Economics of International Enterprises

Case study analysis Faculty: Dr. Tamal Dutta Chaudhuri Prepared By: Vinay Asopa (Class of 2011), Calcutta Business School

BMW Driving on Indian Autobahn

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His knowledge has influenced me to look at different global business strategies from a different level and evoke questions about their (global businesses) strategies and success.Economics of International Enterprises Acknowledgement I would like to thank my faculty Dr. Tamal Dutta Chaudhari for this time and expertise. BMW Driving on Indian Autobahn Page 2 .

(literally English: Bavarian Motor Works) is a German automobile. South Korea.Economics of International Enterprises Abstract In this paper we explore the various possible reasons as to why BMW changes its mode of business from a dealership model to setting up a manufacturing hub in Chennai. Thanks to the close cooperation between all of the plants. The BMW Group currently has 17 production facilities in five countries: Berlin plant. Russia. Cairo. Sweden. New Zealand. Netherlands. Luxembourg. Environmental Protection Agency (EPA) National Environmental Achievement Track. Contract production in Graz (Austria). Regensburg plant. which rates environmentally friendly companies. The BMW Group currently engages in assembly with the help of external partners in the following countries: Jakarta. Portugal. Austria. Brazil. Wackersdorf plant. Indonesia. Dingolfing plant. Thailand. Rosslyn plant (South Africa). Goodwood plant (GB). Norway. Oxford plant (GB). Poland. Canada. Spartanburg plant (USA). Malaysia. Shenyang plant (China). USA. We also discuss possible economic theories that seem relevant and thus arrive to a conclusion whether the set up is beneficial to both BMW as an organization and India as economy and growing automobile market. Mexico. Indonesia. Japan. Leipzig plant. Swindon plant (GB). Switzerland. Kuala Lumpur. Eisenach plant. It is also a member of the South Carolina Environmental Excellence Program and is on the Dow Jones Sustainability Group Index. France. Australia. Kaliningrad. Introduction Bayerische Motoren Werke (BMW). Steyr plant (Austria). India. Malaysia. It also owns and produces the Mini brand (Mini Cooper) and is the parent company of Rolls-Royce Motor Cars. India. This creates significant advantages in the international market. South Africa. Munich plant. motorcycle and engine manufacturing company founded in 1916. Finland. Great Britain. Greece. Italy. It is trying to design less-polluting cars by making existing models more BMW Driving on Indian Autobahn Page 3 . Hungary. Landshut plant.S. Belgium. Chennai. Spain.BMW has taken measures to reduce the impact the company has on the environment. Rayong. Philippines. Thailand. manufacturing takes place quickly and flexibly. Denmark. Hams Hall plant (GB). which recognizes companies for their environmental stewardship and performance. The company is a charter member of the U. Germany. Russia. Egypt. The worldwide production network of the BMW Group is the backbone for growth in all our global markets. BMW Group marketing subsidiaries are present in the following countries: Argentina. The BMW Group is committed to maintaining and enhancing its presence in key markets worldwide. Ireland.

there have been some criticisms directed at BMW. Possibilities include: electric power. BMW Driving on Indian Autobahn Page 4 . hybrid power (combustion.Economics of International Enterprises efficient. Some critics claim that the emissions produced during hydrogen fuel production outweigh the reduction of tailpipe emissions. practical solutions for car pollution Apart from passenger cars BMW has a long and successful history in touring car racing which include Formula 1 Racing. Dakar Rally and many more. BMW offers 49 models with EU5/6 emissions norm and nearly 20 models with CO2 output less than 140 g/km. as well as developing environmentally friendly fuels for future vehicles. However. and that the Hydrogen 7 is a distraction from more immediate. which puts it on the lowest tax group and therefore could provide the future owner with eco-bonus offered from some European countries. accusations of greenwash in reference to their BMW Hydrogen 7. engines and electric motors) hydrogen engines. and in particular.

Congestion of Indian roads. It was at this time that the Indian government chose Suzuki for its joint-venture to manufacture small cars. One should keep in mind that these figures do not take into consideration the second hand cars which hold a special place in the Indian automobile industry. In the 1980s.25 million units in 2002-03. a CAGR of around 16 percent. the Indian automotive industry has demonstrated sustained growth as a result of increased competitiveness and relaxed restrictions. the country is expected to top the world in car volume with approximately 611 million vehicles on the nation’s road. automotive component and automobile manufacturing growth has accelerated to meet domestic and export demands. According to the Society of Indian Automobile Manufacturers. more than market demand.7%. Maruti Suzuki and Mahindra & Mahindra. Current Scenario: BMW Driving on Indian Autobahn Page 5 . monthly sales of passenger cars in India exceeded 100. a number of Japanese manufacturers launched joint-ventures for building motorcycles and light commercial-vehicles. Total capacity for passenger cars and utility vehicles in India stood at around 3.992 units in October 2009. annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. a number of Indian and multi-national car companies launched operations.Economics of International Enterprises Automobile Industry in India Indian automobile industry is one of the largest and fastest growing automobile industries globally. From 2003 to 2010. Several Indian automobile manufacturers such as Tata Motor. Following the economic liberalization in 1991 and the gradual weakening of the license raj. In February 2009.000 units and have since grown rapidly to a record monthly high of 182. Since then. By 2050.0 million units in 2009-10versus 1. and with only 10% of Indian households owning a car in 2009 (whereas this figure reaches 80% in Switzerland for example) this progression is unlikely to stop in the coming decade. India’s robust economic growth led to the further expansion of its domestic automobile market which has attracted significant India-specific investment by multinational automobile manufacturers. History: Following economic liberalization in India in 1991. will likely be the limiting factor. expanded their domestic and international operations. car sales in India have progressed at a CAGR of 13.

220-250 billion over the next 2-3 years. However.Economics of International Enterprises Most of the car manufacturers have already expanded their capacities over the past 5 years. assuming a 3-4 percent growth in total spends on auto engineering and design services over the next 5 years. Thus. In comparison. Honda Siel Cars India Limited is in advanced stages of setting up a new plant in Rajasthan. based on the expectation that it will increase its share in the total outsourced engineering and design spend from the current 20 percent to 30 percent. the global ESO market will double from $3-4 billion in 2008-09 to $6-8 billion by 2013-14. The Indian automotive ESO industry can sustain a 25 percent growth rate. French auto major Renault has put its plan to introduce its cars in the Indian market from the upcoming Chennai Plant on hold indefinitely. Analysts suggest that OEMs will incur a capital expenditure of Rs. The company plans to have an initial capacity of 60. analysts estimate India’s auto ESO revenues to triple by 2013-14 to $1.000 units. BMW Driving on Indian Autobahn Page 6 .9 billion. total capacities are expected to touch 3.75 million units by 2011 on the back of major expansion plans of Tata Motors. Mahindra & Mahindra and Toyota Kirloskar Motors.8-1.

BMW surprised all the leading luxury car manufacturers in Europe when it acquired Mini in 2001. The target market for such motorcycles is again the rich and the affluent. But satisfying the market's demand for new niche products is a strategic risk anyone in the industry has to take. There are rumors that Series 1 was launched to offer low quality BMW for the mid-class customers in Europe who cannot afford a expensive luxurious BMW. This a new line that BMW plans to profit from as across the globe the need for high performance and luxurious SUVs is at a rise. though the company is considering offering Series 1 across the globe. BMW has also stepped into manufacturing of luxury SUVs. BMW went super luxury after this acquisition. To be successful. Though after acquiring Mini BMW still focus on luxury car market. Helmut Panke ‘The product initiative allows us to be focused on market segments that we see developing in the future. The market is shifting. BMW has just kept Series 1 exclusive for the European market. 5-series and the 7-series from its stable. Customers are slicing the market into more focused pieces. BMW increased its product offering after acquiring Rolls-Royce in 1998. BMW still continue to keep production facilities of Roll-Royce and Mini independent from its original stable. you have to fulfill 100% percent of customers' expectations’. Tastes are changing. In mid BMW surprised the luxury car makers when for the first time it introduced Series 1. But it is worthy to note that BMW itself still continues to roll out the 3-series. BMW Driving on Indian Autobahn Page 7 . Today BMW offers super luxurious Rolls-Royce for the rich executives to sporty hatchbacks aimed at upper-middle-class buyers. They also manufacture bikes for sports enthusiasts and touring customers. According to the Chief Executive. This statement gives a peak into the window of future activities of BMW. It's becoming more differentiated…. Series 1 was designed keeping in mind the need to have fuel efficient and mid-sized sedan market.Economics of International Enterprises BMW’s Business Model BMW’s core competence lies in luxury cars. BMW motorcycles are specifically designed keeping in mind the touring tradition it does not manufacture low powered motorcycles.

BMW has gone acquiring other companies like Rolls-Royce and Mini. The production and sales subsidiary is wholly owned by the BMW Group. BMW Driving on Indian Autobahn Page 8 . In the year 2007. In the first year (2007) only 2% of the new car buyers in India knew about BMW brand. 2) Acquisitions and 3) Foreign Direct Investment (FDI). BMW opened their 1st assembly plant in Chennai with a capital investment of Rs. In addition.Economics of International Enterprises BMW & India BMW entered the emerging Indian automobile market in December. Country Head of BMW India. But in 2008. the first dealership opened up in New Delhi (Dealer: Deutschen Motors). Their initial strategy was to provide with dealerships in India.1) Export. 2006. for the leasing for the customers. promoted the brand through strong finance options by way of strategic alliance with Bajaj Allianz general insurance for the motor insurance and with ICICI bank to offer the customized and personalized solution for the finance. these all services are being handled by a separate department in India known as BMW Finance India. Andreas Schaaf. Presently. Mode of Entry in Unexplored Market BMW has so far used three modes to go international: . this figure went up to 13%. The assembly line started manufacturing Series 3 & Series 5 cars solely for the Indian customers. they also set up a sales subsidiary in New Delhi as they plan to expand their operations in Asia. and also with the Orix Auto. 12 active dealership have opened up across India. 1.1 billion. In case of the Indian market BMW initially use to export few of its model and it was in 2006 when BMW funded their first assembly plant in Chennai.

the company has recorded a 73% growth in sales volume and had sold 6246 cars. OEM suppliers for various outsourced components are another problem faced by BMW. with the largest market share in luxury segment in India. BMW had to look forward to go about competing with Mercedes Benz which has been present in India for about 12 years. So one challenge that BMW had for itself was positioning its product to create awareness and brand equity. Though the numbers have increased but still only 3% of customers are buying luxury cars. BMW had a task to cut competition (viz. The Indian automobile market was immature pertaining to the luxury car. Market size of luxury cars in India with respect to aggregate market BMW Driving on Indian Autobahn Page 9 . near all luxury cars were imported. Till date only few Indian automobile part supplier are OEM suppliers to BMW.Economics of International Enterprises Speed Breakers in the Indian Market BMW’s major concern was brand awareness and target market. This growing result is because BMW has offered products keeping in mind the preference of the Indian customers and road conditions. Few Luxury car brands available till 2004.64%. BMW market share as of 2010 is 41. The well recognized brand was Mercedes Benz.2% of the total demand was buying luxury cars till 2006. Many local automobile suppliers cannot meet the standards of quality for BMW. Mercedes Benz) and also create market for luxury cars. In 2010. BMW has targeted the young executive and the average age of the BMW buyers in India is 40 years. Another major issue was that the Indian automobile market is still growing and only about 1.

Many OEM suppliers like Apollo Tyres. BMW’s set up in India has shifted attention of many international car manufacturers towards India.Economics of International Enterprises Dynamics of Trade Technology Transfer Since the invasion of BMW in India. Though most of the components of BMW cars in India are imported from abroad but lately Bosch India has started supplying ECU (Electronic Computer Unit) for two models of BMW manufactured in India. This is also a result of need of quality spares by foreign companies. BMW Driving on Indian Autobahn Page 10 . Porter’s Diamond Through the Porter’s Diamond model we try to establish a conclusion of why BMW became competitive in luxury car market in India. All such automobile giants coming to India will significantly improve the standards of OEM suppliers in India. and Asahi Glass so on and so forth. many local automobile component manufacturers have benefitted due to increase in competition. For instance. Mercedes Benz planning to invest 700 million Euros to set up their plant in Chennai. Apart from such luxury car makers Renault-Nissan has set up a plant in Chennai too with a production capacity of 400. Bosch. Tata’s are considering shifting their production to India for Jaguar Land Rover. Asahi India Glass Ltd developed a high strengthen automotive glass which is now being used in Mercedes Benz M-Class. As of now BMW has Rico Auto and Sundaram Clayton as its global suppliers for differential case and brackets. With better know-how from such companies product development will be inevitable.000 units. Exotic car manufacturer Ferrari is planning to open dealership in India this year itself.

structure & rivalry Chance Increase FDI from rival firms Increase in Cost of production due to rise in input prices BMW has the first mover advantage in this segment BMW’s primary goal is to provide fuel efficient luxury cars through their ‘efficient Dynamics’ technology Rival firms planning to set up manufacturing units in India too Demand conditions Factor conditions Large Capital Resource State of the art technology Large number of OEM suppliers (subjected to BMW’s Quality) The Indian automobile industry is growing at 16% CAGR and it is estimated to be the largest automobile industry by 2020. BMW and other luxury car manufacturers are anticipating a growth of 2-3% Y-O-Y for luxury cars in India. Thus better and faster technological change will be evident Related & supporting industries Government Local OEM suppliers will have to upgrade their technologies if they wish to stay in business New technological upgrade may take place locally in future GOI may reduce excise duty to promote such companies. improve roadways to suit such luxury cars BMW Driving on Indian Autobahn Page 11 .Economics of International Enterprises Firm strategy.

Thus. BMW Driving on Indian Autobahn Page 12 . As and when Indian domestic ancillaries will be able to replicate the quality of BMW. by that time BMW may launch hydrogen powered cars which they are already working upon. So as to cater the need of the growing Asia Pacific market it has a number of facilities in Asia to meet the demand. The map below shows BMW’s manufacturing facilities worldwide: We assume that BMW has one manufacturing facility in USA to cater the needs of North American market. As mentioned earlier local ancillaries are upgrading their products but still BMW outsources its majority of components from outside India. BMW in order to achieve higher profit may have opened its production in India since the Indian automobile ancillary is not technologically advanced to replicate their technology. BMW is not transferring the latest technology in India since most of the R&D is taking place at the Munchen plant (Germany). even if the domestic manufacturers would want to offer their products in comparison to BMW will not be able to do so as the quality offered by BMW is far more superior than the local technology.Economics of International Enterprises North-South Trade & Economic Growth: BMW’s entry in the India can be perfectly replicated in the North-South Trade model. We also observe that all the research & development takes place in the European manufacturing facilities.

There is news of BMW expanding its operations in India by introducing high end motorcycles. but this collaboration broke up in mid 2009. Although there has been a tie-up between BMW and Mercedes Benz in 2008 to work on hybrid cars. We cannot confirm about the existence of North-South Trade model until we see that local Indian suppliers do not emerge to become their global suppliers and BMW launches new and improved models than that available in India right Rediff Business The Financial Times www. So apart from the 4 wheel segment BMW is interested to explore the 2 wheeler market which is a good sign for India and BMW. No JV has been established outside Europe to work towards the future cars. Reference:CRISIL industry report 2010 on Indian passenger car www.Economics of International Enterprises Conclusion We have mentioned various reasons for BMW entering the Indian market. There are talks of setting up a R&D center in China but that will only work to cater the conditions of Asia market BMW Driving on Indian Autobahn Page 13 . The most logical conclusion that we can drive out looking at the current scenario is that BMW wants to capture the emerging luxury car market in India. But BMW and Peugeot Citeron collaboration on engine development still exists and in 2010 the two companies designed engine for the Mini Cooper that meets EU 6 requirements.

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