1. The coming together of Renault and Samsung Motors Incorporated


Since its establishment, Renault has adopted an organisational culture that focuses on the needs of its client not just in terms of mobility but also in terms of their quality of life. The group’s mission is to become a people centred organisation that thrives on innovation and sustainable mobility (Twarowska and Kakol, 2013). The mission statement states that the company strives to make automotive mobility a source of progress for humankind by ensuring sustainability. Therefore, the company strives to create products that are affordable for the consumer, safe, environmentally friendly, and of very high quality. In addition, it positions itself as the people’s champion in terms of meeting their mobility needs.

On the other hand, Samsung positions itself as a pioneer in innovation as it creates inspirational products and brings the products of the future to its customers. The company focuses on providing the most innovative products in the market and offering creative solutions for the customers’ needs. Although the company lacks a clear mission statement, this can be inferred from its philosophy. The company seeks to employ a very simple business model that devotes its talents and resources to create superior products for a better global society.


Historically, France and Japan have enjoyed a robust relationship with the diplomatic ties between the two countries dating back to the seventeenth century. Since then, the two countries have become strategic partners and have strengthened their military, economic, legal, and cultural interactions. The warm relationship between the two countries created a suitable political relationship that facilitated the acquisition. The continued cooperation between the two countries enables Renault Samsung Motors to operate and invest in both countries without worrying about an uncertain political relationship in future.


Since the acquisition gave Renault Group majority shareholding in the company, the deal is an example of foreign direct investment (Rao, 2007). Foreign direct investment is the long-term investment by an individual or corporate investor in an enterprise that resides in any economy other than that which the investor is based. Foreign direct investment usually involves the creation of a transnational corporation that ensures the operations of the parent company and its subsidiary comply with the laws and policies of both countries. Foreign direct investment presents a number of risks for the parent company. These risks depend various factors such as politics, regulatory, economic, financial, social, environmental, technological, and natural disasters (Rao, 2007).

Founded in 1994, Samsung Motors was a South Korean car manufacturer established as a subsidiary of the Samsung Group. According to the chairman of Samsung Group at the time, Kun He Lee, the automobile subsidiary would leverage the parent company’s resources to gain competitive advantages over other car manufacturers in South Korea and the greater Asian region. Samsung Motors Incorporated started selling cars in 1998 after four years of extensive research and development.

Renault is a French multinational car manufacturing company with a history that stretches back over a century. Three brothers Louis, Marcel, and Fernand Renault established the company in 1899 (Renault Group, 2015). Louis handled engineering and product development while his two brothers concentrated on managing operations. Over the years, the company has manufactured cars, vans, trucks, tractors, tanks, buses, and automated rail vehicles. Renault Group has many subsidiaries operating in different countries across the globe. These subsidiaries include Renault S.A.S, Dacia, Nissan, Renault Retail Group, RCI Banque Retail, Montrio, Renault Argentina, Spain, Brazil, Mexico, Russia, and Renault Samsung Motors (Renault Group, 2015).

Although Samsung was successful in creating an automotive wing, it faced a number of challenges that greatly hampered its efforts to become profitable. As the challenges continued, the company sought to abandon automotive production by selling Samsung Motors Incorporated but retaining the commercial vehicles division (Renault Group, 2016). Other car manufacturers such as Daewoo and Hyundai Motors expressed interest in buying the company but Daewoo was bought by General Motors and corporate rivalry prevented Hyundai from completing the deal. Renault eventually bought seventy percent of Samsung Motors Incorporated while Samsung Group would retain control of Samsung Commercial Vehicles Company. The latter suffered bankruptcy and shut down in 2000. Renault later acquired an additional ten percent shareholding in Samsung Motors Incorporated, now known as Renault Samsung Motors (Renault Group, 2016).


Microeconomic issues and trends that led to the acquisition

Competition. Operating a region awash with car manufacturers, Samsung Motors Incorporated faced stiff competition in the Asian market from other mainstream car manufactures such as Honda, Isuzu, Mazda, Suzuki, Mitsubishi, Toyota, Subaru, and Nissan. These companies had vast experience in automotive manufacturing, product development, sales and marketing activities as well as operational efficiencies. They were also significantly larger than Samsung Motors and could take advantage of their size to ensure lesser costs per unit by making use of economies of scale. The economies of scale theory states that businesses experience cost advantages due to their large size, output, and scale of operations as fixed costs are spread over more units of output and variable costs reduce due to bulk purchases (Ruffin and Either, 2011). Other foreign manufacturers such as Daimler AG and BMW had also infiltrated the Asian market and had significant market shares in the region. These companies had a wide range of automobiles for different functions and their spare parts were readily and cheaply available in the market. This meant operational, maintenance costs remained low for the mainstream brands, and Samsung Motors could not compete with them.

The economics of information. Although the Samsung Motors Incorporated was established by a successful parent company, the company was venturing blindly into a new market in which it lacked prior experience. According to the information, incentives, mechanism design and contract theory, access to information and know how is an important determinant of business success (Guoqiang, 2013).  While the company could have chosen a better entry strategy that would see it gain relevant experience on market dynamics and gather information on automotive manufacturing processes, it chose to invest in a new venture. This is against the growth model that is adopted by other automotive manufacturers that seek to venture and expand into large-scale production.

Samsung’s decision not to acquire stakes or buy off existing manufacturers compounded operational risks that are related to the economics of information. The company lacked experience in the production of motor vehicle components and their proper assembly to produce quality automobiles. It also lacked sufficient operational know how to help the management steer the company towards profitability. This situation could have resulted in management inefficiencies as well as the production of substandard cars. Coupled with an ailing economy in which investors have no confidence and diminishing spending power, Samsung Group was left with no choice but to sell of the automotive wing and eventually cease production of heavy commercial vehicles.

Macroeconomic issues and trends that led to the acquisition

The Asian Financial Crisis. The Asian financial crisis was a period of financial instability in Eastern Asia resulting from the collapse of the Thai currency due to the accumulation of substantial foreign debt. The large amount of debt derived the government of funds since international institutions and other governments were unwilling to offer credit. The Thai government decided to float its currency and allow fluctuating exchange rates. As the crisis became evident to investors, demand for the currency diminished and eventually collapsed in July 1997. The crisis affected the Thai, South Korean, and Indonesian economies extensively while other countries such as China, Philippines, Taiwan, Vietnam, and Singapore were less affected.

South Korea’s banking sector bore the brunt of the crisis as the sector had excessive non-performing loans as the country’s top corporations incurred extensive capital expenditure as they sought to expand their operations. This was in an attempt to compete with other conglomerates in the global markets and as they incurred more and more capital expenditure, they failed to get returns on their investments. This resulted in the accumulation of large-scale non-performing loans that brought the country’s banking sector to its knees. The unfolding situation in Thailand resulted in loss of confidence in the Asian economies, especially those that had highly leveraged capital structures. As the crisis developed, South Korea’s credit rating declined from A1 to A3, and then again to B2 in less than a month. This resulted in a subsequent decline of the Seoul Stock exchange that went down by over twenty percent by the end of the year.

Aggregate demand. Aggregate demand in an economy refers to the total demand for finished product within an economy. Aggregate demand measures the volume of goods and services that people are willing and able to purchase at different prices (Montiel, 2009). The success of companies is heavily dependent on the aggregate demand level since it determines the size of the reachable market and the margin attainable at a specified selling price under the continuous time growth macroeconomic theory (Montiel, 2009). Since aggregate demand depends on the economy’s ability to spend, a number of factors have a significant impact on aggregate demand levels. One of these factors is debt and its impact on aggregate demand is commonly referred to as the credit impulse. Aggregate demand depends on income and savings and while debt may be useful in increasing income thereby driving savings and spending power upwards, in cases of weak economies or financial instability, it reduces income by increasing costs through interest charged on the loan amounts.

The South Korean economy experienced turmoil at a time when most of its corporations were debt-ridden following ambitious expansion strategies. During this expansion period, these companies experienced minimum returns since most of the revenues were directed into capital investment. As a result, net cash flows reduced significantly and the interest rates charged on the loans reduced the level of incomes substantially. The minimal income meant that the economy had little net income, which translates into reduced spending power. The less income also reduces the ability to save, thereby inhibiting investment. Lack of spending power and little or no investment result in diminishing aggregate demand. This means that the economy has less demand than it previously did at specific prices.

There are no sociological, ecological, and ethical factors that directly influenced the acquisition. 

Table 1: Porters five forces analysis

Threat of new entrants – very lowInvestment in automotive manufacturing is capital intensive, thus creating an entry barrier.
Supplier power – highDue to safety issues, automotive parts suppliers have high power due to the small number of certified car parts manufacturers.
Buyer power – very highBuyers derive their power from the wide range of automobiles available in the market.
Competitive rivalry – very highThere are numerous local, regional, and international automotive manufacturers that make the automotive industry very competitive.
Threat of substitution – very highThe automobile is easily substituted by bicycles and motorcycles for short and medium distances and aeroplanes and maritime vessels for long distance logistics. The threat of substitution is therefore very high.
  • The nature of the cooperation and the risks involved

Since Samsung Group voluntarily sold majority of the subsidiary’s stake to Renault Group, the cooperation between the two companies is a friendly takeover. As is the case with Samsung Motors Incorporated, a friendly takeover occurs when the target company’s executive and non-executive board members agree to surrender part of the company’s shareholding to another company. The terms are then drafted and the deal is completed after shareholder and regulatory approval. On the contrary, hostile takeovers occur when the acquiring company fails to agree to terms with the target firm’s management and seeks to replace the management team or sway the shareholders in favour of the deal. Hostile takeovers involve resistance from the managers in charge of the target company’s operations at the time of the takeover.

Although the country has some territorial disputes with Japan, it has minimum political risks and has managed to rebuild its economy to be one of the fastest growing in the world. The country also has a solid financial sector that has stringent regulations that govern borrowing and the trading of securities. The company is home to many technologies driven companies and has sufficient skills to drive and adopt to changing technologies.

  • Achieving synergy in Renault Samsung Motors

Organisational synergy is the seamless merging of two or more independent entities to create a single entity that works towards continued growth and expansion (Twarowska and Kakol, 2013). It involves the integration of most, if not all, of the two organisations operational structures. The most essential prerequisite for organisations that seek to synergise is the ability to develop a common corporate strategy and integrate the diverse skills towards achieving common goals. Hofstede’s cultural theory is a model used to determine the possible relationship between different countries by examining certain national values that are important and given significant priority during strategy formulation and implementation (Hosftede, 2011).

Table 2: Hofstede’s cultural dimensions analysis

Power distance5468
Uncertainty avoidance9286
Long term orientation8863

Due to the differences between the two countries in individualism, masculinity and long-term orientation, the merger between Renault Group and Samsung Motors Incorporate resulted in the development of a hybrid corporate strategy. The hybrid strategy developed by the acquisition resulted in the development of perfect synergy between Renault and Samsung. The joint venture now capitalises on the strengths of the individual companies to deliver people oriented and innovative automobiles of their respective markets. This is evidenced by the company’s turn-around to become a profitable venture. In the last two years of operation, the company has managed over three trillion won in sales revenues, forty-five billion in operating profits and seventeen billion won in net profits (Renault Group, 2016).

  • Effects of exchange rate movements on international trade

An exchange rate is the value of one currency in comparison to another currency. Exchange rates have become an integral part of modern business due to the growth in scale of operations for multinational companies, importation of raw materials, and exportation of finished products as well as the remission of taxes for foreign direct investments (Kohler et al.2014). Exchange rates are of concern to investors because they are constantly changing with market dynamics. The rate of variation between the values of two currencies is referred to as the exchange rate movement. Exchange rates are closely tied to interest rates, inflation, and demand for currency.

At the time of the acquisition, the South Korean economy had suffered from the Asian Financial crisis. Since the crisis had resulted in the decline of the Seoul stock exchange, the South Korean won depreciated against major currencies such as the dollar and the sterling pound. At the height of the crisis, in November and December 1997, the won was exchanging at 1700 won to the dollar, devaluation from 800 won to the dollar before the onset of the crisis. Understanding the overall effect of the exchange rate movement on the deal requires the comprehensive of factors affecting the exchange rates in South Korea.

One of the most important determinants of the exchange rate movement is the level of inflation in the country. Higher domestic inflation in comparison to other countries leads to devaluation of the country’s currency. This drives the costs of production up, resulting in more expensive products that are not attractive in the international market. Speculation also plays an important role in determining the exchange rate of different currencies. If investors speculate that the currency will appreciate, they buy it thereby raising demand levels and value in return. The Asian crisis led to speculation of a collapse that decreased demand for the won. This led to loss of value against the dollar, sterling pound and other major currencies.

A declining currency meant that investment in the country became less and less attractive as the situation deteriorated. Eventually, Renault Group agreed to pay five hundred and sixty million dollars for seventy percent stake in the company. According to this deal, the company was valued at only eight hundred million dollars, despite the equivalent of over five billion dollars invested in Samsung Motors Incorporate and Samsung Commercial Vehicles Company. Although the deal was a severe devaluation of the company, the exchange rate had an adverse effect on the deal. Since the won had lost more than half its value, it suffices to conclude that Samsung Group would have received over a billion dollars for the company were it not for the exchange rate movement.

  • Three aspects and challenges of international business

Marketing, distribution and supply chain management

Marketing, distribution, and supply chain management are integral parts of business operations and multinational companies must devise strategies that are effective for the various countries in which they operate (Carpenter & Dunung, 2011). Many countries have different regulations that govern marketing activities such as advertising. Many countries, for example, prohibit the branding for certain products and limit advertising of certain commodities in the mass media. Since the companies must comply with the different laws governing different countries, they must develop country specific marketing strategies for the different markets.

Finance and accounting for multinationals

Financial record keeping, analysis, and reporting are an integral part of business operations in all countries. Most countries have statutory obligations that govern financial reporting and the rules usually vary from one country to another. Although international finance and accounting bodies have tried to harmonise financial reporting practices in many countries, there still exists significant differences in standards and procedures between countries (Carpenter & Dunung, 2011). These differences usually arise due to different taxation policies enforced b governments or statutory requirements regarding the treatment of income, assets, liabilities, and disclosures in the financial statements. Therefore, multinational companies face numerous challenges when harmonising the group financial statements since different approaches used by different countries usually provide variable figures in the financial statements.

Generic strategies

The development of generic strategies is almost unavoidable for multinational companies. These generic strategies develop due to different regulatory requirements imposed by different governments in their respective countries. As a result, extending certain practices to all subsidiaries and subsidiaries of an international company operating in multiple states would result in violation of regulations (Carpenter & Dunung, 2011). For example, different countries have different labour laws and some have strong workers unions than others. This difference results in fundamental operational differences for a company operating in multiple countries. Differences in regulations result in differences in cost structures, operational structures, and organisational cultures.

The significance of these aspects and challenges personally and to the future of international business

As a future professional in the business world, these aspects are of importance due to the implications they have on international business and the operation of firms in different geographical regions. Examination of the aspects and challenges of doing international business is an important undertaking during training since it presents an early opportunity to appreciate the role of a company’s management in its operational and financial success. It is also a great opportunity to examine the different business models that have been used to overcome the various challenges and evaluate their suitability and viability in the future. In addition, the dynamic nature of international business and the challenges present an opportunity for the harmonisation of economic structures, fiscal as well as monetary policies in different countries. Doing so would facilitate the elimination of investment red tape and encourage the movement of factors of production and finished products, thus encouraging international trade.

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