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MBA Strategic Management 24H Case Study - Honda - Jan 12

Jun 03, 2018

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  • 8/12/2019 MBA Strategic Management 24H Case Study - Honda - Jan 12

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    Minyi Huang prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is notintended to show effective or ineffective handling of decision or business processes.

    2010 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced ortransmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwise (including the

    internet)without the permission of The University of Hong Kong.

    Ref. 09/404C

    ALI FARHOOMAND

    HONDA: INNOVATION THE CHINESE WAY

    Do not imitate others.

    - Soichiro Honda, founder of the Honda Motor Group

    Honda Motor Group (Honda) had always regarded innovation as the key to success. On 19July 2007, Guangzhou Honda, a joint venture between Honda and Guangzhou Automobile,developed Guangzhou Hondas Research and Development Co. Ltd (GHRD). Unlike otherautomobile research and development (R&D) institutions started by multinational autocompanies in China, GHRD aimed to develop and build up the technological capabilities to

    produce a completely new car from the ground up. GHRD would be responsible not only forthe styling but also the technologies employed in the new car, including core technologies thathad previously been owned solely by the foreign partners of auto joint ventures in China.While Honda Motor in Japan would provide technological support, the core technologieswould be owned solely by Guangzhou Honda. This arrangement differed from the traditionalR&D management at Honda, which, despite the existence of R&D centres around the globe,used to retain its core technologies at its R&D centre in Japan. In May 2008, GuangzhouHonda announced Li Nian as the brand name for its new car series. Given that Li Nian was

    primarily manufactured for the Chinese market, should Honda change the way R&D wasmanaged in China? If so, how should GHRD be managed?

    ecch the case for learning

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    09/404C Honda: Innovation The Chinese Way

    2

    The Automobile Industry in China

    Market Potentials

    The automobile industry was booming in China and had great market potentials. According to

    Xu Changming of the Chinese State Information Centre, the Chinese automobile industry wascharacterised by rapid increases in internal demand, vehicle production, exports and imports.1

    The automobile industry was a pillar industry in the Chinese economy. In 1994, the ChineseState Planning Commission issued the first industry policy to encourage the transfer oftechnology and management skills from foreign automakers to local automakers. However,there were quite a few restrictions. For example, equity participation by foreign automakerswas restricted to 50%. It also required separate sales channels for vehicles made in Chinafrom those imported from overseas, and that vehicles made by joint ventures with their owntechnology account for more than 50% of the total autos sold in China. In 2004, the newAutomotive Industry Development Policy released by the Chinese State Development andReform Commission had relaxed some of the rules, with the only exception being equity

    participation. In order to raise the industrys entry barriers, however, the commission set theminimum investment in new auto projects to about US$292 million, 2 including an R&Dorganisation with input of no less than US$73 million.3In 2006, in accordance with Chinasaccession to the World Trade Organisation in 2001, China removed most tariff and non-tariff

    barriers for the automotive industry.

    In the same year, China overtook Japan to become the second-largest automobile market inthe world, with 7.2 million vehicles sold annually.4Car sales in China grew 21.68% in 2007to reach 6.3 million units, following a 30.02% rise in 2006 and a 21.4% rise in 2005. 5In thefirst half of 2008, both the production and sales of vehicles exceeded 5 million, an increase of16.71% and 18.52%, respectively.6According to the Chinese State Information Centre, it wasestimated that China could become both the largest automobile consumer market and thelargest vehicle manufacturer in the world by 2010.7

    The Consumer

    With rising disposable incomes and favourable government policies, the average Chinesehousehold had replaced state-owned enterprises and government organisations as the drivingforce behind the auto purchasing spree that had begun in the late 1990s.8

    1ChinaReviewNews (9 February 2008) China Becomes the Largest Automobile Manufacturer in 2010,

    http://zhaojun.net/doc/1005/6/5/3/100565318.html?coluid=10&kindid=259&docid=100565318&mdate=0209090244

    (accessed 17 July 2008). [(2008) 2010 .]2The minimum requirement was Rmb 2 billion. Rmb 1 = US$0.146023 on 7 August 2008.

    3The minimum requirement was Rmb 500 million. Rmb 1 = US$0.146023 on 7 August 2008.

    4Auto China (2008) China Is a Booming Market for International Investors, http://autochina.auto-

    fairs.com/en/leftnavigation/market(accessed 16 July 2008).5Taylor, S. (11 July 2008) Toyotas China Sales rise 34 pct in First Half,Reuters,

    http://www.boston.com/business/articles/2008/07/12/toyotas_china_sales_rise_34_pct_in_first_half/(accessed 21 July 2008).6Information Department of China Association of Automobile Manufacturers (2008) Brief on Automobile Industry Production

    and Sales Situations in the First Half of 2008, http://caam.org.cn/caam/caam.web/Detail.asp?id=3997(accessed 15 August

    2008). [(2008) 2008,

    http://caam.org.cn/caam/caam.web/Detail.asp?id=3997.]7ChinaReviewNews (9 February 2008) China Becomes the Largest Automobile Manufacturer in 2010,

    http://zhaojun.net/doc/1005/6/5/3/100565318.html?coluid=10&kindid=259&docid=100565318&mdate=0209090244

    (accessed 17 July 2008). [(2008) 2010 .]8Adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) Shanghai Volkswagen: Time for a Radical Shift of Gears,

    Asia Case Research Centre, The University of Hong Kong.

    310-206-1

    Usagepermittedonlywithinthese

    [email protected]

    TaughtbyColinPrice,

    from3-Jan-2012to14-Jan-2012.

    Orderref98691.

    PurchasedforuseontheMBAStrategicM

    anagement,atResourceDevelopmentInternationalLtd.

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    09/404C Honda: Innovation The Chinese Way

    3

    However, the Chinese market was highly fragmented. With 80% of Chinese auto buyersowning an automobile for the first time, their shopping habits were very different from thosein more mature automobile markets. Automobile buyers in tier-one cities such as Shanghaiand Beijing preferred sporty hatchbacks, while those living in inland, regional cities had amore traditional preference for branded automobiles.9Experts believed the key to success wasto make an automobile that appealed not only to buyers with traditional brand associations,

    but also to modern consumers looking for individuality in their cars.10

    Chinese consumers attitudes towards purchasing automobiles were also changing. Speakingat the Economists China Automotive Industry Leaders Roundtable in Shanghai in March2008, Chen Anning of Ford China identified what he believed were three broad shifts inconsumer attitudes over the previous decade.

    Ten years ago, Chinese car buyers were generally of the attitude that anycar will do, Over the past few years, consumers stopped looking for justany old car; they wanted a good car. Nowadays, especially in the big cities,

    people are not just looking for a good car, theyre looking for my car,

    something that reflects their identity.11

    - Chen Anning, director of vehicle programmes at Ford China

    This emerging automobile culture was shaped by the younger generations desire to use moreconvenient transportation in fitting with a new lifestyle.12Their preferences were based onemotional factors and intangible attributes rather than tangible attributes such as fuelefficiency or engine quality. Though they had not formed brand loyalties, they wereextremely brand-conscious and placed great importance on industry leadership.

    As with most developing markets, word-of-mouth was important in decision-making.According to research by Taylor Nelson Sofres (TNS), a market research firm,recommendation by friends and family was the single most important factor influencing car-

    buying decisions in China in 2007. Moreover, word-of-mouth among Chinese car buyersoverwhelmingly took place on the internet.13Sina.com, one of Chinas most popular internet

    portals, contained very active internet car forums. Sina.coms auto channel had 26 millionpage views per day, with a thriving message-board community where users could discusseverything from fuel efficiency to whether or not real patriots should buy only Chinese cars.14The internet was considered a trusted source of information and, according to TNS, almost25% of Chinese consumers believed that online information was credible, 15 whiletraditional advertising and car dealers were much less trusted.

    Moreover, Chine

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