The Context of Global Strategy

A Personal View…

Automakers’ Global Supply Chain Configuration

Field Study

Touareg Passat Jetta Beetle Golf

EngineGermany

HungaryGermany

Poland

MexicoMexico Hungary

Transmission Japan JapanArgentina

Japan

Argentina

JapanArgentina

Final Assembly

Slovakia Germany Mexico Mexico Brazil

Country of Origin for VW Models Sold in U.S.:Major Components and Final Assembly

Jetta

Transmissions

Assembly

Engines

Customers

VW International Strategy - Jetta

Germany

Japan

Mexico

Poland

Transmission

Final Assembly

Engine

Misc.

U.S.Marketing

VW International Strategy - Touareg

Germany

Japan

Slovakia

Hungary

Transmission

Final Assembly

Misc.

Steel & Engine

U.S.Marketing

Reasons to “Go Global”Proactive ReasonsProactive Reasonso Exploit factor-cost

differences across countries

o Unique producto Technological advantageo Economies of scaleo Growing foreign marketso Exclusive informationo Attack rivals on home turf

Reactive ReasonsReactive Reasonso Competitive pressureo Overcapacityo Declining domestic

saleso Saturated home marketo Under attack from

foreign rivals

Going Global: Effect on Bottom Line

ROI

% Foreign Sales/Total Sales

Factors/Issues of Globalization

EconomicEconomic

Political Cultural

Technology

Competitive

Legal

The Context of Global StrategyThe Context of Global Strategy

o Globalization and Its Effectso Comparative Advantageo Global Supply Chains for Selected Automakers

The International Political Economy (IPE)o Trade & Investment Policyo Role of Regimes (NGOs and Treaties)o Economic Integrationo Foreign Exchange

What is Globalization?Perspective of Countries

o How are countries connected globally?How are countries connected globally?o How big is globalization?How big is globalization?o Why does it happen? Why does it happen? o Who’s doing it?Who’s doing it?o Is it connected to prosperity? Is it connected to prosperity?

Global Top-20

PoliticaPoliticaGlobalization Index =• Political Engagement +• Technology Contact/Transfer +• Personal Contact +• Trade and FDI

Foreign Policy and A.T. KearneyAnnual Globalization Report

CzechRepublic

U.S.

Singapore

Ireland

Merchandise Exports(US$ billions)

U.S.U.S.

Ger

man

yG

erm

any

Japa

nJa

pan

Fra

nce

Fra

nce

UKUK

IreIreMexMexKorKor

Merchandise Imports (US$ billions)

U.S.U.S.

Ger

man

yG

erm

any

Japa

nJa

pan

Fra

nce

Fra

nce

UKUKIreIreMexMexKorKor

Foreign Direct Investment - Out(% of World Total)

U.S.U.S.G

erm

any

Ger

man

y

Japa

nJa

pan

Fra

nce

Fra

nce

UKUK

Foreign Direct Investment - In(% of World Total)

U.S.U.S.G

erm

Ger

m

Japa

nJa

pan

Fra

nce

Fra

nce

UKUK

Comparative Advantageo Germany:

o 10 units of factor inputs (labor & capital) to produce 1 keg of beer

o 2 units of factor inputs (labor & capital) to produce 1 box of pretzels

o United States: o 15 units of factor inputs to produce 1 keg of beer; o 5 units of factor inputs to produce 1 box of pretzels;

Which country should manufacture

and export only beer? Which country should manufacture and export only pretzels?

Comparative AdvantageGermany:10 labor pretzels = 5 pretzels per beer * beer 2 labor

US:15 labor pretzels = 3 pretzels per beer * beer 5 labor

* Opportunity Costs … price of beer in terms of pretzels, using labor as common denominator

=

=

Comparative AdvantageGermany:10 labor pretzels = 5 pretzels per beer beer 2 labor

US:15 labor pretzels = 3 pretzels per beer beer 5 labor

o Germany has absolute advantage in both beer and pretzels

o U.S. has comparative advantage in beer, and should manufacture and export beer to Germany

o Germany has comparative advantage in pretzels, and should manufacture and export pretzels to the U.S.

Growth in TradeIndexed: 1950 = 100

1950 1960 1970 1980 1990 2000

1600

1200

800

400

100

Trade

GDP

Fair Trade and Outsourcing

…in the media …in politics

Countries don’t trade, companies do.

What is Globalization?Perspective of Multinational Corporations (MNCs)

o Motivations for global operations and reachMotivations for global operations and reacho How are companies engaging in How are companies engaging in

globalization?globalization?o How big is their involvement?How big is their involvement?o What are the effects on managers, customers, What are the effects on managers, customers,

employees, profits, etc.? employees, profits, etc.?

Rank Firm or Country Value (in $bil)

1 United States $8,110.92 Japan 4191.53 Germany 2104.64 France 1394.15 United Kingdom 1288.26 Italy 1145.47 China 902.18 Brazil 802.19 Canada 618.3

10 Spain 531.311 Russia 449.912 South Korea 438.213 Mexico 409.614 Microsoft 407.215 Australia 390.8

16 India 380.817 Netherlands 360.518 General Electric 333.119 Argentina 326.420 Taiwan 283.421 Belgium 242.422 Sweden 227.823 IBM 214.824 Indonesia 214.625 Austria 207.526 Exxon 193.927 Royal Dutch Shell 191.328 Wal-Mart 189.529 Turkey 186.430 AT&T 186.131 Intel 180.232 Cisco Systems 174.1

Extent of Globalization for MNCs

Foreign Sales as

Percent of Total

Foreign Assets as

Percent of Total

Exxon 72% 64%

IBM 57% 44%

Ford 31% 44%

General Electric 32% 48%

Citigroup 35% 41%

Hewlett-Packard 55% 52%

Orange = Percentage of exports to the U.S. by intra-firm trade (via FDI) to total exports (This is NOT volume of total exports)

Green = Globalization Index

Growth in Trade and FDIIndexed: 1950 = 100

1950 1960 1970 1980 1990 2000

1600

1200

800

400

100

Trade

GDP

FDI

Trade and Investment Policy

Free Trade?

Free Trade?

Global Linkages Model

CountryA

CountryB

Management Linkages

Policy Linkages

Trade and Investment Linkages

CountryA

CountryB

Managers choose to…Attack new marketsEntry modesShift manufacturingAlliances, Mergers, etc.

Governments try …Tariffs, quotas

FDI Regulations

Effects are …Persistent Trade DeficitLoss of JobsHigher Domestic Prices

How Nations Influence Trade and Investment Activity Through Policy

o Overt/Visible Policieso Supporting/Strategic Policies

o Follow-up Questions:oHow well to these policies work?oWhat are the side effects?o Retaliation?oHow might managers of MNCs respond?

USTR Definition of Trade Barriers

o Government laws, policies, or practices that either:o Protect domestic products from

competitiono Artificially stimulate exports of particular

domestic products

Overt Policy Alternatives

o Restrict Imports (tariffs, quotas, VERs)

o Restrict FDI o Incoming (F/X controls, local content)oOutgoing (tax code, expatriation disincentives)

o Restrict Exports (DoD restrictive munitions)

o Export Promotion (subsidies, tax credits)

o Import Promotion (tax credits, favors)

o FDI Incentives (subsidies for infrastructure, training & development, market access)

o Preferential Govt. Procurement

Cost of Import ProtectionJapanese Rice Market

DomesticSupply

DomesticDemand

DomesticQuantityProduced

DomesticQuantity

Consumed

World Price

Cost of Import ProtectionJapanese Rice Market

DomesticSupply

DomesticDemand

NewDomesticQuantityProduced

NewDomesticQuantity

Consumed

World Price

Tariff Price

Tariff

Cost of Import ProtectionJapanese Rice Market

DomesticSupply

DomesticDemand

NewDomesticQuantityProduced

NewDomesticQuantity

Consumed

World Price

Tariff PriceExtra Revenue

DeadweightLoss

Tariff

Cost of Import ProtectionJapanese Rice Market

DomesticSupply

DomesticDemand

NewDomesticQuantityProduced

NewDomesticQuantity

Consumed

World Price

Tariff PriceExtra Revenue

DeadweightLoss

# Jobs saved?At what price?

Cost to Domestic Consumers per Job Saved

Extra Revenue for FirmTariff Revenue to GovernmentDeadweight Loss

$800 million+

$800 million10,000 jobs

$80,000/job

=

What is Globalization?Perspective of Consumers vs. “Regular Joes”

o OutsourcingOutsourcingo Cheaper Products vs. Job LossCheaper Products vs. Job Losso Fair Trade -- Product and Production Fair Trade -- Product and Production

StandardsStandardso Working standardsWorking standardso Living wageLiving wageo Environmental standardsEnvironmental standards

“Voluntary” Export Restraints

TMM-K Georgetown

1971 Honda 2008 Acura MDX

Managerial Responses to VERs

Shift Production to U.S.

Sell pricier, more profitable cars

Global Linkages Model

CountryA

CountryB

Management Linkages

Policy Linkages

Trade and Investment Linkages

FDI: Host Country PerspectivePrimary Impact Favorable

Aspects Unfavorable

Aspects Policy

Response Capital Capital

inflow Loss of control

Ownership restriction

Employment Creates new jobs

Career limits/ low wages

Employment regulations

Entrepreneurship Creates new industries

Displaces local ideas

Restrict market acess

Technology Access to new

technol.

Appropriate techology??

??

Government Revenues

Increase tax base

Foreign dependency

??

FDI: Home Country PerspectivePrimary Impact Favorable

Aspects Unfavorable

Aspects

Capital Profitable opportunities

Capital flight

Employment Access to lower wages

Export jobs

Technology Expand usage into new markets

Lose control over

sensitive technol

Government Revenues

Tax income on profits

Loss of domestic wage tax

base

Economic Integration

Global Linkages

CountryA

CountryB

Management Linkages

Policy Linkages

Trade and Investment Linkages

Global Linkages

CountryA

CountryB

Management Linkages

IntegrationIntegration

Trade and Investment Linkages

Regionalization of Economic Activityo Levels of Economic Integration

o Free Trade Areao Customs Uniono Common Marketo Economic Union

o Effects on trade and FDI patternso Evolution toward worldwide integrationo Impact on management of MNCs

Trade in Isolation

20%

100%

33%

15%

40%

10%PrevailingTariff Rateson Imports

Free Trade Area

20%

100%

33%

o No tariffs among members

o Tariffs with non-members unchanged

Consequences External Tariffs?External Tariffs? Trade Creation?Trade Creation? Trade Diversion?Trade Diversion? Regional content? Regional content? Export jobs?Export jobs?

Trade and Investment in Isolation

40%

33%

CheapestProducer

Imports

Trade Creation from FTA Formation

33%

CheapestProducer

Impo

rts

Trade and Investment in Isolation

40%

33%

CheapestProducer

Imports

Trade Diversion from FTA Formation

33%

CheapestProducer

Impo

rts

Customs Union

33%

o FTA plus...o Common tariff

policy for non-members

33%

33%

Common Market

o Customs Union plus...

o Reduction of non-tariff barriers among members

No Non-Tariff Barriers

Shift in International Strategy

Common Market

£

DM

FF DkK

ÖS

National Currencies

ConsequencesConsequences• Strain on F/X ratesStrain on F/X rates• … …tax rates?tax rates?• … …growth?growth?• … …trade?trade?

Economic Union

o Common Market plus...

o Single currencyo Harmonization of

Monetary and Fiscal Policies

Multilateralism in Trade and Investment Regimes: WTO

Europe

PacificRim

NorthAmerica

F/X

Foreign Exchange

o What is it?o Why does it change?o Risk for international managerso How to manage risk

A Medium of Exchange:The Linkage Between Currencies

World Market for Euros

World Market for DollarsPrice = $ /

€Price = € /

$S

D

S

D

$1.30 / € € .77 / $

Same “market”…different perspective.Same “market”…different perspective.

Foreign Exchange Fluctuations and VolatilityIndex of Swiss Franc vs. Dollar

1990 = 100

19901980 2000

Sharply Depreciating Peso vs. Dollar

Medium of Exchange for Foreign GoodsGerman Market for BMWs

Price of a BWMin Euros

€ 100,000

S of BMWs

D for BMWs

Global Market for BMWs:Americans want to import BMWs from Germany

Price of a BMW in Euros

€ 100,000

S

DD’

€ 110,000

World Market for Euros

Price of a Euro in Dollars

$1.30 / €

S of Euros

D for Euros

World Market for Euros:Americans need to convert Dollars to Euros

Price = $ / €

$1.30 / €

S

DD’

$1.35 / €

Linkage Between Currencies

World Market for Euros

World Market for Dollars

Price =$ / €

Price =

€ / $S

D

S

D

$0.77/ € € 1.30/$

Linkage Between Currencies

World Market for Euros

World Market for Dollars

Price =$ / €

Price =

€ / $S

D

S

D

€ .77/$

D’

S’

$1.30/ €$1.35/ €

€ .74/$

Other Forces Causing Changeo Foreign Direct Investmento Foreign Portfolio Investment

o MNCso Government Debt Instruments

o Currency Arbitrage and Speculationo Governmental Intervention

o Official and Unofficial “pegs”o International Agreements (e.g., G-7, the Euro)o Posturing (e.g., “talking” the dollar down)

The Big Mac Index

Big Mac: Local F/X

Actual

F/X Rate

Big Mac: in

US$

Implied

PPP Rate

% Under/ Over Value

U.S. $2.55 – $2.55 – –

EU ℮ 2.44 ℮ 1.08/$ $ 2.26 ℮ .96/$ - 11%

Japan Y 253 Y 118.2/$ $ 2.14 Y 99.2/$ - 16%

England ₤ 2.99 ₤ .69/$ $ 4.33 ₤ 1.17/$ + 70%

Poland Z 1.34 Z 4.12/$ $ .32 Z .52/$ - 87%

www.economist.com

Short-term F/X Management o Currency Hedges

o Forward Contractso Optionso Negotiation of Ratcheted Pricing Schedule

o Adjustment of Prices and Target Profitso Lower foreign prices to keep market share when

home currency appreciates … lowers profit margino Raise foreign prices to keep profit margins when

home currency depreciates … less price competitive

Medium-Term F/X Managemento Balance sheet hedge

o Match foreign assets with same level of foreign liabilities in same currency

o Cash flow hedgeo Match foreign A/P with A/R in same currency

Long-Term F/X Management

o Shift sourcing and procuremento Shift production o Cut costs / improve productivity