Deck 13: Entering Foreign Markets

Question 1

General Motors in China
The late 2000s were not kind to General Motors. Hurt by a deep recession in the United States and plunging vehicle sales, GM capped off a decade where it had progressively lost market share to foreign rivals such as Toyota by entering Chapter 11 bankruptcy. Between 1980, when it dominated the U.S. market, and 2009, when it entered bankruptcy protection, GM saw its U.S. market share slip from 44 percent to just 19 percent. The troubled company emerged from bankruptcy a few months later a smaller enterprise with fewer brands, and yet-going forward-some believe that the new GM could be a much more profitable enterprise. One major reason for this optimism was the success of its joint ventures in China.
GM entered China in 1997 with a $1.6 billion investment to establish a joint venture with the state-owned Shanghai Automotive Industry Corp. (SAIC) to build Buick sedans. At the time the Chinese market was tiny (fewer than 400,000 cars were sold in 1996), but GM was attracted by the enormous potential in a country of more than 1 billion people that was experiencing rapid economic growth. GM forecast that by the late 2000s some 3 million cars a year might be sold in China. While it explicitly recognized that it had much to learn about the Chinese market, and would probably lose money for years to come, GM executives believed it was crucial to establish a beachhead and to team up with SAIC (one of the early leaders in China's emerging automobile industry) before its global rivals did. The decision to enter a joint venture was not a hard one. Not only did GM lack knowledge and connections in China, but also Chinese government regulations made it all but impossible for a foreign automaker to go it alone in the country.
While GM was not alone in investing in China-many of the world's major automobile companies entered into some kind of Chinese joint venture during this time period-it was among the largest investors. Only Volkswagen, whose management shared GM's view, made similar-size investments. Other companies adopted a more cautious approach, investing smaller amounts and setting more limited goals.
By 2007, GM had expanded the range of its partnership with SAIC to include vehicles sold under the names of Chevrolet, Cadillac, and Wuling. The two companies had also established the Pan-Asian Technical Automotive center to design cars and components not just for China, but also for other Asian markets. At this point, it was already clear that both the Chinese market and the joint venture were exceeding GM's initial expectations. Not only was the venture profitable, but it was also selling more than 900,000 cars and light trucks in 2007-an 18 percent increase over 2006, placing it second only to Volkswagen in the market among foreign nameplates. Equally impressive, some 8 million cars and light trucks were sold in China in 2007, making China the second largest car market in the world, ahead of Japan and behind the United States.
Much of the venture's success could be attributed to its strategy of designing vehicles explicitly for the Chinese market. For example, together with SAIC it produced a tiny minivan, the Wuling Sunshine. The van costs $3,700, has a 0.8-liter engine, hits a top speed of 60 mph, and weighs less than 1,000 kg-a far cry from the heavy SUVs GM was known for in the United States. For China, the vehicle was perfect, and some 460,000 were sold in 2007, making it the best seller in the light truck sector.
It is the future, however, that has people excited. In 2008 and 2009, while the U.S. and European automobile markets slumped, China's market registered strong growth. In 2009, some 13.8 million vehicles were sold in the country, surpassing the United States to become the largest automobile market in the world; in 2010, the figure was close to 18 million. GM and its local partners sold 1.8 million vehicles in 2008, which was a record and represented a 67 percent increase over 2007. At this point, there were 40 cars for every 1,000 people in China, compared to 765 for every 1,000 in the United States, suggesting China could see rapid growth for years to come. In 2010, GM sold 2.35 million cars in China, more than the 2.22 million it sold in the United States!
Why did GM enter through a joint venture with SAIC? What are the benefits of this approach? What are the potential risks here?

Answer 1

G# entered into a JV with S# for the following reasons:
1) The JV was essential since G# lacked expertise in the Chinese market which S# brought to the table.
2) At that time it was very difficult for a foreign automobile company to set up manufacturing in China.
3) Doing business in China needs what is known as guanxi - or a network. This S# could provide.
The risks from this JV were that S# was a potential competitor. That firm had been in the business for many years. It would have had good political links. It could cause problems for G# and expropriate its technology. In 1997 when G# first came into China, it was a totally unknown territory and such a large investment could have been very risky.

Question 2

Licensing proprietary technology to foreign competitors is the best way to give up a firm's competitive advantage. Discuss.

Answer 2

The statement is basically correct - licensing proprietary technology to foreign competitors does significantly increase the risk of losing the technology.  Therefore licensing should generally be avoided in these situations.  Yet licensing still may be a good choice in some instances.  When a licensing arrangement can be structured in such a way as to reduce the risks of a firm's technological know-how being expropriated by licensees, then licensing may be appropriate.  A further example is when a firm perceives its technological advantage as being only transitory, and it considers rapid imitation of its core technology by competitors to be likely.  In such a case, the firm might want to license its technology as rapidly as possible to foreign firms in order to gain global acceptance for its technology before imitation occurs.  Such a strategy has some advantages.  By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology.  And by licensing its technology the firm may be able to establish its technology as the dominant design in the industry.  In turn, this may ensure a steady stream of royalty payments.  Such situations apart, however, the attractions of licensing are probably outweighed by the risks of losing control over technology, and licensing should be avoided

Question 3

Outline the advantages and disadvantages of licensing and franchising as entry strategies.

Answer 3

A Licensing agreement is where one firm parts with some of its IPR to enable another firm to manufacture products that were originally developed by the first firm in exchange for a royalty. Normally the IPR is protected by a patent and the licensing contract has various terms and conditions limiting what the second firm can do and cannot do under the same.
This method has certain advantages and disadvantages. The advantages are:
1) The primary advantage is that the licensee invests all that is required to start the overseas operation for the licensor. Thus the costs and risks of operating in a foreign market are avoided.
2) It is advantageous when the firm is unwilling to commit any investment in a market which it is unfamiliar with, or which is politically unstable.
3) It is used in markets where a firm wishes to enter but the country does not permit FDI.
4) It also could be a case where a firm possesses some IPR which it does not wish to develop itself and licenses out to another.
The disadvantages are:
1) It greatly limits the firm's ability to have a right control on the manufacturing, marketing and strategy in the foreign market. This means that it does not get any benefits from the experience curve or the location economies. When these factors are important licensing would not be the right strategy to expand overseas.
2) Competing in a global market may require a strategy where the profits in one market are used to stave off a competitive attack in another country. This is very much limited in a licensing situation.
3) Technology is often the basis of a firm's competitive advantage. BY licensing it the firm loses control on this crucial asset. The licensee having absorbed the technology may become a competitor after the end of the licensing period or even earlier is the IPR control in that country are quite lax.
One way of reducing the risk is to sign a cross-licensing agreement. In this in return for the technology that the first firm gives to the second firm the second firm agrees to give in addition to the royalty some part of its IPR to the first firm. This reduces the risk on either firm trying to behave in an opportunistic manner.
Franchising is a form of licensing in an industry where the technology content is low and where the production has to be local. Here the franchisor parts with its IPR (normally a trademark) under the understanding that the franchisee agrees to conduct his business in a certain way as prescribed by the franchisor. Normally franchisee agreements are longer than licensing agreements. The Franchisor usually gets a royalty as a percentage of the revenues.
In return the franchisee will assist the franchisor to run his business. He may also insist on certain minimum standards to be followed and how the business premises should look. Franchising is very common in the fast-food industry.
Franchising has its advantage and disadvantages. The advantages are:
1) All the initial investment is made by the franchisee to set up the business.
2) This is an incentive for the franchisee to make the business profitable in the shortest span of time.
3) It enables the franchisor expand very rapidly in a foreign market with very little cost and risk.
The disadvantages are:
1) Franchising has fewer disadvantages when compared to licensing.
2) There are very few advantages related to the experience curve or location economies that are needed by the franchisor.
3) The operation is a low technology one so the risk of opportunism is low.
4) As in licensing it restricts one's ability to shift profits from one market to another.
5) The most important aspect is the loss of quality control. When a trademark is used one associate a certain quality with it. If in one franchisee operation this is lacking it could harm the brand. Control is often difficult because of the geographical distances between the principal and the franchisee outlets.
One way is to set up a subsidiary in each country which then controls all the franchisee outlets in that country. This arrangement has proven to be successful for most of the fact-food principals.

Question 4

What are the risks associated with pursuing an acquisition-based entry strategy? How can these risks be reduced?

Question 5

Entering Foreign Markets
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
The U.S. Commercial Service prepares a series of reports titled the Country Commercial Guide (or, CCG )for each country of interest to U.S. investors. Utilize this guide to gather information on India. Imagine that your company is in health technologies and is considering entering this country. Select the most appropriate entry method, supporting your decision with the information collected from the commercial guide.

Question 6

How does the choice of cost reductions influence the choice of entry mode?

Question 7

What factors determine the scale of entry into a foreign market?

Question 8

General Motors in China
The late 2000s were not kind to General Motors. Hurt by a deep recession in the United States and plunging vehicle sales, GM capped off a decade where it had progressively lost market share to foreign rivals such as Toyota by entering Chapter 11 bankruptcy. Between 1980, when it dominated the U.S. market, and 2009, when it entered bankruptcy protection, GM saw its U.S. market share slip from 44 percent to just 19 percent. The troubled company emerged from bankruptcy a few months later a smaller enterprise with fewer brands, and yet-going forward-some believe that the new GM could be a much more profitable enterprise. One major reason for this optimism was the success of its joint ventures in China.
GM entered China in 1997 with a $1.6 billion investment to establish a joint venture with the state-owned Shanghai Automotive Industry Corp. (SAIC) to build Buick sedans. At the time the Chinese market was tiny (fewer than 400,000 cars were sold in 1996), but GM was attracted by the enormous potential in a country of more than 1 billion people that was experiencing rapid economic growth. GM forecast that by the late 2000s some 3 million cars a year might be sold in China. While it explicitly recognized that it had much to learn about the Chinese market, and would probably lose money for years to come, GM executives believed it was crucial to establish a beachhead and to team up with SAIC (one of the early leaders in China's emerging automobile industry) before its global rivals did. The decision to enter a joint venture was not a hard one. Not only did GM lack knowledge and connections in China, but also Chinese government regulations made it all but impossible for a foreign automaker to go it alone in the country.
While GM was not alone in investing in China-many of the world's major automobile companies entered into some kind of Chinese joint venture during this time period-it was among the largest investors. Only Volkswagen, whose management shared GM's view, made similar-size investments. Other companies adopted a more cautious approach, investing smaller amounts and setting more limited goals.
By 2007, GM had expanded the range of its partnership with SAIC to include vehicles sold under the names of Chevrolet, Cadillac, and Wuling. The two companies had also established the Pan-Asian Technical Automotive center to design cars and components not just for China, but also for other Asian markets. At this point, it was already clear that both the Chinese market and the joint venture were exceeding GM's initial expectations. Not only was the venture profitable, but it was also selling more than 900,000 cars and light trucks in 2007-an 18 percent increase over 2006, placing it second only to Volkswagen in the market among foreign nameplates. Equally impressive, some 8 million cars and light trucks were sold in China in 2007, making China the second largest car market in the world, ahead of Japan and behind the United States.
Much of the venture's success could be attributed to its strategy of designing vehicles explicitly for the Chinese market. For example, together with SAIC it produced a tiny minivan, the Wuling Sunshine. The van costs $3,700, has a 0.8-liter engine, hits a top speed of 60 mph, and weighs less than 1,000 kg-a far cry from the heavy SUVs GM was known for in the United States. For China, the vehicle was perfect, and some 460,000 were sold in 2007, making it the best seller in the light truck sector.
It is the future, however, that has people excited. In 2008 and 2009, while the U.S. and European automobile markets slumped, China's market registered strong growth. In 2009, some 13.8 million vehicles were sold in the country, surpassing the United States to become the largest automobile market in the world; in 2010, the figure was close to 18 million. GM and its local partners sold 1.8 million vehicles in 2008, which was a record and represented a 67 percent increase over 2007. At this point, there were 40 cars for every 1,000 people in China, compared to 765 for every 1,000 in the United States, suggesting China could see rapid growth for years to come. In 2010, GM sold 2.35 million cars in China, more than the 2.22 million it sold in the United States!
Why did GM not simply license its technology to SAIC? Why did it not export cars from the United States?

Question 9

What factors determine the choice of which foreign market to enter?

Question 10

Discuss how the need for control over foreign operations varies with firms' strategies and core competencies. What are the implications for the choice of entry mode?

Question 11

General Motors in China
The late 2000s were not kind to General Motors. Hurt by a deep recession in the United States and plunging vehicle sales, GM capped off a decade where it had progressively lost market share to foreign rivals such as Toyota by entering Chapter 11 bankruptcy. Between 1980, when it dominated the U.S. market, and 2009, when it entered bankruptcy protection, GM saw its U.S. market share slip from 44 percent to just 19 percent. The troubled company emerged from bankruptcy a few months later a smaller enterprise with fewer brands, and yet-going forward-some believe that the new GM could be a much more profitable enterprise. One major reason for this optimism was the success of its joint ventures in China.
GM entered China in 1997 with a $1.6 billion investment to establish a joint venture with the state-owned Shanghai Automotive Industry Corp. (SAIC) to build Buick sedans. At the time the Chinese market was tiny (fewer than 400,000 cars were sold in 1996), but GM was attracted by the enormous potential in a country of more than 1 billion people that was experiencing rapid economic growth. GM forecast that by the late 2000s some 3 million cars a year might be sold in China. While it explicitly recognized that it had much to learn about the Chinese market, and would probably lose money for years to come, GM executives believed it was crucial to establish a beachhead and to team up with SAIC (one of the early leaders in China's emerging automobile industry) before its global rivals did. The decision to enter a joint venture was not a hard one. Not only did GM lack knowledge and connections in China, but also Chinese government regulations made it all but impossible for a foreign automaker to go it alone in the country.
While GM was not alone in investing in China-many of the world's major automobile companies entered into some kind of Chinese joint venture during this time period-it was among the largest investors. Only Volkswagen, whose management shared GM's view, made similar-size investments. Other companies adopted a more cautious approach, investing smaller amounts and setting more limited goals.
By 2007, GM had expanded the range of its partnership with SAIC to include vehicles sold under the names of Chevrolet, Cadillac, and Wuling. The two companies had also established the Pan-Asian Technical Automotive center to design cars and components not just for China, but also for other Asian markets. At this point, it was already clear that both the Chinese market and the joint venture were exceeding GM's initial expectations. Not only was the venture profitable, but it was also selling more than 900,000 cars and light trucks in 2007-an 18 percent increase over 2006, placing it second only to Volkswagen in the market among foreign nameplates. Equally impressive, some 8 million cars and light trucks were sold in China in 2007, making China the second largest car market in the world, ahead of Japan and behind the United States.
Much of the venture's success could be attributed to its strategy of designing vehicles explicitly for the Chinese market. For example, together with SAIC it produced a tiny minivan, the Wuling Sunshine. The van costs $3,700, has a 0.8-liter engine, hits a top speed of 60 mph, and weighs less than 1,000 kg-a far cry from the heavy SUVs GM was known for in the United States. For China, the vehicle was perfect, and some 460,000 were sold in 2007, making it the best seller in the light truck sector.
It is the future, however, that has people excited. In 2008 and 2009, while the U.S. and European automobile markets slumped, China's market registered strong growth. In 2009, some 13.8 million vehicles were sold in the country, surpassing the United States to become the largest automobile market in the world; in 2010, the figure was close to 18 million. GM and its local partners sold 1.8 million vehicles in 2008, which was a record and represented a 67 percent increase over 2007. At this point, there were 40 cars for every 1,000 people in China, compared to 765 for every 1,000 in the United States, suggesting China could see rapid growth for years to come. In 2010, GM sold 2.35 million cars in China, more than the 2.22 million it sold in the United States!
GM entered the Chinese market at a time when demand was very limited. Why? What was the strategic rational?

Question 12

Outline the advantages and disadvantages of joint ventures as an entry strategy.

Question 13

Review the Management Focus on Tesco. Then answer the following questions:
a. Why did Tesco's initial international expansion strategy focus on developing nations?
b. How does Tesco create value in its international operations?
c. In Asia, Tesco has a long history of entering into joint venture agreements with local partners. What are the benefits of doing this for Tesco? What are the risks? How are those risks mitigated?
d. In March 2006 Tesco announced that it would enter the United States. This represents a departure from its historic strategy of focusing on developing nations. Why do you think Tesco made this decision? How is the U.S. market different from others Tesco has entered? What are the risks here? How do you think Tesco will do?

Question 14

When might establishing a greenfield venture be the best vehicle for entering a foreign market?

Question 15

Outline the advantages and disadvantages of exporting as an entry strategy.

Question 16

General Motors in China
The late 2000s were not kind to General Motors. Hurt by a deep recession in the United States and plunging vehicle sales, GM capped off a decade where it had progressively lost market share to foreign rivals such as Toyota by entering Chapter 11 bankruptcy. Between 1980, when it dominated the U.S. market, and 2009, when it entered bankruptcy protection, GM saw its U.S. market share slip from 44 percent to just 19 percent. The troubled company emerged from bankruptcy a few months later a smaller enterprise with fewer brands, and yet-going forward-some believe that the new GM could be a much more profitable enterprise. One major reason for this optimism was the success of its joint ventures in China.
GM entered China in 1997 with a $1.6 billion investment to establish a joint venture with the state-owned Shanghai Automotive Industry Corp. (SAIC) to build Buick sedans. At the time the Chinese market was tiny (fewer than 400,000 cars were sold in 1996), but GM was attracted by the enormous potential in a country of more than 1 billion people that was experiencing rapid economic growth. GM forecast that by the late 2000s some 3 million cars a year might be sold in China. While it explicitly recognized that it had much to learn about the Chinese market, and would probably lose money for years to come, GM executives believed it was crucial to establish a beachhead and to team up with SAIC (one of the early leaders in China's emerging automobile industry) before its global rivals did. The decision to enter a joint venture was not a hard one. Not only did GM lack knowledge and connections in China, but also Chinese government regulations made it all but impossible for a foreign automaker to go it alone in the country.
While GM was not alone in investing in China-many of the world's major automobile companies entered into some kind of Chinese joint venture during this time period-it was among the largest investors. Only Volkswagen, whose management shared GM's view, made similar-size investments. Other companies adopted a more cautious approach, investing smaller amounts and setting more limited goals.
By 2007, GM had expanded the range of its partnership with SAIC to include vehicles sold under the names of Chevrolet, Cadillac, and Wuling. The two companies had also established the Pan-Asian Technical Automotive center to design cars and components not just for China, but also for other Asian markets. At this point, it was already clear that both the Chinese market and the joint venture were exceeding GM's initial expectations. Not only was the venture profitable, but it was also selling more than 900,000 cars and light trucks in 2007-an 18 percent increase over 2006, placing it second only to Volkswagen in the market among foreign nameplates. Equally impressive, some 8 million cars and light trucks were sold in China in 2007, making China the second largest car market in the world, ahead of Japan and behind the United States.
Much of the venture's success could be attributed to its strategy of designing vehicles explicitly for the Chinese market. For example, together with SAIC it produced a tiny minivan, the Wuling Sunshine. The van costs $3,700, has a 0.8-liter engine, hits a top speed of 60 mph, and weighs less than 1,000 kg-a far cry from the heavy SUVs GM was known for in the United States. For China, the vehicle was perfect, and some 460,000 were sold in 2007, making it the best seller in the light truck sector.
It is the future, however, that has people excited. In 2008 and 2009, while the U.S. and European automobile markets slumped, China's market registered strong growth. In 2009, some 13.8 million vehicles were sold in the country, surpassing the United States to become the largest automobile market in the world; in 2010, the figure was close to 18 million. GM and its local partners sold 1.8 million vehicles in 2008, which was a record and represented a 67 percent increase over 2007. At this point, there were 40 cars for every 1,000 people in China, compared to 765 for every 1,000 in the United States, suggesting China could see rapid growth for years to come. In 2010, GM sold 2.35 million cars in China, more than the 2.22 million it sold in the United States!
Why has the joint venture been successful to date?

Question 17

When might an acquisition of an established competitor be the best vehicle for entering a foreign market?

Question 18

A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Union market. Its choices are given below. The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If these are the firm's only options, which one would you advise it to choose? Why?
• Manufacture the product at home and let foreign sales agents handle marketing.
• Manufacture the products at home and set up a wholly owned subsidiary in Europe to handle marketing.
• Enter into an alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by the 50?50 joint venture and marketed by the European firm.

Question 19

Entering Foreign Markets
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
Entrepreneur magazine annually publishes a ranking of America's top 200 franchisers seeking international franchisees. Provide a list of the top 10 companies that pursue franchising as a mode of international expansion. Study one of these companies in detail, and provide a description of its business model, its international expansion pattern, the qualifications it looks for in its franchisees, and the type of support and training it provides.

Question 20

Outline the advantages of wholly owned subsidiaries as an entry strategy.

Question 21

How does a consideration of core competencies influence the choice of entry mode?

Question 22

What factors influence the timing of entry into a foreign market?