Introduction
Over the recent past, we have seen companies expand globally by testing their products in foreign markets. Companies such as Starbucks and McDonald’s have successfully expanded by tapping into consumer demand for their products. Car companies, including BMW, Honda, and Volkswagen, have seen an opportunity to capitalize on the global market. The company has been at the forefront and even announced plans to build new factories in China. Strategies employed by BMW to enter foreign markets vary significantly depending on countries’ policies.
Brief History
The acronym BMW stands for the German phrase “Bayerische Motoren Werke.” The company began producing aircraft engines in 1913, supplying them to the Germans during World War I. The end of WWI led to a halt in the construction of aircraft engines, as the Versailles Treaty prohibited Germany from building aircraft, forcing BMW to shift to a different product line. It then started to deal in railway brakes and built-in motors (BMW Group, 2022). Introducing new products, particularly those featuring built-in motors, has led to significant growth for BMW.
Operations in Germany
Whether it is production, planning, logistics, or quality assurance, all eight BMW plants in Germany set trends and drive the technological revolution forward with digital innovation, sustainability, and flexibility. The company is the third-largest car manufacturer in terms of market size. In Germany, it ranks third among the bestselling car brands, behind Mercedes and Volkswagen, with an 8% market share (Wagner, 2022).
Consumers are responding positively, and there is a high demand for its automobile products. BMW’s chief executive, Oliver Zipse, said that never before have their pre-orders been higher than they were on the day of the global semiconductor chip shortage. He went on to add that the markets signal that this high demand will continue.
The company achieved its highest-ever annual sales in China last year, driven by a strong focus on electric vehicles and resilience in the face of global chip shortages and pandemic-related challenges (Arab News, 2022). In China, demand for BMW cars recovered in the third quarter, after lockdowns plagued the first half, the CFO said, describing it as a “rollercoaster” year in its largest sales market (Reuters, 2022). BMW established a robust strategy to win customer loyalty, and even the COVID-19 pandemic could not lower demand for its products.
It registers high sales volumes in its subsidiaries. The German manufacturer announced that production has formally begun at a new plant in China, with an investment of 15 billion Yuan ($2.24bn), as the carmaker escalates its electric vehicle (EV) production (Reuters, 2022). This is beneficial for BMW’s long-term growth, as it will lead to larger market access and a consequent increase in demand. Its third-quarter sales grew from €35 to €37.2bn, representing a 35% increase (Durbin, 2022). Such a surge helped the company maintain strong demand for its products in China and simultaneously set higher prices for its luxury models.
The increase in demand has led to a proportionate increase in profit, which is reflected in the body language of the BMW CEO, who appears pleased to see the sales volume rise rapidly. From China alone, the German carmaker has generated a substantial profit, making the highest profit from China than from all its other subsidiary countries. The German carmaker’s net profit rose from €2.6bn in July to €3.2bn in September of the previous year (Mustoe, 2022). The BMW Group more than tripled its net profit to a record €12.5bn ($13.8bn) in 2021 (Xinhua, 2018). The stability and safety of BMW cars have seen their demand rise to its peak in 2022.
To manufacture its vehicles, BMW relies on a global network of over 100 auto parts suppliers. Approximately 43% of its suppliers are based in Germany or are subsidiaries of German companies (Maverick, 2019). 34% of the suppliers have their bases in other European countries (Sebastian, 2021).
With this, the suppliers are split between the European countries in a ratio of almost 1:1 (Maverick, 2019). These suppliers are numerous, including but not limited to Brembo, Dräxlmaier Group, Peiker Acoustic, ThyssenKrupp, BorgWarner, ElringKlinge, Mahle, Bridgestone, GKN Driveline, Johnston Electric, Gestamp, Apag Elektronic AG, Delphi, Hirschvogel, Magma, and Kardon/Harman (Coe et al., 2017). The above-listed firms supply various materials.
BMW has sustainability guidelines for its suppliers. Being environmentally conscious, the company insists its suppliers must work towards promoting a green environment (Maverick, 2019). As noted by Kotilainen et al. (2019), it uses guidelines such as the use of recycled aluminum, alongside employing the “Efficient-Dynamics concept,” which came about to increase fuel efficiency and reduce emissions. BMW has been featured in the Dow Jones Sustainability Index every year since 1999, ranking first in 2020 and surpassing 38 other car companies in the automobiles section (Mulcahy, 2021). The manufacturer’s commitment to ensuring its suppliers adhere to environmental sustainability protocols has not only improved sales but also positively impacted market size.
BMW is a car manufacturer with the third-largest market size in Germany, while Mercedes and Volkswagen occupy first and second positions, respectively. The company serves a significant portion of the German market, accounting for approximately 8% of the total market share (Germany Trade and Invest [GTI], 2022). It sells at least a third of its cars to China, competing in the market with a larger rival, Volkswagen, which sells almost half of its cars to the same destination (Zhou, 2022). BMW reported selling 214,565 cars in China from July to September, representing a 5.7% increase from the same period last year (Mustoe, 2022). As one of the leading car brands, the company finds it easier to positively influence its sales in both local and foreign markets, such as China, by establishing effective supply chains.
Establishing production chains in large markets can substantially reduce tariffs. BMW has enjoyed a significant share of the Chinese market due to the reduction of import tariffs on automobiles and car parts, which has opened up greater access to the world’s largest auto market (Ou et al., 2019; Schülke et al., 2017; Xinhua, 2018). The company stated that it would review its prices, noting that the move was a positive sign indicating that China would continue to open its doors to new investments (Global Times, 2022). China has issued several policies to boost the EV sector, some of which include Tax Exemptions on purchases of New Energy Vehicles. China is also negotiating with manufacturers about extending the costly electric vehicle (EV) subsidies that were set to expire in 2022.
Operations in China
BMW entered China in 2003 through a joint venture with Brilliance Automotive Holdings Ltd., a leading automotive firm at the time of the strategic partnership (Adrian, 2022). In 2003, when the company expanded its operations to the Chinese market, it initially invested roughly $500 million (Naor et al., 2021). Recently, BMW increased its investment in China to $2.5bn to improve EV production volume. In response to market demand, it launched several of its vehicles in China. It also launched localized versions of the BMW Series 5 and Series 3 vehicles for the Chinese market (Randall, 2022).
BMW built a new 5 Series sedan. The vehicle with a long wheelbase offered luxury and comfort to the passengers seated in the back seats. The car, built in the Shenyang plant, featured high-comfort rear seats, catering to Chinese luxury vehicle customers who were typically chauffeured around the city. Adaptations like these for the specific foreign market have enabled BMW to become one of the most popular foreign automotive brands in the Chinese market, and now lead subdivisions, such as the smart compact segment, after the recent release of the adapted i3edrive (Moon, 2022). Strategic partnerships, such as joint ventures, enabled BMW to enter the Chinese market and acquire more customers within a shorter timeframe.
Its campaigns have also played a pivotal role in seeing its successes in foreign markets. Some of its popular global campaigns were localized and released in China. One such was the ‘Joy of BMW’ Campaign. In 2009, the Joy campaign was launched in Europe and America to enhance the brand’s reputation and create an emotional connection with its customers (Hollebeek & Macky, 2019).
In the localized version of the campaign, the word ‘Joy’ was translated into the Chinese word ‘Yue’ (Jiang, 2018). While expressing joy, it also focused on the act of giving joy. BMW, in China, floated the concept of making emotional factors as important as rational factors. In one of the Joy advertisements, the company utilized Chinese culture, including calligraphy, painting, and opera masks, to tailor the brand for the local market.
Chinese Impact
China impacts BMW through several aspects. To realize China’s growth dream, the Chinese government is developing enterprises, which is good for the company. Economically, under the influence of the innovation-driven development strategy and “the made in China 2025 initiative,” BMW responds to the Chinese market by actively innovating new models and ensuring their excellent quality. Furthermore, China is rapidly embracing digitalization, big data policies, and internet thinking, which need to be reflected in new products and services.
Environmentally, the Chinese government has to implement ecological reforms. Therefore, the company must also pay attention to protecting the environment and reducing the discharge of chemicals that pollute the environment. Lastly, with the implementation of the Belt and Road strategy, the Chinese government has vigorously promoted cooperation with other countries along the route, allowing BMW to seize the opportunity to invest in the Chinese Market and strive for a win-win situation.
Internal Advantages
The advantage of internalization for BMW is that it controls the production and manufacturing process of cars in its own hands, preventing the leakage of patents and confidential technologies, and protecting its interests. But foreign auto brands in China are restricted to joint ventures by the Chinese government, which wants to protect the local market. However, this policy has also avoided many risks.
Generally, Chinese enterprises provide land and establish facilities, while foreign enterprises bring technology, talent, patents, and other resources. Therefore, when BMW entered the Chinese market in 2003, it opted to cooperate with China Brilliance Auto Co., Ltd., with each party holding a 50% equity stake (Sachs, 2018). Such strategic partnerships remained advantageous for the company because it continued to own production rights and technology.
In 2022, China announced the cancellation of restrictions on foreign vehicle ownership for commercial use, and Brilliance Auto filed for bankruptcy due to improper management. BMW China’s brand was also acquired by its parent company, which means the company will now own 100% of Brilliance Auto’s factories and other resources. Not only that, but BMW also took a 25% stake in the BMW Brilliance joint venture to 75% in 2022 for €3.8bn. The manufacturer is likely to acquire the remaining equity to form a wholly owned company in the future, thereby strengthening its internationalization advantage.
Dunning’s OLI
The OLI (Ownership, Location, and Internalization) Paradigm, also known as the Eclectic Paradigm, developed by John Dunning, provides a comprehensive framework for identifying and evaluating the key factors influencing foreign production by enterprises and the growth of foreign direct investment. The idea of OLI was first conceived by Prof. Dunning after realizing the 2 to 5 times higher labor productivity of the US manufacturing industry in the UK industry, when the US affiliates in the UK were not any better than their UK competitors, and even poorer than their parent companies (Kyove et al., 2021).
Subsequently, Dunning came up with the Ownership Specific, Location Specific, and Internalization advantages of an MNE (Multinational Enterprise), which became the OLI Paradigm, which explains the causes for differences in international production. Dunning himself assessed the practical application of this paradigm to the dynamic situations of international activities of MNEs, where he proved to be successful.
Ownership Advantages
BMW is unique and special for various reasons. To begin with, the company has a strong brand image within the industry. As one of the renowned world brands, it offers popular models and brands such as Rolls-Royce, with a reputation for quality and multiple patents—BMW holds 61,964 patents worldwide. More than a third of its patents are licensed, and the company has a strong focus on technological innovation and skilled human resources. As an integral player in the luxury automobile industry, the organization set its sights on competing in the international market.
The horizontal FDI approach was chosen as an effective measure to increase the manufacturing and distribution of high-value vehicles. Plant investment is present in South Africa, India, China, Russia, and the US (Baskaran et al., 2017). The growing economy in China, evident over the past few decades, has been a major motivator for FDI in the market.
The fast growth led to an increasing demand for European luxury automobiles that the newly rich business owners would wish to own. The organization intends to increase the number of dealerships to match the high demand present in the countries and as an effective measure to expand into nearby regions (Kim, 2018). Horizontal FDI ensures that the automobile corporation can take advantage of the stable economy while satisfying the needs of the available market gap in the region.
The potential future growth of this market is estimated as revenue for BMW and is projected to reach $4.63bn in 2022. Revenue is expected to show an annual growth rate (CAGR 2022-2027) of 1.11%, resulting in a projected market volume of $4.89bn by 2027. The company unit sales are expected to reach 95.1K vehicles in 2027. The volume-weighted average price of BMW in 2022 is expected to amount to $51.60k (Som, 2016).
Conclusion
In conclusion, China is BMW’s largest market, and with the subsidies the Chinese government is offering, we could see BMW making significantly more profit than the forecasted potential. It should invest more resources in studying the Chinese market and how to better meet its demands, as it is its biggest market. The company should seek to explore other new markets beyond the 14 it currently operates in, as there may be more untapped potential in some of these markets.
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