Ford Wholly Owned Subsidiary Essay

1047 words - 5 pages

Worldwide in 2007, a total of 71.9 million new automobiles were sold. North America and Japan markets were sluggish, while those in parts of Asia and South America grew vigorously. The major markets that saw the most rapid growth were Russia, Brazil, and China. The most active division in the Russian economy is the automotive market. Russia is seen as one of the most promising automotive markets in all of Europe; with a population of approximately 140 million people. The reason is because the Russian market hasn’t reached its point of saturation yet. The Russia car buyers’ desire for premium products, but also a need for low-cost products, offers potential for the auto industry. At a glance ...view middle of the document...

Car sales in Russia totaled 2.78 million in 2013. According to Ernst & Young, since 2011 more than $6 million has been invested in Russia’s car market by foreign corporations.
Ford chose to enter the Russian market as a wholly owned subsidiary. A wholly owned subsidiary is defined as a subsidiary in which the firm owns 100% of the stock. The Ford Company has several advantages being the first foreign car company to enter the Russian market; these advantages are known as first-mover advantages. One important advantage for Ford was having the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage was the ability to build sales volume in Russia before competition entered the market. This gave Ford a cost advantage over other auto manufacturers that entered the market later. This would give Ford the opportunity, if needed, to cut prices below that of later competitors, and potentially drive them out of the market. Another advantage is the ability to create switching costs that tie customers into their products and services.
However, there are also disadvantages associated with entering a foreign market before other international businesses; first-mover disadvantages. These disadvantages give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business structure in a foreign country is so drastically different from that in a firm’s home market that the organization has to devote extensive time, expense, and effort to learning the rules of the game. Pioneering costs include the costs of promoting and establishing a product offering, including the costs of educating customers. Early entrants can find themselves at a disadvantage if a change in regulations nullifies prior assumptions about the best business model for operating in that country.
Ford not only took major risks being the first to enter the Russian market, but they took another risk deciding to enter as a wholly owned subsidiary. Establishing a wholly owned subsidiary is the most costly method of entry into a foreign market. Ford, entering Russia as a wholly owned subsidiary,...

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