Deadly Sins of International Business Blog

Looking at the mere numbers, Burger King does look impressive. Burger King operates close to 11,000 franchises and owns close to 1,500 restaurants globally. It is present in 76 countries where 40 % of all of its restaurants are located. Unfortunately, 40 % of the restaurants abroad only generate about 30 % of the total revenue. Plus, Burger King hasn’t been doing so well in the home market, either. Time to change gears, time to change owners. Only eight years ago, Burger King switched owners when Diageo, the spirits maker based in the UK sold the fast food chain to a consortium of investment firms made up of TPG Capital, Bain Capital, and Goldman Sachs Capital Partners. After its owners took Burger King public in 2006, it will now sell itself to private equity group 3G Capital. What is interesting besides the 3.3 bn US$ price tag which presents a hefty 46 % premium, is the fact that 3G capital is backed by Brazilian interests including Brazilian billionaire, Harvard graduate, Wimbledon tennis player, and resident of Switzerland, Jorge Paulo Lemann. It therefore doesn’t come as a big surprise that plans have already been announced to expand foreign operations into Latin America, with a focus on Brazil. It’ll be interesting to see if the mastermind behind some of the most publicized deals in the beer market can work his magic for Burger King. In the past, Burger King hasn’t been doing so well in a number of foreign markets, including Europe. Burger King has been in Finland for a short period of time in the 1980s before leaving again, it has briefly been in Greece in the 1990s, it pulled out of France in 1998, then left the Ukraine in 2006, and closed operations in Iceland in 2008. They left and re-entered countries such as Austria and Japan. It seems that in many markets they have been up against first movers such as McDonald’s or KFC. But that alone would be nothing but a bad excuse that no executive should get away with. Ill advised product programming, price strategies gone haywire, restaurant design that falls way behind that of McDonald’s restaurants, and a less than ideal use of technology that allows to track trends in sales in real time have all contributed to its poor performance abroad. It seems as if global market potential is there, but Burger King has never been able to fully tap into it. Brazil seems to be different. Burger King has entered the country in 2004 and expanded impressively since then. With its  GDP per capita steadily growing since 2002, the Brazilian market certainly holds a lot of promise for Burger King.

In a recent post, Australian business blogger Andre Sammartino reports that South African grocer Pick’n’Pay has sold off its Franklins supermarkets (”Australia’s Original Discount Grocer”) to the biggest Australian grocery wholesaler Metcash.  It’s not the first time that Franklins has been sold off after a somewhat unsuccessful takeover. In the late 1970s Franklins was sold to Dairy Farm International who then put it on the market again in 2001 (which was when Pick’n'Pay acquired it). Ironically, Franklin’s new owner Metcash was once South African-owned itself. Besides the mere fact, the interesting observation is the striking frequency with which retailers fail in international markets – WalMart in Germany (and some other countries), Marks and Spencer in the United States (and Hong Kong), Home Depot in Chile, The Gap in Germany, to name but a few. And even more interesting is the question why that is. Using common concepts from the strategic management literature, we could say that it’s either that those companies have not been ready for the markets or that the markets haven’t been right for those companies. The former fits nicely with the structure-conduct-performance (SCP) paradigm. The SCP, in essence, says that it’s all about figuring out how the industry you’re in works and then finding your spot and the selecting an appropriate strategy. Performance will result almost automatically. Assuming that global retailers know how their industry works (even in distant country markets), they must therefore simply have picked the wrong strategy (or executed it poorly). Or, in other words, they may simply not have been ready for the challenges presented by those markets. Under the resource-based view (RBV), we might assume that some of these global retailers possess unique resources and capabilities (that according to the theory should lead to superior performance), but failed to select those markets where these would actually be advantageous. Instead, they chose markets in which their resources and capabilities were not useful or even harmful to their success. So, if you are a retailer and you like theory: next time, do your homework! And if you’re a retailer and you’re more hands-on: well…. do your homework!

It looks like Honda’s China troubles are over for now. Its Chinese joint ventures, Guangqi Honda Automobile and Dongfeng Honda Automobile, will resume operations after having made significant concessions to workers who went on strike mid-May. There were complaints of working conditions and low wages. Honda agreed to raise wages by 25 %. Yes, twentyfive percent. Such a significant increase can only mean (or at least hint to) that Honda has been doing what many multinationals are often accused of – the exploitation of cheap local resources, such as labor. And in fact, workers at Honda or at similar plants earn as low as 1,000 Renminbi monthly, about 150 US$ and have not received a wage increase in five years. What’s the lesson to be learned? Moving production to a low-cost location is not necessarily a bad thing – after all, there’s very little choice for companies in some industries if they want to stay competitive. Besides, foreign direct investment is also helping the development of local economies. However, creating ever worsening wage disparities at foreign subsidiaries of multinational companies over time makes them less welcome than they may have initially been. Besides, in Honda’s case, the company has ambitious plans of growth in the Chinese market. Last year, it produced about 600,00 vehicles in China, but it is looking to increase its capacity by 30 percent to more than 800,000 cars by 2012. The expansion banks on increases in domestic purchasing power. And this is where being not locally responsible becomes a very short-sighted strategy – not only did Honda nothing to contribute to increases in purchasing power, it is also slaughtering its own image.

Other Japanese multinationals in China have recently announced similar increases in output – Nissan plans to produce more than one million cars by 2012, Sharp will double the number of retail outlets, fashion retailer Uniqlo intends to open 1,000 stores by 2020. What happened to Honda recently provides a good lesson for these Japanese companies and for all multinationals from other countries.

Tomorrow, the trial against four executives of the UK-Australian mining giant Rio Tinto will open in Shanghai. The executives have been charged with stealing commercial secrets and receiving bribes and are facing up to 20 years in prison. Both the protection of intellectual property and anti-corruption laws are important domains of the legal environment in any market, so what’s wrong with enforcing these laws? Well, two things. The first is that the facts of the case are not quite clear. Not much has been disclosed about the case, but it seems that what the Chinese courts see as infringements on trade secrets may be what business insiders consider rather normal gathering of industry information. Secondly, the trial may turn out to be highly political and less factual. It is commonly accepted in China that judges weigh both legal and political aspects of cases and sometimes give precedence to the political aspects and interests, including the protection of local markets and companies. That the court hearings will take place behind closed doors certainly contributes to concerns that this may happen in this high profile case, too. Could all of this have prevented? Yes, maybe! Multinational companies such as Rio Tinto simply must be aware of the land mines that are buried all over China’s business environment and proceed with appropriate caution. In a way – to stick with the theme of this blog – it is a case of pride that often shows itself as ignorance concerning differences and threats in the external environment.

eBay has been in several ruffles with french luxury goods maker LVHM. Recently, LVHM, that holds the rights to such well-known brands as Hennessy, Kenzo, Givenchy, Dior Perfumes, or Tag Heuer, has sued eBay over misuse of its Louis Vuitton brand. As its customers frequently misspell Vuitton, eBay has purchased keywords from search engines such as ‘Viton’, ‘Vitton’ or ‘Wuiton’ in order to channel web traffic to listings of the prestigious maker of leather goods products on its own website. Compared to earlier judicial awards LVHM won against eBay, the current one of US$ 316,500 is negligable. In 2008, it was fined 39.9 million Euros for the sale of counterfeit LVHM goods on its platform and in late 2009 it received another hefty 1.7 million Euro  slap on the wrist for continuing to allow the resale of authentic LVHM perfumes on its website. With net revenues in excess of US$ 2 billion in 2009, eBay will probably be able to take the most recent blow as well. As the fight between French brands and the California-based auctioneer has long outgrown its pure business and legal nature, but has become one between two cultures, it has not hard to predict that it will continue into the future.

The times when Western hotel chains where the ones expanding in Asia seem to be over. As the International Herald Tribune reports, the latest trend is Asian hotel chains opening hotels in European locations. Raffles will open the Royal Monceau in Paris, where both Peninsula and Shangri-La Hotels will also be opening new properties soon. In addition, Shangri-La is looking into further projects in London, Moscow and Vienna. Banyan Tree will open hotels on Korfu and Santorini islands in Greece, while Six Sense is looking into the island of Milos. Given the growth prospects in Asia, the stagnating market in Europe and the increasing pressure hotel chains find themselves under, their moves seem counterintuitive at first sight. Considering, however, that an ever more affluent group of Asian tourists is and will be visiting Europe, their plans make perfect sense. Ultimately, these hotels will eat into the market share of European and American hotel chains. Will there be difficulties connected to the entry of these hotels into Europe? I am sorry to say, but I doubt it.

German toymaker Steiff, famous for its teddybears and other stuffed animals, announced that it will pull out of the Chinese market soon. Like many other companies, Steiff entered China (in 2004) in an effort to reduce costs and remain competitive with its range of high-quality toys that are often more collectors items rather than toys. From the outset Steiff was battling with low quality manufacturing. Workers didn’t seem to be capable or willing to adhere to Steiff’s strict strict quality standards. Even intensive (and expensive) training has not shown much effect because of high turnover among workers which is quite common in China. When, in addition, wages began to rise, the venture simply didn’t seem to hold its initial promise and Steiff decided to leave China.

As reported earlier (on this blog and elsewhere) Chinese automaker SAIC will enter into a 50:50 joint venture with GM to sell small cars and light trucks in India. There’s not only the GM angle to this move. Viewed from the SAIC angle, memories from the recent past arise. In 2004, SAIC purchased a majority stake from Korean Ssangyong motors which ended in one big disaster with Ssangyong seeking bankruptcy protection. Most recently there have even been allegations of intellectual property theft. The Koreans blamed the Chinese, and the Chinese the Koreans – just what you would expect of two countries that haven’t head the best of relations throughout history. Now, what about India? What makes SAIC confident that the same challenges won’t emerge in India. Or, if they emerge, what makes them believe that they’re now better at handling them. And, would Indian consumers be interested in a predominantly Chinese car?