Guangzhou Honda: Promoting Glocalisation in China

"Vehicle preferences in China can't be compared with any other country, and meeting local demand will be helpful in expanding market share,"1
Fu Shoujie, Executive Vice Director, Guangzhou Honda.

Guangzhou Honda Automobile Co. Ltd. (GHAC), one of Chinas big five automakers, took one giant step forward towards glocalisation as it established a wholly owned R&D subsidiary in China, with an initial investment of RMB 2 billion.2 Earlier, this JV had successfully exported its popular Chinese compact model Fit (which had a high mileage of around 20km/liter) to EU countries under the brand name of Jazz.3 GHAC was also the first Sino-foreign JV to start developing the vehicles locally, instead of previous practice of assembling the foreign brands. The JV had been able to market its products in much lower price than other Sino-foreign JVs as it raised the use of the Chinese-made spare parts from 40% in 1999 to 80% in 2006.4 Guangzhou and Honda had also established Chinas first solely export-oriented automobile manufacturing JV in 2005. Though, Sino-foreign JVs was a common phenomenon in the Chinese manufacturing industries, very few firms like GHAC had been able to do justice to their set objective of Think Global, Act Local.

The Chinese Auto Industry

The Chinese Auto Industrys history dated long back to 1950s. The Auto Industry in China owes its origin to the First Five Year Plan (1953-1957)5. The first Chinese automobile was produced by First Auto Works in Changchin way back in 19566.The development of the Automobile industry in China was slow in the initial thirty years (1956-1986). During this period, the entire mode of production was focused in the delivery of medium-sized trucks with an output capacity of below 500,000 units per year7. In 1987, there was an interesting development for the industry as the Chinese leadership decided to make the automobile sector one of the pillar industry of the economy. The development was a path breaking one as it surged the production of cars from 0.15 million in 1987 to about 1.4 million in 19938. The sector witnessed major reforms with the introduction of Ninth Five Year Plan in 19949. The reforms paved way for select group of foreign manufacturers to set up joint ventures to produce Personal Mobility Vehicles (PMVs). However, the joint ventures werent allowed to sell or distribute any products that were manufactured outside China. Apart from it, these firms were debarred to sell imported vehicles and establish distribution centers beyond a particular limit. The duty rates for imported vehicles were kept as high as 100% and the tariff imposed was also high. The foreign manufacturers were also not allowed to have more than 50% stake in the joint ventures, which were mostly restricted to the production of Completely Built-up (CBU) 1

vehicles11. Around 2.07 million units were produced in 2000, 63% of which were passenger vehicles. In the heavy-load vehicle division, there were 19 manufacturing companies with a total output of 82,000 units12. After Chinas entry into the WTO in 2001, the automobile industry witnessed relaxations in the rate of tariffs and other regulations (Exhibit I).

Exhibit I Summary of changes in regulations as a result of Chinas entry into WTO

Source: Hayes Keith et.al., Entry to WTO should lower pricing, http://www2.goldmansachs.com/hkchina/insight/research/pdf/chinese_auto_industry.pdf, February 21st 2003

Lower tariffs and relaxed entry regulations led to the entry of several foreign automakers that were allowed to do business, but within restrictions. As per the rules, a foreign player was not allowed to do business in China without forming a joint venture with a domestic player. Consequently, the industry witnessed a number of joint ventures between the domestic players and the foreign manufacturers (Exhibit II).

Exhibit II Joint Ventures Between International Automakers and Domestic Automakers

Source: Ban Linda et.al., Industry Structure: Partnerships versus independence, http://www935.ibm.com/services/us/imc/pdf/ge510-6229-inside-china.pdf

In 2006, the foreign-branded cars with their joint ventures in China held 70% of the domestic market share13. The state-owned and individuallyowned companies accounted for just a small part of the marketshare14. In 2007, the automobile production in China was around 761,900 units15 and was about 12.65%16 more than that of 2006. The total sales figure was around 717,000 units17 and within this the local brands accounted for 126,700 units, about 16.95 % higher than that of 2006. The Japanese brands stood second behind these local brands with sales of 107,400 units(Exhibit III).

Exhibit III Recent Performance

Source: Automotive, China Industry Monitor, Vol.703, Cygnus(Business Consulting & Research),March 2007,Page 7

Guangzhou Honda: The Making

Honda Motor Corporation was a multinational corporation, engine manufacturer and engineering corporation, headquartered in Japan. The company manufactured a wide array of products that included automobiles, motorcycles, trucks, scooters, robots, jets and jet engines, etc. It was the sixth largest automobile manufacturer in the world18 and also was the largest engine maker in the world19. It had a production capacity of more than 14 million internal combustion engines a year.20 Over the years, it had gained engineering excellence and had won the confidence of people by delivering the best of the products available in the market. The main countries, where it had established strategic alliance included USA, Canada, United Kingdom, Belgium, Brazil, Colombia, Thailand, Turkey, Malaysia, Philippines, Argentina, India, Pakistan and Vietnam.21 The recent years revealed strong financial position of the company across various nations of the globe through its increased sales (Exhibit IV).

Exhibit IV Impressive sales

Source: Automobile Business Report 2006, http://world.honda.com/automobile/report/2006/

Hondas operation in China had always been on the forefront of other companies in introducing new concepts in the automobile industry, which started its full-fledged growth in the late 1990s.The achievements include the indigenous production of the latest model, Accord in China and establishment of dedicated automobile dealer network. These dealer networks further responsible for integrated sales, improved supply of service parts and customer service. Apart from these, establishment of a European export unit for passenger vehicles in China was a major accomplishment of Honda motors. Guangzhou Honda Automobile Co., Ltd. (GHAC) was a Sino-Japanese 50:5022 joint venture. The company was established on 1st July, 199823. The partners in that undertaking included Japan-based Honda Motor Co. Ltd. and the local Guangzhou Auto Group Corporation. The company had an annual capacity of 240000 units24(Exhibit V).

Exhibit V Summary of Information on GHAC as of November 2004

July 1998 $139.94 million 50% Honda Motor Co., Ltd., 50% Guangzhou Auto Group Corp Guangzhou City, China Lu ZhiFeng, Chairman, Sho Minekawa, President (Director, Honda Motor Co., Ltd.) Employment Approximately 4,300 associates Start of Production March 1999 Products Accord, Odyssey, Fit Saloon, Fit Annual Capacity 240,000 units (to be increased to 360,000 in latter half of 2006
Established Capital Investment Capitalization Ratio Location Representative
Source: About Guangzhou Honda Automobile Co., Ltd. http://japancorp.net/Artile.Asp?Art_I8714, November 9th 2004

It had strong technical development capability, such as R&D center, emission lab and advanced workshops such as punching, welding assembly, painting assembly, general assembly and synthetic resin. Since the start of its production in 1999, Guangzhou Honda had steadily established a business foundation in China through various efforts that included expanding of production capacity consistent with increasing sales, increase of local content and strengthening of the dealer network. The total amount of investment for thefirst phase of the project was RMB 2.2775 billion25. In 1999, GHAC had an annual installed capacity of 30,000 units26. Production started with the Honda Accord, in the 2 litre, 2.3 litres and 3 litre versions. Production of the Multi Utility Vehicles (MUV) Odyssey started in April 200227. In early 2003, the Accord was updated. In April 2003, Guangzhou-Honda introduced the Chinese Fit saloon28. In 2004, Honda Automobile (China) Co., a new joint venture was set up to produce the Fit for export29. The Fit hatchback was shown at the Beijing Auto Show of June 2004. At the Guangzhou Auto Show of November 200430, the new Odyssey appeared. Guangzhou Hondas medium and high-class vehicle sales reached an impressive number of 500,000 on 32 June 28th 200631. In 2006, out of 4500,000 passenger cars produced in China, Accord, Odyssey and Fit accounted to 225,000 units.33 This enabled GHAC to acquire a significant share of the Chinese passenger car market in 2006 (Exhibit VI).It produced its 1,000,000th car on February 10th 2007.34

Exhibit VI Automobile Business in China: Honda & GHAC

Hondas performance in China GHACs sales in China

Source: Automobile Business, http://world.honda.com/investors/annualreport/2007/05.html

GHACs foray in R&D: A strategy to move ahead of other Sino foreign JVs
Most of the foreign automobile companies considered China to be a prized destination and expressed their eagerness to set up their operations in China. The main driver for this is the availability of low labor cost in China which was expected to reduce the cost of manufacturing. These companies entered in Joint ventures with the domestic companies and brought out models that dominated the market (Exhibit VII). The entry to the WTO in 2001 further led the country into the global competitive age. Though local companies entered into alliances with the foreign multinationals with an eye of capturing sizeable market share, some could not do so as these companies were faced problems regarding product quality etc. As the local Chinese technicians were not given training in handling these problems, these issues were to be referred back to the plants situated outside China (generally Europe and USA). This problem was evident for models like Excelle, Buick Regal, Santana, Elantra, Sunny, Corolla, and Alto, etc.

Exhibit VII Auto manufacturers in China (Sales figures in Unit: Thousands)

Auto-manufacturer Shanghai GM Shanghai VW FAW-VW Beijing Hyundai Guangzhou Honda Tianjin FAW Charade Chery Auto QQ, Dongfeng Nissan Tianjin Toyota Dongfeng Citroen Geely Changan Suzuki Major models 2004 Excelle, Buick Regal, Chevrolet sail 252 Santana, Polo, Golf 355 Jetta, Bora, Audi A6 300 Elantra, Sonata, Tucson 144 Accord, Fit, Odyssey 202 Charade, Platz/vela, Vitz 127 Fulwin, Chey Easter 87 Sunny, Tiida, Teana 61 Corolla, Vios, Crown 821 Citroen ZX,Elysee,Picasso 89 Haoqing,Merrie, Free Battleship 96 Alto,Cultus,Swift 110 2005 325 287 277 233 230 200 185 158 55 140 140 90 YoY% -29 -19.2 -7.7 61.8 13.9 57.5 113.9 159 89.5 57.3 46.6 18.2 Share% 8.2 7.2 7.0 5.9 5.8 5.0 4.7 4.0 3.9 3.5 3.5 2.3

Source: A short history of the Chinese car industry, http://offlinehbpl.hbpl.co.uk/newsattachments/RBW/China%20Cars%20box11.pdf

Most of these strategic alliances lacked the Research base that was required to make the industry the forerunner in the economy. Apart from this, these Joint ventures mainly provided a platform for the local companies to build good quality cars that had an edge over local brands. These JVs could not produce new brands as the required technical know-how was not provided by the foreign counterparts. These were successful only in providing cheap labor and cheap substitutes for the original parts. These JVs, thus, lacked required R&D infrastructure for catering to the demands of the consumers. There lied a serious need to establish R&D center by the local auto manufacturers and break the deadlock in indigenous development of auto parts. Guangzhou Honda made the first attempt to break this deadlock. GHAC in August 2007 announced the establishment of a wholly-owned R&D subsidiary in China (Exhibit VIII). With an investment of around RMB 2 billion (approximately 30 billion yen)35, the new Honda subsidiary, Guangzhou Honda Automobile Research & Development Corporation(Co.) Ltd. (GHRD) built an automobile R&D facility with a full-scale high-speed test score. GHRD planned to develop an independent product line covering design of vehicle concept and automobile moulding, full-scale test, live test and spare parts exploitation. The main objective of the R&D facility was to develop a new automobile product, to be marketed as an original brand of Guangzhou Honda with expected sales to start in 2010.

Exhibit VIII Guangzhou Honda Automobile R & DCo. Ltd: Information

Establishment Capital Investment Capitalization Ratio Initial Investment Representative Location Lot Size Facilities August 2007 RMB 180 million 100% Guangzhou Honda Automobile Co., Ltd Approximately RMB 2 billion (approx.30 bn. yen) Shoujie FU, Chairman, Toshinobu HATA, President Guangzhou, Guangdong Province Approximately 6 million Automobile R&D facility and test course
7

 Source: Guangzhou Honda to Build a new Automobile R&D Center http://goliath.ecnext.com/coms2/gi_0199- 6754549/Guangzhou-Honda-to-Build-a.html, July 18th 2007

The new vehicle proposed to be manufactured by using Honda valve cover gasket, a high quality Honda auto component would be a unique product in as much as it would cater to the specific needs of the Chinese market. To market this new vehicle, Guangzhou Honda planned to use an original GuangzhouHonda brand, which would be distinct from the regular Honda brand. This was the first time that they created and marketed a product under an original brand of the joint venture with a foreign automaker in China. It was believed that Guanzhou Honda would not only develop the car, but also provide all after-sales services, which include warranty and repair without the involvement of its parent company, Honda. According to Takeo Fukui, President of Honda, Guangzhou Honda, would never compromise on the quality standards concerning driving and safety, even if it was Guangzhou Hondas original brand car. It planned to curtail the cost by emphasising more on the parts that the Chinese customers appreciate than on the ones they didnt36. It was prepared to bear relevant costs that might include any recall which is rare in Chinese Automobile industry. The development of the R&D center under such situation seemed obvious, as it was to be directed to meet the consumer demand regarding repair & replacement issue in case of any recall. Earlier, in 2007, GHAC successfully exported its popular Chinese compact model Fit (which had a high mileage of around 20km/liter) to EU countries under the brand name of Jazz37. However, it had to recall 528,604 vehicles sold in Hong Kong due to a faulty power steering. Guangzhou Honda was trying to create a new class of vehicles having selling potential both in and outside China. This, however, requires a setting up of R&D center. The global perspective (Exhibit IX) of authorities of Honda was thus to bring an awakening in the Chinese automobile industry by strengthening its R&D efforts with the establishment of Guangzhou Honda Automobile Research & Development Co. Ltd. It was an endeavor towards a glocalisation38 drive that would help China to think global (exporting cars abroad) and act local (carrying out R&D within the country).

Exhibit IX Global Insight Perspective

Significance

Honda Motors
Honda plans to expand its existing production facilities across all regions, further increasing its global footprint and boosting capacity in line with its forecast growth.

Main Competitors The main competitors of Honda have confirmed that they were planning major extensions of their model alliance across the globe

Implications Honda Motors

Honda's highly globalised manufacturing strategy will be further strengthened, providing the company withflexibility to exploit growth opportunities. Main Competitors They planned to enter new markets through jointly produced models embarking upon orthodox small car designs.

Outlook

Honda Motors
Honda is emphasizing that its growth plans will be largely achieved through its small to medium-sized, fuel-efficient vehicles. Although these segments areset to continue growing in the prevailing environment, Honda's goals are nevertheless highly ambitious and it will struggle to attain the 27% production growth targetby 2010.
Source: Compile by the Authors.

Main Competitors They generally emphasized strategic tie- ps to increase production and enjoy economies of scale. However they werent stressing on capital tie-up.

The emergence of this R&D center might encourage others to open similar institutions which might revolutionize the automobile industry in China. However, initially the responsibilities lies with Guangzhou Honda in utilizing its R&D center for facilitating technology transfer to the relevant industries and provide a focal point and platform to undertake market-led R&D researches. It should also collaborate with industry, universities and other technology providers which in turn would enhance capabilities and competitiveness of the local industry. This would result in improved market intelligence, management, product design, quality standards and technical skills in the industry. The glocalisation drive initiated by the Guangzhou Honda Group through the development of Guangzhou Honda Automobile Research & Development Co., Ltd was path-breaking event in Chinese automobile industry. It created the opportunity for the Chinese Automobile Industry to gain self-sufficiency in R&D. Thus, it remained to be seen whether Guangzhou Honda Automobile Research & Development Co., Ltd could make this glocalisation drive a success in near future.

This Case was written by Avishek Ghosh, Snehasish Chaudhuri and Seshagiri Rao Chaganty, IBS Research Center. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2009, IBS Research Center. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

1 China HondaJV plans to roll out its own logo http://english.autoinfo.gov.cn/jsp?wenjian=xw&id=3432, July 20th 2007. 2 Guangzhou Honda to Build a new Automobile R&D Center http://goliath.ecnext.com/coms2/gi_01996754549/Guangzhou-Honda-to-Build-a.html, July 18th 2007 3 Ibid. 4 Ibid. 5 Bose Supriyo, Chinas Auto Industry, (Case study), IBS Research Centre, Kolkata, 2006, 6 Ibid. 7 Ibid. 8Ibid. 9
10 11 12 Ibid. Ibid. Ibid. Ibid. 13 A Review of China's Car Industry in Past 5 Years, http://www.china.org.cn/english/BAT/191884.htm,

December 11th 2006 14 Jing Jin, Ambitious road ahead of country's car industry, http://www.chinadaily.com.cn/bizchina/200704/23/content_857520.htm, April 23rd 2007 15 Automotive, China Industry Monitor, Vol.703, Cygnus(Business Consulting & Research),March 2007, Page 7 16 Ibid. 17 Ibid. 18 HYUNDAI-KIA WORLDS FIFTH LARGEST CAR MAKER, OUTSELLS NISSAN, HONDA!, http://www.cubiccapacity.com/hyundai-kia-worlds-fifth-largest-car-maker-outsells-nissan-honda/ 19 Honda Motors Co. Ltd, http://www.automobileindia.com/two-wheelers/honda-motors/ 20 Hondas Quarterly Profit Up 38% on Fuel-Efficient Cars, http://www.efluxmedia.com/news_Hondas_Quarterly_Profit_Up_38_on_Fuel_Efficient_Cars_13389.html, January 30th 2008 21 The Group Companies, http://www.honda2wheelersindia.com/aboutus/groupcompanies.asp 22 Project Overview http://goliath.ecnext.com/coms2/summary_0199-3526843_ITM, January 1st 2005 23 Ibid. 24 About Guangzhou Honda Automobile Co., Ltd. http://japancorp.net/Artile.Asp?Art_I8714, November 9th 2004 25 Guangzhou Honda http://www.eautoportal.com/links/LinkCategory.asp?showcategory=56000020 26 Ibid. 27 Ibid. 28 Ibid. 29 Ibid. 30 Ibid. 31 Automobile Business, http://world.honda.com/investors/annualreport/2007/05.html 32 Ibid. 33 Ibid. 34 Guangzhou Honda Automobile Corporation Ltd, http://www.lifeofguangzhou.com/node_10/node_38/node_62/node_64/2008/05/30/121212549139314.shtml, May 30th 2008 35 Guangzhou Honda to Build a new Automobile R&D Center op.cit. 36 Chikaoka Yutaka, Monozukuri Nikkei, Guangzhou Honda to Develop Original Brand Car; Low Price Model Targeting Chinese Market, http://techon.nikkeibp.co.jp/english/NEWS_EN/20070719/136379/, july 19th 2007 37 Guangzhou Honda to Build a new Automobile R&D Center op.cit. 38 It is a portmanteau of globalization and localization

10