Investigate of Chinese Auto Mobile Industry -- a Study of Shanghai Volkswagen Case

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Part 1 External Environment Analysis

Macro Environment Analysis – PEST Analysis

Political/legislative

Chinese began to open its market and reduces of governmental control over marketing and labour mobility in the1980s. After twenty year reform of state-ownership enterprises the SOEs remained the most significant role in China economy and control the key industry of China. The adjustment of government policy and stabile political environment played a role in the recent increase of foreign investment in China. By the end of June 1997, it was reported that over 200,000 business joint ventures had been registered in China, with a total foreign investment of $204 billion ($15.7 billion from US companies) (China National
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(high barrier)

Switching Cost – the switching cost is higher because of the price of automotive was much more higher than can easily switch from one brand to another. (high barrier)

Government Policy – Chinese government was quotas keep barriers to foreign investment to entry into the market (high barrier)

Overall – the biggest threat of new entrants comes from the local government as the government set up high entry barriers for this special industry. As a result, the overall barriers for new entrants were medium to high.

Power of Suppliers

Basic Production Materials: automobile industry can be regarded as a comprehensive and special industry as 50% -- 70% of the value is manufactured in supply firms. Many local suppliers monopolized the local parts industry. In additional they are strange supported by local government. (high power)

Production Equipment: Chinese auto industry was 10-15 years behind the global auto industry development in the period of 1997-1998. Most manufacturers would use second-hand equipments at that time. Therefore the power of suppliers in production equipment was low.
Government Influence: In China government plays an important role in auto parts supplier market. Local government implemented “localization tax” in order to improve domestic content rate of auto parts. As a result the overall bargaining power of suppliers was

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