Assessing the Overseas Market for EU-Based Dishwasher Manufacturing Company - Essay Example

 Assessing the overseas market for EU- based dishwasher manufacturing company: Choosing between Japan and India 1. Executive Summary This report was the result of a study undertaken as per the terms of reference of M/s X Washing Machine Company based in the EU and planning its expansion of production of white goods into an Asian country, either Japan or India. The study examined the business and other environmental factors of each country by reference to key government reports and publications of the chosen countries. It also borrowed from freely available materials on the web and in print media, duly citing the original authors appropriately. The main objective of finding out the specific business opportunities, challenges and other market information was undertaken primarily through desktop research and by applying known business and marketing concepts a considered opinion was arrived at in choosing the target market. Japan was chosen as the target market for company expansion in view of its highly enabling and technologically advanced business climate, its reformed regulatory laws, its supporting infrastructure and presence of white goods industry clusters across the country. Once the country was chosen as the target market, the question of market entry mode was examined in some detail. By comparing several modes viz., licensing, subsidiary formation, joint ventures and mergers and acquisitions, the study arrived at the conclusion that it would be most appropriate for the company to enter the Japanese white goods production sector through forming joint ventures, because of the inherent advantages of the method as compared to the other methods, and in spite of the high initial capitalization requirements. 2. Introduction This study was undertaken to examine the business environment relating to the white goods sector. It examined, through secondary research, the business opportunities in Japan and India, determined the prospects for a white goods manufacturer in setting up production units in either of the two countries, as also choose the relevant market entry mode for one country. Desktop research was conducted with sources from government websites and relevant journals. The brief was to evaluate the target market of Japan and India and to guide the company, M/S X Washing Machine Company adopt a suitable market entry mode for setting up business production in a chosen country. It relied on known business and marketing concepts for arriving at its conclusions, given the limitations of research. 3. Terms of reference The study was to assess the market for producing washing machines in Japan and India. It was to examine the white goods industry, in general, and the washing machine industry, in particular, as required by M/s X Washing Machine Company. It was also asked to compare business opportunities in the two countries and choose target market and market entry mode. 4. Methodology The research used desktop searches and secondary sources of data from the web. However, books and journals were also used. The evaluative framework consisted of understanding the business environment in Japan and India, and conducting Porter’s Five Forces, Porter’s Diamond and PESTEL analysis for the white goods industry. One target market was chosen and the one specific market entry modes chosen. 5. Findings and discussion Initially, a PESTEL analysis was conducted. a) PESTEL Analysis The white goods industry was examined with several key findings on factors conducive or inhibitive towards foreign market expansion. Political This study found that, while both Japan and India promote foreign business entry, both still attempt to protect their interests and retain many legacy systems in spite of gradually having opened up their economy via FDI, joint ventures, etc. India has made remarkable progress in adopting economic and regulatory reforms, while Japan still retains a few bureaucratic controls and forms of protectionism. Indeed, India allows FDI in most industry sectors, excepting sensitive ones like defence (Rebecca, 2009). Globally, ‘white goods’ constitute an important part of the household consumer durables industry and the major hurdles to business ventures were found to be bureaucratic red tape. India, a federal union of 30 States and 5 Union Territories supports a social, democratic, secular and federal governance framework (EC, 2002). Indian government is parliamentary in form and has been found to be quite stable over the years. Japan is also a representative democracy and has a parliamentary form of government. However, regulatory measures in Japan protect and benefit local businesses through licensing regime, often preventing market changes (Tilton, 1997). Economic India and Japan promote bilateral free trade although both are WTO signatories and promote imports and FDI. Japan has eliminated most exchange control restrictions. India has scrapped its import quotas and reformed its import tariffs. It follows a free market economy, advocates privatisation, has made the exchange rate market related and also has almost completely de-licensed several sectors. However, high entry and exit barriers to manufacturing units and infrastructure bottlenecks in power and roadways still restrict industrial growth. Again, most public sector enterprises handling critical industries are inefficient. India uses non-tariff barriers and trade remedies like anti-dumping measures. High tariffs and other barriers to FDI, high costs of forming business etc. afflict India more than Japan (Porter, 2004). Japan ranks better in infrastructure quality, depth of collaboration among producers, quality of local supplies, R & D facilities, and cooperative labour conditions, and has in place much lower tariffs on imports than India (McIntyre, 2010). However, Japan has disadvantages like lower access to bank finance, lack of venture capital availability, intellectual property protections, etc. (Porter, 2002). India also lacks sufficient decentralization of power to states impeding fiscal decisions (Porter, 2004). But, generally, the global electronics appliance and consumer durables market is characterized by low product differentiation and resultant price competition, and low technological developments. Sales have been driven mainly by housing, lower interest rates, higher employment rates and increased consumer confidence (Ferman, 2006). Social Indian social customs, unlike in western countries, were found to be conservative. A heterogeneous population, diverse religious practices, languages, customs, food habits, etc. appeared to make market entry challenging. Research pointed to Hinduism being the predominant religion, cows as sacred and vegetarian food as staple diet of many Indians. There is also a traditional ‘Namaskar’ which people use to greet with hands folded and customs are often very orthodox (EC, 2002). Generally, the public were against privatization. However, Japan was more industrialized, having a population practising Buddhism and Shintoism. Japanese society was linguistically homogenous with Buddhist teachings deeply ingrained in everyday life and the Japanese also commonly mixed up religions (Honda, 2009). Compared to India, where English was an official language, language barriers, stringent business practices and high customer expectations on quality acted as barriers to business entry in Japan. Technological Research found that Indian consumers increasingly favoured fully automatic washing machines and this was caused by rising disposable incomes (Corporate Catalyst India, 2009). However, Japan had better R & D facilities and was technologically more innovative. Also, many Japanese home appliance makers had already entered other Asian markets and collaboration with them could offer substantial expansion opportunities (McIntyre, 2010). Environmental This study found that Japan followed a system of environmental protection similar to that of the EU. Japan’s laws provided for taking back EOL electronics products like washing machines by manufacturers, mandated an “old for new” formula, and charged companies certain fees that ultimately impacted consumers (EC, 2006). India also had adopted the WEEE framework and was a party to the Basel Convention (1990) that concerned the control of trans-boundary movement and disposal of hazardous wastes. Import of hazardous materials was also controlled and the government actively targeted the minimizing of waste and hazardous materials (Bandyopadhyay, 2010). Legal Japan had a stringent anti-monopoly law, a law for protecting IPR, a Securities and Exchange Law for regulating stock markets, Company Law for regulating corporate mergers, Foreign Exchange and Foreign Trade Law for regulating FDI, Commercial Code for defining various forms of doing business, a Corporate Tax law, various laws regulating labour issues, etc. (Deloitte, 2010). India also had similar laws also. But Indian taxes were collected by both Central and State governments. India had a liberal trade policy, some stringent foreign exchange regulations, and higher taxation. The public sector had monopoly over critical sectors like defence, although FDI was welcomed. b) Porter’s Five Forces Analysis The five forces applicable in the white goods industry were analyzed so as to arrive at comparative ease of entering the Japanese or Indian markets. Threat of entry Production of washing machines and other white goods were found to be scale intensive and there were few product innovations over the years; instead, research had focused on adding to user convenience and service delivery in a closely competitive market. Special knowledge and skills sets also derived product brand loyalty. Threat of substitutes Low switching costs existed owing to uniform industry-wide production practices. Very similar products from close competitors also implied stiff price competition and companies relied on brand loyalty for product differentiation. Power of buyers It was observed that increasing disposable incomes and more demanding consumer preferences, imparted power to buyers over both Japanese and Indian firms. Power of suppliers Fast supplies and high quality were found to be critical needs of the white goods sector, and companies seeking to enter Japan or India would need to either collaborate with existing suppliers or itself take over supply aspects. Japanese suppliers, owing to the government’s propensity to favour local industry as also because of their depth of experience, were found to hold substantial control over the growth of white goods industry. Extent of competition Globally, there were around ten odd companies who lead in white goods manufacturing. Superior technology, quality control and labour efficiency in Japan meant that it would be difficult to compete with existing major local producers. However, the scope for business expansion was evident in as much as no market leader could garner more than 10 per cent market share globally. c) Porter’s Diamond The following were studied in relation to Japan and India. Factor conditions Land, raw materials and labour constitute factors of production. Japanese workforce efficiency and productivity is legendary whereas Indian employment conditions with attendant strikes and lack of work culture are well known. Firm strategy, structure and rivalry While rivalry amongst competing firms was found intense in both India and Japan, strategically, Japan appeared placed better. A well developed infrastructure, efficient supplier network and prospects of further growth appeared to favour Japan as target market than India. Demand conditions Growing consumer demands as also technological advancement can affect sector-specific industrial growth. A consumerist economy and higher purchasing power parity appeared to make Japan a better target market than India. Related and supporting industries This is vital for the white goods industry. Support structures, including clusters developing around white goods manufacturing units appeared to be well developed in Japan, rather than in India, in spite of bureaucratic interferences. Also, the advanced technological knowledge gained by years of industry experience as also innovative abilities of the Japanese appeared to make Japan a more attractive market than India. 6. Conclusion Overall, Japan appeared was more developed, supportive, more reformed, technologically advanced, and the more cost effective target market of the two countries. The provision for various ways of forming business entities also lent Japan an edge over India as target market. Another distinct advantage was the location of factories near source materials as also the locational cost advantages and economies of scale. 7. Recommendations Among market entry modes, licensing, joint venture, mergers & acquisitions, and green-field wholly owned foreign subsidiary were considered. In India, the most appropriate mode of market entry appeared to be joint ventures. The Indian government welcomes FDI in the white goods sector although it still mandates a maximum holding by a foreign company in an Indian subsidiary or unit. However, Japan was determined as the appropriate target market, and the market entry mode into Japan was examined more critically. Licensing Licensing regulations and laws protect technology transfers as well as IPR. Licensing is complex and often multiple licensing is adopted. Mergers and acquisitions Buy outs were found to be a lot more economical in Japan although commonly, M&A s were found to fail owing to vastly diverse and non-western culture of Japan. The Japanese also viewed these with suspicion and adopt restrictive attitudes. Green field wholly owned subsidiary Subsidiaries are commonly formed, particularly green field, wholly owned subsidiaries, by smaller foreign companies entering the Japanese market. There are no minimum capital requirements but language seems a major problem in drafting or understanding license agreements. The long pendency to get the license sanctioned, and the need for registration for exclusivity made licenses appear inappropriate for the given business venture. Joint ventures The procedures allow for quick start-ups and joint ventures appeared to be one of the most effective entry modes in the Japanese market, particularly for branded consumer appliance makers. The company would need to be fully committed in its managerial and technological attitudes. However, lucrative deals concern alliances with larger Japanese firms, and also Japan is quite protective of its businesses and work force. However, huge capital is required for starting a joint venture in Japan (Higashino, 2005). By means of JVs, foreign firms deal directly with their Japanese partners and also build their own distribution network. The JV also needs to be registered, must have at least three directors and one auditor appointed, and have a start-up capital of JY 10 million (JETRO, 2005). A JV, in addition to allowing the foreign company to understand the Japanese market better, also allows for easier expansion. Hence, this study recommended the formation of a JV with a Japanese company as market entry mode. 8. 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Porter, ME (1990), The competitive advantage of nations, The Free Press, a Division of Simon & Schuster Adult Publishing Group, Copyright © 1990, 1998 by Michael E. Porter. Porter, ME (2002), ‘Can Japan compete? New findings from the global competitiveness report 2002’, Institute for Strategy and Competitiveness, Harvard Business School, Tokyo, Japan, Dec, 2002. Porter, ME, (2004), ‘Indian competitiveness: where does the nation stand?’ Institute for Strategy and Competitiveness, Harvard Business School, Mumbai, India, Jan 2004. Rebecca, S., (2009), ‘Business destination called India’, White Paper, Leader Prospects, Viewed Online Aug, 18, 2010; http://www.leaderprospects.com Sobrero, M. & Roberts, E.B., (2002), ‘Strategic management of supplier-manufacturer relations in new product development’, Research Policy, Vol. 31, pp. 159-182 Tilton, M. (1997), ‘Regulatory reform and market opening in Japan’, WZB Discussion Paper No. FS 197-305, Social Science Research Center, Berlin, July, 1997. 9. Appendix 1. PESTEL Analysis Every firm operates in a complex macro environment consisting of legal, economical, socio-cultural, political, environmental, and technological factors that influence particular industries, countries, and goods manufactured or marketed. This framework or PESTEL needs a careful assessment in as much as the framework can impact the success of a firm’s competitive strategy (Johnson et al, 2008). For the white goods industry and particularly in case of washing machine production industry, various factors critically influence a firm’s success in its target market. The factors are as follows. Political Industries prosper in enabling political environments and under democratic set-up. This includes cases of expansion by foreign companies in overseas markets. A basic requirement is the commitment of government to promote healthy business growth. Non-democratic, autocratic regimes are non-supportive of free trade and liberalisation which impedes foreign investments and market movements. Economic This includes important factors like exchange rates, import tariffs, market openness, capital market, inflation, GDP, demand and supply trends, etc. that impact choice of target market. Economic reforms favor industrial growth and employment. Social Social factors include society, culture, mannerisms, ethics, professionalism at work, work culture, and so on. All these have been found to impact business attitudes and performances in different industrial sectors in different countries. Technological Technological advancements globally tended towards simplification and user friendliness of products in the white goods sector, with diverse technical knowledge spanning mechanics, plastic moulding and electronics being essential skills. Choice of target markets for expanding white goods manufacturers were also determined by higher demand, lower production costs, existence of quality suppliers, skills in innovation and wireless technology and the development of industrial clusters around manufacturing units (Bonaglia, et al, 2007). Environmental Environmental considerations are increasingly becoming critical for achieving sustainable competitive advantage for industries. The white goods industry, in general, and the washing machine industry, in particular, has to comply with stringent environmental protection laws of the host country as also international laws. In addition, energy efficiency has emerged as key industrial concern. Industry is primarily concerned with reducing ozone layer depletion due to release of harmful gases into the atmosphere by industries. Environmental laws and regulations also concern with reducing electronic waste and other hazardous materials by industrial plants into land, water or atmosphere. Legal Legal regulations and laws pertain to companies, partnerships, contracts, trans-border transportation of goods, disposal of hazardous waste, commercial laws, protection of employees’ rights, etc. Laws and regulations are the legal infrastructure in which industries have to function by following some universal codes of behavior, etc. Business growth is critically impacted by existence or non-existence of various laws. 2. Porter’s Diamond Framework This framework is useful for analyzing and comparing national competitive advantage in particular industries. It includes four factors that impact national competitive advantage (Porter, 1990). Read More