1. Khon Kaen University International College   Business in the Greater Mekong Sub-region   Course number Second semester 2013 Wednesdays at 9:00 in room 823   Lecturer: Michael Cooke office room Web: KKU.AC.TH/Michco

2. Course Grading Criteria % 1 Student presentations 42 2
No.
Course Grading Criteria % 1
Student presentations 42 2
Final Examination 30 3
Class participation and quizzes 28
Total
100
Each student will participate in three presentations. Students will research and analyze an industry with GMS. The student will then apply the results of that study to an analysis of a country within the GMS, analyzing the strengths of that country and the existing barriers to exploiting those strengths. The last presentation will look into the future.
Students must be punctual to take a quiz. Early exit is scored as no participation.
The university enforces an 80% attendance policy, with maximum three absences.
Your student handbook details the KKU policies regarding plagiarism (pages 88-94).
Disrupting the class (such as use of a mobile telephone in class) may count as absent.

3. Plan for the Semester Week Starting Topic Reading1
16 Oct
Perspective – What is a business ecosystem?
GMS BH pp1-6, Fallows pp 2
23 Oct
Holiday – makeup date TBA 3
30 Oct
Investment and risk tolerance
(A) – ‘Apple, America, …’ 4
6 Nov
Strengths and weaknesses along the Mekong
(B) and (C) – ‘Rent Seeking’, ‘Land Conflicts’ 5
13 Nov
Student presentations – 1 GMS successes 6
20 Nov
Demographics and comparative advantage
(D) ‘City Singles’ 7
27 Nov
The implications of trade alliances
GMS-BH pp7-12, 8
4 Dec
Student presentations – 2 Country strengths 9
9-16 Dec
KKUIC Midterm examinations 10
18 Dec
Infrastructure and consumer initiatives
GMS BH 11
25 Dec
Special economic zones 12
8 Jan
Tom Yum Goong and hot money
Fallows pp 13
29 Jan
The changing nature of development
(E) – ‘No More Miracles’ 14
5 Feb
Student presentations – 3 Country potential 15
12 Feb
Review – 21 years of GMS and beyond 16
17 Feb-6Mar
Final Examinations

4. Question from the 2nd Year IM Final Exam
India’s government has decided to create a domestic computer hardware industry (New York Times, April 15, 2013). This is because India’s import bill for semiconductors alone was $8.2 billion in 2012, and demand is growing at around 20 percent a year. However India has been unable to attract investors. A recent attempt ended in a dispute over the terms of the agreement between a company and the state of Andhra Pradesh where the plant was to be housed. India is offering as much as $2.75 billion in incentives to computer chip makers to entice them to build India’s first semiconductor manufacturing plant, but the head of the U.S.-India Business Council said that India’s efforts to force international companies to manufacture in the country are futile. “The government needs to not mandate this, but create an ecosystem.” Critics warn that India has to reduce some of the barriers to doing business in the country. For instance, the now successful Indian automobile industry grew after 1991, when India dropped its local content rules.
What does ‘create an ecosystem’ mean as used here? How can local content rules be a barrier to a company interesting in doing business in India?

5. LE QUANG NHAT / AP
LE QUANG NHAT / AP
‘Hello Vietnam’
Le Quang Nhat/AP

6. Intel Corporation Invests in Vietnam
"Companies in China have been looking for an alternative," said IDC. "Labor costs are rising in China. The cost of doing business in China is rising. Vietnam is the right alternative.“
Hewlett-Packard recently started soliciting for software engineers to staff a new outsourcing operation in Ho Chi Minh City, an investment reported to be $18 million.
Intel’s arrival in the GMS country put Vietnam "on the map for high-tech investment and helped the country attract significant investments from several global technology firms, including Foxconn and Compal
Nearly a decade in the making, the 47,000-square-meter factory is twice the size of the company's next-largest plant, in Malaysia
Construction involved building on top of 8,800 stilts that burrow six stories down through unstable sandy soil to reach bedrock.
Vietnam gave Intel a virtual hotline to top government officials.
Intel is supporting various education initiatives in Vietnam and has helped to train 87,000 teachers in the country.
Intel's billion-dollar factory rises from former rice paddies outside Ho Chi Minh City, on a .47 square km site in the new Saigon Hi-Tech Park

7. An Ecosystem
According to the summary report 2011 of the Saigon Hi-Tech Park (SHTP) Authority, the export value of firms in SHTP last year doubled that of 2010, with Intel Products Vietnam accounting for around 45%.
Since entering Vietnam in 2008, Intel organizes Supplier Day every year and has found many local suppliers of indirect goods such as food, human resources and security services.
With direct goods related to the production, Intel prefers old partners as pledged when expanding the business operation.
Suppliers have considered following Intel to Vietnam to meet the demands of materials in each stage of the project.
Products of the plant will not only be distributed to Asian countries and China but also to markets worldwide.
When operating the plant at full capacity, Intel will need to recruit 800-1,000 engineers and thousands of technicians.

9. Mekong Watershed 36% of the River’s Volume is from Laos

10. Mekong River Commission Secretariat

11. Introduction to GMS
The Greater Mekong Sub-region (GMS) Program was designed in 1992 to promote economic ties and cooperation among its six member countries
Cambodia
Lao People’s Democratic Republic
Myanmar
Thailand
Viet Nam
Yunnan Province, China
The Asian Development Bank believes the Mekong region has potential to be one of the world's fastest growing areas.
Problems preventing GMS countries from reaching potential include:
the gap between urban and rural communities
growing income difference between rich and poor
lack of access to basic health and education
inadequate protection of the environment
Only Thailand has long had a market economy with foreign participation
Low levels of productivity, inadequate amounts of goods, and severe economic problems caused the other five GMS countries to reduce the state’s productive role in the economy
These government recently began to allow business to take a greater role in developing the countries
All but Yunnan are part of ASEAN
The GMS economies are diversifying away from subsistence agriculture and into modern economic sectors

12. Then and Now Statistics from CIA World Factbook
Country
GDP 1992
(nominal)
GDP 2012 (nominal)
Population 1992
Population 2012
Cambodia
$0.9 billion
$14.2 billion
7,295
15,205
Laos
$0.8 billion
$9.2 billion
4,440
6,695
Myanmar
$22.2 billion
$53.1 billion
42,642
55,167
Thailand
$92.6 billion
$365.6 billion
57,624
67,448
Vietnam
$15.0 billion
$138.1 billion
68,964
92,477
Yunnan *1990
*$7.3 billion
$163.0 billion
36,972
46,449
Total GMS
$138.8 billion
$743.2 billion
217,937
283,441
China
$488 billion
$8,227 billion
1,171,000
1,350,000
Note: Gambling revenue Macau 2012: $38 billion. Population: 583 K
$US inflation since 1992=67%

13. Comparative Real GDP Growth Rates CIA World Factbook
Rank (2012)
Country
2012 %
2011 %
2010 % 3
Mongolia
12.3
17.5
6.4 9
Macau
10.0
20.7
27.0 17
Laos
8.3
8.0
8.1 20
China
7.8
9.3
10.4 36
Cambodia
6.5
7.1
6.1 39
Thailand
0.1 42
Myanmar
6.3
5.5
5.3 63
Vietnam
5.0
5.9
6.8
128
USA
2.2
1.8
2.4
136
Japan
2.0
-0.6
4.7
150
Hong Kong
1.4
4.9
169
Germany
0.7
3.1
4.0
211
Italy
-2.4
0.4
1.7

14. Khone Falls - Barrier to Mekong Navigation At the Laos-Cambodia border
Do you see a barrier to navigation? Hydropower potential? A tourist attraction?
A French Mekong Expedition travelled painfully up the river from Vietnam’s Mekong Delta to Jinghong in southern Yunnan in 1866 and 1867

15. Patterns of Consumption 2012

16. Patterns of Consumption 2030

17. Reuters Article September 2013
According to TripAdvisor.com, online travel search:
People from mainland China go to nearby Hong Kong and Macau for getaways and shopping, but are becoming adventurous, with holidays in Asia, Europe and North America.
The new generation of Chinese outbound travelers makes their own decisions about where to go, where to stay and what to do by doing their own research online, going beyond the old stereotype of big buses of group tourists
Hong Kong was the most popular destination search in July to August, with interest from Chinese travelers rising 50 percent from the same period of 2012
Phuket was in second place, with 3.5 times as many searches as a year earlier.
Taiwan was third (up 4.5 times)
Bangkok was fourth (up 3.7 times)
According to the U.N. World Tourism Organization:
Last year, more than 83 million Chinese traveled abroad - a number expected to soar to 200 million by 2020.
Chinese spending on overseas travel was the highest in the world last year at $102 billion,.

18. From the Financial Times

19. GMS Business Issues from a Banker’s Perspective
Labor shortages might become a barrier to business competitiveness in the GMS, said a senior executive vice president of Bangkok Bank (Nation, ).
The shortage of labor, is a more serious issue for Thailand than other countries in the GMS because it is no longer considered a low-wage market
Thai businesses should think about mechanizing production because they cannot rely on workers from neighboring countries
Laos is not a source of labor because of the low population
Workers in Cambodia often strike.
Myanmar is the choice for Thai business, but Myanmar is developing and may soon be unable to export labor
The slow growth of the younger population in some GMS countries is a challenge to the growth of the sub-region.

20. A Transformation
In 1979, Premier Deng Xiaoping named Shenzhen a Special Economic Zone
Shenzen is located in South China’s Pearl River Delta, part of what is now the world’s largest manufacturing complex
Read more:

21. Shenzen, China in 1980

22. Central Shenzen in 1980 and in 2012 The population grew from 320K to 15,000K
How did Shenzen become the economic engine of China? Can the growth be repeated elsewhere?

23. What do you know about this company. Where is the company headquarter
What do you know about this company? Where is the company headquarter? Where are products made?
What do they sell? Do they sell premium or economy products? What is the reputation? Would you find the products at a night market?

24. Wacoal – A Global Firm
Left side – Singapore. Right side – France.

25. Where?
Left side – Philippines. Right side – China.

26. May, 2013 News – Associated Press

27. News CNN

28. Al Jazeera – May 10th 2013
The death toll in Bangladesh's worst industrial disaster has soared past 1,000 after more bodies were found in the rubble of a collapsed building outside the capital, Dhaka.
The death toll now stands at 1,006 as the recovery operation entered its 17th day since the building collapsed.
Some of the bodies could be identified by mobile phones in their pockets or factory identity cards around their neck. Most of the dead are female garment workers.
Of the bodies recovered so far, at least 150 bodies were buried in unmarked graves in a state graveyard after they could not be identified. Authorities are taking DNA samples from all the victims for future compensation claims.
More than 3,000 garment workers were in the building's five garment factories which made clothing for Western retailers such as Benetton, Mango and Primark when the structure collapsed after a loud bang, trapping them.
At least 2,437 people have been rescued, around 1,000 suffering serious injuries, including scores whose limbs had to be cut off to free them from the rubble.

30. Retailers and Brands Damage to Image

31. Risk
Events or factors that may have a negative impact on the profitability or success of a company
Probability or likelihood of an occurrence
The impact if the event occurs
Business is built on risk
Loss of physical assets
Political action
Natural disaster
Loss of intellectual property
Reputational risk
Financial or economic risk
Competition or changing markets
Operational risks (loss of suppliers, loss of key employees, etc)
A recurring theme will be how companies assess and manage the risks that come with operating in GMS countries, and the opportunities they perceive

32. Why Do Garment Factories Locate Near Dhaka
Why Do Garment Factories Locate Near Dhaka? NY Times graphic, 15 May, 2013

33. Companies Seek New Locations
The relentless search for new locations has more urgency after the factory collapse in Bangladesh that left 1,127 people dead last May.
Western garment executives are looking at potential new suppliers in southern Vietnam, central Cambodia and the hinterlands of Java in Indonesia.
Indonesian executives have seen a steady procession of arrivals in recent months, always asking the same questions about political stability, labor laws, safety compliance and wages.
Many poor countries make very basic clothing. Only China, Bangladesh, Vietnam, Indonesia and to some extent Cambodia and Pakistan have developed complex systems for producing and shipping tens of thousands or even hundreds of thousands of identical, high-quality shirts, blouses or trousers to a global retailer within several weeks of receiving an order.
All of the very large-scale garment factories are in Asia. Africa does not have enough workers with the right skills for high-volume labeling and shipping, and Latin America does not have enough workers interested in operating sewing machines.
Most Southeast Asian factories are already fully booked with orders from multinationals fleeing China’s ever-rising costs. “This year, it’s impossible — we’re already full,” said the president of the Indonesian subsidiary of Wacoal, a big Japanese garment manufacturer.

34. Wacoal http://www.wacoal.com/brand_info/global_wacoal.html
In Europe, Wacoal France is characterized by the fashion image and unique position of the capital of the fashion world.
Wacoal(UK)Ltd., having its office and showroom in London, is introducing selected collections from Wacoal America to the UK consumer through prestigious department stores.
In America, Wacoal America located in New York, finding loyal customers in that country through the department and specialty store Chanel.
Wacoal Sports Science Corp., located in New York, markets a new concept of sports wear, CW- X**, for athletes and people who want to live a Healthy and Active Lifestyle.
In Asia, Wacoal Corp., located in Kyoto, Japan, along with the other group companies, makes up the center of R&D and business development and caters to Asian consumers.
Please note that Wacoal Brand Products are marketed mainly through authorized Retail Partners country by country and shop by shop.
EUROPE
Wacoal France S.A. Wacoal (UK) Ltd.
AMERICA
Wacoal America, Inc. Wacoal Sports Science Corp.
ASIA
Wacoal Holdings Corp. Wacoal Corp. Wacoal China Co., Ltd. Guangdong Wacoal Inc. Dalian Wacoal Co., Ltd. Wacoal Hong Kong Co., Ltd. Wacoal Malaysia Sdn Bhd Wacoal Singapore Pte. Ltd. Indonesia Wacoal Co., Ltd. Philippine Wacoal Corp. Shinyoung Wacoal Inc. Thai Wacoal Public Co., Ltd. Taiwan Wacoal Co., Ltd. Vietnam Wacoal Corp.

35. Training Garment Workers – Semarang Indonesia’s national training center for seamstresses in Semarang produces 12,000 graduates a year. But even that isn’t enough. Four factories with a combined employment of 30,000 are to open in the next year in Semarang, and many more factories are being built nearby.

36. Why did floods in Bangkok affect a company based in Minnesota?

37. Hutchinson MN, population 14,000

38. Some Questions to Discuss
Why are most Apple products built in China?
Why not India (or Cambodia)?
Why does Cambodia have a vibrant textile industry (for now)?
Ford is leaving Australia.
They have produced cars in Australia since 1925.
Is Thailand an attractive place to produce for ASEAN?
Why is Intel in Vietnam?
How (and why) does CP Group expand overseas?
What is ‘hot money’ and how can it affect GMS?

39. For October 30th Reminder October 23rd is a holiday.
Think about the countries of GMS and which country you would like to analyze in depth
Background information can be found in “Greater Mekong Sub-region Business Handbook”
Online:
Read “Looking at the Sun” pp

40. GMS Projects
Find a successful industry in GMS, or one which shows potential to be successful (13 Nov)
Explore reasons the industry located in GMS
What is the nature of the business (capital or labor intensive, etc)
Any spillover effects?
What was the mode of entry for the businesses?
Study a GMS country in which the industry is successful (4 Dec)
What are the strengths of that country from a business perspective?
What are the weaknesses?
Look for barriers to further business success in the country
How do you see the business evolving (5 Feb)
Effect of ASEAN or other alliances (trade, labor mobility, etc)
Relevant demographic, economic, trade projections
Infrastructure, education, and other changes as a result of government or business initiatives
Advice you would give to government units to encourage industry growth

41. Foreign Direct Investment (FDI)
Basic choices for firms to enter foreign markets
Non-equity modes
Exporting
Licensing or franchising
Equity modes - Foreign Direct Investment (FDI)
Joint Ventures
Wholly owned subsidiaries
Acquisitions
Greenfields
Reasons firms choose FDI
Control of intellectual property
Tighter management controls over operations
Difficulty of knowledge transfers

42. Where do Firms Choose to Locate
Natural resources seeking firms
Look for natural resources with relevant transport and communication infrastructure
Resources may include energy
Market Seeking
Strong demand and paying customers
HDD component companies locate in Thailand
Efficiency seeking
Economies of scale and other low cost factors
Manufacturing clusters in China often have higher labor cost but low total cost
Innovation seeking
Look for clusters of innovation
Financial services in London, IT in Northern California
Clustering of activities
Knowledge spillovers among companies
Larger skilled labor pools
Specialized suppliers and infrastructure
Clustering effects may endure long after the original impetus for companies to locate in an area has ceased

43. External Criteria for Choosing the Mode of Entry
Market Size and Growth – companies justify large resource commitments if markets grow rapidly
Risk – with higher political and economic risk companies are less likely to commit resources
Government Regulations
Local content regulations
In certain industries foreign ownership is barred (airlines, telecom)
Trade regulations
Competitive Environment
Link with a strong local presence in a highly competitive environment
Joint venture
Alliances
Buy a dominant local firm
Local Infrastructure (distribution, communication, transport). Companies commit fewer resources when infrastructure is poor.
(Exhibit 9-3.)

44. Exhibit 9-3: Opportunity Matrix for Henkel in Asia Pacific
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.

45. Choosing the Mode of Entry - Classification of Markets
Platform Countries (Singapore & Hong Kong)
Gather intelligence
Establish a network
Emerging Countries (Vietnam, Philippines)
Build an initial presence
Liaison offices
Growth Countries (China & India)
Early mover advantages
Future market opportunities
Maturing countries (South Korea, Taiwan)
Sizable middle class, good infrastructure
Established local competitors
(Exhibit 9-4.)
Chapter 9

46. Exhibit 9-4: Entry Modes and Market Development
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.

47. Two Levels of GMS Thailand is viewed as a growth market
Well developed infrastructure
Legal protection for investors
Relatively high standard of living
Vietnam, Cambodia, Laos, Myanmar viewed as emerging markets
History of colonialism
Mostly weak infrastructure
Low per capita GNP
Vietnam may be the strongest of the four
Can Thailand be a ‘platform country’?

48. Internal Criteria for Choosing the Mode of Entry
Company Objectives
Ambitious companies commit more for greater control
Firms with limited goals or resources invest little
Need for Control
Trade off between level of control and resources committed
Control may be desirable in any aspect of the business or marketing
Financial and Human Resources, Assets, and Capabilities
With limited assets choose exporting or licensing
Also weigh risk against amount company can commit
Flexibility of the entry mode (when the environment changes)
JVs and licensing tend to offer less flexibility
Subsidiaries hard to divest when exit barriers exist
Mode of Entry Choice: Transaction Cost Explanation
Benefits of increased control come with costs of additional resources and higher risk
When intellectual property is valuable, high control is best

49. A general rule about risk
Total company risk is not the same across companies
Companies with more resources or a broad portfolio can afford to lose more in a given venture
Early China entrants were large well funded companies with several products
Yum! Brands
AIG
Early entrants had extensive experience in foreign markets (deep human resources)
Companies with more experience in an area can better manage risks
Who has experience in emerging GMS?
Thai companies might be best positioned to enter Myanmar, Laos, Yunnan
Some degree of common language and culture
More experienced with doing business in GMS than non-GMS companies
Several Thai companies (CP Group, PTT, Siam Cement) with resources
Companies will always assess the risk of entry in the context of their own situation and tolerance for losses

50. A Study of Criteria for Choosing the Mode of Entry
Entry with wholly owned subsidiaries (high control)
High R&D business
High brand equity business
The company has high foreign entry experience
Entry via partnerships
Risky country
Legal restrictions on foreign ownership of assets
The country is culturally and socially distant

51. Exporting – Three levels of engagement
Indirect Exporting – use of intermediaries
Export merchant trading companies
Take ownership of merchandise for resale
Usually specialized in a product and region
Export agent trading companies
Does not take ownership of merchandise
Commission based
Export management companies (EMC)
Indirect exporting advantages
Foreign market expertise
Firms understand export paperwork
Low commitment of resources
Indirect exporting disadvantages
Lack of control over marketing
Typical EMCs are small firms and often lack resources
Cooperative Exporting – use distribution networks of another company
Direct Exporting
Firms set up their own exporting departments
High resource demands (marketing, documentation, shipping, etc.)
High control and engagement in international operations

52. Licensing Licensor receives royalties for use of knowledge assets
Licensee pays royalties fees to use the assets
Cross licensing is where companies share intellectual property
Benefits of licensing
Low commitment of resources
Appealing to small companies that lack resources
No import barriers
Low exposure to political and economic risks
Rapid penetration of the global markets
Risks from licensing
Revenue may be lower than with other entry modes
Licensee may not be committed
Lack of control over licensee can result in bad image
Licensee may become a future competitor
Reduce risks through patents, trademarks, analysis, and carefully worded contracts

53. Franchising
Franchisor gets royalty payments for use of intellectual property in a designated area for a specific time
Franchisee pays royalties and other payments
Note the supply chain clause in Papa John’s (Exhibit 9-6)
Potential for mark-up, also ensures quality
Master franchising often used in foreign markets
Master franchise gets right to sell local franchises in a territory (CP=7-11)
Master franchise usually commits to a target number
Benefits:
Overseas expansion with a minimum investment
Franchisees’ profits tied to their efforts
Access to local franchisees’ knowledge of the local laws and customs
Risks:
Revenues may be lower than with other modes
Lack of a master franchisee
Limited franchising opportunities overseas
Lack of control over the franchisees’ operations
Cultural problems
Physical distance

54. Exhibit 9-6: International Franchising with Papa John’s
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

55. Contract Manufacturing (Outsourcing)
Companies specialize in manufacturing for other companies
Benefits:
Labor cost advantages
Tax, energy, raw materials, and overhead savings
Lower political and economic risk
Focus on core competencies (such as product design, marketing)
Access to manufacturing expertise
Quicker access to markets (no need to build factories)
Risks:
Contract manufacturer may become a future competitor
Conflicts of interest if the manufacturer has products
May lack flexibility (contractor often has other commitments)
Backlash from the company’s home-market employees regarding HR and labor issues
Issues of quality and production standards
Reducing the risks
Keep proprietary design item manufacture in-house
Have contingency plans for changes in demand

56. Contract Manufacturing (Outsourcing)
Qualities of An Ideal Subcontractor:
Flexible/geared toward just-in-time delivery
Able to integrate with company’s business
Able to meet quality standards
Solid financial footings
Must have contingency plans for changes in demand
Contract manufacturers typically have multiple clients
In most cases the manufacturer has to balance client needs
No conflicts of interest
Major contract manufacturers (electronics total $360bb in 2011):
Hon Hai (Foxconn) Taiwan Electronics $102BB
Flextronics Singapore Electronics $29BB
Jabil Circuit USA Electronics $17BB
TSMC Taiwan Semiconductors $14BB
Celestica Canada Electronics $7BB
Catalent USA Pharma $2BB

57. Joint Ventures Cooperative joint venture No equity in the venture
Involves collaboration
Common among large multinationals with emerging market partners
Equity joint venture – partners have equity stakes
Benefits:
Higher rate of return and more control over the operations
Shared capital and risk
Sharing of expertise and other resources
Access to distribution network
Contact with local suppliers and government officials

58. Joint Ventures - Risks Lack of control Partner can become competitor
Government restrictions often forbid majority stake
Multinationals can deploy expatriates for greater control
Partner can become competitor
Conflicts arising over matters such as strategies, resource allocation, transfer pricing, and ownership of assets like technologies and brand names (Exhibit 9-7)
Well planned agreements help reduce conflict
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.

59. Exhibit 9-7: Conflicting Objectives in Chinese Joint Ventures
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

60. Successful Joint Ventures
Screen for the right partner (Exhibit 9-8)
Obtain information about the partner
See if the partner has similar investment objectives
Establish clear objectives from the beginning
Bridge cultural gaps (perhaps with a middleman)
Gain top managerial commitment and respect
Use an incremental approach (start on small scale)
Create a launch team during the launch phase:
(1) Build and maintain strategic alignment
(2) Create a system for parent company oversight
(3) Manage the compensation of each parent
(4) Build the organization for the joint venture (assign responsibilities)

61. Exhibit 9-8: Starbuck’s Coffee’s Partner Criteria
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

62. Starbucks Expansion in Asia
Which areas and segments has Starbucks been targeting?
Why does Starbucks use joint ventures to enter a market?
What type of JV does Starbucks typically use?
How else does Starbucks reduce the risks of market entry?
Does Starbucks customize marketing or product for local markets?
How did Starbucks alter strategy for China? Why did it alter strategy?

63. Wholly Owned Subsidiaries
Acquisitions and Mergers
Quick access to local markets by buying an existing company
Good way to get access to the local brands
Greenfield Operations
Entire operation is developed by the multinational
Offers the company more flexibility than acquisitions in the areas of human resources, suppliers, logistics, plant layout, and manufacturing technology.
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.

64. Henkel’s Entry into the USA
Henkel AG founded in Germany 1876
Silicate detergents
First major international expansion 1883
Armour and Company begins to make soap in Chicago 1888
By-product of Armour’s meat packing business
Note similarities with P&G’s origins in Cincinnati
Dial soap became very popular in the 1950s
Armour acquired by Greyhound Corporation 1970
Armour-Dial was the consumer products division
HQ moved from Chicago to Arizona in 1971
Dial Corporation created in 1996 restructuring
Dial Corporation had several top management changes
Henkel buys Dial Corporation in 2004 for $2.9BB (Dial sales $1.3BB)
Value for money segment *
Products well suited to developing markets
Dial soaps and detergents introduced in Russia and China 2005
Purchase of certain Proctor and Gamble product lines for $275MM in 2006
In ‘Marketing Products and Services’ later in the course
Idea is to adapt a product to the host country market via purchase of business *

65. Wholly Owned Subsidiaries
Benefits:
Greatest control and higher profits
Host market perceives strong commitment to the local market by the company
Allows the investor to manage and control marketing, production, and sourcing decisions
Often faster to set up than a joint venture
Risks:
Risks of full ownership, such as absorbing all losses
Developing a foreign presence without the support of a third party
Risks of currency devaluation, nationalization or expropriation
Issues of cultural and economic sovereignty of the host country (reduce this risk by local hiring, sourcing)
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

66. Strategic Alliances
Coalition of organizations to achieve goals for mutual benefit
Can be licensing, joint ventures, R&D partnerships
Can be informal
Types of Strategic Alliances
Simple licensing agreements between two partners
Market-based alliances (distribution channels, trademarks)
Operations and logistics alliances
Operations-based alliances (sharing of manufacturing ideas)
The Logic Behind Strategic Alliances
Defend leading position by access to new ideas, markets, etc
Catch-Up by joining forces
Remain in a leading business that is not core to the parent
Restructure a non-core business (which may be acquired by the alliance partner)

67. Cross-Border Alliances that Succeed
Alliances between strong and weak seldom work.
Autonomy and flexibility
Alliance needs distinct management and directors
Speeds up decision making and makes easier conflict resolution
Partners are equally committed to success
Other factors:
Commitment and support of the top of the partners’ organizations
Strong alliance managers are the key
Alliances between partners that are related in terms of products, technologies, and markets
Have similar cultures, asset sizes and venturing experience
Tend to start on a narrow basis and broaden over time
A shared vision on goals and mutual benefits
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.

68. Timing of Entry Products are not always pioneered in the home market
Firms tend to be early market entrants when
They are large firms
They have international expertise
They have a broad scope of products or services
When host countries have favorable risk dimensions
When market entry requires little capital
Firms tend to enter markets similar to markets in which they already have experience
Note all of the above factors tend to reduce risk to the firm
Late entrants may have more favorable business conditions in developing countries

69. Exhibit 9-10: Wal-Mart’s International Expansion
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

70. Exit Strategies – Reasons for Exit
Sustained losses or difficulty in gaining market share
Volatile host country political or economic environment
Premature entry
Poor host country infrastructure
Lack of strong local partners
Ethical reasons
Intense competition
Attractive markets bring competitors
Overcapacity and price wars
Resource reallocation
Moving resources to areas with highest potential return
Company decides to pull back from international operations

71. Exit Strategies Risks of Exit Guidelines for contemplated exit
Fixed costs of exit
Labor laws
Contractual commitments
Disposition of assets
Damage to company image
Company appears uncommitted to overseas markets
Damage to image in host country
Long-term opportunities missed (upside of volatility)
Guidelines for contemplated exit
Assess options to save the foreign business
Change performance targets (perhaps look to longer term)
Consider alternative (local) sources
Repositioning (maybe go after a niche market)
Incremental exit via licensing or temporary shutdown
Migrate customers to third parties

72. Exhibit 9-11: Advantages and Disadvantages of Different Modes of Entry
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

73. Apple’s iPhone Why does Apple choose to assemble iPhones in China?
Scale of operations
Supply chains
Skilled technical workforce, including engineers
Clusters of excellence
Response times
Think of how 2011 floods in Thailand affected other manufacturers
Labor is not a big component of the total cost
Apple employs 43,000 in the USA (and about 33,000 of those are low-wage retail or call-center)
Apple’s contractors employ 700,000 outside of the USA
Apple’s profits accrue to shareholders across the world
Apple is a true global company
Sales span the globe
Software created in USA
Marketing created and managed in USA
Supply chains span the globe
iPhones assembled in China by a subsidiary of a Taiwanese company
Some components made in USA by S. Korean company (Samsung)
Glass made in Japanese factories by an American company (Corning)