Deadly Sins of International Business Blog

The race is on. India just announced that it will allow foreign majority ownership in its retail industry. This paves the way for global retailers such as Wal-Mart, Tesco, Carrefour, or Metro. And it’ll be a brutal race, too. One might think that a retail market that is estimated at around $ 400 bio this year and is expected to double within the next four to five years will have enough room for all players. However, with the retail industry being largely devoid of any significant national players, this will be all about first-mover advantage. Maybe it’ll even turn out okay for the second in the race, as sometimes it needs a trailblazer to deal with all the nitty gritty groundwork before someone else reaps the benefits from the efforts of others. But nos. 3 and 4 will certainly find entry a lot more difficult. Wal-Mart which already has a joint-venture with Indian conglomerate Bharti will definitely be a serious contender for the top spot in the race – if they manage to learn from some of the mistakes they have made in other markets such as Germany or Korea. As attractive as the Indian retail market is, it is certainly also a market that will have lots of surprises and difficulties for foreign retailers – from differences in consumer behavior to challenges in dealing with Indian employees.

You have certainly heard of Adidas, Bayer, Henkel, Linde, or Siemens – all German companies and major players on world markets and a major source of pride for most Germans. Well, think again. It’s been a while since I read this feature about foreign ownership of German companies in a German weekly. For the vast majority of the 30 largest German companies that are part of the DAX stock index, foreign ownership has increased between 2001 and 2008. The smallest increases were at Deutsche Bank (3.8 %), ThyssenKrupp (9.2 %), and Volkswagen (9.9 %), and the largest at energy giant RWE whose foreign ownership shot up by 200 % (from 15 % to 45 %), Deutsche Post (233.3 %), and steel giant Salzgitter which increased foreign ownership almost five-fold. The only company where foreign ownership actually decreased was Lufthansa, where it fell by 33.1 %. On average foreign ownership for the largest German companies listed in the DAX rose by an astonishing 97.9 %. What’s most interesting is that for 21 of the 26 companies for which data is available foreign ownership is larger than 40 %. For 15 it is even larger than 50 %. Professor Ghemawat is certainly entitled to his own opinion, but this sounds all pretty global to me….

As has been announced a few days ago, Walt Disney is plunking down about $300 mio to acquire a major stake in the Russian Channel Seven with the objective of entering the Russian market. This is their second attempt. About three years ago, Disney had plans to acquire a 49 percent stake in Russian Media-1 TV. Back then, the acquisition was not approved by the Russian Antitrust Agency which cited “problems with Disney’s paperwork”. It looks like Disney has learned an important lesson about Russian culture and has figured out how to work with the country’s bureaucracy. Why is Disney so eager to enter the Russian market? Is it a case of cultural imperialism that US companies are often accused of? Very unlikely. The simple fact is that growth rates in Russian TV advertising are between 20-30% whereas they have been relatively slow in the West. After a Swedish and a Luxemburg-based group, Disney is now the third foreign investor in Russian TV.

Who would have ever thought? Not only is Volvo in Chinese hands, now Saab is, too! Zhejiang Youngman Lotus Automobile Co. and Pang Da Automobile Trade Co. of China have announced that they will purchase insolvent Saab for approximately 100 million Euros. What remains to be seen are two things – first, if the Chinese will really be able to pull off the deal. Not too long ago, another Chinese carmaker’s plans to take acquire Hummer from General Motors have been barred by Chinese authorities. Second, if the deal comes through, will Swedish and Chinese cultures be compatible with each other?

A while ago, a student of mine (yes, I’m also a professor at a business school), has written an interesting term paper. The general topic was – of course – failure in international business, and the student who was working for a US-based mid-sized cosmetics company decided to focus on cosmetics in Japan. The outcome was not surprising, but still highly interesting. Highlighting three foreign companies’ (Avon, Mary Kay, Boots) failed attempts at entry into the Japanese market, there seemed to be recurring patterns. Avon’s Japanese adventure started as early as 1969. For a number of years, Avon struggled as it failed to understand the Japanese consumers – the product portfolio was too Western, the low price strategy didn’t appeal to the market, and Avon’s distribution strategy that relied on the ‘Avon Lady’ was a complete cultural mismatch. Avon eventually worked out all the kinks, but in 2010 decided to exit the Japanese market by selling its business to a TPG, a private equity firm, as there were questions about future competitiveness. In one interview, the head of Avon’s Japanese operations, Terrence Moorehead, also characterized decision-making behavior in Japan as rather cumbersome. Mary Kay entered Japan in 1994 only to pull out again seven years later. Products had to be reformulated due to legal and cultural restrictions, but more importantly for Mary Kay, the entire company’s mission didn’t align well with the Japanese environment. Boots Cosmetics is of course a bit different from Avon and Mary Kay as it is a chain of drugstores and not just a cosmetics manufacturer. Having said that, 40 % of their revenue comes from the sale of cosmetics, mostly their own brands. In all fairness, Boots tried to be intelligent about bridging the huge differences that set Japan apart from other markets where they had been successful before. However, their choice of a joint venture partner – Mitsubishi – may have been less than ideal. Mitsubishi had access to capital and was well respected in Japan, but didn’t have experience in the drug store retail or in the cosmetics business. Mitsubishi’s might may also have lured Boot into a type of entry that was ‘too much, too fast’. Japan is often considered one of the most advanced markets in Japan – a fact that often lets foreign companies underestimate the difficulties associated with it.

Interesting piece in the McKinseyQuarterly about metrics for Chinese exports. Very much in line with my recent postings, this contributes a bit to the debunking of the China myth. Don’t be afraid! All will be good!

Looks like Deutsche Boerse and the New York Stock Exchange are in their final stages of negotiations over a takeover by the Germans. Price-tag: about 10 billion. Upside: synergies and better competitive position vis-a-vis emerging stock exchanges in other parts of the world. Downside: integration is never easy. Neutral: the home of capitalism is no longer American.

Exports were mentioned repeatedly in President Obama’s  State of the Union address. Such U.S. presidential focus is very special and hasn’t happened since the “Export Now” campaign in Reagan days. Though exports have no party affiliation –the policies leading to them do.

The U.S. economy needs a boost. Though the world may count on the U.S. import locomotive, this time around, U.S. exports have global priority. In the ten years from 2000 – 2009, U.S. exports grew by about 50 percent. The President’s goal to double U.S. exports by 2014 requires twice the increase in half the time. It’s hard to generate trade momentum that quickly. But it can be done.

Americans generally are quite good in working their way up to a leadership position. But since the 1980’s, ongoing large and growing trade deficits have undermined its economic foundation. Just as one thinks about America as a nation of open skies and new opportunities, exports must become a national objective. Export not only help an economy, but also allows the sharing of quality, choices and lower prices with the world.

Conditions and preparation matter.  A company in Israel or Liechtenstein never questions whether or not to export. Their small home market makes exports a condition of survival. The literature calls those firms “born global”. German exports in 2009 were $ 13,670 for every man, woman, and child, while for the United States they were only $ 3,238. U.S. firms tend to focus on the substantial opportunities at home. But they need to recognize the export imperative as well.

U.S. consumers are wealthy and interested, and Americans are willing to give outsiders a chance. They enjoy trying a new product early and to exercise their right and capability to choose. This desire and capacity to innovate needs to be translated into the design and export of new goods and services.

Historically, U.S. trade policy has not been very helpful to exporters. Congress typically intervened by restricting, rather than liberalizing trade flows. Concerns mostly focused on helping other nations get their feet back on the ground. Now American firms need some better track shoes.

Today, exporters face new conditions. Technology has reduced global distance. The cultural diversity of America overcomes psychological distances between countries. Immigration brings expertise and encourages new business activities abroad. Increased knowledge reduces the burden of foreignness when going international.

Trade imbalances generate new export opportunities. For example, the U.S. trade deficit makes it much cheaper to ship a container to Asia, than to bring one from there into the U.S.   A lower dollar makes it easier to export, but also reduces U.S. purchasing power. There is little benefit to exporting if one receives little in return.

There is new interest in U.S. international business performance. The Korean Free Trade Agreement, the renewed negotiations with nations in international forums such as the World Trade Organization, and the just announced deal between the United States and China for $ 45 billion of U.S. exports provide impetus.

During the past forty years, the largest U.S. trade growth was in the import arena – that’s where the money was. For those looking to international markets today and tomorrow, the shoe is on the other foot – the exporters will have it. Now it is the U.S.’ turn to export – both a challenge and obligation to U.S. firms and government.  At the same time, trade distorting subsidies need to be curtailed. Exports need to be the result of capability and responsiveness to international needs.

History is characterized by non-linearity – not everything always keeps going the same way. Discontinuities and structural breaks herald new directions. There may well be a U.S. export avalanche and the world needs to get ready for it. This is a unique opportunity for bipartisanship and cooperation by the President and a Republican House. Voters will want to see now, how words are translated into action. Government support of exports needs to be streamlined and attain a new priority. Just as ambassadors know to track and support policies abroad, exports need to become a new key concern for many. One could even envision an ‘export impact statement’ for new regulations. For budget hawks it’s worth remembering that export promotion is an investment rather than an expenditure, which, if done right, earns powerful ongoing returns.

(Reposted from Michael Czinkota’s blog at http://michaelczinkota.com with permission by the author. Prof. Michael Czinkota teaches international business and marketing at Georgetown University and the University of Birmingham in the U.K.  He served in trade policy positions during the Reagan and Bush administrations.)

Not too long ago, at the end of the 1980s (although I acknowledge that for some of the followers of this blog this equals a lifetime), Japanese investment in the United States peaked at about US$ 20 billion. By then, management scholars had long begun to study the Japanese miracle. Based on a general fear that Japanese companies would completely control the US economy, US authors such as Bill Ouchi (in his 1981 book ‘Theory Z: How American Management Can Meet the Japanese Challenge) introduced new ideas, and US companies implemented new processes such as the Toyota system of manufacturing. Everybody was up in arms about the Japanese threat. As always, history seems to repeat itself.

In the context of Chinese president Hu Jintao’s recent visit to the US, there have been nervous reports about Chinese companies taking over US businesses. And indeed, there have been some well-publicized cases – Chinese consumer electronics producer Haier’s early Greenfield investment in 2002, or the more recent Beijing Automotive Industry Company’s (BAIC) acquisition of General Motors’ Saab division, Beijing West Industries’ purchase of Michigan-based automotive supplier Delphi Corporation, or numerous smaller investments in US companies by China Investment Corporation (CIC). Obviously there’s enough activity to make The Economist cry out that China’s buying the world and to ask the question what it is like to be ‘eaten by the dragon’ (The Economist, November 13th, 2010). Relax, knowledge of foreign languages is always a good thing, but it isn’t time yet that we all learn Mandarin. Why? Let’s take a closer look at the data: Out of the total book value of foreign direct investors’ equity in US companies in 2009 (it’ll take a while until we have 2010 data) of US$ 2,319.6 billion, China’s share is still insignificant. The largest investing countries are still based in the Western Hemisphere – the United Kingdom (19.6%), the Netherlands (10.3%), Canada (9.7%), Germany (9.4%), Switzerland (8.2%), and France (8.2%). The only exception, of course, is Japan which holds about 11.4 % of the total foreign direct investment in the United States. In a July 2010 report by the Bureau of Economic Analysis (BEA), China isn’t even mentioned – and that’s for a good reason: China’s total assets in the US are about a 300 times smaller than those of Japan. Even small countries’ foreign direct investments in the United States such as Austria or Panama are larger than China’s. Of course, there’s no question that Chinese investment in the US is growing fast and may soon outgrow the “Other” category on the BEA pie charts, but it’s still to early to panic. And even if China held a lot more assets in the United States, it probably would not mean the end of the world just like Japanese investment in the United States hasn’t. The world is flat, and an increased involvement of China in US companies may be a source of (desperately needed) capital, (desparately needed) new energy and motivation, learning, and global stability.

News agency Reuters reported on Friday that Disney and Shanghai Shendi Group have signed an agreement on the establishment of a Disneyland theme park in Shanghai. On an area of about four square kilometers, a total investment of approximately $3.75 billion will bring Mickey & Co. to Middle Kingdom.This should have really been big news, but it wasn’t. The media didn’t jump on it, and even the stock markets didn’t seem to notice (yet). Why not? One possible explanation could be that no one is really certain yet what the expansion into Mainland China will do for Disney. Disney’s Hong Kong theme park hasn’t really attracted as many visitors as it has hoped so far, and has reported a loss last year. Then again, it doesn’t seem to be as big a blunder as Eurodisney has been for the longest time. So, nobody really knew if the Shanghai theme park will be a source of revenue or a source of ridicule for Disney.
Another explanation is that the news is really old news. As of now, the plans are to open the Shanghai Theme Park in 2014. Considering that the negotiations have been going on for about a decade, and given that even one year ago there have already been announcements about an agreement, why should anybody bother to look up from their cup of green tea now? Approval from China’s central government is still pending, and it’s almost certain that there will be more hurdles and milestones after that.
Everyone familiar with the story of Disney’s resort in Paris can only hope that this time Disney will look beyond the mere potential of a huge market. If Disney wants to be successful from the outset, it needs to focus on the cultural differences that stand between their business model and Chinese visitors.