Automotive Industry in China and India
Samantha Pinto 301087184
Jiaxiao Zhang 301173206
- Purpose: to discuss the automobile industries in China and India and the related business implications based on the various dimensions discussed in class and provide recommendations for foreign investors and auto companies.
- Brief overview of the automotive industries in both China and India
- High Power Distance: expect and accept that power is distributed unequally. Chinese culture respects power and authority. Organization structures tend to be deep and bureaucratic. Therefore, there will be it’s going to be a few key people that have the the major decision making power in a company. Furthermore, the employee that a foreign company sends to contact and meet a Chinese company as well as the and the Chinese employee that is being contacted should have relatively the same authority in their own organizations. If the foreign employee has a much higher relative position, the Chinese employee will feel less authorized and confident in the communication. If the foreign employee has a lower relative position, the Chinese employee will feel being humiliated and offended. Either way will affect the efficiency of the business process.
- Low Individualism: The Chinese culture values in-group harmony and success. Personal relationship is extremely important in every aspect of the society, including doing business. Therefore, building personal relationships with key, and powerful people in the industry will be important for the success of a foreign investor.
- High Masculinity: The Chinese culture is success- oriented. They respect and prefer to work with the successful foreign companies and investors. Furthermore, they tend to be hardworking and willing to sacrifice leisure time to work. This has contributed to the high production efficiency in the automotive industry.
- Low Uncertainty avoidance: The Chinese people are comfortable with ambiguity and willing to take risks. They like to seize opportunities and thus open to work with others. This has been one of the characteristics that are attractive to foreign investors.
- High Long-term orientation: The Chinese culture value long-term plan, relationship and success. They prefer to work with companies and investors who have the potential to be long-term business partners.
- High Power Distance: The unequal distribution of power in India is common and very similar to the Chinese culture. Hierarchy and communication flowing from top- down is accepted in society and organization. Feedback given upwards is seen as negative. Managers look to their employees for obedience and loyalty. Employees prefer to have their job duties and functions clearly directed to them.
- Low Individualism: India has a clear collectivism preference and individuals are expected to act in accordance to the greater good of their defined group(s). In organizations, this dimension can be explained using the employer-employee relationship; loyalty is given to managers in return for almost familial protection from the employer. One will notice that because of the existing collectivist society, job promotions and opportunities are given based on relationships.
- High Masculinity: Success and Power are very visible in the Indian society validated with material gains. The center of one’s life in India revolves around work and successes at work issuccesses at work are very important.
- Medium to low Uncertainty Avoidance: India being a traditionally patient country has a high tolerance for the unexpected. At the same time, people are not driven or compelled to take on action initiatives that might have them step outside their comfort zone. Even though rules might exist, people are innovative in designing methods to overcome the system. The issue of ethics is the key here since people often turn a blind eye to rules and regulations and rather come up with an inventive solution to their problem. The common word used to describe India in this aspect is to “adjust”, therefore they say nothing is impossible in India if one can learn how to adjust.
- High Long-term orientation: The famous concept of Karma is very dominant in religion and philosophy in India. Time is not as important and unpunctuality is accepted.
2. Corporate governance System
- The Chinese automotive industry mostly takes the stakeholder approach and the major stakeholders are the government officials who are choosing and directing the firm managers.
One of the major distinctions compared to the auto industries in other countries is that the major local competitors are a few State-Owned Enterprises (SOEs), such as Beijing Automotive Group and Shanghai Auto Industry Corporation. Government officials are in charge of the firms and firm managers answer to the officials. Managers are picked by the officials and they may have been officials in the government already. Since their career paths are mainly influenced by the officials, they put the officials’ benefits and orders in priority.
- Advantages: Companies have the easy access to financial support, such as cheap bank loans in large amounts, and political support, such as favourable policies.
Many government officials lack of the expertise in the auto industry which may lead to poor decision making.
Governments officials might engage in selfish, bureaucratic or even corruptive behaviours which will hinder the company’s performance and harm other stakeholders’ benefits
- Foreign investors or auto companies should build good personal relationships with the government officials in the Chinese automotive industry if they choose to be partners with the local SOEs.
-The corporate governance model in India is moving towards the Anglo American model whereby shareholder interests are emphasized.
- The ownership pattern of Indian business is different from that of the Anglo-American environment.
- Indian corporate governance model is becoming a system that is capable of inspiring confidence among institutional and, increasingly, foreign investors.
-The Securities and Exchanges Board of India (SEBI), has made a significant progress in providing a rigorous regulatory regime that helps ensure transparency and fair practice.
- Despite the fact that, the country has a well-functioning banking sector and ranks high on the ease of getting credit, a majority of the country’s Small and Medium-Sized Enterprises (SMEs) still rely on relationship-based, informal control and governance mechanisms that limit financing and keep the cost of capital higher than perhaps necessary.
3. National Innovation Systems
Environment and Government Support
- The Chinese innovation system has gone through great changes in the past twenty years. It is becoming a very dynamic system with great potentials. It is moving toward to a market-based open innovation system.
- The Chinese government has adopted various important policy instruments to encourage innovation activities and to promote transfer and commercialization of R&D results.
It has implemented the “National Plan 2006-2020 for the Development of Science and Technology in the medium and long term” which is the current long-term science and technology (S&T) policy framework of China. The intention is to strengthen innovation.
It plans to increase R&D at 2020 to 2.5 % of GDP from the current level of 1.3%. It implies a huge increase of R&D expenditure in absolute terms.
The government also provides 150 % tax deduction on R&D expenditure of businesses conducted in China.
- The Chinese government has so far actively encouraged and promoted foreign corporate R&D in China, viewing it as a way to upgrade domestic technology and skills by importing, and ideally internalising, foreign know-how. It facilitates cooperation between foreign enterprises and Chinese universities and research institutes.
- China has relatively cheap R&D human resources compared to developed countries.
- In terms of output, the innovation capability of Chinese enterprises is still relatively low. Their innovation capability is mostly focused on incremental innovation with little radical innovation.
- There has been diversity of innovation capacity across different regions within China. The east is far more developed than the middle and west.
- One of the major characteristics and advantages of innovation in the Chinese automotive industry is that they innovate by commercialization, as opposed to constant research and perfecting the theory in western automotive industries. This allows them to receive market feedbacks and adapt to customers’ needs better while still developing and perfecting their products.
- Chinese automotive industry has demonstrated the tendency and ability to achieve architectural innovation. This has helped them to efficiently reduce costs which lead to a competitive advantage compare to foreign competitors.
Education & Government Support
- The country’s growing economy is a result of their successful national innovation system over the years.
- The central government has taken charge of science and technology development policies and plans; they support R&D activities and technology transfer.
- However, the weakness in the infrastructure is the bottleneck of manufacturing in India
- The percentage of financial expenses on education as a percentage of GDP in India is high
- Higher education in India is stronger in comparison to China.
- India extremely emphasizes on the cultivation and utility of technical people, expands the high education especially the high education of engineering, intensify the science research.
-India has achieved success in economy especially the IT industry where high education plays an important role.
-Innovation performance subsystem shows that the economic development of India has better potential in the knowledge intensive service-oriented economy.
4. Comparative Political Systems
- China is hard to be classified as any one of the four models proposed by Almond. It is closest to be a Totalitarian system but not that extreme. It is a communist country and politically ruled by one single party which is the Chinese Communist Party (CCP). However, capitalism and private businesses have been allowed and even supported by the CCP in many parts of the economy.
- Specific to the automotive industry in China, local competitors include both SOEs and private businesses. However, the SOEs still have the dominant power over the private businesses since they are supported by the government.
- Joint venture has been the most popular form for the foreign auto companies to enter the Chinese market and it is also promoted by the Chinese government.
- India is a democratic country in terms of politics.
- India's lower house, the Lok Sabha, is modelled on the British House of Commons, but its federal system of government borrows from the experience of the United States, Canada and Australia.
- India’s political environment has been moderately stable which has contributed to the booming economy in India. This is an attractive characteristic for the foreign competitors
5. Different IR systems
- Weak and inefficient union system. Originally, All-China Federation of Trade Unions (ACFTU) is the Communist Party’s official trade union body and the official intermediary between the workers and the party-state. It has a large amount of members but it is virtually impotent when it comes to representing workers. Currently, iIt is being regulated by the Trade Union Law of the People’s Republic of China.
- Relatively new labour market. The labour market is relatively new and has only been firmly established since the introduction of 1994 Labour Law. It introduced labour contracts and established tripartite institutions to mediate in individual disputes. However, the implementation has not been successful and the employment standards have not been fully adopted by many small local firms.
- High income disparity. The Gini Coefficient in China is 0.474 for 2012 which indicates a high level of income inequality. This has led to increasing social conflicts and labour disputes.
- The Industrial Relations Division of the Union Ministry of Labour and Employment is created to maintain a good employer-employee relationship in the country.
- Industrial Relations paradigm in India had dramatically changed following the adaptation of free market policy in the early nineties.
- With the dawn of liberalization, privatization and globalization (LPG), the country is, by and large, able to preserve a sound and positive industrial relations climate. This is apparent from the statistical figures of Union Government’s Labour Bureau, which exhibits drastic decline of industrial disputes from 1,825 in 1990 to 421 in 2008, and India being the third most preferred global investment destination. Foreign direct investment inflows to India went up to $32 billion in 2011, which was a 33 percent increase over the previous year.
- Negative: surge in violence disturbing industrial relations has become a concerning situation for all. On September 22, 2008 the CEO of Graziano Transmissioni India, the Indian unit of an Italian auto component maker, was clubbed to death by a group of 200 workers.
6. Comparative Business Ethics
- According to the CPI score published by Transparency International (2012), China scores 39 which indicate a moderate to high level of corruption.
- Foreign investors should be aware of the corruptive culture in China, such as the under table deals and unfair competition.
- China’s recent anti-corruption campaign is causing demand for luxury goods to fall as affluent Chinese consumers become much more cautious about displaying their wealth. The premium auto brands are currently experiencing declines in sales growth mainly due to the increased cautiousness of the government and military officials.
- India scores 36 out of 100 on a scale from 0 (highly corrupt) to 100 (very clean) on Transparency International’s CPI.
- This high level of corruption in India is very important to note for foreign investors entering the Indian market to conduct business.
Conclusion and Recommendation
- Brief recap of the analysis
- Provide suggestions on eEntering China or India based on different circumstances