Marketing 2

Final Case Study: CityEl

By Mads Edelberg Timmermann
May 9th 2021

Content

Background 2
Problem Statement 2
CityEl 3
Chinese Culture 3
Key Cultural Factors 6
Optimal Entry Mode 7
Plan of Implementation 8
Evaluation 9
 Background

China is the biggest market in the world for electric cars, scooters and
motorcycles (Matthieu David, 2021). Almost half all the world’s electric
vehicles (EVs) are sold in China, and the market is growing rapidly. China is
also the world’s leading manufacturer of EVs.

Several factors attribute to the rapid growth in the Chinese EV market:

⁃ Environmental. The Chinese government has high aims to reduce Co2

emissions and bring down air pollution.
⁃ Regulatory incentives. Many larger cities in China have banned the use of
gasoline motorbikes and scooters.
⁃ Infrastructure. In many larger cities, local governments have built charging
stations at roadside parking spaces, to make it easy for EV owners to charge
their cars and motorbikes.
⁃ Rising cost of fossil fuels. It has become more affordable to own and use an
electric vehicle.
⁃ Government subsidiaries for EV manufactures.

Other factors include the ease of parking in heavily trafficked cities with few
parking spaces. It can also be argued that since China is relatively late to the
car industry, as their industrialization happened later than in Europe and the
US, EVs offer a new opportunity to get a foothold in the market and become a
major player in the car industry (Jeanna Whalen, 2020).

At the moment, China is the leading country in the technological development

of electric vehicles. CityEl is now a German company, and Germany happens
to score highest in the world in terms of customer demand for EVs.

China is potentially a very attractive market for CityEl, but before choosing
mode of entry, there are several factors to consider (Hollesen). This case will
focus on the cross-cultural factors that influence entry mode decision-making.

Problem Statement
What are the key cultural factors to consider when entering the Chinese
market, and what impact will these factors have on CityEl’s choice of
entry mode in the Chinese market?
 CityEl (Internal Factors)

Although CityEl is one of the earliest produced electric vehicles of its kind in
Europe, the company is still relatively small, and the amount of cars produced
yearly is relatively low. When entering the Chinese market, CityEl must
consider to what extent they can allocate the required resources to set up
distribution and offer after-sale services, while also running promotional
campaigns for their products, dealing with local laws, and bureaucracy.

When it comes to international experience, CityEl has been sold in the US and
several countries in Europe. The car has also found customers for special
purposes such as camera-cars at the 1992 Olympics in Barcelona. Overall,
International experience is limited, especially when it comes to markets that
can be categorized as being culturally distant.

From the inception of the CityEl car, the company has insisted on offering a
high level of after-sales service. In the car industry, it is not unusual that cars
sometimes must be called back for service to fix mistakes or unexpected
problems that can occur after some time of use. CityEl has also experienced
such setbacks in its history. (Exam Case, CityEl)

Chinese Culture (External Factors)

Sociocultural distance between the home country and host country

China is a country that differs greatly from Western countries in many aspects.
According to scholars, such as Gert Hofstede, cultural distance plays a key
factor when choosing the mode of entry into a new market (Hoftede, 1983). In
the 1980s, Hofstede developed a framework called the 6D (Cultural
Dimensions) model to help us compare cultural differences across countries.
In the following, I will apply Hofstede’s 6D model to explore some of the key
sociocultural factors that could potentially affect the choice of entry mode.

Power distance
According to Hofestede’s
country comparison, China
scores relatively high in power
distance. With a score of 80,
China ranks higher than the
average of 64 for Asian
countries overall. The social
structure of Chinese business organizations is hierarchically steep and formal.
Chinese culture is heavily influenced by Confucian values, which dictate that
subordinates should obey and respect their superiors without question
(Charles A. Rarick, 2008). Inequalities among people are acceptable, and the
relationship between subordinates and their superiors tends to be polarized.
Rank is considered extremely important in Chinese business relationships,
and when conducting business meetings with Chinese business partners, it is
crucial to address those with a higher rank first.

For CityEl, the implication could be that when sending a delegation to China to
discuss a technical issue, they would likely first attend a meeting with
managers and higher-ups from the Chinese side. The people who are more
hands-on with the technical work, such as technicians etc., will most likely not
be in attendance. Any issues and questions will have to be addressed to the
higher-ranked Chinese managers first who might not be able to immediately
give detailed answers before they have consulted their subordinates.

Individualism
Individualism is the relative importance of individual versus group interests.
China has an individualism score of 20. This indicates that China is a highly
collectivist culture, based on the interdependence of people and the
importance of relationships.

Chinese people prioritize group harmony, and will go far to avoid any direct
individual confrontations. Instead, the Chinese use a more indirect form of
communication when debating issues or giving criticism. For Westerners, this
can be a challenge as they are used to a more direct way of communicating.

When presenting a new idea or discussing the pros and cons of a new process,
Chinese colleagues or business partners might be hesitant to openly share
their ideas or criticism, in fear of offending someone. This is very much in
contrast to German culture, where the ideal is to be “Honest, even if it hurts.”
(Hofstede, Country Comparison).

Masculinity
In Hofstede’s model, masculine societies are driven by competition,
achievement, and economical success, while feminine societies value the
quality of life and caring for each other higher. With a score of 66, China is a
society that is very success-oriented and driven. Making money and being
able to financially care for one’s family takes a very high priority in Chinese
society.

Uncertainty Avoidance
With a score of 30, China has a low score on Uncertainty Avoidance. However,
the score alone does not tell the full story. Chinese people are culturally
comfortable with a high level of ambiguity and are very adaptable to change.
Business contracts are often seen as a starting point or a general direction for
co-operation, rather than something that must be adhered to at all cost. For
example, if a Chinese supplier’s cost of production rises due to unforeseen
issues, it is not unlikely that they would ask for a contract to be renegotiated.
For Western companies, a request for such changes will often be seen as
unacceptable, but Chinese people put a great emphasis on flexibility in the
business relationship.

Another important factor is that Chinese business people and organizations

build trust through personal relationships (Roy Y.J.Chua, 2012). Having strong
personal relationships with business partners and important officials in
government etc. is known as “Guanxi”. Building Guanxi is a complex process
and can take a long time. This is often a challenge for foreign companies
entering the Chinese market without any experience with Chinese culture. As
China is becoming more influenced by Western business practices, legal
contracts play greater importance, and should not be neglected, but they go
hand in hand with strong Guanxi.

Long Term Orientation

China scores 87 in long-term orientation. Chinese believe in building and
maintaining long-term (business) relationships. When conducting business in
China, foreign companies should not expect immediate results. Personal
relationships or “Guanxi” reap results through time, and every year invested in
China will pay off in the future (John L.Graham and N.Mark Lam, 2003).

Indulgence
Chinese culture is generally conservative and constrained when it comes to
indulgence. Leisure time is not highly valued, and the Chinese tend to save up
money rather than spend it carelessly. On the other hand, the Chinese also
like to show generosity towards friends and business associates, and they like
to show off their financial success by purchasing expensive status symbols
such as cars, brand clothing, and expensive watches and jewelry.

This also ties into the deep Chinese cultural concept of “Mianzi” or in English
“face”. Mianzi is the prestige and social status of an individual, and something
that is highly valued in Chinese society.

Key Cultural Factors

(That Impact Choice of Entry Mode Strategy)
Based on my situation analysis of significant cultural factors I conclude that
compared to Germany, China represents a high-distance culture. A key aspect
to consider when doing business in a country with a large cultural distance is
the lack of control, and the operational difficulties that the company is likely to
face. This in turn will affect the choice of entry mode.

According to research by scholars and the literature on the subject, when

expanding a business into a market with a high degree of cultural distance,
companies should lean towards a hierarchical entry mode and fully owned
subsidiaries. The downsides to hierarchical entry modes are the cost and
financial risks affiliated with a high degree of engagement in a foreign market.
However, some of the key aspects of Chinese culture that would support a
hierarchical entry mode are as follows:

⁃ Overall high cultural distance

⁃ The long term attitudes towards business relationships in China

⁃ The time and effort it takes to built up business relationships or “Guanxi”, and
the time it takes for these relationships to pay off
⁃ For optimal communications, CityEl will have to familiarize themselves
deeper with Chinese culture and business etiquette

When choosing an effective and realistic entry mode, we must consider

CityEl’s resources. As a small car company, CityEl will typically have fewer
resources to open up subsidiaries in foreign markets. Additionally, CityEl’s lack
of international experience puts them in a weak position to successfully
manage their activities in China.

There is another key element to consider. The CityEl car is a relatively high
complexity product, and after-sales services, such as repairs, etc., could be
crucial for building up their reputation and branding in the Chinese market.
Export modes only afford the company limited control of how such activities
are carried out and maintained by local Chinese resellers.

⁃ Relatively small-sized company

⁃ Lack of experience in countries with a high level of cultural distance

⁃ Relatively high product complexity that requires after-sales services

 Optimal Entry Mode

When a company expands its activities into a new country’s market, we

distinguish between 3 types of entry modes. Export mode, intermediate mode,
and hierarchical entry mode. Each type of entry mode comes with its
advantages and disadvantages. Briefly summed up, export modes offer low
financial risk, but less control. Intermediate modes offer more financial risk, but
a higher degree of control. Hierarchical modes are costly, but offer full control.

CityEl must consider to what extent they are willing to commit financial and
management resources to the Chinese market. With higher commitment
comes greater risk, but with less commitment chances of success also
decrease and can result in missed opportunities (Hollensen, 2007).

I have constructed a scoring system to decide the optimal mode of entry for
CityEl. The system scores each key factor, and the total sum will give us the
answer of which entry mode is the most suitable. A high score leans towards a
hierarchical entry mode, a medium score leans towards an intermediate entry
mode, and a low score leans towards an export entry mode. The score value
of each factor is between 0-100.

Factor Weight* Score

CityEl company size 20
Product complexity 80
International experience 30
Cultural Distance (overall score) 90
Market Growth/Potential*
Political Climate*
Trade barriers etc.*
Average Score 55
*In my model I have included some other factors that should also be considered when
choosing entry mode, but they are beyond the scope of this case. Score weight is also left
blank. Disclaimer: Each score is a subject evaluation.
Export EM Intermediate EM Hierarchical EM
0-33 33-66 66-100

With an average score of 55 CityEl should strongly consider an intermediate

entry mode when entering the Chinese market.

Plan for Implementation

The first step towards setting up a joint venture in China will be to find a
suitable Chinese partner. First of all, a potential partner should be legally
qualified and agreeable to form a JV in China. CityEl should formulate what
qualities they are looking for in a potential joint venture partner in the Chinese
market. Some of the qualities that CityEl could consider includes, but are not
limited to:

⁃ What financial resources can the Chinese partner supply?

⁃ What technical know-how can the Chinese partner supply?

⁃ What are the market access capabilities of the Chinese partner?

⁃ What industry insights and connection does the Chinese partner have?

⁃ What government connection does the Chinese partner have?

⁃ What level of international experience does the Chinese partner have?

Due diligence on both parties' sides should be initiated and carried out. A
consultancy firm could be called in to help in this process.

With China becoming a major player in the electrical vehicle market, there is
also the chance that a joint venture can act as a strategic alliance. A potential
JV partner could be a Chinese manufacturer looking to expand their business
in Germany. In seeking out a JV partner, there might be related opportunities
that can be explored.

After having found a suitable partner, there will be a long list of contractual and
practical issues to be sorted out such as (HG.ORG):

⁃ Letter of intent

⁃ Project proposal

⁃ Registration of enterprise

⁃ Feasibility studies

⁃ Joint venture contract

⁃ Location of joint-venture

⁃ Establishment of joint-venture

⁃ Enterprise code
⁃ Issuance of the approval certificate

⁃ Issuance of business license

A key element besides the percentage of ownership is the influence on who

will get hired for certain key positions in the JV company structure. This can
have a great effect on the control of the company and the decision-making
process.

Evaluation

A number of factors can be decisive for achieving success in any given market.
The process of making the right entry mode decision is complex, and there are
trade-offs among all the many alternatives.

My problem formulation focuses narrowly on cultural aspects and their impact

on the choice of entry mode. Obviously, other factors must be considered as
well, and I have briefly mentioned such factors in the case.

The cultural distance between Germany and China should have a major
impact on the choice of entry mode. Many big companies like eBay, Home
Depot and Best Buy have failed in the Chinese market0 because they failed to
adapt their business models according to local culture and audiences.

With a joint-venture model, CityEl can share the financial risk with a Chinese
partner while also gaining crucial knowledge of the local market and culture.

My method of choosing the right alternative is not scientific and rather

subjective. When dealing with a large number of factors that could influence
the final decision, I do believe in methods to simplify things to get a better
overview.

Given the information I have available about CityEl and the Chinese market
and culture, I do believe that my final choice of entry mode is sensible.
However, more options could be considered in detail. Establishing a
successful Joint Venture is a challenge on its own, and would also require
deeper insights for optimal implementation and results.
 Bibliography
Charles A. Rarick (2008) Confucius on Management: Understanding Chinese Cultural Values
and Managerial Practices (Online) Available
from:https://www.researchgate.net/publication/228196978_Confucius_on_Management_Und
erstanding_Chinese_Cultural_Values_and_Managerial_Practices
HG.ORG (Online) Available from:
https://www.hg.org/legal-articles/establishment-of-a-joint-venture-china-7496
Hofstede (1983) (Book) Culture′s Consequences: Comparing Values, Behaviors, Institutions
and Organizations Across Nations
(Hollensen) (2013) Global Marketing (Book)
Jeanne Whalen (Jan 17 2020) “The next China trade battle could be over electric cars”
(Online) Available from:
https://www.washingtonpost.com/business/2020/01/16/next-china-trade-battle-could-be-over-
electric-cars/
John L.Graham and N.Mark Lam (2003) The Chinese Negotiation (Online) Available from:
https://hbr.org/2003/10/the-chinese-negotiation
Matthieu David (2021) “The electric vehicle market in China, a rising global leader in EV
technology” (online) Available
form:https://daxueconsulting.com/electric-vehicle-market-in-china/
Roy Y.J. Chua (June 19, 2012) Building Effective Business Relationships in China (Online)
Available from:
https://sloanreview.mit.edu/article/building-effective-business-relationships-in-china/

SWOT
Strengths Weaknesses
Long brand history No experience in markets with high cultural
distance
High safety rating Company size relatively small
Low operating costs Car only seats one adult
Iconic design History of “call backs”
After-sales service
Product complexity
Opportunities Threats
Chinese consumers’ positive bias for Western High local competition, many brands in the
brands Chinese market
Chinese market growth Laws and regulations can quickly change
Chinese city infrastructure Cultural distance
China’s political aim to reduce pollution Chinese bureaucracy
Trade deal between EU and China Protection of IP
Low brand awareness in the Chinese market
Political tension between US and China