1. Supplier Country and Partner Country Features
© Professor Daniel F. Spulber

2. Japan’s domestic production and exports of cars– The turning point
VERs (early 80s -1995), High Yen (70s to 90s)

3. Toyota’s Activities in the US from 1957 till Today

4. Toyota’s Activities in the US in Numbers

5. Toyota’s Foreign Direct Investment in the US

6. Toyota’s Locations in the US

7. Toyota’s US-Production

8. Toyota
production facilities in 9 countries
production in 14 countries
production facilities in 21 countries
Production facilities in Asia, Africa, China, North America, and South America, and plans for Russia
Plans to double overseas production to 6 million vehicles
WSJ, 11/2/04, p. A3

9. In June 2006, outside Japan Toyota has a total of 52 overseas manufacturing companies in 27 countries / regions. Toyota markets vehicles in more than 170 countries / regions.
Source: Toyota.com

10. Supplier country features – Production and procurement
Choose supplier countries for competitive advantage
Worker wages and productivity
Technology
Finance capital
Factor supplies
Supplier industry
Political, legal, regulatory climate
Operating costs/risks
Why did Toyota choose to produce in the US in comparison to Japan or Mexico?

11. Supplier country features – Production and procurement
Choose supplier countries for competitive advantage
Get close to customers
Can produce and procure in or near customer countries to improve distribution

12. Partner country features – Demand-side and supply-side complements
Choose partners for competitive advantage
Complementary products
Video game player and video games
Andy Grove: “Complementors”
Complementary technology
Complementary capabilities

13. Partner countries – Demand-side and supply-side complements
Choose partner countries for competitive advantage
Proximity to customer markets
Partners provide knowledge of customers
Partners provide access to human capital
Political, legal, regulatory climate important for types of agreements
Contracts, JVs, formal and informal alliances

14. Sony-Samsung JV: S-LCD Tang-Jeong, Korea
Complementary technologies
Television (Sony)
Flat panel design (Samsung)
Sony-Samsung JV: S-LCD Tang-Jeong, Korea
Seventh-generation technology plant: Capacity 90,000 panels/month
Eighth-generation LCD plant projected capacity
50,000 panels a month (2.2 x 2.5m) 2007
Cost: $1.9 bn Each firm will invest half.

15. Partner countries Joint venture:
Tata Consultancy Services (TCS) – Microsoft
TCS is India's largest IT outsourcing firm (majority partner)
Microsoft – US
JV to be based in Beijing, China
To provide IT outsourcing services and solutions to U.S., Europe, and the Asia Pacific region, and China.
Three Chinese firms are partners: Beijing Zhongguancun Software Park Development Co., Uniware Co., and Tianjin Huayuan Software Park Construction and Development Co.
The Chinese firms operate national software development parks in China.

16. International modes of entry
Modes of entry are alternatives ways to produce and purchase products in supplier countries
Modes of entry are also ways to sell and distribute in a target customer country
Ownership of facilities in multiple countries makes the business a multinational corporation (MNC)
International businesses tend to be vertically integrated but this is likely to change

17. International modes of entry
Options
Sourcing
Serving
Spot
(Suppliers)
Buy from others
Sell to others
Contract
Repeated purchase contract
Distribution contract
Licenses
Technical licenses to producers
License brand or copyright to distributor
Alliance, Joint Venture
(Partners)
Supply-side partner
Demand-side partner/distributor
Growth
(Vertical integration)
Establish operations
Sell through own network
M&A
Merge with supplier
Merge with distributor.

18. MIX and MATCH
Modes of entry can differ:
Across supplier and partner countries
Across customer countries
Between production and distribution sides
Example: GAP owns stores but outsources production

19. International modes of entry and strategy
Advantages of vertical integration:
Greater internal coordination across international operations
Avoiding market transaction costs
Internal technology transfer
Avoid double marginalization

20. International modes of entry and strategy
Disadvantages of vertical integration:
Operating costs/risks in supplier country
Less flexibility, greater organizational costs
Less market responsiveness
Lose benefits of focus on core competencies and outsourcing

21. Political risk
Nationalization of assets by host country (oil companies in Saudi Arabia)
Imposition of restrictions on repatriation of profits after assets have been sunk
Renegotiation of contract terms by government of host country
Changes in employment requirements, regulations, taxes, tariffs, non-tariff barriers after start of project (also public corruption)
Subsidization of domestic producers after start of project

22. Reducing political risk
Forecast potential changes in the policies of the host country – include domestic politics of host country and international relations
Understand objectives of host government – tax revenues, local control of investment, political control, employment, attracting investment, attracting technology
Understand public policy limits on market power, employment practices, environmental activities
Understand public policy differences toward international business operating abroad versus domestic business

23. Contract risk: Suppliers and partners
Renegotiation of contract terms by supplier or partner in the host country
Renegotiation of contracts by foreign suppliers and partners often protected by government policy, legal system, or absence of business reputation effects
Local supplier or partner does not honor contract (low-quality production) or defaults on payments
Supplier or partner acts after investments have been sunk – hold-up problem

24. Reducing Contract Risk
Long-term relationships with repeated exchange increase incentives for local supplier or partner to perform
Being part of a business network creates performance incentives for local supplier or partner
Use of trusted intermediaries in forming and maintaining business relationship
Evaluate legal and regulatory climate in host country

25. Trade-off between political and contract risks
Entry without local supplier or partner avoids some contract risks by going it alone – but increases political risk
Entry without local supplier or partner allows greater vertical integration and control
Sharing business with local supplier or partner reduces capital at risk and gains allies but increases contract risk
Sharing business with local supplier or partner reduces control and loses some benefits of vertical integration

26. Overview and Take-Away Points
Manager should carefully consider features of supplier countries and partner countries in production and procurement decisions
Adjust mode of entry depending on features of supplier countries and partner countries
Mode of entry is critical for global competitive advantage

27. The global market for petroleum
Case study
The global market for petroleum
Choosing supplier and partner countries

28. Petroleum starts as a local phenomenon
Gusher in Spindletop, Texas, Photo by Trost,
courtesy of the Texas Energy Museum, Beaumont, Texas

29. Petroleum becomes a global market

30. Largest oil companies by production:
Exxon Mobil (USA)
British Petroleum Amoco (UK)
Royal Dutch Shell (UK/Neth)
Chevron Texaco (USA)
Yukos (Russia)
Total Fina Elf (France)
Lukoil (Russia)
ConocoPhillips (USA)
Surgutneftegas (Russia)
ENI (Italy)

31. International oil markets
Total proved reserves
1.025 trillion bbl (1 January 2002)
Total production
75.34 million bbl/day (2001 est.)
Note: 1,025,000/75 = 13,666 days = 37 years
Oil and gas together supply 60% of world energy needs (API, 2004)
US imports over 56% of its petroleum consumption

32. Recoverable Crude Oil Futures (in billions of barrels)
    
0.1
0.1 to 1
1 to 10
10 to 20
20 to 100
> 100
Eckert VI Projection
U. S. Geological Survey, C. Masters & R. M. Turner 1994
World of Petroleum by C.D. Masters, D.H. Root, and R.M. Turner, World map of petroleum basins showing estimated quantities of conventional crude oil future resources in six different categories. Future quantities include identified reserves plus undiscovered resources.

34. World oil reserves

35. Extraction costs
In 1897 the first offshore oil well was drilled at the end of a wharf, 300 feet out into the ocean in Summerland , CA .
Using floating platforms, wells have been drilled in 10,000 deep water
Increasing depth as prices of oil rise

36. World oil reserves

37. Oil has political dimensions that can increase costs

38. Source: American Petroleum Institute Prices adjusted for inflation (2006 = 100).

39. Source: American Petroleum Institute
Source: American Petroleum Institute. Prices adjusted for inflation (2006 = 100).

40. OPEC
Eleven countries: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela
Supplies about 40 per cent of the world's oil output
Has more than three-quarters of the world's total proven crude oil reserves.

43. What the future holds
Sustained higher crude prices eventually
Greater aggregate demand due to economic growth
More discoveries and more new reserves as crude prices increase
Long-term usage of petroleum
Greater efficiency due to higher prices
Many new energy alternatives and technologies coming on line