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Business Strategy Analysis: Renault's China Connection

Updated on April 27, 2013

The French car manufacturer Renault recently announced within six months it plans to have approval from the Chinese government to make and sell its vehicles in China. Renault plans to tap into a huge Chinese market where in 2011 Chevrolet sold 500,000 units and Nissan sold almost a million units. This article looks at this strategic decision in the light of international strategic management principles, particularly barriers that have to be overcome that do not exist in other markets.

Major Challenge: The Chinese Government

Any company wishing to manufacture or sell goods in China must overcome one major obstacle: the Chinese government. Currently this government is allowing limited capitalism while attempting to maintain a hold on communism. In attempting to do this the Chinese government has created significant barriers to entry for these firms.

A barrier to entry is a hurdle that a company must overcome in order to enter a market as a new contender. A previous article discusses the five forces model, in particular the threat of new entrants in a market. The level of competition in a market depends in part on how easily new firms can enter that market. When the market is difficult to enter, there is little threat to firms already present, so the intensity of competition is reduced by this factor. One of the barriers to entry cited by Michael Porter is government policy. Porter states, "Government can limit or even foreclose entry into industries with such controls as licensing requirements..."1. The Chinese government is a major barrier to entry for that market.

Other than just getting approval from the Chinese government, a firm wishing to do business in China must partner with an existing Chinese firm. In Renault's case, they have chosen to partner with the Chinese vehicle manufacturer Dongfeng. However, this is not Renault's first attempt. In the late 1990s Renault partnered with the Chinese manufacturer San Jiang Motors. The partnership fizzled out and Renault has not had much of a presence since.

This partnering requirement for the Chinese government creates several barriers. First, the outside firm, Renault in this case, must find a Chinese firm that would be willing to partner. This search requires the outside firm to research and then court a chosen Chinese firm. This barrier must not only be overcome, but it is imperative the outside firm find the right partner. Renault's first attempt is proof of this.

The second barrier to entry is that an entering firm must use existing Chinese plants, not build new ones. So for a new firm to enter the market and produce goods in the same manner as in other countries, the Chinese plants have to be upgraded. Upgrading an existing asset can create as many problems if not more than building a brand new plant.

A third barrier to entry is the willingness to give up control and information. By having to partner with Dongfeng, Renault is, in some part, relinquishing some control over the operations to Dongfeng and, presumably, to the Chinese government. In addition Renault must also be willing to share production information, whether about processes or about vehicles.

One final barrier is the acceptance that at any time the Chinese government can revert back to a more closed system, kicking out any or all of the foreign firms. Renault and any firm entering the Chinese market must realize that any investment that is made has the potential of being lost at some later time.

Summary

This article has examined Renault's entrance into the Chinese market in light of the strategy concept barriers to entry. The Chinese government itself has become the largest barrier to entry into the Chinese market. Companies entering this market and overcoming this barrier must be anticipating huge rewards in profitability coming in the future. Time will tell how right these firms are.

Footnotes:

1Porter, Michael (1998). Competitive Strategy. The Free Press: New York.

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