Case study of BMW’s expansion into China

August 10, 2018 Economics

Introduction

This case study will investigate the car manufacturer BMW and its recent plans to increase production in the Chinese market. BMW is a Transnational Corporation which can be defined as ‘a firm that has the power to coordinate and control operations in more than one country’ (Dicken, 2011, p.110). The automotive industry for years has been very static, but the automotive power is now shifting. Over the past decade there have been drastic changing patterns of consumption, for example China has experienced rapid changes in their GDP, growing by 10% per annum (World Bank, online). Car production is now shifting to new regions of the world with Japan and China now being the largest producers (18.8% and 12.8%) (Dicken, 2011). The Financial Times article looks at how BMW are experiencing even larger sales volumes even during a global financial crisis. The article discusses that BMW are now changing where they concentrate their sales. A 16.3% fall in European car sales has led to firms such as BMW looking to expand into the Asian market (Guardian, online). The article as a result says that BMW has experienced a 33.5% increase in sales in China (FT, online).

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This case study will investigate the causes and implications of BMW’s expansion in to China with reference to three key geographical concepts; Space, place and actors.

Why have companies such as BMW increasingly expanded overseas? (Space)

1. Neoliberalism and globalization

TNC’s such as BMW have been able to expand their businesses to a global scale since the neoliberal economic reforms that were implemented in the 1970’s as a result of the failing Keynesian economic approach of centralized regulation (Hubbard et al, 2002). Neoliberalism (also known as the Washington Consensus) endorses free trade, economic liberalization, deregulation, free markets and privatization (Mudge, 2008). Since the 1970’s, globalization and economic liberalization has promoted the growth of transnational corporations globally through greater flows of capital, leading to rapid rises in FDI in developing economies (Prasad et at, 2003).

2. Europe’s slowing growth rate

Marcel et al (2010) argue that Europe experienced rapid economic growth up until 2007 when the global financial crisis struck and as a result the European car industry shrunk by 16.3% in Europe by the end of 2012 (Guardian, 2013). BMW as a TNC see profit as their motivational factor and therefore they will look to expand production elsewhere if it has the potential to expand their business.

Why is BMW expanding production in China, and why Shenyang? (Place)

1. Chinese economy

TNC’s have different goals to a state. As profit is imperative they move production to where there is an advantage, whether this is through low production costs or where there is a high demand for their product. China in 1978 moved from a centrally planned economy to a ‘controlled’ market economy that has been coined as ‘red capitalism’ (Lin, 1997). It now has an average GDP growth of 10% per annum, resulting in ‘600 million people moving above the poverty line’ (Tickel, Peck, 2003, p.163). The demand for high quality goods as a result has grown rapidly. BMW have seen sales figures in China grow by over 20% whereas European sales only had 2.6% growth in 2012 (Guardian, 2012).

2. Global Production Networks

Global production networks are defined as ‘operations and transactions through which a specific product or service is produced, distributed and consumed (Coe et al, 2007). BMW has been able to expand their company in China through the geographical concept of time-space compression (Harvey, 1993). A ‘shrinking world’ has enabled BMW to easily part-manufacture their product in Germany before being sent to Shenyang. The creation of Post-Fordist production saw the start of a spatial division of labour which has led to production no longer being confined to a single economy. Post-Fordist production concentrates on having many workers with specialized jobs rather than few workers that can do everything (Jessop, 1995). For BMW this has meant that they have been able manufacture their vehicles in China without having to train highly skilled workers in Shenyang. BMW are therefore able to manufacture and sell their products in the same country, saving money on exporting the goods fully assembled.

3. Shenyang

Shenyang is the 4th largest city in China and has been an important industrial centre for China since the 1930’s. In understanding why BMW have built factories in Shenyang, four aspects need to be addressed; Governance, embeddedness, transport and communication. Shenyang is an attractive place for TNC’s. Shenyang operates under an “open space” system of governance, which means that the Government has limited influence on its activities.

Actors such as the Chinese government offer investment subsidies for companies such as BMW to locate there. One clause of receiving this subsidy is that each foreign company has to strategically couple with a Chinese company. Therefore in 2004 when BMW first moved into China they made a joint venture of €450 Million with Brilliance Automotive, one of China’s leading car manufacturers (BBC, 2003). This has proven a success and BMW are continuing this venture with their expansion, investing $73.5 Million in a new factory (Global Auto Sources, online).

The Manufacturing embeddedness of Shenyang is a key reason for why BMW have experienced success and why they are expanding in the same region. Within this region there is a high skilled pool of automobile workers. With the inside knowledge of Brilliance Auto BMW can continue to manufacture their cars to the highest quality. Having this joint venture also enables BMW to assert greater control over their future expansion in China.

Transportation links of Shenyang enable BMW to export their goods from Leipzig, Germany to Shenyang via a high-speed container train in 23 days (DB Schenker, 2012). So far over 4,700 containers have travelled from Leipzig to Shenyang for BMW (DB Shenker, 2012). Shenyang is also the railway hub for the northeast of China and therefore BMW are able to easily export the vehicles across China for sale.

Implications of BMW’s expansion

There are positive and negative implications of TNC’s such as BMW increasingly expanding production overseas.

Negative Implications

Uneven Development

With an increase in FDI from companies such as BMW in areas such as Shenyang, there is a growing fear that China will see increasing levels of uneven development (Fan, 1995). According to Marx, everyone in all regions within a state should have equal shares of resources and development (Wei, 2000). However this has evidently not happened in China. In 2009 Shenyang had the highest GDP per capita in its region with $12,590 (CSI World Factbook, 2013). However regions such as Guizhou are struggling with unemployment with a GDP per capita of $2541 (CSI World Factbook, 2013). This gap is only going to expand as rapidly developing cities attract the highest skilled workers and attract the most FDI.

Cultural Hybridization

Cultural Hybridization is one of the key concepts of post-colonial theory. Edward Said (1978) in ‘Orientalism’ argues that the West need to dominate the East. This has led to the hybridity of cultures through the growth of TNC’s and globalization. Global brands such as BMW are good examples of what Ritzier (1993) calls McDonaldization. China is now experiencing a loss of diversity and individuality as a result of these changes.

Positive Implications

FDI and Poverty

The rise in FDI from TNCs has the potential to promote more growth and reduce poverty. Although China is developing rapidly, there is still a large gap between the rich and poor. FDI can increase the size of the workforce. BMW Brilliance has created the BMW Shanghai Training Centre which trains 2400 employees each year (BMW Brilliance, 2009). An injection of a highly skilled workforce into the economy has the potential to act as a stimulant for growth in other sectors that could lead to a multiplier effect. Shenyang, although being the 4th largest city in China, only has an unemployment level of 2.2% (Unhabitat, 2001), compared to the national level of 4.1% (Trading Economics, 2013). This shows that investment from companies such as BMW has acted to promote private sector growth and thus increasing employment and reducing poverty.

Summary

This case study has gone out investigate why BMW has expanded production in China and what the causes and implications have been.

Space Greater accessibility of the world economy through the concept of a ‘shrinking world’ and the changing power relations of economies such as the rise of the Asian Tiger economies (Paldam, 2003), have acted as incentives for BMW’s expansion in Shenyang.

Place Shenyang’s concentration of highly skilled automotive engineers, combined with BMW Brilliance Training has enabled BMW to continue to manufacture their vehicles to the same high standard as in Europe. The quality of workforce combined with the location and accessibility of Shenyang has made the city the obvious choice for BMW’s growth.

Actors The Chinese government has been a key actor in promoting FDI in Shenyang by offering incentives and taking a backseat when it comes to state intervention and allowing private sector growth. BMW as a TNC has a drive for profit, which has led to their increased investment of $73.5 Million in China automobile industry.

Causes/Implications Although there will always be negative implications of BMW’s expansion such as the potential rise in inequality and the possible loss of culture, it can be argued that cultural hybridization is not necessarily a negative phenomenon and could even benefit a nation. As a result the positives outweigh the negatives. It is therefore evident why BMW have continued expansion and economic growth in Shenyang.

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