Abstract
This piece of research explores that how Tata one of leading
automobile manufacturer can exploit the market potential for ultra low cost
cars in China. The main focus is given to the appropriate mode of entry in
China. This study explored five entry modes of exporting, licensing, joint
ventures, acquisition and wholly owned subsidiary. Moreover, the scope of this
research is also confined to five factors of control, risk, return,
integration, resource commitment and dissemination of technology. Since, doing
business in China is found to be very difficult so deployment of acquisition
and wholly owned subsidiary is rejected for Nano. However, joint venture
provides the government support as China stimulates to do so but still risk of
dissemination of technology is high along with low investor protection and high
taxes. So, it is recommended to enter in China through exporting. Though high
import cost and low control are two disadvantages of this method but among
alternative this option seems to be more optimal. It is recommended to use
indirect exporting due to product relatedness as it will reasonably decrease
the risk of low marketing control.
Table of Contents
1. Introduction:
Globalization can be attributed
to the one of most critical phenomenon of this 21st century as more firms
are looking to capture growth of other economies outside their local market (Hitt et al. 2012). However, successful
expansion is not easy and arise multiple issues such as selection of
appropriate market and also how to capture that market (Brouthers & Hennart 2007). A detailed analysis regarding
strategic needs and the internal environment will determine the international
market that should be targeted. The markets that are best fitted with firm’s
strategic objectives and its internal environment should be selected in this
respect (Carazo & Lumiste 2010). However, the further step is
to know that how firms should start their detailed operations within that
selected market. It is argued that
selection of optimal entry decision is very important as it contain long term
implications and affect post entry performances significantly (Canabal & White 2008). It is because one entry is
made then it is become much complicated to change. This study also tried to
investigate the different mode of entry in international markets. However,
Tata’s Nano is used as case research in this respect.
Tata is an Indian based multinational
player who is known for its trucks and buses all over the world. In 2008
company manufactured a small car ‘Nano’ and claimed that it is the world’s
cheapest car. In India the cost of Nano is almost $2500. However, Tata is also
looking to offer its lowest cost Nano to other markets. Asian markets are
viewed as most attractive markets for ultra low cost cars. A.T Kearney reports
indicated that China and India are showing highest market share for ultra low
cost cars till 2020 (Mayer & Pleines 2008). So it is suggested to Tata to
select Chinese market for its Nano. Nonetheless, important thing is that how
Tata should enter in Chinese market to capture this growth. (Andersen 1997) defines the term entry mode
in term of institutional deal that will determine that the way to which
international transaction is organized and executed that ultimately will have
an effect on subsequent decision making. So, in this research consequences in
term of cost and benefits of various entry decisions are tried to address for
Tata in China that will provide the basis in selecting optimal entry decision.
2. How to Enter:
Kumar & Subramanian (1997) segregated modes of entry
into two broad categories of equity methods and non equity methods. Figure 1
provides the view of different modes of entry under two broad categories.
Exporting and contractual agreements are two main non equity based entry
methods while joint ventures, acquisition and Greenfield investment are equity
based methods. Subsequent part of this research will briefly explain each entry
method proceeding to their comparative analysis that will determine the most
appropriate entry mode that Tata should deploy to offer Nano in China.
Figure
1: Hierarchal Model of Entry Modes (Kumar
& Subramanian 1997)
2.1 Exporting:
The most
common and easy form of entry is exporting. It refers to the transferring final
or part of the product to selected market (Gooderham & Nordhaug 2003). However, this transformation
is made through some intermediary that could be from home or host country. That
intermediately is responsible for the marketing activities and manages the
distribution of final product to end customers in targeted country. Selecting
middleman from home country to export is known as indirect exporting while
direct exporting is referred to exporting through some agent from selected
country.
2.2 Contractual Agreements:
Despite
exporting directly or indirectly through some agent firms can also use
contractual agreements such as licensing or franchising (Aganval & Ramaswami 1992). For instance licensing
provides right to use property of the company (name, patent or some other
property) against some initial fee and/or interval payments. In other word
licensing is an obligatory binding between the company and licensee to
manufacture and sell the products in selected host market (Luo 1999).
2.3 Joint Venture:
The most
common form of equity based entry is the deployment of joint ventures
especially in China (Jensen 2010). A new organization is formed
in result of joint venture while equity is shared with one or more partners in
host country. However, the extent of shared equity may differ. For instance the
shareholdings by the company can be minority, equally or majority (Gooderham & Nordhaug 2003). Another way of joint venture
is to create strategic partnership and known as strategic alliances. However,
all the partners share common strategic goals.
2.4 Acquisition:
It is a
kind of foreign direct investment where company buy totally or partially
shareholdings of some organization from host country. Acquiring all shares of
targeted company is referred as fully owned acquisition while holding more than
half of voting rights is attributed to majority shareholdings (Cheng 2006).
2.5 Greenfield Investment:
Last entry
method is Greenfield investment and also known with the name of wholly owned
subsidiary. This method creates a new organization and all the equity is
provided by the entering organization (Morschett et al. 2010). Usually firms start from
opening a new sales office manage and controlled by parent company while
subsequently this local branch make an effort to establish own distribution
channel (Gooderham & Nordhaug 2003).
3. Comparative Analysis:
To explore
the cost and benefits of above stated entry methods Koch (2001) provides a useful framework.
He argued that the mode of entry depends on the control risk, return and
integration decision. Figure 2 provides a view of these characteristics for
each entry method.
Figure 2:
Characteristics of Modes of Entry (Koch
2001)
It can be viewed that risk is low in case of exporting and
contractual agreement of licensing or franchising. It is because marketing and
distribution responsibilities are transferred to intermediately or partner
without incurring high resources. On the contrary Acquisition and Greenfield
investment hold highest risk among selected options. Since, to open subsidiary
or acquiring shareholdings from host country require high resources those are
provided by parent company solely so no risk sharing is there. However, in case
of joint venture both the partners who bring equity share Profits and losses that
lead to the moderate risk level.
Similarly, all entry methods are documenting similar results
for returns as exporting and contractual agreements contain lower returns while
wholly owned subsidiary and acquisition leads to higher profits. However, in
joint ventures or strategic alliances firms enjoy moderate profitability. The
differences of return can be attributed to the profit shared by middleman in
case of exporting and licensing while on the other hand whole the profit is
enjoyed by the company in case of acquisition and wholly owned subsidiary. Moreover,
it is general phenomenon that high risk leads to high returns. So, the benefits
of high profits are associated with the two options of wholly owned subsidiary
and acquisition. However, resource commitment is also parallel to risk and
return. In other words high resources are required to open a subsidiary or
acquiring new firm in host country while the extent of these resources are
minimal in case of exporting and licensing. So, to gain high returns high
resources are required and vice versa.
Another
critical factor that should consider while selecting entry mode is control. As
figure 1 indicates that in exporting and licensing control is moderate and low
respectively. Since, in exporting company transfer the manufactured goods by
using some intermediary so the marketing control will be with that middleman.
However, the company still holds operational control. While on the other hand
entering through contractual agreement results into low control as the partner
holds the control over marketing activities and even operational activities to
some extent especially in case of franchising. Nonetheless, acquired or newly
open subsidiary is fully managed and controlled by parent company so the
control will be high in this respect. At last Joint venture contains moderate
control as both partners share control.
At last Koch
(2001)
also considered integration in selecting mode of entry. Since, entering
organization only hire some intermediary for marketing purposes so the
integration with that middleman is almost negligible. It is because long term
strategic goals are not same. Similar is the case of contractual agreement that
is only confined to that agreement between company and agent and no strategic
collaboration are made. However, in case of joint ventures and especially in
strategic alliances entering company integrates low with alliance and this
integration is moderated and highest in acquisition and wholly owned subsidiary
respectively. So, risk and low required investment are benefit points of
exporting and contractual agreement while low control, low profits and
negligible integration are the disadvantages of exporting and licensing. However,
high profits along with high control and high integration are the advantages of
joint venture and Greenfield investment.
Hill et al. (1990) further discussed modes of
entry with respect to three factors of control, resource commitment and
dissemination of risk. Figure 2 explores the extent of control, resources and
dissemination of risk within each category. Figure 2 shows that dissemination
of risk is also important and varies across different entry modes. Exporting
and Licensing contain high risk of transferring technology as intermediary is
involved. Since, in licensing some property is shared with partner so it is
more probable that the partner exploit the advantages of technology in future.
On the contrary this dissemination of risk is medium in case of joint ventures.
It is because firms can have some control over operations and marketing channel
that restrict the dissemination of technology. Nonetheless, dissemination of
risk is lowest in case of acquisition and wholly owned subsidiary as management
and control is done by parent company. So, Licensing and Joint venture has high
and medium risk of transformation of technology. Hill et al. (1990) also argued to the resource
commitment and explore the benefit of low investment required to enter through
exporting and licensing. While to open wholly owned or to acquire high resource
are required to execute the transaction.
Figure 2: Entry
Mode Characteristics (Hill et al. 1990)
3.1 China Environment:
With
population of more than 1344 million and $4930 GNI per capita China has shown
great potential for Ultra Low Cost Cars. Figure 3 demonstrates the doing
business environment for 2013 in China. Figure 3 demonstrates that doing
business in China is difficult as the country is ranked at 91st place.
It can be viewed that starting a new business is the difficult thing in China
as the country is placed at 151st place. Similarly, getting the
construction permit is the most difficult thing in China and ranked at 181st
place. However, the country is only performing well in term of enforcing
contracts as the country is placed at 19th place. Trading across
border is also difficult especially to import as time required to import is 24
days and cost $615 per container on average. Tax rate is also considerable
thing in this respect. It can be viewed that on average corporate pays 63% of
their profits as tax payment. In short it can be concluded that doing business
in China is difficult in China.
Figure 3: Doing
Business in China 2013 (DoingBusiness 2013)
4. Optimal Entry Mode for Nano in China:
On the basis of above results it
can be concluded that opening a wholly owned subsidiary in China is not a
viable option for Tata’s Nano as doing business is difficult especially in term
of starting a new business, dealing with construction permits, payment of
taxes, resolving insolvency and importing in China. So, the country risk with
respect to direct investment is risky. (Hensler 2012) found that acquisition and
Greenfield investments are not appropriate when the host country risk is high. China
is not performing well in term of investor protection index that make it risky
option to start own subsidiary. Moreover, getting credit is also difficult in
China that makes it difficult to finance externally. Since, high resources are
required to open new subsidiary and getting credit is one of alternatives that
is difficult to attain in Chain. Though through acquisition problems regarding
starting new business and construction permit can be solved but still this
option cannot mitigate the potential problems from other areas like tax
payments, investor protection and resolving insolvency. So, it is not suggested
to Tata to enter in Chinese market through acquisition or opening a wholly
owned subsidiary.
However,
the option of exporting is comparatively viable as it is difficult to enter in
Chinese market through Greenfield investment or acquisition. This argument can
be more significant in case of indirect exporting especially when the product
is related and same channel could be use to export in targeted country. Such as
in case of Tata who is already dealing with trucks and busses all over the world.
So, this product relatedness makes it appropriate to use indirect exporting. Nonetheless,
the cost of import is high in China that makes this option more costly and can
affect the competitive advantages of cost differentiation. Moreover, time
required to import in China is also high. Another disadvantage of exporting is
the low control for the organization looking for new markets. However, if
getting market control is not critical along with resource constraint options
then entering in China through indirect exporting is appropriate option. Since,
Tata’s motive to enter in China is capturing new market so Tata should seek
other options before selecting indirect exporting.
At last the
option of joint venture or strategic alliance can also be a viable option in
this respect. The government of Chine stimulates to select joint ventures or
creating strategic alliances. So, one of the benefit of joint venture in China
can be attributed to the government support. Moreover, China is also very good
in enforcing contracts. However, still investor protection and solvency
resolution are not that much appropriate for Tata. Though Tat can gain support
from Chinese government but still other parts of doing business are showing
weak results. Since investors are not protected well so the chance of
dissemination of technology is also high that is the primary competitive
advantage of Tata’s Nano. Moreover, Tata’s Nano strength is its low cost that
the company achieved from its efficient supplier management and it is difficult
to median that level in China that could affect its cost and competitive
advantage. In short advantages of potential government support are associated
with the entry option of joint ventures and strategic alliances while investor
protection and high tax payments are shortcomings of this option. So, it is
suggested to Tata to use exporting to capture the market potential of China in
ultra low cost cars. However, Tata should use its current distribution channel
from India to export in China.
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