INDIVIDUAL ESSAY FOR THEORIES OF
INTERNATIONAL BUSINESS 2018-19
Student ID: 10359543
26/12/2018 |
AN ANALYSIS OF TITAN’S OUTSOURCING JOURNEY
A BRIEF OVERVIEW OF TITAN AND INITIAL STAGES OF ITS GROWTH :
Titan is the fifth largest watch manufacturer Indian company operating in the lifestyle
industry, headquartered in Chennai. Apart from watch production, Titan company is engaged
in a wide range of different products (perfumes, jewellery, engineering, bag, wallets,
eyewear, precision engineering(Ibef.org, n.d.). Titan exports watch to approximately 32
countries around the world(@businessline, 2018). They manufacture jewellery under the
Tanishq brand name(@businessline, 2018). Titan’s parent companies are Questar
Investments Limited, Tata Sons, Tata Press and the Tamilnadu Industrial Development
Corporation Limited (TIDCO).
Titan company was founded in July 1984 by Xerxes Desai through a technical collaboration
with one of the world's largest manufacturers of watch movements, France Ebauches, a
French company (Mukund, 2002). Apart from its collaboration with France Ebauches, a
collaboration agreement between Titan and Casio Computer Company of Japan was signed in
1986, which proposed the production of 2 million watches(Economictimes.indiatimes.com,
2018).
Titan’s first production facility was established in Hosur, Tamil Nadu in 1987. By tapping
into technical know-how knowledge from Japan and Europe, installed capacity of Titan’s
cutting-edge manufacturing facility reached 3.5 million watches per annum(Mukund, 2002).
Following two years, Titan established a new component factory and case manufacturing
plant, both situated close to the central plant in Hosur. Over the years, production facilities of
Titan in Hosur became the one of the largest integrated watch manufacturing unit in the
world.
In 1992, backward vertical integration towards manufacturing step motors was conducted by
Titan(Mukund, 2002). During this period, the company commenced producing electronic
circuit blocks to use in watch mechanism and entered into joint venture with Timex
Corporation of the USA to market times watches in India(Mukund, 2002). The company
established a watch assembly with a capacity of 5 lakh watches in Dehradun(Mukund, 2002).
Apart from establishing new manufacturing facilities, Titan began applying World Class
Manufacturing(WCM) practices such as Just-In-Time Manufacturing, Total Productive
Maintenance and Total Quality Control to its manufacturing process(Mukund, 2002). As a
result of the increasing number of manufacturing facilities and technological upgrading in the
production process, the total production capacity of Titan reached 5 million per
annum(Mukund, 2002).
Titan started outsourcing process in 1999 from both foreign suppliers in China and Hong
Kong with a volume of 1 million components(Mukund, 2002, p. 10). By opting to outsource,
the company managed to launch a new watch branch(Dash) for children(Mukund, 2002).
T ITAN’S INTERNATIONALISATION P ROCESS:
As aforementioned in the introduction, Titan’s internationalization journey has begun through
joint ventures with companies from Europe and Japan. This internationalisation, because it
begins by involving in activities with foreign companies, refers to the inward pattern of
internationalization. By capitalizing on technical know-how provided by mentioned foreign
companies, Titan’s first production plant was set up in Hosur district. At this stage, it can be
asked that why did these foreign companies, who possess the required technical knowledge to
set up such advanced manufacturing plant, allow Titan to capitalize on their resources. This
question will be answered by drawing on the Vendor’s product lifecycle model.
Vendor argues that due to the technological gap between countries and characteristics of the
advanced market(high demand, high purchase power of consumers, higher human capital),
new products are likely to emerge in the USA(Ietto-Gillies, 2005, p. 70). Although watch
production has first initiated in England, which is a contrast to Vendor’s assumption, we can
argue that watch production has commenced in advanced economies. Since watch becomes a
standardized product, its production process requires low labour skills and high capital
intensity which reduces its asset-specificity. In other words, the higher the product
standardisation, the higher the imitability of it(Grazia, 2005, p. 72). As a result of this cycle,
the production of the standardized product, which is the watch in this story, goes to
developing countries when it reaches its maturity. Hence, this explains the rationale behind
the Titan’s joint venture with European and Japan firms.
Owing to its reputation and familiarity in the region, Titan’s outward internationalization has
begun by setting up its own subsidiaries first in the United Arab Emirates(Titan International
Middle East-TIME) then followed by proliferating in the region(Ibef.org, n.d.) According to
sources available on the Internet, there was no sign of export before the Titan’s FDI in the
Middle East market. Therefore, the Uppsala model(1)’s gradual commitment path does not
explain Titan’s internationalization in the Middle East. Further, it is inconsistent with
Johanson and Vahlne’s proposition of establishment chain(2009) that the company did not
begin to internationalise in neighbouring countries.
Institutional setting of countries has a considerable impact on corporations and plays a
decisive role in their strategies. As highlighted in the paper(Peng, Wang, & Jiang, 2008, p.
922), there is a causality between institutions and organisation’s strategic choices. Therefore,
it is crucial to analyse companies’ strategic actions from an institutional perspective.
Following two figures show the differences in formal and informal institutions. Titan’s entry
date into UAE is 1991. To address validity issues, the data set published closest to entry date
were drawn from sources.
Concerning the cultural distance between India and the United Arab Emirates, Hofstede’s
cultural dimension indices(G. Hofstede, 1984) of both countries are illustrated in the table
below(figure 1):
India
Individualis
m
Power Distance
Masculinity Uncertainty
Avoidance
48
77
56
40
United Arab
25
90
50
80
Emirates
Source:(G. Hofstede, 1984, p. 85),(Hofstede Insights, 2018) - Figure 1
The diagram below illustrates the differences in formal institutions between UAE and India
by using worldwide governance indicators(Kaufmann, Kraay and Mastruzzi, 2011).
The comparison in indicators of formal
institutions between India and UAE(1996)
90%
80%
78%
70%
60%
77%
72%
64%
69%
61%
50%
57%
54%
40%
30%
43%
37%
20%
26%
19%
10%
0%
India
United Arab Emirates
Source: (Info.worldbank.org, n.d.), Figure 2
Even though, as shown in the given figures(1-2), there is a marked difference in both formal
and informal institutions between these countries according to the Hofstede’s dimensions and
worldwide indicators of formal institutions.
Titan
opted
for
greenfield
investment,
which
requires
the
highest
resource
commitment(Erramilli and Rao, 1990, p. 140), to enter the UAE’s market. This supports the
empirical findings of Gollnhofer and Turkina’s research(2015) which suggest that the higher
the cultural distance, the higher the resource will be committed in order to keep a tight rein on
the business model in the host country.
The differences in language, political and legal environment increase the psychic distance
between both countries. However, after accumulating experiential knowledge in the United
Arab Emirates, the company has identified the possible opportunities within the markets
close to UAE, which explains Titan’s subsequent growth in the region. As highlighted in
Johanson and Vahlne’s paper(1977), corporations recognize the opportunities through
experiential knowledge.
Concerning Titan’s internationalization in Europe, Titan’s connection with European vendors
started in 1994 by producing watches for several prestigious European brands(Ibef.org,
2018). Further, in 2014 the company initiated a joint venture with Montblanc Services B.V.
Netherlands to establish operations in Indian retail trade. After these stages, Titan established
its own subsidiary in the Netherlands, Titan International Holdings BV, Amsterdam, which
oversees the operations in Europe(Ibef.org, 2018).
Corporations involved in joint venture develop mutual commitment and trust if the venture
serves all companies’ long-term interest(Johanson & Vahlne, 2009, p. 1418). Accordingly, by
capitalizing on network, trust, knowledge developed through previous relations with Dutch
vendors, Titan established its own subsidiary in Netherland. Further, to mitigate the liability
of outsidership, the company hired Jacques Meyer, who was in the position of establishing
Seiko in Europe(Ibef.org, 2018). The company has relied on Jacques’ previous experience in
Europe and wanted to take advantage of Jacques’s network within the European market. As
emphasized in Johanson and Vahlne’s paper(2009, p. 1411), insidership in related networks
is a prerequisite of success in the internationalization process. This proposition explains the
Titan’s motives for the recruitment of Jacques Meyer.
Overall, even though Titan’s first outward internationalisation in UAE is not fully consistent
with any existing internationalization theories, its further expansion in markets close to UAE
can be explained by experimental knowledge accumulated in UAE. However, the company’s
outward internationalisation in Europe market is consistent with the modified Uppsala
model(Johanson and Vahlne, 2009).
IN-DEPTH ANALYSIS IN T ITAN’S O UTSOURCING ACTIVITIES :
Whilst neoclassical economics theory assumes that the market is the place where all agents
possess perfect knowledge and are rational, the Coasian approach argues that there are market
imperfections and costs stemming from the market mechanism(Coase R, 1937). According to
Jill E.Hobbs (1996), transaction costs occurring in the market mechanism can be eliminated
through vertical integration by internalizing with-in firm. Titan’s backwards integration
policy conducted in 1992 is in line with Hobbs’ proposition(1996) to cut transaction costs.
Besides, by implementing practices as a part of WCM initiatives and PQCD world classmanufacturing program, Titan obtained efficiency thereby reducing production cost. Further,
joint ventures and collaborations with foreign companies enabled Titan to learn their knowhow. By drawing on this know-how, Titan upgraded its manufacturing capability thereby
improving its manufacturing efficiency. Apart from obtained efficiency in manufacturing,
Titan’s advertisement campaign for watches with the signature tune adapted from the 25th
Symphony of Mozart boosted sales. As a result of these successful advertisement campaigns,
improvements, growth in the company’s production facilities, Titan gained a competitive
advantage over its competitors. Its share in the domestic market(India) rose from 37% to 48%
in the period between 1993 and 1998(Mukund, 2002).
Titan’s competitive advantage over the competitors used to mainly derive from its low-cost
production over these years. Until 1999, Titan was an undisputed leader in the manufacturing
watches and jewellery. In 1999, the government of India relaxed limitations and reduced tax
duties on watch imports from 50% to 25%(Mukund, 2002). Hence Titan’s dominance over
the market was threatened by foreign competitors.
In the Indian watch market, the grey market has constituted a significant market share(refer to
figure 3).
Indian Watch Industry
Organized Sector
Unorganized Sector
Volume
20 million units
16-18 million units
Value
Rs 10 billion
Rs 3-5 billion
The figure (3) above illustrates the market volume and value of Indian watch
market(Mukund, 2002, p. 7).
With the decline in tax duties, small players in the unorganised sector had commenced
importing watches from low-cost countries and ultimately transformed the Indian watch
market to stiff price competitive market. During the first wave of competition, Titan was not
able to withstand cheaper Chinese watches flooding through the Indian market. Removal of
institutional barriers protecting incumbents from potential competitors prompted Titan to
outsource some of its production.
Apart from the decrease in tax duties imposed on foreigners, Titan had difficulty in
conducting its supply chain which was getting more complex. It was necessary to optimize
the supply chain to gain flexibility. Due to human resources, litigation issues(Mukund, 2002)
and increasing complexity in the supply chain, Titan was approaching towards the “option of
buy” in the dilemma of make versus buy. According to Williamson(1975, 1979), If
performing an activity in-house leads to higher transactional cost than performing it through a
third party in the market, that activity can be bought from the market. To gain flexibility in
the supply chain and focus on core competencies, Titan had to outsource some of its
activities.
The company’s management was aware of the fact that the general trend in the global watch
industry was outsourcing. Since Titan has witnessed the success stories of early outsourcing
cases in the industry, Titan wanted to jump the bandwagon of outsourcing which planned
policy is in line with Lacity and Hirschheim’(1993) arguments regarding the new era of
outsourcing(bandwagon).
On the other hand, performing an outsourcing activity without estimating its possible
negative outcomes might result in a decrease in the quality, loss of control(J.C. Lee, S.A.
Arndt, 1999), loss of core functional skills(Financial Post, 2018), unexpected rise in
complexity(Larsen, M.M., 2009), layoff unrest amongst remaining employees(Huff, 1996),
difficulty in reallocation of existing teams(Tayauova, 2012) and an increase in switching cost.
For instance, Lenovo was once an outsourcing company of IBM. Through the partnership
with IBM, Lenovo became an original brand manufacturer and eventually acquired IBM's
personal computer business in 2005(Peng, Mike W., 2018). Given these reasons, outsourcing
policies motivated by imitate behaviour might end up with failure due to hidden costs in
outsourcing process.
According to analysts, during the 1990s Titan’s essential cost driver was its huge investments
in manufacturing facilities(Mukund, 2002). Apart from large investments in production
facilities, Titan spent a large amount of money on its fundamental activities(marketing
campaigns, operational excellence, design) during the period between 1994-1997(Mukund,
2002). Since the company undertook such heavy burden by allocating its resources to the
wide range of activities, the loss in net profits reached 129,3 Rs million(refer to figure 4).
95-96
96-97
97-98
Net Profits in Rs(million)
275.7
242.2
146.4
Loss in Net Profits(Cumulative)
0
33.5
129.3
Source: (Mukund, 2002, p. 8). - Figure 4
Between 1997 and 2000, various negotiations had taken place and resulted in a wage
agreement which stipulates that a low-skilled blue-collar worker at the company increased to
10,000 Rs per month(Mukund, 2002, p. 9). This put additional cost pressure on the
company’s activities. However, Titan’s supply chain was so complicated that the company
was not able to focus on its key resources(Mukund, 2002). Due to complexity, a malfunction
in the design of watches was found. Intricacies in the supply chain caused impediments on
the operation of core activities.
Owing to these factors given in the previous paragraphs, Titan decided to outsource
manufacturing activities to third parties to mitigate complexity within the supply chain which
led to the high loss in the company’s profitability. Titan had no other option but to outsource
when the fact that Titan’s price disadvantage as opposed to cheaper Chinese watches taken
into account. Titan’s intention to outsource was confirmed by Chief Operating Officer’
comments, Bhaskar Bhat: “There will be no more big investments in manufacturing.
Wherever we find it is more competitive to outsource as against manufacturing it in-house,
we will go ahead and outsource it”(Mukund, 2002, p. 9-10).
Titan’s outsourcing journey began in 1999 with a volume of approximately 1 million
components from suppliers in Hong Kong and China and, Titan’s new kids watch brand,
Dash, were produced with the components outsourced from local and foreign
suppliers(Mukund, 2002, p. 10). Further, Titan outsourced its movement technology to
France Ebauches to produce value-added watches(Ibef.org, 2018). By opting to outsource,
the company saved at least 2,5 million Rs(Mukund, 2002). Otherwise, due to rudimentary
machines used in the company’s production facilities, Titan would have had to improve its
mould technology which requires large investments. According to Quin and Hilmer(1994, p.
43), duplication of an external supplier’s capabilities and innovations may be highly
expensive or even infeasible. Titan’s reluctance to invest in machinery to catch up external
supplier’s capacity supports Quin and Hilmer’s arguments.
As mentioned earlier, the wage agreement between Titan and its employees which put an
additional cost on the company’s budget had reduced Indian’s low labour cost advantage;
therefore, the company outsourced its manufacturing facilities to suppliers in China where
provide low-cost labour advantage. As highlighted in Dunning’s eclectic paradigm (Dunning
& Lundan, 2008, p. 323), firms seek to invest in countries where provide advantageous factor
endowments.
Corporations are unwilling to outsource their essential capabilities due to the invisible costs
in outsourcing(Pederson, 2013). Further, China, where most of Titan’s outsourcing facilities
took place, is well known for its lack of intellectual property protection. Therefore, the
knowledge transfer occurring in the outsourcing process may be exploited by suppliers.
According to J.B. Quinn and F.G. Hilmer(1994, p. 48), companies initially outsource less
critical activities. Accordingly, Titan merely outsourced manufacturing activities(less
significant) to third parties thereby concentrating on its core activities.
While cost efficiency played a decisive role in the company’s outsourcing strategy, another
incentive behind Titan’s outsourcing decision was to concentrate on its key resources,
capabilities, competencies rather than solely cutting cost. Such strategy is in line with Quin
and Hilmer’s arguments(1994, p. 43) who claim that in order to maximise returns earned
through internal activities, companies channel investments and energies into activities which
they are best at.
According to Holcomb and Hitt(2007, p. 466-467), the definition of strategic outsourcing is
“...organizing arrangement that emerges when firms rely on intermediate markets to provide
specialized capabilities that supplement existing capabilities deployed along a firm’s value
chain.” However, Titan wanted to leverage its capabilities by capitalizing on supplier’s state
of the art moulding system, such goal overlap with the definition of strategic outsourcing.
Therefore, the outsourcing strategy that Titan conducted encompasses the characteristics of
strategic outsourcing.
Titan’s supply chain became more flexible by handing over its manufacturing activities to a
large number of local and global suppliers. On the other hand, the larger the number of
suppliers the higher complexity Titan has to deal with. Therefore, Titan’s sourcing strategy
has led to a higher level of complexity arising from a lack of control over its manufacturing
activities. As stated in Quinn and Hilmer’s article(1994, p. 50), “there is a constant trade-off
between control and flexibility.” By sourcing manufacturing facilities, Titan has gained
flexibility at the expense of a loss in control over the supply chain.
Even though the transaction cost theory(TCT) can explain the motives behind Titan’s
outsourcing strategy to some extent, due to the TCT’s deficiency in identifying the need for
the corporations to concentrate on their essential skills(Rodríguez & Robaina, 2006), it is
unable to explain Titan’s need to leverage its resources. At this point, the resource-based
view(RBV) explains Titan’s strategy to create value by taking advantage of supplier’s
specialisation on moulding system. Overall, the company implemented the outsourcing
strategy to address both efficiency and creation of value. Therefore, both TCT and RBV
together can explain the motives and goals behind the Titan's outsourcing strategy and its
practice. Further, another driver of the company’s outsourcing strategy was to gain flexibility
which is the core attribute of a flourishing global factory(Buckley, 2009)
T ITAN’S GLOBAL VALUE CHAIN GOVERNANCE TYPE:
Under this subheading, to explain Titan’s governance type in the global value chain, the
company’s relationships with suppliers will be examined based on three factors(the
complexity of transactions, the ability to codify transactions, and the capabilities in the
supply-base) which generate five different governance patterns(market, modular, relational
captive, hierarchy) devised by Gereffi, Humphrey and Sturgeon(2005).
Complex components in a variety of materials are used in watch production and, these
components have to be compatible with each other to eliminate problems occurring in the
assembly process. Therefore, constant knowledge and information transfer are required to
eliminate the complexity stemming from a large number of components used in production.
Given this point, the complexity of transactions between suppliers and the lead firm(Titan) is
high.
Even though today’s modern smartwatches are integrated with other technologic gadgets and
could perform different tasks, at the time when Titan’s outsourcing activities took place,
watches only could perform basic tasks. Therefore, the tacit knowledge required to produce
such low functional watches are simply codifiable, which reduces its asset specificity.
Therefore, a high degree of monitoring and control are required in the production process to
eliminate opportunism. Furthermore, the tacit knowledge required to transfer in outsourcing
of manufacturing activities is highly codifiable compared to R&D or IT outsourcing. Given
these points, the codifiability of transactions is high.
Supplier’s factories are equipped with more developed technologic systems as opposed to
Hosur factory. Suppliers provide state of art superior moulding technology by which Titan
leverage its resources. Given this point, the capability of suppliers is high.
SUMMARY :
Complexity of
Transactions
Titan-Suppliers
Ability to codify
transactions
Capabilities in the
supply-base
High
High
High
Modular governance High
type
High
High
The figure(5) above is generated according to own inferences and the findings of Gereffi,
Humphrey and Sturgeon’s article(2005, p. 87).
All three factors are high for Titan, which overlap with the characteristics of modular
governance type(Gereffi, Humphrey and Sturgeon, 2005, p. 87).
T HE IMPACT OF PROTECTIONIST POLICIES IMPLEMENTED BY THE INDIAN
GOVERNMENT ON
T ITAN:
In this section, all the arguments regarding the implications of the protectionist policy on
Titan will be generated based on the assumption that the Indian government has levied
additional tax duties on the importation of watch components from China.
Protectionism is the modern euphemism for mercantilism which predicated upon the idea that
nations can only maximize their prosperity and wealth by stimulating export and restricting
import(M. Blaug, 1997, p. 11). Even though at first sight, protectionist policies seem
beneficial and are thought to serve nations' interests, it has severe implications for companies
and ultimately society.
Empirical evidence (S. Lenway, K. Rehbein, L. Starks, 1990, p. 1079) on the steel industry
uncovers that protectionist policies imposed on steel products lead to a rise in prices, output
and employment in the domestic market. As proposed by empirical evidence, it is expected
that the increase in tariffs will lead to a rise in watch prices.
In order to peg prices at the present level, Titan has to reorganise its supply chain to eliminate
the cost stemming from the change in tax duties. Otherwise, a possible decrease in
consumer’s demand is expected due to price sensitive nature of the market. In terms of
reorganising the company’s supply chain, switching cost appears as a significant challenge
due to Titan’s dependence on supplier’s certain resources. If Titan was a company merely
capitalizing on supplier’s low labour cost advantage rather than their capabilities and
technology, it would be safe to source the same activities to another third party from a
different country where provides the same factor endowments to eliminate institutional
barriers. Therefore, in this case, the likelihood of switching suppliers at a low expense is not
very high.
There are two potential scenarios awaiting Titan in future. Titan’ first option is to invest in
moulding, movement technology and set up new manufacturing facilities to sustain the same
quality at the expense of a loss in profits for several years. Apart from the loss of profits, it
might lead to higher complexity and eventually a degradation in core capabilities. However,
to mitigate externalities, the government may provide investment fund for companies who are
affected by protectionist policies. The company might leverage its manufacturing capabilities
by using the fund. As a result of this improvement, the company’s dependence on suppliers’
technology would reduce thereby gaining control over the supply chain. Furthermore, by
using the government’s fund rather than depleting its own resources, the company would
maintain its profitability.
The second scenario is less optimistic as opposed to the former one, which might result in a
costly and poorer quality outsourcing plan. Titan’s second option is to outsource its
manufacturing facilities and movement technology to another supplier, which might not
properly meet the company’s needs, from a different country to reduce tax exposure. Even
though tacit knowledge required to facilitate the production process is not hard to codify(refer
to table 4) for Titan, if the capabilities of the supplier do not meet the necessary quality
criteria, proposed outsourcing plan may end up with failure. Further, Titan may lose the
advantages associated with China’s location. The location where proposed suppliers’
operations take place may not provide the same proximity to the Indian market thereby
increasing transportation cost. Overall, although the second scenario is unlikely to be
implemented without incurring an additional cost, it might be less costly compared to
continuing with current suppliers under the high tax burden.
The table below illustrates the comparison of two suggested scenarios based on the change in
three characteristics(risk exposure, flexibility, control) of the supply chain as an outcome of
followed strategies:
Risk Exposure
Flexibility in the Control over
supply chain
supply chain
First Scenario
Low
Low
Strong
Second Scenario
High
Moderate
Weak
The figure(6) is generated according to own inferences.
the
In conclusion, when the benefits and drawbacks associated with each scenario are taken into
account, the benefits of the first scenario outweigh the latter one due to given reasons.
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