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Chinese automaker Geely Motor Industry Case Study.
Published 23 March 23 2015 Last Edited March 2015.
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China began its economic reforms and adopted its open door policy in 1979. In this period, the Chinese auto industry was rather unproductive Geely Automobile, a Chinese domestic automaker was one of the smallest producers in domestic Automotives 1990 the strong economic outlook and favorable policies in China have contributed to the success of Geely in the right year, Geely has maintained a growth rate of 13 rounded volume sedans sales in recent years, and the level record profits reached in 2008.
Behind the success, the short-term liquidity of the company remained a major problem more annoying, two emerge threats- increased competition on the low-end market and the rapid growth of wages in China were considered the biggest obstacle on the road before.
In my last year at university, I attended a course in economics which has been linked to foreign trade and investment in China, it was the first time I came to the Chinese automotive industry the course coordinator, a professor of mainland China, was an expert China's auto industry in its depth direction and inspiration, I develop gradually my interest in the development of China's auto industry also after witnessing the entry of China into the WTO, which has brought prosperity but also uncertainty for the automotive industry, as domestic car market would be more open to the world, but also face tougher rivals the Chinese market, and these factors make the automotive industry an interesting topic for further study.
Geely Motor, a Chinese domestic automaker, which is also the subject of this study, was one of the smallest producers of domestic Automotives in the 1990s to enjoy the favorable situation in the automotive industry, Geely has evolved a multi-billion and captured more than 3 5 of the market share, which is equivalent to 35 billion yuan this study attempts to reveal the key attributes that contribute to the success of Geely and discuss the challenges that are likely to encounter in a close future.
China began its economic reforms and adopted its open door policy in 1979. Before the automobile industry of China was rather unproductive facing the reform of the market and competition from imports, the Chinese auto industry has undergone several transformations since radical economic reforms in 2001, the entry of China to the WTO brought more opportunities for the automotive industry, but at the same time, it also meant competition would intensify in the industry to ensure the benefits of the WTO entry outweighed the costs involved, the Chinese official regulated industry to protect small domestic producers against giant rivals will allow competitors to enter the Chinese market through a joint venture partnership with domestic automakers see Annex 1 This policy is not only to avoid the domination of the rich competitors Foreign resources, but also allowed the immature domestic producers to better integrate and share resources with other leading technology partners, in which s hould allow domestic producers to grow roots and firmly establish the long term.
Today, China's auto industry has already surpassed the US and become the fastest growing car market in the world in 2009 Hogg Given the strong economic outlook and favorable policies in China, the automotive industry China should maintain its higher growth rate see Annex 2 in the near future we can expect to see consolidation in the auto industry, however, increased competition is expected to be benign because it will help shape the domestic market in a better way and another segment of the market to meet the needs of consumers.
The performance Geely has been robust in recent years despite the prolonged economic downturn, Geely has been able to maintain a growth rate of 13 rounded volume sedans sales in recent years, and earnings reached record to last year, when net income experienced a threefold increase of 866 RMB 05 million last year to 305 77 million RMB see Annex 3.
There were several favorable financial attributes that could contribute to the success of Geely The decline in COGS, reflecting the effectiveness of cost control, has apparently improved the gross margin after underwent a major restructuring of the company's subsidiaries note 1 It was important to note that the only impact of the restructuring on cost reduction is mainly due to favorable economies of scale and elimination of excess resources in tight control over the costs, such as distribution and selling expenses, would be the key to success if Geely wanted to get a market share of more see Annex 4.
The short-term liquidity of the company must give priority attention after Schedule restructuring 5 The strong increase in assets of the company at 10.15 billion, almost 3 times higher than in 2007, would overwhelmed short-term liquidity Geely More worrying, the dramatic increase in assets and the low level of current and quick ratio could be an early sign of overtrading, which Geely could become vulnerable and exposed to emit light cash flow account of global economy remained uncertain, it would be wise to have sufficient liquidity to be better prepared for unforeseen circumstances, unless Geely was fairly certain the amount of excess cash that would be provided in future operating activates.
Apparently, the long-term creditness the company seems to have deteriorated The sharp increase in the debt ratio is mainly due to the accounting effect after the restructuring of subsidiaries of the company Despite this, the increase in capacity Geely gain dilute the burden of interest costs to society, and the debt ratio was maintained at an exceptionally low level, implying that the company relied on equity rather than debt to fund its expanding a healthy capital structure, low level of long-term debt and a corresponding high level of capital, should allow Geely to protect against unexpected economic fluctuations and neutralize the pressure on cash flow.
So far, by analyzing past records Geely offered few clues on the performance of the company To better reflect the potential of Geely, it might be helpful if we compared its performance with other competitors see Appendix 6 in this case, two national automotive suppliers, great Wall and Denway, were selected for benchmarking, as they had a similar background and market capitalization as Geely by conducting a comparative financial analysis between the three companies, we were hoping to get a better understanding of Geely's financial performance from another perspective.
Two distinct points of view have been highlighted in the comparative analysis First, the revenues from jointly controlled entities would provide a stable source of income to the society Moreover, jointly controlled entities are also beneficial for society in many other dimensions, such as marketing, distribution and technology development, the two sides would try to share their accumulated knowledge to optimize their competence meant, Geely, full family business could lose competitiveness these joint ventures that benefit from the advantages provided.
Another important issue is that the accounts receivable turnover and inventory Geely showed a significant difference between that of Denway and Great Wall One possible explanation is that Denway offered a longer period installment purchase than by Geely because of a lower turnover rate accounts However, longer payment periods that were more likely to favor consumers could load the company's cash flow in this case, Geely would have to carefully balance the two opposing effects to optimize its marketing strategy, and at the same time, maintain a healthy cash flow balance as well, planning for the efficient production improve product availability and prevent excess tied up in working capital in the form of inventory the importance of these two factors should not be underestimated because it could not only improve the margin beneficiary of the company, but also offered an alternative to short-term liquidity problem Geely.
There were two major challenges Geely countered - increased competition in the low-end market and the rapid growth of wages in China The impact of these factors is likely to weight differently to other competitors from the point of Geely view, it could be considered a threat to society in particular its heart business was concentrated in the low-end segment Although the entrance gate to the automotive industry was relatively high because he suffered a high output and sunk costs, the requirement for joint venture would be sufficiently reduced the capital requirement for newcomers to enter the automotive industry, especially for the low-end segment, by sharing resources with their partner, this average business who were initially unable to compete in the market, might be able to enter the market if it could benefit from the effect Synergy partner secondly, the level of prices rising steadily in China has greatly increased the cost of components, causing Chinese Automotives lose its attractiveness in the global market more on the domestic market, Geely could lose sales to rivals with advanced technology were able to sufficiently lower the cost of products to meet the price-sensitive buyers Even Geely absorpted increased costs by reducing its margin, decisive action was needed if profitability the company could be seriously damaged.
One of many alternatives is to develop in the high-end market with the introduction of top car with high added value range should allow Geely to enjoy a greater margin for a higher price and reduce dependence on the low-end market where Geely can own more cost advantage to succeed in the high-end market, Geely should invest substantial resources in R & D to differentiate itself from its competitors given the lack of working capital however, Geely should seek external funding Besides equity, hedge favorable interest and the debt ratio could mean that Geely could also consider debt financing another attribute, however, still had to be considered in deciding the source of external funding was the cash flow generated by the strategy Since the strategy would incur a sor tie enormous cash in the initial R & D stage and the financial benefits generated by the development process was considered as indefinite Thus, it would be wise to raise funds through equity to avoid unnecessary pressure liquidity of the interest payment, despite future profits to shareholders would be diluted.
There were two alternative approaches that Geely could opt One approach proposed transformation of Geely in a jointly controlled entity by integrating with a foreign partner This could not only improve the technological competence in the motor development of more fuel efficient to secure future market needs, but also expand the customer base by introducing the brand in the overseas market, in turn, to avoid dependence on the lower segment of internal measurement range in which Geely has benefited from this approach will depend on whether Geely could find a suitable partner would be the optimal outcome joint venture with a company owned an international branding and advanced technology, to maximize the synergy effect However, this also meant Geely should give up total control of the company, which could t lead to conflicts and slow decision making, become less sensitive to market developments.
Another approach was to remain in total control of the company, and created a new brand by repositioning a premium segment The initial cost of R & D and the delay effect of the repositioning strategy would probably be borne profitability in the short term Geely in exchange for the long-term growth of the company, it is important to note that both approaches should improve current technology skills Geely But, the benefit should be higher if Geely launched its own development process that diet by her partner more worrying, on the use of a joint venture partner Geely would reduce the bargaining power in decision-making in the future.
In conclusion, both strategies have their advantages and disadvantages to decide which adaptation strategy should consider how Geely was important for the company to retain full control of its operations, and if the issue of short-term liquidity prolong in the near future if it was the case that Geely has continued to suffer from a lack of working capital, the company would prefer joint venture in which the corresponding synergy and economies of scale should relieve some pressure on short-term liquidity.
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