Question 1 For each country, China and India, provide an analysis of the four attributes of the diamond and discuss the relative importance of domestic vs. international factors for the nation’s...

Question 1

For each country, China and India, provide an analysis of the four attributes of the diamond and discuss the relative importance of domestic vs. international factors for the nation’s competitiveness of the automotive industry. (20 marks - 600 words)

Question 2

Discuss the role of the Chinese and India governments in influencing each attribute of the system and in shaping and constraining the behavior of firms (trade policy, competition policy, regulations, domestic politics, etc.). (15 marks - 500 words)

Question 3

Explain how the international forces affect the competiveness of the automotive industries in both China and India.(10 marks - 400 words)

Question 1 For each country, China and India, provide an analysis of the four attributes of the diamond and discuss the relative importance of domestic vs. international factors for the nation’s competitiveness of the automotive industry. (20 marks - 600 words) Question 2 Discuss the role of the Chinese and India governments in influencing each attribute of the system and in shaping and constraining the behavior of firms (trade policy, competition policy, regulations, domestic politics, etc.). (15 marks - 500 words) Question 3 Explain how the international forces affect the competiveness of the automotive industries in both China and India. (10 marks - 400 words) A Double Diamond Comparison of the Automotive Industry of China, India, and South Korea Rollins College Rollins Scholarship Online Faculty Publications 1-1-2009 A Double Diamond Comparison of the Automotive Industry of China, India, and South Korea Marc Sardy Rollins College, [email protected] Marc Fetscherin Rollins College, [email protected] Follow this and additional works at: http://scholarship.rollins.edu/as_facpub Part of the International Business Commons This Article is brought to you for free and open access by Rollins Scholarship Online. It has been accepted for inclusion in Faculty Publications by an authorized administrator of Rollins Scholarship Online. For more information, please contact [email protected]. Published In Sardy, M., & Fetscherin, M. (2009). A Double Diamond Comparison of the Automotive Industry of China, India, and South Korea. Competition Forum, 7(1), 6-16. http://scholarship.rollins.edu?utm_source=scholarship.rollins.edu%2Fas_facpub%2F14&utm_medium=PDF&utm_campaign=PDFCoverPages http://scholarship.rollins.edu/as_facpub?utm_source=scholarship.rollins.edu%2Fas_facpub%2F14&utm_medium=PDF&utm_campaign=PDFCoverPages http://scholarship.rollins.edu/as_facpub?utm_source=scholarship.rollins.edu%2Fas_facpub%2F14&utm_medium=PDF&utm_campaign=PDFCoverPages http://network.bepress.com/hgg/discipline/634?utm_source=scholarship.rollins.edu%2Fas_facpub%2F14&utm_medium=PDF&utm_campaign=PDFCoverPages mailto:[email protected] 1 _____________________________________________________________________________________________________ COMPARING THE AUTOMOTIVE INDUSTRY FROM CHINA, INDIA AND SOUTH KOREA: AN APPLICATION OF THE DOUBLE DIAMOND MODEL Marc Sardy, Department of international Business, Rollins College Marc Fetscherin, Department of International Business, Rollins College _____________________________________________________________________________________ Executive Summary Recently China became the third largest automotive producing country in the world next to the U.S and Japan. South Korea is the fifth biggest automotive manufacturing country and India has more recently emerged as one of the top ten automotive manufacturing countries. This paper compares industry competitiveness of these three emerging automotive manufacturing countries by using the Double Diamond Model which is based on Porter’s Diamond Model. Our results show that the Chinese automotive industry is as competitive as South Korea’s factor conditions, demand conditions, related and supporting industries as well competitive rivalry. By contrast, India is less competitive. Keywords: Competitiveness, Diamond Model, Automotive Industry, China, India, South Korean. INTRODUCTION Auto manufacturers from China have made no secret of their intention to compete in the global automobile market. With about 8.6 million vehicles (6.4 million cars) produced in 2007, China has already surpassed Germany in number of cars produced and is now the third largest automotive producer in the world behind Japan and the United States. The Chinese automotive industry is highly fragmented so far with more than 100 car manufacturers, ranging from small local producers to large national corporations having multiple joint ventures (JV’s) with foreign companies (Fetscherin and Sardy 2007). However, the industry is dominated by five major companies (FAW, SAIC, Dongfeng, BAIC and Changan) all of whom have JV’s with foreign partners and together control almost 70% of the market (it is expected that further consolidation will happen leading to greater efficiency). Most cars are currently produced for the large, rapidly expanding, domestic market in China, but some Chinese companies are already exporting their cars or making foreign direct investment (FDI). In 2007, more than 413,500 cars were exported worldwide (Kurtenbach, 2007). In 2005 Nanjing Automobile Industry Corporation (NAIC) bought bankrupt MG Rover, the last independent car company in Britain, for over USD 90 million. NAIC now builds MG brand cars in China that are sold in the domestic market. However future plans include selling these cars in the European and U.S. markets through the MG/Rover network of distribution. The two independent Chinese automotive companies Chery and Geely have both announced plans to enter foreign markets (Alon et al 2008; Toncar and Fetscherin 2007). To pull that off, Chery for example, has teamed up with Chrysler. The two have struck a deal that will bring a Dodge-, Jeep-, or Chrysler-branded small car to US shores by 2009 or 2010. India’s automotive industry is also strong and growing. In 2006, total production in India was over 2 million vehicles (1.4 million cars). Exports of automobiles from India have increased significantly and have reached almost 300,000 units in 2006 (India Auto Report 2006). This sector, largely fueled by passenger car sales, grew at a rate of about 57%. The Indian automotive industry has a fraction of the competitors in the Chinese market. In terms of domestic passenger vehicles sales, the three main firms (Maruti, Hyundai, Tata Motors Inc.) control almost 90% of the market which suggest an oligopoly market structure. 2 While there are still many challenges to overcome, it is just a matter of time before the Chinese and Indian firms follow the path of South Korean firms and advance into the global marketplace, albeit with major differences in industrial structure. South Korean automakers were the “most recent” Asian automotive manufacturing companies to emerge as global players in that industry. So, one might ask how competitive are the Chinese and Indian automobile industries compared to that of South Korea which emerged recently as a global player? Which country of manufacturing in the near future is more likely to become a dominant player in the global automotive industry? We examined these questions using the Double Diamond Model (DDM), a framework based on the well known Diamond Model from Porter (1990) which builds on his model by taking into account multinational activities as suggested by Moon, Rugman, and Verbeke (1998). It is critical to understand that this paper does not assess the competitiveness of automotive manufacturing companies from these countries but the industry competitiveness and is looking at the competitiveness, dynamics, growth, and industry structure among others. In the next section of this paper we present and explain the Double Diamond Model which serves as our underlying research framework. In section three of the paper we apply the model in the context of the Chinese and Indian automotive industry and compare it to the one of South Korea. In section four we assess and discuss the competitiveness of each industry in the global context whereas section five provides the conclusion of this paper. RESEARCH FRAMEWORK Diamond Model In the book “The Competitive Advantage of Nations” Porter (1990) criticized conventional economic trade theories and their inability to explain the present economic phenomena. Subsequently, he developed a new paradigm, “the Diamond Model” which he used to explain country or industry competitiveness. His model defines four determinants of industry competitiveness: (1) factor conditions such as the nation's or industry’s position in factors of production, such as skilled labor and infrastructure, (2) demand conditions such as sophistication of customers in the home country or market, (3) related and supporting industries, and (4) business context such as conditions for organization of companies and the nature of their domestic rivalry. Each of these four determinants defines a point on the diamond and constitutes the system where each point also has influence on the others. In his model, Porter identifies government influence and chance as an outside variable in the system. He argues that a nation’s industry is internationally successful if it has competitive advantages related to the world’s best competitors. Some researchers like Cartwright (1993) and Lagrosen (2007) believe that there are severe limitations to Porter’s “single” Diamond Model. They argue that it does not explain the effects of multinational activities such as inbound and outbound foreign direct investments (FDI) in the context of the global economy. Rugman and D’Cruz (1993) argue that it does not apply to countries other than the U.S. Subsequently, a modification of Porter’s model was proposed and is referred to as the “Double” Diamond Model (DDM) (Rugman and D’Cruz 1993; Cho and Moon 2000; Dunning 2005). The DDM incorporates multinational activities and government into the model, instead of treating them as exogenous variables. Although the variables of Porter’s Diamond Model are useful for analyzing an individual nation’s industry competitiveness, the model is too narrowly focused on the home-base to accurately reflect challenges faced in the global marketplace. The Double Diamond Model has proven to be more useful for making the global comparisons. It has three important extensions to Porter’s single Diamond Model. (1) The model clearly incorporates multinational activities; (2) the model is able to operationalize the competitiveness paradigm. A comparison of the sizes and shapes of the domestic and international diamonds shows major strategic differences; (3) it includes government as an important variable which influences the four determinants of the Diamond Model. It combines the domestic diamond and international diamond as shown in the following Figure 1. FIGURE 1 3 Double Diamond Model The inner diamond represents the domestic diamond; the outside one the global diamond. The size of the global diamond is fixed within a certain period, but the size of the domestic diamond of a country or industry differs from those of other countries in size and competitiveness. It reveals conclusions that differ from the Diamond Model, because it incorporates additional variables as explained above. For example, Porter himself reached contradictory conclusions about the competitiveness of South Korea and Singapore. He argued in his book in 1990 that South Korea is more competitive than Singapore. However, when using the Double Diamond Model, the results are different. They reveal that even though South Korea has a larger domestic diamond than that of Singapore, Singapore has a much larger international diamond than does South Korea. As a result, South Korea seemed less competitive internationally than Singapore. This suggests that in order to assess the global competitiveness, both, domestic and international determinants have to be taken into account to assess global competitiveness. This is especially true in today’s global environment, where multinational activities represent more than just an exogenous variable (Cho and Moon 2000). VARIABLES AND DESCRIPTIVE DATA How competitive is the Chinese and Indian automobile industry compared to that of South Korea? Unless otherwise specified, we used the most recent available data for the three countries which was the year 2006. The four determinants considered in the Double Diamond Model that will be discussed in more detail in this section are: (1) Factor Conditions; (2) Demand Conditions; (3) Supportive and Related Industries; (4) Business Context. Factor Conditions Factor conditions refers to