Suggested terms of factor proportions theory, what production

Suggested terms of factor proportions theory, what production

Suggested Solutions to Questions 1. In the intensely competitive global automotive industry, what factors provide comparative advantage to nations? Give some examples of natural advantages and acquired advantages that nations possess in this industry. Comparative Advantage: (Country advantage) The relative efficiency with which a country can produce a particular product or service, compared to other countries.

Examples: • Saudi Arabia- oil • Brazil- coffee • Australia- wool • United Kingdom- financial services Automotive industry: source from locations that can supply low-cost input goods (such as engines, tires, car electronics). Natural Advantages: fertile land, abundant minerals, and favorable climate- were the initial areas of focus for comparative advantage. Examples: • South Africa has extensive natural deposits of minerals, it produces and exports diamonds. • Canada has much agricultural land and suitable climate, it produces and exports wheat. • Automotive industry: source from countries with abundance of factor inputs, e. . steel.

Acquired Advantages: ¦ Over time, it has become clear that countries can also create or acquire new, comparative advantages, or such advantages emerge over time. ¦ Each nation’s bundle of advantages evolves over time. ¦ Examples- • Japan originally built an automotive industry at home, but had to seek lower cost production factors in Southeast Asian nations, Mexico, and Brazil. • Germany had to relocate much of its mass manufacturing to Eastern Europe, to secure lower production costs. HMC built a factory in Turkey in 1997, in India in 2000, (with second plant in 2007), and in China in 2002- main advantages of these locations is the availability of inexpensive, high-quality labor and proximity to the Middle East and Western Europe. ¦ Nations attempt to overcome their inefficiencies relative to other countries, via modernization, reduction of excess capacity, training, and upgrading human resource skills. 2.

Thinking in terms of factor proportions theory, what production factors are most important in the automotive industry?Based on your answer, what countries would appear to possess the most advantages for manufacturing cars? Justify your answer. ¦ According to the Factor Proportions Theory, each country should export products that concentrate on its relatively abundant factors of production, and import goods that concentrate on its relatively scarce factors of production. ¦ Factors of Production: resources used in the production of goods and services, including natural resources, labor, capital, and technology. To gain a competitive edge, HMC must not only seek out inexpensive labor, it must also source from locations that can supply low-cost input goods (such as engines, tires, and car electronics). 3. As a nation, what competitive advantages does South Korea offer to home-grown automakers such as HMC? What are the specific national competitive advantages that have helped HMC succeed in the global car industry? ¦ Competitive advantage- An individual company has a competitive advantage when it possesses one or more sources of distinctive competence relative to others, allowing it to perform better than its competitors. Instead of FDI as in Canada, HMC began exporting to the U.

S. market with the Excel as an economical brand at a $4,995 price tag. The car was soon a big success with exports rising to 250,000 units per year. ¦ HMC introduced a ;quot;10-year warranty;quot; program. ¦ HMC built a factory in Turkey in 1997, in India in 2000, (with second plant in 2007), and in China in 2002- main advantages of these locations is the availability of inexpensive, high-quality labor and proximity to the Middle East and Western Europe.

Automotive industry labor costs make up only 10 percent of total operational costs. To gain a competitive edge, therefore, HMC must not only seek out cheap labor, it must also source from locations that can supply low-cost input goods (such as engines, tires, car electronics). ¦ HMC invests heavily in various value-chain activities and uses FDI to develop key operations around the world. Management chooses foreign locations based on the advantages they can bring to the firm’s global business. R&D is targeted to developing safer, more convenient automobiles of superior quality. HMC is developing environmentally-friendly technologies that emphasize fuel efficiency. HMC conducts market research to help with choosing designs, as well as interior and exterior styling of its cars.

4. Discuss HMC and its position in the global automotive industry in the context of Porter’s diamond model. That is, in regards to HMC’s international progress, what is the role of: firm strategy, structure, and rivalry; factor conditions; demand conditions; and related and supporting industries? a.

Firm strategy, structure, and rivalry- refer to the nature of domestic rivalry, and conditions in a nation that determine how companies are created, organized, and managed. The presence of strong competitors in a nation helps create and maintain national competitive advantage. HMC- ¦ With many competitors battling for market share, carmakers such as Toyota, Nissan, Honda, Hyundai, General Motors, Ford, DaimlerChrysler, Renault, and Volkswagen operate on relatively thin margins. The automotive industry has been suffering from excess production capacity.

Although there is a capacity to produce 80 million cars globally, total global demand runs at only about 60 million a year. Thus, car manufacturers typically employ only 75 – 80 percent of their production capacity. ¦ Industry Characteristics: Capital-intensive with numerous mergers and acquisitions in recent years- Ford and Land Rover, Jaguar and Volvo, Ford and Jaguar and DaimlerBenz with Chrysler (Daimler preparing to divest Chrysler). ¦ Their "10-year warranty" strategy was a major turning point for Hyundai, and they set about designing and building cars based on much higher quality standards.

While still maintaining low prices, HMC was able to provide substantial extra value to consumers. ¦ Geographic diversification – HMC built a factory in Turkey in 1997, in India in 2000, (with a second plant in 2007), and in China in 2002- main advantages of these locations is the availability of inexpensive, high-quality labor and proximity to the Middle East and Western Europe. b.

Factor conditions- describe the nation’s position in factors of production, such as labor, natural resources, capital, technology and know-how.Consistent with the Factor Proportions Theory, every nation has more of certain factor endowments and less of others — a situation that determines the nature of national competitive advantage. ¦ By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. During its lifetime, Kia had managed to acquire a substantial base of highly knowledgeable workers, engineers, and design staff. Together, the two firms created synergies and economies of scale in R&D, engineering, purchasing, quality control, and marketing.HMC also invested in R;D centers in North America, Japan, and Europe. ¦ To gain a competitive edge, HMC must not only seek out cheap labor, it must also source from locations that can supply low-cost input goods (such as engines, tires, car electronics).

¦ HMC invests heavily in various value-chain activities and uses FDI to develop key operations around the world. Management chooses foreign locations based on the advantages they can bring to the firm’s global business. R&D is targeted to developing safer, more convenient automobiles of superior quality.

HMC is developing environmentally-friendly technologies that emphasize fuel efficiency. HMC conducts market research to help with choosing designs, as well as interior and exterior styling of its cars. c. Demand conditions- refer to the nature of home-market demand for specific products and services. The strength and sophistication of buyer demand facilitates the development of competitive advantages in particular industries. ¦ Domestic demand in South Korea is some two million vehicles; total productive capacity had reached five million.Exporting was a necessity.

¦ Late 1970s HMC began an aggressive effort to develop engineering capabilities and new designs. ¦ Instead of FDI (as in Canada), HMC began exporting to the U. S. market with the Excel as an economical brand with a $4,995 price tag. The car was soon a big success with exports rising to 250,000 units per year. ¦ HMC produces about a dozen models of cars and minivans, as well as trucks, buses, and other commercial vehicles.

Popular exported models are the Accent, Elantra, and Sonata. d.Related and supporting industries- refer to the presence of clusters of suppliers, competitors, and complementary firms that excel in particular industries. Operating within a mass of related and supporting industries provides advantages through information and knowledge synergies, economies of scale and scope, and access to appropriate or superior inputs. ¦ The economy comprises numerous family-owned conglomerates, or chaebol. The combined sales of the nation’s five major chaebol — Hyundai, Samsung, Daewoo, LG, and SK – account for roughly 40 percent of South Korea’s GDP and total exports.

The cost-effectiveness of suppliers is a life-and-death matter in the global automotive industry. HMC is cooperating with DaimlerChrysler to develop new technologies and improve supply chain management. Projects include a new four-cylinder engine and a joint purchasing plan. 5. Discuss HMC and its position in the global automotive industry in terms of the eclectic paradigm. That is, for HMC, what is the role played by: ownership-specific advantages; location-specific advantages; and internalization advantages? a.

ownership-specific advantages (firm-specific advantages) R&D- By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. During its lifetime, Kia had managed to acquire a substantial base of highly knowledgeable workers, engineers, and design staff. Together, the two firms created synergies and economies of scale in R&D, engineering, purchasing, quality control, and marketing. HMC also invested in R&D centers in North America, Japan, and Europe. ¦ Cultural affinity- HMC benefits from its proximity to China and management understands the Chinese culture.

Chung Ju Yung’s ‘can do’ spirit prevails throughout the entire HMC network. b. location-specific advantages ¦ Refer to the comparative advantages that exist in individual foreign countries. ¦ Examples include natural resources, skilled labor, low-cost labor, and inexpensive capital. ¦ A location-specific advantage must be present for FDI to succeed. ¦ Automotive industry labor costs make up only 10 percent of total operational costs. To gain a competitive edge, therefore, HMC must not only seek out cheap labor, it must also source from locations that can supply low-cost input goods (such as engines, tires, car electronics).

The cost-effectiveness of suppliers is a life-and-death matter in the global automotive industry. HMC is cooperating with DaimlerChrysler to develop new technologies and improve supply chain management. Projects include a new four-cylinder engine and a joint purchasing plan.

¦ HMC built a factory in Turkey in 1997, in India in 2000, (with a second plant in 2007), and in China in 2002- main advantages of these locations is the availability of inexpensive, high-quality labor and proximity to the Middle East and Western Europe. ¦ In 2006, HMC had more than ten production plants n Taiwan, Vietnam, Iran, Sudan, Venezuela, and in the U. S.

(Alabama- May 2005). c. internalization advantages ¦ Are the advantages that the firm derives from internalizing foreign-based manufacturing, distribution, or other stages in its value chain. ¦ When profitable, the firm will transfer its ownership-specific advantages across national borders within its own organization rather than dissipating them to independent, foreign entities, i.

e. which is the best option- internalization via FDI versus externalization using external partners (licensees, distributors, or suppliers). Internalization advantages: control ¦ In 1983 HMC started its Canadian operation, the firm’s first foreign investment venture.

However, the operation proved unprofitable and was shut down after only four years. ¦ In 1998, HMC took control of Kia, becoming South Korea’s biggest carmaker and holding three-quarters of its domestic vehicle market as well as passing Japan’s Mitsubishi and Suzuki in world ranking. ¦ HMC invests heavily in various value-chain activities and uses FDI to develop key operations around the world. 6.

Visit HMC’s website (www. hyundai-motor. com).What international collaborative ventures is HMC involved in? Does the firm appear to be a part of any networks? Describe these relationships, based on your reading of the website.

HMC was originally a member of the Hyundai Group, one of South Korea’s five largest chaebol (family-run industrial groups). Core business areas for Hyundai had included auto manufacturing and services, electronics, home and industrial construction, financial services, and shipbuilding, shipping, trade, petrochemical production, oil refining, machinery, metals, and aircraft manufacturing.Hyundai Motor Company (HMC) has the following international subsidiaries: HAOS (Turkey); Hyundai America Technical Center Inc.

; Hyundai Auto Canada Hyundai Capital Service Inc. (Seoul, South Korea); Hyundai Machine Tools America Inc. ; Hyundai Mobis Company Ltd. (Seoul, South Korea); Hyundai Motor America; Hyundai Motor Company Australia; Hyundai Motor Europe; Hyundai Motor Hungary; Hyundai Motor India; Hyundai Motor Japan Co. Ltd. ; Hyundai Motor Manufacturing Alabama; Hyundai Motor Poland Sp. zo.

o. ; Hyundai Translead (San Diego, California); Kia Motors Corp. Seoul, South Korea); Czech Republic –HMC initiates first EU manufacturing facility Brazil – HMC opens CKD Assembly Plant The sixth largest automobile manufacturer, HMC capitalizes on the relationships it has built and exploits the opportunities presented. Hyundai has been advancing its global footprint by investing in Hyundai manufacturing plants in North America, India, China and R&D centers in North America, Japan and Europe.

With these new facilities, Hyundai is determined to satisfy the needs of the global market and sustain harmony among its stakeholders.