The automobile industry continues to be globalized. Daimler Benz merged with Chrysler Corporation and focused on integrating operations of individual subsidiaries scattered in the global landscape. In addition, Ford had acquired Volvo that extended the former global brands to six. The purpose of these global manufacturers and assemblers is to build economies of scale in performing activities in the value chain particularly in requisition of car components that make the 60% value of the finished product. Thirty percent of auto market in the US is owned by foreign players while rivalry is tough for luxury brands. Due to internationalization trend, auto companies are confronted with cultural issues especially the languages. A concrete example was Ford’s translation in branding its new released car in Japan called Ka which means mosquito. Apparently, the objective is to enjoy the advantages of scale and localization at the same time. As a result, cost-effectiveness and value-adding capabilities attributable to the firm are enhanced.
In the closing years of Australian car manufacturing in 1950s, there were at least 24 car manufacturers. In the onset of the 21st century, however, they were only four as the previous decades illustrated declining trend. The findings showed that from 1920 to 2000, falling government policy increases the likelihood of exit where exemption applies to a large manufacturer while aggravation applies to a small firm with large production plant. The theme of Australian car industry of continuous decline of car plants was the ability of industry players to be efficient. Although the 1940s level of 14 plants (the government protects local assemblers) was increased in 1960s to 16 plants (the government encourage foreign manufacturing), this suggested that foreign players gradually saturating the industry. Due to this, at the first quarter of 1980s, the effect of globalizing the industry and entrance of relatively technological and experienced players in the West or those from Japan had caused decline. This was flamed by the government’s minimal support and protection to domestic producers. This resulted to managerial decisions to merge and identify strategic links leading to cost-effectiveness, at the same time, small number of companies.
The Japanese automobile industry is using the vertical keiretsu that is said to give them competitive advantage in the international arena. Partly the cause of being the second largest FDI contributor to the United States, interdependence and coordination with competitors and strategic links that supplies activities in the value chain characterized association of such industry. This aspect provides Japanese manufacturers enhancement in there OLI (Ownership, Location and Internalization) paradigm. The automobile ancillaries of core Japanese manufacturers are able to overcome the risk (as it is founded that larger firms tend to invest abroad) of FDI due to their relatively small size because there is long-term relationship between the two. With security of demand and cash flow, there were 97 keiretsu affiliations out of 106 in the US. The restriction of US to use local components on Japanese manufacturers was resolved by including only a limited number of US suppliers while retaining the large number of keiretsu networks.
Political Risks in Brazil
The country has the biggest supply and demand of automobiles in the South American continent. The demand for luxury goods like automobiles is directly relevant to the spending patterns of the elite class situated at the tip of the consumer pyramid occupying around 2% of the total population or 1.1 million families. They are considered wealthy with annual income 14 times greater than the Brazilian average and whose purchasing behavior is attached to product’s capability to be unique or/and reflect their social status. Their number are concentrated in the Southeastern region (73.5%) of the country and scattered in the cities of Sao Paulo, Rio de Janeiro and Brasilia. When the economy is performing well, it will affect the middle class’ incomes which are said to aspire purchasing patterns of their wealthy counterparts.
Brazil requires 30% corporate tax and 15% withholding taxes against profit and dividend remittances. It has double taxation treaty with the United Kingdom and other several countries providing additional incentive to foreign investors and managers which mean unnecessary decrease in their income resulting to higher motivation and possibly lower turn-over in managerial positions assumed to be from home countries. Tariff ranges from 17% to 23% depending on the industry. Automobile sector is highly dependent on the economy and share the over 10% of GDP in 1998 figures. There are few restrictions in fund transfers while the economy accepts all sectors under foreign investments although registration to the Central Bank is required to every aspirant. In 1990s, Brazil experienced trade liberalization that benefited consumer durables and installed the country as the world’s eight largest automotive industry. It has intensive partnership with the Argentina and Mercosur where around 30% of its automobile produce is exported. As a result, economic influence of the region to Brazil can be considered high as illustrated by decline in demand, in effect production, of automobiles when Argentina’s economy slowdown.
Bureaucracy is likely to skew towards excessiveness because of democratic type of governance. The passing of law is undertaken by two separate but complementary bodies under bicameral system which can hamper the investment policies. Corruption is guarded by several political parties and other public associations that guard the dealings of the government. The experience of the country in the impeachment of its 1990s President Fernando Mello can suggest that its system secures the good governance of public servants. In the process of such impeachment, political parties also had an impact, partly to spark public vigilance in the performance of executive officials. The interaction of bureaucracy and corruption is a necessary course of a democratic government. Without bureaucracy, corruption cannot be filtered. On the other hand, without corruption, bureaucracy is unlikely be necessary.
Political Risks in Malaysia
In general, Malaysians are brand and prestige conscious while information about new products is gathered among close peers. The experience in 2002 showed that Malaysian consumers are willing to buy luxury products like cars whenever the government supports their purchase through price and quality incentives. Demand for automobiles can be affected by congestion of public highways that is a continuing concern for the country. There is no data
Malaysia’s corporate tax is 28% and considered one of the lowest in the region while raw materials are subject low to zero import duties. Non-resident employees are subjected to 10% withholding tax. The country is a main producer of vehicle parts, components and accessories to Asian countries like Thailand, Singapore, Indonesia, Japan and the UK and supplies parts to General Motors, Suzuki and Nissan among others. The liberalization of auto industry started when the country aimed to challenge Thailand as the number one car maker in the Southeast Asia. The plan gives auto investors incentive on loans and grants but minimizes the upper hand of the national brand Proton Holdings which was protected by government arm. Import tariff rates were also cut in the Southeast Asian countries from 20% to 15% due to the existence of Asian Free Trade Area (AFTA). Protectionism in the industry against Thailand can be considered not much of pressure because of the latter production focused on trucks and commercial vehicles. The Asian crisis in 1997 opened the minds of political leaders for globalization.
Bureaucracy is relatively unlikely due to relatively small number of legislatures while passing of laws are expedited by the fact that the cabinet where the Prime Minister comes from is supportive to the latter, at least in majority. However, this can be offset by the presence of the King (the religious leader of Islam) which can affect government affairs especially major investment decisions that can connote cultural infiltration which can be a huge concern for his rule. Corruption is likely because of the fact that media is held by the government that can hamper transparency in transactions. In 1998, the Deputy Prime Minister Anwar was dismissed by the Prime Minister due to corrupt practices and sentenced and beaten in the prison afterwards. However, without transparency and media independence corruption cannot be thoroughly examined by the public especially the business sector.
Financial Risks in Brazil
The United States is the largest investor in the country. The Northern part is considered the poorest regions although investments are gradually building up to stimulate its local economy. Privatization and emphasis on education are major themes in the present government. However, the economy is volatile to trading partner’s condition and world affairs including Argentinean, Asian and Russian crises that affected its economic performance. On the other hand, the present reforms of the government made its economy resistant to international economic shocks. As a result, it continued to increase real wage and employment suitable for economic exchanges within the economy. It has close relations with the IMF that helped it developed its economic reforms.
Real currency is pegged into the dollar to revert high inflation experienced during 1980s and 1990s.
Financial Risks in Malaysia
Malaysia actively sought WTO and AFTA deliberations to enhance its FDI level. This is reflected in its five year plan that also seeks to find bilateral agreements. The country is an open economy and shifted its focus to manufacturing since 1970s. The economy continuously diversifies that includes automobile industry although its major produce is semiconductors and appliances. The growth was enhanced by privatizing inefficient government-owned corporations suggesting competition among local and foreign firms with minimal protection. The labor shortage can in the country can be an opportunity for home workers to proliferate their expertise in the host country with relatively ease of entrance. Automobile producers and foreign investors can exploit the concern about current account deficit by producing goods that are previously imported in nature. When they can manufacture in the local soil, they can be allowed and even hand down lucrative investments. However, this can be hampered by the counter argument of slowing the booming economy of the country as to prevent too much size which the economy cannot handle.
In 2003, the economy is boosted by government’s move to lower its interest rates due to declining export and weakening tourism industry. This is intended for hotel owners to pump up their infrastructures and for the business economy as a whole. Employee bonuses of public workers are also increase partly due to increase their purchasing power, an incentive for local producers to augment fund for foreign export. The history of low inflation rates is true to the country that helped it avoid further financial difficulties in 1997 recession and also enhance its ability to stimulate the economy faster. However, this advantage caused its economy to result to deflation since 1998 making imports more expensive to local consumers wherein inflation rate is close zero. This could further result to delaying purchases due to speculation which can result to stagnant economy.
It promotes import substitution and export strategy. Japan is the major investor of the country. Its foreign investment policy is relatively flexible to suit the current needs of the economy due to the absence of law under this category unlike Thailand. The government has the final go-signal to foreign firm’s license to operate in the local soil. The liberalization policy is also aimed to redistribute wealth to the indigenous people. The protection from expropriation of foreign investments can be fully obtained through bilateral agreements that can negotiate the level of protection, compensation, transfer of capital and profits and other disputes between the private firm and the government. However, this scheme, according to several studies is not antecedent to increase FDI rather a complementary feature of broader economic reforms.
Malaysian ringgit is under managed float exchange system giving the government intervention capabilities when necessary. In 2005, Malaysia lifted its dollar pegged currency transforming its currency closer to perceived market value. This can enhance confidence of foreign importers on the real value of Malaysian exports stimulating trend. It also an indication that the money of the country is gradually adjusting to its robust and economy which is brought about by consumer price inflation in 2005 at 3%, a 100% increase in 2004 level. However, there is pressure to the government to intervene infrequently as to deter the improvement of its currency outlook from world partners’ view. In 1990s, its rinngit was cited to be undervalued against the dollar which was partly meant to provide incentive to importing foreign markets and boost its exports.
Credit:ivythesis.typepad.com
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