Bloomberg has a story that illustrates the difficulty of operating in a market that forces foreign companies to form alliances with local companies. The case here is China but it can apply to numerous other countries.
SAIC and other Chinese carmakers that work with overseas companies are introducing their own models to boost margins in a country set to become the world’s biggest auto market this year. Foreign automakers typically have no remedy because Chinese law forces them to work with a local partner.
“There’s nothing they can do,” said Scott Laprise, a Beijing-based CLSA analyst. “Your goal as a foreign automaker is just to stay ahead, come up with new technology, spend more money, and be one step ahead of your Chinese partner.”
SAIC will add about 30 own-brand models by 2012, threatening Volkswagen and U.S. government-controlled GM. China’s biggest domestic automaker more than tripled sales of Roewe sedans this year.
The set up is somewhat similar to how brand-name consumer goods companies such as P&G and Unilever use manufacturers who also produce goods under their own label. In consumer goods, brand reputation, quality, and other intangible benefits play a bigger role than the manufactured products. With cars, no so much. Maybe high-end cars rely on intangible factors but the mid-end and low-end depend more on the manufactured item. Therefore, I think foreign car companies will have a really tough time in China (and other countries like that.) If, say, GM's partner releases a product similar to GM, I think the partner will slowly come to dominate market share (this is especially true if the technology developed and owned by GM is also used in the partner's vehicle.)
It's a tough decision for foreign businesses and their shareholders. Given how countries like China present huge potential, it is difficult to stay away. But at the same time, the concessions made to the government essentially means that you are working with a partner who will, in all likelihood, become your biggest enemy in a decade or two. Tags: commentary