the expansion of toyota motor company in the russian car...
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THE AARHUS SCHOOL OF BUSINESS
Department of Management and International Business
FINAL THESIS
Master of Science in
Finance and International Business
Author:
Oleg Takoev
Academic Advisor:
Kurt Pedersen
The Expansion of Toyota Motor Company in the Russian Car
Market
October 2006
Foreword
I would like to express my sincere gratitude to my academic advisor – Professor Kurt
Pedersen, who guided me throughout the process of writing the thesis.
I would also like to thank Viktor Tskhovrebov from Renaissance Capital, Anatoliy
Kalitsev from Autoreview and Sergei Bazoev from PwC. Without their cooperation this
project would not have been possible.
Abstract
After the collapse of the Soviet Union, the Russian total production output considerably
fell down. That is also the case of the automotive industry. Recently the living standards
in the country have risen up and the country experience a consumption bum. Thus the
companies investing into Russia are looking for new markets and customers.
The research investigates how TMC is expanding its operations in RF and the way the
company benefits from the establishment of production facilities in the country. The
thesis also looks into the role of the Russian government in developing business
environment in the automotive industry and in the attracting FDI from global car
manufacturers.
The findings suggest that TMC will succeed in exploiting the market seeking strategy in
the country. The company will attract large component manufactures to the market. One
of the key success factors is the ability of the company to transfer TPS to its Russian
assembly plant.
Abbreviations
ATV – All-Terrain Vehicles
BRIC – Brazil, Russia, India, and China
CAGR – Compound Annual Growth
Rate
CEEC – Central and Eastern European
Countries
CIS – Commonwealth of Independent
States
CKD – Completely Knocked Down
CV – Medium and Heavy Commercial
Vehicles
EU – European Union
E&Y – Ernst and Young
FDI – Foreign Direct Investments
GDP – Gross Domestic Product
GM – General Motors
JV – Joint Venture
LCV – Light Commercial Vehicles
MNE – Multi-National Enterprise
OEM – Original Equipment
Manufacturers
PSA – Peugeot – Citroen Group
PwC - PricewaterhouseCoopers
RF – Russian Federation
RZD – Russian Railways
SEZ – Specialized Industrial Zone
SKD – Semi Knocked Down
SUV – Sport Utility Vehicles
TMC – Toyota Motor Corporation
TPS – Toyota Production System
VW – Volkswagen
WTO – World Trade Organization
Table of Contents
Chapter 1: Introduction ....................................................................................................... 3 1.1. Background of the study .......................................................................................... 3 1.2. Problem Statement ................................................................................................... 4 1.3. Thesis Relevance ..................................................................................................... 6 1.4. Delimitations of the Thesis ...................................................................................... 6 1.5. The Thesis Structure ................................................................................................ 7
Chapter 2: Methodology ..................................................................................................... 8 2.1. Research strategy and Case Study Design ............................................................... 8 2.2. Systems Approach ................................................................................................... 9 2.3. Data collection ......................................................................................................... 9 2.4. Triangulation.......................................................................................................... 10 2.5. Quality of the Research.......................................................................................... 10
Chapter 3: Theoretical Background .................................................................................. 12 3.1. Internationalization ................................................................................................ 12 3.2. Resource-Based Approach..................................................................................... 15 3.3. Development of Firm’s International Competitiveness......................................... 21
3.3.1. The Porter Diamond........................................................................................ 21 3.3.2. Porter’s Five Forces of Competition Framework ........................................... 23 3.3.3. Value chain ..................................................................................................... 26
3.4. The Eclectic Paradigm ........................................................................................... 28 3.4.1. Market Failure................................................................................................. 31 3.4.2. OLI concept .................................................................................................... 31 3.4.3. The Investment Development Path (IDP)....................................................... 33 3.4.4. Eclectic Paradigm and Alliance Capitalism.................................................... 35 3.4.5. Internationalization in Eclectic Paradigm....................................................... 37 3.4.6. International Production.................................................................................. 38
Chapter 4: The Case Company ......................................................................................... 40 4.1. General Information............................................................................................... 40 4.2. History and Corporate General Timeline............................................................... 43 4.3. Toyota in Russian Federation ................................................................................ 45
Chapter 5: Comparative Analyses of Automotive Industry Development in BRIC Countries and Korea ......................................................................................................... 48
5.1. Models of Development......................................................................................... 49 5.2. Development Paths ................................................................................................ 52 5.3. Key Success Factors in the Development .............................................................. 54 5.4. Perspectives of Manufacturers in Russia ............................................................... 55
Chapter 6: Toyota Expansion in Russian Federation........................................................ 57 6.1. Market Overview ................................................................................................... 57
6.2. Market Growth Perspectives...................................................................................... 63 6.3. Toyota Niche in the Market ................................................................................... 68
Chapter 7: Component Manufacturers in Russia – Possible Alliance (Suppliers) ........... 74 7.1. Global Manufacturers in RF .................................................................................. 74
7.2. Potential Strategic Partnership............................................................................... 76 Chapter 8: The Role of the Government........................................................................... 78
8.1. The Role of Government in the Formation of Automotive Industry in Developing Countries ....................................................................................................................... 78 8.2. Trade Reform: Special Economic Zones ............................................................... 81 8.3. Customs Duties Reform and Component Manufacturers in RF ............................ 85
8.3.1. Import Duties .................................................................................................. 85 8.3.2. The Concept of “Industrial Assembly”........................................................... 87
Chapter 9: Apprising Value Chain Activities ................................................................... 89 9.1. Logistics/Transportation Infrastructure ................................................................. 89
9.1.1. Port Facilities .................................................................................................. 89 9.1.2. Automobile Transporters ................................................................................ 91 9.1.3. Road Infrastructure ......................................................................................... 91 9.1.3. Warehouse Infrastructure................................................................................ 92
9.2. Marketing and Sales............................................................................................... 92 9.2.1. Toyota Financial Services............................................................................... 92 9.2.2. Dealership Network ........................................................................................ 94 9.2.3. B2B ................................................................................................................. 95 9.2.4. Promotion........................................................................................................ 96
9.3. After-sales Service ................................................................................................. 98 Chapter 10: Sustainable Competitive Advantage ........................................................... 100
10.1. Identifying and Appraising Toyota’s Resources and Capabilities..................... 100 10.2. Competitive Advantages.................................................................................... 105
10.2.1. TPS.............................................................................................................. 105 10.2.2. Supply chain Management.......................................................................... 107 10.2.3. Manufacturing and HR Management.......................................................... 108
Conclusions..................................................................................................................... 111 List of References ........................................................................................................... 115
Books and Articles...................................................................................................... 115 Analytical Agencies Researches ................................................................................. 123 Web Sources ............................................................................................................... 124
Appendices...................................................................................................................... 126 Appendix 1: TMC: Sales Analysis ............................................................................. 126 Appendix 2: Sales Comparison................................................................................... 127 Appendix 3: Sales per Employee................................................................................ 128 Appendix 4: TMC Worldwide Operations ................................................................. 129 Appendix 5: TMC Design and R&D .......................................................................... 136 Appendix 6: Sales of New Foreign Cars in RF........................................................... 137 Appendix 7: New Car import by Country 2003 - 2005 .............................................. 138 Appendix 8: Passenger Car Compared ....................................................................... 138 Appendix 9: Car consumption per Price Segment ...................................................... 139 Appendix 10: Map of Vehicle Manufacturing Locations in RF ................................. 140 Appendix 11: Bestsellers in Russia as of 2005 in Different Classes (in units)........... 141 Appendix 12: Average Car Park Age ......................................................................... 142
Appendix 13: Car Sales in Russia, Forecast ............................................................... 142 Appendix 14: Car Park in Russia................................................................................ 143 Appendix 15: Customs Duties by Country ................................................................. 144 Appendix 16: Car Production in RF ........................................................................... 145 Appendix 17: OEMs' Manufacturing Involvement in Emerging Markets.................. 146 Appendix 18: Automotive Component Manufacturers' Involvement in Emerging Markets ....................................................................................................................... 147 Appendix 19: The Largest Importers of Cars in 2005 ................................................ 148 Appendix 20: Waiting List for New Foreign Cars in RF............................................ 149 Appendix 21: After-Sales Service (as of 08.2005) ..................................................... 150 Appendix 22: Largest Vehicle Producing Countries (in mln units) ........................... 151
List of Tables
Table 3.1: Entry Modes..................................................................................................... 13 Table 3.2: Classifying and Assessing the Firm’s Resources ............................................ 19 Table 3.3: Illustration of Use of Factor Endowment/Market Failure Paradigm in
Explaining Three Main Forms of International Production...................................... 30 Table 3.4: Relationship between form of market entry and strategic advantages ............ 37 Table 3.5: LI framework and internationalization ............................................................ 38 Table 3.6: Variables Influencing Foreign Location.......................................................... 39 Table 4.1: The World’s Largest OEMs as of 2005........................................................... 42 Table 6.1: The Growth of Russian passenger Car Market................................................ 58 Table 6.2: Average Price per Car...................................................................................... 61 Table 6.3: World’s Car Fleets per 1000 people, 2003 ...................................................... 64 Table 6.4: Presence of Foreign Brand Dealerships in RF................................................. 66 Table 6.5: Sales of OOO “Toyota Motor” ........................................................................ 70 Table 8.1: Import Tariffs on Cars (both for legal entities and natural persons) ............... 86 Table 9.1: Credit Schemes Offered by Automotive Companies in RF............................. 93 Table 10.1: Apprising Toyota’s resources and capabilities ............................................ 102 Table 10.2: Output of lean and non-lean automobile manufacturers in 1996 - 1999(units
per employee).......................................................................................................... 109 Table 10.3: Sales per Employee (in thousand US$) ....................................................... 110
List of Figures
Figure3.1: Factors affecting entry mode choice ............................................................... 14 Figure 3.2: The links among resources, capabilities, and competitive advantage............ 16 Figure 3.3: Porter’s national diamond .............................................................................. 21 Figure 3.4: The Five Factors or Forces Affecting Competition in an Industry (Based on a
diagram of Competitive Strategy by Michael Porter, (1980))................................... 25 Figure3.5: Determining the optimal location of the value chain activity ......................... 27 Figure 3.6: The Endowment/Market Failure Paradigm of International Production........ 29 Figure 5.1: The Biggest Car Markets................................................................................ 49 Figure 5.2: Development Models in BRIC, Korea, and Mexico ...................................... 50 Figure 5.3: Key Success Factors....................................................................................... 54 Figure 6.1: Potential Growth of Russian Car Fleet........................................................... 65 Figure 8.1: The Role of Government ................................................................................ 79 Figure 8.2: Problems Faced by Foreign Direct Investors in Russia ................................. 84 Figure 10.1: Apprising Toyota’s resources and capabilities........................................... 104
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Chapter 1: Introduction
The aim of this chapter is to acquaint the reader with the content of the thesis. The
chapter contains the background of the research, problem statement formulation,
purpose and relevance of the work, delimitations of the study and the structure of the
work.
1.1. Background of the study
The Russian automobile market is one of the most developing markets during the last
years and the growth rates of Russia automotive industry is one of the biggest in the
world. The global vehicle manufacturers concentrate their attention on Asia and Eastern
Europe as the Western markets are saturated and started to stagnate. Carmakers have
already established manufacturing facilities or planning to do this.
By 2010 the Russian market will absorb about 3 million cars annually that is nearly $31
billion in money terms.
The automobile market of Russia and in the near future will be dynamically developing
in pace with growth of real incomes of the population. That is highly connected to the
fact that quantity of cars in comparison with other countries is on a low level and; hence,
the demand for personal transport is still far behind satisfaction. Thus essential growth of
cars manufacture without large amounts of investments on the basis of operating
capacities of the Russian enterprises is problematic in connection with insufficient quality
of a greater part of production, not satisfy consumers.
The import of new foreign cars is making the major impact for the growth of the market.
However, the production of foreign cars within the country catches these growth rates
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and according to the last data the assembly of foreign cars reached 27% of total Russian
vehicle production1.
Global component manufacturers follow their customers and start to establish production
facilities in Russia.
The government of RF actively participates in developing of automotive industry in the
country. It carries on stimulating and protecting measures introducing reforms concerning
trade, tax, customs regulations.
Toyota is the 9th largest company in terms of market capitalization. It is the first
manufacturer that was able to compete with American carmakers in the North American
market. Toyota has factories all over the world, manufacturing or assembling vehicles for
local markets: the United States, Japan, Australia, Canada, Indonesia, Poland, South
Africa, Turkey, the United Kingdom, France, Brazil, and more recently Pakistan, India,
Argentina, Czech Republic, Mexico, Malaysia, Thailand, China and Venezuela. TMC is
the leader in global market except Europe. In order to strengthen its positions in the
Western and CEE countries the company improved its operations in its plants in France,
Britain and Turkey and established the JV with PSA in Czech Republic. The next step of
the manufacturer is the construction of production facilities in St Petersburg District of
RF. The total investments into the automotive industry of RF are estimated to be about $1
bn. The sum includes $250 mln of Toyota itself, and $700 – 750 mln of major component
manufacturers
1.2. Problem Statement
Thus the tasks of the thesis are the following:
Investigate automotive industry’s development in developing countries, in
particular those countries where respective industries have already formed certain
1 ASM-Holding; Vedomosti 11.09.2006, №169 (1696).
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development shapes and ,at the same time, that I consider to be quite helpful to
analyze the case of Russia;
to investigate the automobile market of RF, to determine the trend and factors that
influence the development of the market and the industry;
to analyze the company’s performance in the Russian market, its strengths and
relative weaknesses in the segments, and problems TMC faces with;
To analyze external factors that influence business activities and the investment
strategy of the company;
To apprise the value chain;
to identify resources and capabilities of the company, the key success factors that
made TMC a leader in the global arena and in the Russian scene.
to draw the line of government’s role. The reason for that is that no industry can
compete on the global scene without the government’s support and protection in
its initial stage of development. First, I look at the industrial policies, concerning
automotive sector, of governments in developing countries China, India and
Korea and try to look for the similarities with the Russian automobile market.
And afterwards I look precisely on the particular measures undertaken by the RF
government.
Thus the major question of the thesis:
How does TMC expand its operations in Russia and how it benefits from the
establishment of production facilities in the country?
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1.3. Thesis Relevance
First, I consider that my work will be useful for the companies involved in the automotive
industry that are planning to invest in Russian operations (to enter the market or expand
activities), especially these that are pursuing market seeking strategies.
1.4. Delimitations of the Thesis
The number of delimitations of the thesis that influence the structure of the thesis is
described below:
The thesis is conducted as a case study, and is limited to a single market;
therefore, it will be not applicable to other countries where Toyota is represented;
the only part appropriate when considering TMC global operations is the analyses
of the competitive advantage of the company.
Financial performance analysis of OOO “Toyota Motor” was not conducted in the
case study. I was able only to find or calculate few numbers through secondary
sources. Therefore, it appears to be an important delimitation for the research.
Nevertheless, I assume that financial performance is not the major concern TMC
at current stage of development as the company is expanding and strengthening its
market presence. And even financial results after a couple years of operation of
Toyota Motor Manufacturing Russia will not be vivid display of company’s
success or failure. E.g. Ford, from 2002 when it started assembly operations,
showed loss in its P&L statements; and the company itself justifies that by the
strategy of conquering the market and that the financial results are still of
secondary importance.
The information base of the thesis consists mainly of secondary sources including
press, Internet resources, the data of official statistics, and market researches of
consulting companies.
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The model of apprising Toyota’s recourses and capabilities is rather simplified
and is based on the interpretation of data.
1.5. The Thesis Structure
This thesis starts with a presentation of a problem setting and problem definition. Chapter
2 is devoted to description of the methodology followed in the paper. Chapter 3 presents
an overview of the existing research on internalization issues. Chapter 4 introduces case
company. The following chapter describes the developments paths of main developing
countries that experience (or have recently experienced boom in the automobile market).
Afterwards I draw up TMC’s resources and capabilities that form competitive advantages
of the company in the world and particularly in RF. The thesis concludes with a
summary. Appendices, which contain figures and tables related to the company’s
performance and to the Russian automotive industry and market, and a list of references
follow.
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Chapter 2: Methodology
The objective of the chapter is to acquaint the reader with the methods and processes
used in the research.
2.1. Research strategy and Case Study Design
To conduct study a researcher can use a number of strategies which differ and depend on
the objectives, problems raised and the sources of data available on the performing a
research. Yin (1994) classifies several types of strategies: survey, experiment, archival
analysis, history, and case study. I found the most appropriate for my work a case study
research strategy: according to Yin (1994), the case study approach is the most suitable
for answering questions “how” and “why”, which exactly correspond with my problem
questions.
Further, there are four types of case study design: single-case holistic design, single-case
embedded design, multiple-case holistic design, and multiple-case embedded design. The
embedded approach differs from the holistic in the way that the first involves the analyses
of several unit and sub-units, and the latter concerns the general nature of the problem.
Single and multiple case study designs differ in a number of case studies carried in the
research.
The embedded single-case study design is the most appropriate for my research as I
analyze the expansion of TMC that includes different types of activities. In addition I
investigate the business environment and the relations with the Russian government,
particularly the events within a Russian automotive industry that considerably influence
the development of TMC in RF.
The study design also could be classified into exploratory, descriptive and explanatory
(Yin, 1994). I employ all of them in the research: to get an overview of the problem I use
explanatory approach – to understand trends in the automotive industries in the
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developing countries and in Russia, descriptive - to observe the Russian car market
situation, and explanatory – to draw cause-and-effect relationship between theories and
empirical findings.
2.2. Systems Approach
Merriam (1998) differentiate between quantitative and qualitative research. The purpose
of the first is to measure the event in figure terms and afterwards use them for
interpretation. The objective of the latter is rather to understand reasons behind various
aspects of behavior. This type of research is mostly suitable for answering questions
“how” and “why” of the case study; moreover I use communication and observation,
unstructured data collection, that are also the characteristics of this type of the research.
However, in my study I carry out the measurement the market size, the size of market’s
particular segments, the share of Toyota in the segments. Thus, make use of both
quantitative and qualitative methods. A methodological approach covering both methods
is the systems approach. In my work the combined use of qualitative and quantitative
research methods should result in a positive synergy effect, as they supplement each other
and the reality is viewed from different angles, which creates a greater whole.
2.3. Data collection
When undertaking a research, the researcher can either base it on secondary or primary
data (Yin, 1994). For the first one can relate internal information, and for the latter –
reports from various forms of public media. Both have advantages and disadvantages.
Normally, the secondary data search is carried out before the primary one, since it is
easier and cheaper, as the data already exists. If the necessary information for answering
the questions defined in the problem statement is not found in the secondary data, the
researcher moves on to decide by which primary methods may lead to a solution. On the
one hand, in some cases secondary data may be more accurate than primary data, since
the primary source may distort the reality. Secondary data also used to provoke new
ideas, helping formulating the problem, defining parameters of the research and finally
10
serve as a reference base to check the validity of the collected primary data. On the other
hand, secondary data may have problems with reliability, timing and collecting method.
Because of our lack of resources it has only been possible for me to search for secondary
data. To estimate the indicators of Russian car market and the Toyota share within I used:
Official press releases of the companies and different press sources.
Statistical data from the Federal State Statistics Committee, Ministry of Economic
Development and Trade of RF, and Federal Customs Service;
Analytical and advisory agencies: Ernst & Young, PricewaterhouseCoopers,
ASM-Holding, Seanews, Abarus Market Research, Renaissance capital.
2.4. Triangulation
When conducting an investigation I combined different sources of different data and
information in order to improve reliability and validity of the results analyzed. To
indicate that different sources of data are used in the research the term data triangulation
is used. Methodological triangulation is used to show that more than one method is used
in a study. I also used theory triangulation as conducting a research I used Eclectic
Paradigm, Porter’s Five Forces of Competition Framework, Product Life-Cycle theory
and RBV in order to reach a right conclusion.
2.5. Quality of the Research
To measure the quality of the research terms reliability and validity are used. The first is
“…the extent to which the measurements of a test remain consistent over repeated tests of
the same subject under identical conditions”2. In other word if the results of another study
is similar or repeat the result of an actual study, than it is highly reliable. The reliability is
based on the analytical skills of the researcher and on the data used in the study. Thus to
improve the reliability a researcher must make clear assumptions, explanation of choice
2 http://en.wikipedia.org/wiki/Experimental_reliability
11
of data sources and theories. Reliability involves also the accuracy of the research
methods and techniques. One of the tools to augment reliability is triangulation already
mentioned above.
I also stress on the notion of transferability or external validity that refers to the extent the
results of the study can be generalized and transferred to other cases. Despite the fact that
some factors influencing development of TMC in RF are company specific, it is possible
to make generalizations for other foreign car manufacturers that are carrying out FDI in
RF.
12
Chapter 3: Theoretical Background
This chapter explains an internationalization pattern behind the case company Toyota.
The first part deals with the notion of internationalization, with entry modes and its
classification. Afterwards, I describe the theories which I consider relevant to the case of
Toyota’s expansion strategy in Russia, including not only those related to internalization,
but also to the company’s strategy on the particular fast growing market. I consider these
issues to be highly integrated concerning the case company. Thus, to understand the
company’s motives, drivers and performance as a whole, I discuss Resource Based
Model, Porter’s theories of competitive advantages, and, finally, Dunning’s Eclectic
Paradigm.
3.1. Internationalization
The terms “Foreign Direct Investments” and “Internationalization” are widely discussed
within the scope of international business. A lot of researches contributed to the better
understanding of firm’s expansion to the foreign markets developing numerous models
and theories, where variables affecting FDI are analyzed. However, the main issues
covered within FDI are: the location of production, the sources of firm’s specific
advantages, the reasons for integrating different business units in one firm.
John Dunning brought together all these issues and developed OLI paradigm. Also he
made a classification of foreign based MNE activity that scholars identified in the
literature and structured all the theories (Dunning 2000) according to the classification
and according to factors the theories discuss (O, L, and I).
Numerous studies are devoted to the factors affecting the choice of appropriate mode of
entry into new markets including FDI. Entry modes are classified in the following way:
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Table 3.1: Entry Modes Entry Modes
EXPORT MODES (externalization) INTERMEDIATE MODES HIERARCHICAL MODES
(internalization) Indirect Exporting
(export buying agent, broker, export management company)
Direct Exporting (distributor, agent)
Export Marketing Groups
Contract Manufacturing Licensing Franchising Joint Venture Management Contracting
Domestic-Based Dales Representatives
Region Centre /Transnational Organization
Acquisition Brownfield Greenfield Investment
Source: Based on Hollensen (2001)
The factors affecting the choice of an entry mode are distinguished into four groups:
internal factors, external factors, desired mode characteristics and transaction specific
behavior. The way they influence the entry mode is shown in the figure 3.1.
However, due to the fact that the case company Toyota invests in Russia in production
facilities I shortly expand on hierarchical modes. Greenfield project supposes building
subsidiary from the scratch, creates jobs transfers technology and know-how. The local
operation becomes highly integrated with the global operations of the investor (Meyer,
1998). Acquisitions take form of investing in the existing company. The investor
possesses control over the company and unites local assets with its resources to operate
on the market. A Brownfield is a “foreign entry that starts with an acquisition but builds
local operation that uses more resources, in terms of their market value, from the parent
firm than from acquired firm” (Meyer 1998). On the one hand, the investor may obtain a
local brand name, market share, valuable relations with suppliers and customers. On the
other hand, company restructures production processes and management (Estrin et al.
1997). Normally the transition period lasts not more than two years, when a company
primarily invests heavily in technology, management and organizational structure.
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Figure3.1: Factors affecting entry mode choice
PRODUCT COMPLEXITY
INTERNAL FACTORS
EXTERNAL FACTORS
DESIRED MODE
CHARACTERISTICS
TRANSACTION SPECIFIC FACTORS
Product complexity + Firm size + Country risk/demand
uncertainty - Risk averse - Tacit nature of
know how + Market size and
growth + Control + Transaction frequency
Direct and indirect trade barriers + Asset specificity
Intensity of competition -/+
Small number of relevant export intermediaries
available + Uncertainty
Opp
ortu
nist
ic b
ehav
iour
Tran
sact
ion
cost
s
Product differentiati
on advantage
+ International experience +
Sociocultural distance between home and
host countries -
Flexibility -
+
Note: +increasing internalization, - decreasing internalization Source: based on Hollensen (2001)
ENTRY MODE DECISION
+ (increasing internalization)
Export modes Intermediate Modes Hierarchical modes
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3.2. Resource-Based Approach
Resource-based theory or resource-based view stipulates the idea that a company
possesses a number of unique resources and capabilities that enable company to
internationalize.
Resources are defined as an accumulation of variable factors that are owned or controlled
by the firm. Resources differ in nature and in quality which is an outcome of the firm as
an entire system. These unique resources are an outcome of the firm as an entire system.
Resources differ in nature-tangible, intangible and human- and in quality (see table 3.2).
A company’s reputation, good-will, image, organizational routines, brand, external
networks, market knowledge are intangible resources. Human resources are skills,
managerial practices, motivation. Tangible resources are such as equipment, semi
finished goods, raw materials, capital, etc. According to Barney (1991) firm’s resources
generate sustained competitive advantage if they are: valuable, rare, imperfectly imitable,
and non-substitutable.
During the process of internationalization a company generates value by the combination
of its own resources with those obtained on the markets. In order for the firm to create
competitive advantage, resources must work together in order to create organizational
capability. On their own, Toyota’s engineers, designers, labs etc are of limited value. But
together they can provide the new product development capability needed to create new
models. So a capability is an ability of resources to perform a stretched task or an
activity3. By the way of constant use of resources capabilities became stronger and more
difficult for rivals to imitate (on the other hand, shouldn’t be too complex to manage and
control). The notion “capability”/”competence” is used to:
3.Schoemaker P.J.H. and Amit R. (1994). Investment in Strategic Assets: Industry and Firm-Level Perspectives
16
To analyze the basis of firm’s growth strategies4
To describe advantages of the firm over competitors5
To find a basis for entering new markets6
And only through the way of applying organizational capabilities to the external
environment in the proper way leads to the formation of competitive advantage. ( figure
3.2).
Figure 3.2: The links among resources, capabilities, and competitive advantage
COMPETITIVE ADVANTAGE
STRATEGY
INDUSTRIAL KEY
SUCCESS FACTORS
ORGANIZATIONAL CAPABILITIES
RESOURCES
TANGIBLE
Financial Physical
INTANGIBLE
Technology Reputation Culture
HUMAN
Skills/know-how Capacity for
collaboration and communication
Motivation Source: Grant R., (2002): Contemporary Strategy Analyses. Concepts Techniques, Applications. 4th ed., Blackwell Business
Two approaches are used to classify capabilities: a functional analysis- the base is
functional areas of the company, and value chain analysis – a chain of activities from
4 Ansoff Igor(1965). Corporate Strategy. Penguin. 5 Selznik P. (1957). Leadership in Administration: a Sociological interpretation. New York: Harper and Row. 6. Hamel G and. Prahalad C.K (1990), The Core Competences of the Corporations, Harvard Business Review, May-June.
17
R&D, marketing to after-sales services. The concept was founded by M. Porter (1980),
who distinguishes between primary, concerned with the creation or delivery of a product
or service, and support activities - procurement, technology development (including
R&D), human resource management, and infrastructure (systems for planning, finance,
quality, information management etc.)
However, a firm’s value chain activities can be divided into smaller and more specific
areas- specialized capabilities, which must work as an entire unit to create a sustainable
competitive advantage. So the “system” must be organized in hierarchical mode.
Toyota’s manufacturing capability- known as a system of “lean production” is a highly
complex organizational capability requiring the integration of a large number of more
specific capabilities relating to the manufacture of components, supply chain
management, assembly process, production scheduling, quality control procedures,
systems for managing innovation and continuous improvement, and inventory control
mechanisms. In the scope of the firm, specialized capabilities relating to individual tasks
are integrated into broader functional capabilities: marketing, manufacturing, and R&D
capabilities. At the upper level of such integration are capabilities that require wide -
ranging cross functional integration. That’s why product development capability requires
the integration of R&D, marketing, manufacturing, finance, and strategic planning.7
As stated above, the final target of uniting resources and capabilities is the creation of
competitive advantage. In order to be a success, two conditions must be fulfilled:
resource and capability must be scarce and relevant. It shouldn’t be widely available in
the scope of an industry; otherwise it may be essential to stay on the market, but not
sufficient to be the leader.
E.g. in automotive industry quality remains critical, but is no longer a source of
competitive advantage - that is a required criterion for car producers just to play on the 7 Clark K.B. and Fujimoto T., (1991), Product Development Performance, New York: The Free Press.
18
scene (the case of Western countries). Such capabilities as IT and design are very often
outsourced (within the industry). Nevertheless, resources such as brand strength and
global distribution network and capabilities such as fast – cycle new product development
and global logistics, can not be easily required or developed. Thus they are critical to
establishing competitive advantage.
In order to sustain competitive advantage, resources and capabilities shouldn’t be:
Replicable - e.g. Just-in-time scheduling system, effectively used by Japanese
companies, is very easy to replicate as it doesn’t require advanced manufacturing
technologies or information systems. (However American and European
companies hardly implement it )
Transferable - mobile between companies. E.g. geographical immobility of
resources, capital equipment, some types of employees forces competitors to
relocate themselves in order to acquire them.
To summarize shortly, the internationalization process of a company depends on its own
unique set of resources and capabilities. The resource base of Toyota Motor Co affected
the choice of expansion strategy in Russia. The company possesses “required” resources
and capabilities to create competitive advantages that enable it to make Greenfield
investments in Russia.
19
Table 3.2: Classifying and Assessing the Firm’s Resources
RESOURCE RELEVANT
CHARACTERISTICS KEY INDICATORS
Tangible resources
Financial Resources
The firm’s borrowing capacity and its internal funds generation determine its capacity for investments
Debt/equity ratio
Operating cash flow/free cash flow
Credit rating
Physical Resources
Physical resources constrain the firm’s set of production possibilities and impact its cost position. Key characteristics include:
The size, location, technical sophistication, flexibility of plant and equipment
Location and alternative uses for land and buildings
Reserves of raw materials
Market value of fixed assets
Vintage of capital equipment
Scale of plants
Flexibility of fixed assets
Intangible resources
Technological resources
Intellectual property:
Patent portfolio
Copyright
Trade secrets
Resources for innovation
Research facilities
Technical and scientific employees
Number and significance of patents
Revenue from licensing patents and copyrights
R&D staff as a percent of total employment
Number and location of research facilities
20
Reputation
Reputation with customers through the ownership of brands and trademarks;
established relationships with customers;
The reputation of the firm’s products and services for quality and reliability.
The reputation of the company with suppliers (including component suppliers, banks, employees), with government and government agencies, and with the community
Brand recognition
Brand equity
Percent of repeat buying
Objective measures of comparative product performance (ratings and rankings)
Surveys of corporate reputation
Human resources
The education, training and experience of employees determine the skills available to the firm.
The adaptability of employees contributes to the strategic flexibility of the firm.
The social and collaborative skills of employees determine the capacity of the firm to transform human resources into organizational capabilities.
The commitment and loyalty of employees determine the capacity of the firm to attain and maintain competitive advantage
Educational, technical and professional qualifications of employees
Compensation relative to industry
Percentage of days lost through stoppages and industrial disputes
Employee turnover rate
Source: Grant R., (2002). Contemporary Strategy Analyses. Concepts Techniques, Applications. 4th ed., Blackwell Business
21
3.3. Development of Firm’s International Competitiveness
Porter’s analyses of national competitiveness (1990), competition analyses in an industry
(1980) and value chain analyses (1980) describe how firms create and develop
competitive advantage in international markets.
3.3.1. The Porter Diamond
The Porter’s analyses discusses the impact of national conditions on firm’s international
competitive advantage and is based on three principles: 1) the competitive performance
of a country and the performance of the firms are interrelated as a country’s “success”
depends on the firm’s performance and the performance of the firms depends on the on
the nation’s environment; 2) for a country to sustain its competitive advantage its firms
must maintain its competitive advantage through constant innovations and development
of resources and capabilities; 3) dynamic conditions of national environment are of the
major impact on firms ability to innovate and develop.
Figure 3.3: Porter’s national diamond
Source: Porter, 1990
Firm strategy. structure and
rivalry conditions
Demand conditions
Related and supporting industries
Factor conditions
government
chance
22
The four determinants of competitive advantage include:
Factor conditions - the economy's position in factors of production such as skilled
labor, physical resources, capital or infrastructure necessary to compete in a given
industry;
Demand conditions - the nature of the local demand for the industry's product or
service;
Firm Strategy, structure and rivalry conditions - the conditions in the economy
governing how companies are created, organized, and managed, and the nature of
domestic rivalry;
Related and supporting Industries: the presence or absence in the economy of
supplier industries and related industries that are highly competitive.
Two factors influence the development of these determinants:
Chance - acknowledging the extent to which an industry’s competitiveness is
related to its historical path of development;
Government - the ability of governments to manage the determinants of advantage
to the benefit of their basic industries.
The concept is widely discussed in the literature. One of the outcomes of the debates is
the model of double diamond of competitive advantage, developed by A. Rugman (1993,
1995) that extends the Porter’s model. The author states that in order to identify nation’s
competitive advantage, country’s diamond scheme must include the diamonds of other
countries, namely those with which the home country firms have the most dealings, by
the way of trade, FDI and non-equity cooperative joint ventures. The importance of the
double diamond is explained by the growing geographical opportunities for creating
competitive advantages, by the changing conditions of the world’s business environment
resulted in alliance capitalism (Dunning, 1995), and by the deepening structural
integration of world’s economy (Dunning, 1993).
23
3.3.2. Porter’s Five Forces of Competition Framework
The theory analyses the firm’s industry structure and its corporate strategy. The aim of
the competition analyses is to find a niche in industry where a firm can defend itself
against five forces or can influence them in its favor. These five forces include three
sources of “horizontal” competition: competition from substitutes, from entrants and from
the existing rivals; and two sources of “vertical” competition: the bargaining power of
buyers and suppliers.
Threat of Entry - new entrants, which are dependant on present barriers in a market, can
increase competition within an industry. Moreover, the threat of entry rather than actual
entry may make established firms to lower their prices to the competitive level. The
major sources of entry barriers are economies of scale, capital requirements, cost
advantages (high fixed costs), product differentiation, access to distribution channels,
governmental and legal barriers.
Threat of substitutes - the presence of substitute products can reduce profitability in an
industry due to the limited prices. The costs of switching to substitutes, the buyer’s
willingness to substitute, and the relative prices and performance of substitutes influence
the threat level.
Bargaining power of buyers – the bargaining power of buyers is dependant on several
circumstances that include the amount of the product’s suppliers, buyers’ concentration,
product’s level of differentiation, buyers’ price sensitiveness.
Bargaining power of suppliers - the relationship between producers and suppliers is
similar to the relationship between producers and buyers. The difference is that now the
firms play a role of buyers and producers of inputs – suppliers. The main issues are the
ability of firms in the industry to switch between different input suppliers and the relative
power of each party.
24
Competitive rivalry in the industry – the competition among firms in the industry
normally determines the industry overall competition. Moreover, in some industries firms
compete so aggressively that they price products below costs level (e.g. Ford’s strategy in
Russia concerning sales of the model Focus). In other industries firms compete in non
price dimensions such as marketing and innovation. The intensity of rivalry depends on
sic factors: the concentration in the industry, rate of market growth, cost conditions,
product differentiation, switching costs, and exit barriers.
25
Figure 3.4: The Five Factors or Forces Affecting Competition in an Industry (Based on a diagram of Competitive Strategy by Michael Porter, (1980)).
Source: Distance Consulting - http://home.att.net/~nickols/five_forces.htm
26
3.3.3. Value chain
The value chain concept was described in the resource based model and now I mention
few aspects concerning the way firm chooses the optimal location for each activity in
chain.
So, production of any goods is composed of value chain activities and the requirements
for each differ considerably. To identify the optimal location for each particular activity,
the firm needs to determine the main resources and capabilities for each activity, its
acceptable cost levels, and search for the availability of components satisfying the
criterion in different countries (Kogut, 1985).
Making decision on locating activities, firms also take into consideration the relationship
with local government that attract producers by establishing specific operation conditions,
which may be not available for competitors on the market (reduced customs duties, tax
reductions etc). That is the case of Ford in Russia. The company located assembling
facility in Russia receiving zero customs duties for the necessary components from the
government.
However, firm faces with new issues as it has to take into consideration transportation
and inventory costs that may neutralize the advantages of foreign location. Moreover, the
dispersion of activities can increase problems with coordination and control.
27
Figure3.5: Determining the optimal location of the value chain activity
The optimal location in terms of costs The importance of links
between activity X and other activities of the firm
Government incentives / penalties affect the location decision Internal resources and capabilities does the firm possess in particular locations Firm’s business strategy (cost vs. differentiation advantage)
WHERE TO LOCATE ACTIVITY X
The optimal location of activity x considered
independently
Coordination benefits Source: Source: Grant R., (2002). Contemporary Strategy Analyses. Concepts Techniques, Applications. 4th ed., Blackwell Business
28
3.4. The Eclectic Paradigm
Since 1976, when John Dunning presented the model at Nobel Symposium on the
International Location of Economic Activity, he devoted numerous articles and books
reappraising and expanding the original theory. As stated above, the model tries to bring
together other models on internationalization as, according to the author, no single theory
can satisfactorily analyze the determinants of foreign activities (Dunning, 2001). That’s
the reason why the paradigm is eclectic. The model presents a systematic approach
explaining the interdependent factors influencing international operations. To be precise,
O advantages are taken from theories analyzing firm performance, L from host country
related models, and I from theories explaining market imperfections. The basic structure
of Eclectic Paradigm is presented in table 3.3 and figure 3.6 shows the relevance of
eclectic paradigm in explaining three main kinds of international production.
29
Figure 3.6: The Endowment/Market Failure Paradigm of International Production
Source: Dunning (1988)
30
Table 3.3: Illustration of Use of Factor Endowment/Market Failure Paradigm in Explaining Three Main Forms of International Production
Source: Dunning (1988), p. 13
31
3.4.1. Market Failure
A central assumption of the model is that countries’ factor endowments and economic
and political institutions differ. This leads to a situation of market failure in which
opportunities emerge to convert these failures into competitive advantages. The author
distinguishes between two types of market failure: structural and transactional. Structural
market failures arise form factors that are external to the company. Transactional market
failure arises “…from the inability of market to conduct arm’s length transactions
efficiently” (Dunning, 1988). There are three reasons for that. The first is additional risk
and uncertainty relating to foreign transactions. Secondly, the market can not take
account of the benefits and costs related to certain transaction between buyers and sellers
which accrue to one or another of the parties, but which are external to that transaction
(Dunning, 1988). E.g. company may want to combine its value-added chain activities in
one firm. That is also associated to the advantages of common governance that arise from
e.g. the difference in fiscal policies and from the imperfections of international capital.
And the last factor influencing market failure relates to the problem of economies of size,
scope and coordination (in field of marketing, finance, R&D, purchasing and etc) that
arises when the market is insufficiently big for the companies to capture these
advantages.
There are two responses that firm can undertake in order to reduce or eliminate market
failure: exit strategy, where the response is to replace the market by administrative fiat;
and voice strategy when the company ‘works’ with the market (Dunning, 1995).
3.4.2. OLI concept
The main idea of the framework is that a firm undertakes foreign direct investments if
three necessary conditions are satisfied:
Ownership advantages
32
A firm must possess ownership-specific advantages relatively to firms present on the
particular market. These advantages are the result of company’s special technological and
managerial resources and capabilities. It is normally more difficult for foreign companies
to enter the market than it is for domestic firms, and larger the cultural and linguistic
distance between the home and the host country, the greater the difference. In order for a
firm to succeed it ownership advantages must outweigh the obstacles of being foreign.
Ownership advantages are classified into asset advantages (Oa) and transaction
advantages (Ot). The first relate to specific assets that are not available to competitors:
property rights, product innovations, production management, organizational and
marketing systems, employees experience, know-how, etc. The latter arises from the
organization of transactions. Transaction advantages may first be a result of the
economies of scale, economies of scope and specialization, economies of joint supply, the
better resource capacity and usage, the access of the inputs within the favored terms,
access to the resources of parent company at marginal costs. There are two types of Ot
advantages: from being multinational as multinationality assumes access to the better
knowledge about foreign markets (information, labor, finance, etc), ability to diversify
risks, and, generally, provides wider opportunities; advantages that emerge as a direct
consequence of foreign production.
Internalization advantages
It is more beneficial to the firm possessing ownership advantage to use them rather than
to sell them or lease them to foreign firms (Dunning, 1988). That means that a firm must
possess control over the investments and exploit competitive advantages on its own; here
a wholly owned subsidiary is preferable to other entry modes like licensing or joint
venture. The internalizations advantages include: avoidance of search and negotiating
costs, costs of enforcing property rights; ability to capture economies of interdependent
activities, ability to avoid or exploit government intervention (e.g. quotas, tariffs, price
controls, etc), advantages of control of supplies and conditions of sale of inputs, ability to
control market outlets, etc.
33
Location advantages
Location advantages arise on economic differences between nations. It means that the
host country must possess such advantages in order to support foreign direct investments.
Resources of location advantages arise:
from the input side -input prices, quality and productivity;
from the output side - infrastructure and market conditions (including
international transport and communications costs, legal, educational, commercial
environment) and psychic distance (language, customs, cultural, and business
differences);
from the structural side – economic system and polices of government, investment
incentives, the institutional framework of resource allocation.
Once again, OLI variables are interdependent. E.g. a firm’s response to its exogenous
location variables might itself influence its ownership advantages, including its ability
and willingness to internalize markets. More generally, variables are linked in the way
that: O advantages of investor may affect the L advantages of host country, while the
choice of foreign location influences the O advantages of a firm (Dunning, 2001).
3.4.3. The Investment Development Path (IDP)
The IDP is a dynamic element of the eclectic paradigm. It formulates the relevance of
OLI framework in explaining changing international position of countries within a
number of their development stages (Dunning, 2001). The author argues that OLI
advantages of both foreign and domestic firms change along the way with country’s
development. The IDP suggests that a country may progress through five stages of
economic development.
34
The first stage of the IDP, pre-industrialization, is characterized by the absence of inward
FDI and no outward investment. The country has very few L-advantages to attract inward
FDI, and, moreover, local infrastructure and O-advantages of domestic firms are
insufficient to support inward, or outward, FDI. Location advantages could be low due to
limited low income domestic market, lack of infrastructure, institutions and political or
economical instability. In this stage, portfolio investments are the best way for
multinationals to enter local markets. Beside that, natural resource-rich countries could
attract significant investment at this stage that explains resource-seeking nature of FDI.
The second stage is connected to the first one as the government still plays important role
in attracting FDI. It creates satisfactory legal system, commercial infrastructure, builds
communication and transport systems, provides attractive business environment
(including regulations of tariffs, barriers, free economic zones), and etc. This
development leads to the growth of inward investments. But still, investments are mostly
concentrated in resource-based sectors, in the traditional and labor intensive
manufacturing sectors, in trade and distribution, transport and communications and
construction.
Middle stage of development path is characterized by the replacement of low-cost
seeking FDI by market-seeking and increasing efficiency-seeking FDI in manufacturing
industries due to the fact that L advantages become increasingly created-asset-based
(Narula and Dunning, 2000). The investors undertake more horizontal FDI than vertical.
The final two stages are characterized by emerging and increasing outward investments
as the economy reaches some degree of maturity. Foreign firms undertake FDI not only
to exploit their O advantages, but also to augment them by obtaining complementary
assets or new markets (Dunning, 2001). However, investment activity depends: on the
government’s policies toward creating competitive advantages of its own firms, on
making its own locations attractive to both domestic and foreign firms (Dunning, 2001),
35
on creating competitive environment for domestic firm to effectively exploit the
opportunities offered by the global economy (Dunning and Narula, 1996).
3.4.4. Eclectic Paradigm and Alliance Capitalism
The eclectic paradigm has been revised and changed over the time. Most of recent works
adjust the model to the presence of a new trajectory of market capitalism- alliance
capitalism. Alliance capitalism supposes “…both cooperation and competition between
institutions and between parties within these institutions” (Dunning, 1995). It is an
outcome of technological progress and globalization of many kinds of value-added
activity. So the framework is extended to cooperative alliances. The alliances emerge for
several numbers of reasons including reducing coordinating and transaction costs,
protecting existing and gaining new O advantages, overcoming entry barriers to
international markets, gaining access to new and complementary technologies, upgrading
the efficiency of particular activities (R&D, marketing, distribution, and manufacturing)
and etc. Consequently, strategic alliances make firms to be more dynamic competitive on
markets. Moreover, 1990s witnessed a growth of networks of alliances.
Dunning analyzes three major responses of companies to alliance capitalism that can be
also viewed as distinctive features of the phenomenon. The first is “concentrate on
critical competency” response, which represents the disinternalization of some value
chain activities and outsourcing them to the companies specialized in these activities and
that already possess a competitive advantage over the rivals. This issue emphasizes the
importance of small- and medium size firms in the global economy. E.g. numerous
suppliers to the large Japanese automobile companies; the competitive advantages of the
firms in this group relies on the exchange of skills, learning experience, knowledge and
finance between the firms in the network.
However, form the other side firms must guarantee access to the products outsourced and
must still possess influence over the price and quality of the products they lost control
36
over. Thus disinternalization usually takes form of controlled inter-firm cooperative
arrangements, especially in high-technology sectors of economy.
Moreover, cross-border alliances are the consequence of rising costs of R&D and
shortening products’ life cycles – that is a “asset seeking alliance response”. At the same
time, MNEs have increased the R&D intensity for their foreign operations and have set
up technological listening posts in the leading innovating countries (E.g. Daimler-
Chrysler AG outsourced the production of electronic inputs for their products to its
Chinese affiliates and set up listening posts through the world including Moscow).
The third response of companies is “market positioning alliance response”, which means
that firms expand their presence in international markets through market-seeking and
strategic asset-seeking FDI in order to fully exploit the benefits form the economies of
scale.
A distinctive feature of the alliance capitalism is also its governance structure. It holds
less formal structure than in a hierarchy and suggests that parties in the alliances perform
not only for their own benefit, but for the success of the whole alliance (Dunning, 1995).
Thus, as the economic and business environment changes under the pressure of alliance
capitalism, so do OLI variables. First ownership advantages: Dunning (1995) argues that
Oa advantages may be strongly influenced by cooperative agreements. That is the case of
Oa advantages that arise from firm’s ability to obtain new knowledge, to keep on product
quality, to search for reliable and valuable suppliers and customers, to spread risks in
foreign markets; in other words, advantages from exploiting new resources and
capabilities and successful combination with existent. Concerning Ot advantages,
alliances reduce transaction and coordination costs as new advantages arise from the
mutual support and coordination, from better knowledge about production, marketing etc,
from economies of scale and from possible standardization of products and etc.
37
Alliance advantages influence I variable in the way that agreements help firms to exploit
their internalization advantages more efficient and to spread risks and to strengthen the
overall competitiveness of partners. It is notable that alliances are mostly successful in
cultures where trust, reciprocity and informal relations are important. The L specific
advantages of alliances arise from presence and structure of resources and capabilities
that are necessary to the firm to augment and better exploit its O specific advantages
(Dunning, 1995). That means that local governments create immobile assets such as
industrial and science parks to create a stimulating industrial environment that attract
investments. Networks may also decrease the information asymmetries and likelihood of
opportunism in imperfect markets (Dunning, 1995).
3.4.5. Internationalization in Eclectic Paradigm
According to the author, a form of market entry depends on the combination of OLI
advantages of a particular firm (table 3.4). Foreign direct investment is appropriate when
company possesses all the advantages. In the absence of location advantages an export
strategy is preferable. And when there no internalization advantages, licensing production
to a foreign company is the best solution. Company must possess ownership advantages
in order to penetrate the market in all forms of entry.
Table 3.4: Relationship between form of market entry and strategic advantages
FDI Export Licensing
Ownership advantages Yes Yes Yes
Internalization advantages Yes Yes No
Location advantages yes No No
Source: Dunning (1988)
Pedersen (2003) states that LI framework is more useful tool for companies (table 3.5); O
variable could be omitted, as these advantages are essential for internationalization. Here,
an entry through sales subsidiary is appropriate when there are no location advantages,
38
but the company wants to keep control of downstream activities in its value chain.
Moreover, the author states that it is a absolute mistake to suppose that contractual
agreements (licensing, franchising, JV) possess no L advantages. In addition, Pedersen
emphasizes the importance of strategic alliances in automotive industry as large
automobile MNEs possess strong O advantages. In case of Russia, many Korean and
growing Chinese automobile companies that possess only upstream O advantages have
licensed production to those Russian to companies that have large dealership and service
networks in the country.
Table 3.5: LI framework and internationalization
- L +L
- I Simple Export Contractual agreements
+ I Sales Subsidiary FDI
Source: Pedersen (2003)
3.4.6. International Production
As stated above, Dunning gives classification of FDI and describes the use of eclectic
paradigm in explaining several forms of international production. Here I just shortly
discuss some variables influencing the location of value added activities. I present them
in a form of a table.
39
Table 3.6: Variables Influencing Foreign Location
Resource-Seeking
Availability, price, quality of natural resources and local opportunities of upgrading these resources;
Availability of infrastructure to exploit these resources; Availability of local partners to jointly promote knowledge
and capital-intensive resource exploitation; Government restrictions on FDI; Investment incentives.
Market-Seeking
Availability and price of skilled and professional labor;
Quality of national and local infrastructure;
Transportation costs;
Presence and competitiveness of related firms;
Availability of local service support facilities, distribution networks;
Macroeconomic policy of host governments (including government restrictions and incentives, tariffs and etc);
Importance of promotional activities by regional or local development agencies
Efficiency-Seeking
Availability and price of skilled labor; Competitiveness of related firms; Quality of infrastructure; Government activity towards liberalization and educational
improvement; Investment incentives, including tax breaks, accelerated
depreciation, subsidized land; Availability of science and industrial parks and service
support systems; Business environment that encourages competitiveness
strengthening cooperation within and between firms.
Type
of F
DI
Strategic Asset
Seeking
Availability of knowledge-related assets and markets that protect or augment O specific advantages of investors at right price;
Price of synergetic assets to foreign investors; Cultural aspects including access to different cultures,
consumer demands and preferences. Source: Based on Dunning, 1998
40
Chapter 4: The Case Company
This chapter is devoted to general presentation of Toyota Motor Corporation (TMC) and
Toyota Motor Manufacturing Russia LLC8 (TMMR). It carries the company’s history,
general overview of positions the company occupies in Russian and foreign markets. It
also covers the strategic priorities and goals of the company. All the data used in this
chapter was taken from the company’s web pages and from the business newspaper
Vedomosti, so I will omit the references to the sources, except the cases where another
sources were used.
4.1. General Information
Toyota Motor Corporation is a Japanese multinational corporation that manufactures
automobiles, trucks and buses. Toyota is the world's second largest automaker by sales.9
In 2005, Toyota was the 4th largest auto company in the world in terms of sales with
$135.82 billion trailing General Motors with $185.52 billion, Ford with $164.20 billion,
and Daimler-Chrysler with $157.13 billion. As of May 2006, Toyota was able to catch
Daimler-Chrysler for 3rd place in total sales in the United States. In June 2006, Toyota
surpassed Ford in terms of total vehicle sales in the U.S., becoming the 2nd largest maker
of automobiles in the country. The headquarters of Toyota is located in Toyota, Aichi,
Japan. Toyota also provides financial services through its subsidiary, Toyota Financial
Services, and participates in other lines of business. It manufactures vehicles sold
worldwide under the brand names Toyota, Scion and Lexus. Toyota also owns majority
stakes in Daihatsu and Hino, and 8.7% of Fuji Heavy Industries, which manufactures
Subaru vehicles.
In 2005 Toyota (including Daihatsu and Hino) produced 7.231 million vehicles (6.513 in
2004), that is about 500,000 fewer than the number produced by GM that year. Toyota
has a large market share in the United States (in 2005 sales account for 2.5 mill vehicles
8 Limited Liability Co 9 OICA Statistics Committee: http://www.oica.net/htdocs/statistics/tableaux2005/worldranking2005.pdf
41
that is 285,000 more than in 2004, the sales flagship is Camry – 430,000 sedans), Europe
(about 1 million sales in 2005 that is 44,000 more than in 2004) and Africa, and is the
market leader in Australia. It has significant market shares in several fast-growing South
East Asian countries (sales in 2005 – 880,000 vehicles that is 47,000 increase relatively
to 2004). However, in Japan sales decreased for 17,000 to 2.4 million vehicles. By June
2006, outside Japan Toyota has a total of 52 overseas manufacturing companies in 27
countries / regions. Toyota markets vehicles in more than 170 countries / regions.
In the FT Global 500, it is the 9th largest company in the world in terms of market
capitalization, and in Fortune Global 500 it is the 8th largest company leaving behind
Ford Motor Company in all listings in terms of revenue and in the 2006 Forbes Global
2000 it is the 12th largest company in the world (table 4.1).
Toyota has factories all over the world, manufacturing or assembling vehicles for local
markets: the United States, Japan, Australia, Canada, Indonesia, Poland, South Africa,
Turkey, the United Kingdom, France, Brazil, and more recently Pakistan, India,
Argentina, Czech Republic, Mexico, Malaysia, Thailand, China and Venezuela.
In April 2002, Toyota adopted the 2010 Global Vision, a vision for meeting mobility
needs in a way that respects our earth and all people. It is made of long-term policies
centered on the basic theme of 'innovation into the future.' Four key themes based on
trends seen as developing from 2020 to around 2030 are: 1) toward a recycle-oriented
society; 2) toward the age of IT and ubiquitous networks; 3) toward a mature society (the
decline of nationalism and war and the rise of respectful exchange of ideas); toward
motorization on a global scale (societies with little private transport gaining more). These
are linked to the pursuit of a new global image for Toyota with four key components:
kind to the earth, comfort of life, excitement for the world, and respect for all people. The
42
encompassing motto of "innovation into the future" is "working with passion and
dedication to create a prosperous society."10
Table 4.1: The World’s Largest OEMs as of 2005
FT Global 500 (rank, capitalization; $ millions)
Fortune Global 500 (rank, revenue, profits; $ millions.)
Toyota 9 196731,8 8 185,805.0 12,119.6
Ford Not in the list --- 9 177,210.0 2,024.0
Nissan 122 53563,5 41 83,273.8 4,575.6
Daimler-Chrysler
106 58098,9 7 186,106.3 3,536.3
Honda 112 56682,3 31 87,510.7 5,273.2
BMW 182 36896,6 78 57,973.1 2,782.1
Renault 219 30258,8 100 51,365.1 4,183.7
Hyundai 391 19763,1 80 57,434.9 2,268.7
Fiat 500 15944,4 79 57,833.9 1,653.9
Mazda --- --- 235 25,788.9 589.2
General Motors
--- --- 5 192,604 ---
Volkswagen 261 26739,3 17 118,377 1,391.7
Peugeot --- --- 60 69,915 1,278.6
Volvo 390 19760,9 178 32,184 1,746.2
Source: FT Global 500, Fortune Global 500.
10source: http://www.toyoland.com/history.html
43
4.2. History and Corporate General Timeline
1930 – 1939 TMC started in September 1933 when Toyoda Automatic Loom11
created a department of the automobiles production directed by the founder's son,
Kiichiro Toyoda. Soon thereafter, the division produced its first Type A Engine in 1934,
which was used in the first Model A1 passenger car in May 1935 and the G1 truck in
August 1935. Toyota Motor Co. was established as an independent company in 1937. A
year later Koromo Plant (currently Honsha Plant) started operations and just-in-time
system was launched on a full-scale basis.
1940 – 1949 In early 40s productions facilities were redirected for military
purposes. After the defeat in WWII the company had to begin everything from the
scratch. Moreover, in order to produce vehicles, Japanese companies were to receive
permission from the US authorities. So the company was developing in home country and
established a number of firms that are in present time reliable suppliers of inputs for car
manufacture: Toyoda Seiko, Ltd. (currently Aichi Steel Works, Ltd.); Toyoda Seiko, Ltd.
(currently Aichi Steel Works, Ltd.); Toyoda Physical and Chemical Research Institute,
Toyota Machine Works Co., Ltd., Tokai Hikoki Co., Ltd. (currently Aisin Seiki Co.,
Ltd.), Toyota Shatai Kogyo Co., Ltd. (currently Toyota Auto Body Co., Ltd.), Kanto
Electric Auto Manufacturing, Ltd. (currently Kanto Auto Works, Ltd.), Nisshin Tsusho
Co., Ltd. (currently Toyota Tsusho Corporation), Nagoya Rubber Co., Ltd. (currently
Toyoda Gosei Co., Ltd.), Nippondenso Co., Ltd. (currently Denso Corporation12) .
1959 – 1959 In 50s Toyota started overseas operations: Toyota Motor Sales
USA Inc and Toyota Motor Sales Australia were established. Manufacturing started in
Brazil in 1959.
11 Although the Toyota Group is best known today for its cars, initially it was a textile company, and is still in the business and makes automatic looms and electric sewing machines which are available worldwide. 12 Nowadays Denso is one of the world’s biggest manufacturer of auto parts; the company works side-by-side with all major automakers worldwide in the fields of powertrain control systems, electronic systems, electric systems, thermal systems, ITS and small motors.
44
1960 – 1969 In 60s three more factories started manufacturing in Japan and in
1962 the production of Toyota’s Japanese factories reached a level of one million cars.
The network of dealers is actively developed. The company continues to expand
internationally as the manufacture of vehicles in Southern Africa on Toyota South Africa
Motors (Pty.), Ltd begins. In Thailand Toyota Motor Thailand Co is, Ltd. (TMT) is
established. In 1966 Toyota developed the model Corolla which is produced till present
time, and also enters into the business tie-up with Japanese automakers Hino Motors and
Daihatsu Motor Co. At the end of a decade the company reached a level of 1 million units
in cumulative exports and a level 1 million units in annual domestic sales.
1970-1979 In the decade, cumulative exports reached 10 million units. The
company developed a number of new models and 5 new factories started operations in
Japan.
1980-1989 In 1982 Toyota Motor Co., Ltd. and Toyota Motor Sales Co., Ltd.
merged into Toyota Motor Corporation. By the time, Toyota has already been a largest
manufacturer in Japan and the third largest in the world in terms of production volume. In
1984 a JV with GM was established and New United Motor Manufacturing, Inc.
(NUMMI), started production. Four years later Toyota Motor Manufacturing, Kentucky,
Inc., a wholly owned subsidiary, started manufacturing. However, the main event in the
decade was the establishment of Lexus – the luxury car department (before, Japan was
associated with small, economic, and inexpensive cars).
1990-1999 In 1990 Toyota established its own design center – Tokyo Design
Center. In 90s Toyota invested heavily in R&D: Toyota System Research Inc. (JV with
Fujitsu Ltd.), Toyota Soft Engineering Inc. (JV with Nihon Unisys, Ltd.), and Toyota
System International Inc. (JV with IBM Japan Ltd. and Toshiba Corp.) were established.
Toyota continues its international expansion and opens its first factory in Europe in GB -
Toyota Motor Manufacturing (U.K.), Ltd. (TMUK Ltd.). Moreover, DUO dealerships for
VW and Audi cars opened. By 1990 Toyota had produced 100 mil vehicles and annual
45
overseas sales reached 3 mil units. In 1992 a Toyota Earth Charter was established, as a
reaction to the increasing ecological concern, and developed a number of vehicles with
hybrid system13, e.g. Prius that had a great success in United States as their sales reached
100 thousand units already in 2002.
2000- For the last 6 years the company established a number of manufacturing
facilities and sales subsidiaries in the world’s biggest markets:
China - Sichuan Toyota Motor Co., Ltd., a cooperative agreement with FAW
Group Corporation (FAW); Tianjin Toyota Motor Co.; Ltd Toyota FAW (Tianjin)
Dies Co., Ltd., FAW Toyota Changchun Engine Co.,Ltd., Guangzhou Toyota
Motor Co., Ltd;
Europe - Toyota Motor Manufacturing France S.A.S., Toyota Peugeot Citroën
Automobile Czech, Toyota Motor Manufacturing Poland Sp.z o.o, Toyota Motor
Industries Poland Sp.z o.o., OOO “TOYOTA MOTOR MANUFACTURING
RUSSIA”
North America - Toyota Motor Manufacturing de Baja California S. de R.L. de C.
V., Toyota Motor Manufacturing, Texas, lnc., Toyota Motor Manufacturing,
Alabama, lnc.
4.3. Toyota in Russian Federation
With the beginning of 90th years when first official dealers of the company were
established, the history of active Toyota brand promotion in the Russian market begins.
However the first official Toyota service centers appeared in 1990 in the Soviet Union
and Toyota was the first among foreign auto companies from “western” countries to
officially enter the Soviet market. 13 A hybrid vehicle is a vehicle using an on-board rechargeable energy storage system (RESS) and a fueled propulsion power source for vehicle propulsion. Hybrid-electric vehicle (HEV) use petrol or diesel to power internal-combustion engines (ICEs), and electric batteries to power electric motors. Modern mass-produced hybrids, such as the Toyota Prius, recharge their batteries by capturing kinetic energy via regenerative braking. (source: Wikipedia)
46
In 1998 the Toyota Motor Corporation opened the Moscow representative, which was
created to estimate a market situation and to promote sales increase through the trading
companies and a network of dealers in the basic regions of Russia. In 2001, in connection
with dynamical development of the automobile market, the decision on creation of the
national company that would be responsible for marketing and sales of OOO "Toyota
Motor" was accepted. This company is a strategic base of the Japanese manufacturer that
plays a key role in development of vehicle sales and sales of auto components of Toyota
and Lexus models.
Currently, there are 27 official dealers across Russia: 7 in Moscow, 4 in St. Petersburg, 3
in Ekaterinburg, and 1 in Ufa, Chelyabinsk, Samara, Kazan, Rostov-on-Don, Nizhniy
Novgorod, Perm, Tolyatti, Krasnodar, Krasnoyarsk, Irkutsk Tyumen, Surgut (the
population of all these cities is more then a million citizens; and the last two towns are the
headquarters place of most of the Russian oil companies). Moreover there are two official
dealers in Kazakhstan. All of them not only are sell cars and spare parts, but also provide
a service in full conformity with the high quality Toyota standards
All Toyota dealers in Russia correspond to a number of enough rigid requirements which
are made to the dealers of the company all over the world, and also to the ways and
methods of business dealing. The concept of three S lays in their basis. The first S - own
motor show (Showroom), the second S - presence of modern service station (Service
Shop), the third - presence of a spare parts warehouse (Spare Parts Shop).
For TMC Russia is one of the most perspective markets. Own marketing strategy based
on deep studying of all features of the market has been developed for Russia in Toyota. It
follows the strategy of promotion of 9 basic models: 5 passenger cars - Camry, Avensis,
Corolla, Corolla Verso and Yaris; 3 SUVs - Land Cruiser 100, Land Cruiser Prado and
RAV4; and Hiace in the segment of commercial vehicles.
In 2005 TMC started constructing manufacturing plant in St. Petersburg’s district
Shushary and OOO “Toyota Motor Manufacturing Russia” was established in
47
cooperation of EBRD (20%). The plant is scheduled to start operations in 2007. TMMR
will be the forth auto assembling factory in Russia: Ford, GM and Renault have already
been producing cars in Russia. It will provide an almost full-scale production, including
production of standardized spare part sand pressing, welding and painting of steel body.
The new Toyota plant will have an initial annual production capacity of approximately
50,000 units (with the possible extension to about 200,000 units), and, at the start of
production, it will produce the Camry—a mainstream seller in Russia—at a pace of about
20,000 units a year. Those units are to be sold in Russia through OOO "Toyota Motor". It
has not yet been decided what additional models may be produced, but in order to prepare
for future expansion, Toyota has secured approximately 220 hectares of land (to compare,
the Ford plant in St. Petersburg’s district Vsevolzhsk takes only 26 hectars). An initial
investment is approximately 4 billion Russian rubles (15 billion yen or $143 mil), EBRD
will provide 1 billion rubles, and the local authorities will invest 2 billion rubles for the
construction of communication facilities for the plant. The overall investments of TMC in
to the Russian automotive industry are considered to be about $1 billion; the sum
includes the investments of Toyota’s main suppliers ($700-750 million), TMMR will also
create approximately 500 local jobs.
48
Chapter 5: Comparative Analyses of Automotive Industry Development in BRIC Countries and Korea
Having observed a situation in automotive industries of developing countries, I can
conclude that in all countries where there is a car industry, local manufacturers not only
have survived, but also strengthened the positions. Support of governments plays a
positive role, but the success in a greater degree depends on the companies. They became
competitive developing new models, creating base of suppliers and raising efficiency of
the enterprises.
Already now, by the quantity of sold cars Russia takes the sixth place14 in the Europe.
Within the nearest ten years Russia can catch up with the markets such as France, Italy
and the Great Britain, conceding only Germany. The volume of the Russian market will
possibly reach 2.6 million units a year15. This is a display of the global tendency: if in
developed countries car sales grow more than 10%, in BRIC countries sales will increase
several times (see figure 5.1).16 However, despite of favorable market conditions and
perspectives, the Russian car manufacturers have a lot of problems and large-scale
transformations are on agenda: output volumes do not grow; profits fall, greater
investments into development of new models and purchase of new technologies are
necessary. The foreign companies in the meantime increase the presence in the Russian
market.
First, I briefly explain why I consider BRIC countries and Korea for the comparison. The
term BRIC – from Brazil, Russia, India, and China – was introduced by the investment
bank Goldman Sachs (GS). The bank consider that these countries were ‘the most
perspective developing markets’ that will be the leaders in the world economy by the mid
of century: in 2032 India will leave behind Japan, and in 2041 China’s economy will be
14 Source: Global Insight 15 Source: report of V. Khristenko in State Parliament concerning realization of concept ”Development of Russia’s Automotive Industry” 16 Nagel M. & Berbner J. (2005), Attention! BRICmobil!; Business #341.
49
bigger that the US. According to the report of GS, contribution of BRIC countries to the
growth of world gross national product has reached 28 % (including Russia 6 %) and the
share in world trade has grown from about 7 % up to 15 %. Furthermore, BRIC countries
are the largest recipients of FDI: from 2000 its share increased from 5% up to 15%
(outward investments increased from 0,5% up to 3%).17As to Korea, it is the only of
developing countries that achieved the globalization stage of industry development (I
explain it later in the chapter).
Figure 5.1: The Biggest Car Markets
5.1. Models of Development
In order to better understand perspectives of the Russian car industry, let’s observe
development paths of several developing countries of Asia, Latin America and East
17 Groznovskiy B., (2005), The Great Four, Vedomosti, №237.
50
Europe. Ranging the countries on potential of a home market and geographical proximity
to the developed countries, there are three models of development18.
Figure 5.2: Development Models in BRIC, Korea, and Mexico
Source: Mckinsey
First, “model of growing market”. That is the case of India and China, countries
with huge market potential, which involve the international manufacturers and at
the same time leaves a place for the old and new local companies.
18 Nagel M., Berbner J., Mitrovich Y., (2006). Obgon razreshen, Vestnik Mckinsey, #2.
51
Second is export-oriented model, the case of Korea. In the country market
potential is not sufficient for the industry’s development in long-term period.
However, cost advantages allow its manufacturers to expand internationally.
Brazil can also follow this model as its car manufacturers have recently started to
export their products.
The third model is a production platform. That is the case of countries with small
market potential, but due to low costs and geographical proximity to the
developed markets the automotive industry has an opportunity to grow. E.g.
Mexico plays a role of an industrial platform for Northern America, and Central
and East European countries (CEEC) such as Hungary - for the European Union.
According to the size of the market (sales of new cars in 2005 – about 1,4 mil. cars19),
Russia is close to Brazil and Korea. But in the following ten years the Russian
automobile market will grow faster, than in these two countries. Thus I can relate Russia
to model of growing market. However, its development path will depend on domestic
manufacturers. The Russian automotive industry is a successor of Soviet industry, which
active development has begun in 1970th years. In 1980 in the USSR sales amounted to
about 1,3 million cars per year. However, in 1990 this quantity dropped by half. For the
following ten years the Russian market has reached parameters of Soviet time, but
basically due to foreign manufacturers. The strongest Russian players still prevail in the
market, but they did not manage to repeat former break-even sales level. With a high
probability the nearest ten years their market share will continue to fall.
If we look on countries with the big or middle-size market, such as Korea, Brazil, China,
and India, we can conclude that universal formula of car industry development does not
exist. E.g. in Brazil the market is entirely captured by the multinational auto giants; on
the contrary, in Korea the local manufacturers prevail. And in China and India all the
19 Source: Autoreview
52
companies are presented: old and new local manufacturers, JVs, and global companies
(figure 5.2).
However there are some features that are common for all markets and important for local
car manufacturers. One is that in the countries which traditionally developed the car
industry, nowadays there are strong local players (Chery, FAW, TATA). Moreover,
almost in every country there are newly established local competitors that succeeded on
the markets, despite the fact that governments helped only old domestic companies.
Second, these companies didn’t rely on the help of the government and invested heavily
into the development of new model, into the development of base of suppliers, into the
production efficiency.
5.2. Development Paths
All the developing countries, where traditionally there was an automotive industry,
managed to keep it. And local brands take strong steady positions on the market. Only in
Brazilian market that has never had motor industry auto giants dominate. Local car
manufacturers are very strong in Korea where the industry exists from the middle of
1970s that is also the case of China and India (though some companies, such as Daewoo
and Prince, have withdrawn or have been sold). Comparing developments of car
industries in these countries, it is difficult to reveal the general scheme, nevertheless there
is much in common: significant regulation of the market and protectionism at an initial
stage (10-20 years), then gradual liberalization and, to some extent, transition to a stage
of globalization and escalating of export. The development of car industries in all these
countries is consistent with Dunning’s IDP framework. However, I don’t stick exactly to
the model and distinguish between three stages that I shortly describe in the following.
At early stages governments of all these countries applied protectionist measures. High
import tariffs, quotas and a total prohibition for foreign cars import during the certain
periods protected local manufacturers from a competition from the outside, allowing
them to develop, reach economy of scales and to accumulate skills and capabilities. Thus,
53
the Chinese and Korean markets have been completely closed for import up to mid
1980s, Indian - up to 1993 and Korea was many years after closed for Japanese import.
At early stages these countries also limited access to the markets for transnational
corporations. They were authorized to create manufactures only in the form of joint
ventures in order the local companies could borrow form them new technologies,
resources and skills. For example, in 1983 JV Maruti-Suzuki was established in India,
which is now the leader on the market, and the government forced Suzuki to transfer their
newest technologies to India. Many joint ventures have also appeared in China.
At a stage of liberalization the countries operated differently. India and China have
opened markets to new JV that possess today 70-80 %. Korea created alliances with
Toyota, Nissan, Fiat and Ford in 1960th years at the beginning of car industry
development. Since then, during protectionism, and today, local manufacturers have
strongest positions in the market.
From common features it is possible to mark out the following. In India and China, local
brands have got stronger not during protectionism, but at a stage of liberalization when
their market share began to increase steadily. What is even more important is that this is
provided with the newly established companies. In China two of them, Geely and Chery,
already supervise 20 % of the market. They have pressed also local "old" manufacturers
that have today only 10 % of the market, and joint ventures. In India on a phase of
liberalization Tata Motors for the first time has entered into a market as the car
manufacturer and today possesses more than 16 %. It has practically driven out the
traditional companies which market share today does not exceed 1 % undermined
positions Maruti-Suzuki. The same tendency is in Korea. Here company Hyundai always
was the leader, but in a phase of liberalization new manufacturers appeared such as Kia
and SsangYong.
A stage of globalization and export is only achieved by Korea. It is the country that was
first (among China and India) to systematically develop the industry and also to
54
consistently stimulate export activities at all stages of industry development. However,
India and China are about to enter this stage. Their companies have to prove global
competitiveness.
5.3. Key Success Factors in the Development
Summarizing, I repeat that governments played an important role in the industry’s
development in early stages, but it doesn’t guarantee the success of local companies; it
depends on their own activities.
Figure 5.3: Key Success Factors
Source: Mckinsey
55
More precisely, as seen from the figure 5.3 these success factors are 1) the developed
system of local input suppliers. That is the case of all three countries, e.g. Korean Hall,
Indian Bharat Forge and a number of Chinese private companies which were barely
supported by authorities. In China market protection measures have not led to the
effectiveness of state input manufacturers. 2) Efficiency increase of the enterprises, 3)
accumulation of technological and administrative skills and costs reduction depends on
the companies’ activities. The role of the state here is limited: the compulsion of foreign
manufacturers in China to create the joint venture with local state companies has not led
to increase of their technological level or efficiency. Only the new private companies,
such as Geely or Chery which do not receive state support, made their best to compete on
foreign markets. In case of Korea, government regulation positively affects the market as
the measures are not protective but stimulating. As to India, companies themselves
consistently raise efficiency in order to internationalize. At the same time the state can
help with education of qualified personnel, and also facilitate a social burden of the
automobile enterprises, often limited in freedom of maneuver because of it.
5.4. Perspectives of Manufacturers in Russia
Having observed the situation in three countries, there is a question, how the industry will
develop in Russia and what will be the parity between domestic and foreign
manufacturers. However, I don’t consider old Russian companies due to the fact that their
production refer to the lowest price segment – the segment which to a lesser degree
attracts foreign companies.
Foreign companies will for sure gain a significant market share. Considering large
volume of the Russian car market, it is possible to predict, that cars which sales do not
exceed 100,000 a year will be imported to the country. That is the break-even level for
decision-making on locating manufacture in the country. But the decision will mainly
depend on the real advantages of location including the ability to use local suppliers and
the economic stability on the whole. The companies which have already built production
facilities in Russia are growing much faster, than those that chose import strategy. Thus a
56
number of automobile MNEs have already manufacturing facilities or planning to build
plants. Semi knocked down assembly20 is not so risky and demands less investment, than
a full-scale production therefore the companies can prefer to enter the Russian market all
over again thus. At the same time semi knocked down assembly is preferable to import
only at high tariffs for cars import, and after the Russia’s entry into WTO the advantage
will be sterilized.
20 CKD stands for Complete, Knocked Down, which is a complete kit needed to assemble a vehicle. It's a common practice among car manufacturers to sell knocked down kits to their foreign affiliates in order to avoid high import taxes and/or receive tax preferences for providing local employment. An incomplete kit is known as SKD or Semi Knocked Down. KD kit assembling plants are cheaper to maintain because there is hardly any modern robotic equipment and the working force is usually much less expensive in comparison to the home country, so they are perfect for low-volume production. In most basic form, a car in KD kit misses only the engine, battery and transmission, which are supplied as parts for assembly; wheels and all of the interiors are already installed on the head factory. To gain some extra tax preferences, the manufacturer needs to further localize the car, i.e. increase the share of parts produced by local manufacturers, such as tires, wheels, seats, headlights, windscreens and glass, batteries, interior plastics, etc. down to the engine and transmission; that makes the car kit an SKD kit. At some point, even the steel body could be pressed, welded and painted locally; this effectively makes KD assembly only a couple of steps behind the full-scale production. (from Wikipedia.org)
57
Chapter 6: Toyota Expansion in Russian Federation
The aim of the chapter is to analyze the expansion strategy of Toyota in Russian
Federation. I look at the company from the point of type of FDI involved; I examine
automobile market of the country and consumer trends, look more in detail on the
Moscow region market (the biggest within country); and analyze business environment in
the automotive industry in Russia and in the country on the whole. The data is mostly
taken from the State Customs Service and ASM-Holding (the company which provides
statistics of the Russian automotive industry).
6.1. Market Overview
First, I consider the current situation on the market, as Toyota primarily pursues the
market seeking strategy, – size, growth, perspectives. The logic under this is the model of
the development of Russian of Russian automotive industry, “the growth of the market
model”. The Russian automotive market is one of the most dynamically developing
within the country. The sales of foreign cars are booming, automotive MNEs continue to
announce new FDI projects in Russia, new players enter the market and increase
competition
According to the E&Y and estimates the Russian car market amounts to 1.84 million
units; the number includes both domestic production and overall import of passenger
cars, SUVs and LCVs. That is the 14.5% increase form the previous year - 1.76 million –
and 33% increase form 2002.
In 2005 Russian auto market overcame the break even level: for the first time sales of
new foreign cars (51.2%) exceeded those of domestic produced (48.8%). The market
share of domestically produced cars decreased for 5.8%. The reason for that is not only
the increase of locally manufactured vehicles (from 121,000 in 2004 up to 151,500 in
2005), but also because of the soared amount of imported cars (from 280,000 in 2004 up
to 410,000 in 2005). .Moreover, the Russian car market grew not only in quantitative
58
terms - from 1.76 to 1.84, but also in money terms – from $17.9 bn in 2004 to $22 bn
in2005 (see table 6.1). The number of registered cars is estimated to be more than 25
million.
Table 6.1: The Growth of Russian passenger Car Market
Market Volume in Number of
Vehicles (mln)
Change from Previous Year
Market Volume in Money
Terms ($bn)
Change from Previous Year
2003 1.4 - 10.7 -
2004 1.765 15% 17.9 67%
2005 1.85 14.4% 22 23%
Source: ASM-Holding, E&Y, Autoreview, Abarus Market Research.
The surge in sales and production volumes includes all the sectors of Russian passenger
car market. The import of new foreign cars increased by 46%, influenced by the rapidly
growing demand. The average price per new imported car, however, reduced (see Figure
6.1). This reason for that is not a drop in prices, but by the fact that cheap models (like
Daewoo Nexia) were imported much more than in 2004.The major factors influencing
this trend are the following:
Economic growth (due to the high oil and fossil prices);
Growing middle class and growing disposable income of consumers;
Development of banking industry and consequently boom of consumer credit
(about 20-25% of new car sales were made on credit21);
Appreciation of national currency against US dollar (most of the dealers quote
prices in dollars);
21 Renaissance Capital
59
Rapid development of dealership networks across the country;
Relatively high import duties.
The leaders in this segment are Japanese and Korean automakers, which hold nine
positions in the ranking of most popular cars in Russia. It is also notable, that Chinese
companies entered the market in 2005 and sold about 7000 cars, that is more than any
European manufacturer; in addition, according to the forecasts of the biggest auto-dealer,
the sales of Chinese companies will grow in 2006 up to 30,000 units.
The second fastest growing segment is the segment of local assembled foreign vehicles –
15% increase and the demand for these cars is not satisfied. A number of JV has been
established for the last 2 years and started/increased operations. Nonetheless, due to the
limited capacity of these factories, the demand for the production considerably exceeds
the supply. The most active players in the segment are Chinese companies, established
four JV with Russian counterparts; three of them have already started production.
Currently, the following companies started/announced assembling of foreign passenger
cars:
Avtotor – JV with BMW, Kia Motors, GM, Great Wall Motors, FAW;
Avtoframos – JV with Renault;
Ford Motor Co. – Greenfield investment;
GM–AvtoVAZ - JV – Greenfield on AvtoVAZ plant territory;
IZH–Avto – JV with Kia Motors;
TagAZ – JV with Hyundai;
ZMA – Ssang Yong, Brownfield;
TMC – Greenfield;
60
VW – Greenfield;
GM – Greenfield;
NAZ – JV with Chery Automobile Co;
BKZ – JV with FAW.
Nevertheless, in the following years the situation on the market will change. The driving
force will be the sales in the segment of local assembled foreign cars. First, in 2006 the
biggest plants established with foreign capital, plants manufacturing Ford Focus, Renault
Logan and Kia Spectra, will achieve the full production capacity (Ford will double the
output, relatively to 2005, up to 60,000 units); and the second, Toyota and VW models
produced in Russia will enter the market in 2008.
The amount of import of used foreign cars didn’t considerably change. It is estimated to
be about 320,000 units, but in money terms it increase by 14%. Though in 2004 the
government raised customs duties for imported used cars, not for all cars customs duties
and taxes are paid in full amount. E.g. used cars imported from Japan (with right-side
steering wheel) are cheap relatively cheap due to the corruption and numerous schemes of
law abuse. Demand for and import of used cars can start to decrease. This forecast is
based on the assumption that in the near future import of used cars at present volume will
not be already necessary to Russia. It is expected, that Russians will start to prefer the
cars that have been imported new several years ago to second-hand import foreign cars.
Import of second-hand cars was high three years ago, and import of new - small. Then,
import of new cars grew and consequently import of second-hand cars reduced. Now
import of second-hand cars stable. Logically, with the considerable amount of used cars
in the country, there is no need to import them further; besides, the buyer doesn’t have to
pay 30% customs duties for the car with the “Russian” mileage, and it is cheaper.
Therefore I expect, that in a year or two imports of new cars will continue to grow, and
61
import of second-hand – reduce; but, probably, there will remain a certain constant
demand for imported used foreign cars.
Unlike the segment of foreign cars, the market share of domestic production reduced not
only in quantitative (from 880,000 to 840,000 units) but also in percentage terms – 5.8%.
Two factors influence this trend: first, the increased costs and therefore prices; and
second, the shift of several Russian manufacturers from their own developed models
towards production of foreign brands; e.g. IZH-Avto started to assemble Kia Spectra
instead of LADA models. The Russian players’ sales are supported only by the demand
from regions that is the demand for low budget cars. The reason is that the consumer in
the region is highly dependent on the price of the car and on the repair costs, which are
low for domestically produced cars with parts and components readily available.
Table 6.2: Average Price per Car
2005 2004 2003
2005/2004
Change in
%
2004/2003
Change in
%
Cars produced in
Russia 8,500 7,800 5,000 9 56
Imported New
Cars 23,200 31,600 22,500 -26.6 40
Source: E&Y, Abarus Market Research
So, having observed the main trends on the market I can conclude that:
In the following one or two year the import of new foreign cars will be the major driving
force for sales growth. The present level of assembled foreign cars is not considerable
and doesn’t change the structure of the market at a whole The reason is that no one
foreign manufacturer decided to produce a considerable amount of cars in Russia that is
not less than 200 thousand units a year. But in few years some of the established
manufacturers will definitely increase the production capacity of the plants from the
62
present 50 – 60 thousand units. In order to develop the assembly of foreign models in
Russia, in this direction heavy capital investments should be made. Moreover, the
Russian government can promote the development by creating more attractive
environment for manufacturers; e.g. it can give identical tax privileges not only to
manufacturers of cars, but also to components manufacturers.
63
6.2. Market Growth Perspectives
Russian automobile market remains one of the most attractive consumer areas in the
world. Russia’s car fleet per 1000 people (car density level) remains very low relatively
to the developed countries. It is estimated to be about 177 cars and even in Moscow it’s
not high - 260.22 However, in the following years a considerable growth is inevitable; the
growth for the last two years is 18% (15023 in 2003 and 168 in 2004). The trend can be
explained by the continuous growth of GDP per capital: by the 2010 it is expected to be
$8000 – 8500 comparatively to the present about $4000.Last year GDP grew by 6.4%
and has averaged 7% growth over the past 5 years. Dollar income per capita has risen by
about 29% for the same time that is even faster than in China.24In addition, the inflow of
FDI in 2005 is estimated to be about $16.7 billion, which is 38% more than in 2004.25
The consequence of growing macroeconomic indicators is the increase in common well-
being of Russians. Thus, due to increase in a consumer demand for cars the car density
level in the country will grow at least up to 230 cars per 1000 people (see figure 6.1) and
the cars sales volume will grow from present 1,8426 million up to more than 3 million
cars a year. According to the research conducted by Renaissance Capital, the passenger
car park will reach 34.1 million cars in 2014.
In terms of a number of cars per 1000 people the USA ranks for many years first (table
6.3). And no one developed country (home countries of largest automakers) can reach
such results and there are different reasons for that including large population, large
percent of export and etc. It is noticeable that most of the countries in the top 20 are not
vehicle manufacturers, but importers.
22 Ernst&Young 23 Abarus Market Research 24 Businessweek 25 Businessweek 26 ASM – Holding, Ernst&Young
64
Table 6.3: World’s Car Fleets per 1000 people, 2003
Rank Country
Car Fleet
per 1000
People
Rank Country
Car Fleet
per 1000
People
1 USA 800 14 Germany 519
2 Luxemburg 686 20 GB 430
3 Malaysia 641 22 Slovenia 413
4-5 Australia 627 24 Czech 399
4-5 Malta 627 27 Estonia 353
6 Italy 566 53 Russia 150
7 France 565 65 Kazakhstan 120
8 Canada 563 80 Azerbaijan 51
9 New Zealand 560 82 Moldova 49
10 Austria 558 109 China 10
11 Japan 543 Ukraine 98
Source: E&Y, ASM- Holding, UN.
Russia is far below even countries of Central and Eastern Europe and Baltic States.
However this assumes high growth potential. Moreover, in Moscow there is a large
demand for cars (Moscow demand is comparable to the demand in e.g. Austria) and the
automakers are unable to satisfy it in time (dealers have waiting lists and the waiting
period ranges form couple of weeks to 1.5 year (see appendix 20). Automakers explain
that differently. E.g. Ford factory in Russia works in 3 shifts, but still can not produced
the required by the market amount of vehicles; its components manufacturers simply
haven’t enough production capacity (e.g. Ford’s engine manufacturer in Belgium). Other
companies face the following problems:
65
Figure 6.1: Potential Growth of Russian Car Fleet.
Source: the report of V. Khristenko in State Government in 19.05.2005
Quality;
Logistics;
Country quotas limitation;
Market trend forecasts;
Not enough dealers and service stations.
Many auto giants solve the problem of meeting large demand by establishing JVs with
Russian counterparts, by establishing their own sales subsidiaries, or by FDI.
0
200
400
600
800
0 10 20 30 40GDP per Capita in thousand US dollars
Car fleet per 1000 people
Russia-2004
USA
Argentina
Brazil Turkey
Italy
Ger
Poland
Korea
Czech
Slovenia
Spain
Sweden
Hungary Slovakia
China India
France
Great Britain
Japan
Russia-2010
Russia-1992
66
Moreover one more factor influence the indicator: the development and condition of
infrastructure, such as vast network of roads not only in the capital and large cities but
also in the regions. The population in such regions is used to invest into real estate and
doesn’t think about buying cars. But situation is changing and automotive companies
develop regional dealerships. However, Russia still experience huge discrepancies in the
living standards and level of incomes across the country. Thus, currently the companies
establish representatives in the Western Siberia, where Russian oil giants are
concentrated, and in the Ural region, where the companies producing ferrous metals are
based, and in the Central Siberia, where companies producing non-ferrous and precious
metals are based (table 6.4). Nonetheless, this gap is reducing form year to year as people
prosper form the development of agriculture (in the south), timber industry (in the far east
and in the north of European part of Russia).
Table 6.4: Presence of Foreign Brand Dealerships in RF
Region Number of
Dealerships
Moscow 242
St. Petersburg 75
Sverdlovsk District (Ekaterinburg) 34
Republic of Tatarstan (Kazan, Elabuga, Nab. Chelny) 24
Rostov District (Rostov-na-Donu) 23
Samara District (Samara, Togliatti) 20
Permsk District (Perm) 18
Krasnodarsk Region (Krasnodar, Novorossiysk, Sochi) 15
Tumensk District (Tumen, Nizhnevartovsk, Surgut) 12
Source: Autoreview, E&Y
67
One more vivid indicator is the frequency of cars replacement. In large cities the average
replacement rate is 5 years, which is the European level. Moreover, the replacement rate
for luxury cars is three years, which happens very seldom in even high income countries.
The latter can be explained by the fact that there are 88,000 millionaires27 in Russia and
more than 8 million Russians earn more $2000 a month and 3.5 million – double than
that. And those that earn more than $700 a month are interested in buying new foreign
cars. Besides, there is 13% flat income tax, subsidized housing and utilities; thus, about
Russians’ 70% of income is disposable (comparatively to the around 40% for a typical
Western consumer)28. .Moreover, the average age of about 50% of the Russian car park is
over 10 years that implies high potential for replacement rates to increase
Another factor that will contribute to the growth of sales in Russia is the development of
credit schemes. Moreover, Ford, Nissan, BMW, VW, Audi provide their customers with
very attractive finance schemes, which is their competitive advantage (discussed in next
chapters).
The consumer boom in Russia is closely connected to the high oil prices and the trend
will continue in next few decades. That is the reason why consultants predict that
Russia’s GDP per Capita will reach $45,000 by 203029.
Thus there are a lot of opportunities for foreign car producers on the rapid developing
Russian auto market and it is the last chance for component manufacturers to organize
production and to exploit location and internalization advantages before Russia enters
WTO. Moreover, latecomers may also succeed due to the high potential of the country.
Moreover, there is a huge potential in countries of former Soviet Union. And, due to the
location advantages and geographical position of the country, car producers can use
Russia as a manufacturing platform in CIS. E.g. Ukraine is also a rapid growing market,
and there are few new JVs; however the automakers are presumably not satisfied with the 27 Merill Lynch 28 Businessweek, Russia: Shoppers Gone Wild. 29 Renaissance Capital
68
business environment in order to establish fully controlled production subsidiaries. Thus
they pursue export strategy in the country. Consequently Russia can acquire this niche
with the help of MNEs. Kazakhstan, the second largest country within the CIS with
population of 15 mln people, is also a rapid growing economy (7.7%growth of GDP;
GDP per Capita - $3000, forecasts of GDP per Capita in 2015 - $9000) experiencing
consumer boom as the country is flooded with oil and gas money. The car market is
estimated at about $1.27 mln in money terms (compared to Russia’s of $22 bn). The year
to year growth of the market is about 50%. However, only 11 auto companies are
presented in the country; moreover none of the component manufactures are placed in the
country.30 In addition, Russian government supports manufacturers by the way of
established trade agreement with Kazakh authorities supposing zero custom duties on car
exports from RF. Thus global car producers have a great opportunity to satisfy the
demand in the huge market of 200 million of citizens.
6.3. Toyota Niche in the Market
Sales of OOO Toyota Motor surged up in 2005 and, as seen from the table 6.3, continue
to grow in 2006. Sales of Toyota models increased by almost 40% and Lexus models by
51%. Toyota vehicles are best sold cars almost in all the segments of passenger cars
where the company is presented.
Class A, B
Only in 2006 Toyota debuted in A-class with Yaris model and has already sold more than
1.1 thousand units. The leaders in the segment are Daewoo Matiz (13448 cars sold) and
Kia Picanto (1352). However Matiz is in the lower price segment and assembled in
Uzbekistan and there are no problems with the logistics of the model to the consumers.
Thus I can conclude that Toyota model will succeed in A-class segment with average
sales 2500-3000 units.
30 www.autoworld.kz
69
Class C
In class C the company’s market share has been stable for the last several years. The
leaders in the segment are LADA models that are twice cheaper than Corolla. Among
foreign automakers the leader is Mitsubishi Lancer. The success of the model is
connected to the success of its importer/dealer ROLF, which pursue the strategy of
developing dealership network. This fact proves that Toyota should invest more in this
dimension in order to be highly competitive in the segment C, the biggest segment in the
market that grows faster than the market itself. In addition, most of foreign manufacturers
assemble in Russia C-class vehicles (Ford Focus, Renault Logan, and Daewoo Nexia).
Class D
There is a keen competition in class D between Toyota, Hyundai, Ford, Nissan and
Mazda. The leader is Hyundai Sonata model which is produced locally and thus has price
advantage over the rivals, and the company actively develops dealership network in
regions. However, demand for Toyota Avensis model is not met in time (see appendix
20). The problem can be solved by local production and potential capacity of the Toyota
plant (200,000 units a year) will allow the company to produce several models.
70
Table 6.5: Sales of OOO “Toyota Motor”
Sales in 2004 Sales in 2005 Sales in 2006 (6
months)
TOYOTA
Corolla 12973 Corolla 22442 +72,99% Corolla 12 866
Camry 9797 Camry 12860 +31,26% Camry 6 804
Avensis 6092 Avensis 8612 +41,37% Avensis 5 866
RAV4 6156 RAV4 6335 +2,91% RAV4 5 445
Land Cruiser 100 4964 Land Cruiser
100 5314 +7,05% Land Cruiser 100 4 171
Land Cruiser Prado 3667 Land Cruiser
Prado 4449 +21,33% Land Cruiser Prado 3 753
Coaster 24 Corolla Verso 402 - Corolla
Verso 661
Hiace 194 Hiace 224 +15,46% Hiace 148
Yaris 1 125
Total Toyota 43867 Total
Toyota 60638 38,20%
Total Toyota
40 839
LEXUS
RX300 2589 RX300 2806 +8,38% RX300 2395
GS 300/430 113 GS 300/430 1195 +957,52% GS 300/430 975
LS430 349 LS430 319 -8,60% LS430 92
LX470 467 LX470 596 +27,62% LX470 343
SC430 41 SC430 49 +19,51% SC430 41
RX 400h 268 - RX 400h 370
IS 250 136 - IS 250 435
Total Lexus 3559 Total Lexus 5369 50,90% Total Lexus 4281
TOTAL 47426 TOTAL 66007 39,2 Total 45120
Source: TOYOTA, Autoreview
71
Class E
Sales of Toyota in class E are 5 times greater than those of its nearest rival Audi (12800
against 2357 units sold).
Toyota Camry sedan has a long history. Production started in 1982 in Japan and in 1983
it appeared in the USA where the Japanese manufacturer was struggling with its both
national and American rivals. In 1985 production started in its first wholly owned US
automobile manufacturing facility in Kentucky.31 Since that time it is on of the most
popular cars in the North American market (it has been holding the title of the best-
selling passenger car in the U.S. almost every year since 1997), which can be considered
as the “home market” for the model as it was initially designed and developed for the US.
The American plant builds three quarters of all Camrys sold across the world. Camry is
produced to sell locally also in Australia and New Zealand and in the recently opened
facilities in China. However, the Camry has never been especially popular outside the US
due to its size and expense.
However, the first car model to be produced locally will be Camry which price is $29,000
– 30,000. And there is a certain risk in such a strategy. On the one hand, the company
will improve its position and make a preemptive strike. Unlike Corolla and Avensis (class
C and D) the model has much less competitors in the segment. Audi increased the sales of
A6 model and BMW 5 series is assembled in Kaliningrad District at small amount.
Moreover, the development of this segment of the market is only on the early stage as the
mass consumer can afford only a C – class car. But due to the growing economy and
income disposable (as stated above) the segment has large potential. Thus, by producing
the model locally Toyota is preparing to the rapid growth in competition in the segment.
31 http://www.toyoland.com/camry/
72
But on the other hand, the buyers of the cars priced around $30,000 are very sensitive to
the country of production as a vehicle “made in Russia” is still associated with the poor
quality. Thus the Russian assembling is a disadvantage from a marketing point of view.
Camry is not a mass product like e.g. Renault Logan (created for developing countries
and assembled in Russia) the main advantage of which is price. And the fact that the
Russian Camry will be 10-15% cheaper than that produced in Japan or in the US doesn’t
make sense for such a carping consumer.
Thus the company will export a certain part of an output produced in Russia to Europe.
The Russian production will lower the price and make the model more attractive on the
European Market. In the United States Camry has been the best seller for 6 years. In 2004
Toyota sold 426,990 units, whereas in Western Europe – only 13,265. The 2007 model is
currently popular in the country of origin and demand in Europe is limited to the
relatively high price. Thus the company satisfies the demand by exports. However, by
2008 – 2009, when the new plant meets its production capacity, the demand in Europe for
this model will grow; so it will be worthwhile of international production. Moreover,
Toyota Group will produce vehicles of all segments in Europe: Aygo is produced in
Czech, Yaris in France, Corolla in Turkey, and Avensis in GB.
As the model reaches the certain level of maturity, I suppose it to be 2-2.5 years (due to
the fact that Toyota’s advantage is also a relatively short product life cycle), the price will
became the main competitive weapon. The price difference of Russian and Japan made
Camry will be about $5000. But even at this price it will be highly competitive relatively
to the expensive Audi A6 and Mercedes E-class.
ATV & SUV
Toyota Land Cruiser 100 and Land Cruiser Prado has been the most popular ATVs in
Russia since 1999 and the sales have been growing steadily for the past years. Moreover,
Toyota succeeded in sales of new RAV4 model – 50% increase.
73
To shortly conclude, Toyota is the leader in almost all the segments of the Russian
market. However, in order to sustain its leading positions the company should improve
several activities of the value chain (Discussed in chapters 7, 8).
Lexus
For the last 2 years Toyota considerably increased its market positions in RF. The new
Lexus models, including models with advanced hybrid technology, introduced within the
period successfully compete with German rivals BMW, Mercedes-Benz and Audi; a
vivid example is the sales of a new GS460h of 50 units within a month just after the
presentation on the market. The demand of Lexis SUVs and ATVs is constant and
increases with the rates of market growth.
74
Chapter 7: Component Manufacturers in Russia – Possible Alliance (Suppliers)
One of the competitive advantages of Toyota is the Japanese supply chain management,
which assumes that the company itself and its suppliers are highly interrelated and
interdependent. Thus in the chapter I consider Western and Russian component
manufacturers, with which Toyota can build a strong network based on co-operation and
interests equity. The success of Toyota in Russia is highly dependent on the ability of the
company to apply its supply chain principles to the Russian business environment.
Moreover I suppose that Toyota should make an alliance with the biggest group of
component manufacturers Group SOK.
7.1. Global Manufacturers in RF
As stated above, the regime of “industrial assembly”, which Toyota has already received,
assumes that the manufacture reduces the timeframe and volumes of imported
components by 10% within 2 years after the start-up of the production following by the
further 10% in 2.5 years and another 10% in 3.5 years. That means that the foreign
automobile companies are forced to use local component manufacturers. Moreover, this
means that the market is opened to foreign component manufacturers. Thus, it is for the
benefit of vehicle manufacturers to attract global suppliers to localize production in
Russia. That is the reason why Toyota have rented 220 hectares of land (the Toyota plant
will occupy not more than 60 h). The first companies that have established (or planning)
production facilities are the companies that have long relationships and contracts with
global auto producers. That is the case of Toyota Boshoku, which will start production of
high-tech seats (including curtain-shield airbags) in RF for Toyota models produced in
the country. It also specializes on the production of several interior details such as strap
belts, wood panels, luggage nets, bumpers, engine undercovers, and fender liners. Denso
Corp. is investing into the construction of a Greenfield plant for the production of car
electronic systems. Denso is a traditional partner of Toyota and the quality of products is
75
of the highest level. Magna Steyr (MS) spends $50 mln on the construction of
manufacturing facilities for the production of gearboxes and plastic details for vehicle
interiors. MS is one of the biggest global component manufacturers and supplies Toyota,
Ford, Honda, GM, DymlerChrysler, VW and etc. The last Greenfield investor is Johnson
Controls, the producer of interior systems, which have already established two plants in
RF (one in the industrial zone near St. Petersburg). Currently the company works in RF
with Ford.
But still, car manufacturers in Russia face the problem of the localization of the
production, as major global component manufacturers are not planning to make
Greenfield FDI in Russia for the following reasons32:
Absence of tax benefits – unlike vehicle manufacturers, the government doesn’t
provide component manufacturers with tax and customs-duty benefits; unlike
Japanese manufacturers that are very sensitive to the quality of the products, the
other components manufacturers are establishing JV with the Russian companies.
The quality of Russian producers - quality of the car in many respects depends on
its components. Thus the share of responsibility for consumer properties of the car
lies on component suppliers. For this reason foreign manufacturers operating in
Russia, choose suppliers very scrupulously; they have to meet the requirements on
the localization and they are forced to work with Russian suppliers; at the same
time they should keep on high-quality standards. Only few Russian companies are
ready to satisfy partners with quality of production. As a result participation of the
domestic firms in assembly of foreign cars is limited to a minimum of details,
among which basically inexpensive and technically simple details: wires, rugs and
mud flaps. Even Ford, which operates in RF from 2002 localized production only
for 10%.
32 See appendix 18
76
Consumer preferences - a potential customer wants to buy a foreign-quality car
and he is not always morally ready to purchase the car with a lot of the Russian
details.
7.2. Potential Strategic Partnership
One of the features of present business environment is the “alliance capitalism”, which is
the result “…of technological advances and of globalization of many kinds of value-
added activities”33.So, one of the companies’ responses to the changed global
environment is the expansion to markets in order to benefit from the economies of scale,
to access the market knowledge and distribution capabilities of local companies and etc;
that is a “market-positioning alliance response”. The local companies access the
technology, brands and products developments of MNEs.
In my point of view, in order to strengthen OLI advantages in Russia, Toyota can
establish an alliance or partnership with a big Russian component manufacturer SOK
Group. The market share of the company is estimated to be about 25%. The group
consists of 44 companies united in 4 divisions: the division of automobile components
(21 manufacturers), the division of assembly (Izhmash, Roslada, VAZ Interservice), the
division of dealership networks (“Intertrading”, SOKIA, “Samarskie Avtomobili”, and
Toyota Center Samara) and the division of non profile assets. The production of
components is 90% within group. The company is currently working on the improvement
of quality and the reduction of costs. The enterprise has advantage over its Russian
competitors as the latter produce only small automobile details with the minimum value-
added. But for manufacture of hi-tech units it is necessary to find and train personnel, to
conclude the contract on delivery of special materials, to adjust complex manufacture.
And the small companies are in lack of financial assets to develop R&D. Moreover the
industries that involve high-tech production are still in crises after the collapse of Soviet
Union.
33 Dunning, 1995
77
The goal of SOK is to become competitive on the market of components for foreign
manufacturers in RF. The company is investing heavily on the renovation of equipment
and machinery employing advanced industrial technology and on R&D. Recently it has
established JV with a number of global component manufacturers. Hella KGaA Hueck &
Co, which specializes on the development of lightning technologies for vehicles, and
Monroe, which focus on the ride control products, are among partners. In addition SOK
works with Kia Motors: it assembles Kia Spectra model. Thus, SOK has not only
acquired new resources and capabilities, but also adapted to the western business and
corporate culture.
Besides, SOK has strong relationship with the government and local authorities as it is
the key supplier of Avto-VAZ, the biggest state owned automotive company in RF
One more reason for the establishment of a partnership is the fact that the potential of the
market of vehicle components. Thus Toyota can make a preemptive strike. More and
more global automotive manufacturers are planning to construct production facilities in
Russia, and they will face a problem of localization. Moreover, foreign component
manufacturers are not so determinant in establishing there own production facilities as
they are not ready to overcome economic risks; the construction of a plant is as complex
as the construction of car production facilities itself. The logic under this is explained by
the fact that most of the traditional suppliers of Ford and Renault are not working with
them in Russia.
The success of the possible alliance depends on one more factor. It is the willingness of
Toyota to actively support SOK in international markets. E.g. since the quality of the
Russian components satisfies the Japanese and European standards, the manufacturer
may use SOK as a supplier of a number of components for the production of vehicles in
the European factories in Turkey and France.
Thus, it is in the mutual interests of Toyota and SOK to make a partnership in order to
strengthen their competitiveness on the market.
78
Chapter 8: The Role of the Government
Authorities in Russia still influence investment and business climate in the country to the
large extent and are highly involved in the development of an automotive industry by the
means of stimulating and protecting measures. Besides, like in any other state, there is an
industrial policy. And this is an important factor that influences the establishment of
production facilities not only of vehicle manufacturers, but also the components
manufacturers in RF. Thus I consider reforms in trade, tax, and customs policies.
The government of RF is currently implements reforms in The Customs Code, The Tax
Code, and Legal Code, reforms concerning trade and land policy. The most considerable
and important for automotive manufacturers concern trade reform and customs duties
reform. But I look first into the experience of the developing countries that have common
features in automotive industries.
8.1. The Role of Government in the Formation of Automotive Industry in Developing Countries
As stated above, in certain stages the governments played an important role in the
development of auto industries. However, I emphasize, that their significance shouldn’t
be overestimated, as success of local companies is mostly dependent on their own
activites.
But still, on the early stages of industry development government support was essential.
And these countries that experienced such supports have now a strong automotive
industry. From the figure 8.1 one can observe that it is the case of Korea where the
industry was protected.
I will not go deeply to the classification of measures that government can undertake, but
mention the major ones: protectionist measures, such as import tariffs, restrictions on
property participation and etc; and stimulating measures, e.g. stimulating JVs, alliances,
providing with cheap capital resources, and etc. All these countries applied the same
79
protectionist measures: import tariffs, quotas or a total prohibition of import. As to
supporting measures, they differed with a degree of intensity and time of action that lead
to different results. I briefly consider situation in three countries.
Figure 8.1: The Role of Government
Source: Mckinsey
Korea has chosen a way of strong protectionism (the market long time has been
completely closed). Besides it applied supporting measures encouraging companies to
increase their own competitiveness. Korea has limited the quantity of manufacturers and
purposefully supported only several, helping them to achieve economy of scale in
conditions of a small market. Moreover, from the very beginning the state stimulated
export in the form of subsidies to exporters (financed by the overpricing on the home
80
market closed to foreigners). Korea preferred to develop ‘private’ automobile industry. In
1970 and 1980s Korean companies purchased over 50 licenses in developed countries.
The industry of auto components has been protected by import tariffs; but as suppliers did
not belong to the largest car manufacturers, the country managed to create an internal
competition and to improve efficiency.
China has also closed the market, however the government differently supported car
manufacturers and less stimulated their competitiveness. In China the basic role in the
market regulation played not central, but regional authorities, therefore many companies
received support; thus economy of scales wasn’t achieved. In 1995 all the 15 enterprises
produced only 326,000 cars.34 Moreover, the government supported only state
companies. It was considered, that in order to obtain technologies it is enough to create
JVs with foreign companies; however this approach has not justified itself. Moreover
efficiency of car manufacturers and suppliers grows rather slowly. An existing system of
fastening of suppliers to large JVs doesn’t stimulate the suppliers to increase productivity.
The only competitive advantage of Chinese inputs suppliers is cheap labor.
India has long been closed for import. Many years the market was dominated by JV
Maruti-Suzuki. At a stage of liberalization the government did not interfere in the
industry development and did not supported manufacturers financially. After a revocation
of licensing car manufacture (1993), MNEs entered the market. So did the commercial
transport manufacturer Tata Motors, which stably increases the output. Thus, the success
of the Indian car industry first of all is caused by the companies’ actions. E.g., Tata
Motors developed new models together with Italian partners - design offices I.DE.A
Institute and Stile Bertone. Tata Motors has raised efficiency also by the long-term
reorganization of production and personnel training. Aspiring to create the modern car,
Tata Motors has built a high quality network of suppliers. The government supported
local players only keeping import tariffs at a level of 60 % that constrained a foreign
competition.
34 Source: Kanunnikov S. (2006). The History of Auto Industry in China. Za rulem, #3.
81
8.2. Trade Reform: Special Economic Zones
In 2005 the government accepted the law “On Special Economic Zones” (SEZ). The act
supposes the creation of two types of zones:
Industrial production one – for assembly production to promote manufacturing
sector of the economy;
Technically intensive zone – for scientific development and commercialization of
developments to promote IT industries
By establishing SEZ the government tries to use the experience of Chinese trade policy.
Since 1984 more than 40 SEZ, open ports and free trade areas and 53 techno-parks were
created in China. They have been separated from other territory of the country by border,
and the special tax and customs allowances were provided. The government itself played
an imported role as its investments into infrastructure are estimated to be about $15-17
million on hectare of territory. Annual economic growth in zones reached 27 %35, and
restrictions on capital export and political support of investors have also resulted in
investments into depressive regions of the country.
Moreover Russia has its own experience in creating SEZ. First is Kaliningrad District
where importers doesn’t pay import and customs duties; and in order to deliver the
imported goods further to the Russia companies must add value to the products by 30%
(for consumer electronics – by 15%). The district has attracted FDI from Philips,
Samsung, LG, BMW, GM, Kia Motors which established JVs with Russian companies.
The second success experience is Magadan District, where companies pay 50% of federal
taxes and zero corporate income tax (if the resident invests incomes into production and
social spheres), and are free from payment of the customs duties. Since the establishment
of the SEZ, new factories have been constructed, the total production output has stopped
35 Vedomosti 31.08.2005, №161 (1442)
82
to fall, the quantity of the enterprises with debts on salary was twice reduced, and
incomes of the regional budget are growing.
Six SEZ were established in RF:
Four high-tech zones in: 1) St. Petersburg – the zone will be engaged in research
and IT products and equipment; 2) Dubna – the zone will specialize in nuclear
technology; 3) Zelenograd – the zone will concentrate in microelectronics and
nanotechnologies; 4) Tomsk - the Siberian zone will focus on the development of
new materials.
Two industrial zones in: 1) Elabuga - the zone will produce car components in
cooperation with Hyundai and GM. However, the government’s general position
is not to establish SEZ for automobile manufacturers as it can lead to disrupt of
equal competitive conditions for companies that have already established their
production facilities. But the driving force of the decision is to attract global
component manufacturers that can follow car producers; moreover the
government’s requirement for all the automobile producers is the gradual
“localization” of the production, which means that a certain number of
components for assembly must be produced locally. In addition, one of the
world’s biggest component producers Siemens (to be precise, the division of
Siemens AG enterprise VDO Automotive AG, which specializes in the
development of body and chassis electronics, braking technology, electric motor
drives, electronic network solutions, restraint systems and safety electronics) has
already established a subsidiary in Russia and received the status of a resident of
SEZ; the company will focus on supplying components for car manufacturers in
RF. 2) Lipetsk - the zone will focus on household electronic production and
possibly furniture.
83
In the following four years the government is planning to spend about $.84 bn on the
development of SEZ.36
To become a resident of and industrial zone the company must fulfill several
requirements including capital investment of no less than €10 mln (1€ mln during the first
year). In return, the government provides these zones with duty-free regime, which means
that foreign-made goods can be imported to them without the payment of import duties,
and Russian-made goods can be exported from them without payment of export duties.
The residents will also receive tax allowances (for maximum 20 years), including the
reduced rate of social tax (14 against 26%) and accelerated amortization, and property
benefits (absence of property tax for the first 5 years), simplified registration
requirements, and, what is the most important, the government guarantees that the federal
and local tax legislation will not be changed for the residents during the period of
agreement validity. The reason of such an importance is the fact that Russian tax law and
unexpected changes in tax law are the most frequent problems that are faced by foreign
direct investors the country (see figure 8.2).
The research carried on by the R. Ahrend (1999) for The European Commission also
highlighted that production companies in Russia have problems with trade policy. And
that is the reason why the government works intensively on this dimension.
36 Decision of the government of the Russian Federation no. 530 of august 19, 2005 on the Federal Agency for Administration of Special Economic Zones
84
Figure 8.2: Problems Faced by Foreign Direct Investors in Russia
Source: Ahrend, 1999
In addition, currently the Economic Ministry is working on creation of port SEZ. The
purpose of creation port SEZ in the Russian Federation is not only to attract domestic and
foreign investments for construction and reconstruction of a port infrastructure, but also
to stimulate the development of port facilities, and to develop port services. That is very
important factor for the automotive manufacturers, as local plants receive components for
the assembly mainly by the marine transport. Moreover, ports in Russia, Ust-Luga and St.
Petersburg on the Gulf of Finland, the Barents Sea port of Murmansk, the Far Eastern
port of Nakhodka, and the Black Sea port of Novorossiysk are the main gates for the
import of new foreign cars. In particular, the attention will be paid to the port of St.
Petersburg as it is the nearest port to the production facilities of Ford, Toyota and GM.
85
8.3. Customs Duties Reform and Component Manufacturers in RF
The last year the government of RF introduced a reform in relation to customs duties
policy in order to develop the automotive industry if the country and particularly to
attract foreign vehicle manufacturers to establish production facilities.
8.3.1. Import Duties
First, in the beginning of 2004, new tariffs were implemented for the import of new and
used cars. But still, they are the lowest among the developing countries (see appendix 15
and table 8.1). The measures are supposed to reduce the flood of imported used cars to
RF; however, the import has just increased. But the reason for that, as stated earlier is the
rapid growth in demand for foreign cars and the inability of local manufacturers to satisfy
the demand. In the following years the amount of imported cars will decrease as the
manufacturers will offer already locally produced vehicles. However, there is a threat for
the local manufacturers, which is connected to the entrance of Russia into WTO.
Russia’s WTO Entry
One of the requirements of WTO to the Russian government for the accession is the
liberalization of markets in the country, which also means leveling out or total
elimination (in some cases) of import tariffs for automotive production. The government
succeeded in agreement on the seven-year transitional period of a liberalization of the
automobile market which assumes the gradual decrease of customs rates. Thus, during
the first four years after Russia joins the WTO import tariffs on both new and over 7
years old cars will probably remain unchanged. Consequently, the local foreign vehicle
manufacturers have the opportunity to increase the competitiveness of their products.
86
Table 8.1: Import Tariffs on Cars (both for legal entities and natural persons) New Foreign Cars (under 3 years old)
Price of the Car* Tariff Less than 325.000 rub 48% of Customs Value, but not less than
€2.5 for 1 c.c. of engine volume 325.000 rub. - 650.000 rub 48% of Customs Value, but not less than
€3.5 for 1 c.c. of engine volume 650.000 rub - 1.625.000 rub 48% of Customs Value, but not less than
€5.5 for 1 c.c. of engine volume 1.625.000 rub - 3.250.000 rub 48% of Customs Value, but not less than
€7.5 for 1 c.c. of engine volume 3.250.000 rub - 6.500.000 rub 48% of Customs Value, but not less than
€15 for 1 c.c. of engine volume More than 6.500.000 rub 48% of Customs Value, but not less than
€20 for 1 c.c. of engine volume Cars over 3 but under 7 Years Old
From 2004 Engine Volume Tariff
Less than 1000 c.c. €0.85 for 1 c.c. of engine volume 1000 c.c. - 1500 c.c. €1 for 1 c.c. of engine volume 1500 c.c. - 1800 c.c. €1.5 for 1 c.c. of engine volume 1800 c.c. - 2300 c.c. €1.75 for 1 c.c. of engine volume 2300 c.c. - 3000 c.c. €2 for 1 c.c. of engine volume More than 3000 c.c. €2.25 for 1 c.c. of engine volume Up to 2004 (for natural persons) Up to 2500 c.c. €0.85 for 1 c.c. of engine volume More than 2500 c.c. €1.4 for 1 c.c. of engine volume For legal entities: 25% of Customs Value, but not less than €1-2.35 for 1 c.c. of engine volume dependent on the engine volume + customs fee – 0.15% + VAT - 20% + excise-duty – 10 rub for 1 h.p.
Cars over 7 Years Old
Engine Volume Tariff Up to 2500 c.c. €2 for 1 c.c. of engine volume More than 2500 c.c. €3 for 1 c.c. of engine volume * Market price / dealers’ price / manufacturer’s price / catalogue price Source: Federal Customs Service of RF, Japcars.ru
87
And that is also one of the reasons why auto-giants are trying to build production
facilities in the country as soon as possible. On the other hand, the entry to the WTO will
decrease the competition on the market, as new environmental standards will be
introduced. Euro-2 environmental standards are implemented from October 2006, and
Euro-3 – from January 2008, which means that the import of cars produced in European
Union before 2001 (2004 dependent on the type of vehicle), USA – 2001 (2003), Canada
- 2004, Japan – 2005, Korea – 2003 (2005), China - 2008 will be prohibited. Toyota, in
particular, will gain from new rules as its main rivals - the used German business cars –
will loose price advantage over Toyota’s new E-class vehicles. Currently, even more than
half of Russian car park does not meet the European standards; one-third satisfies the
Euro-2 standards and only 1/10 of vehicles – Euro-4 standards
8.3.2. The Concept of “Industrial Assembly”
The second important step in customs duties reforms is the introduction and
implementation of a concept of “industrial assembly”. The main idea under the notion is
that a number of components for the manufacture of cars can be imported either without
payment of the import custom duties or with duty payable at rate of around 3-5%. In
order to receive a status of an “industrial assembly” the applicant company should meet
the following requirements37:
An investment agreement must be signed between the Ministry of Economic
Development and Trade and the Russian legal entity (the reason why Toyota
registered OOO “Toyota Motor Manufacturing Russia”)
The assembling operations must include: Body assembly, welding and painting;
The assembling operations must be organized within 18 months in the case of
Brownfield investments and within 30 months in the case of Greenfield
investments;
37 Ministry of Economic Development and Trade, Abarus Market Research, E&Y
88
The production capacity must be not less than 25,000 units per year at a two-shifts
operating mode;
The volumes and time constrains of imported components must be reduced by
10% within the 24 months after the start-up of assembly operations (not including
body itself as a component), following by a further 10% in 42 months and another
10% in 54 months.
That means that the companies have to localize the production of components. It is also
noticeable that the production quality of Russian auto-parts suppliers is still very low.
Thus, by the means of the concept, the government makes manufacturers themselves
being interested in the foreign direct investments of component manufacturers. Moreover,
The Ministry of Economic Development and Trade is currently working on developing of
analogous concept for the component producers.
In addition, the automotive manufacturers are allowed to import equipment for their
assembling plants without any customs duties if analogous equipment is not produced in
Russia. And all the major equipment that producers need for the assembly manufacturing
satisfies this requirement as all the companies that establish production in the country use
high tech machinery that is not produced in RF (the industry hasn’t recover after the
collapse of the Soviet Union).
89
Chapter 9: Apprising Value Chain Activities
In the chapter I appraise the value chain activities to the Russian environment’s
demands. I concentrate on the primary activities of the firm, and concerning support
activities I return to them in the following chapter where I consider Toyota Production
System, human resource management.
9.1. Logistics/Transportation Infrastructure
9.1.1. Port Facilities
With the growing amount of imported cars and the companies eager to localize
production in RF, the problem with quality of infrastructure have risen to the highest
level. In order to satisfy the demand for the cars and to supply its plant with components
in time Toyota and the government has also to invest into infrastructure. As seen from the
table, OOO “Toyota Motor” is the largest importer of vehicles in RF, thus it is of
particular interest of the company. The factors that that justify the location of Toyota’s
production facilities in St. Petersburg district are also geographical position, in particular
the proximity to the biggest ports of Russia and Finland plus relatively good road
infrastructure that connects the district with the capital. However, port facilities in Russia
are outdated and need renovation or even reconstruction. So, I look more precisely on the
problem.
The major amount of imported cars, about 75%, is delivered to Russia through Finland.
Vehicles are carried up to Finnish ports by ferries and them by automobile transporters to
Moscow. In average it takes 3.5 – 4 days for one return run. And it is twice as faster as to
deliver vehicles from Europe through Poland, Belarus and Baltic States. The advantages
of Finnish ports are:
Relatively cheap land with warehousing capacity of 60-80 thousand cars at a time,
which is approximately the amount of 1.5 months’ sales;
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Low tariffs of cars warehousing: cost of storage of one car at a Finnish port is
approximately €50 a month that is 5-10 times cheaper than in Russia; thus
importers usually hold in Finland a monthly stock of cars, gradually transporting
them to the warehouses in Moscow or St Petersburg;
All the Finnish ports are customs-duty free zones (assumes also simplified
formalities); and there are no time limits for the storage;
The ability to service large vessels: water depth is min 14 meters while in St
Petersburg the maximum water depth is 11 meters.
The absolute necessity in the similar port facilities in RF is also explained by the
following fact: two years ago the major storage terminal for the Russian automobile
transit was port of Hanko at coast of Gulf of Finland; in late 2005 the port reached the
limiting capacity of 260 thousand cars a years and the importers started to use ports of
Kotka, Turku, Hamina and Helsinki; and in 2006, already ports of Turku and Kotka
reached their limiting capacity and the authorities are planning to invest €5 mln for
extension of the warehousing capacity up to 700,000 vehicles a year. Moreover, vessels
with cars are usually waiting on the road, as ports are unable to unload such an amount of
vehicles.
Thus, in order 1) import cars on the sufficient amount (Toyota is the biggest importer), 2)
to reach a full capacity of the plant in Russia, and 3) to be able to supply its Camry model
to the European markets Toyota needs to consider its logistics operations. The first step
on improving the infrastructure of port facilities was made by the government with
currently develops an economic program similar to SEZ. The second step must be done
by the importers themselves. Thus Toyota is developing a project of investing into the
creation of an automobile terminal in the new port of Ust-Luga near St Petersburg with
the planned capacity of 250,000 vehicles a year, which is about 75% of Finnish transit.
According to estimates of Seanews the investments are amounted to $5 mln. And the
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possible earnings are amounted to approximately $13.5 million (according to Seanews,
the earnings of Finnish port are estimated to be about $18 mln).
9.1.2. Automobile Transporters
It is also worth to notice that there are no alternative to marine shipments. The reasons for
that are (in case of transportation by trucks) the increased period of delivery and
increased costs. Moreover, there is a lack of special automobile transporters. That is also
a problem applied to the transportation of vehicles within Russia: from ports and plants to
cities. The deficit of such trucks is about 25%. The importers and manufacturers either
establish logistics departments that are working only on this dimension or use logistics
companies that possess large fleets of automobile transporters. E.g. Ford have cancelled a
contract with the Russian biggest transporter GEMA-Trans (337 trucks) and established
its own logistics department. However, if Toyota establishes its own department it will
face the lack of trucks. The reason is that the European production of automobile
transporters is amounted to be about 3.5 thousand trucks a year which is mainly
consumed by the European companies.
And currently there are no alternatives to automobile transporters. There is no
infrastructure for transportation by inland waterways; in particular there are no
specialized vessels, no ports. The same situation is with the railroad transport: the
transportation of cars by rail is insignificant as the companies use automobile transport
the advantages of which are timing and accuracy. Moreover, the railroads in RF are
monopolized by the state company RZD, which means the lack of control from
automobile companies.
9.1.3. Road Infrastructure
Besides the shortage of port capacities and automobile transporters there is a problem of
road facilities between St Petersburg and Moscow. The utilized capacity of roads also
influences terms of delivery of the car to the concrete buyer. And the highway Moscow -
St Petersburg (E95) works on a limit carrying capacity. The part of deliveries has already
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moved from E95 to highway Novorizhskoe and to other roads. However all this does not
solve a problem. The government plans to invest $6 bn for the construction of a new paid
high-speed motorway.
9.1.3. Warehouse Infrastructure
The problem of warehouse infrastructure in Moscow as the central receiving point of cars
and in the Russian regions is not so sharp, as with automobile transporters. Almost all the
importers have on two-three platforms, which currently close their needs for storage of
cars; however considering perspectives of import volumes growth, the problem can rise
to the highest level. The basic difficulties will arise in relation to the search of places in
proximity to Moscow and expensiveness of the land near the city. At present, Toyota has
a centralized spare parts warehouse that supply all the service centers
9.2. Marketing and Sales
In the section I concern marketing issues that are strategic for the company. However, I
don’t consider pricing and product strategy - elements of marketing mix - as these issues
were already discussed in the chapter where I observe the company’s niche on the
Russian market.
9.2.1. Toyota Financial Services
As stated in the previous chapters, one of the factors that contribute to the growth of auto
sales in Russia is the development of credit schemes. Ford, Nissan, BMW, VW, Audi
provide their customers with very attractive finance schemes, which is their competitive
advantage. Currently Toyota Motor doesn’t a have a unified credit program. Most of the
Toyota dealers work with Raiffeisen Bank, which offer credit scheme for 5 years under
10-11%. However, if TMC establishes (the issue is on the agenda) its own bank in
Russia, Toyota Kreditbank Gmbh38, the company will take the lead over its competitors.
The bank, obviously, will be engaged in retail crediting of natural persons for purchase of 38 Toyota Kreditbank Gmbh is a subsidiary of Toyota Financial Services Corp.
93
Toyota and Lexus cars. Besides, the bank will provide credit schemes and programs to
the dealers. It is expected, that the step will strengthen a competition also in the banking
industry as the Toyota Bank can offer more attractive interest rates, than other Russian
retail banks. Due to the estimates of United Financial Group, in 2005 35% of car sales in
RF were financed by credits; the total amount in money terms is more than $4 bn.39
According to the forecast of the company, in 2006 the share of sales financed by credit
schemes will increase by 40% and will amount to approximately $6 bn.
Unlike Toyota, its rivals on the market, financial subsidiaries of auto giants, are not so
decisive on this issue. GM was planning to establish a subsidiary of General Motors
Acceptance Corp (GMAC) in Russia, but the control share of the division was sold to the
group of investors. Renault is just about to establish a subsidiary of Renault Credit
International Banque (RCI Banque) in Moscow.
Table 9.1: Credit Schemes Offered by Automotive Companies in RF.
FORD
Nissan
Finance/
Renault Credit
BMW
Financial
Services
VW Group
Finance
Audi
Financial
Services
Interest Rate 4.9% 7.9% 5.9% 9% 9% (5.9%)
Initial Installment 40%, 50% 10% (min) 25% (min) 15% (min) 15% (min)
Duration (years) 3 5 (max) 3(max) 4(max) 5(max)
KASKO 5% + $200 - - - 6.99%
The real interest rate in all the programs is 9%; all the offers are subsidized (except VW) by the importers.
Source: Companies’ Own Data
39 G. Stolyarov. Credit ot Toyota. Vedomosti,19.06.2006, #109
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Other manufacturers work through other schemes (table 9.1). Ford offers the most
favorable terms of credit schemes on the market: duration-3 years, initial installment –
40%, interest rate 4.9%. However, Ford didn’t establish Ford Motor Credit in Russia and
works with partner-banks: Raiffeisen Bank, MMB, MDM-Bank, Gazprombank, and
Bank of Moscow (the real interest rate of the banks is 9%; the rest is subsidized by Ford).
The main competitor of Toyota in D class Audi offers its customers 5.9% interest rate
with initial installment 15%. The similar offer provides BMW Financial Services.
Thus, Toyota’s financial subsidiary in Russia should introduce interest rates on the level
of 9% as currently, due to high sales, there is no need in attraction of new clients by
lowering interest rates. Moreover, the new bank automatically becomes a monopolist on
consumer crediting within the Toyota and Lexus dealers.
9.2.2. Dealership Network
Place
In previous chapters I observed the current situation concerning the enlargement of
distribution within the whole Russia. In addition, despite the fact that Moscow consumes
most of the new cars, the growth in the regions is estimated to be about 40% of total
market growth. That is not only due to the growth of incomes of population, but also due
to the development of regional dealership networks. However it is not easy to become an
official dealer of TMC as the company has its business plan for the region, corporate
standards and etc. Moreover, investments into an establishment of dealership center
including construction and land rent vary from $1 million in the regions to $5-7 millions
in Moscow. And the return on such projects in the regions is less than in the capital: the
prices for cars and spare parts are the same, but service is cheaper.
But in the section I add my opinion about the way TMC should manage its dealership
network in Russia as soon as sales of any vehicle manufacturer directly depend on the
local dealers. According to the survey of VCIOM, there are five major reasons the
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potential customers do not buy a model of a particular brand and a nonprofessionalism of
dealers is one of them. In several years, when the rates of market growth will stabilize,
the success of the company will mainly depend on the effectiveness of the dealers.
In order to improve efficiency of dealers and to change the structure of the network in the
way it corresponds to the strategic purposes of the manufacturer, the company should
constantly work on several dimensions:
Possession of equal rights in cooperation with the dealers, assuming improvement
of quality of their work, individual approach to each dealer and perfection of
several directions of their activity, e.g. sales;
Programs of professional skill level improvement: carrying out special training
courses in show rooms, even training of management;
Implementation of corporate culture and culture of constant efficiency
maintenance. It is important to remember, the implementation of corporate culture
is time-consuming and that will gradually be reflected in key parameters of
efficiency.
A vivid example is the way Lexus operates its dealership network in the US, where the
company heavily invests into the optimizing of dealers’ working processes. The
employees of the company introduce the best practices and train dealers’ personnel. And
carefully evaluating each dealer the company has built a strong network from the scratch
around the brand.
9.2.3. B2B
In addition, there is one more justification of producing Camry model in Russia. The
segment of corporate sales (B2B) is currently underestimated, but there are prerequisites
for its development as more and more western companies establish there subsidiaries in
the country. Different companies with different needs possess their own car fleets:
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pharmaceutical, trading, financial, industrial companies, and also taxi stations, banks,
etc., which can buy both premium class, business class and so called budget cars. Toyota
is definitely interested in corporate sales because 1) Camry is the best model in the
business class in price-quality terms and 2) this is not only the increase in sales volume
and earnings, but also a good advertisement: the employee of the customer-company has
more opportunities to get acquainted with the model, to estimate after-sales service and
maintenance and this can the influence his decision of acquiring such a car. According to
the estimates of SOKIA Company, the share of the segment can reach 25-30% of total
sales of new cars. Moreover, corporate sales provide a stable load of mechanic and body
service centers. The current leader in the segment is Ford as it offers vehicles of all the
classes, except F-class in all the specifications. Ford is strong in B2B sales of D-class
vehicles sales. However Toyota models made in Russia can be very competitive on the
particular segment as the company will be able to offer a business car on the price of the
D-class vehicle.
9.2.4. Promotion
The main promotion instruments in Russia are advertising, product placement and
sponsorship. The way and tactics of promotion depends on different aspects including
cultural issues. Advertising on television consume most of the advertising budgets of car
producers. Sponsorship projects are among the powerful tools of advertising. Thus
Toyota is supports the Russian Olympic Committee: the company presented ATVs for all
the winners of Winter Olympic Games – Land Cruiser 100 for men and Lexus RX 430
for women. However in the section I discuss the long term promotion program that
Toyota has recently released.
The main idea of a program is to influence the potential customer from the childhood.
Nowadays the manufacturer tries to inspire the European kids, that its cars are the best in
order in 20 years the Toyota cars became native for Europeans. As stated above,
European market is very complicated for the Japanese manufacturer due to the keen
competition: Toyota’s market share of new car sales is 5% and in US it is more than 16%.
97
Moreover, the company will face even stronger competition in RF after the stabilization
of growth rates and after the country enters WTO.
The major obstacle for the growth in Europe is adherence of local consumers to
traditions; the family continuity is very strong, that is if a father had Mercedes or Volvo,
a son would prefer to buy a model of the same brand. Moreover, the demographic
situation in Europe is changing: the share of natives of Africa, Eastern Europe and
Middle East and Asia increases; for these people it is very important to follow the
existing way of life, and children imitate fathers in many respects. And that is also for
sure the case of multinational Russia. Thus Toyota developed a complicated plan to
change consumers’ perceptions.
The program contains: special lessons in kindergartens, analyzing perception of a ‘cool’
car and a ‘Japanese’ car by the kids. These kinds of surveys and researches help to draw a
‘car of future’. I consider it to be very important for the future success of the company, as
nowadays almost all the cars (within a class or segment) are technically more or less
identical and design plays a vital role. As the trend continues, it is very important to
convince kids that Toyota cars are among prestigious and fashionable cars.
The next step of the company is investing into video games. In 2004 TMC created a
concept car MTRC – Motor Triathlon Race Car which has been shown in Geneva Motor
Show. Afterward the concept car appeared in videogame Grand Turismo 4, one of the
most popular simulators for Play Station 2. In the simulator, a player can choose between
700 cars from 80 manufacturers; however MTRC was the most popular among gamers.
Thus Toyota influences children aged 7 – 14.
However, this kind of promotion has pro and cons. The major are: pro – Toyota
promotion strategy is innovative in Russia, as none of the companies carries out such a
long term strategy, which I consider to be a competitive advantage of the manufacturer;
cons - the influence of advertising on development of the child depends on its family. If a
kid from early ages was accustomed to independence, the influence of advertising would
98
also be minimal, and in the future he can estimate the goods itself, instead of being
guided by ‘family’ stereotypes. If parents are inclined to impose their decisions on a
child, he would be strongly dependent on advertising.
Moreover, advertising on TV has a great impact on children audience. According to the
research carries out by KOMCON (advertising company), 60% of kids, 38% of children
aged 7-9 years and 14% of 15 years old teenagers watch attentively commercials on TV
and do not switch channels.
9.3. After-sales Service
The number of cars registered in Moscow is estimated to be about 3 million units and the
amount is growing with a rate of nearly 500 cars per day.40 But for the after-sales service
and the maintenance of the car fleet there are only 2.5 thousand service centers (7.5
thousand in Russia). According to the European norms and standards, for every 250 cars
there should be 1 service center. Thus the demand in service centers in Moscow is more
than ten thousand that is a more than four times lack. Moreover, only 10 percent is the
official centers of OEMs and 2 percent are those specialized on particular kinds of
services such as installation of alarm devices and etc.
The direct consequence is the inability of dealer to provide in-time after-sale service for
the customers. The owners of Toyota cars have face the most complicated terms. The
main reason for this is that Toyota Motor, having been increasing sales, paid a little
attention to the increase of number and the development of service centers. At present,
there are only 7 after-sales service centers in Moscow with a total number of 169 car
lifters; the average waiting period for usual technical checkup is one week and for the
body maintenance – 3 months. Thus only 7 centers have to service about 70,000 Toyota
cars registered in Moscow. Thus, to satisfy even the smallest part of the demand, the
centers work on a twenty-four hour basis. The main competitors of the company have
more service centers that have to service fewer amounts of cars (appendix 21). 40 Abarus Market Research
99
Moreover, the cost of maintenance is much higher than those of Toyota’s main
competitors and is comparable to the maintenance of German cars. E.g. the working hour
in Toyota centers is twice as expensive as that of Korean OEMs.
To my point of view, the strategic dimension of the development of after-sales service
enters is still underestimated by Toyota. In future, even in few years, when the market
will show the first signs of saturation, and when the amount of the cars sold will double
or triple, the company will face the serious problems with the maintenance and the time
will be lost. Moreover, the after-sales centers can bring a significant amount of revenues;
and that is the way that business is done in Western countries, where the dealers earn
mainly from the guarantee maintenance and after-sales service.
Thus, I consider that the company has to invest heavily into this dimension. In Moscow
there is a shortage of land for the building of centers. And if the cost of all the
maintenance equipment is about $300 thousand, the price of land rent is about $2 million
(the land of several hectares including facilities, parking and etc.). The requirements and
the costs of new service center are the following: area – 1,500 – 2,000 m2; diagnostic
equipment – from $1,000; 4-5 car lifters – from $3,000 for the unit; suspension diagnostic
equipment – $3,000-5,000; painting chamber – from $40 thousand plus of 30 % for its
installation, and the laboratory for selection of enamels - from $8-10 thousand.
.
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Chapter 10: Sustainable Competitive Advantage
In the chapter I identify Toyota’s sustainable advantage worldwide: I look at importance
and relative strength of company’s resources and capabilities determining competitive
advantages, and expend on them. Also, I discuss strengths and weaknesses of TMMR.
10.1. Identifying and Appraising Toyota’s Resources and Capabilities
In order to identify sustainable competitive advantage, I will start determining key
resources and capabilities of the company. The first step here is to draw up key success
factors in the world automobile industry, factors that are essential to prosper on the
market (in the industry); that are the external side, in other words demand side. These
factors explain the worldwide leadership of Toyota in the automotive industry. So, I
relate the following factors:
Low-cost production;
Attractively designed new models embodying the latest technologies;
Financial strength to keep on with the cyclicality and heavy investment
requirements of the industry.
These key success factors imply the following resources and capabilities: manufacturing
capabilities, new product development capability, effective supply chain management,
global distribution, band strength, scale-efficient plants with up-to-date capital
equipment, financial stability and etc. To organize these various resources and
capabilities I turn to the internal side (supply side) and look at the company’s value chain,
identify capabilities of each stage of value chain form new product development to
purchasing, to supply chain management, component manufacture, assembly, dealership
support and after-sales service, and identify resource on which these capabilities are
based.
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The second step is to appraise these resources and capabilities within two issues: 1)
importance – which resources and capabilities are most important in conferring
sustainable competitive advantage; 2) to compare strengths and weaknesses with
competitors. Concerning the first issue, in the automotive industry many resources and
capabilities are essential in competing on the market, but several of them are not scarce.
E.g. total quality management capability and technologically advanced assembly plants
have become widely diffused within the industry. Moreover, others, such as IT capability
and design capability, are outsourced (not in the case of Toyota as it has its own Tokyo
Design Center). Thus they are necessary to do business but not enough to be a leader in
the industry. On the other hand, resources such as brand strength and global distribution
network, and capabilities such as fast-cycle new product development and global logistics
capability, cannot be easily obtained or internally developed. Thus they are critical in
creating and sustaining advantage.
Next I assess relative strengths and weaknesses of resources and capabilities of the
company comparing with other auto companies. Companies use benchmarking as a
method of the improvement of their capabilities in performing a particular activity, which
means they transfer best practices from companies that are considered to be the leaders in
that particular activity.
Consequently, putting together importance and relative strength, I can determine key
strengths and key weaknesses. I present results in table 10.1 and figure 10.1, where I
generally identify Toyota’s resources and capabilities and estimate them in relation to the
importance and relative strength. The diagram, drawn on the results, shows key strengths
and weaknesses of the company. My estimation suggests that Toyota is strong in all the
related issues and is the leader in a number of them. As for the weaknesses, they arise
mainly from the fact that Toyota isn’t comparatively strong only in Europe, where it has
only 3 plants and sales are not high – in 2005 Toyota sold about a million vehicles and
e.g. Fiat sold 1.8 mill; however Europe is the strategic market for the company where it
102
competes to be at the top 6 biggest automakers in European market, where Fiat is the
6th41.
Table 10.1: Apprising Toyota’s resources and capabilities
Import
ance42
Toyota’s
Relative
Strength43
Comments
R1. Finance 6 8
If we look at financial statements such as
debt/equity ratio and compare that with
those of other major auto companies
we’ll see that Toyota performs at the
level of Japanese manufacturers and is
much better then European and
American companies44
R2.
Technology 8 9
Toyota is a leader in automotive
technologies
R3. Plant and
Equipment 8 9
Toyota has in disposal modern plants
and always invests in upgrading old ones
Res
ourc
es
R4. Location
(proximity to
key markets
and low-cost
inputs)
7 7
Relatively high costs of European
factories; wide presence in Asian and
American markets
41 Vedomosti #44 (1326), 15.03.2005 42 Range from 1 to 10 where 1 = very low, 10 = very high. 43 Toyota’s capabilities are compared against those of Nissan Motor, Honda Motor, Ford, GM, Renault, PSA, Fiat, Daimler-Chrysler, VW, where 5 represents parity. 44 Debt/equity ratio: Toyota – 1.03; Honda Motor – 0.83; Nissan Motor – 1.65; VW – 1.31; Daimler-Chrysler – 2.17; Ford – 11.01, Renault – 0.97 (source: Bloomberg).
103
R5.
Distribution
(dealership
network)
9 6 Dealership network is as extensive as
that of Ford, Nissan, Renault and GM
C1. Product
Development 7 8
Fast-cycle product development is one of
the most Toyota’s distinctive capabilities
C2.
Purchasing
(supply chain
management)
10 10 The key factor of success in the activity
is its close relations with suppliers
C3.
Manufacturing 10 10
Toyota Production System is the main
competitive advantage of the company
C4. HR 10 10
Unique human resource management
that stimulates employee creativity and
loyalty.
C5.
Engineering 7 9 The core technical strength of Toyota
C6. Financial
Management 8 9
Toyota earned $10.9 billion more than
GM, Ford, and DaimlerChrysler
combined45; Toyota Financial Services
Corporation was established to oversee
Toyota's finance companies worldwide.
Cap
abili
ties
C7. R&D 7 9
A competitive strength of Toyota, but
becoming less important as technology
shifts increasingly to suppliers, though
remains technological and design leader
45 The FORTUNE Global 500
104
C8. Marketing
and Sales 10 10
Toyota ranks the second in the Fortune
survey concerning meeting customer
needs; Toyota is among the most
recognized brands in the world
C9.
Government
Relations
8 9
Important in doing business in emerging
markets; also the case of Russia where
authorities still influence business in
large scale
Figure 10.1: Apprising Toyota’s resources and capabilities
Apprising Toyota's Resources and Cpabilities
02468
10R1.
R2.
R3.
R4.
R5.
C1.
C2. C3.
C4
C5.
C6.
C7.
C8.
C9.
Importance Relative strength
105
10.2. Competitive Advantages
10.2.1. TPS
Thus I consider that all the general resources and capabilities are Toyota’s strengths.
Those that are ranked (considering both criteria) at the very top of my estimation,
particularly manufacturing and purchasing and HR management I consider to be
company’s competitive advantages.
Japanese automakers Nissan and Honda are building high quality cars; however, they are
unable to overcome Toyota’s advantages. This is the result of Toyota Production System
(also known as lean production) and The Toyota Way. TPS is a system of highly efficient
production (C3), network of suppliers and manufacturers of components (C2), which also
involves a unique human resource management (C4) that provides tools for people to
continuously improve their work. The system has been developed since mid 40s, when all
the Japanese companies were in lack of human, natural and capital resources. The system
principles are to some extent similar to the system that Henry Ford developed (in
literature H. Ford is considered to the pioneer of lean production). However, TPS proved
to be much more consumer-friendly and market driven as it is a result of lean production
advantages and the culture behind TPS, i.e. the Toyota Way. In case of TPS it is people
who bring this system of lean production to life.
So TPS (I assume The Toyota to be the essential part of TPS) is based on fourteen
principles of continuous perfection organized in four groups46:
Long-Term Philosophy
1. Base your management decisions on a long-term philosophy, even at the expense
of short-term financial goals;
46 J.K.Liker (2005), The Toyota Way: 14 Management Principles From The World's Greatest Manufacturer, McGraw-Hill
106
The right Process Will Produce the Right Result
2. Create continuous process flow to bring problems to the surface;
3. Use the "Pull" system to avoid overproduction;
4. Level out the workload, (Work like the tortoise, not like the hare);
5. Build a culture of stopping to fix problems, to get quality right the first time;
6. Standardize tasks and processes are the foundation for continuous improvement
and employee empowerment;
7. Use visual control so no problems are hidden;
8. Use only reliable, thoroughly tested technology that servers your people and
processes;
Add Value to the Organization by Developing Your People
9. Grow leaders who thoroughly understand the work, live the philosophy, and teach
it to others;
10. Develop exceptional people and teams who follow your company's philosophy;
11. Respect your extended network of partners and suppliers by challenging them and
helping them improve;
Continuously Solving Root Problems Drives Organizational Learning
12. Go and see for yourself to thoroughly understand the situation;
13. Make decisions slowly by consensus, thoroughly consider all options; implement
decisions rapidly;
14. Become a learning organization through relentless reflection and continuous
improvement.
Consistency, perhaps, is the most reliable parameter of success of the company from the
extremely competitive automobile industry and very few of its players were so
consistently successful, as Toyota. In 2003 the company, not involving merges and
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acquisitions, has overtaken Ford and was ranked the second in sales of cars in the world.
In 2007 it can leave behind General Motors. These results correspond to philosophy of
the continuous perfection, 14 principles of which are named. Toyota has successfully
introduced them also at the enterprises in Northern America, Europe and other regions,
different in the geographical and cultural sense. Moreover, long-term success created in
partnership with GM JV New United Motors Manufacturing Inc. shows, that Toyota Way
can be applied not only at new, but also at the existing enterprises. Toyota always
succeeded just because it relied on these 14 principles.
10.2.2. Supply chain Management
Engineering and component manufacturing account for about 85% of the direct cost of
the vehicle manufacturing process. Here outsourcing plays an important role as the
companies externalize many of their direct cost using specialized suppliers, both
domestic and foreign. E.g. GM produces most of the components itself, Daimler-Chrysler
outsourced most of them, VW uses low-cost countries such as Mexico to manufacture
50% of its components, Toyota concentrates on vehicle design (TDG), assembly and
manufacturing of certain components such as the engines; the rest is sub-contracted.
But in Japan the supply chain relationships are base on a complex system of co-operation
and equity interests. The key factor here is culture. And Toyota succeeded to transfer
Japanese model of supply management and cooperation to its worldwide operations. E.g.
in the US Toyota sustains this competitive advantage in the way that it schedules and
coordinates the activities of its network of 300 component suppliers.
The company has built a sub-contracting pyramid. The most important suppliers are at
the top and the others are below. The companies at the bottom of pyramid supply
companies, higher in the pyramid; the latter assemble received components and supply to
the next level companies. The top sub-contractors are relatively large firms (such as
Denso). If there are problems with quality or a drop in productions, Toyota sends its staff
to work at the first level of sub-contractors. They in turn do the same, sending staff to
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work for sub-contractors of the second order.47 E.g. in the US there is a department in
Toyota that is responsible only for the technical support of its suppliers. That is the way
the company cultivating constant cooperation and trust. Thus, the components suppliers
always consider Toyota to be on e of the best business partners.
10.2.3. Manufacturing and HR Management
The key factors of Toyota’s success in its manufacturing processes are the following:
Network of suppliers (discussed in the previous paragraph);
Just-in-time (JIT) system – an effective and efficient inventory system that is
highly dependent upon the coordination of supplier network. JIT supposes having
components to hand at the required quantity only at the time when they are
needed. JIT not only improves internal logistics, but also saves time of managing
warehouse, the time that can be used in the areas that need improvement. As the
system is dependent on network of suppliers, the company doesn’t want to break
its production process and improves relations with its suppliers; the success of
counterparts is interdependent. Moreover, as trust plays a vital role in Toyota’s
relations with suppliers - peculiarity of Asian culture - JIT system is much more
effective in Toyota than e.g. in European automakers.
Robotic technologies in assembly plants. Since 2000, Toyota’s Tahara, Japan, car
plant has been receiving the Platinum Plant Quality Award for worldwide plant
quality. The Tahara plant produces the Lexus GS 300/GS 430 and the Lexus LS
430. Toyota’s Higashi-Fuji plant in Japan - the Silver and Bronze Plant Quality
awards, respectively, among Asia Pacific plants.
The Toyota’s advantage in HR management system is a result of TPS, as employees are
stimulated for loyalty, creativity. The company developed a system of internal promotion,
47 Thomas Gounet (1998), The Toyota way of increasing exploitation in the car industry. Workers’ Party of Belgium - http://www.wpb.be/icm/98en/98en11.htm
109
which makes possible for workers can rise to a team leader or even manager; a worker
doesn’t belong to a working class, but to a Toyota empire and his success is highly
interrelated with the company’s well performance. Toyota implemented this system not
only in its plants, but also in supplier plants that were experiencing problems. Moreover
TMC transfers this advantage to its foreign production locations through TPS.
The effectiveness of the system is proved by the measures of productivity for lean versus
non-lean automotive companies (table 10.2), which show that Japanese companies are
almost two times more effective in terms of productivity (even though the data is
relatively old, the tendency is clear). Moreover, Toyota’s results are most stable in the
year-to-year basis, which also, to my opinion, proves that HR management system is the
company’s sustainable competitive advantage.
Table 10.2: Output of lean and non-lean automobile manufacturers in 1996 - 1999(units per employee)
Non- Lean Companies Lean Companies
Year GM Ford Renault VW Toyota Nissan Honda
1999 13.61 9.6 12.42 25.71 23.59 17.3 19.49
1998 9.05 9.7 14.05 15.33 20.73 17.89 14.67
1997 9.15 10.33 10.81 9.99 24.59 16.07 21.02
1996 8.51 10.38 10.85 10.63 24.53 20.22 13.67
Source: M.R.Vaghefi, 2001
One more data on productivity – sales per employee - confirms that Toyota has provided
an environment for their workers, which enables employees to be more productive (table
10.3). Moreover, Vaghefy (2001) estimated the relationship between percentage change
in number of employees (human assets) and percentage change in sales for the major
automobile companies. According to the estimation for Toyota shows that increase of
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human assets by 1% is associated with 0.35% change in sales. The results for other
companies are: Nissan – 0.32%, Honda – 0.24%, GM – 0.09%, Ford – 0.07%.
Table 10.3: Sales per Employee (in thousand US$)
Toyota Nissan Mazda Honda Ford GM Daimler-
Chrysler Renault VW
639 505 693 595 590 574 391 326 276
Source: own estimation based on data from www.corporateinformation.com.
According to the Mckinsey estimates, the coefficient of production facilities utilization is
95 – 98% comparing to the automotive industry level of 75 – 85% and labor efficiency in
Toyota is 90 -95% comparing to industry level of 70 – 80%.
In addition, in Japan Toyota considerably cuts costs through HR policy: 1) wages in
Toyota are 20% - 50% higher than in supplier companies; 2) working hours in Toyota are
longer: 2300 hours annually against 2800 in sub-contractors; 3) typically small and
medium-sized firms in Japan have no labor unions that makes Toyota dictate its terms.48
Summarizing, TMC has worldwide competitive advantages in the areas of production,
supply chain management, and human resource management. Thus the success of its
Russian production subsidiary will depend on the successful implementation of the
principles.
48 Thomas Gounet (1998), The Toyota way of increasing exploitation in the car industry. Workers’ Party of Belgium - http://www.wpb.be/icm/98en/98en11.htm
111
Conclusions
The last chapter summarizes the most important findings of the TMC expansion of
business activities in RF analysis.
TMC is the World’s second largest carmaker in terms of sales. The company is the first
which entered the Russian market. In late 90s a sales representative was established and
in 2007 Toyota will start assembling operations in the plant that is being constructing in
the St Petersburg District. The initial investments are estimated to be about $150 mln.
To investigate the way TMC expands international operations in RF and how the
company will benefit from the establishment production facilities in the country, I:
1. Look at the automotive industries in BRIC countries: define particular
characteristics of these industries; observe development paths of industry by using
Dunning’s IDP model; and classified the countries according to the model
developed by Nagel et al. My conclusion is that RF follows the experience of
China and India; that is the “growing market model”.
2. Having observed the rapid growth of Russian car market and having determined
the model of development of the respective industry, conclude that TMC pursues
market seeking strategy through establishment of production facilities in RF.
3. Analyze the Russian car market and TMC positions in different segments of the
market; more precisely I look into E-class segment as Toyota will produce Camry
model in RF. The business class model Camry will be produced with an output of
50,000 vehicles a year. Such a risky strategy is explained by the major aim of
Toyota to strengthen its market positions in Europe, the only region where it is not
the leader. The other reasons are the following: Camry is the most popular E-class
model in RF; with the Russian production of the model the company will produce
the range of all models within the Europe. The risks are related to the fact that in
112
Russia a buyer of a business model is sensitive to country of its production; and
Camry is not a mass model like Renault Logan the only advantage of which is
price; thus the reduction of costs is not the main driver of a decision to
manufacture business car.
4. Investigate the variables influencing the location of production facilities within
the market seeking strategy:
Large and growing domestic market and neighboring markets of several
countries of CIS, namely Kazakhstan and Ukraine;
Macroeconomic policy pursued by the Russian government: the
government support foreign OEMs as by providing automotive investors
with a status of “industrial assembly”, which supposes considerable tax
and customs benefits. Currently only very few companies involved in the
industry have received the status. Thus it is an important location
advantage of TMC.
The quality of local infrastructure: the establishment of SEZ will improve
the development of local infrastructure; in particular, at present the most
essential is the problem of port facilities that causes difficulties in
respective value chain activity of OOO Toyota Motor.
Presence and competitiveness of related firms: the dilemma for the
company is either to use local suppliers at a large scale or to attract
investments from its traditional suppliers. However, due to the
requirements of the regime of “industrial assembly” and despite the fact
that TMC will attract its traditional component suppliers to the Russian
market, the company may face the problem of the production localization.
Thus I offer a solution in the form of a alliance/partnership with the
biggest Russian component manufacturer SOK Group, which has an
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experience with doing business with foreign companies and which heavily
invests in the equipment and machinery improving the quality of products
5. By means of RBV model, analyze company’s resources and capabilities in order
to define competitive advantages of the firm: TMC has worldwide competitive
advantages in the areas of production, supply chain management, and human
resource management. Thus the success of its Russian production subsidiary will
depend on the successful implementation of the principles.
6. Appraise the value chain of the company; the major concern for the company is
after sales service network that is poorly developed and doesn’t meet the demands
of customers and the situation can badly impact the growth of the company. An
innovative promotion strategy recently developed by Toyota is for sure its
competitive advantage as the company concerns not only a short term strategy
connected to a rapid growth of the market, but also a long term.
Finally, I found the most recent data on the Russian automobile market: the import of
new foreign cars after half of a year reached the level of 400,000 vehicles that is 55%
increase from 2005; the production of cars increased on 10% and the share of foreign cars
produced in the country reached 27%.49 The sources of such a rapid growth are in real
estate market. According to the data of an analytical research group IRN.RU, the prices
on the real estate in Moscow increased by about 30%. The real estate rises in prices much
more quickly, than cars; and when people understand that in the nearest years it will not
be possible to buy an apartment, they decide to improve quality of a life, even having
bought themselves the good car. Moreover, according to the State statistical department
ROSSTAT, for first five months real disposable incomes of the population have grown in
comparison with the corresponding period of the last year by 10,5 %. The share of
population that can afford consumer durable have grown from 8 up to 13% and the share
49 ASM-Holding
114
of relatively wealthy people remained unchanged – 1%.50 That means that the middle
class is growing and the consumption of cars will follow the trend. Thus the foreign
manufacturers will definitely establish production facilities in the country and the
competition will increase. Toyota has already made a preemptive strike for the future
struggle in the market.
50 http://www.wciom.ru/?pt=47&article=3080 (WCIOM – All-Russian Public Opinion Research Center)
115
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33. www.vedomosti.ru – Russian Daily Business Newspaper (issued in association
with Wall Street Journal and Financial Times).
34. www.wciom.ru – WCIOM – All-Russian Public Opinion Research Center
35. www.welovetoyotas.com - internet source for ‘what's new from Toyota’
36. www.zr.ru – Za Rulem - Russian journal on automotive industry and market
126
Appendices
Appendix 1: TMC: Sales Analysis
Year Sales Cost of
Goods Sold EBITDA
After Tax Income before Extraordinary Charges and Credits
Employees
Amount
in millions
Year-to-year
Growth
Amountin
millions% ofSales
Amountin
millions% ofSales
Amount in
millions % of Sales Number
Sales Per
Employee
After Tax Income
Per Employee
1997 106,399 14.2% 81,378 76.5% 11,845 11.1% 3,354 3.2% 150,736 705,863 22,248
1998 101,485 -4.6% 74,247 73.2% 13,135 12.9% 3,948 3.9% 159,035 638,132 24,827
1999 110,789 9.2% 79,364 71.6% 13,232 11.9% 3,095 2.8% 183,879 602,510 16,833
2000 111,923 1.0% 80,238 71.7% 13,490 12.1% 3,535 3.2% 210,709 531,175 16,777
2001 116,658 4.2% 84,698 72.6% 14,375 12.3% 4,096 3.5% 215,648 540,966 18,992
2002 131,274 12.5% 93,899 71.5% 16,938 12.9% 5,352 4.1% 246,702 532,115 21,692
2003 139,512 6.3% 99,179 71.1% 21,990 15.8% 8,209 5.9% 264,096 528,262 31,084
2004 150,291 7.7% 110,454 73.5% 23,953 15.9% 10,099 6.7% 264,410 568,403 38,193
2005 161,213 7.3% 119,979 74.4% 24,083 14.9% 10,178 6.3% 265,753 606,626 38,300
2006 182,811 13.4% 136,726 74.8% 28,852 15.8% 11,924 6.5% 285,977 639,250 41,697
Source: www.corporateinformation.com
127
Appendix 2: Sales Comparison
Company Sales
(trlns)
Sales
Growth
Sales/
Emp
(US$)
Largest Region
Toyota Motor 21.037 13.4% 639,250 Japan (36.8%)
Nissan Motor Co Ltd 9.428 9.9% 505,443 North America (43.5%)
Mazda Motor
Corporation 2.920 8.3% 692,766 Japan (41.6%)
Honda Motor Co., Ltd 9.908 14.5% 594,678 North America (55.3%)
Source: www.corporateinformation.com
128
Appendix 3: Sales per Employee
Toyota Nissan Mazda Honda Ford GM Daimler-Chrysler Renault VW
639 505 693 595 590 574 391 326 276
Sales per Employee (in thousand US$)
0
100
200
300
400
500
600
700
800
Toyota
Nissan
Mazda
Honda
Ford GM
Daimler
-Chry
sler
Renau
ltVW
Company
Sale
s/Em
p
129
Appendix 4: TMC Worldwide Operations
130
Name Start of Operations
TMC Related Equity
Products Number of Employees
2005 vehicle production (1=1000
units)
Argentina Toyota Argentina S.A. (TASA) Mar. 1997 TMC 100% Hilux, Fortuner (SW4) 2,523 46.2
Australia Toyota Motor Corporation Australia Ltd. (TMCA)
Mar. 1959 TMC 100% Camry, engines 4,518 109.2 87.3*5
Bangladesh Aftab Automobiles Ltd. June 1982 TMC 0% Land Cruiser Prado, Hino bus*3 110 0.1
Brazil Toyota do Brasil Ltda. May 1959 TMC 100% Corolla, Fielder 2,525 57.8
Canadian Autoparts Toyota Inc. (CAPTIN) Feb. 1985 TMC 100% Aluminum wheels 242 –
Canada
Toyota Motor Manufacturing Canada Inc. (TMMC)
Nov. 1988 TMC 100% Corolla, Matrix, RX330, engines 4,518 306.0
217.8*5
FAW Toyota (Changchun) Engine Co., Ltd. (FTCE)
Dec. 2004 TMC 50% Engines 250 –
Guangqi Toyota Engine Co., Ltd. (GTE) Jan. 2005 TMC 57.6%
TMCI 12.4%Engines, engine parts (cam shafts, crank shafts) 50 –
China
Guangzhou Toyota May 2006 TMC 30.5% Camry 1,400 –
131
Motor Co., Ltd. (GTMC) TMCI 19.5%
Sichuan FAW Toyota Motor Co., Ltd. (SFTM) Dec. 2000 TMC 45%
TTC 5% Coaster, Land Cruiser Prado, Prius 1,800 13.4
Tianjin in FAW Toyota Engine Co., Ltd. (TFTE) July 1998 TMC 50% Engines 800 133.8*5
Tianjin Toyota Press Co., Ltd. May 2002 TMC 50% Stamping parts 260 –
Tianjin Toyota Resin Co., Ltd. Mar. 2002 TMC 50% Plastic parts 190 –
Tianjin Fengjin Auto Parts Co., Ltd. (TFAP) May 1998 TMC 90% Continuous velocity
joints, axles 350 –
Tianjin Toyota Forging Co., Ltd. (TTFC) Dec. 1998 TMC 100% Forging parts 100 –
Tianjin FAW Toyota Motor Co., Ltd. (TFTM) Oct. 2002 TMC 40%
TMCI 10% Corolla, Vios, Crown, Reiz 2,310 131.1
Tianjin Jinfeng Auto Parts Co., Ltd. (TJAC)
July 1997*6 TMC 30% Steering assy, propeller
shafts 410 –
Toyota FAW (Tianjin) Dies Co., Ltd. (TFTD) Dec. 2004 TMC 90% Stamping dies for
vehicles 160 –
Colombia Sociedad de Fabricacion de Automotores S.A. Mar. 1992 TMC 28% Land Cruiser Prado 1,316 12.6
Czech Republic
Toyota Peugeot Citroën Automobile Czech s.r.o. (TPCA)
Feb. 2005 TMC 50% Peugeot Citroën
Aygo 3,345 34.6*7
132
Automobile S.A. 50%
France Toyota Motor Manufacturing France S.A.S. (TMMF)
Jan. 2001 TME 100% Yaris, engines 3,829 180.6 191.6*5
Toyota Kirloskar Motor Private Ltd.(TKM) Dec. 1999 TMC 89% Innova, Corolla 2,567 44.5
India
Toyota Kirloskar Auto Parts Private Ltd.(TKAP) July 2002 TMC 64%
TICO 26% Axles, propeller shafts, transmissions 742 –
Indonesia PT. Toyota Motor Manufacturing Indonesia May 1970 TMC 95% Kijang Innova, Kijang
P/U, engines 3,949 113.2 232.8*5
Kenya Associated Vehicle Assemblers Ltd. Aug. 1977 TMC 0% Land Cruiser 360 1.7
Malaysia Assembly Services Sdn. Bhd (ASSB) Feb. 1968 UMW
Toyota 100%
Camry, Corolla, Vios, Hiace, engines, Hilux, Innova, Fortuner
3,232 54.5 10.5*8
Mexico
Toyota Motor Manufacturing de Baja California S .de R.L.de C.V. (TMMBC)
Sep. 2004 TABC Holding 99%TMMNA 1%
Truck beds, Tacoma 794 23.7
Pakistan Indus Motor Company Ltd. Mar. 1993 TMC 12.5%
TTC 12.5% Corolla, Hilux, Cuore*2 1,651 28.5
Philippines Toyota Autoparts Philippines Inc. (TAP) Sep. 1992 TMC 95% Transmissions, CVJ 578 220.7*4
133
Toyota Motor Philippines Corp. (TMP) Feb. 1989 TMC 34% Camry, Corolla, Innova 1,289 17.8
Toyota Motor Manufacturing Poland SP.zo.o. (TMMP)
Apr. 2002 TME 94.3% Transmissions, engines 1,982 331.4*4 101.5*5
Poland
Toyota Motor Industries Poland SP.zo.o. (TMIP) Mar. 2005
TME 60% Toyota Industries 40%
Engines 932 45.0*5
Portugal Salvador Caetano I.M.V.T., S.A. Aug. 1968 TMC 27% Dyna, Hiace, Optimo 950 3.9
Russia Toyota Motor Manufacturing Russia LLC. (TMMR)
2007 planned
TMC 80% EBRD 20% Camry 500 –
South Africa Toyota South Africa Motors (Pty) Ltd. June 1962 TMC 75.0% Corolla, Dyna, Hiace,
Hilux, engines, Fortuner 8,690 123.8 96.1*5
Taiwan Kuozui Motors, Ltd. Jan. 1986 TMC 51.7% Camry, Corolla, Hiace, Vios, Zace, Wish, Dyna, engines, stamping parts
2,486 139.7
Siam Toyota Manufacturing Co., Ltd. July 1989 TMC 96% Engines, propeller shafts,
casting (block, head) 1,219 403.8*5
Toyota Auto Body Thailand Co., Ltd. May 1979 TMT 49% Stamping parts 141 –
Thailand
Toyota Motor Thailand Co., Ltd. (TMT) Dec. 1964 TMC 86.4% Camry, Corolla, Vios,
Wish, Hilux VIGO, Yaris 6,172 366.9
134
Thai Auto Work Co., Ltd. (TAW) May 1988
TABJ 20.0%TABT 60.0%
Fortuner, Hilux, VIGO 477 49.4
Turkey Toyota Motor Manufacturing Turkey Inc. (TMMT)
Sep. 1994 TME 90% Mitsui 10% Corolla 3,421 158.6
U.K. Toyota Motor Manufacturing (UK) Ltd. (TMUK)
Sep. 1992 TME 100% Avensis, Corolla, engines 4,897 264.3 174.7*5
Bodine Aluminum, Inc Jan. 1993 TMMNA 100% Aluminum castings 980 –
New United Motor Manufacturing, Inc. (NUMMI)
Dec. 1984 TMC 50% GM 50%
Corolla, Tacoma Vibe(GM) 5,402 355.1*1
TABC, Inc. Nov. 1971 TABC Holding 100%
Catalytic converters, stamping parts, steering columns, truck-deck
662 –
Toyota Motor Manufacturing, Alabama, Inc. (TMMAL)
Apr. 2003 TMMNA 100% Engines 480 168.8*5
Toyota Motor Manufacturing, Kentucky, Inc. (TMMK)
May 1988 TMMNA 100%
Avalon, Camry, Solara, engines 6,820 509.1
444.2*5
U.S.A.
Toyota Motor Manufacturing, Indiana, Inc. (TMMI)
Feb. 1999 TMMNA 100% Tundra, Sequoia, Sienna 4,634 364.9
135
Toyota Motor Manufacturing, Texas, Inc. (TMMTX)
2006 planned
TMMNA 100% Tundra 447 –
Toyota Motor Manufacturing, West Virginia, Inc. (TMMWV)
Nov. 1998 TMMNA 100% Engines, transmissions 926 464.4*5
394.5*4
Venezuela Toyota de Venezuela Compania Anonima (TDV)
Nov. 1981 TMC 90% Corolla, Dyna, Land Cruiser, Terios*2, Hilux 1,708 16.5
Vietnam Toyota Motor Vietnam Co., Ltd. Aug. 1996 TMC 70%
Camry, Corolla, Vios, Hiace, Land Cruiser, Innova
712 13.3
Source: TMC
Notes: Data of 2005 vehicle production and Number of employees are as of December 2005. Figures in the "2005 vehicle production" column refer to the number of Toyota-and Lexus-brand vehicles produced on a line-off base in 2005.
Abbreviations:
TMC = Toyota Motor Corp., TMMNA = Toyota Motor Manufacturing North
America,Inc.,
TMEM = Toyota Motor Engineering & Manufacturing Europe.
TICO = Toyota Industries Corp., *1 The 2005 vehicle production figures for NUMMI do not include those of the GM Vibe (62,000units). *2 Daihatsu brand. The figures does not include this model *3 Hino brand. The figures for Hino vehicles are not included *4 Transmission production *5 Engine production
*6 Start of Toyota's equity participation *7 The 2005 vehicle production figures for TPCA do not include those of the PSA-brand *8 Engine Assembly.
136
Appendix 5: TMC Design and R&D
Source: TMC
TMC possesses R&D and design (body and major components) facilities in North
America, Europe, Australia, Asia and Japan. R&D bases in North America, Europe,
Australia and Asia function, taking platforms and base models developed in Japan and
modifying the specifications and body to reflect the tastes of each market.
137
Appendix 6: Sales of New Foreign Cars in RF
Source: Autoreview *includes production in Russia except for GM-AvtoVAZ
138
Appendix 7: New Car import by Country 2003 - 2005
Source: E&Y
Appendix 8: Passenger Car Compared
*-includes production by foreign legal entities, joint ventures, and production by Russian entities with foreign assembly licenses
Source: E&Y
139
Appendix 9: Car consumption per Price Segment
Average Price per Car
Source: E&Y
140
Appendix 10: Map of Vehicle Manufacturing Locations in RF
141
Appendix 11: Bestsellers in Russia as of 2005 in Different Classes (in units)
C D E
Mitsubishi Lancer 39195 Hyundai Sonata 10890 Toyota Camry 12860
Daewoo Nexia 35175 Nissan Primera 9130 Audi A6 2357
Ford Focus 35088 Toyota Avensis 8612 Nissan Maxima QX 1996
Toyota Corolla 22442 Mazda 6 8455 Kia Magentis 1941
Ford Mondeo 6173 BMW 5-series 1791
F SUV ATV
Mercedes S-class 985 Nissan X-trail 7420 Toyota Land Cruiser 5314
Audi A8 829 Toyota Rav4 6335 Toyota Land Cruiser Prado 4449
BMW 5-series 823 Hyundai Tucson 5720 VW Touareg 3565
Lexus LS430 319 Mitsubishi Outlander 4126 Nissan Pathfinder 1839
VW Phaeton 79 Honda CRV 3319 Land Rover Discovery 1615
Source: Companies’ Own Data, Autoreview
142
Appendix 12: Average Car Park Age
more than 10 years50%
lessthan 10 years20%
5-10 years30%
Source: Renaissance Capital
Appendix 13: Car Sales in Russia, Forecast
Source: Renaissance Capital
143
Appendix 14: Car Park in Russia
Source: Renaissance Capital
144
Appendix 15: Customs Duties by Country
0
5000
10000
15000
20000
25000
30000
35000
40000
EU
Russia
South
Africa
China
Mexico India
Brazil
Vietnam
Total wholesale price includes all customs payments, excise and offsetable VAT. For the example: new vehicle with CIF value of $10000; 1,600 cc gasoline engine; the country of origin Japan;
Commodity Classification Code selected - 8703 23.
Ряд1
Source: E&Y
145
Appendix 16: Car Production in RF
2005 2004 2003 2005/2004 Change
in %
2004/2003 Change in
%
AvtoVAZ Togliatti 721,492 717,985 699,889 0.5 2.6
GM-AvtoVAZ Togliatti 51,819 57,737 21,839 -10.3 164.4
GAZ Nizhny Novgorod 51,686 65,686 56,783 -21.3 15.7
IZH-Avto Izhevsk 45,621 82,687 78,497 -44.8 5.3
TagAZ Taganrog 42,451 30,000 5,896 41.5 408.8
Ford Motor Co. Vsevolzhsk 33,038 29,703 16,261 11.2 82.7
KamAZ-ZMA
Naberezhny Chelny 30,280 41,207 40,016 -26.5 3.0
UAZ Ulyanovsk 29,141 31,136 32,748 -6.4 -4.9
Avtotor Kaliningrad 16,303 14,525 8,415 12.2 72.6
Avtoframos Moscow 10,246 517 n/a 1,881.8 n/a
Others 36,045 39,292 49,684 -8.3 -20.9
TOTAL 1,068,145 1,110,475 1,010,028 -3.8 9.9
Data source: ASM – Holding,Autoreview, Companies’ own data
146
Appendix 17: OEMs' Manufacturing Involvement in Emerging
Markets
Brazil China India Mexico Poland Russia Thailand Ukraine
BMW • • • • • • • DaimlerChrysler
Chrysler • • • • • Mercedes • • • • • Mitsubishi • • • •
Fiat Group Fiat • • • o •
IVECO • • • • • Ford Group
Ford • • • • • • • Mazda • • • Volvo • • • • • • •
GM Group Chevrolet • • • • • • • •
ISUZU • • o • • Opel • • • •
Subaru • Suzuki • • • • •
Honda Group Honda • • • • •
Hyundai Group Hyundai • • • •
Kia • • • • PSA Group
Citro ёn • • Peugeot • • •
Renault-Nissan Nissan • • • • •
Renault • • • • Toyota Group
Toyota • • • • • o • VAG
Audi • • • • • Skoda • o • VW • • • • • o • •
Source: E&Y O – confirmed plan/announcement
147
Appendix 18: Automotive Component Manufacturers'
Involvement in Emerging Markets
Brazil China India Mexico Poland Russia Ukraine
AisinSeiki • • • • Arvin Meritor • • • • • Borg Warner • • • • • Bosch • • • • • • • Cooper Tire • • • • • Cummins • • • • • • Delphi • • • • • • Dura • • • • Eaton • • • • • • Eberspächer • • • Faurecia • • • • • • Federal Mogul • • • • • • Freudenberg • • • • • • GKN • • • • • • Hayes Lemmerz • • • • Hella • • • • • • • Johnson Controls • • • • •
Johnson Matthey • • • • •
KnorrBremse • • • • • Lear • • • • • • Magna • • • • * Magneti Marelli • • • • • Pilkington • • • • • Siemens VDO • • • • • Tenneco • • • • • • • Thyssen Krupp • • • • O • Tower • • • • • • TRW • • • • • • Valeo • • • • • • Visteon • • • • • Yazaki • • • • ZF Friedrichshafen • • • • •
Source: Companies' Own Data, E&Y O – Technical assistance * - Confirmed plan
148
Appendix 19: The Largest Importers of Cars in 2005
Importer Cars Volume ($ mln)
ООО “Toyota Motor” Toyota 1 124,0
Private import - 859,96
ООО “Nissan Motor Rus” Nissan 633,9
ZАО “Ford Motor Co” Ford 627,0
ООО “VW Group” Volkswagen 562,5
ZАО “Rolf Holding” Mitsubishi 548,98
ZАО “Carnet-2000” Hyundai 370,09
ZАО “DaimlerChrysler Auto Rus” DaimlerChrysler 311,5
ООО “BMW Russland Trading” BMW 202,99
ОАО “Avtoframos” Renault 174,2
ООО ”GM DAT CIS” General Motors 157,5
ЗАО ”Uz-Daewoo Avto Saratov” Daewoo 155,9
ООО “Honda Motor Rus” Honda 151,2
ООО “GM CIS” General Motors 114,1
ООО “Uz Daewoo Ufa” Daewoo 95,5
ООО “Peugeot Rus Avto” Peugeot 83,98
ООО “Vlad Track” Разные 79,0
ООО “Subaru Motor” Subaru 78,1
ООО “Major-Auto” Mazda 67,8
ООО ”Kuntsevo Limited” Suzuki 56,8
ООО “Lonteks MV” Kia 54,3
Source: Kommersant
149
Appendix 20: Waiting List for New Foreign Cars in RF
Model Waiting Period Model Waiting Period
Toyota Corolla Up to 5 days Nissan Primera Up to 5 weeks
Nissan Almera Up to 12 days Mazda 6 Up to 6 weeks
Chevrolet Lacetti Up to 2 weeks Hyundai Accent Up to 7 weeks
Daewoo Nexia Up to 2 weeks Toyota Camry Up to 7 weeks
Lada Kalina Up to 2 weeks VW Pointer Up to 2 months
Mitsubishi Lancer Up to 2 weeks Toyota Avensis Up to 3 months
Chevrolet Aveo Up to 3weeks VW Passat Up to 4 months
Hyundai Sonata Up to 3weeks Renault Logan 2 – 4 months
Renault Megane Up to 3weeks Mazda 3 2 – 6 months
Hyundai Elantra Up to 4 weeks Ford Focus II 5 – 9 months
Hyundai Gets Up to 4 weeks Honda Civic 10 – 18 months
Toyota Rav 4 Up to 4 weeks
Source: Auto-Dealer.ru, Business
150
Appendix 21: After-Sales Service (as of 08.2005)
The Number of Registered
Cars
Amount of Service Centers
The Total Amount of Car Lifters
The Average
Number of Cars
Serviced by 1 Car Lifter in 24 Hours
The Average Price of
Working Hour (in rubles)
Audi 67825 7 109 2,17 1921
BMW 56016 9 121 2,5 1977
Ford 57760 14 174 3.5 1388
Honda 21017 8 84 4 1430
Hyundai --- 10 120 2.5 930
Kia --- 27 --- 4.5 788
Mazda --- 6 70 8,5 1340
Mercedes-
Benz
78377 6 117 1.5 1879
Mitsubishi 45991 9 166 4 1360
Nissan 44628 19 215 About 4 1205
Opel 59467 12 110 3,5 1200
Renault 24050 19 124 3,5 1173
Toyota 63410 7 169 3,5 1620
Volkswagen 98701 14 168 2,5 1475
Source: Kommersant, Autoreview, Abarus
151
Appendix 22: Largest Vehicle Producing Countries (in mln units)
Country 2005 2004 %
change
United States 11,56 11,60 -0.3%
Japan 10,47 10,19 2.7%
Germany 5,34 5,14 3.9%
China 5,04 4,43 13.9%
South Korea 3,84 3,43 12.3%
France 3,71 3,61 2.9%
Spain 2,76 2,93 -5.8%
Canada 2,62 2,66 -1.7%
Brazil 2,24 2,03 10.2%
United
Kingdom 1,74 1,84 -5.1%
Mexico 1,52 1,49 2.0%
India 1,40 1,30 7.8%
Russia 1,20 1,30 -8.2%
Thailand 1,08 0,91 18.9%
Italy 0,99 1,11 -10.2%
Source: Global Insight, Mckinsey, E&Y