DISSERTATION PROPOSAL ON CHINESE SMEs IN AUTOMOTIVE INDUSTRY: EXPLORATION ON THE DIFFERENT STRATEGIES UPON THE DISAPPEARANCE OF OEMs
The working title of this dissertation is initially drafted as: CHINESE SMEs IN AUTOMOTIVE INDUSTRY: EXPLORATION ON THE DIFFERENT STRATEGIES UPON THE DISAPPEARANCE OF OEMs
At a continuum, the dynamism of SMEs is one of the key factors for China’s economic growth. SMEs are now responsible for about 60% of the country’s industrial output and high employability rate (75%). In addition, these SMEs are well-positioned to take full advantage of the opportunities fashioned by China’s accession to WTO. However, achieving the so-called success for these SMEs is still a blur especially for SMEs in automotive industry. This is due to the fact that these SMEs depended heavily on OEMs. But because of the intensive trade agreements with other nations, OEMs are threatened to disappear. This has significant effects on SMEs, employment and China’s further growth by and large. This topic for dissertation is chosen to arrive at concluding on different strategies that these SMEs might utilize especially when OEMs are totally wiped out.
Original Equipment Manufacturer or simply OEM is an ambiguous phrase. Typically, this confusing phrase has two popular meanings. The first one refers to a company that supplied equipment to other companies to resell or incorporate into another product using the reseller’s brand name. The other definition refers to the company that requires the product or component and reuses or incorporates in into a new product with its own brand name. Put simply, the companies that supply and acquire products and/or services from manufacturers are called OEMs. This will be the accepted conception of OEM that this dissertation will be going to use.
In light of the massive competition in the global markets, OEMs are facing the challenge to maintain and further gain the competitive edge. The difficulty lies in striking a balance between reducing costs while improving features, functionality and performance. Exacerbated by lower volumes, rapid New Product Introduction (NPI) cycles and fewer internal resources, such OEM challenge is even harder for small and medium scale enterprises (SMEs). Fernandes (2006) maintains that the potential cost savings associated with offshore manufacturing and the global supply chain might be a plausible solution for SME OEMs. However, this solution would be short-term.
At first, SME OEMs outsource operations to North Atlantic countries, allowing them to maintain and enhance competitive advantage by focusing and investing in growth initiatives such as product development and marketing, effective management of costs and requisite capital investments. For large OEMs, cost pressures brought by highly competitive marketplaces prompted them to migrate to low-cost geographies like Asia. This proved to be viable for several reasons including low labor costs for skilled workers, manufacturing infrastructures equivalent to North Atlantic infrastructures, real-time communications and proximity to component and sub-assembly manufacturers.
This condition had increased the competitive pressure on Asian SME OEMs albeit the immediate realization of cost-saving. For instance, when electronics manufacturing services (EMS) providers delivered economies of scale combined with state-of-the-art manufacturing infrastructures and systems, the global-scaled supply chain delivered profound challenges for SME OEMs. Cultural, geographical and communication related issues emerged as well as transportation of equipment/infrastructures between facilities, vendor stability, vender financial strength, quality, materials, management, intellectual property (IP) protection and responsiveness.
These SME OEMs in addition faced issues of product lifecycle and high levels of responsiveness to keep pace with the rapid technology changes. Apart from this, product development and engineering processes might suffer especially during the earlier stages of product lifecycle. Depending on the nature of the industries they belonged to, SME OEMs might have grater NPI and change requirements. In China in particular, locally owned manufacturers master only but few core technologies and mainly compete in economical segment. As such, the tough competition between these manufacturers is the main reason for the continuous decline of prices and the eventual profit-making level (Xuehong, 2007).
China’s automotive industry is said to be large but weak. By 2006, there were 117 approved vehicle manufacturers with Shanghai Automotive Industry Group as the biggest producer. Part supplying is the business strategy more acceptable for these vehicle manufacturers. During 200-2005, the sales income grew by 36.82% on an average due to more than 6, 000 major parts suppliers and another 500 that enters the market each year. These parts businesses are either owned by the state, joint or solely owned foreign ventures or private with most of these privately owned businesses are SMEs.
The advantages and opportunities of these SME OEMs are evident on focusing to cost-based competition, making quick decisions and adopting differed strategies. In addition, they face a larger market that includes both local and overseas orders while also the multinational suppliers are shifting core technologies through relocating plants and purchasing local parts. However, since they are relatively small in scale, they find difficulties in serving state-owned businesses and joint ventures, failing to supply integrated or modularized parts for the time being. These SME OEMs also lag behind their foreign counterparts in terms of process management, quality control and R&D.
Moreover, there are threats that might obstruct these SME OEMs participation in the global supply chain. These are R&D, production technology, quality control, environmental protection, professional languages and communication, application of supply chain standards, creativity of high caliber staff, lean production and cost control. Nonetheless, these are exacerbated by the increased penetration of foreign OEMs in the Chinese market that otherwise have the capacity to tap innovation, engineering and design with respect to their financial capability which might result in the extinction of local OEMs especially the SMEs (Peart, 2003).
This paper proposes to investigate what are the different strategies that these SME OEMs would employ to revert the effects of the increased concentration of foreign OEMs that otherwise intensify the competition in China. Notable are: that over the last five years, China has witnessed a significant increase in vehicle sales though most of the products are owned by multinational names or produced by joint ventures and that export has surpassed import since 2005 though most export are of lower added value. The rationale behind this dissertation is to come up with various business strategies of action for these SME OEMs so that they could cope up with domestic and global competition.
3.0 Theoretical Framework
This dissertation will be guided by the lean manufacturing model since this research focuses on translating strategies through adding value and quality to manufacturing processes. The features of the lean manufacturing model are central on the elimination of wastes which will be the key in optimizing processes while reducing costs. These are: overproduction – production ahead of time; transportation – moving products that are not actually required to perform the processing; waiting – waiting for the nest production step; inventory – all components, work-in-progress and finished product not being processed; motion – people or equipment moving or walking more than the process required; overprocessing – because of poor tool or product design creating activity; and defects – the effort involved in inspecting for and fixing defects.
Diagram 1 Lean Manufacturing Model (Source: http://images.google.com)
4.0 Research Questions and Objectives
The key questions that this dissertation will attempt to answer are: How could Chinese SMEs adopt their strategies without relying on OEMs? What are the different business strategies that the SMEs could utilize in order to maintain ‘a level playing field’ once OEMs departs? The following specific questions will be answered:
1) How could Chine SMEs leverage their R&D capabilities? What are the strategic roles of the local R&D centers?
2) Is the management of transferring of know how feasible? or the protection of IP? How could these activities contribute to the continuous growth of SMEs?
3) To what extent does local sourcing could assists SMEs? How these could affect the quality of the produce? What are the roles of the local suppliers?
4) How these SMEs could optimize the scale of operations? How effective are the manufacturing processes?
5) Is increasing the density of sales network and customizing product portfolio feasible? How could these endeavors add value to the produce?
6) How could local regulations and laws protect the SMEs against foreign OEMs?
The main purpose of this dissertation is to arrive at different strategies that SME OEMs could use in their actual operation. To achieve this aim, this research purports on accomplishing the specific objectives as follows:
· To identify ways on how these SMEs could leverage R&D, marketing and innovation and design
· To determine the role of lean manufacturing in sustaining quality and therefore advancing the competitive edge
· To explore on the role of domestic policies and rules on protecting the interests of SMEs
5.0 Research Plan
The research plan will be guided by the research process onion developed by Saunders et al (2003) in order to arrive at the central issue.
Figure 1 Research Process Onion
According to Saunders et al, there are three research perspectives that the researcher could choose to apply: positivist, interpretivist and realist approaches (2003). Provided that the research is exploratory, I will be using the interpretivist approach. Interpretivism is the most plausible approach for this because it allows the search of the details of the situation to understand the reality or perhaps the reality working behind them (Remenyi et al, 1998). The interpretivist approach necessitates the exploration of subjective meanings that motivate people’s actions in order to understand their actions.
The research approach that the research will use is the inductive approach since the research focuses on building theories instead on testing them. The inductive research emphasizes the understanding of the meanings and the use of qualitative data. It also focuses on a more flexible structure to permit changes as the research progresses.
The timeline of the study is cross-sectional because of time constraint in conducting the research. I will be collecting data on more than one case through the use of questionnaires, semi-structured interviews, structured observation and document analysis since these tools can provide me the flexibility of focusing on the breadth of the research.
Exploratory research will be research strategy of this dissertation. The exploratory research will be used in the research. This kind of research will enable us to look at the problem in descriptive and exploratory manner. The descriptive nature of the study focuses on gathering information about the present existing condition in order to describe the nature of situation as it exists at the time of the study and to explore the causes of the phenomena, making possible the utilization of formal observation. The exploratory nature will facilitate us to investigate the different strategies that these SMEs might use when local OEMs are defeated by foreign OEMs.
Qualitative data will be collected through interviews and questionnaires to acquire deeper understanding of these strategies of action. Primary and secondary research will be used also. The primary data will be the results of the questionnaires and interviews after they have been analysed. Primary data will be presented in the discussion sections of the dissertation. Secondary data will come from the selection of books especially business administration books, journals, newspapers and magazine articles, related case studies, official statistics and the Internet. Data collated from these sources will be subjected to contents analysis and will be presented in the literature review section of the actual research.
Questionnaires will be utilized since it is important to arrive at necessary details, acceptable to the subjects and convenient to analyze and interpret. Hypothetical, probing and open-ended questions as well as ranking questions will be included. Department heads of 5 Chinese SMEs will be sent with questionnaires as well as 2-3 Chinese authorities that are responsible for SME business support. I have chosen to use semi-structured interview because it allows structuring the interview before by preparing the questions, but also it is possible to be flexible, if issues which was not planned appears and it will provide me the advantage to further explore themes as it emerge. Aside from the department heads, representatives from the upper management of these 5 SMEs will be interviewed.
Validity, Reliability and Generalisability
To ensure the validity of the research, I will make ascertain that the methods used and analysis with the particular attention given to designing questionnaires and interview questions. SME as a business, OEM and the automotive industry will be also studied to ensure that the “findings are really about what they appear to be” (Saunders et al, 2007).
In providing other researchers to replicate the results of this dissertation, the four threats to reliability will be lessened if not totally eliminated. These are the subject of participant error, subject of participant bias, observer error and observer bias. To ensure reliability, I will plan the interview with high degree structure to minimize participant bias and observer error. In interpreting and analyzing data without personal bias and observer bias, independent analysis of the data through a blinded researcher will be conducted.
I do not claim that the results and conclusions of the research can be generalized since it includes only one country. Further, the SMEs that will be surveyed and interviewed might use different strategies fir to their organizations as well as the reason for implementing these strategies.
China’s Small and Medium Enterprises: Room to Grow with WTO, American Embassy in China, retrieved on 29 April 2008 from http://www.usembassy-china.org.cn/econ/smes2002.html.
Fernandes, C 2006, Going Global – New Options for Small to Medium Enterprise OEMs, EPM Global Services, retrieved on 29 April 2008 from http://www.epmglobal.com/about_epm/news/going%20global.php.
Lean Manufacturing, University of Auckland, retrieved on 29 April 2008 from http://images.google.com/imgres?imgurl=http://www.shortcourses.auckland.ac.
Peart, L 2003, Chinese Carmakers Set to Challenge Foreign Original Equipment Manufacturers in the Domestic Market, Business Briefing: Global Automotive Manufacturing & Technology.
Remenyi, D., Williams, B., and Swartz, E. (1998). Doing Research in Business Management: An Introduction to Process and Method. London: Sage.
Saunders, M, Lewis, P & Thornhill, A 2003, Research methods for business students, (3rd edition), Prentice Hall, London.
Saunders, M, Lewis, P and Thornhill, A 2007, Research methods for business students, (4th edition), Pearson Education Limited, Harlow.
Xuehong, J I 2007, Development of China’s Small and Medium-Sized Parts Suppliers, China Automobile Technology and Research Center.
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