is aside from production and sales which would position the company for a further opportunity for growth in the future as a successful and growing joint venture company in the local market.

ConclusionIn the past ten years, there is almost no increase of Japanese economy. However, the Japanese automobile industry grew rapidly. Toyota surpassed Ford and GM, Nissan became the automobile manufacturer with most profit margin, and Honda's sales grew from 2.5 million to 3.7 million, and it became the 7th automobile manufacturer in the world.

From exportation to manufacture abroadBecause of the impact from Honda and other Japanese automobile manufacturers, many countries started to adopt lots of policies or means to reduce the impact as much as possible, such as tariffs, subsidies, import quotas, local content requirements, administrative policies and so forth. For example, when some countries found that the import quota could not solve the problem thoroughly, speculators are connived to increase the exchange rate of Japanese Yen, which did damage Japanese industry a lot, including automobile manufacturers of course. And some developing countries drove up the tariff barrier to Japanese cars, besides, they also set up many non-tariffs barriers, some of them even declared Japanese cars are forbidden to import.

Under such situations, Honda started to divert its plant to overseas, the advantages of doing so are: it can avoid the import quota, tariff barrier and reduce cost. Honda's main targets are North America, Europe and Developing countries in Asia. Actually, these three places are the largest automobile markets and plants. By doing so, Honda changed its exportation quantum into exportation quantum in other countries and kept its market share.

Choosing the marketsHonda is always very careful and cautious when it is selecting which country to invest in. For instance, Honda chose China is because compare with most of other countries, China has the foundation of automobile and component parts industries, and China also has relatively cheaper labour and a growing demand for automobiles.

Furthermore, Honda also thinks much the different cultures in different region around the world. For instance, Honda set up R&D departments in its major markets such as North America, Europe, China and Japan. In addition, most of the staffs are native. And when Honda developes a new model for the world, it usually has different versions such as European version or North American version, which is used to make its products more suitable for the local costumers. By doing so, Honda got bigger market share.

HarvestUnder such a depressing economic environment nowadays, the Detroit Big Three are shutting down their plants in North America continuously. However, Honda and other Japanese automobile manufacturers are getting more and more market shares. And Honda is going to increase its production ability through expanding and setting up new plants in China, Russia and other Southeast Asia countries. Honda is now harvesting from the seeds it planted in China, Europe and Southeast Asia since two decades ago.

Appendix(Source: Wikipedia & Honda's official website)Appendix 1References1)Automotive Brief -- Honda Motor Co.: China Joint Venture Begins Sales Effort of Civic Model. (2006, March 21).Wall Street Journal (Eastern Edition), p. A.12. Retrieved March 19, 2009, from ABI/INFORM Global database. (Document ID: 1006738141)2)Berl Thomas. (2009, January). Opportunity In China. Greenhouse Grower, 27(1), 124,126,128. Retrieved March 19, 2009, from ABI/INFORM Trade & Industry database. (Document ID: 1644416181).

3)Chester Dawson. (2000, September). Sitting pretty. Far Eastern Economic Review, 163(37), 66-67. Retrieved March 21, 2009, from ABI/INFORM Global database. (Document ID: 60626963).

4)Finance And Economics: Rebalancing act; Japan's economy. (2009, March). The Economist, 390(8621), 78. Retrieved March 2, 2009, from ABI/INFORM Global database. (Document ID: 1656665781).

5)Honda Motor: 2008 company profile edition 3: Competitor analysis. (1 November). Just - Auto: Honda Motor: 2008 company profile edition 3,11-15. Retrieved March 2, 2009, from ABI/INFORM Global database. (Document ID: 1600851071).

6)Mark Bursa. (1 October). China automotive market review 2006: Management briefing: Foreign manufacturers. Just - Auto: China automotive market review 2006: Management briefing,6-15. Retrieved March 19, 2009, from ABI/INFORM Global database. (Document ID: 1144533641).

7)Patricia Jiayi Ho. (2009, February 18). Corporate News: China Sales Hold Up for Chery, Honda. Wall Street Journal (Eastern Edition), p. B.2. Retrieved March 21, 2009, from ABI/INFORM Global database. (Document ID: 1646928501).

8)Sharon Moore, Julie Jie Wen. (2006). Reform of state owned enterprises and challenges in China. Journal of Technology Management in China, 1(3), 279-291. Retrieved March 27, 2009, from ABI/INFORM Global database. (Document ID: 1143467851).

9)Tina Nielsen. (2009, February). BEYOND THE BRIC WALL. Director, 62(7), 42-44. Retrieved March 21, 2009, from ABI/INFORM Global database. (Document ID: 1646700301).

10)Business in China - Honda Joint Venture Company Begins Motorcycle Business in China11)Yadong Luo. How to enter China: choices and lessons. Published by University of Michigan Press, 200112)Honda joint venture looks to strengthen China R&D operations to Blossom - Honda's Entry into the Chinese Auto Market million of course, One million of joys≺.y=11&sy=2004&ey=2008&scsm=1&ssd=1&sort=country&ds=.&br=1&c=158&s=NGDPD,NGDPDPC,PPPGDP,PPPPC,LP&grp=0&a=24)