Abstract
Tata produced world’s cheapest car in 2008 with the name of
Nano. However, Tata is looking to capture markets other than India due to
limited sales in its local market. This decision primary requires deciding
about country to be targeted and the entry method that should be selected. This
study explored the second question of entry mode for Tata’s Nano. Tata is
suggested to select Malaysia due to expected growth for ultra low cost cars and
ease of doing business in Malaysia. Four entry methods of exporting, licensing,
joint ventures and wholly owned subsidiary are addressed in this respect. Exporting
and wholly owned subsidiary contain least risk of dissemination of technology. On
the other hand licensing contains high technology risk. However, extent of
control and resource commitment intensifies from exporting, licensing, joint
venture to wholly owned subsidiaries. Tata is suggested to use combination of
exporting and wholly owned subsidiary entry method. Since, cost of import is
least and doing business is also easy in Malaysia. So, Tata should import parts
of Nano and assemble in its assembly factories in Malaysia.
Table of Contents
1. Introduction:
In 2009
Tata claimed that the company produced world’s cheapest car with the name of
Nano. However, due to limited sales of Nano in local Indian market Tata is
looking to target other markets beyond the boundaries of India. It is recommended
that Tata should offer its Nano to Malaysian customers. The suitability of
Malaysian market is due to increasing growth for ultra low cost cars, increasing
GDP per capita, ease of doing business, urbanization, low cost of import, less
inflationary threats especially for short term and low interest rates on
lending. However, the important thing needed to explore is that how Tata should
enter in this attractive Malaysian market. Lee & Lieberman (2010) argued that the success of multinational
companies depends on the mode of entry in selected foreign country. So, the
purpose of this study is also to investigate the available mode of entry for
Nano in Malaysia and selecting most appropriate method while considering its
pros and cons.
2. Mode of Entries:
The mode of
entry can be divided into two broad categories of equity based and non equity
based contractual entry (Kumar & Subramanian 1997; Wild et al. 2008). Both the categories can also
be segregated into several sub categories. Equity based entry contains three
methods of joint venture, acquisition and Greenfield investment (Wild et al. 2008). While on the other hand ‘exporting’
and ‘contractual agreements’ are non equity based methods in this respect (Wild et al. 2008). So, Tata can introduce Nano
through these modes of entry. However, to explore most appropriate entry method
it is important to know the pros and cons of each entry method. Entry method
that create best match between Nano and Malaysian market should be selected.
2.1 Non Equity Based Mode of Entry:
The
selection of equity based or non equity based entry mainly depends on three
factors of control, resources and risk (Todeva, 2005). Ideally firms want to enter
with highest control while deploying least resources and minimum risk. However,
in practice it is almost impossible to enter with 100% control and least
resources and minimize risk (Burgel & Murray 2000). So, it will be the control,
resources and risk that will determine the mode of entry in international
market. For instance non equity based entry is more suitable when firms are
resource constraints. It is because no equity is contributed and firms can
enjoy advantage of that foreign market without having resources. On the
contrary firms can lose control over distribution channel as intermediaries or
partners are hired to distribute final product to end customers (Madhok 1997). Exporting and Licensing are
two main non equity based model.
2.1.1 Exporting:
This is an
entry method in which firms export the goods to host country without entering
physically (Rhyne 2009). In other words final or
partial product is manufactured somewhere else outside the host market and then
transferred to it. Firms can use exporting further in two ways i.e. indirect
exporting and direct exporting. Using home country intermediaries to transfer
the goods in host market is called indirect exporting while on the contrary
contacting host country middlemen is referred as direct exporting (Rhyne 2009). (Osland et al. 2001) provided useful framework to
identify the pros and cons of different entry methods on the basis of control,
resources and risk of transferring technology as shown in figure 1 and 2. Primary
advantage of export is requirement of least resources. For instance if Tata
transfer Nano is Malaysia then it requires least resources as no set up will be
created in Malaysia for exporting. It is also believed that exporting is the
quickest mean of entering in international market (Osland et al. 2001). So, to gain the first mover
advantage Tata can uses exporting as many other car manufacturers are also
expected to offer ultra low cost cars and can exploit the emerging
opportunities before Tata’s entrance.
Figure 1: Resources
and Control for Different Entry Modes (Osland
et al. 2001)
Figure 2: Technology
for Different Entry Modes (Osland
et al. 2001)
Exporting is greatly affected by
the cost of trade. High cost to import or export can result in to high prices.
However, exporting to Malaysia is advantageous as Malaysia is ranked at 1st
place in cost of import and even import (Doing Business, 2013). Overall
Malaysia rank on eases of trading is 11th place. On average cost of
import per container in Malaysia is only $435 and on average it takes only 8
days to import that container. So, ease of trade also prefers exporting as
proffered entry mode. Another advantage of exporting Nano will be the least
risk of transfer of technology as shown in figure 1. Since, operational control
will remain with Tata and intermediaries will only transfer it so it is less
likely that technology will be copied. Exporting in Malaysia is also suitable
as cost of import and even time required to import are relatively less. However,
the most critical thing is the control. Though operational control will remain
with Tata but its marketing control will shift towards the middlemen. However,
in case where firms are seeking new markets it is more important to gain
control over distribution channel. In this way Tata can face such disadvantages
of if selects exporting as mean of entry in Malaysia.
2.1.2 Licensing:
It is
another non equity based mode of international entry. It is a kind of contractual
agreement with some partner from host country (Osland et al. 2001). However, contrary to
exporting some or all rights regarding company name, patent, copyrights etc are
transferred to that selected partner against some initial fee and part of sales
revenue to the licence provider. Licensing also contain some pros and cons. For
instance technology risk is highest in case of Licensing as shown in figure 2. Since,
company name or some patent are transferred to partner so licenser has to share
technology information with that partner that can affect the ability of long
run profit generation. This argument is more critical in case of high product
differentiation. It is argued
that in case where product differentiation is high it is more appropriate to
use high control. It is because in case of sharing product differentiation
information with organizations from host market can result into loss of long
run benefits (Osland et al. 2001). Cost differentiation is the
primary source of competitive advantage for Nano and sharing information with
partner can affect this sustainable source of competitive advantages. This
argument is more important in case of operational control. Tata has to share
information with partner from host country in case of licensing. So, this option
of licensing can forgo the sustainable competitive advantages of cost
differentiation for Nano. Despite this both marketing and even operational
control are also low in case of licensing. So, Tata will face low control
disadvantages if choose licensing as mode of entry in Malaysia.
2.2 Equity Based Mode of Entry:
Equity
based mode of entry requires high resources to incur marketing expenses, copy
rights and other expenses to gain economy of scale (Wild et al. 2008). So, resource constraints
firms are less likely to enter through equity based mode of entry. However, cheap
financing cost in host country enhances the probability of multinational
corporation entry even organizations have low resources (Burgel & Murray 2000). It is because firms can use
external financing to acquire required resources with low cost of capital. On
the other hand international experience of firm is also an important factor
that should be considered while selecting entry mode (Aganval & Ramaswami 1992). For instance firms having
high experience at international can choose equity based entry while with less
international experience the selection of non equity based method is more
appropriate. Despite this market potential also plays an important role in
determining mode of entry in international markets (Aganval & Ramaswami 1992). It is argued that firms
enter through equity based mode gain long term profits when the growth and
potential of host market are significantly high. It is because such situations
lead to low marginal costs due to high volume and firms can gain economy of
scales in this respect. Three famous approaches of equity based entry are Joint
Ventures, Strategic Alliance and Greenfield investment.
2.2.1 Joint Venture:
A joint
venture is a result of formation of new entity through participation of two or
more partners who share risk, benefits, cost and management. The required
resources or equity are shared by each participant that could be in the form of
cash or some technology or fixed assets in the form of plant (Rhyne 2009). Resource based view explains
the selection of joint venture. Resource based perspective believes that firms
go for joint venture when they need resources (such as information, skills or
knowledge etc) specifically related to host market environment. In other words
firms collaborate with those partners who could provide those resources. Figure
1 demonstrates that joint ventures require high resources and also firms can
gain high control as compared to equity based entry models of exporting and
licensing. Tata is a multinational organization and contain strong financial
position. Moreover, getting credit is very easy in Malaysia as the country is
at top of ease of getting credit (Doing Business, 2013). So, Tata can use its
resources and external financing against low cost of capital to form joint
venture with high control. This option is also suitable in Malaysia as the
country is ranked at fourth place in investor protection index and more
specifically first in disclosure index (Doing Business, 2013). So, the
potential discrepancies with partner with whom equity is shared will be least. However,
risk of transferring technology is high in case of joint ventures as compared
to exporting and Greenfield investment. (Osland et al. 2001) argued that experienced
multinational firms do not prefer this option of joint ventures because of
dissemination of technology to the other partner.
2.2.3 Greenfield Investment:
In this
entry method firms open a wholly owned subsidiary is host country. However, the
investments, management, risk and operations are fully manages by the parent
company. This can be done through acquiring some company from host country or
starting wholly owned subsidiary. Primary advantage associated with Greenfield
investment method is full control and no less risk of dissemination of
technology. Figure 1 indicates that the wholly owned subsidiary contain highest
control. Similarly, figure 2 also demonstrates that the risk of dissemination
of technology is least in case of wholly owned subsidiary as compared to other
options. So, Tata can avoid the risk of transferring technology through opening
its subsidiary in Malaysia. However, it requires highest resources as shown in
figure 1. Since, Tata has strong financial position and getting credit with low
cost is easier in Malaysia is easier so this problem of high required resources
is not critical in this respect. However, the disadvantage of wholly owned
subsidiary is the high risk. As wholly owned subsidiary is manage and operate
by parent company so the total risk is also associated with parent company. In
other words Tata has to bear all the losses if it fails to create value in
Malaysia. Sohn, (1994) found that using wholly owned
subsidiary is more appropriate when investing in host country is less risky. Wholly
owned subsidiary is also appropriate as inflation is less and also the chance
of economic crises. It is also consistent with Osland et al. (2001) who also found that wholly
owned subsidiary is not appropriate in case of hyperinflation and economic
crises.
3. Preferred Method for Tata’s Nano:
Previous
discussion explored the four modes of entry in Malaysia for Tata’s Nano along
with their pros and cons. Since, Nano competitive advantage lies with its low
cost so it is more important to use that mode of entry that lead to sustainable
competitive advantages for long term. However, using non equity based mode of
entry i.e. exporting and licensing can affect the marketing control or
disseminate the technology advantages to other partner. Though such methods are
more useful where firms are resource constraints but in Malaysia getting credit
are most easy with low interest rate and Tata’s financial position is also
reasonably good. So, it is recommended to use equity based mode of entry. Equity
based options are also right options as Tata has reasonable international
experiences and investment based entry is more appropriate in this respect. Tata
is suggested to use wholly owned subsidiary to enter in Malaysia market. It is
because doing business in Malaysia is much easier as in ease of doing business
index Malaysia is ranked at 12th place. Though, joint venture is
another option that could be use by Tata but investment risk is reasonably low
and getting marketing control is important that makes the wholly owned
subsidiary more appropriate option in this respect. Tata should seek Malaysian
market for long run that requires more control over distribution channel. Moreover,
economic conditions and inflation are also under control in Malaysia and less
expected to affect businesses in Malaysia. Moreover, Tata is also producing
other automobile products such as trucks and buses. Controlled marketing and
operational activities can also create overall value for Tata.
4. Required Practical Steps:
Though Tata
is recommended to choose direct investment rather than exporting but still
truth is that Tata’s Nano is cheapest car due to its efficient supplier
management in India. Tata is recommended to import only parts of Nano and
assemble them in Malaysia. Doing this will not significantly affect the prices
of Nano and Tata will achieve required quality as well. Moreover, effective
supplier management as Tata did in India is less likely to be implemented in
Malaysia. So, exporting only parts and assembling them in Malaysia is seems to
be more appropriate option. As it is found earlier that cost and time of import
in Malaysia is very low that indicates that exporting only parts will not
affect the price and even supply chain for Nano. Tata already has assembly
factories in Malaysia and previously Tata practiced similar strategy i.e. exporting
parts and assembling them in Malaysia. So, its experience and current
distribution channel will assist in assembling Nano for Malaysian customers. Tata
should use direct distribution channel and open its showrooms in big cities of
Malaysia. However, it is important that Tata use appropriate promotional
activities in this respect. Exporting and assembling in Tata’s factories in
Malaysia will result efficient output but after that selling them requires more
efficient marketing activities. Tata’s profit from Nano lies with volume. In
other words has to increase its volume to cross breakeven point to gain
reasonable profits and these objectives are contingent with strong marketing. In
short Tata is recommended to imports only parts of its Nano to assemble in its
current assembly canters in Malaysia and sold Nano through direct channel with
strong promotional activities.
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