International Business: CeramiCo Ltd Case - Essay Example

? International Business: CeramiCo Ltd. ID Number & Total Number of Words: 2,998 Introduction Operating in Birmingham, UK, CeramiCo Ltd. is a small to medium size enterprise that specializes in the manufacturing of ceramic tiles. To increase its business opportunity and avoid saturating the market in UK, the company is in the midst of deciding whether or not it is best for them to expand its production line in either in UK or in Turkey. To help CeramiCo’s board of directors gain a better analysis and understanding with regards to the ceramics industry in UK and Turkey, it is best to use the Porter’s five forces framework (Henry, 2008, pp. 68 – 69). Since both the UK and Turkish government are highly promoting the practice of free trade, barriers to potential new entrants is relatively low (Stonehouse et al., 2004, p. 120). Since business people can easily penetrate the ceramic industry in Turkey makes the threat of new entrants high. Applicable in both UK and Turkey, low barriers to entry clearly explains why there is a very tight market competition within the ceramic industry in Turkey. The threat for product substitution is also high. Instead of using ceramic tiles for flooring, the public consumers can choose from a wide-range of non-ceramic floor tiles like vinyl flooring, vitrified tiles, porcelain floor tiles, quarry tiles, eco surface recycled rubber flooring tiles, congoleum tiles, laminated flooring, baseboard tiles, natural stones like granite, floor tiles made of wood, etc. (Castano, 2012; Roberts, 2012). Therefore, the bargaining power of buyers is very high. The local manufacturers of ceramic products has long-time been dominating both the domestic and international markets. This explains why there is a high number of potential suppliers of raw materials for ceramic floor tiles. Since CeramiCo can easily move from one supplier to another, the bargaining power of suppliers is very low. (See Figure I – Summary of Porter’s Five Forces Analysis on page 3) Figure I – Summary of Porter’s Five Forces Analysis The global demand for ceramic tiles is continuously expanding despite the global economic difficulties in most parts of the American and the EU nation. However, the recent economic turmoil in Euro zone is making the exchange rate more volatile. Therefore, CeramiCo’s board of directors are more concern with the long-term impact of volatile exchange rate on its cost of production and overall sales and profit. Furthermore, a significant increase in the global demand for ceramic tiles would mean encouraging more business people to join the ceramic tiles industry. With regards to its production expansion plan in Turkey, CeramiCo’s board of directors have a strong doubt with regards to the Turkish government’s support on free trade. Since Turkey had a history of strict government regulations and red tape, potential foreign investors decided not to expand their production facitilies in Turkey despite its promise to offer cheaper operating costs. In relation to the case of CeramiCo Ltd., this study will examine the economic arguments behind the idea of expanding its production line in either UK or in Turkey. Eventually, this study will present some useful advises on how the company can improve its pricing stategy in both domestic and international market. Economic Arguments behind the Expansion Plan in Turkey To determine the market competition within a specific industry, it is necessary to examine the market structure of ceramic industry in both UK and in Turkey. According to McEachern (2009, p. 176), the market structure focus on analyzing “the important features of a market such as the number of suppliers, the product’s degree of uniformity, the ease of entry into the market, and the forms of copetition among firms”. Furthermore, several studies explained that the market structure is all about examining the number of companies that are currently selling homogenous products (Tucker, 2011, p. 136; Tucker, 2010, p. 199). Specifically the ceramic industry in Turkey is well-established. Today, there are more than 63 firms that are currently involved in the production of ceramic products and 23 of these firms are focused in the manufacturing of ceramic floor tiles (Republic of Turkey - Ministry of Economy, 2012, p. 1). The rest of the firms are manufacturing santiaryware products. Among the Turkish firms that manufacture ceramic floor tiles include: the Eczac?bas? (VitrA), Kale, Toprak, V&B Fliesen, and the Ege Seramik Groups (Republic of Turkey - Ministry of Economy, 2012, p. 1; Kara, 2011). Considering the fact that ceramic industry in Turkey does not entail barriers to entry, it is expected that there will be unlimited number of manufacturers that will aim at producing ceramic floor tiles for the public consumers. Since there are already 23 existing Turkish firms that specialize in the manufacturing of ceramic floor tiles, it is clear that the market structure of ceramic industry in Turkey is a perfect competition (Tucker, 2011, p. 136). The problem with expanding another production line facility in UK is the fact that the ceramic industry in EU nation is composed of 2,000 companies that specializes in the manufacturing of different products such as “wall and floor tiles, bricks and roof tiles, the tableware and ornamental ware, santiaryware, refractory products, technical ceramics, and vitrified clay pipes” (ECORYS Nederland BV, 2008, p. 19). Among these seven (7) sub-sectors, the ceramic industry in EU nation is composed of mostly companies that manufacture “wall and floor tiles” (i.e. Marazzi Group, etc.) (ECORYS Nederland BV, 2008, p. 24, 28). Therefore, expanding another production line facility in UK would only mean increasing the market competition on the part of CeramiCo. (See Figure II – Summary of Ceramics Sub-Sector in EU Nation as of 2006 below) Figure II – Summary of Ceramics Sub-Sector in whole EU Nation as of 2006 Source: ECORYS Nederland BV, 2008, p. 24 A perfect competition is referring to “a market situation where there is a large number of buyers and sellers... that sells homogenous products” (Jain, 2011, p .241). Earlier it was mentioned that there are 2,000 companies that manufacture different types of ceramic products which are mostly wall and floor tiles in UK (ECORYS Nederland BV, 2008, p. 19). In Turkey, there are 63 companies that manufacture ceramic products and 23 of these firms are focused in the manufacturing of ceramic floor tiles (Republic of Turkey - Ministry of Economy, 2012, p. 1). Based on these figures, It means that there is a perfect competition within the ceramic industry in both UK and Turkey. Backward vertical integration is referring to the process wherein the company decided to produce their own raw materials needed in their production line (Hill and Jones, 2010, p. 293). Although the available sources of raw materials is quite abundant in Turkey, the Republic of Turkey - Ministry of Economy (2012, p. 1) reported that most of the Turkish firms that are currently manufacturing ceramic tiles have already invested in backward integration. It means that most of the Turkish firms have already successfully installed thair own facilities needed to prepare the raw materials. This should not be an issue in the case of CeramiCo since putting up its own R&D can only increase its fixed operating costs. Furthermore, the suppliers of raw materials in Turkey has already mastered the art of producing raw materials needed by CeramiCo. Therefore, the company should just rely on the experties of its potential suppliers. To strengthen the argument on why it is best for CeramiCo to expand its production line in Turkey, its board of directors should consider and carefully study not only the market structure of ceramincs industry within both the EU nation and in Turkey but also the discripancy between the national minimum wage rate in UK and Turkey. As a common knowledge, a large part of the company’s fixed operating expenses is composed of the salary and wages of each human resources (Pagoso, Dinio and Villasis, 2008, p. 129). For this reason, it is important for the CeramiCo’s board of directors to take note of the latest minimum wage requirement in UK and in Turkey. As of 2012, the minimum wage requirement in UK is ?6.19 per hour for employees more than 21 years of age (gov.uk, 2012). During the first and second half of 2012, the Turkish government has implemented a 5.91% and 6.09% increase in the minimum wage requirement respectively (World Bulletin, 2011). Therefore, the minimum wage for each worker more than 16 years of age was 701.1 and 739.8 Turkish Liras during the first and second half of 2012 per month (World Bulletin, 2011). Using the conversion rate of 0.34752 GBP/TRY, the minimum wage requirement in Turkey would be ?257.1 per month starting the second half of 2012 (The Money Converter, 2012). Assuming that each worker is required to work for 8 hours a day and 26 days a month, the minimum wage requirement per hour in Turkey would costs CeramiCo only ?1.236 [26 days x 8 hour/day = 208 / ?257.1]. The UK government is strongly supporting the practice of free trading (Foreign & Commonwealth Office, 2012, p. 35; HM Treasury, 2007, p. 3). This explains why the manufacturers of ceramic tiles throughout the different members of the EU nation could easily ship, transport, and sell their ceramic tile products within the UK market. Because of the practice of free trading, China being the world’s largest manufacturer of ceramic tiles also export their products to UK and EU markets. Therefore, this scenario could mean that the market competition that CeramiCo is facing will continuously be tighter over the next few years. (See Figure III – Summary of the World’s Ceramic Tiles Production below) Figure III – Summary of the World’s Ceramic Tiles Production Source: ECORYS Nederland BV, 2008, p. 27 The Turkish government has already signed the Free Trade Agreement (FTA) with 22 other countries around the world (European Commission, 2012; Invest in Turkey, 2012). Other reasons why CeramiCo should consider expanding its production line in Turkey includes: a relatively lower national salary and wage requirement, continuously improving economy, the availability of highly qualified and competitive employees, the presence of good infrastructure, lower energy costs, huge domestic market, and lower tax rates, and foreign investment incentives (Invest in Turkey, 2012). Despite the perfect competition in the Turkish ceramic industry, the manufacturers of ceramic wall and floor tiles in Turkey were able to increase their export value from 467,770 in 2010 up to 521,108 in 2011 (Republic of Turkey - Ministry of Economy, 2012, p. 2). One of the main reasons why there is a high demand for Turkish-made ceramic tiles is because of its high quality products that are sold at a more affordable prices. Based on the recent report that was published by Kara (2011, p. 36), “the ceramic tile sector is one of the most important one because it is composed of 30% turnover in the entire ceramic industry in Turkey”. Similar to the case of CeramiCo in UK, the continuous increase in the production and selling of ceramic tiles in Turkey strongly suggest that tha company will also experience a tight market competition in this area. However, the cheaper operating costs in Turkey will make the company’s product become more attractice and easier to sell in the global markets. (See Figure IV – Summary of Turkey’s Ceramic Wall and Floor Tiles Export below) Figure IV – Summary of Turkey’s Ceramic Wall and Floor Tiles Export Source: Republic of Turkey - Ministry of Economy, 2012, p. 2 With regards to the issue on red tape, CeramiCo should take note that the Turkish govenment has already established its “Investment Support and Promotion Agency of the Republic of Turkey (TISPA)” which aims to reduce the incidence of red tape among the Turkish and foreign investors (Oxford Business Group, 2009, p. 228; Kremida, 2007). In case a foreign investor has encountered government employees who are asking for red tape, the foreign investors can immediately report the government employee to the TISPA. As a result of solving the issue on red tape in Turkey, revealed that foreign investors can now easily set-up their company within a short span of one (1) week (Oxford Business Group, 2009, p. 228). Since CeramiCo has long-time been operating in Birmingham, this company is already familiar with the available sources of raw materials in UK, the UK government regulations behind the manufacturing and selling of ceramic tiles, and the level of demand for its products. Since the company has a ready contact with different sources of raw materials, operating another production faciltiy in UK will be a lot easier on the part of its top management. Familiarity with regards to UK government’s regulation in the manufacturing and selling of ceramic tiles will minimize the risks wherein the company could face serious legal sanctions. Furthermore, CeramiCo will have also have no problems with regards to the cultural and language differences that the company will be facing in case its board of directors decided to expand its production line in an unknown country (Hongyi, 2009; Pagell, Katz and Sheu, 2005). All these factors should not be a problem if CeramiCo will expand its production facility in Turkey. By hiring some Turkish people to help in the business management CeramiCo, its top management officials will be able to easily learn more about the differences in language and business culture, the available sources of raw materials in Turkey, and the Turkish government regulations when running a business in Turkey. Specifically the economic turnoil that happened in EU nation makes the exchange rate more volatile. In fact, having a volatile exchange rate can be dangerous on the part of CeramiCo since its top management officials will not be able to accurately project its expected future operating costs (Mahmood and Ali, 2011; Arize, Osang and Slottje, 2004). If the company decided to expand its production line in Turkey, having a very high exchange rate could cause the company to suffer from the consequence of financial instability (Blundell-Wignall, 2011). However, all these financial issues can be controlled by the top management of CeramiCo. The Turkish Central Bank is using a free-floating exchange rate (Daily News, 2010). In most cases, a free floating exchange rate is often subject to a lot of exogenous shocks (Collignon, Pisani-Ferry, Park and Pak, 1999, p. 259). Even though having a fixed exchange rate is more beneficial on the part of CeramiCo (Ooghe, 2000, p. 325), the company can still adopt some financial strategies on how the company can control and make its daily operational costs will be more stable and predictable. (See Table I – Summary of Economic Differences between UK and Turkey below) Table I – Summary of Economic Differences between UK and Turkey UK Turkey Market Structure of Ceramic Industry Perfect Competition Perfect Competition Market Competition Very Tight Tight National Minimum Wage ?6.19 per hour ?1.236 per hour Barriers to New Entrant Low Low Threat of a New Entrant High High Threat of Product Substitution High High Bargaining Power of Buyers Very High Very High Bargaining Power of Suppliers Very Low Very Low Risks of Exchange Rate Volatility No Yes Government Support of Free Trade Yes Yes Familiarity with the Available Sources of Raw Materials Yes No Familiarity with the the Government Regulations Yes No Problems with Cultural and Language Differences No Yes Advises on how CeramiCo can Improve its Pricing Stategy within the Domestic and International Markets Between the choice of expanding the business in UK and Turkey, this study strongly advice CeramiCo to choose Turkey over UK. First of all, the national minum wage in Turkey is only ?1.236 per hour as compared to UK’s ?6.19 per hour. From this particular fixed operating cost savings alone, CeramiCo will be able to offer or sell its ceramic tiles at a more attractice and reasonable prices. By doing so, CeramiCo will have a better opportunity to serve the price-conscious buyers worldwide. Another way for CeramiCo to improve its current pricing strategy is to take advantage of economies-of-scale. Basically, the concept of economies-of-scale is all about reducing the average cost of production by allowing the company to maximize the use of its available resources (Moschandreas, 2000, p. 99; Smart, 1999, p. 66). Through economies-of-scale, CeramiCo will be able to manufacture and sell high quality ceramic tiles at a relatively competitive price. Therefore, as soon as CeramiCo has established its new production facility in Turkey, the company should eventually close down its existing production line in Birmingham. Instead of maintaining its production line in UK, the company could simply open more retail store outlets or establish a better business connection to those interested retailers. By doing so, CeramiCo could save a huge amount of money from the high operational costs in UK. The current economic situation in Turkey is steadily going strong. The problem with a continuously improving domestic economy is the risk of having a higher inflation rate (Kremida, 2007). In line with this, CeramiCo should consider the fact that the actual costs of running its own production facilities in Turkey would still be relatively low as compared to maintaining its production facility in Birmigham despite the risks of higher inflation rate in Turkey. Exchange rate volatility can result to trigger a lot of financial and operating problems on the part of CeramiCo (Fapohunda, 2012). Despite the potential adverse consequences of having unpredictable exchange rate, CeramiCo should consider the practice of leveraging once the company has established a production facility in Turkey. To take advantage of the exchange rate volatility, the company’s board of directors will have to consider the practice of changing some of its available fund from British pounds to Turkish Liras each time the value of Turkish Liras is low. By doing so, the company can somehow protect its short-term operating cash flow from the risks of exchange rate uncertainties. Therefore, having a free floating exchange rate is not always bad for the business owners. Conclusion When deciding for the company’s expansion plan, CeramiCo should focus on examining the presence of red tape, exchange rate volatility, government support in the foreign country, and the fixed operational costs (i.e. foreign country’s minimum wage requirement and taxes). Between UK and Turkey, it is more feasible on the part of CeramiCo to expand its production facility in Turkey because of lower minimum wage and salary requirement and a strong Turkish government support on foreign investors. The free trade practices in UK makes it a lot easier on the part of the ceramic floor manufacturers in different EU members to ship and sell their products within the UK market. Since there are almost 2,000 manufacturers of ceramic products throughout the EU nation, it is more difficult for CeramiCo to compete in the UK market. The number of manufacturers of ceramic tiles in Turkey is only 23. Therefore, there is a higher chance wherein CeramiCo could easily penetrate and compete in the Turkish market. 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