Khon Kaen University International College
Business in the Greater Mekong Sub-region
Course number 050 451 - Second semester 2013
Wednesdays at 9:00 in room 823
Lecturer: Michael Cooke
office room 817
E-mail: Michco@kku.ac.th
Web: KKU.AC.TH/Michco
No.
Course Grading Criteria
%
1
Student presentations
42
2
Final Examination
30
3
Class participation and quizzes
28
Total
100
Each student will participate in three presentations. Students will research and analyze an
industry with GMS. The student will then apply the results of that study to an analysis of a
country within the GMS, analyzing the strengths of that country and the existing barriers to
exploiting those strengths. The last presentation will look into the future.
•Students must be punctual to take a quiz. Early exit is scored as no participation.
•The university enforces an 80% attendance policy, with maximum three absences.
• Your student handbook details the KKU policies regarding plagiarism (pages 88-94).
•Disrupting the class (such as use of a mobile telephone in class) may count as absent.
Plan for the Semester
Week
Starting
Topic
Reading
1
16 Oct
Perspective – What is a business ecosystem?
2
23 Oct
Holiday – makeup date TBA
3
30 Oct
Investment and risk tolerance
(A) – ‘Apple, America, …’
4
6 Nov
Strengths and weaknesses along the Mekong
(B) and (C) – ‘Rent Seeking’, ‘Land
Conflicts’
5
13 Nov
Student presentations – 1 GMS successes
6
20 Nov
Demographics and comparative advantage
(D) ‘City Singles’
7
27 Nov
The implications of trade alliances
GMS-BH pp7-12, 221-234
8
4 Dec
9
9-16 Dec
10
18 Dec
Infrastructure and consumer initiatives
11
25 Dec
Special economic zones
12
8 Jan
Tom Yum Goong and hot money
Fallows pp 278-299
13
29 Jan
The changing nature of development
(E) – ‘No More Miracles’
14
5 Feb
Student presentations – 3 Country potential
15
12 Feb
Review – 21 years of GMS and beyond
16
17 Feb-6Mar
GMS BH pp1-6, Fallows pp 325-354
Student presentations – 2 Country strengths
KKUIC Midterm examinations
Final Examinations
GMS BH
Question from the 2nd Year IM Final Exam
• India’s government has decided to create a domestic computer hardware
industry (New York Times, April 15, 2013). This is because India’s import
bill for semiconductors alone was $8.2 billion in 2012, and demand is
growing at around 20 percent a year. However India has been unable to
attract investors. A recent attempt ended in a dispute over the terms of
the agreement between a company and the state of Andhra Pradesh
where the plant was to be housed. India is offering as much as $2.75
billion in incentives to computer chip makers to entice them to build
India’s first semiconductor manufacturing plant, but the head of the U.S.India Business Council said that India’s efforts to force international
companies to manufacture in the country are futile. “The government
needs to not mandate this, but create an ecosystem.” Critics warn that
India has to reduce some of the barriers to doing business in the country.
For instance, the now successful Indian automobile industry grew after
1991, when India dropped its local content rules.
• What does ‘create an ecosystem’ mean as used here? How can local
content rules be a barrier to a company interesting in doing business in
India?
LE QUANG NHAT / AP
‘Hello Vietnam’
Le Quang Nhat/AP
Intel Corporation Invests in Vietnam
• "Companies in China have been looking for an alternative," said
IDC. "Labor costs are rising in China. The cost of doing business in
China is rising. Vietnam is the right alternative.“
– Hewlett-Packard recently started soliciting for software engineers to
staff a new outsourcing operation in Ho Chi Minh City, an investment
reported to be $18 million.
– Intel’s arrival in the GMS country put Vietnam "on the map for hightech investment and helped the country attract significant investments
from several global technology firms, including Foxconn and Compal
• Nearly a decade in the making, the 47,000-square-meter factory is
twice the size of the company's next-largest plant, in Malaysia
– Construction involved building on top of 8,800 stilts that burrow six
stories down through unstable sandy soil to reach bedrock.
– Vietnam gave Intel a virtual hotline to top government officials.
– Intel is supporting various education initiatives in Vietnam and has
helped to train 87,000 teachers in the country.
– Intel's billion-dollar factory rises from former rice paddies outside Ho
Chi Minh City, on a .47 square km site in the new Saigon Hi-Tech Park
An Ecosystem
• According to the summary report 2011 of the Saigon Hi-Tech Park (SHTP)
Authority, the export value of firms in SHTP last year doubled that of 2010,
with Intel Products Vietnam accounting for around 45%.
• Since entering Vietnam in 2008, Intel organizes Supplier Day every year
and has found many local suppliers of indirect goods such as food, human
resources and security services.
• With direct goods related to the production, Intel prefers old partners as
pledged when expanding the business operation.
• Suppliers have considered following Intel to Vietnam to meet the
demands of materials in each stage of the project.
• Products of the plant will not only be distributed to Asian countries and
China but also to markets worldwide.
• When operating the plant at full capacity, Intel will need to recruit 8001,000 engineers and thousands of technicians.
http://english.thesaigontimes.vn/Home/business/other/22027/
Mekong Watershed
36% of the River’s Volume is from Laos
Mekong River Commission
Secretariat






The Greater Mekong Sub-region (GMS) Program was designed in 1992 to
promote economic ties and cooperation among its six member countries
◦
◦
◦
◦
◦
◦
Cambodia
Lao People’s Democratic Republic
Myanmar
Thailand
Viet Nam
Yunnan Province, China
◦
◦
◦
◦
the gap between urban and rural communities
growing income difference between rich and poor
lack of access to basic health and education
inadequate protection of the environment
The Asian Development Bank believes the Mekong region has potential to
be one of the world's fastest growing areas.
Problems preventing GMS countries from reaching potential include:
Only Thailand has long had a market economy with foreign participation
◦ Low levels of productivity, inadequate amounts of goods, and severe
economic problems caused the other five GMS countries to reduce
the state’s productive role in the economy
◦ These government recently began to allow business to take a greater
role in developing the countries
All but Yunnan are part of ASEAN
The GMS economies are diversifying away from subsistence agriculture and
into modern economic sectors
Country
GDP 1992
(nominal)
GDP 2012
(nominal)
Population
1992
Population
2012
Cambodia
$0.9 billion
$14.2 billion
7,295
15,205
Laos
$0.8 billion
$9.2 billion
4,440
6,695
Myanmar
$22.2 billion
$53.1 billion
42,642
55,167
Thailand
$92.6 billion
$365.6 billion
57,624
67,448
Vietnam
$15.0 billion
$138.1 billion
68,964
92,477
Yunnan *1990
*$7.3 billion
$163.0 billion
36,972
46,449
$138.8 billion
$743.2 billion
217,937
283,441
$488 billion
$8,227 billion
1,171,000
1,350,000
Total GMS
China
Note: Gambling revenue Macau 2012: $38 billion. Population: 583 K
$US inflation since 1992=67%
Comparative Real GDP Growth Rates
CIA World Factbook
Rank (2012)
Country
2012 %
2011 %
2010 %
3
Mongolia
12.3
17.5
6.4
9
Macau
10.0
20.7
27.0
17
Laos
8.3
8.0
8.1
20
China
7.8
9.3
10.4
36
Cambodia
6.5
7.1
6.1
39
Thailand
6.4
0.1
7.8
42
Myanmar
6.3
5.5
5.3
63
Vietnam
5.0
5.9
6.8
128
USA
2.2
1.8
2.4
136
Japan
2.0
-0.6
4.7
150
Hong Kong
1.4
4.9
6.8
169
Germany
0.7
3.1
4.0
211
Italy
-2.4
0.4
1.7
Khone Falls - Barrier to Mekong Navigation
At the Laos-Cambodia border
A French Mekong Expedition travelled painfully up the river from Vietnam’s Mekong Delta to Jinghong in southern Yunnan in 1866 and
1867
Patterns of Consumption 2012
Patterns of Consumption 2030
Reuters Article September 2013
 According to TripAdvisor.com, online travel search:
 People from mainland China go to nearby Hong Kong and Macau for getaways
and shopping, but are becoming adventurous, with holidays in Asia, Europe and
North America.
 The new generation of Chinese outbound travelers makes their own decisions
about where to go, where to stay and what to do by doing their own research
online, going beyond the old stereotype of big buses of group tourists
 Hong Kong was the most popular destination search in July to August, with interest
from Chinese travelers rising 50 percent from the same period of 2012
 Phuket was in second place, with 3.5 times as many searches as a year earlier.
 Taiwan was third (up 4.5 times)
 Bangkok was fourth (up 3.7 times)
 According to the U.N. World Tourism Organization:
 Last year, more than 83 million Chinese traveled abroad - a number expected
to soar to 200 million by 2020.
 Chinese spending on overseas travel was the highest in the world last year at
$102 billion,.

Labor shortages might become a barrier to business
competitiveness in the GMS, said a senior executive vice
president of Bangkok Bank (Nation, 14-6-13).
 The shortage of labor, is a more serious issue for Thailand than other
countries in the GMS because it is no longer considered a low-wage
market
 Thai businesses should think about mechanizing production because
they cannot rely on workers from neighboring countries
▪ Laos is not a source of labor because of the low population
▪ Workers in Cambodia often strike.
▪ Myanmar is the choice for Thai business, but Myanmar is developing and may
soon be unable to export labor

The slow growth of the younger population in some GMS
countries is a challenge to the growth of the sub-region.

In 1979, Premier Deng Xiaoping named
Shenzhen a Special Economic Zone

Shenzen is located in South China’s Pearl
River Delta, part of what is now the world’s
largest manufacturing complex

Read more:
http://www.businessinsider.com/old-photosof-shenzhen-2013-2?op=1#ixzz2hmeOQj3J
Wacoal – A Global Firm
May, 2013 News – Associated Press
News CNN
Al Jazeera – May 10th 2013
•
The death toll in Bangladesh's worst industrial disaster has soared past 1,000 after
more bodies were found in the rubble of a collapsed building outside the capital,
Dhaka.
•
The death toll now stands at 1,006 as the recovery operation entered its 17th day
since the building collapsed.
•
Some of the bodies could be identified by mobile phones in their pockets or
factory identity cards around their neck. Most of the dead are female garment
workers.
•
Of the bodies recovered so far, at least 150 bodies were buried in unmarked graves
in a state graveyard after they could not be identified. Authorities are taking DNA
samples from all the victims for future compensation claims.
•
More than 3,000 garment workers were in the building's five garment factories
which made clothing for Western retailers such as Benetton, Mango and Primark
when the structure collapsed after a loud bang, trapping them.
•
At least 2,437 people have been rescued, around 1,000 suffering serious injuries,
including scores whose limbs had to be cut off to free them from the rubble.
Retailers and Brands
Damage to Image
Risk
 Events or factors that may have a negative impact on the profitability
or success of a company
 Probability or likelihood of an occurrence
 The impact if the event occurs
 Business is built on risk
 Loss of physical assets
 Political action
 Natural disaster
 Loss of intellectual property
 Reputational risk
 Financial or economic risk
 Competition or changing markets
 Operational risks (loss of suppliers, loss of key employees, etc)
 A recurring theme will be how companies assess and manage the risks
that come with operating in GMS countries, and the opportunities
they perceive
Why Do Garment Factories Locate Near Dhaka?
NY Times graphic, 15 May, 2013
Companies Seek New Locations
• The relentless search for new locations has more urgency after the factory
collapse in Bangladesh that left 1,127 people dead last May.
• Western garment executives are looking at potential new suppliers in southern
Vietnam, central Cambodia and the hinterlands of Java in Indonesia.
• Indonesian executives have seen a steady procession of arrivals in recent
months, always asking the same questions about political stability, labor laws,
safety compliance and wages.
• Many poor countries make very basic clothing. Only China, Bangladesh,
Vietnam, Indonesia and to some extent Cambodia and Pakistan have
developed complex systems for producing and shipping tens of thousands or
even hundreds of thousands of identical, high-quality shirts, blouses or
trousers to a global retailer within several weeks of receiving an order.
• All of the very large-scale garment factories are in Asia. Africa does not have
enough workers with the right skills for high-volume labeling and shipping, and
Latin America does not have enough workers interested in operating sewing
machines.
• Most Southeast Asian factories are already fully booked with orders from
multinationals fleeing China’s ever-rising costs. “This year, it’s impossible —
we’re already full,” said the president of the Indonesian subsidiary of Wacoal, a
big Japanese garment manufacturer.
•
http://www.nytimes.com/2013/05/16/business/global/after-bangladesh-seeking-new-sources.html
Wacoal
http://www.wacoal.com/brand_info/global_wacoal.html

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
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In Europe, Wacoal France is characterized by the
fashion image and unique position of the capital
of the fashion world.
Wacoal(UK)Ltd., having its office and showroom
in London, is introducing selected collections
from Wacoal America to the UK consumer
through prestigious department stores.
In America, Wacoal America located in New York,
finding loyal customers in that country through
the department and specialty store Chanel.
Wacoal Sports Science Corp., located in New
York, markets a new concept of sports wear, CWX**, for athletes and people who want to live a
Healthy and Active Lifestyle.
In Asia, Wacoal Corp., located in Kyoto, Japan,
along with the other group companies, makes up
the center of R&D and business development and
caters to Asian consumers.
Please note that Wacoal Brand Products are
marketed mainly through authorized Retail
Partners country by country and shop by shop.
EUROPE
Wacoal France S.A.
Wacoal (UK) Ltd.
 AMERICA
Wacoal America, Inc.
Wacoal Sports Science Corp.
 ASIA
Wacoal Holdings Corp.
Wacoal Corp.
Wacoal China Co., Ltd.
Guangdong Wacoal Inc.
Dalian Wacoal Co., Ltd.
Wacoal Hong Kong Co., Ltd.
Wacoal Malaysia Sdn Bhd
Wacoal Singapore Pte. Ltd.
Indonesia Wacoal Co., Ltd.
Philippine Wacoal Corp.
Shinyoung Wacoal Inc.
Thai Wacoal Public Co., Ltd.
Taiwan Wacoal Co., Ltd.
Vietnam Wacoal Corp.

Training Garment Workers – Semarang
Indonesia’s national training center for seamstresses in Semarang produces
12,000 graduates a year. But even that isn’t enough. Four factories with a
combined employment of 30,000 are to open in the next year in Semarang,
and many more factories are being built nearby.
http://www.nytimes.com/2013/05/16/business/global/after-bangladesh-seeking-new-sources.html
Hutchinson MN, population 14,000

Why are most Apple products built in China?
 Why not India (or Cambodia)?
 Why does Cambodia have a vibrant textile industry
(for now)?

Ford is leaving Australia.
 They have produced cars in Australia since 1925.
 Is Thailand an attractive place to produce for ASEAN?


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Why is Intel in Vietnam?
How (and why) does CP Group expand overseas?
What is ‘hot money’ and how can it affect GMS?

Reminder October 23rd is a holiday.

Think about the countries of GMS and which
country you would like to analyze in depth
 Background information can be found in “Greater
Mekong Sub-region Business Handbook”
 Online: http://www.unescap.org/tid/publication/indpub2183.pdf

Read “Looking at the Sun” pp 325-354

Find a successful industry in GMS, or one which shows potential to be
successful (13 Nov)





Explore reasons the industry located in GMS
What is the nature of the business (capital or labor intensive, etc)
Any spillover effects?
What was the mode of entry for the businesses?
Study a GMS country in which the industry is successful (4 Dec)
 What are the strengths of that country from a business perspective?
 What are the weaknesses?
 Look for barriers to further business success in the country

How do you see the business evolving (5 Feb)
 Effect of ASEAN or other alliances (trade, labor mobility, etc)
 Relevant demographic, economic, trade projections
 Infrastructure, education, and other changes as a result of government or
business initiatives
 Advice you would give to government units to encourage industry growth

Basic choices for firms to enter foreign markets
 Non-equity modes
▪ Exporting
▪ Licensing or franchising
 Equity modes - Foreign Direct Investment (FDI)
▪ Joint Ventures
▪ Wholly owned subsidiaries
▪ Acquisitions
▪ Greenfields

Reasons firms choose FDI
 Control of intellectual property
 Tighter management controls over operations
 Difficulty of knowledge transfers

Natural resources seeking firms
 Look for natural resources with relevant transport and communication
infrastructure
 Resources may include energy

Market Seeking
 Strong demand and paying customers
 HDD component companies locate in Thailand

Efficiency seeking
 Economies of scale and other low cost factors
 Manufacturing clusters in China often have higher labor cost but low total cost

Innovation seeking
 Look for clusters of innovation
 Financial services in London, IT in Northern California

Clustering of activities




Knowledge spillovers among companies
Larger skilled labor pools
Specialized suppliers and infrastructure
Clustering effects may endure long after the original impetus for companies to
locate in an area has ceased
External Criteria for Choosing the Mode of Entry
 Market Size and Growth – companies justify large resource
commitments if markets grow rapidly
 Risk – with higher political and economic risk companies are less
likely to commit resources
 Government Regulations



Local content regulations
In certain industries foreign ownership is barred (airlines, telecom)
Trade regulations
 Competitive Environment
 Link with a strong local presence in a highly competitive environment
 Joint venture
 Alliances
 Buy a dominant local firm
 Local Infrastructure (distribution, communication, transport).
Companies commit fewer resources when infrastructure is poor.
(Exhibit 9-3.)
Exhibit 9-3: Opportunity Matrix for Henkel in Asia Pacific
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
44
Choosing the Mode of Entry - Classification of Markets




Platform Countries (Singapore & Hong Kong)
 Gather intelligence
 Establish a network
Emerging Countries (Vietnam, Philippines)
 Build an initial presence
 Liaison offices
Growth Countries (China & India)
 Early mover advantages
 Future market opportunities
Maturing countries (South Korea, Taiwan)
 Sizable middle class, good infrastructure
 Established local competitors
(Exhibit 9-4.)
Chapter 9
45
Exhibit 9-4: Entry Modes and Market Development
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
46
Two Levels of GMS
 Thailand is viewed as a growth market
 Well developed infrastructure
 Legal protection for investors
 Relatively high standard of living
 Vietnam, Cambodia, Laos, Myanmar viewed as
emerging markets
 History of colonialism
 Mostly weak infrastructure
 Low per capita GNP
 Vietnam may be the strongest of the four
 Can Thailand be a ‘platform country’?
Internal Criteria for Choosing the Mode of Entry
 Company Objectives
 Ambitious companies commit more for greater control
 Firms with limited goals or resources invest little
 Need for Control
 Trade off between level of control and resources committed
 Control may be desirable in any aspect of the business or marketing
 Financial and Human Resources, Assets, and Capabilities
 With limited assets choose exporting or licensing
 Also weigh risk against amount company can commit
 Flexibility of the entry mode (when the environment changes)
 JVs and licensing tend to offer less flexibility
 Subsidiaries hard to divest when exit barriers exist
 Mode of Entry Choice: Transaction Cost Explanation
 Benefits of increased control come with costs of additional
resources and higher risk
 When intellectual property is valuable, high control is best
48
A general rule about risk
 Total company risk is not the same across companies
 Companies with more resources or a broad portfolio can afford to lose
more in a given venture

Early China entrants were large well funded companies with several
products



Yum! Brands
AIG
Early entrants had extensive experience in foreign markets (deep human
resources)
 Companies with more experience in an area can better manage risks


Who has experience in emerging GMS?
Thai companies might be best positioned to enter Myanmar, Laos, Yunnan



Some degree of common language and culture
More experienced with doing business in GMS than non-GMS companies
Several Thai companies (CP Group, PTT, Siam Cement) with resources
 Companies will always assess the risk of entry in the context of
their own situation and tolerance for losses
49
A Study of Criteria for Choosing the Mode of Entry
 Entry with wholly owned subsidiaries (high control)
 High R&D business
 High brand equity business
 The company has high foreign entry experience
 Entry via partnerships
 Risky country
 Legal restrictions on foreign ownership of assets
 The country is culturally and socially distant
50
Exporting – Three levels of engagement
 Indirect Exporting – use of intermediaries
 Export merchant trading companies
 Take ownership of merchandise for resale
 Usually specialized in a product and region
 Export agent trading companies
 Does not take ownership of merchandise
 Commission based
 Export management companies (EMC)
 Indirect exporting advantages
 Foreign market expertise
 Firms understand export paperwork
 Low commitment of resources
 Indirect exporting disadvantages
 Lack of control over marketing
 Typical EMCs are small firms and often lack resources
 Cooperative Exporting – use distribution networks of another company
 Direct Exporting
 Firms set up their own exporting departments
 High resource demands (marketing, documentation, shipping, etc.)
 High control and engagement in international operations
51
Licensing




Licensor receives royalties for use of knowledge assets
Licensee pays royalties fees to use the assets
Cross licensing is where companies share intellectual property
Benefits of licensing
 Low commitment of resources
 Appealing to small companies that lack resources
 No import barriers
 Low exposure to political and economic risks
 Rapid penetration of the global markets
 Risks from licensing
 Revenue may be lower than with other entry modes
 Licensee may not be committed
 Lack of control over licensee can result in bad image
 Licensee may become a future competitor
 Reduce risks through patents, trademarks, analysis, and carefully worded
contracts
52
Franchising
 Franchisor gets royalty payments for use of intellectual property in a
designated area for a specific time
 Franchisee pays royalties and other payments
 Note the supply chain clause in Papa John’s (Exhibit 9-6)
 Potential for mark-up, also ensures quality
 Master franchising often used in foreign markets
 Master franchise gets right to sell local franchises in a territory (CP=7-11)
 Master franchise usually commits to a target number
 Benefits:
 Overseas expansion with a minimum investment
 Franchisees’ profits tied to their efforts
 Access to local franchisees’ knowledge of the local laws and customs
 Risks:
–
–
–
–
–
–
Revenues may be lower than with other modes
Lack of a master franchisee
Limited franchising opportunities overseas
Lack of control over the franchisees’ operations
Cultural problems
Physical distance
53
Exhibit 9-6: International Franchising with Papa John’s
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
54
Contract Manufacturing (Outsourcing)
 Companies specialize in manufacturing for other companies
 Benefits:






Labor cost advantages
Tax, energy, raw materials, and overhead savings
Lower political and economic risk
Focus on core competencies (such as product design, marketing)
Access to manufacturing expertise
Quicker access to markets (no need to build factories)
 Risks:
Contract manufacturer may become a future competitor
Conflicts of interest if the manufacturer has products
May lack flexibility (contractor often has other commitments)
Backlash from the company’s home-market employees regarding HR and labor
issues
 Issues of quality and production standards




 Reducing the risks
 Keep proprietary design item manufacture in-house
 Have contingency plans for changes in demand
55
Contract Manufacturing (Outsourcing)
 Qualities of An Ideal Subcontractor:
 Flexible/geared toward just-in-time delivery
 Able to integrate with company’s business
 Able to meet quality standards
 Solid financial footings
 Must have contingency plans for changes in demand


Contract manufacturers typically have multiple clients
In most cases the manufacturer has to balance client needs
 No conflicts of interest
 Major contract manufacturers (electronics total $360bb in 2011):
 Hon Hai (Foxconn)
Taiwan
Electronics
$102BB
 Flextronics
Singapore
Electronics
$29BB
 Jabil Circuit
USA
Electronics
$17BB
 TSMC
Taiwan
Semiconductors $14BB
 Celestica
Canada
Electronics
$7BB
 Catalent
USA
Pharma
$2BB
56
Joint Ventures
 Cooperative joint venture
 No equity in the venture
 Involves collaboration
 Common among large multinationals with emerging
market partners
 Equity joint venture – partners have equity stakes
 Benefits:
 Higher rate of return and more control over the
operations
 Shared capital and risk
 Sharing of expertise and other resources
 Access to distribution network
 Contact with local suppliers and government officials
57
Joint Ventures - Risks
 Lack of control


Government restrictions often forbid majority stake
Multinationals can deploy expatriates for greater control
 Partner can become competitor
 Conflicts arising over matters such as strategies,
resource allocation, transfer pricing, and ownership of
assets like technologies and brand names (Exhibit 9-7)
 Well planned agreements help reduce conflict
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
58
Exhibit 9-7: Conflicting Objectives in Chinese Joint Ventures
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
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Successful Joint Ventures
 Screen for the right partner (Exhibit 9-8)
 Obtain information about the partner
 See if the partner has similar investment objectives
 Establish clear objectives from the beginning
 Bridge cultural gaps (perhaps with a middleman)
 Gain top managerial commitment and respect
 Use an incremental approach (start on small scale)
 Create a launch team during the launch phase:
(1) Build and maintain strategic alignment
(2) Create a system for parent company oversight
(3) Manage the compensation of each parent
(4) Build the organization for the joint venture (assign
responsibilities)
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Exhibit 9-8: Starbuck’s Coffee’s Partner Criteria
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Copyright (c) 2007 John Wiley & Sons, Inc.
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Starbucks Expansion in Asia
 Which areas and segments has Starbucks been targeting?
 Why does Starbucks use joint ventures to enter a market?
 What type of JV does Starbucks typically use?
 How else does Starbucks reduce the risks of market entry?
 Does Starbucks customize marketing or product for local
markets?
 How did Starbucks alter strategy for China? Why did it alter
strategy?
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Wholly Owned Subsidiaries
 Acquisitions and Mergers
 Quick access to local markets by buying an existing
company
 Good way to get access to the local brands
 Greenfield Operations
 Entire operation is developed by the multinational
 Offers the company more flexibility than acquisitions in
the areas of human resources, suppliers, logistics, plant
layout, and manufacturing technology.
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Copyright (c) 2009 John Wiley & Sons, Inc.
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Henkel’s Entry into the USA
 Henkel AG founded in Germany 1876
 Silicate detergents
 First major international expansion 1883
 Armour and Company begins to make soap in Chicago 1888
 By-product of Armour’s meat packing business
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Note similarities with P&G’s origins in Cincinnati
Dial soap became very popular in the 1950s
 Armour acquired by Greyhound Corporation 1970
 Armour-Dial was the consumer products division
 HQ moved from Chicago to Arizona in 1971
 Dial Corporation created in 1996 restructuring
 1997- 2004 Dial Corporation had several top management changes
 Henkel buys Dial Corporation in 2004 for $2.9BB (Dial sales $1.3BB)
 Value for money segment *
 Products well suited to developing markets
 Dial soaps and detergents introduced in Russia and China 2005
 Purchase of certain Proctor and Gamble product lines for $275MM in 2006
 In ‘Marketing Products and Services’ later in the course
 Idea is to adapt a product to the host country market via purchase of business
* http://www.businessweek.com/stories/2005-06-26/online-extra-henkel-dial-ing-for-growth
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Wholly Owned Subsidiaries
 Benefits:
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Greatest control and higher profits
Host market perceives strong commitment to the local
market by the company
Allows the investor to manage and control marketing,
production, and sourcing decisions
Often faster to set up than a joint venture
 Risks:
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Chapter 9
Risks of full ownership, such as absorbing all losses
Developing a foreign presence without the support of a
third party
Risks of currency devaluation, nationalization or
expropriation
Issues of cultural and economic sovereignty of the host
country (reduce this risk by local hiring, sourcing)
Copyright (c) 2007 John Wiley & Sons, Inc.
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Strategic Alliances
 Coalition of organizations to achieve goals for mutual benefit
 Can be licensing, joint ventures, R&D partnerships
 Can be informal
 Types of Strategic Alliances
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Simple licensing agreements between two partners
Market-based alliances (distribution channels, trademarks)
Operations and logistics alliances
Operations-based alliances (sharing of manufacturing ideas)
 The Logic Behind Strategic Alliances

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Defend leading position by access to new ideas, markets, etc
Catch-Up by joining forces
Remain in a leading business that is not core to the parent
Restructure a non-core business (which may be acquired by the
alliance partner)
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Cross-Border Alliances that Succeed
 Alliances between strong and weak seldom work.
 Autonomy and flexibility


Alliance needs distinct management and directors
Speeds up decision making and makes easier conflict resolution
 Partners are equally committed to success
 Other factors:
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Commitment and support of the top of the partners’
organizations
Strong alliance managers are the key
Alliances between partners that are related in terms of
products, technologies, and markets
Have similar cultures, asset sizes and venturing experience
Tend to start on a narrow basis and broaden over time
A shared vision on goals and mutual benefits
Copyright (c) 2009 John Wiley & Sons, Inc.
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Timing of Entry
 Products are not always pioneered in the home market
 Firms tend to be early market entrants when
 They are large firms
 They have international expertise
 They have a broad scope of products or services
 When host countries have favorable risk dimensions
 When market entry requires little capital
 Firms tend to enter markets similar to markets in which they
already have experience
 Note all of the above factors tend to reduce risk to the firm
 Late entrants may have more favorable business conditions
in developing countries
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Exhibit 9-10: Wal-Mart’s International Expansion
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Copyright (c) 2007 John Wiley & Sons, Inc.
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Exit Strategies – Reasons for Exit
 Sustained losses or difficulty in gaining market share
 Volatile host country political or economic environment
 Premature entry

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Poor host country infrastructure
Lack of strong local partners
 Ethical reasons
 Intense competition
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Attractive markets bring competitors
Overcapacity and price wars
 Resource reallocation
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Moving resources to areas with highest potential return
Company decides to pull back from international operations
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Exit Strategies
 Risks of Exit
 Fixed costs of exit
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Labor laws
Contractual commitments
 Disposition of assets
 Damage to company image
 Company appears uncommitted to overseas markets
 Damage to image in host country
 Long-term opportunities missed (upside of volatility)
 Guidelines for contemplated exit
 Assess options to save the foreign business
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Change performance targets (perhaps look to longer term)
Consider alternative (local) sources
Repositioning (maybe go after a niche market)
 Incremental exit via licensing or temporary shutdown
 Migrate customers to third parties
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Exhibit 9-11: Advantages and Disadvantages of
Different Modes of Entry
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Copyright (c) 2007 John Wiley & Sons, Inc.
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Apple’s iPhone

Why does Apple choose to assemble iPhones in China?
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Scale of operations
Supply chains
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Skilled technical workforce, including engineers
Clusters of excellence
Response times
Think of how 2011 floods in Thailand affected other manufacturers
Labor is not a big component of the total cost

Apple employs 43,000 in the USA (and about 33,000 of those are low-wage retail or call-center)
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Apple’s contractors employ 700,000 outside of the USA
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Apple’s profits accrue to shareholders across the world

Apple is a true global company
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Sales span the globe
Software created in USA
Marketing created and managed in USA
Supply chains span the globe
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iPhones assembled in China by a subsidiary of a Taiwanese company
Some components made in USA by S. Korean company (Samsung)
Glass made in Japanese factories by an American company (Corning)