Ready to Blossom - Honda’s Entry into the Chinese Auto Market

When Peugeot pulled out of its partnership with the Guangzhou Automobile Group in 1997, Honda Automobile Company seized the opportunity to take on the failing venture. Honda had already invested in several joint ventures in China, and this was just what they needed to establish an even stronger foothold in the nascent auto market. With a relatively small initial investment, Honda has seen a significant return on investment: by 2001, Guangzhou Honda reached sales of RMB 12 million (US $1.4 billion), with pre-tax profits of RMB 4.5 million (US $0.5 billion). Professors Philippe Lasserre and Ming Zeng, and Hiromi Hinata delve deeper into this turn-around story in this new Case Study.

by Philippe Lasserre,Ming Zeng
Last Updated: 23 Jul 2013

When Honda Automobile Company took over Peugeot’s operation in Guangzhou, China, in 1997, it already had a foothold in the Chinese market. In 1992 it had created a joint venture in China to manufacture motorcycles, in 1993 it oversaw imports of Honda to Mainland China via Honda Motor China in Hong Kong, and in 1994 it had established a joint venture with Dongfeng Automobile Company to create Dongfeng Honda Automobile Parts Co. in Huizhou, within the Guangzhou Province. But could the company turn around the dismal circumstances it was about to inherit? Philippe Lasserre, Professor of Strategy and Asian Business, Ming Zeng, Assistant Professor of Asian Business, and Hiromi Hinata, INSEAD MBA (’02) offer some insights in this Case Study.

The authors provide the context for the deal by first exploring the Chinese automobile market in the mid- to late-1990s. In 1996, the year before Honda took over Peugeot’s operation in Guangzhou, the market size in China was roughly 445,000 vehicles annually. Among those vehicles, 87% were manufactured locally and the remaining 13% were imports. That percentage would soon drop further, as China sought further controls on imports as a way to bolster the local automobile industry.

With these factors in play, Honda saw that a joint venture to manufacture cars represented a long-term investment in a slow, but growing market. Indeed, in 1996, China’s GDP per capita was just below US $700. (Analysts believed the auto market would begin to develop when the per capita GDP reached US $4,000.) Since a car was still a luxury item in China, most cars purchased were for commercial or official use. In 1996, only 18% of the car sales in China were to private citizens, though that represented an increase from 1% 12 years earlier.

When Honda took over it was careful to avoid the mistakes made by Peugeot. Unlike the Guangzhou Peugeot partnership, in which equity was split among several stakeholders, Honda established a 50-50 joint venture with Guangzhou Automobile Group (GAG), creating clear rights and responsibilities for the two parties from the outset. The company’s strategy was to start operations on a relatively small scale. Its overall investment was US $0.2 billion, a fraction of General Motors’ initial investment in Shanghai of US $1.25 billion. Honda also spent an additional US $0.1 billion to renovate the aging factory.

The authors review Honda’s strategy for managing its people, which included reorganizing along less hierarchical lines. (Where Guangzhou Peugeot had separate cafeterias for the president, general managers, managers, and other employees, Guangzhou Honda built just one.) This new structure has reinforced open communication and employee participation.

The organizational changes were accompanied by investments in training for suppliers and fully integrating its sales-service function, which was previously managed by state-owned companies. With a relatively small initial investment, Honda has seen a significant return: by 2001, Guangzhou Honda reached sales of RMB 12 million (US $1.4 billion), with pre-tax profits of RMB 4.5 million (US $0.5 billion).

Looking ahead, say the authors, Guangzhou Honda faces several challenges. First, it will contend with increasing competition. The number of companies holding licenses to produce passenger cars surged from six in 1995 to almost 20 in 2002. China’s accession to the WTO will also affect the company. Furthermore, high-end models like the Accord, which is currently the company’s sole product, have a limited market. The company is now in negotiations with the Chinese government to establish another joint venture to produce compact cars. Finally, the Guangzhou region itself poses problems, as it is far from Shanghai, which is where most of the industry is concentrated.

INSEAD 2002

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