B6838 Game Theory

Chery Automobile Company Case Study

Team 8

TEAM 8 MEMBERS Valeryn Josephine Hong Yingling - G1201988C Yuhico Bondifacio III Ligad G1202262C Anton Stefan Oram G1202051D John Rae Philippe S. Cortes - G1200014H

1) Cherys best seller model QQ was accused and sued for its close imitations to GMs model Sparks. In 2004, the two companies were battling in court, using Game theory concept (suggest to utilize concept of payoff matrix, decision tree model, mixed strategies etc) (a) If you are the CEO of Chery in 2004, what would you have done (cooperate or fight?) What factors and payoff were you considering? (not more than 200 woods)
(70%) Chery Wins (40%) Go to Court (30%) Chery Loses (70%) Chery Accepts (35%) Chery Accepts Court Case (GM sued) (60%) GM asks for Settlement (65%) Chery Declines (25%) GM accepts (30%) Chery ask for Settlement 7.5% Probability (40%) Chery Wins (60%) Chery Loses (40%) Chery pays for Penalty 14.7% Probability (70%) Chery Wins (30%) Chery Loses 19.11% Probability 8.19 Probability 19.6% Probability (30%) GM accepts (70%) GM Declines 3.36% Proability 1.5% Probability 3.5% Probabilty

(60%) Chery asks for Settlement

(75%) GM declines (go to court)

9% Probability 13.5% Probability

These are the factors to consider: In cooperating or settling Pro May cost less Strengthen relations with GM May make partnering with others easier In fighting or staying in court Pro Support of Chinese Govt Can take QQ abroad if win Payoffs: As CEO of Chery, if we accept the court case:

Con Acknowledge guilt Could cost more than if lawsuit fails

Con Expensive if lose

If we lose, we have to pay USD10 million to GM for compensation purposes and our local sales will be affected, as we can no longer continue to sell our QQ models in China. Not only that, Chery will have to halt our overseas expansion plans. If we win the court case, we can continue to sell QQ models in China and continue our overseas expansion plans. However, this will be in the expense of offending GM and may trigger an even bigger counter attack from GM in the overseas markets. B6838 Game Theory 2

It is unlikely that GM will drop the case because GM would want to protect its market share in the developed market. However, GM will be afraid jeopardizing the relationships with the central Chinese government if it persists in its case at the court. From our decision tree, Chery has the highest possibility of winning from any point in the decision tree (either through settlement or through the court), and the highest probability is that GM will offer settlement. Thus, as CEO of Chery, we would pursue the case, and remain open to any offer for settlement to minimise any counter attack from GM in the overseas market. (b) If you are the CEO of GM in 2004, what would you have done, (cooperate or fight?) What factors and payoff were you considering? (not more than 200 woods)
(70%) GM accepts (60%) Chery asks for Settlement (30%) GM Rejects (45%) GM sues (20%) GM Loses

18.9% Probability
(80%) GM Wins

6.48% Probability 1.62% Probability

(25%) GM Wins (40%) Chery takes the Case Court Case (75%) GM Loses (5%) GM drops case

4.5% Probability 13.5% Probability

5% Probability
(40%) Chery Accepts

20% Probability
(40%) GM Wins

(50%) GM asks for Settlement (60%) Chery Declines

12% Probability 18% Probability

(60%) GM Loses

These are the factors to consider: In cooperating or settling Pro Build relations with Chinese Govt Better relations with Chery Build better relations with Chinese media In fighting or staying in court Pro Validate Copyright claims Financial reward Deter other copyright infringements Prevent/slow Chery entering developed markets

Con Less money than court win May encourage further copyright infringements

Con Could lose Chinese govt support for Chery Negative effects of Chinese Media

B6838 Game Theory

Payoffs: If GM wins, they will win USD10.1M. If GM loses, they will lose around USD10M (the cost of patent lawsuit)1 As CEO of GM, we will threaten to sue Chery as a form of deterrent to prevent them from imitating other GM models in future and to protect our developed markets from Chery imitations. It is crucial for GM to foster good relationships with the central Chinese government to ensure the development of GM goes well in China, especially because of a huge future demand of vehicles for China as they grow exponentially every year. This is not a good time to jeopardize the relationship with central Chinese government by strongly pursuing the case. Moreover, the court is not in our favor as Chery has patented a number of our designs in China. From our decision tree, we see that we have greater probability of settling with Chery because of the greater number of cons against us versus pursuing the case where we have greater probability of losing. As long as Chery is willing to settle out of court with the conditions that they will sell a different QQ in the developed markets, we will accept the settlement. References: 1) http://wiki.mises.org/wiki/Costs_of_intellectual_property

B6838 Game Theory

2) After the presentation made by the international expansion manager from GM to Chery. Chery is quite interested in the partnership. However, the chairman of GM is having doubt to see if the partnership makes sense. As a result, he has hired you as a consultant (extremely high pay of USD$1M) to give reasons why GM should not partner with Chery. (a) Send a proposal and background of why GM should not partner with Chery (no more than 250 words) No doubt if GM partners with Chery, GM could leverage on Cherys distribution network in China to expand GM market share in China. At the same time, it can help to foster better relationships with China Central government as it is partnering with a Chinese corporation. However, possibility of Chery imitating GMs technology is high as it is Cherys dominant strategy to imitate GM technology and this will not be unusual, as they have done so in the past. Reason of why it is a dominant strategy for Chery to do so, kindly look at the payoff matrix below: Chery GM Partnership No Partnership Imitate 60/40 65/35 Not Imitate 70/30 75/25

The scenario is as below: GM goes into partnership with Chery and Chery imitates GM technology and gains market knowledge from GM during this period GM goes into partnership with Chery and Chery does not imitate GM technology during this period GM does not go into partnership with Chery and Chery still try to imitate GM technology but it does not have market knowledge as GM. GM does not go into partnership with Chery and Chery does not imitate GM technology Boxes within the matrix refer to the % of market share captured by each company after the partnership has ended. (Black = GMs share and Red = Cherys share) However, the dominant strategy for Chery is to imitate GM technology. This will be dangerous to the future market share of GM and the outcome is worsened if GM goes into partnership with Chery. Thus it will be wiser if GM does NOT into partnership with Chery as the dominant strategy for GM is NOT get into partnership with Chery and the Nash Equilibrium is reached at the bottom left box. On top of that, there are other reasons why Chery is not a suitable partner for GM, which are Cherys known track record of poor quality and poor customer service. If GM partners with Chery, this may compromise GMs superior brand equity in the minds of the customers.

B6838 Game Theory