Challenges of Expansion to a Foreign Country

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Table of Contents

  • Government Financing
  • Capital Controls
  • Exchange Rate Risk
  • Supply Chain Challenges
  • Comparative Advantages
  • Position Business Strategy
  • Synthesizing Macroeconomics and Microeconomics

Government Financing

The government of China views its automotive industry as one of the pillar industries of the nation. The Chinese government expects the domestic automobile output will reach 30 million units by 2020 and 35 million by 2025. In order to support this endeavor the government has launched a program known as “Made in China 2025”. The main focus of the program for the auto industry is to upgrade the country’s industry from low cost manufacturing to high end valued added technology. Due to China’s pursuit of this goal the government has also been generous with research and development grants for new vehicle startups that Ford Motor Company may be able to access.

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Capital Controls

Capital controls are measures taken by a government or regulatory body to regulate the flow of foreign capital in and out of the country. Typical controls used include taxes, tariffs, and quotas. China's capital controls are directly affecting foreign companies' investment activity within the country. Currently foreign acquisitions and money exchanges as well as outbound transactions exceeding five million dollars require regulatory approval. Previously the limit was 50 million hence it is apparent the Chinese government is tightening the leash for money destined for overseas. In addition, the government also informed investors that foreign money entering China would be examined more strictly to ensure compliance with the new rules. Due to the new capital controls inbound investment to China has decreased. In particular, there have been sharp declines of foreign investment from high tech countries such as the U.S., the U.K and Germany.

Exchange Rate Risk

Exchange rate risk exists any time a company is doing business in a foreign nation such as China. The financial risk is present due to the fluctuation of the two currencies involved, the U.S. dollar and the Chinese yuan. Exposure to foreign risk goes beyond simple fluctuations of the currency on the world stage it also involves things such as economic exposure, translation exposure as well as contingent exposure. The value of the Chinese yuan against the U.S. dollar

In recent history the lowest value the yuan hit was in 1980 when the yearly average came to 1.498 and the greatest value was obtained in 1994 at 8.73 yuan to 1 U.S. dollar. Today the exchange rate sits in the low to high sixes and has done so for a decade. There are several factors that can influence the exchange rates between countries such as the relationship between the two countries as well as differentials in inflation, differentials in interest rates, account deficits, public debt, terms of trade and political stability of both countries.

Supply Chain Challenges

China’s logistics companies have experienced unprecedented growth however there are a number of challenges the country must address. These include weak transport; information and communications infrastructure outside economic zones; a culture of regulation and bureaucracy; fundamental problems of energy supply; high transport and logistics costs; a poorly educated and badly trained work force as well as high regional imbalances of trade (both domestically and internationally) ("Ten key challenges for the Chinese logistics industry", 2012). New U.S. tariffs on Chinese made products will disrupt the supply chain due to the supply and demand of raw materials. The current political climate between USA and China could force component manufacturers to “reshore” their supply chains to avoid tariffs and avoidable taxes.

Comparative Advantages

China’s comparative advantage is inexpensive labor and many economists believe this is the sole reason for the countries recent economic success. Simply put, this advantage allows them to produce any good at a lower cost. A typical vehicle assembly plant can employ as many as two to three thousand workers not including the office staff. During the launch of the new assembly line Ford will be faced with the stark reality that its key competitors in the region SAIC Motor, Dongfeng, FAW and Changan (known as the big four) at experiencing and profiting from the low cost labor the region has to offer. The big four have optimized labor however they also have the added benefit of understanding the supply chain in China and the ability to move product from point A to point B efficiently and with minimal waste. Ford Motor Company’s greatest challenge in China will be ensuring they are not taken advantage of in the areas of wages and benefits for the workers they will need to employ for the production of the Ford Edge.

Position Business Strategy

Ford’s major competitor in the China SUV market will be Chery. Chery is well respected within the Chinese community and currently manufactures a vehicle known as the Tiggo 7 which will be a direct competitor to the Edge. From a cost perspective, both vehicles are similarly priced with the Tiggo 7 ~19,000 USD and the Edge currently costing Americans ~22,000 USD. When the Edge is manufactured in China is would be highly advised to match the Tiggo 7’s price point which should be achievable with the significant labor save associated with operating in China. Ford would also be advised to set themselves apart from Chery by focusing attention through advertising and marketing on their experience and success in the truck market. Chery motors began its automotive journey in 1997, Ford on the other hand began in 1903 this could be the basis of all advertising during launch of the Ford Edge in China.

Synthesizing Macroeconomics and Microeconomics

Ford would be advised to manufacture the new assembly line equipment in China and avoid utilizing U.S. suppliers whenever possible. Conducting business will local suppliers and the government at the initial stages will create a greater level of understanding and trust between the American automaker and the Chinese. By utilizing the local supply base Ford can shield itself from numerous macroeconomic and microeconomic concerns.

In the macroeconomic world, Ford will need to navigate through factors such as China’s unemployment rate, growth rate, and gross domestic product and inflation rates. China’s unemployment rate is currently at 4.675% (The World Bank, 2018) with little sigs it will be changing. The unemployment rate has consistently remained between 4 to 5% for more than a decade with only one blip in 2007 when it briefly fell to 3.76%. The countries GDP has been on the increase since 1995 and currently rests at 12.238 trillion in 2017 (The World Bank, 2018).

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