International Expansion Of Ashok Leyland And The Uk Business Essay

This report is to investigate the business opportunities for India’s largest heavy motor vehicle manufacturer Ashok Leyland with one of the world luxury car manufacturer Aston Martin in economic hub of the world United Kingdom. The profiles, products of both the companies are conferred briefly. Essential factors such as competitive forces, ongoing trends, and domestic demands are considered using appropriate theories. Methods of analysis include SWOT – to analyse the internal and external strength and weakness of Ashok Leyland, PEST – used as a tool to examine political, economical, social and technological factors of chosen country. Based on the result of above analysis, investment project is drawn by considering the resource suppliers, location and type of investment. The primary objectives of the expansion and expected success rate are derived. Two world most emerging economies are selected and the business environment, risks and expected problems, government policies, political stability are compared. Different types of index are considered to find out the best economy among them. The dominant economy is selected for the investment project.

After assessing the different type of entry modes, Joint venture is chosen as the best suitable one. Research work is carried out to find out the exact partner for joint venture. With proper justification, the regulations, marketing and distributing channel of host country is identified. The possible difficulties, problems, competition level and the solutions in the host country are specified. At the end of report the recommendations such as the expansion of time, ways to overcome competition level with differentiation and way to lead a competitive advantage are given. For which the group report is divided into different stages. In the next part it is about the overview of the company.

Overview of Ashok Leyland

Ashok Motors was set up in 1948 for assembling of car name Austin cars in Madras. When the British Leyland get participate in Equity, the Ashok Leyland’s name and destiny changed and in 1955 they started manufacturing the commercial heavy vehicles (Ashok Leyland, 2010).In the Indian market they are the leaders as they provide unique products such as CNG, Double decker and many other buses (Hinduja, 2007) Ashok Leyland is known for manufacturing the varieties of commercial vehicles like light truck and buses, multi axle trucks as well as tractors and also military and emergency vehicles. They also produce spare parts like crank shafts, Ball and Roller bearing, Crown wheels and pinions and engines for Industrial generator and marine applications and finally become a part of Hinduja group in the year 1987 (Hoovers, 2010). Before moving into any country some of the key environmental factors should be kept in mind by the firm that is internal factors and operational factors which are under controlled for the firm while the external factors are not under controlled for the firm like competition, Demand Shift, government policies and many more (Daniels, Radebaugh, Sullivan, 2009). For Ashok Leyland moving Internationally is the best option because after the recession around 1996-97 they decided a Marketing strategy not only for holding position in South Market but also to open up new niche markets by product segmentation or by developing customized products (Financial Express, 1999) .During the year 1997 the sales showed 16 % growth that is it sold around 43530 vehicles as compared to 37470 in the previous year.(Times of India, 1997) There might be various reasons for the increase in demand might be change in Income of buyers, or change in price of other products or change in taste and preference of the consumer. In the year 1998 it received social responsibility award There was again demand shift they were chosen for the cross border service with Pakistan because of the Viking model and this helped to export more (Press release, 1999). In the same year in October they received order form Bangladesh of 68 double decker buses. For marketing their product domestically and internationally they started putting their information on Internet and this was done to improve the service to the customers (Economic Times, 2000) In the year 1998 it became the first Indian automobile manufacturer that received the latest version of QS 9000 certificate. According to the Managing Director Mr. R. Seshasayee they have opted for QS 9000 certification because this offers an international benchmark specific to the automobile sector which is not for any commercial reasons (Press release, 1998).The Company’s core competence is providing Quality product as well as new product in terms of adding new features or developing totally a new product with the help of technology by joint ventures and strategic alliances with other company which add a competitive advantage for the company and this helps in long term growth (Quick MBA, 1999-2007) and so for this, In the year 2001 Ashok Leyland build Memorandum of Understanding with the Compaq for IT Infrastructure which covered all the operations of the company and which allowed the company in updating the technology which will help in competing with the other competitors as well as to produce at a lower rate (House journal, 2001). From the below table we can see that there is continuous increase in the net sales from 2003 to April 2006 which shows increase in demand.

Press article 2007 http://hindujagroup.com/news/press-articles/20070413.html

Ashok Leyland made an agreement to acquire Defiance Testing and Engineering organization which provides independent testing service paying the fullest of capital for acquiring this service ,which is near Detroit located in Michigan that is in USA. This organization helps in the areas of Laboratory that is based testing and acquiring the data, testing the durability of the product, Safety Testing and Facilities Management and many other facilities like NVH Testing, Road Load Data Acquisition (Economic Times, 2007). Product diversification is also one of the way to stay in the market and so in the year 2007 Ashok Leyland made joint venture sharing 50:50 percentage with the Alteams Group for manufacturing High Pressure Die Casting aluminium products for the automotive and telecommunications sectors and it is situated in the Finland and according to Mr. R Seshasayee, this expansion in auto component sector will help them to take advantage for the upcoming opportunities which is both in India. and as well as abroad (Economic Times, 2007).

In the same year they entered into Pre-owned commercial vehicle market to complete make-over with ALTRUX from Ashok Leyland and making entry into the used vehicles market purchasing them from the market and re-conditioned by using an exhaustive 140-point check to achieve a quality standard that will ensure trouble-free operation and these vehicles was given up to 6 months warranty (Press release, 2007).Then in August an agreement was made between Ashok Leyland and Nissan Motor for joint venture to manufacture Light Commercial Vehicle (LCV) business and this was sold under both the brands that is Ashok Leyland and Nissan (Times of India, 2007) The latest plan for them is investing Rs 3000 Crore in the next three years on various projects which includes its light commercial vehicle joint venture with Japanese automaker Nissan and because the market condition was poor they had cut back their investment but now market is taking its pace to grow so they are planning to invest. The investment will also include about construction equipment business that is Joint venture with John Deere (Times of India, 2010)

SWOT Analysis:

Source: Marketingteacher.com

The SWOT analysis can be termed as Strength, Weaknesses, Opportunities and Threats. Strength and Weaknesses are the internal factors while Opportunities and Threats are external factors for the firm (Rugman and Hodgetts, 2003). A new, innovative product or service can be an strength for the company and Quality processes and procedures could be the other strength for the company (Marketing Teacher, 2000-2010) and Ashok Leyland has got certificate of Standardization and Quality maintenance (Press release, 2005) Ashok Leyland is continuously making innovation in their production with the help of the technology and it is also known for providing good quality at a lower rate (House journal, 2001). The another strength is comparing to Tata Motors the net sales of Ashok Leyland is more that is almost triple 170 as compared to 66 which indicates more demand of Ashok Leyland (Shirsat, 2010). It has also received many certificates like BS 7799 certificate for Information Security Management system (Press release, 2005)

The weakness of the Ashok Leyland is the prices of the products are high as compared to the competitors. The other weakness is the Profit margin is low. The opportunities for Ashok Leyland can be offering of the new products to the customers and that’s what they are giving through technology advancement (House journal, 2001) Ashok Leyland’s employment journal

They also have they opportunities to enter into the new country by having a joint venture with Aston Martin which is in U.K by producing the raw materials for them because Aston Martin car is known for making expensive car (Aston Martin, 2010) and so by manufacturing the raw materials for them will help Aston Martin to produce at a lower rate. The another opportunity is to commence operation in other centres in which they are not present and they are trying to do exactly the same thing (Business Standards, 2010) One of the threats could be government policies and if any policies changes which is against Ashok Leyland then it is a threat for them and delays in the supply can be a threat for Ashok Leyland and this what happen with them because they were not able to supply the buses on the time given to Delhi Transport corporation (Times of India, 2010). The Economic condition is also one of the threat for the company because of it demand decreases. As the Strength, Weaknesses, Opportunities and Threats of the Ashok Leyland is mentioned above, it’s most crucial and important part of the project which is the investment project plan. This investment project plan is briefly explained in the upcoming part of the report.

Description of investment project

Ashok Leyland being India’s second largest manufacturer of commercial vehicles has to undergo a complete transformation to gain a significant role in the rapidly changing market place. In the scenario of going abroad, the company should be more formalise in their investment strategy. Being an amateur company in the process of conquering other foreign market, its investment plans should be up to a disciplinary level in whatever market they are going to enter (Khachani, 2009). The company’s revenue reached a mark of US$1.4 billion for the financial year 2008-2009 (Ashok Leyland Ltd, 2009).

As the company making its maiden entry in the new market, it has to set up their base in that particular country. So setting up the manufacturing units in the foreign country is going to be a difficult task to cover all their expenses by themselves (MANGEN & DURNEV, 2009). So some kind of collaboration with a company in the entering country will favour the Ashok Leyland Company in many ways. Firstly the company has to choose in what name that the company is going to called in the expanding country. Whether it’s going to be joint names of Ashok Leyland and Aston Martin or in some other name whatsoever according to the board of directors.

The next step is the main objectives for which the companies made collaboration with each other. In this case both the companies are coming together to form a joint venture between them to manufacture automobiles, mainly cars and other Light commercial vehicles. Aston martin being an expensive and luxurious car maker around the world is going to use Leyland Company to make spare parts for their own company at a cheaper rate or to make specialized engines which can be environmental friendly and giving more fuel efficiency. In either way Aston Martin is a gainer, where as Ashok Leyland has to play a vital role in this venture.

In the crucial economic sector these companies has to decide whether to be a public sector company, if so the companies has to decide about the sharing of the stakes at a equal level or according to the amount they invest in the project (Chakravarti, 2009). To a significant level the companies has to decide on the term of the collaboration period. This will ensure them to develop or may pave way for other type of collaboration between these two companies itself (Borgonovo, Emanuel, & Borgonovo, 2010).

Utilization of the resources and technology available to them in an effective manner will ensure them many benefits (Dragotă & Dragotă, 2009). Offering of the resources available which is to Indicate which of the following items are required -but not available yet – in order to implement the project, Business partner,Financial sources (credit/ guarantor/equity/donor-grant, Technology ,Industrial Equipment , Land/ industrial land, Consultant / professional services / training programme/ expert, Facilities/ business officies/ industrial plants, Natural resources/ rawness, Institutional support / development centre and services (Liao & Ho, 2010).

In the process of manufacturing not all products should or can be made in the new manufacturing unit, it can also be manufactured in any of these companies main production unit and can be exported for assembling. This type of process can be brought in the progress to cut down the costs of the product. The capital investment for this collaboration can be made from these companies existing share holders or it might go public as a brand new company. The companies should use their brand name and goodwill of their existing customers and can create an impact and awareness about the new venture (Jones & Danbolt, 2005).

The most crucial part in this venture is not only the sharing of resources and technology, but also making the existing employees work together. It will also envoy many employment opportunities in both the countries (Jones & Wren, 2004; Pollard, 2008). Well the management has to play a vital role in this, because employees are the core of the any company and any manufacturing. There are many cultural and other barriers which they might face in process of the manufacturing units (Meschi, 1997).

Thus the companies can make a big stand in making the low price, fuel efficient and environmental friendly vehicles, which are going to be produced by these companies. The most decisive problem in the collaboration is the sharing of decision making power and governance. Both the heads of the companies should share the common interest and should focus on making this joint venture a successful. There might be indifferences in the beginning due to working in a new environment and with different set of management scenarios will make any employee buzz in the initial stages, once they started working as a unit they’ll surely overleap the odds (Demirbag, Weir, & Mirza, 2003). After the investment project is fully determined, the company is sets to find a perfect country for its international expansion. With a briefly explained PEST analysis we can finalise a country to which Ashok Leyland is going to enter.

Selection of Country:

Emerging markets are searched for international expansion project of Ashok Leyland. Different European countries’ automobile markets are investigated for an opportunity. That includes Greece, Brazil, United Kingdom and other European, African countries are explored. At the end United Kingdom and Greece are selected for comparison. The supporting and restricting force for expansion are analysed for final decision.

Greece is one of the biggest economies in the world. It takes 27th largest economy regarding gross domestic product. Purchasing power of the community is considerably high compare to other European countries. It is a developed economy, where public sector contributes 40 % in total GDP growth. To understand the advantage of Greece economy compare to other European economies the following graph is given below.

Impact of economic recession hit is more in Greece which makes many companies to shut down the plants. The economy of Greece in the last two years is going downwards without any possibility to go up. Government is seeking bail out for European Union committee. Greece is calling EU to help to recover from the red zone economy (Athanassiou, 2009).

Innovation is the key factor for competitive advantage. In case of automotive industry, Research & Development project will help firms to deliver improved and innovative products. Automotive industry holds 6 % of total R & D in United Kingdom which shows that there are great opportunities ahead for a company to import their business. Top most companies Ford, jaguar and Land Rover investing huge money in R&D process (Business and Enterprise committee report, 2009). Government is implementing pragmatic approach to ensure the survival of automotive industry.

PEST analysis for UK automotive industry:

Political Factor:

Stable political parties

Well legislation for home market

future legislation

regulatory bodies and processes

Supporting government policies

Fixed government term and change

Well developed trading policies

Funding and grants from the government for business development

Dominated home market

international identity

wars and conflicts – minimum

Economical Factor:

home economy situation

home economy trends

overseas economies and trends

general taxation issues &policies

taxation for investment

market and trade cycles

specific industry factors

market routes and distribution trends

high interest and exchange rates

international trade policies

Social Factor:

lifestyle

demographics coverage

well consumer attitudes

media views

brand, company, technology image

consumer buying patterns

fashion and role models

major events and influences

buying access and trends

ethnic/religious factors

advertising and publicity

ethical issues

Technology Factor:

competing technology development

R &D funding from the government

associated/dependent technologies

Technology replacements

manufacturing maturity and capacity levels

information and communications developments

potential for innovation

Access to the new technology, license

Communications to other parts of world

Political:

Political stability and more competence among the parties’ are resulted in good policy making, shaping the economy. As a result of these UK is becoming one of the top most economies which attracting more and more foreign investments (Annesley, 2004). Well known regulatory bodies are tracing home market for safer trading between the countries. Structured legislation parties so that any laws which are developed will get approval without any delays. Watchdog commission and regulatory bodies are developed run without any corruption. High standard of regulations are followed in all areas. Financial and marketing regulatory bodies are running smoothly which make Britain as a safest place to do business.

Government terms are fixed and there is no fluctuation in the assembly, which increases the trustfulness of ruling government. Security of business is safer and the risk level is minimised by the available government grants. It gives international identity to the company which starts business in the world economy hub United Kingdom. Wars are conflicts of a nation is very less, it gives more security assurance for any investment. Bus lanes and motor ways are extended by the local authorities which is another strong supporting factor for automobile industry.

Economical:

UK is fast growing economy in the world since the Second World War. Gross Domestic Product (GDP) rate is consistently growing, the below given diagram shows the growth of GDP since 1960s and reached $2.65 Trillion in the year 2008.

Source: National Statistics of a nation, UK

Fast recovering economic trends have been seen, the borrowing levels are decreased drastically compare to previous years (Alistair, 2010). International monetary union controls the trading of international bodies in a domestic market. Financial resources are allocated to ensure the modernising the road networks. UK is one of the members of G8 nations and has good economic stability and sixth largest GDP in the world by volume. It is forecasted that in 2020 London will be the fourth largest economy in the world by overtaking Paris. Even though interest rate and the exchange rates are fluctuating, It is higher than US rates, which attracting more investors and the buyers to buy goods from UK.

Social:

Almost all geographical areas are covered by different social groups, there are well developed transport network. There are many high spending middle class people available which give an opportunity for an automobile industry to introduce new vehicles. Advertising and publicity is easier in a technology developed nations, the newly introduced cars or any product will reach different kind of people in less time (Glaister & Buckley, 1997).

Technological:

It is easy to access new and latest innovated technologies in developed nations. Government is funding more on research and development process. High competition level increases the chances for innovation. Maturity level is obtained in manufacturing process. UK is the central part in the world which makes easy to communicate through out world easily and the shipping cost to any other nation from UK is less compare to any other nations (Johnson, 2004).

PEST analysis shows that there is a great of chance for an automotive manufacturer to develop a business in a fast recovering market. Technological and political factors are more favour for foreign company to enter and develop their business.

International market entry mode

“An international joint venture is a separate legal Organizational entity in which at least two partners that are economically, geographically and legally independent of each other participate” (Frèdèric & Pierre-Xavier, 2006). Many multinational companies use Joint Venture as a market entry mode in terms of developing and developed countries. With the partnership with the foreign venture, it enables both the countries to share knowledge in terms of technology (Broll, Marjit, & Mukherjee, 2003).

In this report, Ashok Leyland an Indian, commercial vehicle manufacturing company is the parent company which looks for the International expansion in the host company which is Aston Martin of United Kingdom. For which the company is forming an International Joint Venture with the local company Aston Martin to enter the British market.

One of the most desirable and preferable entry modes of by many Multinational Companies is Joint Venture, other market entry modes are Licensing, Internationalization, Franchising, Direct Foreign Investment and Exports. International joint venture involves two or more legally formed distinct companies each of them involves in the same activities or other according to their legal entity (Michael & Hebert, 1991; GERINGER, 1988). Thus Ashok Leyland has only one joint venture so far, with Nissan of Japan. These two companies formed a joint venture to make Light Commercial Vehicle (LCV). Both the companies share a 50:50 of their stakes (Ashok Leyland Corporate Office, 2007). Thus Ashok Leyland doesn’t have much experience in expanding its business boundaries, it has got only one open option to enter a new market is to have a joint venture with a company in the selected country. Because of the above reason the other mode of entry doesn’t suits Ashok Leyland to enter the British Market.

With its experience of over 50 years in this business of producing commercial vehicle it has the capacity to abroad alone, but it is not an easy task for any company to International, it might result in failures also. In the case of the joint venture with a local company Ashok Leyland can grab the local’s attention by advertising through the local companies channels of advertising. Being a newly formed joint venture these companies has to grab the interest and trust of the Stakeholders for growing both the companies brand image among the general customer.

There are some of key factors through which International Joint Venture can be of success they are, performance, Human resource development, practices and followings and believes based on the host countries cultural characteristics, Performance of Quality, Training Competence, Flexibility and Adaptability, Knowledge acquisition from each foreign partners, sharing resources, sharing Equity, competitive training, Sophisticated Technology, Cooperation between parents, Governance, Political risk in the Host country. These are some of the key important factors to influence the International Joint venture into Success (Michae, Schon, & Andreas, 2007).

When it comes to the above success factors both Aston Martin and Britain has got the above specified success factors for the Joint venture. As English is the Official language in both the countries, so the mode of communication between the company’s workers won’t be difficult to understand. Both companies have to agree on sharing their resources, equity and Technology.

Cooperation between the partners is important in terms of knowledge transfer, Flexibility and Adaptability. The other main thing is the Political Risks, as it is a Joint venture between the local company and the parent company there won’t be many difficulties in terms of political risks. Because there will be a high benefits of employments opportunities and income for the local companies there won’t be very much political risks in doing this venture.

Ashok Leyland when combining with the Aston Martin can jointly produce Light Commercial vehicle or cars. Ashok Leyland has already signed with Nissan to produce small cars for the world market and that could be priced at around $4,500-5,000 (Economictimes, 2010). Having been already engaged to produce small cars segment Ashok Leyland can also do the same in the United Kingdom as well. Aston Martin and Ashok Leyland can jointly produce small car segment or commercial vehicles. Ashok Leyland being experienced in the commercial vehicle segment we prefer it to continue its same with Aston Martin also. But whereas Aston Martin can use the Ashok Leyland to produce parts for its cars, which will lower their material costs as of now and can earn high profits in their own car segment.

The UK logistics market has become more developed and advanced in terms of technology, regulatory changes and the increased competition. The economic crisis and the expansion of the global trade is becoming a challenge for the automotive industry. Despite of these challenges, it would not be wrong to state that the UK market has much higher degree of resources, adaptability and entrepreneurship as compared to other nations (Willis, 2008). .

Indian truck manufacturer Ashok Leyland entrance in UK can lead to a high competition in the market. The need for transportation is increasing at a rapid pace and so is the market; therefore it would be a benefit to the company to make a mark in the global market. But, likewise the benefits there are some critical issues that Ashok Leyland might face during their entry period i.e. problems in terms of fuel prices, introduction of eco- friendly trucks as the country is concerned about emission regulations, turbulent changes on the demand side and the holding capacity. Moreover, the truck manufacturers and the transport companies are connected to each other and hence this challenge can be a hindrance for both the parties.

As far as the economic issues are concerned the price of the crude oil and the emission regulatory factors are having an impact on the truck industry and the economy in terms of inflationary pressures. Over last few years, the diesel price has increased by 31% and the current scenario is getting more critical as it is the prime aspect for the transport companies and the manufacturers during their course of purchasing decisions. Therefore, Ashok Leyland should come up with the more advanced trucks which are more fuel efficient and better in performance (PWC International Limited, 2008)

(http://www.petrolprices.com/images/blog/diesel-5-pound-per-gallon-graph.png)

In addition, political factors also have an impact towards the business. The changes in the government policies play a major role in it i.e. value of exchange rate, devaluation and the inflation is a big factor to influence alterations in the market. It deals in where the devaluation improves competitiveness and as in recent years the value pound has been strong. Secondly, the introduction of Monetary Policy Committee in 1997, the UK government is being more concerned about the inflationary issues. And hence, the low inflationary rate has helped to increase the competitiveness in UK (Pettinger, 2007).

There are some other external factors as well which can affect Ashok Leyland operations in UK. The external factors differ from nation to nation and have limits like capital market which acts a prime ingredient for the strategy making process of the firms. The countries capital markets can be oriented towards long run or short run. The former deals wherein industry varies and the latter is more competitive in nature and investment is short term. In addition, Ashok Leyland the giant player in India is planning to make recognition with the global leaders and hence is more inclined towards the long term aspects. Moreover, the changes in the government policies is a big hindrance for Ashok Leyland wherein the government can affect the limits directly or indirectly, implementation of the tax to corporate and business and property ownership issues. Despite of the entry barrier being low due to high capital investment and cutting edge technology, Ashok Leyland can enter the UK market but they have to face high competition with the gigantic players like Volvo who has high intensity and high dominating power in the market in terms of technology, manufacturing processes, customer relationships and distribution systems. Secondly, the supplier power is weak because they have broadened their operations across the borders and hence it will act as an opportunity for Ashok Leyland to operate in an effective manner (BERA, 2004)

As mentioned earlier, the joint venture of Ashok Leyland and Aston Martin will show a positive response in the market, wherein; Aston Martin is a renowned player and is been accounted for the luxurious cars and Ashok Leyland is a major player of trucks in India. Therefore, Ashok Leyland will provide raw material to Aston Martin in order to save their production and manufacturing cost. This venture will help both the companies to have a stand in the market profitably and physically.

Despite of this venture there can be another challenge for Ashok Leyland while operating in UK i.e. the cultural barriers, because; what works at home doesn’t work outside. Therefore, to reduce the conflicts amongst the members in the headquarters and subsidiaries, Ashok Leyland should train their engineers wherein communication should not be a barrier while operating across the borders.

Aston Martin is more concerned about the technology sector than anything. Their n