mgw2351_week 6_entry mode relation to internationalization process_joint venture wos.ppt

Lecture 6

Entry Mode to Foreign Markets: Joint venture and wholly owned subsidiary (WOS);Entry mode in relation to internationalisation process

MGW2351: International Business

Learning ObjectivesTo describe different modes of entryTo outline the advantages and disadvantages of the different modes that firms use to enter foreign markets - FDI: - Joint venture - Wholly owned subsidiary - Merger & acquisition Understand the usefulness of Uppsala model in explaining internationalisation process (from zero export to FDI)

Entry modes FDI: Joint venturesA joint venture is the establishment of a firm that is jointly owned by two or more otherwise independent firms. Advantages A firm can benefit from a local partners knowledge of the host countrys competitive conditions, culture, language, political systems and business systems. - DMG Shanghai vs Astro in Indonesia: what is the difference in terms of JV outcomes?The costs and risks of opening a foreign market are shared with the partner.Political considerations may make joint ventures the only feasible entry mode. - India does not allow wholly foreign owned subsidiary; Only until recently just for IKEA after IKEA lobbied.

Good JV: Top 10 Passenger Vehicle Manufacturing in China (2009)- By 2010, top 10 passenger vehicle manufacturerers (7 are JVs with foreign players) make up almost 90% of Chinas market share;- Nearly every major global vehicle manufacturer has JV operations in China.

RankCompanyHQJV PartnerMarket Share1SaicShanghaiGM, VW19.83%2,705.5K sales units2FawChangchunVW, Toyota, Mazda14.25%1,944.6K3DongfengWuhanPSA, Nissan, Honda13.91%1,897.7K4Chana (incl. Hafei)ChongqingFord, Mazda, Suzuki13.70%1,869.8K5Beijing AutoBeijingHyundai, Daimler9.11%1,243.0K6Guangzhou AutoGuangzhouHonda, Toyota, Isuzu, Fiat4.45%7CheryHefeiN/A3.67%8BYDShenzhenN/A3.29%9BriallianceShenyangBMW, Toyota2.55%10GeelyTaizhouN/A2.41%Others12.84%1,750KSource:CAAM

Entry modes FDI: Joint venturesDisadvantagesA firm risks giving control of its technology to its partner risks of losing technological advantage; ethics. The firm may not have the tight control over subsidiaries that it could need to realise experience curve or location economies; - E.g., Astro in terms of pricing, understanding the Indonesian market & promotion strategy??Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time. - Chinese partners may tend to have short-term goals - profits

Entry modes FDI: Wholly owned subsidiaries (WOS)In a wholly owned subsidiary, the firm owns 100% of the stock.Establishing a wholly owned subsidiary in a foreign market can be done two ways:Greenfield: the firm can set up a new operation in that country.Acquisition: the firm can acquire an established firm; - e.g., Mittal Steel is skilful not only in acquiring but in enhancing acquired firms poor performance internalization advantage.

Entry modes FDI: WOSAdvantages A wholly owned subsidiary reduces the risk of losing control over core competencies.A wholly owned subsidiary may be required if a firm is trying to realise location and experience curve economies. A wholly owned subsidiary gives a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination - i.e., using profits from one country to support competitive attacks in another- easier to have global integration/convergence and coordination (i.e., policies, corporate image, business strategies)

Entry modes FDI: WOS

DisadvantagesFirms bear the full costs and risks of setting up overseas operations. Acquisitions raise additional problems, including those associated with trying to marry divergent corporate cultures.Poor knowledge of local work culture implement less suitable reward and punishment systems staff productivity and motivation.If it is a hostile acquisition or takeover, there may be problems with resentment, resistance to change & etc that may affect organizational efficiency and effectiveness.

Entry mode: Merger Merger is a strategy through which two firms willingly agree to integrate their operations on a relatively co-equal basisWhy because they believe they have the resources and capabilities that together may create a stronger competitive advantageBoth previous entities disappear into the new organisation. Shares are commuted into new shares and usually revalued to account for new market value. In practice the two partners are usually of comparable size .

Acquisition is a strategy through which one firm buys a controlling, or 100% interest in another firmWhy intent of using a core competence more effectively by making the acquired firm a subsidiary business within its portfolio.Usually involves the joining of unequal partners. The large firm subsumes the smaller one into its structure (Stonehouse et al 2001)Can be agreed or hostileAgreed is where target company accept the price offer for shareholdingHostile acquisition (also called hostile take-over) is where the shares are acquired from the shareholders at a price that the target company directors do not recommend.

Entry mode: Acquisition

Advantages of acquisitions1. Increased market powerMain aim is to increase size and scope (Gucci vs LVMH)Gain efficiencies Horizontal acquisitionsTaking over of a firm in the same industry eg competitorsResearch shows these work if businesses have similar characteristics ie corporate cultures (Gucci lost to LVMH in acquisition of Fendi ), but national pride may hinder (Italian Gucci vs French LVMH)Vertical acquisitionsTaking over of a supplier or distributorAim is to control the value chain: Toyota in China for strong supplier networkRelated acquisitionsTaking over a firm in a related industryExample: Sony in pursuing convergence in music, movies, games & communications.

Advantages of acquisitions2. Overcoming entry barriersBarriers to market entry might include economies of scale requirements and differentiated products (different to own product & services)The higher the barrier to entry the more likely a take over.Overseas acquisition provides more control than alliances.

3. Cost of new product development Taking over existing products rather than developing own R&D.Almost 88% of innovations fail to achieve adequate returns60% of innovations are successfully imitated within 4 years after patent is obtainedMatsushita with LED technology 25 years of investmentVF Corps acquisition of Timberland which is well known for its tough leather footwear to compete in a different industry

Advantages of acquisitions4. Increased diversificationProvides product diversification in unfamiliar marketsDiversification strategies can be related or unrelated To mitigate latex cost increases in the future, Top Glove has started moving upstream by acquiring land and diversifying into rubber plantationUnder related diversification, VF Corp (The North Face, Nautica, Lee & Wrangler Jeans) expected to benefit from acquisition of Timberland to add footwear into its existing product line.

Advantages of M&A1. Reshaping the firms competitiveness (strategic)May want to reduce dependence on a single market or product range (i.e. LVMH acquiring Fendi from Prada).VF Corp acquired Timberland2. The competitive situation Market may be static and only chance enter a market is via buying existing capacity. 3. Human asset networksAccess to key people or known quantity.

Advantages of M&A4. New opportunities identifiedLeaders move between different businesses and see opportunities May take over business CEO previously worked for.5. Increased speed to marketProvide a quick route to new products and new markets e.g process via internal development is too slow i.e an e-commerce business6. Lower risk compared to developing new products (R&D)Buying known quantity rather than needing to develop your own.

Advantages of M&A7. Low share valueBuying under valued companies Gucci a potential target in 1999 8. Buying cost efficiencyEstablished company may be well down experience curve and have achieved efficiencies difficult to match by internal developmentNecessary innovation and organisational learning would be too slowVF Corp acquisition of Timberland

HBR 2012: Where Japan Inc. Leadsand Where It DoesntA study of six product categories in BRIC and Indonesia reveals that only a few Japanese firms are leaders in these markets, where MNCs dominate. WHY? 4 reasons: (1) reluctance for M&A; (2) lack of managerial talents; (3) target premium market; (4) lack of commitment for emerging economies.

BRAZILRUSSIAINDIACHINAINDONESIAAutomotive:FIATAVTOVAZSUZUKIVWTOYOTATVs:LGSAMSUNGLG/SAMSUNGHISENSELGHome appliance:WHIRLPOOLINDESITLGHAIERSHARPRetail hygiene:P&GP&GP&GP&GUNICHARMPersonal care: NATURAP&GUNILEVERP&GUNILEVERPackage food:NESTLEWIMM-BILL -DANNGUJARAT COOP MILK MKTGINNER MONGOLIA MENG NIU DAIRYINDOFOOD SUKSES MAKMURBLUE: MNCSBLACK: LOCALRED: JAPANESE

Problems with M&AIntegration difficultiesDifficult to meld different corporate culturesIntegration most important step Positive link between speed of integration and success. Need to deal with unpopular issues first and be honest with people on likely results of integration on themInadequate evaluation of targetNeeds to cover more than financeNeed to look at cultures, tax consequences, workforce attributesFailure of proper due diligence is likely to be paying a premium eg AMP purchase of GIO

Problems with M&ALarge or extraordinary debtDebt can be positive or negativeToo much debt reduces spending on key resources eg people and R&DPrinciple and interest can send the company into bankruptcy.Inability to achieve synergy especially if too largeMust identify if increasing value together or more valuable apart - Need to look at transaction costs required to achieve planned outcomes (i.e. Toyota in China has shareholding with its long-term suppliers in China).Public relations problemsTaking over local icon can have negative consequences Mittal Steel in Europe

The stage models of internationalisation: an incremental sequential approachThe Uppsala Models (U-Models)The internalisation process is an incremental process Stage 1: No regular export activity.Stage 2: Export via independent representatives (agents). Stage 3: Establishment of an overseas sales subsidiary.Stage 4: Overseas production/manufacturing units.

The stage models of internationalisation: an incremental sequential approachJohanson and Vahlnes Uppsala-Model

Insert Figure 2.3 about hereFigure 2.6 The theoretical and operational level of the knowledge and foreign market commitment development U-ModelSOURCE: O. Andersen, On the internationalization process of firms: a critical analysis, Journal of International Business Studies, 24(2) (1993), pp. 20931.

The stage models of internationalisation: Johanson and Vahlnes Uppsala-ModelAssumption 1: market commitment affects not only commitment decisions but also the way current activities are operated changes in knowledge and commitment.In other words, the firm aims to increase its long-term profit along with growth shape decision making of the firm through the the above influence

The stage models of internationalisation: Johanson and Vahlnes Uppsala-ModelAssumption 2: firms target markets that are physically close to have a communication advantage.similar language, culture & economic/political systemsThe internationalisation process is an incremental process owing to the progressive reduction of psychic distance through managers gradual accumulation of knowledge of foreign markets Highlighted the importance of knowledge in export market development: Psychic distance plays a roleJohanson and Vahlne have highlighted the importance of networks.

Conservative Toyotas 3-stage plan in China: an incremental sequential process too!Stage 1: No regular export activity; 1936: export only 4 trucks.Stage 2: 1964 - Export direct & regularly (a large MNC). Stage 3: 1980 - Establishment an overseas sales network in Beijing, China.Stage 4: Built wholly owned & JV autoparts manufacturing bases (Japanese JV suppliers) 2000 Built manufacturing plant: Tianjin FAW Toyota Motor 2002 Built manufacturing plant via JV with FAW (Chinese partner): Toyota Motor (China) Investment Co. Ltd. First car model: Toyota Vios. 2004 Via JV to manufacture 9 models Continue import of other models & by 2004 become strong in the Chinese market with 50,000 units annually; 2004 Toyota has 57 JVs; Try localization to stay competitive as Western players increase sourcing from local Chinese suppliers.http://www.toyota-global.com/company/history_of_toyota/75years/data/automotive_business/sales/activity/china/index.html

The Chinese automotive marketBy 2009, China became the worlds largest automobile producer and market.Sales from Tier 1 & Tier 2 cities rural areas Rapid sales moved from eastern China to central & western China. Extracted from a 2010 market report by APCO Worldwide

The Chinese automotive marketChinas local players are weak in R&D, domestic innovation & design capabilities intl competitiveness?? With governments encouragement, domestic firms opted for strategic partnerships with foreign players, technology transfer & improve engineering capabilities environmentally friendly strategy (electric vehicles!!)Lower import tariff over the years helps Toyota to continue import of certain car models while others are manufactured in China: Complete built-up (CBU): 70% to 25%Complete knocked-down (CKD): 50% to 25%Extracted from a market report by APCO Worldwide

Haiers 3-stage plan for international expansion: NOT an incremental sequential process!Stage 1: No regular export activity; Stage 2: 1985 - Export started after licensing agreement with a leading home appliance German manufacturer, Liebherr (also Haiers JV partner from 1985) to gain refrigerator technology 1988 dominated Chinese market.- Stage 2: XXXX Sales alliance for the U.S. market with Welbit Appliance;Stage 2: 1992 Established Haier ASEAN export to Indonesia.Stage 4: 1996 Set up a manufacturing plant in Indonesia.Stage 3: XXXX Use external sales agents to import fridge from China to EUStage 4: 2000 Set up manufacturing plant and WOS in the U.S.Stage 4: 2001 Merged with Italian fridge firm (Meneghetti) conquered EU markets in fridge and freezer. - Stage 4: 2001 JV in Nigeria, Africa to centralize production for the African continent. Stage 3: 2003 Built trading subsidiary for air cond in Italy & Spain.Stage 3: 2004 Built trading subsidiary for air cond in UK.

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