Republic of the Philippines

BATANGAS STATE UNIVERSITY

Rosario
Namunga, Rosario, Batangas

COLLEGE OF ACCOUNTANCY, BUSINESS, ECONOMICS AND

INTERNATIONAL HOSPITALITY MANAGEMENT
Bachelor of Science in Business Administration

CASE 1 – FROM JEEP TO MERCEDES: THE STORY

OF A CHINESE JOINT VENTURE

This case examines an international joint venture (IJV) in China between western multinational
and a local Chinese partner. Part One charts the development of the joint venture, in particular
the early days with a US partner (AMC and then Chrysler) and focuses on the motives, problems
and issues encountered, many of which are typical of many IJVs. Part Two examines the changes
that occurred when Chrysler merged with Daimler Benz and was then demerged a few years
later. The original IJV was set up to produce the US-designed Jeep. Production was stopped on
the Jeep in 2006 as Daimler Benz assumed total control and the IJV then focused entirely on the
production of Mercedes vehicles.

Part One: 1983-2006

The Beijing Jeep Corporation was established in 1983 as a joint venture between American
Motors Corporation (AMC), manufacturers of the Jeep and the Beijing Auto Works, with AMC
owning 31 percent and Beijing owning 69 percent. The intension was that AMC would be
allowed to purchase more equity with profit from the operation. Production of the jeep began in
1984 and joined the existing production of the Russian designed four-wheel drive BJ2020, the
first of its kind in China, but a vehicle far less sophisticated and less reliable than the Jeep. The
focus in the early years was on the production of military and government vehicles. The original
joint venture between BAIC and AMC established a third independent company, the Beijing
Jeep Corporation (BJC). The original agreement was for 20 years with the option to renew if
both parties and the Chinese government were agreeable.

AMC was one of the smaller motor manufacturers in the USA and the company was bought by
Chrysler, the third largest US producer, in 1987. By 1998, Beijing Auto Works had become
Beijing Automobile Industry Holding Company Ltd (BAIC). In the same year Chrysler merged
with Daimler Benz to form Daimler-Chrysler. Responsibility for the joint venture in the West
therefore passed form AMC to Chrysler to Daimler-Chrysler with a 15-year period. During the
period the Chinese government had taken steps to liberalized its economy and give more
freedom for decision-making to individual managers. By 1998, the stake of Daimler-Chrysler in
Beijing jeep had risen to 42.4 percent, the Chinese holding 57.2 percent. In 2005, the name of
Beijing jeep was changed to Beijing-Benz Daimler-Chrysler Automobile Company Ltd, and
ownership was split 50-50 between Daimler-Chrysler and the Chinese.

BAIC reported directly to the Beijing municipal government and was a typical state-owned
Chinese company, whose production output was a function of targets set by a centrally planned-
economy. BAIC was originally established in the 1950s with backing from the former USSR.

The original benefits to AMC passed on to Chrysler were many. The final risk involved was
minimal. The initial investment was low and, in any case, the Beijing municipal government
contracted to pay this back as share dividend. Moreover, the Americans would be allowed to
increase their stake if the company was profitable. A further financial gain for AMC/Chrysler
came through the sale of kit versions of the Jeep and parts. AMC/Chrysler sold these to the
Chinese joint venture at a profit. AMC/Chrysler therefore benefited both from the sale of the
Jeep made by BJC and through the sale of the parts to BJC. Since a joint venture was the only
routine into the Chinese market (and still is in the automobile industry). AMV/Chrysler gained

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entry to an emerging market with considerable potential, particularly for the sales of four-wheel-
drive vehicles. AMC and Chrysler were keen to control the extent of technology transfer to the
new company. The model to be produced in China was an older version of that being produced
in the USA. AMC/Chrysler were therefore doing what many had done before them, notably Flat
in the USSR. They were extending the product life cycle of an older product and its parts through
its manufacture in an emerging economy. BJC would therefore offer no completion in export
markets and AMC/Chrysler were not ‘handing over’ state-of-the-art to the Chinese. An
additional benefit to AMC/Chrysler was learning more about the Chinese market and about joint
venture generally.

There were number of benefits for BAIC and for the Chinese economy in general. They were
gaining access to western technology not just in terms of product but in terms of manufacturing
processes as well. They were gaining the vehicle with a global brand and reputation.
AMC/Chrysler was contracted to assist BAIC set up a local R&D centre. The knowledge gained
from the West and from R&D could be disseminated with other industries. As well as technology
transfer the Chinese were also gaining knowledge from management practices and techniques.
The jeep as a global brand would have export potential, with an initial focus on other emerging
economies, and the promise of hard currency earnings for the Chinese. Although initially reliant
on kits and parts from the USA, the intension was to shift the emphasis to local suppliers. The
joint venture was therefore important in the development of the local supply chain, involving
both suppliers and distributors, to the benefit of Chinese industry generally. In general, the joint
venture was part of the wider process in China of learning more about the West and its business
methods. It also offered the promise of expansion and job creation

From the early days of the joint venture in the 1980s there were several problems.

State Bureaucracy. Although BJC was set up as an autonomous company it was soon clear to
AMC/Chrysler that the hand of central planning by the Chinese was evident in everything the
company did. In the early days, BJC was seen by the Chinese government more as a means of
controlling the flow of foreign exchange than as a potential for a manufacturing company.
AMC/Chrysler managers were frustrated by the politics and bureaucracy of doing business in
China.

Accounting Systems. BJC operated with Soviet-style accounting systems that provide vital
information to centrally planned economy, However, these were inadequate for the management
of a joint venture with accountability needed in the USA. There were no cash flow statements,
budget forecast or cost accounting information all essential parts of a USA accounting system.

Localization. The initial plan was that 80 percent of the Jeep would be manufactured locally by
the end of 1990. Only half of that target was achieved, the main problems being delivery times
and quality. For example, there was a high initial investment in press shop machinery, which
stamped out the body shapes. However, this was dependent on using high quality steel, which
none of the local supplier was able to deliver. The machinery lay idle until imported steel from
Japan was used.

After-sales. Income derive from servicing vehicles and part sales make a greater contribution to
the profit margin of most major vehicle manufacturers than the sales of new vehicles. This was
not the case of that time in China. Chinese companies were preoccupied for meeting production
targets and after-sales customer cares was not a consideration. Moreover, as a manufacturer of
four-wheeled drive vehicles, the majority of early sales were to the state. State employees
traditionally had little interest in maintenance. Of something needed to be fixed it was just a easy
to order a replacement vehicle.

Human resource issues. The initial joint venture employed more than 4,000 Chinese and six
expatriate workers from the USA. There were problems of labor discipline. Productivity at BJC
was only 65 percent of that at the Chrysler Jeep plant at Ohio. As China had a full-employment
policy, there was a reluctance to dismiss poor performers. Also, there were problems involving

Second Semester, A.Y. 2016-2017 Page 2 of 5

the expatriate workers. They were paid much more than their Chinese counterparts, which cause
some resentment. Of the first 25 expatriate sent by AMC/Chrysler only one spoke Mandarin
Chinese and only three competed their full tour of duty. Many expats complained about their
living conditions in China and all considered it a hard posting. There were differences of culture
perception based on the concept of age. The first USA workers were fairly young and China was
seen as an important part of their management development. The fact that they were young
disappointed the Chinese who equate youth with inexperience. As a result, Chrysler changed its
policy and sent older managers close to retirement age. The Chinese preferred this, assuming that
as they were older that they have more experience and status. The policy also served to revitalize
the careers of some Chrysler managers.

Sales and profits. Between 1984 and 1996 over half a million vehicles were built by BJC. During
that period sales increase annually by an average 29 percent and profit by an average 7 percent.
In 1996, BJC was ranked third among the top 500 foreign-invested companies in China, and the
company received several honours both locally and nationally. However, from the record
production of 80,000 Jeeps in 1995 only 30,000 were made in 1998. Between 1998 and 202 the
company suffered heavy losses.

When Daimler came on the scene in 1998 it inherited a company with an ageing plant that
produced two outdated models. These were the Jeep Super Cherokee and the BJ2020 which was
still essentially based around 40-year old Soviet technology. BJC had problems competing with
new entrants to the four-wheel-drive market in China, notably Volkswagen and General Motors,
with the Japanese not far behind. All offered newer models than the Jeep, with state-of-the-art
technology, greater comfort and added features at competitive prices. Profits at BJC disappeared
and the company was inefficient even by Chinese standards. For example, while BJC was
building 5 vehicles per employee per year, the VW plant of Shanghai was building 24. The labor
force at BJC, which had risen to 8000 when production was soaring, had been cut back to 4000
and by 2003 was only 3200. Daimler still considered BJC to be over-staffed. Daimler-Chrysler
was therefore faced with a dilemma. The contact was available for renewal in 2003. The
company could be used as a platform for the introduction of the Mercedes range but massive
investment would be required, and some commentators predicted that BJC would be sold off.

Daimler-Chrysler itself was facing financial problems relating to the merger and to the sluggish
performance of Chrysler cars in the USA. In 2001 the company had announced 20 percent job
losses and the closure of 6 plants. Beijing, however, was relatively unscathed, benefiting in part
from the switch in the locus of control from the USA to Beijing, now officially the North-east
headquarters of Daimler-Chrysler.

Daimler-Chrysler chose to invest with a large capital injection in plant, the introduction of
advanced technology and establishing a new management team. The investment amounted to
sum US$226 million. In 2001, cooperation between Daimler-Chrysler and BAIC was extended
to 30 years until 2003 and it announced that the flagship model of the range, the Grand Cherokee
was to be built in Beijing. By 2003, the company was making three types of Jeep, the Grand
Cherokee, the Super Cherokee and the Jeep 250. In addition, the BJ2020 was re-branded as the
City Cruiser. Daimler-Chrysler pledged to introduce a new model every year and plan to assist
BJC extend its sales and service network from eleven provinces I 2001 to cover all 23 provinces
in China. By 2003 the company was back to profit of about US$24 million.

By 2005, the company had built two new plants, one to make the Jeep and other sport utility
vehicles. (SUVs), and the second to concentrate on Mercedes and Chrysler saloon cars. It had
dropped the City cruiser but produced a version as a military vehicle. The company made the
Grand and Super Cherokee but the Jeep 250 became a version of the Cherokee made entirely
from local parts. The company had also branched out in to the manufacture of other SUVs,
producing Mitsubishi Outlander. At the time, Mitsubishi was 37 percent owned by Daimler-
Chrysler (although Daimler-Chrysler was soon to sell its shares.) a step forward was the
production of Mercedes Benz E class cars and the Chrysler 300C, a large saloon using Mercedes
technology. Plans were made to build the Mercedes c class and the Chrysler Sebring. The

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manufacture of Mercedes cars especially offered the company much greater profit potential than
the Jeep alone. The company also licensed the manufacture of small vans to Fuzhou in China to
Taiwan. A significant development was that Daimler-Chrysler became the first company in
China to offer financing for both passenger and commercial vehicles.

Part two: 2006-2013

Jeep introduction was halted in 2006t before the demerger of Chrysler and Daimler Benz. In May
2007, Daimler-Chrysler announced the sale of 80.1 percent of Chrysler US to the private equity
investment company Cerberus (the remaining 19.9 per cent was sold by Daimler in 2009). The
value of Chrysler at the time of 1998 merger was US$36 billion. The sale in 2007 was worth
US$7.4 billion. This was accompanied by the withdrawal from Mitsubishi. The Jeep was still
available in China but only as a US import. With an increase in price to incorporate import
tariffs, by 2012 sales had fallen to 46,000.

Daimler Benz kept the plant and became the sole foreign partner with 50 percent equity in the
newly named IJV, Beijing Benz Automotive Ltd (BBAC). The company was originally
registered in 2005. BBAC produced Mercedes C Class, E Class cars and GLK Class SUVs. Plans
were drawn up to expand facilities to build Mercedes compact cars, establish new engine plant in
2013 and set up a new R&D centre both for vehicle testing and for joint development of
components with suppliers. At the beginning of 2013 BBAC employed over 9000 people. The
2012 performance gave Daimler some concern as sales had fallen by 11 percent. And revenues
by 2.8 percent from the previous year. This was at a time when the Chinese market in car sales
had been growing at around 10 percent per year. The company appointed a new Chief Executive
to oversee its China operations.

In 2013 sales had improved and not including Hong Kong, 228,000 vehicles were sold in China.
The Chinese market became the third largest for Daimler Benz behind Germany and the USA
and currently one in six of all Mercedes cars sold worldwide are sold in China. Sales forecast for
2015 are for 300,000 vehicles. Seventy-five new dealer outlets were added in 2013 making 300
in all covering 150 cities. The company see China as crucial in establishing itself as the leading
as crucial in establishing itself as the leading brand in the luxury car market.

Daimler Benz involvement in China is coordinated by Daimler Greater in China Ltd (DGRC),
established in 2001 in Beijing and responsible for all activities in China, Hong Kong, Macau and
Taiwan. The activities now include the manufacture of cars, vans, trucks and business; a finance
company; R&D; and a spare parts company, DRGC is involved in a number of joint ventures
(most 50-50 equity with a Chinese partner).

Beijing Benz Automotive Ltd (Established in 2005 for Mercedes cars and SUVs)

Fujian Benz Automotive Limited (Established in 2007 for Mercedez vans)

Beijing Foton Daimler Automobile Co. Ltd (Established in 2011 for medium and heavy duty trucks and to
locate a new engine plant)

Shenzen BYD New Technology Co Ltd. (Established in 2011 to develop electric vehicles under the Denza
brand)

Chrysler and the Jeep

Chrysler was declared bankrupt in 2009 and like the other US car giant general Motors the
company was effectively owned by the US and Canadian Governments and by the Union of
Auto Workers (to protect the health care provision of current and past employees). The company
has since been acquired by FIAT, the Italian car manufacturer, as the majority shareholder with
plans to buy the remaining shares in 2014. Plans are in place to re-establish Jeep production in
China in Changs,a the capital of Hunan Province in a new IJV with FIAT’s current Chinese
partner the Guanshou Automobile Group.

Second Semester, A.Y. 2016-2017 Page 4 of 5

Questions:

1. What were the main reasons for the joint venture between AMC/Chrysler and BAIC, formerly
the Beijing Auto Works? What benefits were to be gained by both parties?

2. What were the early problems and issues encountered by this venture?

3. Assess the dilemma facing Daimler-Chrysler in 1998. Was the company justified in its
decision to invest?

4. Assess the motives of Daimler Benz since 2001?

Source:

Needle, David. Business in Context: An Introduction to Business and Its Environment. 6 th

Edition.
Cengage Learning EMEA. Cheriton House, NorthWay, Andover, Hampshire, SP10 5BE
United Kingdom.

Prepared by:

_____________________________
DR. LUZVIMINDA AN ABACAN
Faculty
Date Signed:

Reviewed by:

_________________
Asst. Prof. MARILOU A. VERA
Associate Dean
Date Signed:

Approved by:
____________________________
DR. ROSALINDA M. COMIA
Dean of Colleges
Date Signed:

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