Deadly Sins of International Business Blog

#71 The Shape of Things to Come

admin — Thu, 26 Aug 2010 19:53:33 +0000

There’s something remarkable going on in China’s automotive industry. Yes, there’s growth, but there’s more to it. Chinese automaker BYD that is backed by Warren Buffet’s Berkshire Hathaway, Inc has set up a Chinese 50-50 joint venture with Daimler in late May. The goal of the joint venture is to jointly design and produce an all-electric vehicle for the Chinese market. This will add a new dimension to Daimler’s expansion in China. Having recently experienced above average sales growth, Daimler also has plans for an engine factory in China – the first one ever outside of Germany. Naturally, Daimler as a corporation thinks of opportunities first and I, as an academic, think of the risks first. Joint ventures haven’t been known to be among the easiest ways to cooperate across borders, especially in China. This one, however, seems to be on a straight trajectory to success. The Chinese government is reported to have announced that it will order 100,000 of the new vehicles come out of the Daimler-BYD joint venture. Although details of the agreement haven’t been made public yet, the government is expected to honor its commitment by 2012. What’s interesting about this is that initial plans to subsidize private consumers for buying electric cars seem to have been scrapped after they drew criticism from the Chinese Communist Party for benefiting mostly the nouveau riche in China. Someone has been doing an excellent job lobbying the Chinese government. For once, it seems that what’s good for an automotive manufacturer will also be good for the environment. And for BYD, the deal is a godsend, too. After record increases in 2009 (by an astonishing 160 percent), it had to announce in early August that it’ll cut its sales targets by 25 %. Obviously, ‘too big to fail’ exists in other countries, too…

#70 The Phoenix Rises from the Ashes … in China

admin — Mon, 23 Aug 2010 07:18:18 +0000

Of course, what is commonly referred to as the Chinese phoenix, the fenghuang, only distantly resembles the phoenix of the West. So, erudite reader, please forgive the amateurish use of the phoenix as a metaphor for what’s going on in China’s automotive sector. Mercedes, BMW, or Audi are all reporting very positive developments from the Chinese market. This confirms what insiders to the automotive industry and experts in cross-cultural marketing have long pointed out silently. It’s not necessarily (only) available income that drives purchasing decisions, but national culture plays a big role, too. Income levels in China would suggest that smaller models are sought after, but the opposite is true. Status, power and prestige are very important elements of Chinese culture. Several years ago now, Volkswagen had planned to rapidly increase market share in China by offering a small car – assuming that with rising levels of affluence, everyone would buy a small, entry-level car. Guess what, they didn’t. The polo was simply too small for the Chinese market. Today, larger Volkswagen models such as the Passat or the Tiguan are doing a lot better. Owning a luxury car is the ultimate sign of social status, and so demand in the premium automotive segment is on a constant rise. In July, Audi sold about 50 percent more cars in China than last year, BMW about 80 % more and Mercedes-Benz even tripled its sales. And all of this despite the rather high luxury taxes in China which raise the prices of the flagship models – the S-Class, the 7-series, or the A8 – to about double from what they are in Europe. These developments certainly come at the right time for luxury carmakers whose sales have been less than favorable in their core markets in the West in past years. The Chinese fenghuang is a symbol of virtue and grace – very similar to what the Mercedes brand stands for. Maybe my use of the metaphor isn’t that off after all.

#69 The Globalization of Healthcare

admin — Mon, 16 Aug 2010 09:29:55 +0000

Yes, we have all heard the stories. Stories of patients in need of treatment in the Western hemisphere traveling to countries such as Thailand or India in need for more affordable healthcare, stories of hospitals in the so-called developed world outsourcing certain diagnostic procedures to the so-called emerging markets, or stories of hospitals in the United States who meet their staffing needs by recruiting nurses and doctors from other countries. In a time when the World Health Organization ranks countries such as Singapore 6^th among the world’s healthcare systems and the United States only 37^th, quality concerns are no longer an issue in discussions about the globalization of healthcare. Only questions of liability are still raised as big impediments to a fully globalized healthcare industry. But even these no longer seem to be barriers for business. In Europe, Capio of Sweden, which operates in several European countries including Norway, Denmark, Finland, France, the United Kingdom, Spain, and Switzerland, is owned by global private equity form Apax. And let’s just look at other world regions. Dubai Healthcare City is the world’s first healthcare free trade zone, attracting global brands such as the Mayo Clinic from the USA, Great Ormond Street Children’s Hospital from the UK, the German Heart Centre or the American Academy of Cosmetic Surgery Hospital. The Cleveland Clinic has entered a contract to manage a hospital in Abu Dhabi and has established similar arrangements with hospitals in Austria, Canada, Egypt and Saudi Arabia. Or, let’s look at recent transnational mergers and acquisitions activity in other world regions. In mid-July US-based private equity firms Carlyle and TPG acquired Australia’s Healthscope for nearly US$ 2 billion. Among several hospitals in Australia, Healthscope also has operations in New Zealand, Malaysia and Singapore. In late July, Integrated Healthcare Holdings Ltd of Malaysia won a battle against the Indian Fortis group over Parkway hospitals of Singapore. It seems that the pace at which the world of healthcare is becoming flat is accelerating rapidly.

#68 Transnational Take-Over Alert: ASDA of US buys UK operations from Danish Netto

admin — Sun, 18 Jul 2010 06:54:27 +0000

If approved by UK authorities, Asda, Wal-Mart’s British arm will be acquiring almost 200 UK stores of the Danish Netto chain for an alleged amount in excess of 1 billion US$. Acquiring smaller stores seems like a good move for Wal-Mart in Europe. First, shopping habits in many regions seem to change in a way that (an aging population of) shoppers start to develop a preference for more frequent shopping of smaller quantities in convenient locations. Second, zoning regulations prevent retailers from opening new locations. However, the usual caveats apply: first, Wal-Mart hasn’t done too well in a number of international markets, including European ones (just think of the disaster in Germany). Most recently Asda’s sales dropped inthe UK and it has been loosing market share to its competitors. Second, cultural differences. In addition to differences between national cultures that Wal-Mart sometimes has troubles with, there’s also the fact that Wal-Mart’s pervasive business model isn’t something that travels easily into other contexts. Looks like there’s some homework to do before the post-acquisition integration pains start.

#67 What is it with global retailers?

admin — Mon, 05 Jul 2010 23:39:00 +0000

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!

#66 Honda’s painful experience in China

admin — Thu, 03 Jun 2010 20:04:18 +0000

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.

#65 Post-merger Integration 2.0

admin — Tue, 18 May 2010 16:23:58 +0000

Consultant McKinsey & Company reports on two seemingly unrelated facts of the global business world: first, many transnational mergers go down the drains, and second, the age of Asia continues to dawn. At the intersection of these two topics, evidence is emerging that Asian companies approach post-M&A integration slowly and cautiously, sometimes to the extent that there are no integration efforts at all. It may be too early to tell, but the hands-off approach that only focuses on a hand full of key performance indicators rather than on fully blown integration that often leads to distraction, inefficiency and demotivation, seems to generate better results. With stronger emphasis on the need for internal control, post-M&A integration seems to be a distinctly western objective. Maybe here’s a lesson to be learned from Asian companies? Maybe the fact that we better start to learn from Asia is a lesson in itself?

#64 Donuts for Russia!

admin — Fri, 30 Apr 2010 17:46:59 +0000

As the Wall Street Journal reports, Dunkin Donuts is returning to Russia. After it has retreated from the market in 1999, the owner of the Dunkin’ Donut brand, Dunkin’ Brands, is planning to open 20 stores in Russia this year. At the time when then owner Allied Domecq decided after only three years in the market that Russia would not work for their brand, there were two Dunkin’ Donut stores in Moscow and three outside. The official reason has been Russia’s economic crisis, but there was also talk about difficult relationships with franchisees (in particular one who sold liquor and meat pies in addition to Dunkin’ products). There may have been at least one more reason – at least according to the Wall Street Journal, Russians aren’t really familiar with donut’s. In recognition of this, Dunkin will be experimenting with scalded cream and raspberry fillings. Plus, this time they are bringing in a lot of Russia expertise – Dunkin’ is teaming with a Russian real-estate developer. What’s also noteworthy is that Dunkin’s CEO, Nigel Travis, has developed the Russian market for another US brand in the past, Papa John’s.

#63 Cheat Sheets for Doing Business Abroad

admin — Wed, 21 Apr 2010 10:04:48 +0000

Here’s an interesting list of “100 Essential Cheat Sheets for Doing Business Abroad”, ranging from ‘food faux pas’ to ‘dress codes’ to ‘negotiations across cultures’. Not all of it offers the deepest insight available, but it’s definitely a good place to start.

#62 Dancing around the volcano

admin — Tue, 20 Apr 2010 16:16:03 +0000

Having been in Iceland during the most recent eruptions of the volcano Eyjafjallajokull in Iceland has been an interesting experience, even with a view to international strategy. Academics and managers have come so accustomed to being in control that the only thing we worry anymore are issues that may be tricky, but still are manageable. Standardize or adapt? Send expatriates or promote locals? Export or invest? Most answers to these questions aren’t easy ones, but there are ways to handle them. Enter the volcano. Apart from it being a belittling experience if one sees the volcano spewing boulders, it is definitely worth a thought to bring the simple things back into the design of international strategies. Let’s not forget that there are events beyond our control that render any strategy, no matter how well designed useless.