China began its financial reforms and adopted its open up door coverage in 1979. In that time frame, China's automotive industry was alternatively unproductive. Geely Electric motor, a Chinese home car developer was one of the smallest domestic automotives producers in 1990s. The strong economic potential customer and favorable guidelines in China have contributed to the success of Geely. On the "good year", Geely looked after a curved 13% progress rate in sales volume of sedans over past years, and the revenue level reached record saturated in 2008.
Behind the success, the short term liquidity of the company remained a significant concern. More annoyingly, two emergent dangers- intensified competition in the low-end market and immediate growth of wage level in China, were thought to be the biggest obstacle on the open up road ahead.
In my final year at school, I went to an economics course which was related to the foreign trade and investment in China. It was the first time I came across with the Chinese language motor vehicle industry. The course coordinator, a professor from mainland China, was a specialist at the Chinese automotive industry. Under his extensive guidance and motivation, I little by little developed my involvement in the go up of the Chinese motor vehicle industry. Furthermore, having witnessed the entry of china in the WTO, which brought success but also doubt to the automobile industry, as the domestic car market would be more open to the globe but also face tougher rivals in the Chinese market, and these factors would make the car industry an interesting topic for further study.
Geely Motor unit, a Chinese domestic car company, which is also the concentrate of this study, was one of the tiniest domestic automotives makers in 1990s. To appreciate the good condition in the car industry, Geely has advanced to a multi-billion organization and captured more than 3. 5 % of the marketplace share, that was equal to 35 billion yuan. This review attempts to disclose the key features that contribute to the success of Geely and discuss the obstacles that are likely to encounter soon.
Chinese motor vehicle industry
China started its economic reforms and implemented its open door insurance plan in 1979. Before that China's motor vehicle industry was alternatively unproductive. Facing the marketplace reforms and import competition, the Chinese car industry has experienced several radical transformations since the monetary reforms. In 2001, china's entrance to the WTO helped bring greater opportunities to the automobile industry, but, all together, it also recommended competition within the industry would intensify. To make sure the great things about admittance to WTO outweighed the equivalent costs, the Chinese language official regulated the industry to safeguard the small domestic producers against giant rivals by only allowing rivals to type in the Chinese language market through joint venture collaboration with the domestic car providers (see appendix 1). This insurance plan did not only avoid domination of international resource-rich rivals, but also allowed immature domestic producers to raised integrate also to share resources with other technical advanced partners, in which it should permit the domestic companies to grow roots and firmly establish themselves in the long run.
Today China's car industry has already overtaken the united states and be fastest-growing vehicle market in the world (Hogg 2009). Given the solid economic possibility and favorable insurance policies in China, Chinese language car industry should maintain steadily its higher expansion rate (see appendix 2). In the near future, we may be prepared to see loan consolidation in the car industry. However, the intensified competition should be harmless as it will help to shape the domestic market in a much better way and additional segment the market to meet consumer needs.
The rise of Geely
The performance of Geely has been powerful in the last few years. Regardless of the prolonged financial downturn, Geely has had the opportunity to keep a curved 13% progress rate in sales volume of sedans above the modern times, and the profit reached record high in the last financial calendar year, where net earnings acquired a threefold increase to RMB 866. 05 million from previous year's RMB 305. 77 million ( see appendix 3).
There were several favorable financial attributes that may donate to Geely's success. The drop of COGS, which mirrored the success on costs control, has apparently improved upon the gross margin level, after gone through a considerable restructuring of the business's subsidiaries (note 1). It was important to note that the 'one-off' impact of the restructuring on the cost reduction was due mainly to the favorable economies of range and removal of excessive resources. A continuing tight control on costs, such as distribution and selling expenditures, would be the main element to success if Geely wanted to secure a larger market show (see appendix 4).
The short term liquidity of the business should be given priority attention, following the restructuring (appendix 5). The sharp increased in company's belongings, to 10150 million, which was almost 3 times of this in 2007, can have burdened the Geely's short term liquidity. More worryingly, the dramatic increase in investments and the reduced degree of current and quick proportion could reveal an early on sign of overtrading, in which Geely could become prone and subjected to cash flow concern. Given the global market was continued to be uncertain, it might be wise to have got sufficient liquidity in order to be better well prepared for unforeseen circumstances unless Geely was pretty certain about the surplus amount of cash that might be provided in the future operating activates.
Apparently, the long term creditness of the business seemed to have deteriorated. The pointed increase of arrears ratio was mainly due to the accounting effect after the restructuring of the business's subsidiaries. Even though, the increased earning ability of Geely has diluted the burden of interest expenditures to the company, and the gearing percentage has taken care of at a exceptional low level, implying the actual fact that the business was counting on equities alternatively than bills to finance its expansion. A healthy capital structure, a low level of long-term debt and a corresponding higher level of collateral, should allow Geely to protect against unplanned economical swings and neutralize the pressure on cashflow.
So considerably, by analyzing the past records of Geely offered little signs about the business performance. To raised reflect the potential of Geely, it might be helpful if we benchmarked its performance with other direct rivals (see appendix 6). In cases like this, two home car suppliers, Great Wall and Denway, have been chosen for comparative analysis, given that they had a similar track record and market capitalization as Geely. By starting a comparative financial examination between the three companies, we were wishing to obtain a much better knowledge of Geely's financial performance from another standpoint.
Two particular perspectives have been outlined in the comparative examination. First of all, the income made from the share of jointly managed entities would provide a stable source of income to the company. Moreover, jointly handled entities would also profit the business in many other measurements, such as marketing, syndication and technical development, as both factors would endeavor to share its accumulated knowledge in order to enhance their competence. That meant, Geely, a wholly local owned venture, could lose it competitiveness to the people joint venture companies which benefit from the prescribed advantages.
Another prominent issue was that the receivable and inventory turnover rate of Geely exhibited a substantial variance between that of Denway and Great Wall membrane. One possible justification was that Denway offered a longer purchase installment period than that of Geely in lead to less receivable turnover rate. However, longer installment cycles which were much more likely to favour the consumers could load the company's cashflow. In cases like this, Geely would have to carefully balance both opposing effect in order to optimise its online marketing strategy, and at the same time, maintain a healthy cash flow balance. Similarly, effective creation planning would improve the availability of the merchandise and avoid unwanted tied up of working capital in form of inventory. The need for the both of these factors should not be underestimated as it can not only enhance the company's profit percentage, but also offered another solution to Geely's short term liquidity problem.
The road ahead
There were two major difficulties that Geely countered - intensified competition in the low-end market and speedy growth of income level in China. The impact of these factors was likely to weight in another way to other rivals. From the standpoint of Geely, it could be regard as a menace to the company especially its central business was concentrating in the reduced end segment. But the entry hurdle to the automobile industry was moderately high as it incurred a higher exit and sunk cost, the joint venture need would sufficiently lowered the capital requirement for newcomers to type in the car industry, especially to the reduced end portion, by posting resources with the partner. This mean enterprises which initially weren't able to compete in the market, could able to enter the marketplace if it might take advantage of the synergy effect from their partner. Second, the constantly rising price level in china has significantly increased the part cost, which would cause the Chinese automotives to reduce its elegance in the global market. Furthermore, in domestic market, Geely could lose sales to competitors with advanced scientific that were competent to sufficiently lower the expense of the products to fulfill the price hypersensitive clients. Even Geely absorpted the increased cost by minimizing its margin, decisive action was required normally the profitability of the company could be seriously damaged.
One of the many possible alternatives was to develop into top end market. By presenting add-valued superior car should allow Geely to enjoy a greater margin by charging a higher price and decrease the reliance on the reduced end market where Geely might no longer own any cost advantage. To reach your goals in the higher end market, Geely would need to invest significant amount of resources in R&D in order to differentiate themselves from rivals. Given the limited amount of working capital, however, Geely would have to look for external finance. Besides equity, the favorable interest coverage and gearing percentage might imply Geely may possibly also consider debt financing. Another attribute, however, had yet to consider in deciding the foundation of external finance was the money circulation provided by the strategy. Since the strategy would incur a huge cash outflow in the initial level of the R&D and the financial benefits generated by the development process was respect to be indefinite. Thus, it might be sensible to improve fund by collateral to avoid unnecessary liquidity pressure from the interest payment, regardless of the future revenue to shareholders would be diluted.
There were two different techniques that Geely could select. The first strategy proposed the transformation of Geely to a jointly manipulated entity by integrating with another international partner. This may not only enhance the scientific competence in developing more efficient petrol engine motor to secure the future market needs, but also extend the customer platform by producing the brand to international market, in turn to avoid over reliance on the domestic low end section. The degree to which Geely benefited out of this approach would depend on whether Geely could find a suitable spouse. The optimal final result will be a joint venture collaboration with a firm possessed a global brand image and advanced technology, to be able to increase the synergy effect. However this also meant Geely would need to give up the full control of the company, which could lead to dispute and poor decision making, become less responsive to market change.
Another strategy was to stay full control of the company, and established a fresh brand image by repositioning to a higher end segment. The initial R&D cost and the wait effect of the repositioning strategy may likely to load the Geely's short-term profitability in exchange for a permanent growth of the business. It was important to note that both strategies should improve Geely's current scientific competence. But, the beneficial impact should be better if Geely initiated its own development process than 'feeding' by its partner company. More worryingly, over reliance on joint venture partner would reduce the bargaining electricity of Geely when it comes to decision making in the foreseeable future.
In bottom line, both strategies had their merits and drawbacks. In deciding which strategy to adapt, Geely would have to consider how important was for the business to maintain full control of its functions, and whether the short term liquidity issue would prolong in the near future. If it was the case that Geely sustained to have problems with shortage of working capital, the business should prefer the joint venture collaboration where the corresponding synergy result and economies of level should relief some pressure on short-term liquidity.
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