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M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 292 www.downloadslide.com Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances 9 F rom modest beginnings in Seattle’s Pike Street Market, Starbucks Corporation has become a global marketing phenomenon. Today, Starbucks is the world’s leading specialty coffee retailer, with 2006 sales of $7.7 billion. Starbucks’ founder and chairman, Howard Schultz, and his management team have used a variety of market entry approaches—including direct ownership as well as licensing and franchising—to create an empire of more than 12,000 coffee cafés in 35 countries. In addition, Schultz has licensed the Starbucks brand name to marketers of noncoffee products, such as ice cream. The company is also diversifying into movies and recorded music. However, coffee remains Starbucks’ core business; to reach its ambitious goal of 40,000 shops worldwide, Starbucks is expanding aggressively in key countries. For example, at the end of 2006, Starbucks had 67 branches in 21 German cities; that number is expected to reach 100 by the end of 2007. Starbucks had set a higher growth target for Germany; those plans had to be revised, however, after a joint venture with retailer Karstadt-Quelle was dissolved. Now Starbucks intends to pursue further expansion independently. Despite competition from local chains such as Café Einstein, Cornelius Everke, the head of Starbucks’ German operations, says, “We see the potential of several hundred coffee shops in Germany.” Starbucks’ relentless pursuit of new market opportunities in Germany and other countries illustrates the fact that most firms face a broad range of strategy alternatives. In the last chapter, we examined exporting and importing as one way to exploit global market opportunities. However, for Starbucks and other companies whose business models include a service component or store experience, exporting (in the conventional sense) is not the best way to “go global.” In this chapter, we go beyond exporting to discuss several additional entry mode options that form a continuum. As shown in Figure 9-1, the level of involvement, risk, and financial reward increases as a company moves from market entry strategies such as licensing to joint ventures and, ultimately, various forms of investment. When a global company seeks to enter a developing country market, there is an additional strategy issue to address: Whether to replicate the strategy that served the company well in developed markets without significant adaptation. This is the issue that Starbucks is facing. To the extent that the objective of entering the market is to achieve penetration, executives at global companies are well advised to consider embracing a mass-market mind-set. This may well mandate an adaptation strategy.1 Formulating a market entry strategy means that management must decide which option or options to use in pursuing opportunities outside the home country. The particular market entry strategy company executives choose will depend on their vision, attitude toward risk, how much investment capital is available, and how much control is sought. 1 David Arnold, The Mirage of Global Markets: How Globalizing Companies Can Succeed as Markets Localize (Upper Saddle River, NJ: Prentice Hall, 2004), pp. 78–79. M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 293 www.downloadslide.com Starbucks opened a small coffee café in Beijing’s Forbidden City in 2000. However, in 2007, bowing to criticism that the presence of a Western brand near the former imperial palace was disrespectful, Starbucks closed the shop. The company still has more than 540 other locations in China. LICENSING Licensing is a contractual arrangement whereby one company (the licensor) makes a legally protected asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation.2 The licensed asset may be a brand name, company name, patent, trade secret, or product formulation. Licensing is widely used in the fashion industry. For example, the namesake companies associated with Bill Blass, Hugo Boss, and other global design icons typically generate Figure 9-1 Involvement/Risk/Reward of Market Entry Strategies Degree of involvement High involvement/ high cost Joint venture Equity stake or acquisition Contract manufacturing Licensing Exporting Low involvement/ low cost Cost 2 Franklin R. Root, Entry Strategies for International Markets (New York: Lexington Books, 1994), p. 107. M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 294 www.downloadslide.com Licensed merchandise generates nearly $15 billion in annual revenues for the Walt Disney Company. Thanks to the popularity of the company’s theme parks, movies, and television shows, Mickey Mouse, Winnie the Pooh, and other popular characters are familiar faces throughout the world. The president of Disney Consumer Products predicted that the company’s license-related revenues will eventually reach $75 billion. more revenue from licensing deals for jeans, fragrances, and watches than from their high-priced couture lines. Organizations as diverse as Disney, Caterpillar, the National Basketball Association, and Coca-Cola also make extensive use of licensing. None is an apparel manufacturer; however, licensing agreements allow them to leverage their brand names and generate substantial revenue streams. As these examples suggest, licensing is a global market entry and expansion strategy with considerable appeal. It can offer an attractive return on investment for the life of the agreement, provided that the necessary performance clauses are included in the contract. The only cost is signing the agreement and policing its implementation. There are two key advantages associated with licensing as a market entry mode. First, because the licensee is typically a local business that will produce and market the goods on a local or regional basis, licensing enables companies to circumvent tariffs, quotas, or similar export barriers discussed in Chapter 8. Second, when appropriate, licensees are granted considerable autonomy and are free to adapt the licensed goods to local tastes. Disney’s success with licensing is a case in point. Disney licenses trademarked cartoon characters, names and logos to producers of clothing, toys, and watches for sale throughout the world. Licensing allows Disney to create synergies based on its core theme park, motion picture, and television businesses. Its licensees are allowed considerable leeway to adapt colors, materials, or other design elements to local tastes. In China, licensed goods were practically unknown until a few years ago; by 2001, annual sales of all licensed goods totaled $600 million. Industry observers expect that figure to more than double by 2010. Similarly, yearly worldwide sales of licensed Caterpillar merchandise are running at $900 million as consumers make a fashion statement with boots, jeans, and handbags bearing the distinctive black-and-yellow Cat label. Stephen Palmer is the head of London-based Overland Ltd., which holds the worldwide license for Cat apparel. He notes, “Even if people here don’t know the brand, they have a feeling that they know it. They have seen Caterpillar tractors from an early age. It’s subliminal, and that’s why it’s working.”3 Licensing is associated with several disadvantages and opportunity costs. First, licensing agreements offer limited market control. Because the licensor typically does not become involved in the licensee’s marketing program, potential returns from marketing may be lost. The second disadvantage is that the 3 294 Part 3 Cecilie Rohwedder and Joseph T. Hallinan, “In Europe, Hot New Fashion for Urban Hipsters Comes from Peoria,” The Wall Street Journal (August 8, 2001), p. B1. Approaching Global Markets M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 295 www.downloadslide.com STRATEGIC DECISION-MAKING in global marketing Sony and Apple Perhaps the most famous example of the opportunity costs associated with licensing dates back to the mid-1950s, when Sony cofounder Masaru Ibuka obtained a licensing agreement for the transistor from AT&T’s Bell Laboratories. Ibuka dreamed of using transistors to make small, battery-powered radios. However, the Bell engineers with whom he spoke insisted that it was impossible to manufacture transistors that could handle the high frequencies required for a radio; they advised him to try making hearing aids. Undeterred, Ibuka presented the challenge to his Japanese engineers who spent many months improving high-frequency output. Sony was not the first company to unveil a transistor radio; a U.S.-built product, the Regency, featured transistors from Texas Instruments and a colorful plastic case. However, it was Sony’s high quality, distinctive approach to styling, and marketing savvy that ultimately translated into worldwide success. Conversely, the failure to seize an opportunity to license can also lead to dire consequences. In the mid-1980s, Apple Computer chairman John Sculley decided against a broad licensing program for Apple’s famed operating system (OS). Such a move would have allowed other computer manufacturers to produce Mac-compatible units. Meanwhile, Microsoft’s growing world dominance in both OS and applications got a boost in 1985 from Windows, which featured a Mac-like graphic interface. Apple sued Microsoft for infringing on its intellectual property; however, attorneys for the software giant successfully argued in court that Apple had shared crucial aspects of its OS without limiting Microsoft’s right to adapt and improve it. Belatedly, in the mid-1990s, Apple began licensing its operating system to other manufacturers. However, the global market share for machines running the Mac OS continues to hover in the low single digits. The return of Steve Jobs and Apple’s introduction of the new iMac in 1998 marked the start of a new era for Apple. More recently, the popularity of the company’s iPod digital music players, iTunes Music Store, and the new iPhone have boosted its fortunes. However, Apple’s failure to license its technology in the pre-Windows era arguably cost the company tens of billions of dollars. What’s the basis for this assertion? Microsoft, the winner in the operating systems war, had a market capitalization of nearly $300 billion in 2006. By contrast, Apple’s 2006 market cap was roughly $66 billion. agreement may have a short life if the licensee develops its own know-how and begins to innovate in the licensed product or technology area. In a worst-case scenario (from the licensor’s point of view), licensees—especially those working with process technologies—can develop into strong competitors in the local market and, eventually, into industry leaders. This is because licensing, by its very nature, enables a company to “borrow”—that is, leverage and exploit—another company’s resources. A case in point is Pilkington, which has seen its leadership position in the glass industry erode as Glaverbel, Saint-Gobain, PPG, and other competitors have achieved higher levels of production efficiency and lower costs.4 Companies may find that the upfront easy money obtained from licensing turns out to be a very expensive source of revenue. To prevent a licensorcompetitor from gaining unilateral benefit, licensing agreements should provide for a cross-technology exchange among all parties. At the absolute minimum, any company that plans to remain in business must ensure that its license agreements include a provision for full cross licensing (i.e., that the licensee shares its developments with the licensor). Overall, the licensing strategy must ensure ongoing competitive advantage. For example, license arrangements can create export market opportunities and open the door to low-risk manufacturing relationships. They can also speed diffusion of new products or technologies. Special Licensing Arrangements Contract manufacturing such as that discussed in Case 8-1 requires a global company—Nike, for example—to provide technical specifications to a subcontractor or local manufacturer. The subcontractor then oversees production. Such arrangements offer several advantages. The licensing firm can specialize in product design and marketing, while transferring responsibility for ownership of manufacturing facilities to contractors and subcontractors. Other advantages include limited commitment of financial and managerial resources and quick entry into 4 Charis Gresser, “A Real Test of Endurance,” Financial Times—Weekend (November 1–2, 1997), p. 5. Chapter 9 Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances 295 M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 296 www.downloadslide.com Table 9-1 Company 7-Eleven McDonald’s Yum Brands Doctor’s Associates (Subway) Domino’s Pizza Jani-King International (commercial cleaning) Worldwide Franchise Activity Overseas Sites Countries 23,652 22,571 14,057 5,962 3,038 2,210 18 110 100 85 55 20 Source: The Wall Street Journal (Western Edition) by The Wall Street Journal. Copyright 2006 by Dow Jones & Company, Inc. Reproduced with permission of Dow Jones & Company, Inc. in the format Other book via Copyright Clearance Center. target countries, especially when the target market is too small to justify significant investment.5 One disadvantage, as already noted, is that companies may open themselves to public scrutiny and criticism if workers in contract factories are poorly paid or labor in inhumane circumstances. Timberland and other companies that source in low-wage countries are using image advertising to communicate their corporate policies on sustainable business practices. Franchising is another variation of licensing strategy. A franchise is a contract between a parent company-franchiser and a franchisee that allows the franchisee to operate a business developed by the franchiser in return for a fee and adherence to franchise-wide policies and practices. Table 9-1 lists several U.S.-based franchisers with an extensive network of overseas locations. Franchising has great appeal to local entrepreneurs anxious to learn and apply Western-style marketing techniques. Franchising consultant William Le Sante suggests that would-be franchisers ask the following questions before expanding overseas: ● ● ● ● ● ● ● “One of the key things licensees bring to the business is their knowledge of the local marketplace, trends, and consumer preferences. As long as it’s within the guidelines and standards, and it’s not doing anything to compromise our brand, we’re very willing to go along with it.”8 Paul Leech, COO, Allied Domecq Quick Service Restaurants By addressing these issues, franchisers can gain a more realistic understanding of global opportunities. In China, for example, regulations require foreign franchisers to directly own two or more stores for a minimum of one year before franchisees can take over the business. Intellectual property protection is also a concern in China.7 The specialty retailing industry favors franchising as a market entry mode. For example, there are more than 1,800 Body Shop stores around the world; franchisees operate 90 percent of them. Franchising is also a cornerstone of global growth in the fast-food industry; McDonald’s reliance on franchising to expand globally is a case in point. The fast-food giant has a well-known global brand name and a business system that can be easily replicated in multiple country markets. Crucially, McDonald’s headquarters has learned the wisdom of leveraging local market knowledge by granting franchisees considerable leeway to tailor restaurant interior designs and menu offerings to suit country-specific preferences and tastes (see Case 1-1). Generally speaking, however, franchising is a market entry strategy that is typically executed with less localization than licensing. When companies do decide to license, they should sign agreements that anticipate more extensive market participation in the future. Insofar as is possible, a 5 6 7 8 296 Part 3 Will local consumers buy your product? How tough is the local competition? Does the government respect trademark and franchiser rights? Can your profits be easily repatriated? Can you buy all the supplies you need locally? Is commercial space available and are rents affordable? Are your local partners financially sound and do they understand the basics of franchising?6 Root, p. 138. Eve Tahmincioglu, “It’s Not Only the Giants with Franchises Abroad,” The New York Times (February 12, 2004), p. C4. Richard Gibson, “ForeNign Flavors,” The Wall Street Journal (September 26, 2006), p. R8. Root, p. 138. Sarah Murray, “Big Names Don Camouflage,” Financial Times (February 5, 2004), p. 9. Approaching Global Markets M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 297 www.downloadslide.com Doctor’s Associates, based in Milford, Connecticut, owns the Subway brand. The company relies almost exclusively on franchising as it expands around the globe; currently, more than 27,000 Subway locations invite customers to “Eat fresh,” including this one in Saudi Arabia. company should keep options and paths open for other forms of market participation. Many of these forms require investment and give the investing company more control than is possible with licensing. INVESTMENT After companies gain experience outside the home country via exporting or licensing, the time often comes when executives desire a more extensive form of participation. In particular, the desire to have partial or full ownership of operations outside the home country can drive the decision to invest. Foreign direct investment (FDI) figures reflect investment flows out of the home country as companies invest in or acquire plants, equipment, or other assets. Foreign direct investment allows companies to produce, sell, and compete locally in key markets. Examples of FDI abound: Honda is building a $550 million assembly plant in Greensburg, Indiana; IKEA has spent nearly $2 billion to open stores in Russia, and South Korea’s LG Electronics purchased a 58 percent stake in Zenith Electronics. Each of these represents foreign direct investment. The final years of the twentieth century were a boom time for cross-border mergers and acquisitions. At the end of 2000, cumulative foreign investment by U.S. companies totaled $1.2 trillion. The top three target countries for U.S. investment were the United Kingdom, Canada, and the Netherlands. Investment in the United States by foreign companies also totaled $1.2 trillion; the United Kingdom, Japan, and the Netherlands were the top three sources of investment.9 Investment in developing nations also grew rapidly in the 1990s. For example, as noted in earlier chapters, investment interest in the BRIC nations is increasing, especially in the automobile industry and other sectors critical to the countries’ economic development. Foreign investments may take the form of minority or majority shares in joint ventures, minority or majority equity stakes in another company, or, as in the case of Sandoz and Gerber, outright acquisition. A company may choose to use a combination of these entry strategies by acquiring one company, buying an equity stake in another, 9 Maria Borga and Raymond J. Mataloni, Jr., “Direct Investment Positions for 2000: Country and Industry Detail,” Survey of Current Business 81, no. 7 (July 2001), pp. 16–29. Chapter 9 Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances 297 M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 298 www.downloadslide.com ”Drive your way” is the advertising slogan for Hyundai Motor Company, South Korea's leading automaker. In a press statement, Hyundai chairman Chung Mong Koo noted, “Our new brand strategy is designed to ensure that we reach industry-leading levels, not only in terms of size but also in terms of customer perception and overall brand value.” To better serve the U.S. market, Hyundai recently invested $1 billion in an assembly plant in Montgomery, Alabama. The plant will produce two models, the popular Sonata sedan and the Santa Fe SUV. and operating a joint venture with a third. In recent years, for example, UPS has made more than 16 acquisitions in Europe and has also expanded its transportation hubs. Joint Ventures A joint venture with a local partner represents a more extensive form of participation in foreign markets than either exporting or licensing. Strictly speaking, a joint venture is an entry strategy for a single target country in which the partners share ownership of a newly created business entity.10 This strategy is attractive for several reasons. First and foremost is the sharing of risk. By pursuing a joint venture entry strategy, a company can limit its financial risk as well as its exposure to political uncertainty. Second, a company can use the joint venture experience to learn about a new market environment. If it succeeds in becoming an insider, it may later increase the level of commitment and exposure. Third, joint ventures allow 10 298 Part 3 Root, p. 309. Approaching Global Markets M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 299 www.downloadslide.com the rest of the story Starbucks Starbucks has also been successful in other European countries, including the United Kingdom and Ireland. This success comes despite competition from local rivals such as Ireland’s Insomnia Coffee Company and Bewley’s and the fact that per capita consumption of roasted coffee in the two countries is the lowest in Europe. In January 2004, Starbucks opened its first outlets in Paris. CEO Howard Schultz acknowledged that the decision to target France was a gutsy move; relations between the United States and France had been strained because of political differences regarding President Bush’s Iraq policy. Moreover, café culture has long been an entrenched part of the city’s heritage and identity. The French prefer dark espresso, and the conventional wisdom is that Americans don’t know what good coffee is. As one Frenchman put it, “American coffee, it’s only water. We call it jus des chaussette—‘sock juice.’” Greater China—including the mainland, Hong Kong, and Taiwan—represents another strategic growth market for Starbucks. Starting with one store in Beijing at the China World Trade Center that opening in 1999, Starbucks now has more than 400 locations. Starbucks has faced several different types of challenges in this part of the world. First of all, government regulations forced the company to partner with local firms. After the regulations were eased, Starbucks stepped up its rate of expansion, focusing on metropolises such as Beijing and Shanghai. Another challenge comes from the traditional Chinese teahouse. One rival, Real Brewed Tea, aims to be “the Starbucks of tea.” A related challenge is the perceptions and preferences of the Chinese, who do not care for coffee. Those who had tasted coffee were only familiar with the instant variety. Faced with one of global marketing’s most fundamental questions— adapt offerings for local appeal or attempt to change local tastes—Starbucks hopes to educate the Chinese about coffee. Chinese consumers exhibit different behavior patterns than in Starbucks’ other locations. For one thing, most orders are consumed in the cafés; in the United States, by contrast, most patrons order drinks for carryout. (In the United States, Starbucks is opening hundreds of new outlets with drive-through service) Also, store traffic in China is heaviest in the afternoon. This behavior is consistent with Starbucks’ research findings, which indicated that the number one reason the Chinese go to cafés is to have a place to gather. Sources: Janet Adamy, “Different Brew: Eyeing a Billion Tea Drinkers, Starbucks Pours It on in China,” The Wall Street Journal (November 29, 2006), pp. A1, A12; Gerhard Hegmann and Birgit Dengel, “Starbucks Looks to Step Up Openings in Germany,” Financial Times (September 5, 2006), p. 23; Steven Gray, “‘Fill ‘Er Up— With Latte,’” The Wall Street Journal (January 6, 2006), pp. A9, A10; John Murray Brown and Jenny Wiggins, “Coffee Empire Expands Reach by Pressing Its Luck in Ireland,” Financial Times (December 15, 2005), p. 21; Gray and Ethan Smith, “New Grind: At Starbucks, a Blend of Coffee and Music Creates a Potent Mix,” The Wall Street Journal (July 19, 2005), pp. A1, A11; Noelle Knox, “Paris Starbucks Hopes to Prove U.S. Coffee Isn’t ‘Sock Juice’,” USA Today (January 16, 2004), p. 3B. partners to achieve synergy by combining different value chain strengths. One company might have in-depth knowledge of a local market, an extensive distribution system, or access to low-cost labor or raw materials. Such a company might link up with a foreign partner possessing well-known brands or cuttingedge technology, manufacturing know-how, or advanced process applications. A company that lacks sufficient capital resources might seek partners to jointly finance a project. Finally, a joint venture may be the only way to enter a country or region if government bid award practices routinely favor local companies, if import tariffs are high, or if laws prohibit foreign control but permit joint ventures. Many companies have experienced difficulties when attempting to enter the Japanese market. Anheuser-Busch’s experience in Japan illustrates both the interactions of the entry modes discussed so far and the advantages and disadvantages of the joint venture approach. Access to distribution is critical to success in the Japanese market; Anheuser-Busch first entered by means of a licensing agreement with Suntory, the smallest of Japan’s four top brewers. Although Budweiser had become Japan’s top-selling imported beer within a decade, Bud’s market share in the early 1990s was still less than 2 percent. Anheuser-Busch then created a joint venture with Kirin Brewery, the market leader. Anheuser-Busch’s 90 percent stake in the venture entitled it to market and distribute beer produced in a Los Angeles brewery through Kirin’s channels. Anheuser-Busch also had the option to use some of Kirin’s brewing capacity to brew Bud locally. For its part, Kirin was well positioned to learn more about the global market for beer from the world’s largest brewer. By the end of the decade, however, Bud’s market share hadn’t increased and the venture was losing money. On January 1, 2000, Anheuser-Busch dissolved the joint venture and eliminated most of the associated job positions in Japan; it reverted instead to a licensing agreement with Kirin. The lesson for consumer products marketers Chapter 9 Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances 299 M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 300 www.downloadslide.com BRIC Briefing Book Joint Ventures Joint venture investment in the BRIC nations is growing rapidly. China is a case in point; for many companies, the price of market entry is the willingness to pursue a joint venture with a local partner. Procter & Gamble has several joint ventures in China. China Great Wall Computer Group is a joint venture factory in which IBM is the majority partner with a 51 percent stake. In automotive joint ventures, the Chinese government limits foreign companies to minority stakes. Despite this, Japan’s Isuzu Motors has been a joint venture partner with Jiangling Motors for more than a decade. The venture produces 20,000 pickup trucks and one-ton trucks annually. As indicated in Table 9-2, in 1995 General Motors pledged $1.1 billion for a joint venture with Shanghai Automotive Industry to build Buicks for government and business use. GM was selected after giving high-level Chinese officials a tour of GM’s operations in Brazil and agreeing to the government’s conditions regarding technology transfer and investment capital. In 1997, GM was chosen by the Chinese government as the sole Western partner in a joint venture in Guangzhou that will build smaller, less expensive cars for the general public. Other global carmakers competing with GM for the project were BMW, Mercedes-Benz, Honda Motor, and Hyundai Motor. Russia represents a huge, barely tapped market for a number of industries. The number of joint ventures is increasing. In 1997, GM became the first Western automaker to begin assembling vehicles in Russia. To avoid hefty tariffs that pushed the street price of an imported Blazer over $65,000, GM invested in a 25–75 joint venture with the government of the autonomous Tatarstan republic. Elaz-GM assembled Blazer sport utility vehicles from imported components until the end of 2000. Young Russian professionals were expected to snap up the vehicles as long as the price was less than $30,000. However, after about 15,000 vehicles had been sold, market demand evaporated. At the end of 2001, GM terminated the joint venture. GM executives are counting on better results with AvtoVAZ, the largest carmaker in the former Soviet Union. AvtoVAZ is home to Russia’s top technical design center and also has access to low-cost Russian titanium and other materials. GM originally intended to assemble a stripped-down, reengineered car based on its Opel model. However, market research revealed that a “Made in Russia” car would only be acceptable if it sported a very low sticker price; GM had anticipated a price of approximately $15,000. The same research pointed GM toward an opportunity to put the Chevrolet nameplate on a redesigned domestic model, the Niva. With GM’s financial aid, the Chevrolet Niva was launched in fall 2002; another model, the Viva, was launched in 2004. In addition to GM, several other automakers are joining with Russian partners. BMW Group AG has already begun the local manufacture of its 5-series sedans; Renault SA is producing Megane and Clio Symbol models at a plant near Moscow. Fiat SpA and Ford also anticipate starting production at joint venture plants. Some other recent joint venture alliances are outlined in Table 9-2. Sources: Keith Naughton, “How GM Got the Inside Track in China,” Business Week (November 6, 1995), pp. 56–57; Gregory L. White, “Off Road: How the Chevy Name Landed on SUV Using Russian Technology,” The Wall Street Journal (February 20, 2001), pp. A1, A8. considering market entry in Japan is clear. It may make more sense to give control to a local partner via a licensing agreement rather than making a major investment.11 The disadvantages of joint venturing can be significant. Joint venture partners must share rewards as well as risks. The main disadvantage associated with joint ventures is that a company incurs very significant costs associated with control and coordination issues that arise when working with a partner. (However, in some instances, country-specific restrictions limit the share of capital help by foreign companies.) A second disadvantage is the potential for conflict between partners. These often arise out of cultural differences, as was the case in a failed $130 million joint venture between Corning Glass and Vitro, Mexico’s largest industrial manufacturer. The venture’s Mexican managers sometimes viewed the Americans as too direct and aggressive; the Americans believed their partners took too much time to make important decisions.12 Such conflicts can multiply when there are several partners in the venture. Disagreements about third-country markets 11 12 300 Part 3 Yumiko Ono, “Beer Venture of Anheuser, Kirin Goes Down Drain on Tepid Sales,” The Wall Street Journal (November 3, 1999), p. A23. Anthony DePalma, “It Takes More Than a Visa to Do Business in Mexico,” The New York Times (June 26, 1994), sec. 3, p. 5. Approaching Global Markets M09_KEEG4348_05_SE_C09.QXD 10/18/07 3:18 AM Page 301 www.downloadslide.com where partners face each other as actual or potential competitors can lead to “divorce.” To avoid this, it is essential to work out a plan for approaching thirdcountry markets as part of the venture agreement. A third issue, also noted in the discussion of licensing, is that a dynamic joint venture partner can evolve into a stronger competitor. Many developing countries are very forthright in this regard. Yuan Sutai, a member of China’s Ministry of Electronics Industry, told The Wall Street Journal, “The purpose of any joint venture, or even a wholly-owned investment, is to allow Chinese companies to learn from foreign companies. We want them to bring their technology to the soil of the People’s Republic of China.”13 GM and South Korea’s Daewoo Group formed a joint venture in 1978 to produce cars for the Korean market. By the mid1990s, GM had helped Daewoo improve its competitiveness as an auto producer, but Daewoo chairman Kim Woo-Choong terminated the venture because its provisions prevented the export of cars bearing the Daewoo name.14 As one global marketing expert warns, “In an alliance you have to learn skills of the partner, rather than just see it as a way to get a product to sell while avoiding a big investment.” Yet, compared with U.S. and European firms, Japanese and Korean firms seem to excel in their ability to leverage new knowledge that comes out of a joint venture. For example, Toyota learned many new things from its partnership with GM— about U.S. supply and transportation and managing American workers—that have been subsequently applied at its Camry plant in Kentucky. However, some American managers involved in the venture complained that the manufacturing expertise they gained was not applied broadly throughout GM. To the extent that this complaint has validity, GM has missed opportunities to leverage new learning. Still, many companies have achieved great successes in joint ventures. Gillette, for example, has used this strategy to introduce its shaving products in the Middle East and Africa. Investment via Ownership or Equity Stake The most extensive form of participation in global markets is investment that results in either an equity stake or full ownership. An equity stake is simply an investment; if the investing company acquires fewer than 50 percent of the total Companies Involved Purpose of Joint Venture GM (United States), Toyota (Japan) NUMMI—a jointly operated plant in Freemont, California 50–50 joint venture to build assembly plant to produce 100,000 midsized sedans for Chinese market beginning in 1997 (total investment of $1 billion) Joint venture to build up to 20,000 Opel Astras annually (GM’s investment $100 million) 25–75 joint venture to assemble Blazers from imported parts and, by 1998, to build a full assembly line for 45,000 vehicles (total investment $250 million) Joint operation of a plant in Flat Rock, Michigan 50–50 joint venture to build Ford Fiestas in Indian state of Tamil Nadu ($800 million) 50–50 joint venture to build a plant in South America to produce small-displacement 4-cylinder engines ($500 million) GM (United States), Shanghai Automotive Industry (China) GM (United States), Hindustan Motors (India) GM (United States), governments of Russia and Tatarstan Ford (United States), Mazda (Japan) Ford (United States), Mahindra & Mahindra Ltd. (India) Chrysler (United States), BMW (Germany) 13 14 Table 9-2 Market Entry and Expansion by Joint Venture David P. Hamilton, “China, With Foreign Partners’ Help, Becomes a Budding Technology Giant,” The Wall Street Journal (December 7, 1995), p. A10. “Mr. Kim’s Big Picture,” Economist (September 16, 1995), pp. 74–75. Chapter 9 Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances 301