Potential for Foreign Investment in Taiwan - Example

Potential for foreign investment in Taiwan: The Perrier Brand BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS Section Page 0 Introduction 2.0 Micro-level analysis 3.0 Macro-level analysis 4.0 Risk analysis of most significant risks 5.0 Evaluating and resolving additional risks 6.0 Inability to create barriers to new market entrants 7.0 The VRIN framework for analysis 8.0 Culturally related risk analysis 9.0 Conclusion and recommendations References Potential for foreign investment in Taiwan 1.0 Introduction There is considerable opportunity for launching Perrier in Taiwan, a country with positive economic conditions, a well-developed commercial infrastructure, a competent distribution network and consumers that are familiar with Western product brands. The feasibility of introducing Perrier into Taiwan is dependent on understanding the potential risks for market entry, inclusive of competitor activity, consumer behaviour disparities between Europe and Taiwanese consumers, threat of substitute products in the established market, and the ability of Nestle to create a relevant brand management strategy that gains product recognition with the Taiwan consumer. Historically, Perrier has been a brand success in many European countries which have given the product a premium reputation, which justifies higher pricing competitively and also enhances word of mouth advertising (Chaudhuri and Holbrook 2001). This has been a product of having a long product history in European markets and competent advertising and other promotions which build brand recognition and in some markets even brand loyalty. In Taiwan, the Perrier brand would be a new competitive product in which consumers are unfamiliar with the brand and its premium benefits which could inject risks of high expenditures in marketing in order to make the product stand out over other competing products. This report assesses all of the potential risks for launching Perrier into Taiwan. Using relevant theoretical models for analysis, the report examines the feasibility and profit potential for introducing Perrier into this new foreign market. Further, this analysis evaluates the level of uncertainty that exists in Taiwan, making recommendations for how Nestle can secure a prominent brand identity for Perrier. 2.0 Micro-level analysis Thompson, Gamble and Strickland (2005) describe the model constructed by Michael Porter which assesses the potential risks for a business in the micro environment. Risks that should be identified include threat of substitutes in the market, buyer and seller power, competitive rivalry, and entry of new competitors in an established market. The following addresses these potential risks: Table 1: Analysis of risks utilising Porter’s Five Forces Model Risk Category Description and Relevancy to Perrier Threat of Substitutes In Taiwan, there are convenience stores on practically every street corner that provide convenience products (Bates and Bates 2005). These stores provide many domestic and imported drink products (ranging from energy drinks to bottled water) that are all generally priced competitively. Consumers, rather than seeking water products, have many substitutes that can fulfil their consumption needs. Furthermore, soda products such as Coca-Cola and other relevant domestic and imported brands available in the plethora of convenience store outlets provide substantial risk for establishing a prominent competitive position. Competitive rivalry Perrier would maintain many competitors upon entry in this market. Established brands such as Aquafina, Dasani and Evian dominate the Taiwan consumer market in this industry category. Aquafina, owned by PepsiCo, a company with significant experience in consumer marketing, has established brand recognition in Taiwan. Dasani, owned by Coca-Cola, is also competent in establishing brand recognition and is managed by a parent company that fully understands how to create potent psychologically-based marketing connections with desirable target consumers in the country. The most dominant bottled water brands in Taiwan understand how to position themselves amongst competition effectively, focusing on unique flavours, processes for production that purify (hence leading to quality perceptions with consumer segments), and have developed effective promotional materials to have given these brands first mover advantages in this market. Aquafina is a prominent brand and the marketing capability and strategy development of the company has given the Aquafina brand considerable visibility in the nation. Aquafina is a major endorsed sponsor of Major League Soccer, Major League Baseball and even the Professional Golf Association (Bottled Water Web 2011; Lefton 2008). These sponsorships not only improve competitive visibility, but provide co-branding opportunities that expand positive perceptions of the product to desired consumer segments. Competitive rivalry, therefore, is a substantial risk to market entry for Perrier in this nation with a very saturated competitive marketplace. Buyer Power In Taiwan, consumers have considerable buying power in the established bottled water market. Consumers in Taiwan have very high price elasticities (Lee, Brown and Seale 1994). Hence, due to the high volume of available competitor and substitute products, the switching costs to other brands are very low for the consumer segments. With a price-sensitive market in this category of products, buyers have considerable control over price setting and whether or not they will become loyal to a particular brand. Supplier Power Perrier, also marketed as the champagne of table waters, has built a reputation for top quality product through years of brand management strategies. It is considered to be one of the most palatable and fresh bottled water products in established European markets. Perrier is produced from a French spring that is carbonated through natural processes. Hence, supplier power as a risk to market entry is virtually non-existent as the product would be procured from the same established supplier network and imported into Taiwan. Threat of new entrants There is a moderate level of risk for Perrier in terms of new market entrants. The available transportation infrastructure including air transport, land and sea transport systems, provide ample opportunities for competing bottled water companies (or substitute products) to enter this developed market environment. Costs of procuring water are not necessarily substantial from a corporate perspective and Taiwan offers many incentives to attract foreign direct investment. Perrier, upon entering this potential market, would need to conduct routine environmental and competitive analyses to understand what brands are entering the market and could pose significant competitive threat by further saturating the market. 3.0 Macro-level analysis It is absolutely critical for Nestle to understand the macro environment and the factors that could impact potential success upon market entry in Taiwan. Using the PEST framework for analysis, this section describes the political, economic, social and technological environment that will have influence and impact on success for the Perrier brand. Political considerations – The government of Taiwan is moving rapidly toward a wholly democratic state. The country elects a President based on popular vote from constituents. The Taiwanese government is rapidly adopting neoliberalism ideology which promotes far less government regulation over business (Brenner 2006), which tends to service a capitalistic system that is supportive of commercial activity and foreign investment related to trade (Boas and Gans-Morse 2005). Less government regulation and government-generated support for business has many advantages related to the Perrier brand. Furthermore, this neoliberalist policy establishes a variety of tax reforms that provide companies with incentives and liberalisation in trade that include reducing import tariffs (Chomsky 1998). Neoliberalism in the country and a new focus on its ideology for business success has made the corporate tax rates much more competitive (The Heritage Foundation 2014). The average tariff rate as a result of adopting new and liberal principles in government regulation is only 2.1 percent (The Heritage Foundation). Hence, with an import strategy necessary due to procurement options for Perrier is advantageous from a cost perspective. Despite the advantages, there are also disadvantages. For instance, the Consumer Protection Law in the country, established in 1994, is designed to ensure safety of consumers who purchase products in the country. It has been criticised, however, that the law maintains ambiguous language and shows considerable favouritism for special consumer protection agencies (Juang 1997). Hence, it appears that the Consumer Protection Law in Taiwan is slanted where favour for the business operators is not prevalent. This creates a type of moderate risk of liability in the event of product failures without ample defences for companies that violate this rather stringent set of consumer protection laws. Economic Considerations – From an economic perspective, Taiwan maintains many advantageous benefits. The country has a GDP of $484 billion (IMF 2013). Taiwan maintains a positive balance of trade in an economy ranked the 19th largest in the world. GDP growth has improved steadily at a rate of approximately eight percent each year. The unemployment rate in the country is only four percent, which remained relatively steady between the years 2002 and 2006. This is significant in a nation with a population of 23.4 million people who represent viable market opportunities. Furthermore, the inflation rate in the country is much lower than other developed nations, at a rate of only 1.61 percent as of March of 2014 (Trading Economics 2014). This does not deplete consumer incomes at the same high rate as nations such as the UK and the United States that battle considerable annual inflation. Furthermore, the Central Bank of the country made a positive move to increase the interest rates from 1.25 percent to 1.375 percent which is a result of competent monetary policy. This has improved revenue streams for banks and other financial lenders which create an environment with less risk for vendors which make procurement of business loans more available and feasible for businesses seeking capital infusions. From a currency perspective, Taiwan maintains an exchange rate of 30:1 against the American dollar, which is disadvantageous for companies operating in this country. In order to attract the same level of profitability that has been achieved in such countries as France and the United Kingdom, pricing would have to be considerably inflated on Perrier products with such a negatively-high exchange rate on currency. However, at the same time, taxation rates for businesses were altered from 20 percent to 17 percent which will assist in offsetting any risks related to the high exchange rate value of Taiwanese currency. It was, however, illustrated that consumers in Taiwan are price-sensitive which could complicate using pricing strategies which inflate product pricing on store shelves in an effort to boost profitability when exchange rates are 30:1. Social considerations – First and foremost, Taiwan provides legislative support for the free expression and practice of religion. The most prominent religions are Buddhism, Taoism and Roman Catholicism, three religions which do not have strict food consumption regulations. For instance, in Muslim nations, food must not be najis, which means inability to ensure proper purification of foods to make them suitable to consumer as according to religious ideology (Bearman, et al. 2005). This has cost many companies in Islamic nations considerable financial expenditures to gain product certification that makes food acceptable for consumption. Perrier has absolutely no risk of religious influence causing consumers to reject the product as the dominant religious doctrines in the country are quite liberal in allowing for consumption of diverse products. Furthermore, Taiwan is a nation that participates widely in sporting events. Baseball is the country’s most prominent social sport. Another popular sport is basketball in the nation (Wang 2008). This is advantageous for Perrier as opportunities to potentially sponsor sporting activities in order to improve brand visibility. With sports and bottled water being rather synonymous and with competitive presence which maintains ample experience in branding through this fashion, Perrier can capitalise on social trends for activities which require hydration. Television viewing and radio are two prominent aspects of the culture of Taiwan. Through these mediums, Taiwanese consumers have grown accustomed to product advertising for many different consumer products. Hence, these serve as excellent marketing forums for brand management and promotion. Chen (2012) conducted a study of 596 Taiwanese consumers with different socio-economic backgrounds and discovered that Taiwan’s consumers have a measurable distrust for imported food products. Since Perrier will be adopting an import market entry strategy, this has moderate risks in how consumers will perceive this foreign brand as opposed to trusted domestic products in the competitive market. Moreover, Lee and Chen (2008) identified that Taiwanese consumers buy products based on country of origin effects. This study found that as it pertains to product-related beliefs, consumers were more willing to buy Taiwanese-made products over that of imported products. Again, this illustrates that consumers in the country have ethnocentric beliefs related to the viability and trust levels of domestic products over that of imported foreign products. This could be disadvantageous to Perrier upon market entry in an environment where country of origin effects impact consumption decision-making. Technological considerations – Access to the mainland Chinese environment provides ample opportunities for procurement of assets and software systems that support production and general business practice. Research did not indicate any hindrances related to the technological environment in Taiwan as a result of improved international trade and infrastructure development for distribution. There are, hence, no risks to the company related to technology necessary to facilitate effective business activity in this new potential market. 4.0 Risk analysis of most significant potential risks Risk I.D. Risk Category Cause Risk Description Consequence Status Overall Likelihood Impact Priority T1 Major Event Terrorist activity, natural disasters Any situation that slows distribution or procurement. Total business operations disruption. Active 1 Very unlikely -5 Crisis Undesirable level of risk T2 New market entrants Loosened tariff restrictions and improved taxation structures inviting FDI.  Substitutes and like competitive products flooding an already saturated market. Revenue losses and customer losses, inability to establish brand loyalty.  Active 4 Possible -3 Significant  Undesirable level of risk T3  IT Systems Failures Software malfunction and energy blackouts Can cause business resource planning problems and other software access problems such as accounts receivable. Delay in invoicing, scheduling problems and general business activity slowdowns Active 3 Possible -4  Critical  Undesirable level of risk T4 Unbalanced and biased consumer protection laws Poor private sector appeals to government Liabilities, lawsuits and compliance costs to the business Capital depletion  Active 4 Unlikely -3 Significant  Undesirable level of risk T5  Enhanced competitor marketing Aggression in an effort to improve competitor market share Brand value and equity losses, loss of market share, establishment of consumer loyalty toward competing products Revenue losses, brand identity devaluing  Active 2 Possible -3  Significant  Undesirable level of risk 5.0 Evaluating and resolving additional risks Buyer behaviour risks: The recession which impacted many countries around the globe between 2008 and 2010 caused many companies to lose revenues. It also altered buyer behaviour with limited consumer confidence and perceived threat of loss to disposable incomes. As a result, companies must be equipped with contingency strategies to ensure revenue production in the event of recessions or changes in buyer behaviour. Management of Perrier should be developing contingency plans to target niche consumer segments, rather than a mass market strategy, to be prepared in the event that consumer behaviour suddenly becomes uncertain and unpredictable. Rising costs of logistics Fuel costs are rising in Europe and Asia as a result of cartel activity and market conditions. In general, fuel prices are controlled within the capital markets across the world. Under the current distribution strategy for Perrier, delivering products to markets is usually accomplishable through land transportation. However, in order to import Perrier products, it will be necessary to utilise sea transportation or even air transport depending on demand levels in the country. To minimise this moderate risk, management should be exploring options for alternative investment strategies in order to offset rising costs of logistics. Nestle will need to consider hedging for fuel costs as the costs of petroleum and oil continue to escalate with little evidence that these conditions are going to lower in the near future. Changes in interest rates and currency value – turbulent economic markets The currency market is currently in a period of volatility across the world. With much foreign direct investment in Taiwan currently, the impact of monetary policy generated by the government is of considerable importance to businesses operating in the country. Perrier will be conducting trade in a region where there is an exchange rate substantially lower than the Euro and the Pound Sterling. If the country attempts to adopt new fiscal policy, such as the crawling peg system in which currency values are measured against other more stable international currencies, it could impact profitability and also impact any investment equities that Perrier enacts in Taiwan. To mitigate this risk, management should be conducting routine external market analyses and create contingencies in the event that the currency value of Taiwanese currency is altered or becomes disadvantageous. Furthermore, Perrier will need to be aware of the capital market in Taiwan in order to determine the shareholder perceptions of brand equity. The country maintains a very mature and established stock market with over 800 listed companies with a value of NT$24 billion (TWSE 2014). Perrier should be consulting with appropriate government and legal resources to offer stock in the Taiwan Stock Exchange which will not only serve as a public relations and marketing tool to build brand interest, but also inject Perrier with much needed capital that would be critical to ensuring asset accumulation in the country and assisting in redeveloping many aspects of the company’s value chain. Competitors capable of replicating competitive advantages Perrier’s current source of competitive advantage has been in the brand power established after decades of production in Europe. Top quality ingredients and advertising these benefits have given consumers in Europe a perception of high quality and superiority over that of other competing bottled water producers. However, most of this advantage is part of the positioning process and the use of clever promotions that focus on ostentatiousness for this premium brand. Competitors such as Coca-Cola and PepsiCo have ample resources by which to attempt to replicate aspects of the Perrier brand, such as changing procurement to include more innovative source supply, using promotions to illustrate similar additives and flavours, or even changing packaging to make competing products appear similar or superior to Perrier’s premium packaging design. Especially in an environment where local production provides substantial cost savings as a result of the exchange rate between the Euro and the local currency, these companies can attempt to outperform Perrier’s product benefits and maintain the tangible know-how, management and financial capital to replicate the brand. The company must be conducting routine analyses on what is driving competitive activity in marketing, production and promotion to ensure the business is insulated from competitive product imitation. 6.0 Inability to create barriers to new market entrants Porter (1987) indicates that one method of reducing risk is to create barriers that prevent new market entrants. This is especially important in an already saturated competitive environment and where there are ample substitute products available to consumer segments. Unfortunately, Perrier will be unable to establish intellectual property protections on water or patent the product. The company cannot build barriers without having the ability to ensure product legal protections that make replication of the product difficult for consumers; hence dissuading market entry for competition. Additionally, there are no proprietary securities related to Perrier’s ingredients, packaging and flavouring. Other companies such as Aquafina and Dasani have ample experience and financial resources for innovation and research and development efforts in an endeavour to replicate benefits and ingredients associated with the Perrier name. 7.0 The VRIN framework for analysis The VRIN framework analyses a firm’s strategic advantages which considers four firm features: rarity, value, inimitability and non-substitutables. To sustain competitive advantage, a company must provide internal value. Value is the ability of a firm to outperform its main competitors or seek methods to reduce weaknesses in the business model (Conner 1991). Financial or labour-oriented investment transaction costs in a valuable resource cannot be higher than the specific rents achieved as a result of the company’s value-building ideology. Packaging, being blown green glass is quite unique from other competitors in the established Taiwan market. It gives the packaging a presence of superiority and exclusivity. Though replicable by competition, currently this serves as a moderate competitive advantage. However, many companies such as Coca-Cola and PepsiCo realise that innovation production is absolutely critical to sustaining competitive advantages. Perrier does not invest the type of labour and capital into the innovation process, relying instead on the brand reputation of the product in Europe to carry its premiumisation presence among the competitive environment. This is not relevant in a new market where the Perrier brand is not highly recognised or preferred by Taiwanese consumers. Lack of emphasis on innovation production and development is a moderate risk in sustaining advantages over competition. In terms of rarity on the VRIN framework model, Perrier enjoys no advantages. All other water producers in this industry have clear, fresh and processed water that provides consumers with safety and quality taste. Unfortunately, nothing of the Perrier brand is highly unique in formulation, additives and flavouring. Nothing of Perrier is rare other than the ability to market with an ostentatious ideology to sustain a premium brand perception. This poses considerable risks to market entry in Taiwan as the product might have difficulty positioning itself based on rare resources which would differentiate Perrier more substantially from that of competing bottled water producers. In relation to inimitability, Perrier does not have any domination over a specific resource that would provide the firm with sustained competitive advantage. Water is a commodity that is available all around the world and many organisations have similar processing systems and strategies to Perrier. None of the product additives introduced into Perrier products are unavailable to competitors, as well as the processes by which water is purified and flavour enhanced. In relation to non-substitutability, competitors are consistently offering products in Taiwan that are considered substitutes. Energy drinks, sodas, carbonated and flavoured bottled water already have a presence in this country. Many larger companies are regularly diversifying their production and operations to cater to consumers in disparate markets. There is very little about the Perrier brand that cannot be mimicked by competition and it does not appear that Perrier is in a position to maintain absolute control over any dimensions of production and procurement that would give the brand competitive advantages. 8.0 Culturally related risk analysis The Taiwanese culture is much different than that of European nations. Most European nations in which Perrier is considered to be a premium quality brand are individualistic in which consumers want to express their uniqueness and personality through consumption of products. In Taiwan, the country is highly collectivist in which group loyalty and sentiment from important in-group reference groups drive consumption behaviours (Cheung, et al. 2008). This would typically imply that word-of-mouth value could be jeopardised in the event that Perrier’s product or marketing does not make a positive impression on consumers. Collectivist cultures tend to purchase products that their important friends and family prefer, unlike in Europe where such considerations are generally not influential in what products consumers choose. This poses a potential moderate risk of ensuring that any promotional materials or other integrated marketing communications are relevant to the cultural characteristics of consumers in this nation. It may even be more difficult to establish brand relationships between product and consumer in a collectivist nation where trust establishment is absolutely paramount to gaining brand loyalty. Taiwan is also a highly pragmatic culture which emphasises such concepts as virtue, integrity and a very strong desire to be thrifty (Hofstede Centre 2014). This means that to gain loyalty, Perrier will need to provide collectivist consumers with evidence that the product and business model share these virtues which are prevalent in this culture. It is unlikely that Taiwanese consumers are going to be loyal to a brand that emphasises ostentatiousness when thrift is a dominating social value. Perrier may have to adjust its marketing to be more conscious of such conceptions as corporate social responsibility, an activity of which the company maintains little experience after years of appealing to premium-conscious consumers that want exclusivity and superiority when making consumption decisions about bottled water products. It may, theoretically, take longer for Perrier to establish important consumer relationships with the brand unless the product sends the perception of internal virtues, integrity and prudence. 9.0 Conclusion and Recommendations Based on a thorough risk assessment of Taiwan as potential investment opportunity for Perrier, a series of recommendations can be offered competently. Firstly, Perrier must be considerate of the many consumer characteristics and national cultures that differ from European consumers. Perrier has long emphasised that it is a premium quality brand and has positioned itself competitively under this premise. However, based on research, this strategy conflicts with the pragmatism and collective characteristics of consumer culture in this nation. It is recommended that Perrier, prior to market launch in Taiwan, conduct preliminary market research in order to understand the specific attitudes and criteria required to gain consumer loyalty. Using surveys and questionnaires as relevant instruments to gather important consumer data, the company should be recruiting between 800 and 1200 disparate consumers in the country inquiring of such concepts as virtue, thrift, product pricing, and any other relevant information that could assist in developing relevant and effective integrated marketing communications. Perrier is unfamiliar with this type of culture and it is unlikely that simply transferring European promotional strategies are going to be accepted and appropriate for this particular culture. By gaining knowledge in this quantitative or qualitative fashion, the business can fully understand its markets before attempting market entry in this nation. Additionally, because other brands have found success in building brand recognition through sponsorship of sporting events, Perrier has many opportunities in this manner. Perrier has no brand recognition in the country and certainly no consumer loyalty. By co-branding with sporting agencies and then advertising Perrier’s identity as a premium brand, it will expose consumers to the product and also build a perception of authenticity and cultural relevancy to the Taiwanese consumer segments most desirable to the firm. Perrier should be seeking out sponsoring partnerships with sport clubs and agencies with similar characteristics for having first-class brand-related characteristics. Brand visibility will be crucial in gaining the attention of Taiwanese consumers in this highly saturated competitive marketplace. Finally, because of the country of origin effect that drives Taiwanese consumption attitudes, Perrier should consider procuring water for Perrier products from this nation rather than in France. Perrier could avoid many costs incurred when purchasing using the Euro (the French spring) in an environment where the exchange rate is 30 to 1 against the U.S. dollar. 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