Something new: Strategic Flexibility in the Chinese automotive market

Those responsible for China strategic planning in global OEMs have a tough, and some would say unenviable job. There are always uncertainties about the development of markets - demand growth, pricing and costs, competitor initiatives, etc. China presents additional, less predictable factors such as auto industry and exchange rate policies. Add to that the sheer size of the China market, and these uncertainties drive scenarios with quite different outcomes and significantly different strategic implications.

Nonetheless, there are strong pressures to make investments in key long lead time areas such as plant, product, and dealers. Board expectations about China exacerbate this challenge. China is either near or at the top of the agenda, and regardless of uncertainties, decisive action is what is wanted.

What should executives do? One way to address the problem of uncertainties is to invest and cover all plausible eventualities; yet few companies can amass the resources without spreading too thin. A second way is to invest in a superior job of predicting the future; however, studies show that even the most thoroughly conducted forecasts usually turn out to be at least somewhat off, and they can be woefully wrong.

A third is to push ahead with the expectation that the company will be agile enough to react to whatever surprises emerge; but true agility is easier said than done – especially in China – due to the scale and long lead times involved. Overall, none of these approaches is entirely satisfactory.

To cope with this type of dilemma, Deloitte has developed and successfully applied a framework called Strategic Flexibility1, which enables a company to compete effectively today while preparing for an uncertain tomorrow without either over-committing to one vision of the future or simply hoping for the best.

Strategic Flexibility involves using scenarios to anticipate alternative future business environments, defining a core strategy that includes actions that will be appropriate regardless of which scenario the future most resembles, and applying real options concepts to make contingent arrangements for elements of the strategy that may or may not be needed. It is applying real options thinking that makes Strategic Flexibility both truly strategic and truly flexible.

The basic structure of an option – a contract which gives the right but not the obligation to purchase an underlying asset at a pre-determined price in the future – can be applied to real assets – hence the name “real options.” Acquiring a real option can involve leasing a piece of property, buying a small share of another company, or funding the initial stages of an R&D project.

The option price is the cost of obtaining the asset with the ability to alter the level of commitment. Exercising the option – if desired – requires additional investment to buy the property, gain control of the other company, or commercialise the new technology. If the assets are not needed, the company walks away with far less downside than if they had made a full commitment upfront. ...

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CONTENTS
Sustainable strategies for China’s automotive industry: 1
Something old, something new
Export readiness of China’s automotive industry: 8
The “ins” and “outs” of management issues
Contacts 25
About Deloitte 26

About Deloitte Touche Tohmatsu
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organisation of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 150 countries.

With access to the deep intellectual capital of 120,000 people worldwide, Deloitte delivers services in four professional areas – audit, tax, consulting and financial advisory services – and serves more than one-half of the world's largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas.

As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte", "Deloitte & Touche", "Deloitte Touche Tohmatsu", or other related names.

About Deloitte’s China practice
Deloitte's China practice provides services through a number of legal entities and those entities are members of Deloitte Touche Tohmatsu (Swiss Verein).

We are one of the leading professional services providers in the Chinese Mainland, Hong Kong SAR and Macau SAR. We have more than 5,000 people in ten offices including Beijing, Dalian, Guangzhou, Hong Kong, Macau, Nanjing, Shanghai, Shenzhen, Suzhou and Tianjin.

As early as 1917, we opened an office in Shanghai. Backed by our global network, we deliver a full range of audit, tax, consulting and financial advisory services to national, multinational and growth enterprise clients in China.

We have considerable experience in China and have been a significant contributor to the development of China's accounting standards, taxation system and local professional accountants. We also provide services to around one-third of all companies listed on the Stock Exchange of Hong Kong.

For more information, please visit our website at www.deloitte.com/cn.

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