238 I PART 2 Acquiring Tools

while running their US plants at full tilt. Japanese auto-makers encountered "capacity restraints in their exist-ing USplants as a sharp increase in the price of gasolinesparked greater consumer demand for fuel-efficient,environmentally friendly vehicles," says William Dun-can, general director of the Japan Automobile Manufac-turers Association's officein Washington, DC.

All told, each of the Detroit automakers supports21/2 times more US jobs than Toyota, says Jim Doyle,president of the Level Field Institute, a Washingtonresearch group. He acknowledges, however, that "peo-ple are trying to define what an American car is, andthey are having a tough time."

The confusion pains Luehrmann, 48. Hoping toreach a decision soon about his next car,he's looking ateverything. He's a believer in American cars, but, sayswith a tinge of regret, "I don't feel any great loyaltyanymore."

Case Discussion Questions

1. What are the pros and cons of inbound foreigndirect investment (FOI) in the US automobile

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industry? Discuss this question from the perspec-tive of (1) the US economy, (2) US car consumers,and (3)US car companies.

2. Toyota tries very hard to advertise itself as an"American" company. Recently, it has been addingmore production capacity than any automaker inthe United States. Yet, it still confronts significantliability of foreignness. If you were (1) a Toyotaspokesperson, (2) a GM spokesperson, (3) the gov-ernor of California, Kentucky, Mississippi, or Texas(where Toyota makes cars), or (4) a US car buyerwho drives a Toyota or Lexus, do you think it is fairto label Toyota a "non-American" company?

3. A number of Japanese companies have increasedUS-bound FDI and exports (or imports from theUS perspective) at the same time. What does thattell us in terms of the relationship between FDI andtrade?

4. In this age of globalization, is it still relevant to iden-tify an "American" car? Should patriotic Americanconsumers continue to look for" American" cars?

Americas, accounting for 96% of total area and 90%of total output. At present, the United States, Brazil,China, and Argentina are the world's top-four soybeanproducing countries (in that order), with North Amer-ica accounting for 45% total area and 49% output, fol-lowed by Latin America and then Asia.

SOYBEANS IN CHINA

Liu Yiand Yang WeiXi'an Jiaotong University, China

Soybeans were first grown in China over 5,000 yearsago, and today, China is the world's largest producerof non-genetically modified (non-GM) soybeans. Chi-na's northeast region (Manchuria), the Inner Mongo-lian Autonomous Region, and the Yellow River andHuaihai River valleys are some of the best locations inthe world to grow soybeans.

In 1938,the soybean growing area in China reached9.07million hectares and the total output was 12.1mil-

Ilion tons, accounting for 93% of world output. Sincethen, other countries have caught up, with the UnitedStates, Brazil, and Argentina all progressing greatly.Soybean production is concentrated in Asia and the

This case was written by Professor Liu Yi and Yang Wei (bothat Xi'an Jiaotong University, Xi'an, China) for teaching pur-poses. The authors thank Professor Mike W. Peng and ErinPleggenkuhle-Miles for editorial assistance on the Englishversion. © Liu Yi and Yang Wei. Reprinted with permission. A

, Chinese version is available upon request from the authors.Please e-mail ProfessorLiuYiatliuyi@mail.xjtu.edu.cn.

Soybeans in China: From Exporter to ImporterAs economic growth increases, so does the demand ofsoybean production. Before1995,China was a net export-ing country of soybeans. However, since 1996, it hasbecome a net importing country. From 2003to 2005,theannual import amount was more than 20million tons. In2005,China produced 17.8million tons, and it imported26.6million tons,which accounted for one-third ofglobaltrade. China thus became the largest soybean importingcountry. Experts estimate that by 2020,China will needto import 36 million tons of soybeans-in other words,about 80%of China's soybeans will be imported.

Unfortunately, this strong increase in demandbrings no benefits to the soybean farmers in China. In

2005, the acreage of soybean planting in HeilongjiangProvince (China's northernmost province located inthe Northeast [Manchuria]) decreased from 108 mil-lion mu' to 82 million mu, a 24% decrease from theprevious year. During the same period, the soybeanacreage in the Inner Mongolian Autonomous Regionalso decreased by 17%,from 28 million mu in 2004 to23million mu in 2005.At the same time, soybean sup-plies stockpiled due to low prices. Many farmers whohad planted and harvested soybeans with the expec-tation of increased income lost profits instead. Forexample, in Heilongjiang, which had the largest acre-age and highest output of soybeans, the average salesprice was only $0.271per kilogram, which was lowerthan the farmers' cost. Consequently, farmers in Hei-longjiang collectively lost $419.26million, had incen-tive to reduce output, and the number of unemployedsoybean farmers soared to approximately 1.2million.

Subsidies and ImportsSoybean farmers suffer, but farmers who grow wheatand com are "lucky."Toencourage farmers' enthusiasmtoward wheat and com, the government offerssubsidiesevery year. For example, in 2005,the Henan provincialgovernment gave $1.23for every mu of wheat grown,resulting in $3.627million of total subsidies to wheatfarmers in the province. In 2006,the 'Beijingmunicipal-ity government adjusted its subsidies for com growersupward to $1.88per mu. One county in the Chongqingmunicipality announced that it would subsidize $0.64per mu to wheat growers in 2007.At the national level,the central government uses strategic storage of wheatand com to ensure that the sales prices farmers com-mand are not lower than minimum prices. In contrast,subsidies for soybeans are negligible.

Falling soybean prices and the rise of imports alsoaffect downstream soybean oil processing firms. No.

I ••TABLE 1

PART 2 Integrative Cases 239

93Seed-Oil Corporation was set up by one of the state-owned farms in Heilongjiang in China's Northeast(Manchuria) with the specific purpose of absorbingand processing soybeans produced by farms in theprovince. The annual soybean output of HeilongjiangProvince is about six million tons, and the companypurchases two million tons (one-third of the total out-put from that province). Yet,even such a firm crucial tosoybean production and processing in the Northeasthad to yield to the pressures from the rise of imports.In 2004, five of its soybean oil processing subsidiar-ies in the Northeast went bankrupt. As a result, twonew subsidiaries were built in 2005:one in Tianjin andanother in Dalian. However, both these new soybeanoil processing subsidiaries exclusively used importedsoybeans, which commanded more than half of all thesoybeans processed by No. 93 Seed-Oil Corporation.

Aside from the lack of subsidies, one crucial rea-son that domestic soybeans are not as competitiveas imports is because soybeans are primarily grownin China's Northeast, whereas soybean oil process-ing companies concentrate along the coast. If No. 93Seed-Oil Corporation used locally grown soybeans,taking into account transportation, storage, and capitalrequirements, the cost of domestic soybeans is $20.54more than imported soybeans per ton. Because ofeconomies of scale, industrialized production, foreigngovernment subsidies, and topographical and climaticconditions, the cost of imported soybeans is far lowerthan that of domestic soybeans. In 2003, the produc-tion cost of soybeans per ton in the United States was$168, in Brazil $119, and in China $192. Table 1 has amore detailed comparison of prices between domesticand imported soybeans in recent years.

More than half this huge difference in price canbe attributed to agriculture subsidies. Among the 30OECD members, the ratio of agriculture subsidies

SOYBEAN PRODUCTION, CONSUMPTION, AND IMPORTS IN CHINA

Planting area(million hectare)

Output(million tons)

Consumption(million tons)

Import(million tons)

DomesticPurchase Price ($/kg)

Import Price($/kg)

1998 8.liOO 15.152 22.020 3.196 0.273 0.181

1999 7.962 14.245 26.290 4.317 0.297 0.183

2000 9.299 15.300 31.810 10.420 0.261 0.193

2001 8.700 15.000 30.700 13.940 0.266 0.242

2002 8.720 16.507 32.690 11.320 0.267 0.220

2003 9.133 16.400 37.900 20.740 0.346 0.312

2004 9.600 18.000 38.150 20.229 0.326 0.338

2005 9.103 17.800 40.000 26.590 0.331 0.278

Source: http://www.93.com.cn

240 I PART 2 Acquiring Tools

(percentage of subsidies over total agricultural income)varies tremendously (see Table 2). In many competingcountries, agricultural subsidy ratios are over 20%, butin China, the overall agricultural subsidy ratio is only8.5%, as pledged by the government's commitment tothe WTO in 2001.

The quality of soybeans depends on the quantityof oil that can be extracted from the bean. A 1% vari-ance can lead to a profit difference of $1.9 million forevery 100,000 tons of soybeans produced. At present,the ratio of oil extraction from domestic soybeans isonly 16%-17%, which is 2%-3% lower than importedsoybeans. Not surprisingly, when confronting higherprices and lower quality domestic soybeans, oil pro-cessing firms in China, such as No. 93 Seed-Oil Corpo-ration, choose to import soybeans.

International CompetitionIn the international agricultural market for basic food-stuffs such as soybeans, about 80% of the market shareis dominated by four Fortune Global 500 companies:Archer Daniels Midland (ADM), Bunge, and Cargillof the United States and Louis Dreyfus of France-col-lectively known as "ABCD." Since 2005, these multi-national firms have intensified their acquisitions inthe Chinese soybean oil processing industry. In 2000,the number of Chinese soybean oil processing firmsexceeded 1,000. In 2006, there were only 90, and 64 ofthem were wholly or partially controlled by foreigninvestors. These 64 foreign-invested firms command85% of the production capability.

In 2005, Baogang Seed-Oil Corporation, once aleading seed oil manufacturing company in JiangsuProvince, declared bankruptcy as a result of capitalshortage. The company could not pay its debt, so theNantong municipality government authorized it to beleased by Cargill. However, employees clearly knewthat the "lease" was just a transition form and that thecompany's eventual fate would be an acquisition byCargill. In addition to acquisitions, foreign firms areshifting some attention to soybean research. For exam-ple, Kwok Brothers Corporation of Singapore heldtalks with theAcademy ofAgricultural Sciences in Hei-longjiang Province, hoping that the academy wouldlicense the output ofqts research to the Singapore com-pany. By popularizing the new breed of soybeans pio-neered by the academy, the Singapore company hopedto purchase such soybeans directly from farmers whenharvested and then to gradually monopolize the soy-bean industry of Heilongjiang Province (and perhapseven the whole country).

The Soybean Value ChainAn extensive industry value chain can be derivedfrom soybeans. First, soybeans can be made into avariety of food products, including tofu and otherbean curd-based products, soy milk, and soy-protein

zc

TABLE 2 • SUBSIDY RATIOVARIANCES

Country Subsidy Ratio" ~

Switzerland 71%

Iceland 69%

Norway 68%

South Korea 63%

Japan 56%

EU 33%

Canada 21%

United States 18%

China 8.5%

a Subsidy ratio = percentage of subsidies over total agricultural income.

drinks. Second, oil can be pressed from soybeans.Finally, the soybean oil extraction process generatesa byproduct, soybean residue, which contains abun-dant proteins. Soybean residue is a main ingredientin feed for livestock and poultry. Animal feed, inturn, connects soybeans with livestock and poultryproduction, another crucial component of the agri-cultural industry.

Nowadays, foreign direct investment (FDI) hasmainly penetrated the soybean oil production process(other than some attempts to be involved in upstreamproduction as noted earlier). What is the attitude ofother players in the soybean value chain toward FDI?Consider Qinghe Technology,Ltd., a large animal-feedproducer. Because soybean residue represents 60% ofthe raw materials used in production, the market priceof soybeans directly affects the company's productioncost. Obviously, the low price of imported soybeansmakes Qinghe happy. Therefore, managers in theanimal-feed industry are interested in more importedsoybeans.

The Future of Soybeans in ChinaAs the country that proudly pioneered soybean pro-duction, China has been producing non-GM soybeansfor more than 5,000 years. Except for Qinghai Province,soybeans are grown everywhere in China, and the vari-ety of soybean categories in China is the most completein the world. We can say, without exaggeration, thatChina cultivates soybeans, and in turn, soybeans nur-ture our country. At present, soybeans are at a crucialhistorical crossroads between progress and decline.Fortunately, on October 1, 2006, the central govern-ment passed new regulations on the labeling standardsof edible oil, requiring that "GM-based" or "non-GM-

----_ ..._----_ .. ~--,-----~~~~~~~~--------

based" soybeans be clearly labeled for consumers. Canthis "institutional change" in the rules of the gamegoverning soybean oil labeling and consumption bringnew hope to domestic soybeans?

Case Discussion Questions

1. Does China have an absolute or comparativeadvantage in soybean production?

2. In China, what is the current crisis of the soybeanindustry? Do you think the government should orshould not intervene? If intervention is called for,what measures should be taken?

• •

PART 2 Integrative Cases I 241

3. What difficulties do Chinese soybean farmersface? How can they compete with internationalproducers?

4. Will the new labeling standards for non-GM-basedsoybeans used for edible oil production have anyimpact on domestic soybeans?

5. Facing the imminent wave of consolidations fueledby FDI, what can the soybean oil processing com-panies do to promote locally grown soybeans? Isthis their responsibility?

1 Mu is the standard Chinese unit for acreage. The conversion is: 1 mu = '/,5hectare = 1/6 acre.

AGRANA: FROM A LOCAL SUPPLIER TO A GLOBAL PLAYER

Erin Pleggenkuhle-MilesUniversity of Texas at Dallas

Although most readers of this book probably have neverheard of AGRANA, virtually everybody has heard ofNestle, Coca-Cola, Danone, PepsiCo, Archer DanielsMidland (ADM), Tyson Foods, and Hershey Foods.Headquartered and listed in Vienna,Austria, AGRANAis one of the leading suppliers to these multinationalbrands around the world. With revenues of US$2.6bil-lion and capitalization of $1.4billion, AGRANA is theworld's leader in fruit preparations and one of CentralEurope's leading sugar and starch companies.

AGRANA was formed in 1988 as a holding com-pany for three sugar factories and two starch factoriesin Austria. In the last two decades, it has become aglobal player with 52production plants in 26 countrieswith three strategic pillars: sugar, starch, and fruit.AGRANA supplies most of its fruit preparations andfruit juice concentrates to the dairy, baked products,ice-cream, and soft-drink industries. In other words,you may not knpw AGRANA, but you have probablyenjoyed many AGRANAproducts. How did AGRANAgrow from a local supplier serving primarily the smallAustrian market to a global player?

From Central and Eastern Europe to the WorldInmany ways, the growth ofAGRANAmirrors the chal-lenges associated with regional integration in Europeand then with global integration of multinational pro-

This case was written by Erin Pleggenkuhle-Miles (University ofTexas at Dallas) under the supervision of Professor Mike Peng.© Erin Pleggenkuhle-Miles. Reprinted with permission.

duction in the last two decades. There are two com-ponents of European integration. First, EU integrationaccelerated throughout Western Europe in the 1990s.This means that firms such as AGRANA, based in arelatively smaller country, Austria (with a populationof 8.2million), needed to grow its economies of scale tofend off the larger rivals from other European countriesblessed with larger home country markets and hencelarger scale economies. Second, since 1989,Central andEastern European (CEE)lcountries, formerly off limitsto Western European firms, have opened their markets.For Austrian firms such as AGRANA, the timing ofCEE's arrival as potential investment sites was fortu-nate. Facing powerful rivals from larger Western Euro-pean countries but being constrained by its smallerhome market, AGRANAhas aggressively expanded itsforeign direct investment (FDI)throughout CEE.MostCEE countries have become EU members since then.As a result, CEE provides a much larger playgroundfor AGRANA, allowing it to enhance its scale, scope,and thus competitiveness.

At the same time, multinational production byglobal giants such as Nestle, ConAgra, Coca-Cola,PepsiCo, and Danone has been growing by leaps andbounds, thus reaching more parts of the world. Emerg-ing as a strong player not only in Austria and CEEbutalso in the EU,AGRANA has further "chased" its cor-porate buyers by investing in and locating supplieroperations around the world. This strategy has allowedAGRANA to better cater to the expanding needs of itscorporate buyers.