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Find more at http://www.downloadslide.com 9 Global Market-Entry Strategies: Licensing, Investment, and Strategic Alliances CASE 9-1 MyMarketingLab™ Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs. Visit mymktlab.com for simulations, tutorials, and end-of-chapter problems. Mo’men Launches Franchises in UAE M o’men, owned by the Mo’men Group, is one of the largest restaurant chains in Egypt. The name comes from the word mo’men or “believer” in Arabic which highlights the Islamic identity of the brand. The Mo’men Group includes the Al Motaheda Foods, Mo’men, Pizza King, Three Chefs, and Planet Africa brands. The Mo’men brothers started the company in 1988 to meet the Egyptian market’s need for a fast-food restaurant that offered high-quality foods, often on-the-go, at competitive prices. At present, Mo’men serves over 9 million customers annually in Egypt and holds about 15 percent share of the fast food market. Since Mo’men is based in Egypt and has an Islamic identity, it only offers foods that are halal. As opposed to haram, halal stands for anything, object or action, that is permissible under the Islamic law. There is no pork on the menu; it is forbidden to eat pork in Islam. Similarly, bread is one of the important components in Egyptian cuisine. Thus, Mo’men makes sure that the quality of the bread Exhibit 9-1 Mo’men restaurants today cater to more than 9 million customers annually in Egypt alone. In a little more than 20 years, the one-store restaurant has become a fast food chain spread over eight countries. At present, the company is aggressively seeking to expand in the UAE and Malaysia, the potential growth markets. Source: Jasmine Merdan/Fotolia 284 M09_KEEG7389_08_SE_C09.indd 284 06/03/14 12:36 PM Find more at http://www.downloadslide.com Degree of involvement High involvement/ high cost Joint venture Figure 9-1 Investment Cost of Market-Entry Strategies Equity stake or acquisition Contract manufacturing Licensing Exporting Low involvement/ low cost Cost in its sandwiches is high on taste as well as nutrients. It is worth noting that Egypt has the highest bread consumption worldwide. Since its humble beginnings in 1988, Mo’men has grown from just one store to an international brand. However, such rapid growth has not been easy. The Mo’men Group has invested heavily in infrastructure and in the application of modern branding concepts. In 2008, it made the strategic decision to work with one of the world’s largest branding agencies to create a reputable, well-respected name and to revive the brand’s original spirit. The rebranding was reflected in its restaurants, customer experiences, and advertising. The retooling was a leap in Mo’men’s history, taking it to an international level. In addition to the Islamic identity that the company has built, Mo’men Group has also entered into a long-term joint venture with the Al Islami Group of the United Arab Emirates (UAE) to market Mo’men franchises. Al Islami Group is a leading halal food producer in the Middle East. The $21 million project will span 20 years. The first franchised outlet in the UAE opened in Sharjah, and the goal is to open a total of 20 outlets across the Emirates. Mo’men Group sees the UAE as a regional hub from where it can expand and capitalize on the growing halal market in the Middle East and North Africa. The Mo’men Group’s goal is for Mo’men to be the consumers’ favorite quick-service restaurant and an integral part of its clientele’s daily lives, nationally and globally. Mo’men restaurants are located in Egypt, Bahrain, Libya, Sudan, Malaysia, Qatar, Saudi Arabia, and the UAE, as per the franchise agreement. As it expands to the global market, Mo’men ensures that its food menu accounts for the local taste, while retaining the essence of the brand. This was the case when Mo’men penetrated the Malaysian market. The second part of this case aims to show how Mo’men adapted to the cultural differences in Malaysia and the method for operating in the Malaysian market. To learn more about Mo’men’s international growth, particularly in Malaysia, see the continuation of Case 9-1 at the end of the chapter. In this chapter, we discuss several additional entry mode options that form a continuum. As shown in Figure 9-1, the levels of involvement, risk, and financial reward increase 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, an additional strategy issue that must be addressed is whether to replicate, without significant adaptation, the strategy that served the company well in developed markets. 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 that company executives choose will depend on their vision, their attitude toward risk, the availability of investment capital, and the amount of control sought. Learning Objectives 1 Explain the advantages and disadvantages of using 4 Describe the special forms of cooperative strategies 2 Compare and contrast the different forms that a 5 Explain the evolution of the virtual corporation. 6 Use the market expansion strategies matrix to licensing as a market-entry strategy. company’s foreign investments can take. 3 Discuss the factors that contribute to the successful launch of a global strategic partnership. found in Asia. explain the strategies used by the world’s biggest global companies. 285 M09_KEEG7389_08_SE_C09.indd 285 06/03/14 12:36 PM Find more at http://www.downloadslide.com 286    Part 3 • Approaching Global Markets 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.1 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 more revenue from licensing deals for jeans, fragrances, and watches than from their high-priced couture lines. Organizations as diverse as Disney, Caterpillar Inc., the National Basketball Association, and Coca-Cola also make extensive use of licensing. Even though none is an apparel manufacturer, 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. Two key advantages are 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 (see Exhibit 9-2). 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 grow by 10 percent or more each of the next few years. Similarly, yearly worldwide sales of licensed Caterpillar merchandise are running at nearly $1 billion as consumers make a fashion statement of 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. Exhibit 9-2 Licensed merchandise generates $30 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 recently predicted that the company’s license-related ­revenues will eventually reach $75 billion. Source: John Mocre/The Image Works. 1 M09_KEEG7389_08_SE_C09.indd 286 Franklin R. Root, Entry Strategies for International Markets (New York: Lexington Books, 1994), p. 107. 06/03/14 12:36 PM Find more at http://www.downloadslide.com  chapter 9 • Global Market-Entry Strategies: Licensing, Investment, and Strategic Alliances    287 He noted, “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.”2 Licensing is also 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 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.3 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 instead. Undeterred, Ibuka presented the challenge to his Japanese engineers, who then 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. Companies may find that the upfront easy money obtained from licensing turns out to be a very expensive source of revenue. To prevent a licensor-competitor 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 Companies that use contract manufacturing provide technical specifications to a subcontractor or local manufacturer. The subcontractor then oversees production. Such arrangements offer several advantages. First, 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 target countries, especially when the target market is too small to justify significant investment.4 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. Exhibit 9-3 shows an ad for Pollo Campero, a restaurant chain based in Central America that is using franchising to expand operations in the United States. 2 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. 3 Charis Gresser, “A Real Test of Endurance,” Financial Times—Weekend (November 1–2, 1997), p. 5. 4 Franklin R. Root, Entry Strategies for International Markets (New York: Lexington Books, 1994), p. 138. M09_KEEG7389_08_SE_C09.indd 287 06/03/14 12:36 PM Find more at http://www.downloadslide.com 288    Part 3 • Approaching Global Markets Exhibit 9-3 Executives at Guatemala’s Pollo Campero SA know how to spot a market entry opportunity. It came to their attention that passengers flying to the United States from Guatemala City and San Salvador often carried packages of the company’s spicy chicken on board the planes. The Campero team also recognized that the chain enjoyed high levels of brand awareness in Los Angeles, where there is a large Guatemalan population. Source: Used by permission of Campero US. 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: ● ● ● ● ● ● ● 5 M09_KEEG7389_08_SE_C09.indd 288 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?5 Eve Tahmincioglu, “It’s Not Only the Giants with Franchises Abroad,” The New York Times (February 12, 2004), p. C4. 06/03/14 12:36 PM Find more at http://www.downloadslide.com  chapter 9 • Global Market-Entry Strategies: Licensing, Investment, and Strategic Alliances    289 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 1 year before franchisees can take over the business. Intellectual property protection is also a concern in China. The specialty retailing industry favors franchising as a market-entry mode. For example, The Body Shop has more than 2,500 stores in 60 countries; franchisees operate about 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 wellknown 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 1-2). Generally ­speaking, however, franchising is a market-entry strategy that is typically executed with less localization than is 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 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. “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.”6 —Paul Leech, chief operating officer, Allied Domecq Quick Service Restaurants 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. FDI allows companies to produce, sell, and compete locally in key markets. Examples of FDI abound: Honda built a $550 million assembly plant in Greensburg, Indiana; Hyundai invested $1 billion in a plant in Montgomery, Alabama; 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 (see Exhibit 9-4). Each of these represents FDI. 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.7 Investment in developing nations also grew rapidly in the 1990s. For example, as noted in earlier chapters, investment interest in the BRICS (Brazil, Russia, India, China, and South Africa) 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 outright acquisition. A company may also choose to use a combination of these entry strategies by acquiring one company, buying an equity stake in another, and operating a joint venture with a third. In recent years, for example, UPS has made numerous 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.8 This strategy is attractive for several reasons. First and foremost is the sharing of risk. By 6 Sarah 7 Murray, “Big Names Don Camouflage,” Financial Times (February 5, 2004), p. 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. 8 Franklin R. Root, Entry Strategies for International Markets (New York: Lexington Books, 1994), p. 309. M09_KEEG7389_08_SE_C09.indd 289 06/03/14 12:36 PM Find more at http://www.downloadslide.com 290    Part 3 • Approaching Global Markets Exhibit 9-4 “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 industryleading 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 produces two models, the popular Sonata sedan and the Santa Fe SUV. Source: Hyundai Motor America. 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 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 cutting-edge 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. M09_KEEG7389_08_SE_C09.indd 290 06/03/14 12:36 PM Find more at http://www.downloadslide.com  chapter 9 • Global Market-Entry Strategies: Licensing, Investment, and Strategic Alliances    291 Many companies have experienced difficulties when attempting to enter the Japanese ­ arket. Anheuser-Busch’s experience in Japan illustrates both the interactions of the entry modes m ­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 became 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 v­ enture with Kirin Brewery, the market leader. Anheuser-Busch’s 90 percent stake in the venture entitled it to m ­ arket and distribute beer produced in a Los Angeles brewery through Kirin’s ­channels. AnheuserBusch 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 v­ enture and eliminated most of the associated job positions in Japan; it then reverted to a licensing agreement with Kirin. The lesson for consumer products marketers considering market entry in Japan is clear. It may make more sense to give control to a local partner via a licensing agreement than to make a major investment.9 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 control and coordination cost 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 being too direct and aggressive; the Americans believed their partners took too much time to make important decisions.10 Such conflicts can multiply when there are several partners in the venture. Disagreements about third-country markets where partners view each other as actual or potential competitors can lead to “divorce.” To avoid this, it is essential to work out a plan for approaching third-country markets as part of the v­ enture 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.”11 GM and South Korea’s Daewoo Group formed a joint venture in 1978 to produce cars for the Korean market. By the mid-1990s, GM had helped Daewoo improve its competitiveness as an auto producer, but Daewoo Chairman Kim WooChoong terminated the venture because its provisions prevented the export of cars bearing the Daewoo name.12 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 abilities 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 Toyota subsequently applied at its Camry plant in Kentucky. However, some American managers involved in the venture complained that the manufacturing expertise Toyota gained was not applied broadly throughout GM. 9 Yumiko Ono, “Beer Venture of Anheuser, Kirin Goes Down Drain on Tepid Sales,” The Wall Street Journal (November 3, 1999), p. A23. 10 Anthony DePalma, “It Takes More than a Visa to Do Business in Mexico,” The New York Times (June 26, 1994), sec. 3, p. 5. 11 David P. Hamilton, “China, with Foreign Partners’ Help, Becomes a Budding Technology Giant,” The Wall Street Journal (December 7, 1995), p. A10. 12 “Mr. Kim’s Big Picture,” The Economist (September 16, 1995), pp. 74–75. M09_KEEG7389_08_SE_C09.indd 291 06/03/14 12:36 PM Find more at http://www.downloadslide.com 292    Part 3 • Approaching Global Markets Emerging Markets Briefing Book MyMarketingLab  SYNC • THINK • LEARN Auto Industry Joint Ventures in Russia Russia represents a huge, barely tapped market for a number of industries, and 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 would have pushed the street price of an imported Blazer to $65,000 or more, GM invested in a 25-75 joint venture with the government of the autonomous Tatarstan republic. Elaz-GM assembled Blazer SUVs 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 has achieved better results with a joint venture with AvtoVAZ, the largest carmaker in Russia. Founded in 1966 in Togliatti, a city on the Volga River, AvtoVAZ is home to Russia’s top technical design center and also has access to low-cost Russian titanium and other materials. The company was best known for being inefficient and for the outdated, boxy Lada, whose origins dated back to the Soviet era. 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 be acceptable only if it sported a very low sticker price; the same research pointed GM toward an opportunity to put the Chevrolet nameplate on a redesigned domestic model. Developed with $100 million in funding from GM, the Chevrolet Niva was launched in the fall of 2002. Within a few years, however, the joint venture was struggling as AvtoVAZ installed a new management team that had the personal approval of then-President Vladimir Putin. The Russian government owns 25 percent of AvtoVAZ; in 2008, Renault paid $1 billion for a 25 percent stake. Renault’s contribution consisted of technology transfer—specifically, its “B-Zero” auto platform—and production equipment. That same year, Russians bought a record 2.56 million vehicles. However, Russian auto sales collapsed as the global economic crisis deepened, and AvtoVAZ was close to bankruptcy. More than 40,000 workers were laid off, and Moscow was forced to inject $900 million into the company. In 2009, an American, Jeffrey Glover, was sent from GM’s Adam Opel division in Germany to run the Russian joint venture. By 2011, when AvtoVAZ celebrated its 45th anniversary, Russian automobile sales had rebounded. In 2012, sales reached pre-crisis levels of 3 million vehicles. Indeed, industry analysts expect Russia to surpass Germany as Europe’s top auto market by 2014. And the Niva? More than 500,000 have been sold since 2002. As Jim Bovenzi, president of GM Russia explains, “Ten years ago, this was a difficult decision for GM. It was the first time in the 100-year history of the company that we would produce a fully locally designed and produced product, but when we look back now, it was the right decision.” Renault’s Logan is already a big seller in Russia; executives are leveraging the investment in AvtoVAZ by producing cars under the Renault nameplate. Renault’s plans call for increasing its stake to 50.1 percent by mid-2014. Nissan, which is an alliance partner with Renault, will take a 17 percent stake in the venture. Other automakers are hoping to capitalize on the growing Russian market. For example, Fiat scouted sites for a Jeep factory in Russia; expanded production was part of Fiat’s goal to sell 800,000 Jeeps worldwide by 2014. In 2012, Jeep’s worldwide sales totaled 700,000 vehicles. Some other recent joint venture alliances are outlined in Table 9-1. The Russian market for imported premium vehicles is also exploding as the number of households that can afford luxury products exhibits rapid growth. Porsche (a division of Volkswagen) and BMW are both expanding the number of dealerships. Rolls-Royce (owned by BMW) now has two dealerships in Moscow; the only other city in the world with two dealerships is New York City. In addition, Nissan is assembling the Infiniti FX SUV in St. Petersburg. Sources: Anatoly Temkin, “The Land of the Lada Eyes Upscale Rides,” Bloomberg Businessweek (September 17, 2012), pp. 28–30; Luca I. Alpert, “Russia’s Auto Market Shines,” The Wall Street Journal (August 30, 2012), p. B3; John Reed, “AvtoVAZ Takes Stock of 45 Years of Ladas,” Financial Times (July 22, 2011), p. 17; David Pearson and Sebastian Moffett, “Renault to Assist AvtoVAZ,” The Wall Street Journal (November 28, 2009), p. A5; Guy Chazan, “Kremlin Capitalism: Russian Car Maker Comes Under Sway of Old Pal of Putin,” The Wall Street Journal (May 19, 2006), p. A1; Keith Naughton, “How GM Got the Inside Track in China,” BusinessWeek (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. Exhibit 9-5 Russia used to be known as “the land of the Lada,” a reference to a Soviet-era car of dubious distinction. Today, Russia is on track to surpass Germany as Europe’s largest car market. This is good news for global automakers such as BMW, Renault, and Volvo. Strong demand also means that GM’s $100 million bet on a joint venture with AvtoVAZ is paying big dividends. Source: © RIA Novosti / Alamy M09_KEEG7389_08_SE_C09.indd 292 06/03/14 12:36 PM Find more at http://www.downloadslide.com chapter 9 • Global Market-Entry Strategies: Licensing, Investment, and Strategic Alliances    293  Table 9-1 Market Entry and Expansion by Joint Venture Companies Involved Purpose of Joint Venture GM (United States), Toyota (Japan) NUMMI, a jointly operated plant in Freemont, California (venture was terminated in 2009). GM (United States), Shanghai Automotive Industry (China) A 50-50 joint venture to build an assembly plant to produce 100,000 mid-sized sedans for the Chinese market beginning in 1997 (total investment of $1 billion). GM (United States), Hindustan Motors (India) A joint venture to build up to 20,000 Opel Astras annually (GM’s investment was $100 million). GM (United States), governments of Russia and Tatarstan A 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 of $250 million). Ford (United States), Mazda (Japan) AutoAlliance International 50-50 joint operation of a plant in Flat Rock, Michigan. Ford (United States), Mahindra & Mahindra Ltd. (India) A 50-50 joint venture to build Ford Fiestas in the Indian state of Tamil Nadu (total investment of $800 million). Chrysler (United States), BMW (Germany) A 50-50 joint venture to build a plant in South America to produce small-displacement 4-cylinder engines (total investment of $500 million). Source: Compiled by authors. Investment via Equity Stake or Full Ownership 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 investor owns fewer than 50 percent of the shares, it is a minority stake; ownership of more than half the shares makes it a majority. Full ownership, as the name implies, means the investor has 100 percent control. This may be achieved by a startup of new operations, known as greenfield investment, or by merger or acquisition of an existing enterprise. For example, in 2008 the largest merger and acquisition (M&A) deal in the pharmaceutical industry was Roche’s acquisition of Genentech for $43 billion. Prior to the onset of the global financial crisis, the media and telecommunications industry sectors were among the busiest for M&A worldwide. Ownership requires the greatest commitment of capital and managerial effort and offers the fullest means of participating in a market. Companies may move from licensing or joint venture strategies to ownership in order to achieve faster expansion in a market, greater control, and/or higher profits. In 1991, for example, Ralston Purina ended a 20-year joint venture with a Japanese company to start its own pet food subsidiary. Monsanto and Bayer AG, the German pharmaceutical company, are two other companies that have also recently disbanded partnerships in favor of wholly owned subsidiaries in Japan. Home Depot used acquisition to expand in China; in 2006, the home improvement giant acquired the HomeWay chain. However, Chinese consumers did not embrace the big-box, ­do-it-yourself model. By the end of 2012, Home Depot had closed the last of its big-box stores in China; its two remaining Chinese retail locations are a paint and flooring specialty store and an interior design store. If government restrictions prevent 100 percent ownership by foreign companies, the investing company will have to settle for a majority or minority equity stake. In China, for example, the government usually restricts foreign ownership in joint ventures to a 51 percent majority stake. However, a minority equity stake may suit a company’s business interests. For example, Samsung was content to purchase a 40 percent stake in computer maker AST. As Samsung manager Michael Yang noted, “We thought 100 percent would be very risky, because any time you have a switch of ownership, that creates a lot of uncertainty among the employees.”13 13 Ross Kerber, “Chairman Predicts Samsung Deal Will Make AST a Giant,” The Los Angeles Times (March 2, 1995), p. D1. M09_KEEG7389_08_SE_C09.indd 293 06/03/14 12:36 PM