BorgWarner in China A Study in Country Risk Thomas Brady ... · BorgWarner‟s philosophy is to...

Running head: BORGWARNER IN CHINA 1

BorgWarner in China – A Study in Country Risk

Thomas Brady

Oksana Cobb

Jean Foretia

Zachary Parker

Sheri Stroop

University of Maryland University College

IMAN 640 9020

July 14, 2013

BORGWARNER IN CHINA 2

Table of Contents

Executive Summary .......................................................................................................... 3

BorgWarner’s Profile ....................................................................................................... 5

Operations ....................................................................................................................... 6

BorgWarner‟s Management Philosophy ......................................................................... 7

The Automotive Parts Industry Profile .......................................................................... 8

Rivalry ............................................................................................................................. 9

Bargaining Power of Suppliers ....................................................................................... 9

Threat of New Entrants ................................................................................................. 10

Threat of Substitutes ...................................................................................................... 11

Bargaining Power of Buyers ......................................................................................... 11

China’s Country Profile ................................................................................................. 12

Societal System ............................................................................................................. 12

Societal Predisposition .................................................................................................. 16

Ideologies ...................................................................................................................... 19

Potential Ethical and Social Conflicts ........................................................................... 23

BorgWarner Strategies and Policies ............................................................................. 25

BorgWarner Constraints ................................................................................................ 26

BorgWarner Strategies and Policies .............................................................................. 27

Action Plan for Next 5-10 years .................................................................................... 29

Conclusion ....................................................................................................................... 30

References ........................................................................................................................ 32


Executive Summary

This report examines China‟s country risk and evaluates how BorgWarner should

manage operations there. The strategies and policies presented for risk mitigation are based on

findings from the following determinants: The company‟s current and future market prospects,

the industry‟s local and international components, and China‟s economic, cultural and

environmental factors. Based on these findings, the paper proposes strategies that BorgWarner

should address in its 5 to 10 year action plan.

BorgWarner views China as key to its vision of becoming the world‟s leader in

powertrain and engine solutions. Analysis of the automotive manufacturing industry in China

indicates a competitive but moderately attractive environment for profit. An examination of

contrasting societal systems and predispositions between China and the United States identifies

threats and opportunities for BorgWarner, to include projections of future consumer behaviors,

as well as ideologies and potential ethical controversies.

The firm will need to address four challenges to remain successful in China: (1)

Urbanization and lack of skilled labor pose challenges in delivery of quality goods, requiring

additional investment in research and development and innovative technologies; (2) unfamiliarity

with local laws and regulations, such as China‟s social insurance system (hukou), may negatively

influence operations and increase company expenses; (3) rising costs of raw materials may

expand suppliers‟ bargaining power, which in turn could affect sales; and (4) rapid

industrialization magnifies environmental problems, which may eventually cause the Chinese

government to move toward mass transit systems.

To mitigate operational risks and maintain the dominant position in the market,

BorgWarner should pursue several recommendations. First, the firm should work with China to


develop comprehensive training programs that update employees on the most current operational

techniques. Second, to offset rising costs in coastal operations and address insurance expenses,

BorgWarner should assess the feasibility of relocating manufacturing facilities to inland

industrial clusters. Third, to reduce supplier costs, BorgWarner should consider leveraging

brokerage agencies to access globally available commodities, and should consider value chain

integration through emerging, cost-effective technologies. Finally, the company should consider

addressing China‟s environmental concerns by marketing its competitive advantage in state-of-

the-art, fuel-efficient and low-emission systems.


BorgWarner in China – A Country Risk Study

China today is at a monumental crossroads in its transformation from an emerging

economy to a world leader. Rising from a Communist, third-world economy, China has rapidly

and readily embraced a quasi-capitalist system and molded it around its cultural and political

systems and ideologies. While China redefines itself as a global leader, BorgWarner – a leading

manufacturer in high technology automotive components – must view its own international

direction through a fresh lens. This paper weighs BorgWarner‟s corporate vision, goals and

objectives against China‟s political, economic and cultural dynamics in order to recommend a

near-term and long-term corporate strategy. Of interest to BorgWarner‟s campaign plan are

China‟s industry-focused institutions and infrastructure, the corresponding relationships with

value chain activities, the increase in Chinese labor costs, the rapidly expanding urban market,

and the ecological undercurrents – all of which greatly impact the automotive industry there.

BorgWarner’s Profile

BorgWarner is a multinational enterprise organized into its Engine and Drivetrain sub-

markets. Each group contains multiple businesses, which conduct their own sales, marketing,

and research and development functions. According to BorgWarner‟s Belief Statement, it “is

both a community of entrepreneurial businesses and a single enterprise” (Annual Report, 2012).

A board of directors, elected by stockholders, determines direction for the company globally.

BorgWarner, Inc. (BWA) is a Tier 2/Tier 1, global automotive parts and systems

manufacturer and supplier. Its common stocks are trading on the New York Stock Exchange

(NYSE) at $89.30 per share1 (Google Finance, 2013). The company focuses on vehicle parts

manufacturing as a primary industry (NAICS: 336399), but also deals in secondary industries,

1 As of close of business July 12, 2013


such as manufacturing of sheet metal and fabricated metal products, as well as motor vehicle

supplies and new parts merchandise. Major segments include Engine (68% of total sales) and

Drivetrain systems (32%). Engine components include Turbo Systems, Thermal Systems,

Emission Systems, Timing Systems, and Ignition systems; while Drivetrain components include

Transmission and Torque Transfer systems.

BorgWarner‟s vision is to be the world‟s leader in powertrain solutions by improving

automotive fuel efficiency, emissions, and performance. In the next decade, BWA plans to

emphasize next generation, fuel-efficient engine components, turbo technologies, and

drivetrains. BorgWarner sees China as ripe for growth in these markets (BWA, 2012a). With a

growing and urbanized middle class at the apex of the world‟s greatest industrial revolution,

China is experiencing a rising demand for high quality and advanced automotive technologies.

These societal trends, combined with its desire to gain worldwide footprint, make China the

world‟s largest automotive market (DOC, 2011).

Operations

Based in Auburn Hills, Michigan, the company maintains 60 locations in 19 countries to

include nine joint ventures all over the world. The operations are categorized by five regions:

Europe, North America, Japan/Korea, India/Thailand, and China. In 1993, BorgWarner opened

its China operations in Shanghai, with the intent of delivering transmission technologies to a

burgeoning Asian market. It now maintains four joint ventures there: NSK-Warner transmission

components (Shanghai), Borg-Warner Shenglong (Ningbo), BorgWarner TorqTransfer Systems

(Beijing), and BorgWarner United Transmission Systems (Dalian) (BWA, 2012b). BorgWarner

maintains its ever-expanding China headquarters in Ningbo, where, in December 2012, it

launched its latest production and testing plant to meet demands of a rapidly expanding

powertrain and timing systems market (Leggett, 2012).


Markets. According to the company‟s Annual Statement, BWA supplies automotive

parts to all major original equipment manufacturers (OEMs) in all of its markets with its largest

customers being Volkswagen, Ford, Toyota and Honda. Its primary targets are (1) Europe (50%

of sales), (2) Asia (21% of sales), and (3) the Americas (29% of sales). By 2018, the firm

anticipates its Asia market to increase by 9%. China itself makes up a total of 8% of current

sales, and the firm expects China to produce two-thirds of BorgWarner‟s future sales (BWA,

2013a).

Suppliers. BorgWarner relies on Tier 3 suppliers from all over the globe to provide raw

materials. The company purchases 80,000 metric tons of commodities globally including steel,

copper, resin, aluminum, and powdered metals. Despite China being a large source of the

world‟s steel, copper and rare earths, BorgWarner production facilities rely on imports of fuel,

metal ores, plastics and organic compounds from Latin America and Africa. Raw materials are

expected to become increasingly scarce, driving up future auto industry costs (DOC, 2011).

Value Chain. In addition to shortage accrual of raw material and increasingly frugal

OEM buyers, BWA utilizes a variety of value chain tactics to control costs. For example, BWA

uses a global procurement organization to advance in cost reductions, targeting the lower cost

regions and collaborative buying activities. Also, the company links commodity price forecasts

and resultant rate hikes in order to appropriately pass on the cost increases/decreases, which

reduces margin fluxes (Mitchel, 2013). In China, BorgWarner provides value through its

addition of technical expertise and quality control, producing complex, turnkey systems that

allow Chinese automobile manufacturers to compete in Western markets (Lovy, 2007).

BorgWarner’s Management Philosophy

As a self-described community of entrepreneurial businesses within a single enterprise,

BorgWarner‟s philosophy is to preserve each employee‟s freedom to find personal satisfaction


while pursuing a corporate unity of purpose. BorgWarner maintains a western style, project-

oriented, Guided Missile management philosophy, which seeks to leverage strategic intent to

reach target goals.

BorgWarner operates transnationally to remain responsive to the needs of respective

subsidiary localities. For example, automobile manufacturers in China have different

requirements for emissions than that in the U.S. As such, the Ningbo headquarters can tailor its

manufacturing parts to Chinese specifications, while BorgWarner‟s Michigan headquarters

ensures that parts for U.S. automakers meet U.S. specifications.

With its economy of scale, global marketplace, and diverse worldwide customer base,

BorgWarner is organized to flourish in China. Although labor costs there are growing 20% per

year, BorgWarner plants retain a comparative advantage by cohabitating with auto suppliers and

buyers in China‟s unique industry clusters. BorgWarner can also flexibly leverage its world

presence to minimize regional costs or mitigate local crises. In a country with growth prospects

as high as China, the ability to adapt and support remote offices will prove to be vital in

maintaining a competitive advantage (Whadcock, 2012).

The Automotive Parts Industry Profile

The automotive parts industry in China consists of both domestic and multinational joint-

venture competitors. In comparison to the U.S. automotive parts industry profile that is focused

on highly regulated, modern products built for domestic OEMs, China‟s industry profile consists

of (1) firms that mass produce automotive parts for a very large, growing, lower segment

consumer base, or (2) joint ventures strategically located to leverage a cost-effective industrial

base, geared toward a burgeoning, growing and sophisticated Asia market. Given its

comparative edge in high technology, efficient engine and drivetrain systems, BorgWarner does

not compete head to head with any other like automotive parts manufacturers in China.


Domestic firms lack the technology, and the foreign investor segments focus on other automotive

components.

Rivalry

China‟s automobile parts industry rivalry is high, with competition stemming from both

domestic and foreign firms. While BorgWarner currently holds a comparative advantage in its

unique segments, there are looming threats of backwardly integrating large OEMs who might be

able to achieve economies of scale by producing their own engine and drivetrain systems. Also,

the Chinese government has invested heavily in its domestic automobile parts industry, so

independent domestic suppliers are on the cusp of advancing their technology and experience to

mount a long-term challenge. With more than 3,000 parts companies supplying only 130 car

factories, the Chinese parts industry covers almost as much as that of the U.S., Europe, and Japan

combined. The Chinese government plans to consolidate its seven current national, foreign-

competing automotive firms into three automotive giants. With the intent of forming alliances

with foreign investors, it hopes to further improve domestic technology levels, achieve greater

economies of scale, and assure a continued strong domestic presence (DOC, 2011).

Bargaining Power of Suppliers

Supplier power is moderate in China. Two factors drive up supplier power: First,

worldwide raw material demand in steel, aluminum and copper is outstripping availability, thus

driving competitors to strain profit margins in response to volatile domestic prices or importation

costs. Second, to meet the specifications of high tech industry manufacturers like BorgWarner,

the Tier 3 part suppliers require substantial qualifications, expertise and quality control; this

severely limits the number of qualified Tier 3 suppliers, and provides a negotiation edge to those

suppliers (DOC, 2011).

However, supplier power has been offset by recent developments. With the advent of


new Tier 3 manufacturing technologies such as 3D printers, basic components can be more

easily developed, thus encouraging new competition amongst suppliers (Mims, 2013). Also, to

mitigate supplier power, manufacturers can reduce costs by using procurement groups who

broker with the low price global suppliers (DOC, 2011). Finally, global shipping is undergoing a

blight, creating a surplus in transport ships and driving down import costs, thus broadening

supplier competition (Foxman, 2013).

Threat of New Entrants

The threat of new entrants in motor vehicle parts manufacturing is moderate. Due to tight

competition among established companies that operate globally, it would be difficult to gain a

considerable part of market share as a new entrant. Most existing companies already enjoy the

economies of scale (especially manufacturing as a core activity of production) and have already

established channels of supply and distribution, which allow them to produce parts at lower costs

than a newcomer can offer. Also, existing top companies that branch out to “workshop”

countries like China are more likely to successfully forge joint ventures, as they offer such

intangibles as well-known brand names and know-how. Hence, new companies may experience

difficulty in conceiving appropriate alliances that would be able to offer innovative capabilities

with comparative advantage.

Industry entry requires investing an enormous amount of financial resources to cover

start-up losses, possible overhead, and major failures during the learning or experience curve.

Moreover, government policies can become a major entry barrier (Porter, 1980). For instance,

China has proclaimed new regulations lowering emissions and fuel-consumption, which force

companies to enhance their research and development. While industry leaders have an

advantage of previous expertise, new companies may not be able to accommodate progressive

changes.


Although, it is quite difficult to break into the motor vehicle manufacturing industry,

BorgWarner may have a threat of new entrants from its Chinese partners (Porter, 1980). After

collaboration with BorgWarner yields knowledge of its value chain and patented technologies,

the Chinese subsidiary owners may decide to split up and exploit their gained knowledge to

develop their own production lines and squeeze BorgWarner out of the Chinese market.

Threat of Substitutes

The threat of substitutes to the automotive industry is low in the short term and moderate

in the long-term. Currently, the domestic and global demand for conventional automotive

transportation continues to show evidence of growth. However, as raw materials dwindle,

petroleum becomes scarce, roads become congested, and pollution becomes unbearable, China

will rely more on mass transit as a substitute. Therefore, companies that produce low emission,

fuel-efficient automotive parts stand a greater chance of surviving a shift to mass transit. The

Chinese government is currently placing a great priority on cleaning up vehicle emissions and

improving fuel consumption, increasing the potential market for fuel efficient, and low emission

cars. These new regulations may stave off substitution and encourage continued usage of

personal transportation (DOC, 2011).

Bargaining Power of Buyers

Buyers have high bargaining power in the automotive parts industry. OEMs are often

large enough to integrate backwards and manufacture their own components, so they have

inherent bargaining power over smaller parts manufacturers. Also, OEMs are increasingly

relying on advanced technologies and total solution capabilities, forcing suppliers to provide

more complex, holistic components, while innovating and investing in research and

development. China‟s rapid rising consumer purchasing power, supplemented by environmental

policies, has expanded the demand for high quality, high tech automobile components. Finally,


as China‟s domestic manufacturers continue to improve their quality and technological capacity,

emerging competitors will provide OEMs more choices (DOC, 2011).

Overall, the automotive parts industry is moderately competitive. Although intense

rivalry and buyer power are narrowing industry profit margins, these factors may be offset by

new indications that supplier power is weakening. The threat of new entrants is moderate,

thanks to governmental policies that improve domestic competence, and the threat of substitutes

is low, unless China‟s anti-pollution policies create a demand for mass transit systems.

China’s Country Profile

China‟s massive population and burgeoning economy portray it to be an ideal candidate

for investment in certain industries. However, its culture can prove difficult for Western

companies to navigate without consideration for cultural differences. Understanding China‟s

societal system, predisposition, ideologies and potential social and ethical conflicts can help

companies invest successfully in China.

Societal System

Through examination of China‟s societal system – its demographics, growth prospects,

and economy – a better understanding can be gained of BorgWarner‟s current and future risks.

Despite its continuing transition from a planned economy to a market economy, China presents a

business environment that is politically and culturally unlike any Western society. By viewing it

as an integrated system, one can understand how the distinguishing characteristics of the nation‟s

economic, political and cultural dimensions provide a competitive edge to foreign investors.

Macro indicators of the economy. China‟s post-reform rapid growth has increased its

GDP and made China the second largest economy in the world. With an export-driven GDP of

$11.3 trillion (9.1%), “China is on course to become the world‟s largest economy by 2016”

(OECD, 2013). China‟s 2012 exports totaled over $180.2 billion dollars, while their net imports


were $148.5 billion dollars (World Bank, 2013).

Even through the recent recession, China‟s economic expansion has continued, with

growth derived more from consumption than investment. In addition, the Chinese government

has been working to remedy inequalities between rural and urban areas, increasing government

spending on quality of life services, including medical insurance, social security and pensions.

The increased government expenditure on health spending puts more money into the pocket of

rural consumers, as they need to spend less on medical expenses. Furthermore, with almost a

quarter of China‟s population living in urban areas, per capita income has increased, matching

that of some OECD (Organization for Economic Co-operation and Development) countries

(OECD, 2013).

China has excellent potential for foreign investment, particularly in the automotive parts

industry. Its export driven economy is expected to continue to hover at 10% growth, and its

purchasing power parity will continue to increase, as will the size, proportion and wealth of the

middle class. Economic growth slowed in 2011 and 2012, which helped bring inflation under

control. In seven years, the market in China is expected to be larger than the U.S. and Europe

combined. However, China‟s economic boom created excess capital, which in turn inspired

shadow banks and bad short-term loans (OECD, 2013).

Existing and future markets. In the past six years, China‟s automotive industry has

grown at an unbelievable pace, and the market is now nine times larger than what it had been just

ten years ago. One cause for this growth was the economic uncertainties in Europe, the U.S and

other parts of the world following the 2008 credit crisis. Today, China is the world‟s largest

automotive market (Stephen, 2012).

Although past trends show enormous potential in the auto parts industry, future markets

are not as certain. To counter the credit bubble in 2011, the Chinese government took steps to


slow its economy by limiting new auto registration and reducing government incentives. In

addition, increased urban road congestion and air pollution has raised speculation that the

government might soon restrict the number of automobile owners. However, regardless of these

obstacles, China is expected to remain the largest market in terms of automotive parts

consumption, demand and production (DOC, 2011). In addition, the middle-class population and

its purchasing power continue to grow with expectations of continued future growth.

Economic system aspects. Thanks to post-Mao era economic reforms, China has a

mixture of several types of economic systems – essentially it is a quasi-communist country. On

one hand, it can be described as a command economy, because the government plans production

and distribution of goods. On the other hand, China also portrays characteristics of a mixed

economy, which allows private ownership of property but requires a fairly even distribution of

wealth controlled by the state (Maddison, 2007).

China practices what some call state capitalism, where corporations exist, but are only

partially free, and where government is often more than just a regulator but also an owner. As

such, the government maintains significant direct interest and control of the automotive market

and its rules. For example, in 2012 the Chinese government declared that government officials

must purchase their vehicles only from domestic automakers (Stephen, 2012).

Infrastructure and institutional aspects. As the economy of China continues to boom,

the government is committed to shape China‟s economic institutions around supplemental

manufacturing. In an effort to increase domestic consumption and bolster the domestic

automotive industry growth, the government is investing heavily in roads and railways, thus

helping middle class consumers commute while improving industrial supply and distribution

networks. China‟s Ministry of Transport‟s Five Year Plan (2011-2015) earmarked $156 billion

for industry-supporting infrastructure improvements, to include construction of five inland


waterway ports, two waterway projects, and 13 highway projects. As the competitive advantage

of low-cost, export-oriented manufacturing in China‟s coastal industrial center decreases, China

will rely more heavily on the cities along the western and central stretches of the Yangtze River

to drive the development of a supplemental industrial base throughout the country (Ministry of

Transport, 2013).

China‟s regulatory policies have dramatically affected the automotive industry. Since the

1980s, the government has promulgated policies which leveraged and learned from western

multinational companies‟ (MNC) capabilities and technologies through joint venture enterprises.

In the future, the government is expected to establish more stringent, environmentally friendly

and fuel efficient public policies – these rules are bound to provide a growth opportunity for

companies that specialize in modern, fuel efficient and low emission technologies (Maddison,

2007).

Cultural dimensions. Historically, China has maintained a community-driven culture,

as expressed by its long-standing communist government. Like many Asian nations, the culture

generally follows the characteristics of Confucianism: stable society is based upon unequal

relationships; the family is the prototype for all social organizations; virtuous behavior toward

others consists of treating others as one would like to be treated; and virtue with regard to one‟s

tasks in life consists of trying to acquire skills and education, with moderate consumption.

(Hofstede & Bond, 1988).

Competitive structure of the automotive parts industry in China. One of China‟s

primary industry-supporting institutions is the establishment of industry cluster systems. To

enable China‟s vision of crafting a western style automobile industry that can compete

worldwide, industry clusters consolidate the value chain and facilitate technology sharing. These

industry clusters, which are government organized and regulated, consolidate and co-locate


industry stakeholders. The system promotes efficiencies and cost reduction in distribution,

transportation, coordination, adaptation, and positions key manufacturing hubs near domestic

and international transportation systems (DOC, 2011).

Societal Predisposition

Mann addresses societal predisposition using “the three functional poles of the SPT

(significating, organizational and foundational)” (Mann, 2006). In recent years, the Chinese

have been applying the technology of Western cultures to their Confucian culture, adapting from

more traditional ways of doing things to newer, more efficient ways. Additionally, the Chinese

government is allowing more and more foreign direct investment, opening doors for many

would-be multinational companies. However, while China has made advances in education and

infrastructure in recent years, it has yet to be considered a developed nation.

Significating. The top tier of Mann‟s SPT addresses the elements of culture also called

the significating pole. The Chinese culture has evolved rapidly over the last 20 years, moving

away from its traditional values and embracing communal capitalism. In examining Chinese

societal predisposition, China has a rich Confucian heritage, taking on many characteristics of

Confucian Culture Theory.

Workforce mindset involves a high power distance, where employees are more

comfortable in a hierarchical environment as, “stability of society [is] based on unequal

relationships between people” (Hofstede & Bond, 1988). In subscribing to this theory, it is

important to the Chinese that there is an order to life, including clear definitions of who is the

manager and who is the subordinate. At the same time, this must be balanced with the collective

nature of Chinese culture, where family is the basis for society, and the group is more important

than the individual (Lecture 5 – Culture). If it is to succeed in managing its Chinese operations,

BorgWarner will need to make sure that it adheres to these social norms within its management


strategy. Some ways BorgWarner can adapt is to ensure that incentives are given to a group

rather than to individuals, and to ensure that managers oversee their employees like a father

would, taking care of the needs of the group.

Chinese culture subscribes more to a relational method of conducting business as

opposed to the transactional method of Western cultures. Social norms relating to business

relationships with suppliers and customers present a particular challenge, in that guanxi

relationships are expected before any transactions will take place. According to Ai and

Abramson, a guanxi “relationship has come to mean trust which results in protective and

complimentary relations, and the sharing or pooling of resources” (1999). BorgWarner will need

to capitalize on guanxi relationships in order to form partnerships with suppliers and lure

customers to do business with them.

Consumer mindset in China, while embracing the concept of thrift, is likely to change in

the next ten years. Current trends show that China‟s middle class will rise dramatically from 6%

in 2012 to 51% in 2020 (Atsmon & Magni, 2012). In China, the privilege of buying a car comes

only after a five-year consecutive working record in addition to the money to buy the car.

Therefore, business for auto parts manufacturers such as BorgWarner is likely to skyrocket in the

coming years.

Organizational. When considering the role of government in BorgWarner‟s China

operations, which is the organizational pole of Mann‟s SPT, the company would need to be

cognizant of the varying differences between regions regarding laws, business practices and

attitudes toward multinational companies (Vanhonacker & Pan, 1997). BorgWarner‟s success in

China will depend greatly on its ability to negotiate a rapidly changing political and social

structure. Although China is transitioning from a purely Communist society to a more Socialist

market society, “the Communist party maintains a monopoly on political power [and] local


governments make economic and policy decisions” (Khana, Palepu, & Sinha, 2005). Several

reforms have been made since the 1980s improving relations between the Chinese government

and foreign investors, but there is still much censorship of outside ideas in the media and abuses

of government power remain largely unchecked.

BorgWarner will need to remain flexible enough to deal with such a dynamic

governmental structure while maintaining its personal company ethics. While the Chinese

government is likely to welcome the fruits of the research and development that BorgWarner

must bring with it in its Chinese facilities, its intentions for long-term partnership with any

business can be uncertain. Some companies in China, such as Boeing, have been put on notice

that once the Chinese have obtained the technology that they need to build airplanes themselves,

the company will no longer be manufacturing there (Navarro, 2013).

The most prominent institution that BorgWarner will need to partner with is China

Automotive Technology and Research Center (CATARC). CATARC‟s functions that will

directly impact BorgWarner are automotive standardization and technical regulations, investment

consultation and evaluation, engineering design, vehicle testing, and energy standards

(CATARC, n.d.). According to PRNewswire, BorgWarner was “ranked fourth in China Auto

Parts Suppliers Top 100 Best for 2007”; therefore, current opinion of the company within the

Chinese government and CATARC is favorable (BorgWarner, 2007). Other institutions that

BorgWarner would need to have a relationship with are the China Association of Automobile

Manufacturers (CAAM) and the Auto Technical Research Institute. These institutions, in

collaboration with the National Development and Reform Commission (NDRC) make all of the

decisions pertinent to the success or failure of players in the automotive industry (IFCAID,

2013).

Foundational. The foundational pole of Mann‟s SPT revolves around the economic


factors of country risk. China welcomes foreign direct investment, offering incentives for

foreign companies to relocate there, such as waiving import taxes on manufacturing machinery.

However, companies such as BorgWarner are better off entering markets there through joint

ventures, only moving those areas of its operations that will produce an advantage to being in

China. While knowing China‟s culture and political structure is important, the availability of

resources, potential of local markets, and existence of transportation infrastructure for products

are what keep a company in the black.

Some potential issues for BorgWarner in the area of resources are the lack of skilled

management for their plants in China and the lack of local sourcing in both quality and reliability

(Vonhacker & Pan 1997). The lack of skilled local management increases the cost of doing

business in China, as expatriate costs for any length of time can be extremely expensive.

BorgWarner can turn to institutions such as the Society of Automotive Engineers of China (SAE-

China), which trains the engineers and management that will potentially work at its facilities

(SAE-China, 2013). As mentioned previously, BorgWarner addresses the issues with the quality

and reliability of local raw materials by importing them from other countries.

Ideologies

For an American company working to establish a growing presence in China,

BorgWarner has many barriers to overcome with different ideologies between the countries.

While some are complementary, the company must work to proactively address the differences

between the two societies to ensure success.

Economic. China‟s economic ideology focuses more on the functional concept of

fairness than that of efficiency. In efforts to promote fairness, China has struggled to develop

laws and policies to protect the worker while fostering a positive business environment. After

China‟s “Open Door” policy to economic development emerged in 1980, much foreign


investment came into the country; however, there were very little worker protection laws

available. That changed with the implementation of Labor Law of the People‟s Republic of

China in 1995 (Warner, 1996).

As the basic framework for worker‟s rights, the 1995 labor law included multiple

methods to ensure fair employment by establishing that workers had the right to choose one‟s

job, to be compensated for the position, and to have rest and holidays. Further, the law set a

minimum age for employment at 16 and outlawed discrimination based upon gender, race,

nationality or religion. The law also allowed for local governments to set a minimum wage,

established maternity leave for women, and set a ceiling on work week hours. Finally, the law

created employer protections to resolve disputes and outline the steps required to end

employment (Warner, 1996).

After the initial laws were established, worker uprisings became an increasingly familiar

theme, mainly due to a lack of enforcement and a greater knowledge of worker‟s rights. Many

of the grievances were similar to those encountered in the United States in the early 20th century

– extension of working hours, delaying wage payment and unsafe working conditions. In

response to growing labor tensions within the country, in 2007 the Chinese National People‟s

Congress enacted the Labor Contract Law, which provided for greater worker protections than

previous labor laws (Lauffs, 2008).

This Labor Contract Law outlined multiple areas where a worker‟s contract must be in

accordance to national standards, giving greater protections to the worker. The worker‟s contract

terms were to include job descriptions, hours, rest/leave policies and compensation (Lauffs,

2008). Additionally, there were guidelines set that allowed for restrictions on worker

termination and layoffs, most of which required a 30 day minimum notice and minimum

severance requirements.


Much of the legal framework for worker‟s rights within China is similar to the worker

protections of those in the United States. However, news reports increasingly exhibit worker

exploitation from manufacturers, such as Foxconn, as electronics manufacturing company with

plants located throughout China. (Albanesius, 2012) Foxconn is one of many examples showing

that enforcement continues to be an issue in certain areas, particularly around, working

conditions and overtime. As the economy of China continues to mature, and with increased

pressure from external governments, companies and consumers, the working conditions and

worker protections will continue to improve.

Political. Politically, China is a coerced acceptance society. Since Mao Zedong founded

the People‟s Republic of China in 1949, the country has maintained a single-party communist

rule. While this governmental rule remains, the “Open Door” economic policy of the early

1980‟s seems to have changed, and stressed, the communist political landscape within the

country and has moved the axis of the political ideology within the country slightly toward an

informed consensus.

Prior to this change, there was limited accessibility to non-Chinese information available

within society. State-run media maintained a solid, pro-government message and heavily

censored dissident messages throughout the country. Additionally, a large part of the country

was very poor and rural, relying on the state to provide for the population. When Chairman Mao

died in 1976, slight changes were made within the country‟s economic structure with the

implementation of the “Open Door” policy, allowing foreign investment, and subsequently

foreign culture, into the country. Throughout this change, the population has been exposed to

greater outside influences, which many feel have led to some level of political dissension.

There is a large gap between the government-espoused Communist values and ideology

and the practice of relative economic freedom within the country. Some within China are


pushing for political reform to complement the changes within the economic system – moving

from a now irrelevant system, in which power is concentrated disproportionately with the

wealthy upper class, into a more socialist or democratic government system. (Peng, 2013)

However, there has been no consensus about how to move the government in that direction.

Without political reform, contradictions and hypocrisy undermine expressed core values, and

ideology will continue to conflict with the existing practice of government. If allowed to

continue, the contradictions will eventually de-legitimize the government‟s rule and potentially

force much needed governmental reforms.

While economically compatible to the economy of the United States, politically the

Chinese society could not be more different. The difference between the communist government

of China and the democratic government of the United States may cause friction, particularly as

it relates to personal freedoms. Censorship is heavy within China, with heavy penalties, such as

prison, for anything that may be perceived as anti-government. (Yizhong, 2012).

Cultural. In evaluating the culture of China, and to identify the differences between the

country and that of the United States, the Geert Hofstede studies and analysis were analyzed.

(The Hofstede Center, 2013). China maintains a high score in the power distance dimension of

Geert Hofstede‟s cultural dimensions. Power distance determines the comfort level society has

with individuals having unequal power or control and the level of authority accepted.

Predictably, cultures such as China, with a high power distance dimension, score low in the

Individualism dimension. This low score represents a highly collectivist society that focuses on

the good of the community versus that of the individual and expresses a great level of loyalty to

an organization. China is also a highly long-term oriented society that cherishes traditions and

focuses on the overall future of the community and society.

The masculinity dimension measures the cultural attribute of competition. China is a


highly competitive culture, one that allows and encourages individuals to sacrifice to succeed;

however, the country maintains a low Uncertainty Avoidance dimension score, representing that

the culture is fairly comfortable with ambiguity and lack of structure, as well as enterprising

when met with a challenge.

While very similar in the masculinity and uncertainty avoidance dimension, the United

States varies greatly from China in the other dimensions. Within the power distance dimension,

the United States maintains a low power distance, representing a culture highly focused on

equality for all members of society. Conversely, the individualism dimension in the U.S. reflects

a highly individualistic society, in which members‟ responsibility for themselves and immediate

family is stressed. And finally, within the long-term orientation dimension, the United States

conflicts with the Chinese in that Americans are focused on the short-term gains versus long-

term success.

While the ideological differences between China and the United States can be great, with

proper planning and proactively addressing issues prior to conflict, BorgWarner can overcome

these challenges. However, by failing to address the potential challenges, the company may

become unsuccessful by running afoul of the political system, failing to manage the legalities of

the economic system and offending the stakeholders within the country by making taboo cultural

mistakes.

Potential Ethical and Social Conflicts

Accompanied by acceleration of international investment in recent decades, China has

become a source of social and ethical controversies for multinational corporations. Challenges

experienced by companies such as BorgWarner include labor management practices, business

partner expectations, and social context perceptions.

With its rapid economic development, China has started experiencing a shortage of


quality workers and managers. People who are highly qualified for specialized jobs have been

rewarded with quick advancement in pay and responsibility, while regular employees have been

neglected. One of the examples is the captivity of a supervisor at his office until the financial

demands of some workers were met (FoxNews, 2013). This was the result of a dispute regarding

high payouts offered to some employees but not to others. Hence, the workers who kept the

office closed felt that their compensation in comparison to the others was unfair. The situation

created an ethical dilemma that the management had to solve to avoid future misunderstandings

among the company and its personnel.

Another area of a socio-ethical conflict for companies is different expectations of the

business partners. Depending upon the industry and government restrictions, a foreigner will

often have to partner with a Chinese organization. The local partner, as set by the government

strategic policies to develop national competencies, is often interested in gaining expertise and

knowledge of the production and business process. For this reason, all foreign automobile

operations have been structured as joint ventures. Often times, the Chinese partner may be

operating with several foreign partners. For example, Dong Feng Car works with Nissan and

Peugeot (Wang, 2013) and also produces several local brands, which overlaps with partners‟

interests. To further complicate the issue, the management decision process is influenced by the

state ownership and Communist Party guidelines.

A third area that fosters ethical or social conflict is the “high context” nature of

relationships and communication in China, as opposed to the relatively “low context” of

American and many Northern European people. As a result, the Chinese will tend to leave

things unsaid or implied, while foreign partners will attempt to create detailed contracts and

agreements. As Pixley indicated in his interview, “One of my Chinese colleagues always tells me

about subtle body and eye motions that will inform us about the possibility of doing business,


while I tend to just listen to what has been stated” (2013). The high context framework also

relates to the Chinese people‟s intense awareness of who are in power and the pecking order.

While many foreign managers attempt to flatten their organizations, Chinese counterparts prefer

a more hierarchical structure.

Thus, businesses in China need to examine management decisions to mitigate any

potential social and ethical predicaments. With higher competitiveness, the solution of socio-

ethical problems – or their absence – often becomes the factor in the consumer decision-making

process. Companies must be prepared to emphasize their ethical and social commitment as it

pertains to optimizing the efficiency of operating processes.

China‟s cultural, economic and political dissimilarities present a challenge to any

Western company intending to do business there. Its societal system shows promise in macro

indicators of economic growth, but warrants caution with regard to changes in governmental

policies, especially regarding the environment. Societal predisposition indicates a tradition of

hierarchical order, and society is still catching up to the rest of the world with regard to education

of rural peoples and infrastructure. In addition, China‟s collectivist culture requires the

cultivating of family style management and guanxi supplier and customer relationships to be

integrated into business models of companies that wish to be successful there. Furthermore,

China‟s ideologies represent a coerced acceptance society, where Chinese society prefers a low

context, high power distance approach to communication and subscribes more to the idea of

fairness than to that of efficiency.

BorgWarner Strategies and Policies

China‟s proven performance has sparked new challenges that may eventually become of

great concern to companies like BorgWarner. To keep up with consumer demands for high-

quality products, additional investment will be required in automotive research and development.


Constraints of doing business in China will need to be addressed with strategies and policies that

will ensure future success in the country.

BorgWarner Constraints

BorgWarner faces many constraints while doing business in China. In addition to

BorgWarner current has strategies and policies, a targeted strategy to address China-specific

constraints will strengthen the company‟s prospects there. The authors have identified four main

constraints that BorgWarner will need to address: labor dynamics, raw material costs, hukou, and

rapid industrialization.

Labor dynamics. First, China‟s labor dynamic is changing with improvements and

changes in China‟s economy, with much of its population shifting from rural to urban areas.

Shortages in qualified management and skilled workers push the costs of labor up, causing a loss

of competitive advantage for companies relocating to China in search of cheap labor. Trending

wage rate growth and currency appreciation have diminished China‟s ability to export with low

cost advantages (OECD, 2013).

Hukou. The localization of each region presents a challenge specific to doing business in

China. While much of China is migrating to urban regions, the hukou system remains in place,

causing a challenge to businesses unfamiliar with China‟s regional social insurance system.

Each region has its own hukou, a type of social insurance office, into which businesses pay on

behalf of employees. Complications arise as a result of the hukou system because companies

may be forced to pay into a hukou in a different region than where its plant resides, with stiff

penalties to both employer and employee for late or incorrect payments (M. Liu, personal

communication, May, 2012).

Material costs. As a result of production excesses, raw material shortages have triggered

erratic and rising production costs, thus narrowing profit margins and increasing the power of


domestic commodity suppliers and Tier 3 parts suppliers. Furthermore, rapid expansion of the

middle class in coastal areas has increased the cost of doing business in coastal regions, which

had historically been ideal locations for manufacturing companies (OECD, 2013).

Rapid industrialization. China‟s post-reform, twenty-year rush to catch up with the free

market leaders paid little regard to sustainability, and its negligence has begun to show. The

pace of progress has made some of China‟s metropolitan areas the most polluted cities on the

planet. Chinese policy makers may consider limiting personal ownership of automobiles, thus

stifling market growth. Despite the government‟s continuing investment of new transportation

infrastructure, new environmental policies may seek to constrain their use (OECD, 2013).

BorgWarner Strategies and Policies

As BorgWarner continues to grow in China, the company will need to continue to

reevaluate and adjust its short-term and long-term business policies and strategies to meet the

dynamic socioeconomic climate. With contributing factors like rapid urbanization, product

proliferation, and e-commerce, China‟s transformation to a sophisticated value chain will require

companies to establish advanced logistic processes (Eloot, 2013).

Workforce policies and strategies. BorgWarner needs to take precautions to safeguard

against potential issues that the changing labor dynamic may cause. BorgWarner needs to adopt

a family-style philosophy in its management of Chinese employees (Trompenaars, F., &

Hampden-Turner, C., 2000). The family-style philosophy is adapted to the collectivist,

relationship-oriented culture there. Figure 1 indicates hierarchy of management characteristics

for high performing organizations in China such as BorgWarner. As opposed to Western

corporate philosophy centered on results, job satisfaction and individual achievement, Confucian

organizations create a family-style, nurturing environment centered on care, learning and

harmony (Lee, Price, Zhu, Gregson, & Qu, 2013).


Supplier policies and strategies. BorgWarner management will need to establish

guanxi relationships with its suppliers. A guanxi relationship between BorgWarner and its

suppliers will mean balancing company policies on giving and receiving gifts with building

mutual trust and reciprocating on favors received from suppliers. BorgWarner can form guanxi

with its suppliers by maintaining an open line of communication between its manufacturing

facility and its suppliers, meeting regularly with suppliers to ensure compliance and to clarify

component specifications and by ensuring that each supplier has a designated point of contact at

each plant. Guanxi with suppliers will ensure BorgWarner receives the best components with

which to make its automotive parts.

BorgWarner will need to pay particular attention to its suppliers in China to guard against

“labor exploitation…unsafe working conditions… subminimum wage levels, and…child labor”

(Zhao, Flynn, & Roth, 2006). The Supplier Code of Conduct includes a section titled

“Responsibility to our Communities,” which addresses expectations of suppliers with regard to

labor, including prohibition of “forced, involuntary or child labor” and also addresses a

requirement of wages that “meet basic needs…in light of local conditions” (BWA Supplier Code

of Conduct, 2007). While the Supplier Code of Conduct does address potential supplier issues,

BorgWarner should also create a standard policy for vetting potential suppliers if it has not

already done so. BorgWarner should not rely on employees of either company to self-report

non-compliance (as stated in the Code of Conduct), as this is not in the nature of the Chinese

culture and directly conflicts with the idea of saving „face‟.

Another important component of supplier strategy involves the negotiation of pricing and

timeliness of the receipt of goods. According to a study in International Business Research,

“Chinese businessmen tend to be lower acculturation in business negotiations” (Jiang, 2013). A

lower acculturation indicates that in China, businessmen are less likely to negotiate in English


than in Chinese, relying on translators in negotiations. Additionally, they are often unfamiliar

with the meaning of Western body language and are unlikely to understand Western culture.

Based on this study, Western companies such as BorgWarner are more likely to succeed at

negotiating with suppliers either by having Western managers adapt to Chinese cultural norms or

by hiring Chinese nationals to negotiate with suppliers that are familiar with the process.

Action Plan for Next 5-10 years

In considering China‟s constraints with regard to doing business there, BorgWarner will

need to create an action plan that will take it into the next decade. The company will need to

implement continued training programs that keep workers abreast of automotive and technology

trends, thus counteracting the effects of increased wages by increasing worker skillsets. In

addition, BorgWarner will need to assess feasibility of divesting some operations in China in

favor of US-based operations, where robotics trends in repetitive tasks have been proven to

reduce costs.

To offset increasing power of suppliers, BorgWarner should leverage collaborative

brokerage agencies that look worldwide for best commodities and supplies. The company

should also assess feasibility of taking advantage of shipping glut to minimize transportation

costs of imported goods. With modern advances in molded parts manufacturing, such as 3D

printing, BorgWarner should consider the affordability of backwards integration to maximize

value chain control.

Increasing costs in coastal areas require a feasibility study of potential success investing

in inland industrial cluster areas, where costs are lower and where newly available river and

manmade infrastructure can now support transportation and distribution costs. BorgWarner

should identify inland industrial clusters that will most benefit its business and plan to relocate

some, if not all of its coastal operations inland in the next five to ten years to maintain its


competitive advantage.

China‟s environmental concerns mandate that BorgWarner promote the benefits of fuel-

efficient and low-emission auto parts to divert potential governmental policies, which might

force mass transit in lieu of private automobile ownership. The company should engage in a

strategic communications campaign to inform the professionals, legislators, policy-makers, and

the public on the merits of BorgWarner‟s unique technologies to help China cure the

environment. The company would also benefit by campaigning for strategic public

infrastructure overhauls which enable mass use of electric and hybrid cars (BWA makes parts for

these). Campaigns for policy changes, which subsidize, de-regulate or otherwise encourage

environmentally friendly manufacturing practices, would also be in BorgWarner‟s best interest.

BorgWarner can accomplish this communications campaign by leveraging professional

magazines, advertising campaigns, governmental and commercial media.

Conclusion

As a Fortune 500 automotive parts and systems manufacturing firm, BorgWarner realizes

China is a key stakeholder to achieving global leadership in fuel efficient, low emission and

high-performance automotive solutions. In pursuit of expanded China‟s market, BorgWarner

must consider the region‟s unique challenges and opportunities. While the firm‟s core

competencies and regional posture mesh well with China‟s booming economy, environmental

conservation policies and surging automotive demand, BorgWarner must also negotiate potential

hurdles related to China‟s domestic credit bubble, regulatory controls, rising labor costs, waning

raw materials, and emerging rivals. As a transnational corporation, BorgWarner has the ability

to leverage a global presence as a hedge against value chain volatility and has the global capacity

to flexibly respond to regional market dynamics. Although the automotive industry in China is

moderately competitive BorgWarner must track policies, which may encourage emerging


domestic rivals or restrict local automotive sales growth.

Looking through the lens of China‟s societal and cultural nuances, BorgWarner‟s strategy

should account for China‟s continuing economic dominance, growing middle class and

expanding automotive interests. The prevalence of a communal, relationship-oriented industry

stakeholders and workforce demand Confucian-centric approaches to industry partnering,

negotiation methods, employee management practices, and stakeholder codes of conduct.

Opportunities abound for BorgWarner if it exploits China‟s upgraded infrastructure systems,

growing demand and environmental enlightenment, while simultaneously examining the benefits

of expanded local value chain control and divesture of select operations abroad.


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