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Automobile Industry: The Case of Geely Motors Liesl Martin & Royce Kuzwayo

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  • Automobile Industry: The Case of Geely MotorsLiesl Martin & Royce Kuzwayo

  • ContentsCHINESE AUTOMOBILE INDUSTRYGEELY AUTOMOBILE HOLDINGS LTDVOLVO ACQUISITIONCOMPETITORS, SUPPLIERS, CUSTOMERSKEY SUCCESS FACTORSCONCLUSION

  • Chinese Automobile Industry

  • Automobile Production Statistics Source: OICA

  • World Economic Outlook: Shift in Global Output

    Source: World Bank, 2010.

  • Political Economy Issues: Growth Competitiveness Ranking

    Losing competitiveness due to structural and political factors and the strength of the currency

  • ContentsCHINESE AUTOMOBILE INDUSTRYGEELY AUTOMOBILE HOLDINGS LTDVOLVO ACQUISITIONCOMPETITORS, SUPPLIERS, CUSTOMERSKEY SUCCESS FACTORSCONCLUSION

  • Geely Automobile Holdings LtdHong Kong investment holding company, operations Hong Kong & China Manufactures automobiles and automobile components through subsidiaries 12,282 EmployeesResearch, Production, Marketing & SalesBrands: Free Cruiser, Geely Kingkong, Vision, Geely PandaProduce under five key brand groups: Geely, Maple, Gleagle, Emgrand & Englon6 Assembly manufacturing plants in ChinaRevenues Dec 09 CNY14,069.2 mill ($2,062.7 mill) 3 times 2008Operating profit CNY1,252 mill ($183.6 mill) 2009 8 times 2008Net profit CNY1,182.7 million ($173.4 mill) 2009 34.5% increase

    *(Datamonitor, 2010)

  • ContentsCHINESE AUTOMOBILE INDUSTRYGEELY AUTOMOBILE HOLDINGS LTDVOLVO ACQUISITIONCOMPETITORS, SUPPLIERS, CUSTOMERSKEY SUCCESS FACTORSCONCLUSION

  • Volvo AcquisitionBiggest overseas acquisition by a Chinese automaker100% ownership of Volvo and related assets, including agreements on intellectual property rights, supply and R&D arrangements Planned production 300000 Volvos annuallyDouble original Volvo production capacityMainstream European brand vs domestic economy car brandBuilding a successful partnership between Volvo and Geely will require a solid plan for post-acquisition integration

  • Geely / Volvo Life-Cycle

  • Competitive Strategy

  • ContentsCHINESE AUTOMOBILE INDUSTRYGEELY AUTOMOBILE HOLDINGS LTDVOLVO ACQUISITIONCOMPETITORS, SUPPLIERS, CUSTOMERSKEY SUCCESS FACTORSCONCLUSION

  • Geely Competitors & Suppliers*(Datamonitor, 2010)(Geely Annual Report, 2009)

  • Geely Customers*Customer base is diversified and fragmentedAll customer transactions below 10% of the Groups revenue2009 sales from the largest and 5th largest customers respectively between 8% & 2%Distributor networks: 45 countries 5 continents 500 retail distributors 600 service stations 300 dealers

    Beijing 2010: Geely Alternative Power Insect Vehicle(Datamonitor, 2010)

  • ContentsCHINESE AUTOMOBILE INDUSTRYGEELY AUTOMOBILE HOLDINGS LTDVOLVO ACQUISITIONCOMPETITORS, SUPPLIERS, CUSTOMERSKEY SUCCESS FACTORSCONCLUSION

  • Key Success FactorsGood relationships with GovernmentExpansion strategyAdaptabilityGap analysisSimilaritiesDifferences

    Geely was the only automobile company in 2009 awarded The State Technology Achievement Class 2 Award by Government for achievements in technological innovations (Geely Annual Report, 2009)

  • ContentsCHINESE AUTOMOBILE INDUSTRYGEELY AUTOMOBILE HOLDINGS LTDVOLVO ACQUISITIONCOMPETITORS, SUPPLIERS, CUSTOMERSKEY SUCCESS FACTORSCONCLUSION

  • GDP: History of low growth volatility, 1994-2009 (Standard Deviation)

  • ConclusionThe initial Strategic Transformation, new technologies and product launches strengthens the Groups competitiveness positioning the company for further expansion.Important that they stay focused on their core business and not expand too fast too soon.

  • Thank YouQuestions?

  • ReferencesGeely Annual Report. 2009. Geely Automobile Holdings Limited. http://hmdatalink.com/PDF/C00530/e00175(116).pdf

    Geely holdings limited http://www.marketlineinfo.com.ez.sun.ac.za/library/DisplayContent.aspx?R=DFE4AE0A-B587-4C04-8C21-2840BA1B6944&N=4294546488

    OICA http://www.oica.net/category/production-statistics/

    PingQing, L., HuaJie, S & Qiang, G. 2008. The Global Value Chain And China Automotive Industry Upgrading Strategy. Management Science and Engineering. 2(1), 11-19.

    Qin, F. & Huchen, X. 2006. The Management Strategy in GEELY Automobile Marching towards International Standard. College of Business and Administration Zhejiang University of Technology, P. R. China. 738-743.

    **Risk factorsValue propositionSupply chain pricingforecast auto sales growth in China, worlds largest market, to slow to 15 percent next year after strong growth of about 30% 2010, & 40% 2009

    government policies played an important guiding role in high speed growth of China's automobile industry. 3 major policies--halving of taxes on buying vehicles, "automobiles going to the countryside, "the old for the new"--helped stimulate huge consumption potentials for privately-owned cars and accomplish feat of 30%-40% per month of the year-on-year growth in both auto production and sales in 2009 in China**27 May 2010 PAPE Presentation*27 May 2010 PAPE Presentation****Geely has strong drive to become international player - Zhejiang Geely Holding Group, bought Volovo in August 2010Volvo last made a full-year profit in 2005. Its main plants are in Torslanda, Sweden, and Ghent, Belgium. also has manufacturing units

    The committee will meet at least twice a year to create synergy,.Ford had originally paid $6.5 billion in 1999. Acquisition helps Geely better tap into domestic luxury Chinese market where BMW, Lexus, and other foreign brands have dominated in the past. Geely will learn a lot about American and European auto markets through Volvo in terms of Marketing, Distribution, And Global Supply Chain

    What are the challenges and risks:Strategic alignment in governance > huge gap betw Geely dynamic family bus mode vs Volvo European management modeWhat are benefits for Geely and Volvo > Technology insights vs Economies of ScaleCan they manage the process?

    **Initial low-cost competitive strategy through innovation in product architecture

    Geely has moved into a new phase of development, which means that it will no longer manufacture cheap cars, but instead focus on cars with advanced technology, high quality and great service. Geely's new goal is to build good cars which are the safest, most energy-saving/fuel-efficient and environmentally-friendly.

    At first, Geely based its competitive strategy on low price. This strategy corresponded with the low-end segment where the importance of price outweighs quality and brand image.

    Geely launched series of price wars to keep its leadership - effectively spurred sales. average growth rate ito sales was 59% between 2001 and 2006:Geely started to expand its product range from the low-end economic cars (1.1 l) to middle range (1.8 l) roadster produced in small quantities. By 2007, Geely had built eight brands: Haoqing, Meiri, Ulio, Beauty Leopard, Maple, Free Cruiser, King Kong and Vision.2010: other models such as SUV, MPV and hybrid power cars.**Other Competitors: Chery, BYD and Great Wall

    Suppliers: Zhejiang Geely Automobile Parts and Components Company Limited and Shanghai Maple Engine Company Limited, Are related companies controlled by Geely & is first largest supplier and second largest supplier, respectively.

    Major restructuring of suppliers implemented in 2008, including the introduction of a new evaluation and management system for all theGroups suppliers, the elimination of some suppliers that failed to satisfy the Groups new quality requirements and the building up of the Groupscore supplier base. 2009, 88 suppliers disqualified and eliminated from list of suppliers, added 69 new suppliers, of which 37 are leading international players.

    Choosing the right suppliers and effectively managing inter-firm relationships is vital:Geographic location, Key competencies - price, component quality & service ito on-time delivery / after sales/ ISO9000, QS9000, Double sourcing - two suppliers for the same type of component -> trade off between economies of scale (favoured by single sourcing) and the risk of opportunistic behaviour and bilateral hold up (minimised by multiple sourcing)... road infrastructure is not highly developed, Power shortages are common, peak periods (summer) plants have to adjust working hours either to include more night shift work or temporarily shut down operations. For the time being, double sourcing reduces the risk associated with component delivery.

    ***innovative use of product architectureSignifying Geelys leading position in technological development and Innovations in China and reflecting the official endorsement and recognition by the Central Government of its technological achievements.

    Geelys MR4790Q engine can be produced at one third of the price of a Toyota engine because the components of Toyotas engine have become imitation-turned-versatile parts that can be produced at low costs and in large volumes. In terms of total cost, Geelys plant manager observed:If our competitors are selling their vehicles (of the same category) at prices as low as ours, they are losing money, whereas we still make profit.

    Breakthrough strategy involves a complete reconceptualisation or reconfiguration of an existing business model.Geely was able to identify precisely what the consumer wanted but, in addition, was able to develop a new product architecture thatallowed it to produce a low-price/low-cost product that was designed to meet specific local needs.

    As elsewhere, components from best selling foreign cars were reverse engineered and copied, but the approach pioneered by Geely differed from traditional copying in one important respect: the architecture of the copied product was progressively altered in such a way that the high-level mixing-and-matching of components from different sources became possible.

    Architectural change requires a significantly higher level of technological and engineering capability than copying

    interface between the engine and the rest of the car has been designed to allow the manufacturer to mix-and-match major components in a flexible and efficient way. This architectural innovation, both at the level of the engine and that of the whole car, has helped Geely to significantly reduce its costs (Wang, 2008). For example, Geelys MR4790Q engine can be produced at one third of the price of a Toyota engine because the components of Toyotas engine have become imitation-turned-versatile parts that can be produced at low costs and in large volumes. In terms of total cost, Geelys plant manager observed: If our competitors are selling their vehicles (of the same category) at prices as low as ours, they are losing money, whereas we still make profit.

    The final element in Geelys breakthrough -> enabled creation of innovative inter-firm relationships that support its overall strategy. A high percentage (around 70 percent) of components, including parts of the engine, are outsourced; consequently, Geely and its suppliers need to work very closely together. Geely strives to lower the price but must also maintain an acceptable level of quality to meet the local markets needs. To achieve this goal it has built on its links with its suppliers from its motorcycle business who are experienced in high volume production at low costs. This category accounts for 50 percent of its total number of suppliers. To ensure quality is maintained, the suppliers of big companies such as Volkswagen, Toyota, and General Motors are also integrated into the sourcing system. Having Geely as the customer helps those suppliersrealize economies of scale because of the higher production volume. Thus, the architectural innovation that has taken place at Geely, is now contributing to a wider change at the industrial level.**27 May 2010 PAPE Presentation*launch three new models this year to be delivered next year. With a total capacity to produce up to 680,000 cars a year, the company was well prepared for growth,***