8Toyotaproduction facilities in 9 countriesproduction in 14 countriesproduction facilities in 21 countriesProduction facilities in Asia, Africa, China, North America, and South America, and plans for RussiaPlans to double overseas production to 6 million vehiclesWSJ, 11/2/04, p. A3
9In 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
10Supplier country features – Production and procurement Choose supplier countries for competitive advantageWorker wages and productivityTechnologyFinance capitalFactor suppliesSupplier industryPolitical, legal, regulatory climateOperating costs/risksWhy did Toyota choose to produce in the US in comparison to Japan or Mexico?
11Supplier country features – Production and procurement Choose supplier countries for competitive advantageGet close to customersCan produce and procure in or near customer countries to improve distribution
12Partner country features – Demand-side and supply-side complements Choose partners for competitive advantageComplementary productsVideo game player and video gamesAndy Grove: “Complementors”Complementary technologyComplementary capabilities
13Partner countries – Demand-side and supply-side complements Choose partner countries for competitive advantageProximity to customer marketsPartners provide knowledge of customersPartners provide access to human capitalPolitical, legal, regulatory climate important for types of agreementsContracts, JVs, formal and informal alliances
14Sony-Samsung JV: S-LCD Tang-Jeong, Korea Complementary technologiesTelevision (Sony)Flat panel design (Samsung)Sony-Samsung JV: S-LCD Tang-Jeong, KoreaSeventh-generation technology plant: Capacity 90,000 panels/monthEighth-generation LCD plant projected capacity50,000 panels a month (2.2 x 2.5m) 2007Cost: $1.9 bn Each firm will invest half.
15Partner countries Joint venture: Tata Consultancy Services (TCS) – MicrosoftTCS is India's largest IT outsourcing firm (majority partner)Microsoft – USJV to be based in Beijing, ChinaTo 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.
16International modes of entry Modes of entry are alternatives ways to produce and purchase products in supplier countriesModes of entry are also ways to sell and distribute in a target customer countryOwnership 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
17International modes of entry OptionsSourcingServingSpot(Suppliers)Buy from othersSell to othersContractRepeated purchase contractDistribution contractLicensesTechnical licenses to producersLicense brand or copyright to distributorAlliance, Joint Venture(Partners)Supply-side partnerDemand-side partner/distributorGrowth(Vertical integration)Establish operationsSell through own networkM&AMerge with supplierMerge with distributor.
18MIX and MATCHModes of entry can differ:Across supplier and partner countriesAcross customer countriesBetween production and distribution sidesExample: GAP owns stores but outsources production
19International modes of entry and strategy Advantages of vertical integration:Greater internal coordination across international operationsAvoiding market transaction costsInternal technology transferAvoid double marginalization
20International modes of entry and strategy Disadvantages of vertical integration:Operating costs/risks in supplier countryLess flexibility, greater organizational costsLess market responsivenessLose benefits of focus on core competencies and outsourcing
21Political riskNationalization of assets by host country (oil companies in Saudi Arabia)Imposition of restrictions on repatriation of profits after assets have been sunkRenegotiation of contract terms by government of host countryChanges in employment requirements, regulations, taxes, tariffs, non-tariff barriers after start of project (also public corruption)Subsidization of domestic producers after start of project
22Reducing political risk Forecast potential changes in the policies of the host country – include domestic politics of host country and international relationsUnderstand objectives of host government – tax revenues, local control of investment, political control, employment, attracting investment, attracting technologyUnderstand public policy limits on market power, employment practices, environmental activitiesUnderstand public policy differences toward international business operating abroad versus domestic business
23Contract risk: Suppliers and partners Renegotiation of contract terms by supplier or partner in the host countryRenegotiation of contracts by foreign suppliers and partners often protected by government policy, legal system, or absence of business reputation effectsLocal supplier or partner does not honor contract (low-quality production) or defaults on paymentsSupplier or partner acts after investments have been sunk – hold-up problem
24Reducing Contract Risk Long-term relationships with repeated exchange increase incentives for local supplier or partner to performBeing part of a business network creates performance incentives for local supplier or partnerUse of trusted intermediaries in forming and maintaining business relationshipEvaluate legal and regulatory climate in host country
25Trade-off between political and contract risks Entry without local supplier or partner avoids some contract risks by going it alone – but increases political riskEntry without local supplier or partner allows greater vertical integration and controlSharing business with local supplier or partner reduces capital at risk and gains allies but increases contract riskSharing business with local supplier or partner reduces control and loses some benefits of vertical integration
26Overview and Take-Away Points Manager should carefully consider features of supplier countries and partner countries in production and procurement decisionsAdjust mode of entry depending on features of supplier countries and partner countriesMode of entry is critical for global competitive advantage
27The global market for petroleum Case studyThe global market for petroleumChoosing supplier and partner countries
28Petroleum starts as a local phenomenon Gusher in Spindletop, Texas, Photo by Trost,courtesy of the Texas Energy Museum, Beaumont, Texas
31International oil markets Total proved reserves1.025 trillion bbl (1 January 2002)Total production75.34 million bbl/day (2001 est.)Note: 1,025,000/75 = 13,666 days = 37 yearsOil and gas together supply 60% of world energy needs (API, 2004)US imports over 56% of its petroleum consumption
32Recoverable Crude Oil Futures (in billions of barrels) 0.10.1 to 11 to 1010 to 2020 to 100> 100Eckert VI ProjectionU. S. Geological Survey, C. Masters & R. M. Turner 1994World 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.
35Extraction costsIn 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 waterIncreasing depth as prices of oil rise
37Oil has political dimensions that can increase costs
38Source: American Petroleum Institute Prices adjusted for inflation (2006 = 100).
39Source: American Petroleum Institute Source: American Petroleum Institute. Prices adjusted for inflation (2006 = 100).
40OPECEleven countries: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and VenezuelaSupplies about 40 per cent of the world's oil outputHas more than three-quarters of the world's total proven crude oil reserves.
43What the future holdsSustained higher crude prices eventuallyGreater aggregate demand due to economic growthMore discoveries and more new reserves as crude prices increaseLong-term usage of petroleumGreater efficiency due to higher pricesMany new energy alternatives and technologies coming on line