The Policy towards FDI mentioned at the start of the article by Gumbel (2007) was heavily influenced by the local economic conditions in Germany at the time. Exorbitant labour costs, unbending union rules and Administrative Policies all influenced BMW to investigate solutions for their local economic stagnation from mostly Oligopoly conditions of most companies in the saturated European Market. BMW had to find solutions elsewhere. Theory and analysis Duthmann et al. (2006) reports that Labour costs are traditionally expensive in Germany.
This view is supported by data from Appendix A.
It was compounded by the re-unification of East Germany and the Government needed to find a solution for Unemployment. BMW used the strategic advantage that these unemployed East German Automotive workers at Leipzig were providing, while helping government lower unemployment through FDI. Lowering that aspect of the inputs to the value chain had injected profit to BMW’s earnings. The Leontief Paradox states that countries that are abundant in capital should be exporters of capital intensive goods, and import labour intensive goods.
These imports did not relieve the strain on domestic labour intensive industries. The Leontief Paradox disputes the Heckscher-Olin theory on the point that Factor endowments can be impacted by Government Policy. BMW is a good example proving that this paradox exists. Government intervention into labour rights, the shortened work week and East German re-unification problems caused excessive pressures on high labour costs. This directly caused BMW to shift their focus on investment elsewhere, to achieve cost reduction.
The Benefits that Germany enjoyed from allowing BMW to pursue their FDI efforts are related to their resource transfer effect, their employment effect, their balance of payments effect and their effect on competition and economic growth.
Specific parts for the leather seats and cockpits of BMW’s are manufactured by Fauracia. The natural resource leather is of better quality. The parts do not have to be trucked in as finished parts, thus incurring transportation costs, customs and import duties, and can be assembled on-site, providing immediate service support if needed.
All these resources are transferred from elsewhere and do not need to be consumed and provided by Germany. Allowing FDI from Daimler-Chrysler and Fauracia allows technical resources to lower the intellectual capital drain needed in Germany, and this resource can be better utilized in other sectors. Costs involved in Research and Development of individual parts needed in assembly then stays with the host nation and not Germany, and lowers costs for BMW. FDI effect on competition and economic growth in Germany relates to the Competition created by the rivalry between Daimler-Chrysler and BMW.
This especially affects service industries such as Management and these services have to be delivered in Germany where the cars are produced. Radosevic and Rozeik (2005) reports on the Cluster in the Central European Economy, and the clustering of supplier networks. BMW made the same decision regarding the supply of some of their parts to reduce costs. Hill (2007) discusses Porters “Diamond Model” for the determinants of National Competitive Advantage. He is of the opinion that Governments influence the four determinants.
To evaluate whether Germany’s attitudes and policies towards FDI where effective, we need to investigate the effects the FDI decision had on factors of production, such as skilled labour and infrastructure, on demand conditions (sophisticated customers in home market), related and supporting industries, and firm strategy, structure and rivalry (conditions for organization of companies, and the nature of domestic rivalry) Factor conditions were influenced in Germany at that time through their policies towards capital markets.
The Business Times(2008) reports that Germany has the most transparent banking System in Europe and is of the opinion that their high personal income tax rate will cause money to ultimately flow to Southeast Asia or Central America if they do not change it soon. Gumbel (2007) also states that the skepticism of Anglo-Saxon capital finance hampers the capital market even though Germany is supposed to draw advantage from the unified European economy.
Although hedge funds exist to help subsidize growth within the European Union (EU), Germany wants to curb their power so that individual local economies within the EU may be stimulated. Germany has themselves provided money through the private sector, even though the unification with East Germany took a lot of investment to develop again. This decision can thus be evaluated as a good stimulant for domestic macro-economic growth. Porter (1980) note that local government usually shape local demand conditions in more subtle ways.
Local Product Standards have always been high in Germany, and regulations for buyers needs are strictly controlled. The shift towards FDI will fit in with this advantage. Gumbel (2007) alludes to the fact that Germany has always invested heavily in their Automotive Industry through subsidizing related and supporting industries via their traditional engineering prowess. BMW moved Faurecia, the company that builds their seats and cockpits, on site to create a backwards Vertical FDI. This accelerates the shared value chain activities, and co-ordinates supportive industries.
The cutting of Transportation costs by moving Faurecia on site allowed the special conditions created by mass customization to be solved even though the cockpits assembled generally have a high value to weight ratio. BMW organized their firm structure as Porter’s Diamond Model suggested they should through using management structures that are technically trained and allows for hierarchical methodical product and process improvements. This can be seen in their Mass Customization program that has bee the life line of their current success.
The Domestic Rivalry between BMW and Daimler-Chrysler Mercedes-Benz has also traditionally been responsible for the continual product innovation at BMW. This resulted in the drive to reduce input costs to the Value Chain and improve quality of their product through automation and use of robotics. FDI was one of the sources BMW identified that provides innovation, lower costs and better quality. It is also the collusion with Daimler-Chrysler to develop new hybrid engines that gives them new technology. This can only be beneficial to both companies through the use of FDI. Discussion
FDI was a good solution to take advantage of factor conditions such as great technical resources, already existing Research and Development infrastructure, Germany’s good banking system, and strong local capital investment policies, the unified Euro. Demand conditions such as High local quality in product standards, the technically trained management firm structures inherent in most German organizations, and the longstanding domestic rivalry with Daimler-Chrysler Mercedes, have all created and environment where FDI became the logical solution to the challenges they faced.
The Macro-economic consequence of the Foreign Direct Investment allowed Germany to lower unemployment without allocating part of the Gross Domestic Product to improve it. FDI created jobs specifically for the unemployed East German automotive industry workers in Leipzig. The Balance of payments effect allowed Germany to have a growth rate of 2. 8% last year. This allowed net exports of $200 Billion, of which BMW showed on their own balance statement healthy revenue of $65 Billion.
This was achieved by establishing FDI to be a substitute for imports of goods or services and thus on a continual basis will improve the current account of Germany. Conclusion The close relationship of Porter’s Model of determinants of comparative advantage to the FDI decision was discussed. This showed the accuracy of FDI in providing a head-start in the Market. When the positive effects of BMW’s FDI decision is measured against the macro-economic benefits it provided, it must be evaluated that it was a correct decision. Question 2:
Explain the benefits to the German economy in BMW’s decision to maintain and improve its manufacturing operations in Germany. Introduction Amdam, Lunnan and Ramanauskas (2007) has the opinion that strong domestic customer relations demanding change, or strong innovative domestic competitors are more forceful change agents than those that are located in other countries. Maintaining and improving the manufacturing operations in Germany may also have to do with the competitive presence of competitors like Daimler-Chrysler. The benefits to BMW to concentrate manufacturing operations or decentralize will be discussed.
Hill (2007) discusses that concentration of production makes sense when trade barriers are low, differences between countries in factor costs, political economy, and culture have a substantial impact on the costs of manufacturing in various countries, externalities arising from the concentration of like enterprises favour certain locations, important exchange rates are expected to stay relatively stable, the production technology has high fixed costs and high minimum efficient scale relative to global demand, or flexible manufacturing technology exists, production value-to-weight ratio is high and the product serves universal needs.
Alternatively, decentralization of production takes place when differences between countries in factor costs, political economy, and culture do not have a substantial impact on the costs of manufacturing in various countries, trade barriers are high, location externalities are not important, volatility in importantant exchange rates is expected, the production technology has low fixed costs and low minimum efficient scale, and flexible manufacturing technology is not available, the products value-to-weight ratio is low and the product does not serve universal needs.
BMW would concentrate production, since the factor cost of Oil, Electricity and Minerals for automotive production is easily influenced by political decisions. The concentration of automotive manufacturing in Germany, and the high fixed costs, the high value-to-weight ratio and the product serves universal needs. There are certain factors which make the case for decentralization. Trade barriers are generally high with automotive manufacturing, since entry to the market is restricted by technological barriers, high start-up and input costs and the volatility of important exchange rates, specifically the Brent Crude Oil Price is expected.
There are therefore more benefits to concentrating, rather than decentralizing. Hill (2007) states that reducing economic exposure requires strategic choices that goes beyond the realm of financial management. The key to reducing economic exposure is to distribute the firm’s productive assets to various locations so the Firms long term financial well-being is not severely affected by changes in exchange rates. This point towards decentralization, but since the Euro is a strong currency, it is hedged against volatility more than the benefit of lowering foreign exchange risk.
This may be because most Factors of Production, and the other determinants of Porter’s Diamond Model, already exist in the robust German Domestic Economy. This also explains why there is no drive to move productive assets elsewhere. Dunning’s Eclectic Approach demands that Ownership advantage needs to be backed up by Locational Advantages from factor endowments. BMW may feel that those markets can still be served with exports. This is consistent with the economic theory of positive income elasticity for luxury products.
Porter’s Diamond Model also confirms the benefits of local demand conditions, the importance of related and supporting industries, and the domestic rivalry with Daimler-Chrysler. Conclusion It benefits BMW’s research and Development from the stimulation of technological advancement from domestic rivalry. The streamlining of value chain activities through keeping Just-in-time production as fast as possible, it offsets the delays possibly caused by mass customization.
Keegan (1999) as quoted in Hill (2007) state that by reinforcing positive determinants of competitive advantage in an industry, government can improve the Competitive position of a nations firms. This does not have a negative effect on the balance of payments for Germany and actually helps the GDP grow by lowering unemployment and increasing exports. If BMW wanted to extend its manufacturing operation into a developing Southern African country, explain what your recommendations would be to their CEO with regard to: Question 3. 1: Factors to consider prior to the ormulation of a global strategy? E. g. Culture, Negotiation, etc. Introduction Ling and Miller (2003) states that when individuals conduct business across national borders, they often bring to the negotiation table diverse cultural predispositions in which they interact with another. For BMW to successfully negotiate extending its manufacturing operations, it needs to understand the South African culture of Ubuntu. Hill (2007) suggested that there is a checklist of various cultural dimensions that can provide a cultural review prior to entering into Foreign Direct Investments.
These are Nature(control, harmony and subjugation), Time(monochronic or polychronic), time(past, present or future), Action(doing or being), Communication(low or high context), Space(private or Public), Power(equality or Heirarchy), individualism or collectivism, competitiveness or co-operation, structure(high or low) and Formality(formal and informal). We will discuss the application of each of these to South Africa. Discussion The traditional African culture puts high value on Nature, and that we need to care for our environment. Africans believe that we are subjugate to the fate of nature and we are only part of it.
BMW instituted stringent emission limitations on their products since the Kyoto protocol, at the World Summit in Johannesburg, South Africa in 2002. They also built the Earth Lounge in Sandton, South Africa to display the contribution they make to sustainable development. Africans believe that activity supercedes time, which is polychromic, propicious, circular and that human beings are more important than time itself. Tradition from the past, is very important to an African, and it is more important than the immediate conditions of the present or the progress of the Future.
Being a good person in the community is much more important to African people than doing things. This extends to treat even strangers as extended family, thus one’s child is the community’s child. Africans are direct in their communication, since they live in community they do not place higher value on the individuals words and manner than the collective. The only cultural body language that is significant in this context is the custom for a visitor to sit down before ant communication even takes place.
Hurn (2007) advises that the pace of negotiations needs to be slow when done in low context though, and directness is essential, since Ubuntu sees not coming to the point as dishonesty. Public space is allocated before private space, and Ubuntu demands that there is minimal private space, and all resources should be shared. Equality is very important to Ubuntu, since all are equal. The only hierarchy exists amongst those who allocate resources to the collective, like traditional chieftains, or political representitives.
Not co-operating with the needs of the whole community, sharing its resources in the Zulu culture traditionally led to death for the individual. Informal relationships and social structures prevail in Ubuntu, since being formal is a sign of rejection of the community and its values. Building social relationships, sharing in the customs of the local tribes or giving of gifts to the community shows this support. Evidence of using this cultural experience can already be seen in the BMW SEED Programme that was initiated in 1996.
It is aimed at awakening in our youngsters an interest in the environment by sponsoring planting seeds, and supports outcome based education, augments feeding schemes, develop entrepreneurial skills amongst learners and create environmental awareness through behavioural change. Rodrigues (2001) is of the opinion that decision making in the African Culture is by consensus, and this process is circular providing feedback to ensure better decisions made for all in the future. This view is supported by Tay (2007) who believes that this has been the key factor amongst the Japanese automotive industry’s success Conclusion
Pursuing a global strategy for BMW to extend their manufacturing operation to South Africa, must include sensitivity to reaping cost reductions from experience curve effects and location economies. This exploitation can only occur in the Ubuntu context, if the company has done all it could to be seen as part of the community, or providing resources to the community’s needs. Negotiation for BMW would thus need to include a proper needs analysis of the local community, an accurate transaction cost analysis including the non material benefits proposed to be provided, like education, providing housing and food.
Question 3. 2: The strategy that BMW should utilize. Justify Introduction Hill (2003) discusses the four basic strategies to enter and compete in the international environment. They are an international Strategy, a multi-domestic strategy, a global strategy and a transnational strategy. The mode of entry into this market must include alleviating pressures for cost reduction, and transferring of Management and Technical know-how. We will discuss how the transnational model and wholly owned subsidiary as entry mode is the best strategy. Discussion
BMW cannot pursue a multi-domestic strategy, since it cannot without high costs replicate their entire value chain. Strong local autonomy would make them lose control over the benchmark of quality that has become their brand identity. The weakness from a pure global strategy is that BMW will lose the ability to customize their products. This mass customization as reported by Gumbel (2007) was the very reason for their profits in recent years. Cost reductions from the underlying experience curve also causes economies of scale in the international strategy.
Previously the attempt to transfer innovation is a good strategy for any multinational company investing in a developing country. BMW traditionally has followed this strategy, where the Head Office in Munich controls Research and Development, technology, processes and marketing. Marketing Functions and manufacturing plants can under this strategy be set up in major business countries. Gumbel (2007) reports that the shift away from Germany as a head Office towards a true Transnational strategy. Research and Development are now partnered with Daimler-Chrysler and Peugeot in developing new engines outside of Germany.
A transnational strategy would allow for the following advantages: It exploits the experience curve effects BMW has built up over years of technological innovation. Location economies now allow BMW to cut high labour costs, and the cost of steel. BMW should use their FDI to utilize the abundance of cheap labour conditions. They could negotiate with the South African Government to help lower unemployment, improve education skills through apprenticeships. Jenkins and Thomas (2002) reports that in manufacturing, rising capital intensity and improved productivity may limit the benefits of FDI in terms of ongoing job creation in South Africa.
It is therefore essential that BMW provides ongoing job creation as a guarantee when negotiating with South Africa for FDI. The Budget of 2008 has made several tax concessions around the skills levies imposed on the South African Tax Payer. BMW should take strategic advantage of these conditions. The benefits of FDI for a country like South Africa are seen as flowing mainly from externalities generated by technology transfer They should use the supply side support measures mentioned by Streak and Dinkelman (2000) to lower their supply chain input costs.
BMW should invest in local infrastructure fro Manufacturing processes, because it combines both the lower labour costs and lower input resources required. It will also be lucrative for South Africa, since the FDI now allows exports from South Africa, adding to the health of the domestic economies balance of payments. The strategy BMW should follow must include a proper analysis of both their internal strengths and weaknesses. Weirich (1999) proposed the use of the TOWS (Threats, Opportunities, Weaknesses, Strengths) Matrix to analyze the Competitive Advantages and Disadvantages of Germany.
The TOWS analysis for BMW allows four strategies to emerge. When we use Weirich’s opinion that The Strengths-Opportunities Strategy would play to the Culture of quality, we can justify why BMW used its skilled intellectual capital, its superior technological innovation, engineering machinery, chemicals and managerial practices. BMW must then analyze whether there exists an Opportunity in South Africa for these strengths. The Strengths -Threats Strategy would assume that they need to consider FDI as a means to capture more of an Emerging Expanding Market share in South Africa.
BMW needs to look at the health of the automotive retail sector as well as the industrial manufacturing sectors. The Automotive Sector in South Africa is very healthy, as seen in the Local Manufacturing plants for Volkswagen and Toyota already in South Africa. The Weaknesses-Opportunities Strategy would use cheaper labour costs to overcome rising domestic competition from Labour Unions in mature contracting Economies. Kamoche (2002) reports the success of multinationals in the past to leverage low labour in South Africa.
Machaka and Roberts (2003) also confirm that spiralling supply input costs like steel and other natural resources are also cheaper in South Africa. Weakness-Threats Strategy would only apply to countries that are a threat from their strong economic market share. Experiencing difficulties in exporting arising from an expensive product and strong currencies in their home country would scare off BMW. They would look for a stable political environment, a growing economy and a stable currency. Conclusion From this analysis the best fitting strategy that would fit BMW to adopt regarding Developing Economies, is the Weakness-Opportunities.
BMW is a large multi-national company looking to find new markets in which to sell not only their product, but sell their expertise. BMW should us the abundance of natural cheap resources like steel, available in South Africa. This view is supported by Matjekana (2002). Matjekana (2002) also suggests that it is unusual that South Africa did not attract more FDI in their labour market. Using this opportunity as a value chain activity will increase profits. Matjekana(2002) is of the opinion though, that the reason for this paradox (that can be seen as a reversed Leontif paradox? is related to the South African Governments inability to get crime under control. BMW should use the Transnational strategy for moving their manufacturing plant to South Africa. BMW can exploit their experience curve effects in South Africa, importing technical resources; they can exploit location cost economies like cheap steel and labour. BMW can customize local product offerings better, since the costs incurred to do this is less in South Africa. In the South African Context it may make more sense to leverage their valuable skills this way as a commodity than pursuing a Global Strategy.
A Global strategy has a lack of local responsiveness, and the market for Luxury Vehicles in African economies is small compared to developed nations. This lack of providing product customization is not a huge consideration therefore in South Africa. BMW should use South Africa as a doorway into the Market for both the rest of Africa, and a cost cutting distribution Centre to Australasia. They should use the wholly owned subsidiary model in which they can transfer their transient technology advantage, while it is structured to reduce risk of loss of technology. Question 4:
Analyze the Global Competitive environment in which BMW operates and rank their position in the industry. The five competitive forces model was developed in 1980 by Michael E. Porter. The five competitive forces Porter (1980) proposed in his model have an effect on the car manufacturer BMW. Based on this analysis, the force with the most impact on the company will be identified. Based We will examine how BMW uses information systems to offset the most competitive of these forces. Porter (1980) suggests that competition in an industry is rooted in its underlying economic structure.
The stage of competition depends upon five basic competitive forces, which determine the degree of competition and the profit potential in an industry. The five forces are (a) intensity of competitors, (b) power of suppliers, (c) power of customers, (d) threat of new entrants and (e) threat of substitute products (Porter, 1980). (a) Intensity of competitors BMW, which stands for Bayerische Motoren Werke, has made a well-known name as a luxury car manufacturer (Bernhardt & Kinnear, 1994). The headquarters of the BMW group is in Munich, Germany, but the company has global reach.
The company built high brand equity over the years through continuous branding efforts and high quality products. Kiley (2004) states” BMW is arguably the most admired carmaker in the world and BMW products inspire near- fanatical loyalty”. Within the luxury car manufacturing direct industry competition is fierce. U. S. manufacturers produce cars like Cadillac, Lincoln, Buick and Chrysler that look comfortable and visually stylish. European manufacturers like BMW, Mercedes Benz, Audi and Jaguar focus on customers that want the communication with the road via steering nd suspension systems (Bernhardt & Kinnear, 1994) by producing functionally superior cars. The luxury car segment of the automobile market is at the maturity stage of the life cycle, locally and globally, due to an increased number of competitors from domestic and foreign markets. The automobile market is characterized by a low potential for market growth, but high sales and profit potential (Murtagh, 2004). There are traditionally high entry barriers in this market and products are usually differentiated. Competitive forces are high in each segment of the overall market. BMW belong to the strategic group of luxury functional cars.
This segment is categorized by low product diversification but a relatively high geographical scope (Murtagh, 2003). It is also a differentiated oligopoly. An oligopoly consists of a few companies with an unspecified number of buyers. The action of each company in this oligopoly affects the other manufacturers in the market and thus invokes reaction of manufacturers to one another. The objective of companies in an oligopoly is to maximize the present value of profit (Bernhardt & Kinnear, 1994). BMW differs in the features, styles, quality, innovation, technology, design, appearance and services they aim to provide.
BMW can also gain a competitive advantage to its U. S. competitors through exchange rates when the dollar is strong (Bernhardt &Kinnear, 1994). (b)Power of Suppliers The roles and responsibilities of suppliers in the automobile industry have changed because the industry structure has merged. High switching costs and dependency give automotive suppliers high amounts of economic monopoly. High quality and high service levels towards BMW customers, from the consistent high quality, co-operating, high competency, just-in-time and reliability of suppliers. (c) Power of customers
Customers, who buy, have major influence on the decisions of companies in an oligopolistic market structure. Porter (1980) explains that buyers force down prices, bargaining for higher quality or more services, and playing competitors against each other at the expense of industry to make profit. BMW’s positive brand image distinguished itself through its point-of-difference. The outcome is that BMW customers are loyal towards the brand. As a result, many competitors of BMW have to face falling sales and market share, while demand for BMW products continues to grow (Kiley, 2004). (d) Threat of New Entrants
New entrants are essential for an industry to stay competitive (Porter, 1980). Their absence removes the drive to gain market share and profit. The Global Automotive Industry is an Oligopoly, and any new entrants make commanding profit and controlling price more challenging. BMW takes advantage of economies of scale, one of the major aspects of barriers to entry (Porter, 1980) because its unit costs decrease significantly with quantity increases. Capital requirements are probably the most significant barrier to entry because the production of cars requires immense financial resources.
Research and Development, further facilities abroad for global operating scale, brand switching costs, Government Regulations in technology and environmental pollution influence entry barriers as well. (e) Threat of Substitutes Low End Cars, Motorcycles, bicycles and usage public transportation are limited, which results in low pressure on manufacturers (Porter, 1980). Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.
The Power of Customers impacts mostly on BMW, because they increase competitors and product variety. Customers are the most important part for the success of BMW. As Gumbel (2007) reports the mass customization system BMW developed for catering for the specific tastes of individual customers, fills this need. A comprehensive passive safety system information system innovation by BMW called the Intelligent Safety and Information System (ISIS) was developed. BMW also use a dealer communication system that enhances the manufacturer-dealer relationship and effectiveness Conclusion:
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Belgium30. 00Denmark29. 90Sweden30. 90 Luxembourg28. 30Sweden29. 60France30. 90 France28. 20Netherlands28. 90Belgium30. 60 Netherlands22. 40Finland28. 80Finland27. 20 Finland26. 80France27. 60Netherlands26. 50 Germany26. 20Austria26. 60UK24. 50 Austria25. 30Luxembourg25. 80Germany24. 10 UK24. 70UK24. 70Austria23. 80 Italy21. 40Italy20. 60Spain14. 30 Spain14. 80Spain16. 30Greece13. 70 Greece13. 40Greece12. 70Portugal10. 80 Portugal9. 60Portugal8. 30ItalyNo data EU1524. 00EU1525. 00EU1524. 20 Note: Data on Sweden and Greece refer to 2003; no data available for Ireland. Source: IMK Report, 2006 Appendix B