International Business-ISBM
No: 1
BPO – BANE OR BOON ?
Several MNCs are increasingly unbundling or vertical disintegrating their
activities. Put in simple language, they have begun outsourcing (also called business
process outsourcing) activities formerly performed in-house and concentrating their
energies on a few functions. Outsourcing involves withdrawing from certain
stages/activities and relaying on outside vendors to supply the needed products, support
services, or functional activities.
Take Infosys, its 250 engineers develop IT applications for BO/FA (Bank of
America). Elsewhere, Infosys staffers process home loans for green point mortgage of
Novato, California. At Wipro, five radiologists interpret 30 CT scans a day for
Massachusetts General Hospital.
2500 college educated men and women are buzzing at midnight at Wipro
Spectramind at Delhi. They are busy processing claims for a major US insurance company and
providing help-desk support for a big US Internet service provider-all at a cost upto 60
percent lower than in the US. Seven Wipro Spectramind staff with Ph.Ds in molecular biology
sift through scientific research for western pharmaceutical companies.
Another activist in BOP is Evalueserve, headquarterd in Bermuda and having main
operations near Delhi. It also has a US subsigiary based in New York and a marketing
office in Australia to cover the European market. As Alok Aggarwal (co-founder and
chairman) says, his company supplies a range of value-added services to clients that
include a dozen Fortune 500 companies and seven global consulting firms, besides market
research and venture capital firms. Much of its work involves dealing with CEOs, CFOs,
CTOs, CIOs, and other so called C-level executives.
Evaluserve provides services like patent writing, evaluation and assessment of
their commercialization potential for law firms and entrepreneurs. Its market research
services are aimed at top-rung financial service firms, to which it provides analysis of
investment opportunities and business plans. Another major offering is multilingual
services. Evalueserve trains and qualifies employees to communicate in Chinese, Spanish,
German, Japanese and Italian, among other languages. That skill set has opened market
opportunities in Europe and elsewhere, especially with global corporations.
ICICI infotech Services in Edison, New Jersey, is another BOP services provider
that is offering marketing software products and diversifying into markets outside the US.
The firm has been promoted by $2-billion ICICI Bank, a large financial institution in
Mumbai that is listed on the New York Stock Exchange.
In its first year after setting up shop in March 1999, ICICI infotech spent $33
million acquiring two information technology services firms in New Jersy-Object Experts and
ivory Consulting – and command Systems in Connecticut. These acquisitions were to help
ICICI Infotech hit the ground in the US with a ready book of contracts. But it soon found
US companies increasingly outsourcing their requirements to offshore locations, instead of
hiring foreign employees to work onsite at their offices. The company found other native
modes for growth. It has started marketing its products in banking, insurance and
enterprise resource planning among others. It has earmarket $10 million for its next US
market offensive, which would go towards R & D and back-end infrastructure support, and
creating new versions of its products to comply with US market requirements. It also has a
joint venture – Semantik Solutions GmbH in Berlin, Germany with the Fraunhofer Institute
for Software and Systems Engineering, which is based in Berlin and Dortmund, Germany –
Fraunhofer is a leading institute in applied research and development with 200 experts in
software engineering and evolutionary information.
A relatively late entrant to the US market , ICICI Infotech started out with
plain vanilla IT services, including operating call centeres. As the market for
traditional IT services started wakening around mid-2000, ICICI Infotech repositioned
itself as a “Solutions” firm offering both products and services. Today , it offers
bundied packages of products and services in corporate and retail banking and include data
center and disaster recovery management and value chain management services.
ICICI Infotech’s expansion into new overseas markets has paid off. Its $50
million revenue for its latest financial year ending March 2003 has the US operations
generating some $15 million, while the Middle East and Far East markets brought in another
$9 million. It new boasts more than 700 customers in 30 countries, including Dow Jones,
Glazo-Smithkline, Panasonic and American Insurance Group.
The outsourcing industry is indeed growing form strength. Though technical
support and financial services have dominated India’s outsourcing industry, newer fields
are emerging which are expected to boost the industry many times over.
Outsourcing of human resource services or HR BPO is emerging as big opportunity
for Indian BPOs with global market in this segment estimated at $40-60 billion per annum.
HR BPO comes to about 33 percent of the outsourcing revenue and India has immense potential
as more than 80 percent of Fortune 1000 companies discuss offshore BOP as a way to cut
costs and increase productivity.
Another potential area is ITES/BOP industry. According to A NASSCOM survey,
the global ITES/BOP industry was valued at around $773 billion during 2002 and it is
expected to grow at a compounded annual growth rate of nine percent during the period 2002
– 06, NASSCOM lists the major indicators of the high growth potential of ITES/BOP industry
in India as the following.
During 2003 – 04, The ITES/BPO segment is estimated to have achieved a 54
percent growth in revenues as compared to the previous year. ITES exports accounted for
$3.6 billion in revenues, up form $2.5 billion in 2002 – 03. The ITES-BPO segment also
proved to be a major opportunity for job seekers, creating employment for around 74,400
additional personnel in India during 2003 – 04. The number of Indians working for this
sector jumped to 245,500 by March 2004. By the year 2008, the segment is expected to
employ over 1.1 million Indians, according to studies conducted by NASSCOM and McKinsey &
Co. Market research shows that in terms of job creation, the ITES-BOP industry is growing
at over 50 per cent.
Legal outsourcing sector is another area India can look for. Legal
transcription involves conversion of interviews with clients or witnesses by lawyers into
documents which can be presented in courts. It is no different from any other
transcription work carried out in India. The bottom-line here is again cheap service.
There is a strong reason why India can prove to be a big legal outsourcing Industry.
India, like the US, is a common-law jurisdiction rooted in the British legal
tradition. Indian legal training is conducted solely in English. Appellate and Supreme
Court proceedings in India take place exclusively in English. Due to the time zone
differences, night time in the US is daytime in India which means that clients get 24 hour
attention, and some projects can be completed overnight. Small and mid – sized business
offices can solve staff problems as the outsourced lawyers from India take on the time –
consuming labour intensive legal research and writing projects. Large law firms also can
solve problems of overstaffing by using the on – call lawyers.
Research firms such as Forrester Research, predict that by 2015 , more than
489,000 US lawyer jobs, nearly eight percent of the field, will shift abroad..
Many more new avenues are opening up for BOP services providers. Patent
writing and evaluation services are markets set to boom. Some 200.000 patent applications
are written in the western world annually, making for a market size of between $5 billion
and $7 billion. Outsourcing patent writing service could significantly lower the cost of
each patent application, now anywhere between $12,000 and $15,000 apiece-which would help
expand the market.
Offshoring of equity research is another major growth area. Translation
services are also becoming a big Indian plus. India produces some 3,000 graduates in
German each year, which is more than that in Switzerland.
Though going is good, the Indian BPO services providers cannot afford to be
complacent. Phillppines, Maxico and Hungary are emerging as potential offshore locations.
Likely competitor is Russia, although the absence of English speaking people there holds
the country back. But the dark horse could be South Affrica and even China
BOP is based on sound economic reasons. Outsourcing helps gain cost advantage.
If an activity can be performed better or more cheaply by an outside supplier, why not
outsource it ? Many PC makers, for example, have shifted from in – house assembly to
utilizing contract assemblers to make their PCs. CISCO outsources all productions and
assembly of its routers and witching equipment to contract manufactures that operate 37
factories, all linked via the internet.
Secondly, the activity (outsourced) is not crucial to the firm’s ability to
gain sustainable competitive advantage and won’t hollow out its core competence,
capabilities, or technical know how. Outsourcing of maintenance services, date processing,
accounting, and other administrative support activities to companies specializing in these
services has become common place. Thirdly, outsourcing reduces the company’s risk exposure
to changing technology and / or changing buyer preferences.
Fourthly, BPO streamlines company operations in ways that improve
organizational flexibility, cut cycle time, speedup decision making and reduce coordination
costs. Finally, outsourcing allows a company to concentrate on its core business and do
what it does best. Are Indian companies listening ? If they listen, BPO is a boon to them
and not a bane.
Questions:
1. Which of the theories of international trade can help Indian services providers
gain competitive edge over their competitors?
2. Pick up some Indian services providers. With the help of Michael Porter’s
diamond, analyze their strengths and weaknesses as active players in BPO.
3. Compare this case with the case given at the beginning of this chapter. What
similarities and dissimilarities do you notice? Your analysis should be based on the
theories explained.
No: 2
PERU
Peru is located on the west coast of South America. It is the third largest nation of the
continent (after Brazil and Argentina) , and covers almost 500.000 square miles (about 14
per cent of the size of the United States). The land has enormous contrasts, with a desert
(drier than the Sahara), the towering snow – capped Andes mountains, sparkling grass –
covered plateaus, and thick rain forests. Peru has approximately 27 million people, of
which about 20 per cent live in Lima, the capital. More Indians (one half of the
population) live in Peru than in any other country in the western hemisphere. The
ancestors of Peru’s Indians were the famous incas, who built a great empire. The rest of
the population is mixed and a small percentage is white. The economy depends heavily on
agriculture, fishing , mining, and services, GDP is approximately $15 billion and per
capita income in recent years has been around $4,3000. In recent years the economy has
gained some relative strength and multinationals are now beginning to consider investing in
the country.
One of these potential investors is a large New York based bank that is
considering a $25 million loan to the owner of a Peruvian fishing fleet. The owner wants
to refurbish the fleet and add one more ship.
During the 1970s, the Peruvian government nationalized a number of industries
and factories and began running them for the profit of the state in most cases, these state
– run ventures became disasters. In the late 1970s the fishing fleet owner was given back
his ships and allowed to operate his business as before. Since then, he has managed to
remain profitable, but the biggest problem is that his ships are getting old and he needs
an influx of capital of make repairs and add new technology. As he explained it to the new
York banker. “Fishing is no longer just an art. There is a great deal of technology
involved. And to keep costs low and be competitive on the world market, you have to have
the latest equipment for both locating as well as catching and then loading and unloading
the fish”
Having reviewed the fleet owner’s operation, the large multinational bank
believes that the loan is justified. The financial institution is concerned, however, that
the Peruvian government might step in during the next couple of years and again take over
the business. If this were to happen, it might take an additional decade for the loan to be
repaid. If the government were to allow the fleet owner to operate the fleet the way he
has over the last decade, the fleet the way he has over the last decade, the loan could be
repaid within seven years.
Right now, the bank is deciding on the specific terms of the agreement. Once
theses have been worked out, either a loan officer will fly down to Lima and close the deal
or the owner will be asked to come to New York for the signing. Whichever approach is used,
the bank realizes that final adjustments in the agreement will have to be made on the spot.
Therefore, if the bank sends a representative to Lima, the individual will have to have
the authority to commit the bank to specific terms. These final matters should be worked
out within the next ten days.
Questions:
1. What are some current issues facing Peru? What is the climate for doing business
in Peru today?
2. What type of political risks does this fishing company need to evaluate? Identify
and describe them.
3. What types of integrative and protective and defensive techniques can the bank
use?
4. Would the bank be better off negotiating the loan in New York or in Lima ? Why?
No: 3
RED BECOMING THICKER
The Backdrop
There seems to be no end to the troubles of the coloured – water giant Coca Cola. The cola
giant had entered India decades back but left the country in the late 1970s. It staged a
comeback in the early 1990s through the acquisitions route. The professional management
style of Coca Cola did not jell with the local bottlers. Four CEOs were changed in a span
of seven years. Coke could not capitalize on the popularity of Thums Up. Its arch rival
Pepsi is well ahead and has been able to penetrate deep into the Indian market. Red in the
balance sheet of Coke is becoming thicker and industry observers are of the opinion that it
would take at least two decades more before Coke could think of making profits in India.
The Story
It was in the early 1990s that India started liberalizing her economy. Seizing the
opportunity, Coca Cola wanted to stage a comeback in India. It chose Ramesh Chauhan of
Parle for entry into the market. Coke paid $100 million to Chauhan and acquired his well
established brands Thums Up, Goldspot and Limca. Coke also bagged 56 bottlers of Chauhan as
a part of the deal. Chauhan was made consultant and was also given the first right of
refusal to any large size bottling plants and bottling contracts, the former in the Pune –
Bangalore belt and the latter in the Delhi and Mumbai areas.
Jayadeva Raja, the flamboyant management expert was made the first CEO of Coke
India. It did not take much time for him to realize that Coke had inherited several
weaknesses from Chauhan along with the brands and bottlers. Many bottling plants were small
in capacity (200 bottlers per minute as against the world standard of 1600) and used
obsolete technology. The bottlers were in no mood to increase their capacities, nor were
they willing to upgrade the trucks used for transporting the bottle. Bottlers were more
used to the paternalistic approach of Chauhan and the new professional management styles of
Coke did not go down well with them. Chauhan also felt that he was alienated and was even
suspected to be supplying concentrate unofficially to the bottlers.
Raja was replaced by the hard – nosed Richard Niholas in 1995. The first thing
Nicholas did was to give an ultimatum to the bottlers to expand their plants or sell out.
Coke also demanded equity stakes in many of the bottling plants. The bottlers had their
own difficulties as well. They were running on low profit margins. Nor was Coke willing
to finance the bottlers on soft terms. The ultimatum backfired. Many bottlers switched
their loyalty and went to Pepsi. Chauhan allegedly supported the bottlers, of course, from
the sidelines.
Coke thought it had staged a coup over Pepsi when it (Coke) clamed the status
of official drink for the 1996 Cricket World Cup tournament. Pepsi took on Coke mightily
with the famous jingle “Nothing official about it”. Coke could have capitalized on the
sporty image of Thums Up to counter the campaign, but instead simply caved in.
Donald Short replaced Nicholas as CEO in 1997. Armed with heavy financial
powers, Short bought out 38 bottlers for about $700 million. This worked out to about Rs 7
per case, but the cost – effective figure was Rs 3 per case. Short also invested heavily in
manpower. By 1997, Coke’s workforce increased to 300. Three years later, the parent
company admitted that investment in India was a big mistake.
It is not in the culture of Coke to admit failure. It has decided to fight
back. Coke could not only sustain the loss, it could even spend more money on Indian
operations. It hiked the ad budget and appointed Chaitra Leo Burnett as its ad agency.
During 1998 – 99, Coke’s ad spend was almost three times that of Pepsi.
Coke is taking a look at its human resources and is taking initiatives to re –
orient the culture and inject an element of decentralization along with empowerment. Each
bottling plant is expected to meet predetermined profit, market share, and sales volumes.
For newly hired management trainees, a clearly defined career path has been drawn to enable
them to become profit centre heads shortly after completion of their probation. Such a
decentralized approach is something of a novelty in the Coke culture worldwide.
But Alezander “Von Behr, who replaced Short as Chef of Indian operations,
reiterated Coke’s commitment to decentralization and local responsiveness. Coke has
divided India into six regions, each with a business head. Change in the organization
structure has disappointed many employees, some of whom even quit the company.
Coke started cutting down its costs. Executives have been asked to shift from
farm houses to smaller houses and rentals of Gurgaon headquarters have been renegotiated.
Discount rates have been standardized and information systems are being upgraded to enable
the Indian headquarters to access online financial status of its outposts down to the depot
level.
Coke has great hopes in Indian as the country has a huge population and the
current per capita consumption of beverages is just four bottles a year.
Right now, the parent company (head – quartered in the US) has bottle full of
problems. The recently appointed CEO-E Neville Isdell needs to struggle to do the things
that once made the Cola Company great. The problems include –
Meddling Board
Coke’s star- studded group of directors, many of whom date back to the Goizueta
era, has built a reputation for meddling.
Moribund Marketing
Once world class critics say that today the soda giant has become too
conservative, with ads that don’t resonate with the teenagers and young adults that made up
its most important audience.
Lack of Innovation
In the US market, Coke hasn’t created a best – selling new soda since Diet Coke
in 1982. In recent years Coke has been outbid by rival Pepsi Co for faster growing noncarb
beverages like SoBe Gatorade.
Friction with Bottlers
Over the past decade, Coke has often made its profit at the expenses of
bottlers, pushing aggressive price hikes on the concentrate it sells them. But key
bottlers are now fighting back with sharp increases in the price of coke at retail.
International Worries
Coke desperately needs more international growth to offset its flagging US
business, but while some markets like Japan remain lucrative, in the large German market
Coke has problems so far as bottling contracts go.
When its own house is not in order in the large country, will the company be
able to focus enough on the Indian market?
Questions:
1. Why is that Coke has not been able to make profit in its Indian operations?
2. Do you think that Coke should continue to stay in India? If yes, why?
3. What cultural adaptations would you suggest to the US expatriate managers
regarding their management style?
4. Using the Hofstede and the value orientations cultural models, how can you explain
some of the cultural differences noted in this case?
NO. 4
THE ABB PBS JOINT VENTURE IN OPERATION
ABB Prvni Brnenska Stojirna Brno, Ltd. (ABB-PBS), Czechoslovakia was a joint
venture in which ABB has a 67 per cent stake and PBS a.s. has a 33 per cent stake. This
PBS share was determined nominally by the value of the land, plant and equipment, employees
and goodwill, ABB contributed cash and specified technologies and assumed some of the debt
of PBS. The new company started operations on April 15, 1993.
Business for the joint venture in its first two full years was good in most
aspects. Orders received in 1994, the first full year of the joint venture’s operation,
were higher than ever in the history of PBS. Orders received in 1995 were 2½ times those
in 1994. The company was profitable in 1995 and ahead of 1994s results with a rate of
return on assets of 2.3 per cent and a rate of return on sales of 4.5 per cent.
The 1995 results showed substantial progress towards meeting the joint
venture’s strategic goals adopted in 1994 as part of a five year plan. One of the goals
was that exports should account for half of the total orders by 1999. (Exports had
accounted for more than a quarter of the PBS business before 1989, but most of this
business disappeared when the Soviet Union Collapsed). In 1995 exports increased as a
share of total orders to 28 per cent, up from 16 per cent the year before.
The external service business, organized and functioning as a separate business
for the first time in 1995, did not meet expectations. It accounted for five per cent of
all orders and revenues in 1995, below the 10 per cent goal set for it. The retrofitting
business, which was expected to be a major part of the service business, was disappointing
for ABB-PBS, partly because many other small companies began to provide this service in
1994, including some started by former PBS employees who took their knowledge of PBS-built
power plants with them. However, ABB-PBS managers hoped that as the company introduced new
technologies, these former employees would gradually lose their ability to perform these
services, and the retrofit and repair service business, would return to ABB-PBS.
ABB-PBS dominated the Czech boiler business with 70 per cent of the Czech
market in 1995, but managers expected this share to go down in the future as new domestic
and foreign competitors emerged. Furthermore, the west European boiler market was actually
declining because environmental laws caused a surge of retrofitting to occur in the mid -
1980 s, leaving less business in the 1990 s. Accordingly ABB-PBS boiler orders were flat
in 1995.
Top managers at ABB-PBS regarded business results to date as respectable, but
they were not satisfied with the company’s performance. Cash flow was not as good as
expected. Cost reduction had to go further. The more we succeed, the more we see our
shortcomings” said one official.
Restructuring
The first round of restructuring was largely completed in 1995, the last year
of the three-year restructuring plan. Plan logistics, information systems, and other
physical capital improvements were in place. The restricting included :
Renovating and reconstructing workshops and engineering facilities.
Achieving ISO 9001 for all four ABB-PBS divisions. (awarded in 1995)
Transfer of technology from ABB (this was an ongoing project)
Intallation of an information system.
Management training, especially in total quality assurance and English language.
Implementing a project management approach.
A notable achievement of importance of top management in 1995 was a 50 per cent increase in
labour productivity, measured as value added per payroll crown. However, in the future
ABB-PBS expected its wage rates to go up faster than west European wage rates (Czech wages
were increasing about 15 per cent per year) so it would be difficult to maintain the ABB-
PBS unit cost advantage over west European unit cost.
The Technology Role for ABB-PBS
The joint venture was expected from the beginning to play an important role in
technology development for part of ABB’s power generation business worldwide. PBS a.s. had
engineering capability in coal – fired steam boilers, and that capability was expected to
be especially useful to ABB as more countries became concerned about air quality. (When
asked if PBS really did have leading technology here, a boiler engineering manager
remarked, “Of course we do. We burn so much dirty coal in this country; we have to have
better technology”)
However, the envisioned technology leadership role for ABB-PBS had not been
realized by mid – 1996. Richard Kuba, the ABB-PBS managing director, realized the slowness
with which the technology role was being fulfilled, and he offered his interpretation of
events.
“ABB did not promise to make the joint venture its steam technology leader. The
main point we wanted to achieve in the joint venture agreement was for ABB-PBS to be
recognized as a full-fledged company, not just a factory. We were slowed down on our
technology plans because we had a problem keeping our good, young engineers. The annual
employee turnover rate for companies in the Czech Republic is 15 or 20 per cent, and the
unemployment rate is zero. Our engineers have many other good entrepreneurial
opportunities. Now we’ve begun to stabilize our engineering workforce. The restructing
helped. We have better equipment and a cleaner and safer work environment. We also had
another problem which is a good problem to have. The domestic power plant business turned
out to be better than we expected, so just meeting the needs of our regular customers
forced some postponement of new technology initiatives.”
ABB-PBS had benefited technologically from its relationship with ABB. One
example was the development of a new steam turbine line. This project was a cooperative
effort among ABB-PBS and two other ABB companies, one in Sweden and one in Germany.
Nevertheless, technology transfer was not the most important early benefit of ABB
relationship. Rather, one of the most important gains was the opportunity to benchmark the
joint venture’s performance against other established western ABB companies on variables
such as productivity, inventory and receivables.
Questions:
1. Where does the joint venture meet the needs of both the partners? Where does it
fall short?
2. Why had ABB-PBS failed to realize its technology leadership?
3. What lessons one can draw from this incident for better management of technology
transfers?
NO. 5.
CHINESE EVOLVING ACCOUNTING SYSTEM
Attracted by its rapid transformation from a socialist planned economy into a
market economy, economic annual growth rate of around 12 per cent, and a population in
excess of 1.2 billion, Western firms over the past 10 years have favored China as a site
for foreign direct investment. Most see China as an emerging economic superpower, with an
economy that will be as large as that of Japan by 2000 and that of the US before 2010, if
current growth projections hold true.
The Chinese government sees foreign direct investment as a primary engine of
China’s economic growth. To encourage such investment, the government has offered generous
tax incentives to foreign firms that invest in China, either on their own or in a joint
venture with a local enterprise. These tax incentives include a two – year exemption from
corporate income tax following an investment, plus a further three years during which taxes
are paid at only 50 per cent of the standard tax rate. Such incentives when coupled with
the promise of China’s vast internal market have made the country a prime site for
investment by Western firms. However, once established in China, many Western firms find
themselves struggling to comply with the complex and often obtuse nature of China’s rapidly
evolving accounting system.
Accounting in China has traditionally been rooted in information gathering and
compliance reporting designed to measure the government’s production and tax goals. The
Chinese system was based on the old Soviet system, which had little to do with profit or
accounting systems created to report financial positions or the results of foreign
operations.
Although the system is changing rapidly, many problems associated with the old
system still remain.
One problem for investors is a severe shortage of accountants, financial
managers, and auditors in China, especially those experienced with market economy
transactions and international accounting practices. As of 1995, there were only 25,000
accountants in china, far short of the hundreds of thousands that will be needed if China
continues on its path towards becoming a market economy. Chinese enterprises, including
equity and cooperative joint ventures with foreign firms, must be audited by Chinese
accounting firms, which are regulated by the state. Traditionally, many experienced
auditors have audited only state-owned enterprises, working through the local province or
city authorities and the state audit bureau to report to the government entity overseeing
the audited firm. In response to the shortage of accountants schooled in the principles of
private sector accounting, several large international auditing firms have established
joint ventures with emerging Chinese accounting and auditing firms to bridge the growing
need for international accounting, tax and securities expertise.
A further problem concerns the somewhat halting evolution of China’s emerging
accounting standards. Current thinking is that China won’t simply adopt the international
accounting standards specified by the IASC, nor will it use the generally accepted
accounting principles of any particular country as its mode. Rather, accounting standards
in China are expected to evolve in a rather piecemeal fashion, with the Chinese adopting a
few standards as they are studied and deemed appropriate for Chinese circumstances.
In the meantime, current Chinese accounting principles present difficult
problems for Western firms. For example, the former Chinese accounting system didn’t need
to accrue unrealized losses. In an economy where shortages were the norm, if a state-owned
company didn’t sell its inventory right away, it could store it and use it for some other
purpose later. Similarly, accounting principles assumed the state always paid its debts –
eventually. Thus, Chinese enterprises don’t generally provide for lower-of-cost or market
inventory adjustments or the creation of allowance for bad debts, both of which are
standard practices in the West.
Questions:
1. What factors have shaped the accounting system currently in use in China?
2. What problem does the accounting system, currently in sue in China, present to
foreign investors in joint ventures with Chinese companies?
3. If the evolving Chinese system does not adhere to IASC standards, but instead to
standards that the Chinese governments deem appropriate to China’s “Special situation”, how
might this affect foreign firms with operations in China ?
NO. 6
UNFAIR PROTECTION OR VALID DEFENSE ?
“Mexico Widens Anti – dumping Measure …………. Steel at the Core of US-Japan Trade
Tensions …. Competitors in Other Countries Are Destroying an American Success Story … It
Must Be Stopped”, scream headlines around the world.
International trade theories argue that nations should open their doors to
trade. Conventional free trade wisdom says that by trading with others, a country can
offer its citizens a greater volume and selection of goods at cheaper prices than it could
in the absence of it. Nevertheless, truly free trade still does not exist because national
governments intervene. Despite the efforts of the World Trade Organization (WTO) and
smaller groups of nations, governments seem to be crying foul in the trade game now more
than ever before.
We see efforts at protectionism in the rising trend in governments charging
foreign producers for “dumping” their goods on world markets. Worldwide, the number of
antidumping cases that were initiated stood at about 150 in 1995, 225 in 1996, 230 in 1997
, and 300 in 1998.
There is no shortage of similar examples. The Untied States charges Brazil,
Japan, and Russia with dumping their products in the US market as a way out of tough
economic times. The US steel industry wants the government to slap a 200 per cent tariff
on certain types of steel. But car markers in the United States are not complaining, and
General Motors even spoke out against the antidumping charge – as it is enjoying the
benefits of law – cost steel for use in its auto product ion. Canadian steel makers
followed the lead of the United States and are pushing for antidumping actions against four
nations.
Emerging markets, too, are jumping into the fray. Mexico recently expanded
coverage of its Automatic Import Advice System. The system requires importers (from a
select list of countries) to notify Mexican officials of the amount and price of a shipment
ten days prior to its expected arrival in Mexico. The ten-day notice gives domestic
producers advance warning of incoming low – priced products so they can complain of dumping
before the products clear customs and enter the marketplace. India is also getting onboard
by setting up a new government agency to handle antidumping cases. Even Argentina, China,
Indonesia, South Africa, South Korea, and Thailand are using this recently – popularized
tool of protectionism.
Why is dumping on the rise in the first place? The WTO has made major inroads
on the use of tariffs, slashing tem across almost every product category in recent years.
But the WTO does not have the authority to punish companies, but only governments. Thus,
the WTO cannot pass judgments against individual companies that are dumping products in
other markets. It can only pass rulings against the government of the country that imposes
an antidumping duty. But the WTO allows countries to retaliate against nations whose
producers are suspected of dumping when it can be shown that : (1) the alleged offenders
are significantly hurting domestic producers, and (2) the export price is lower than the
cost of production or lower than the home – market price.
Supporters of antidumping tariffs claim that they prevent dumpers from
undercutting the prices charged by producers in a target market and driving them out of
business. Another claim in support of antidumping is that it is an excellent way of
retaining some protection against potential dangers of totally free trade. Detractors of
antidumping tariffs charge that once such tariffs are imposed they are rarely removed.
They also claim that it costs companies and governments a great deal of time and money to
file and argue their cases. It is also argued that the fear of being charged with dumping
causes international competitors to keep their prices higher in a target market than would
other wise be the case. This would allow domestic companies to charge higher prices and
not lose market share – forcing consumers to pay more for their goods.
Questions
1. “You can’t tell consumers that the low price they are paying for a particular fax
machine or automobile is somehow unfair. They’re not concerned with the profits of
companies. To them, it’s just a great bargain and they want it to continue.” Do you agree
with this statement? Do you think that people from different cultures would respond
differently to this statement? Explain your answers.
2. As we’ve seen, the WTO cannot currently get involved in punishing individual
companies for dumping – its actions can only be directed toward governments of countries.
Do you think this is a wise policy ? Why or why not? Why do you think the WTO was not given
the authority to charge individual companies with dumping? Explain.
3. Identify a recent antidumping case that was brought before the WTO. Locate as many
articles in the press as you can that discuss the case. Identify the nations, products (s),
and potential punitive measures involved. Supposing you were part of the WTO’s Dispute
Settlement Body, would you vote in favor of the measures taken by the retailing nation? Why
or why not?
No: 1
BPO – BANE OR BOON ?
Several MNCs are increasingly unbundling or vertical disintegrating their
activities. Put in simple language, they have begun outsourcing (also called business
process outsourcing) activities formerly performed in-house and concentrating their
energies on a few functions. Outsourcing involves withdrawing from certain
stages/activities and relaying on outside vendors to supply the needed products, support
services, or functional activities.
Take Infosys, its 250 engineers develop IT applications for BO/FA (Bank of
America). Elsewhere, Infosys staffers process home loans for green point mortgage of
Novato, California. At Wipro, five radiologists interpret 30 CT scans a day for
Massachusetts General Hospital.
2500 college educated men and women are buzzing at midnight at Wipro
Spectramind at Delhi. They are busy processing claims for a major US insurance company and
providing help-desk support for a big US Internet service provider-all at a cost upto 60
percent lower than in the US. Seven Wipro Spectramind staff with Ph.Ds in molecular biology
sift through scientific research for western pharmaceutical companies.
Another activist in BOP is Evalueserve, headquarterd in Bermuda and having main
operations near Delhi. It also has a US subsigiary based in New York and a marketing
office in Australia to cover the European market. As Alok Aggarwal (co-founder and
chairman) says, his company supplies a range of value-added services to clients that
include a dozen Fortune 500 companies and seven global consulting firms, besides market
research and venture capital firms. Much of its work involves dealing with CEOs, CFOs,
CTOs, CIOs, and other so called C-level executives.
Evaluserve provides services like patent writing, evaluation and assessment of
their commercialization potential for law firms and entrepreneurs. Its market research
services are aimed at top-rung financial service firms, to which it provides analysis of
investment opportunities and business plans. Another major offering is multilingual
services. Evalueserve trains and qualifies employees to communicate in Chinese, Spanish,
German, Japanese and Italian, among other languages. That skill set has opened market
opportunities in Europe and elsewhere, especially with global corporations.
ICICI infotech Services in Edison, New Jersey, is another BOP services provider
that is offering marketing software products and diversifying into markets outside the US.
The firm has been promoted by $2-billion ICICI Bank, a large financial institution in
Mumbai that is listed on the New York Stock Exchange.
In its first year after setting up shop in March 1999, ICICI infotech spent $33
million acquiring two information technology services firms in New Jersy-Object Experts and
ivory Consulting – and command Systems in Connecticut. These acquisitions were to help
ICICI Infotech hit the ground in the US with a ready book of contracts. But it soon found
US companies increasingly outsourcing their requirements to offshore locations, instead of
hiring foreign employees to work onsite at their offices. The company found other native
modes for growth. It has started marketing its products in banking, insurance and
enterprise resource planning among others. It has earmarket $10 million for its next US
market offensive, which would go towards R & D and back-end infrastructure support, and
creating new versions of its products to comply with US market requirements. It also has a
joint venture – Semantik Solutions GmbH in Berlin, Germany with the Fraunhofer Institute
for Software and Systems Engineering, which is based in Berlin and Dortmund, Germany –
Fraunhofer is a leading institute in applied research and development with 200 experts in
software engineering and evolutionary information.
A relatively late entrant to the US market , ICICI Infotech started out with
plain vanilla IT services, including operating call centeres. As the market for
traditional IT services started wakening around mid-2000, ICICI Infotech repositioned
itself as a “Solutions” firm offering both products and services. Today , it offers
bundied packages of products and services in corporate and retail banking and include data
center and disaster recovery management and value chain management services.
ICICI Infotech’s expansion into new overseas markets has paid off. Its $50
million revenue for its latest financial year ending March 2003 has the US operations
generating some $15 million, while the Middle East and Far East markets brought in another
$9 million. It new boasts more than 700 customers in 30 countries, including Dow Jones,
Glazo-Smithkline, Panasonic and American Insurance Group.
The outsourcing industry is indeed growing form strength. Though technical
support and financial services have dominated India’s outsourcing industry, newer fields
are emerging which are expected to boost the industry many times over.
Outsourcing of human resource services or HR BPO is emerging as big opportunity
for Indian BPOs with global market in this segment estimated at $40-60 billion per annum.
HR BPO comes to about 33 percent of the outsourcing revenue and India has immense potential
as more than 80 percent of Fortune 1000 companies discuss offshore BOP as a way to cut
costs and increase productivity.
Another potential area is ITES/BOP industry. According to A NASSCOM survey,
the global ITES/BOP industry was valued at around $773 billion during 2002 and it is
expected to grow at a compounded annual growth rate of nine percent during the period 2002
– 06, NASSCOM lists the major indicators of the high growth potential of ITES/BOP industry
in India as the following.
During 2003 – 04, The ITES/BPO segment is estimated to have achieved a 54
percent growth in revenues as compared to the previous year. ITES exports accounted for
$3.6 billion in revenues, up form $2.5 billion in 2002 – 03. The ITES-BPO segment also
proved to be a major opportunity for job seekers, creating employment for around 74,400
additional personnel in India during 2003 – 04. The number of Indians working for this
sector jumped to 245,500 by March 2004. By the year 2008, the segment is expected to
employ over 1.1 million Indians, according to studies conducted by NASSCOM and McKinsey &
Co. Market research shows that in terms of job creation, the ITES-BOP industry is growing
at over 50 per cent.
Legal outsourcing sector is another area India can look for. Legal
transcription involves conversion of interviews with clients or witnesses by lawyers into
documents which can be presented in courts. It is no different from any other
transcription work carried out in India. The bottom-line here is again cheap service.
There is a strong reason why India can prove to be a big legal outsourcing Industry.
India, like the US, is a common-law jurisdiction rooted in the British legal
tradition. Indian legal training is conducted solely in English. Appellate and Supreme
Court proceedings in India take place exclusively in English. Due to the time zone
differences, night time in the US is daytime in India which means that clients get 24 hour
attention, and some projects can be completed overnight. Small and mid – sized business
offices can solve staff problems as the outsourced lawyers from India take on the time –
consuming labour intensive legal research and writing projects. Large law firms also can
solve problems of overstaffing by using the on – call lawyers.
Research firms such as Forrester Research, predict that by 2015 , more than
489,000 US lawyer jobs, nearly eight percent of the field, will shift abroad..
Many more new avenues are opening up for BOP services providers. Patent
writing and evaluation services are markets set to boom. Some 200.000 patent applications
are written in the western world annually, making for a market size of between $5 billion
and $7 billion. Outsourcing patent writing service could significantly lower the cost of
each patent application, now anywhere between $12,000 and $15,000 apiece-which would help
expand the market.
Offshoring of equity research is another major growth area. Translation
services are also becoming a big Indian plus. India produces some 3,000 graduates in
German each year, which is more than that in Switzerland.
Though going is good, the Indian BPO services providers cannot afford to be
complacent. Phillppines, Maxico and Hungary are emerging as potential offshore locations.
Likely competitor is Russia, although the absence of English speaking people there holds
the country back. But the dark horse could be South Affrica and even China
BOP is based on sound economic reasons. Outsourcing helps gain cost advantage.
If an activity can be performed better or more cheaply by an outside supplier, why not
outsource it ? Many PC makers, for example, have shifted from in – house assembly to
utilizing contract assemblers to make their PCs. CISCO outsources all productions and
assembly of its routers and witching equipment to contract manufactures that operate 37
factories, all linked via the internet.
Secondly, the activity (outsourced) is not crucial to the firm’s ability to
gain sustainable competitive advantage and won’t hollow out its core competence,
capabilities, or technical know how. Outsourcing of maintenance services, date processing,
accounting, and other administrative support activities to companies specializing in these
services has become common place. Thirdly, outsourcing reduces the company’s risk exposure
to changing technology and / or changing buyer preferences.
Fourthly, BPO streamlines company operations in ways that improve
organizational flexibility, cut cycle time, speedup decision making and reduce coordination
costs. Finally, outsourcing allows a company to concentrate on its core business and do
what it does best. Are Indian companies listening ? If they listen, BPO is a boon to them
and not a bane.
Questions:
1. Which of the theories of international trade can help Indian services providers
gain competitive edge over their competitors?
2. Pick up some Indian services providers. With the help of Michael Porter’s
diamond, analyze their strengths and weaknesses as active players in BPO.
3. Compare this case with the case given at the beginning of this chapter. What
similarities and dissimilarities do you notice? Your analysis should be based on the
theories explained.
No: 2
PERU
Peru is located on the west coast of South America. It is the third largest nation of the
continent (after Brazil and Argentina) , and covers almost 500.000 square miles (about 14
per cent of the size of the United States). The land has enormous contrasts, with a desert
(drier than the Sahara), the towering snow – capped Andes mountains, sparkling grass –
covered plateaus, and thick rain forests. Peru has approximately 27 million people, of
which about 20 per cent live in Lima, the capital. More Indians (one half of the
population) live in Peru than in any other country in the western hemisphere. The
ancestors of Peru’s Indians were the famous incas, who built a great empire. The rest of
the population is mixed and a small percentage is white. The economy depends heavily on
agriculture, fishing , mining, and services, GDP is approximately $15 billion and per
capita income in recent years has been around $4,3000. In recent years the economy has
gained some relative strength and multinationals are now beginning to consider investing in
the country.
One of these potential investors is a large New York based bank that is
considering a $25 million loan to the owner of a Peruvian fishing fleet. The owner wants
to refurbish the fleet and add one more ship.
During the 1970s, the Peruvian government nationalized a number of industries
and factories and began running them for the profit of the state in most cases, these state
– run ventures became disasters. In the late 1970s the fishing fleet owner was given back
his ships and allowed to operate his business as before. Since then, he has managed to
remain profitable, but the biggest problem is that his ships are getting old and he needs
an influx of capital of make repairs and add new technology. As he explained it to the new
York banker. “Fishing is no longer just an art. There is a great deal of technology
involved. And to keep costs low and be competitive on the world market, you have to have
the latest equipment for both locating as well as catching and then loading and unloading
the fish”
Having reviewed the fleet owner’s operation, the large multinational bank
believes that the loan is justified. The financial institution is concerned, however, that
the Peruvian government might step in during the next couple of years and again take over
the business. If this were to happen, it might take an additional decade for the loan to be
repaid. If the government were to allow the fleet owner to operate the fleet the way he
has over the last decade, the fleet the way he has over the last decade, the loan could be
repaid within seven years.
Right now, the bank is deciding on the specific terms of the agreement. Once
theses have been worked out, either a loan officer will fly down to Lima and close the deal
or the owner will be asked to come to New York for the signing. Whichever approach is used,
the bank realizes that final adjustments in the agreement will have to be made on the spot.
Therefore, if the bank sends a representative to Lima, the individual will have to have
the authority to commit the bank to specific terms. These final matters should be worked
out within the next ten days.
Questions:
1. What are some current issues facing Peru? What is the climate for doing business
in Peru today?
2. What type of political risks does this fishing company need to evaluate? Identify
and describe them.
3. What types of integrative and protective and defensive techniques can the bank
use?
4. Would the bank be better off negotiating the loan in New York or in Lima ? Why?
No: 3
RED BECOMING THICKER
The Backdrop
There seems to be no end to the troubles of the coloured – water giant Coca Cola. The cola
giant had entered India decades back but left the country in the late 1970s. It staged a
comeback in the early 1990s through the acquisitions route. The professional management
style of Coca Cola did not jell with the local bottlers. Four CEOs were changed in a span
of seven years. Coke could not capitalize on the popularity of Thums Up. Its arch rival
Pepsi is well ahead and has been able to penetrate deep into the Indian market. Red in the
balance sheet of Coke is becoming thicker and industry observers are of the opinion that it
would take at least two decades more before Coke could think of making profits in India.
The Story
It was in the early 1990s that India started liberalizing her economy. Seizing the
opportunity, Coca Cola wanted to stage a comeback in India. It chose Ramesh Chauhan of
Parle for entry into the market. Coke paid $100 million to Chauhan and acquired his well
established brands Thums Up, Goldspot and Limca. Coke also bagged 56 bottlers of Chauhan as
a part of the deal. Chauhan was made consultant and was also given the first right of
refusal to any large size bottling plants and bottling contracts, the former in the Pune –
Bangalore belt and the latter in the Delhi and Mumbai areas.
Jayadeva Raja, the flamboyant management expert was made the first CEO of Coke
India. It did not take much time for him to realize that Coke had inherited several
weaknesses from Chauhan along with the brands and bottlers. Many bottling plants were small
in capacity (200 bottlers per minute as against the world standard of 1600) and used
obsolete technology. The bottlers were in no mood to increase their capacities, nor were
they willing to upgrade the trucks used for transporting the bottle. Bottlers were more
used to the paternalistic approach of Chauhan and the new professional management styles of
Coke did not go down well with them. Chauhan also felt that he was alienated and was even
suspected to be supplying concentrate unofficially to the bottlers.
Raja was replaced by the hard – nosed Richard Niholas in 1995. The first thing
Nicholas did was to give an ultimatum to the bottlers to expand their plants or sell out.
Coke also demanded equity stakes in many of the bottling plants. The bottlers had their
own difficulties as well. They were running on low profit margins. Nor was Coke willing
to finance the bottlers on soft terms. The ultimatum backfired. Many bottlers switched
their loyalty and went to Pepsi. Chauhan allegedly supported the bottlers, of course, from
the sidelines.
Coke thought it had staged a coup over Pepsi when it (Coke) clamed the status
of official drink for the 1996 Cricket World Cup tournament. Pepsi took on Coke mightily
with the famous jingle “Nothing official about it”. Coke could have capitalized on the
sporty image of Thums Up to counter the campaign, but instead simply caved in.
Donald Short replaced Nicholas as CEO in 1997. Armed with heavy financial
powers, Short bought out 38 bottlers for about $700 million. This worked out to about Rs 7
per case, but the cost – effective figure was Rs 3 per case. Short also invested heavily in
manpower. By 1997, Coke’s workforce increased to 300. Three years later, the parent
company admitted that investment in India was a big mistake.
It is not in the culture of Coke to admit failure. It has decided to fight
back. Coke could not only sustain the loss, it could even spend more money on Indian
operations. It hiked the ad budget and appointed Chaitra Leo Burnett as its ad agency.
During 1998 – 99, Coke’s ad spend was almost three times that of Pepsi.
Coke is taking a look at its human resources and is taking initiatives to re –
orient the culture and inject an element of decentralization along with empowerment. Each
bottling plant is expected to meet predetermined profit, market share, and sales volumes.
For newly hired management trainees, a clearly defined career path has been drawn to enable
them to become profit centre heads shortly after completion of their probation. Such a
decentralized approach is something of a novelty in the Coke culture worldwide.
But Alezander “Von Behr, who replaced Short as Chef of Indian operations,
reiterated Coke’s commitment to decentralization and local responsiveness. Coke has
divided India into six regions, each with a business head. Change in the organization
structure has disappointed many employees, some of whom even quit the company.
Coke started cutting down its costs. Executives have been asked to shift from
farm houses to smaller houses and rentals of Gurgaon headquarters have been renegotiated.
Discount rates have been standardized and information systems are being upgraded to enable
the Indian headquarters to access online financial status of its outposts down to the depot
level.
Coke has great hopes in Indian as the country has a huge population and the
current per capita consumption of beverages is just four bottles a year.
Right now, the parent company (head – quartered in the US) has bottle full of
problems. The recently appointed CEO-E Neville Isdell needs to struggle to do the things
that once made the Cola Company great. The problems include –
Meddling Board
Coke’s star- studded group of directors, many of whom date back to the Goizueta
era, has built a reputation for meddling.
Moribund Marketing
Once world class critics say that today the soda giant has become too
conservative, with ads that don’t resonate with the teenagers and young adults that made up
its most important audience.
Lack of Innovation
In the US market, Coke hasn’t created a best – selling new soda since Diet Coke
in 1982. In recent years Coke has been outbid by rival Pepsi Co for faster growing noncarb
beverages like SoBe Gatorade.
Friction with Bottlers
Over the past decade, Coke has often made its profit at the expenses of
bottlers, pushing aggressive price hikes on the concentrate it sells them. But key
bottlers are now fighting back with sharp increases in the price of coke at retail.
International Worries
Coke desperately needs more international growth to offset its flagging US
business, but while some markets like Japan remain lucrative, in the large German market
Coke has problems so far as bottling contracts go.
When its own house is not in order in the large country, will the company be
able to focus enough on the Indian market?
Questions:
1. Why is that Coke has not been able to make profit in its Indian operations?
2. Do you think that Coke should continue to stay in India? If yes, why?
3. What cultural adaptations would you suggest to the US expatriate managers
regarding their management style?
4. Using the Hofstede and the value orientations cultural models, how can you explain
some of the cultural differences noted in this case?
NO. 4
THE ABB PBS JOINT VENTURE IN OPERATION
ABB Prvni Brnenska Stojirna Brno, Ltd. (ABB-PBS), Czechoslovakia was a joint
venture in which ABB has a 67 per cent stake and PBS a.s. has a 33 per cent stake. This
PBS share was determined nominally by the value of the land, plant and equipment, employees
and goodwill, ABB contributed cash and specified technologies and assumed some of the debt
of PBS. The new company started operations on April 15, 1993.
Business for the joint venture in its first two full years was good in most
aspects. Orders received in 1994, the first full year of the joint venture’s operation,
were higher than ever in the history of PBS. Orders received in 1995 were 2½ times those
in 1994. The company was profitable in 1995 and ahead of 1994s results with a rate of
return on assets of 2.3 per cent and a rate of return on sales of 4.5 per cent.
The 1995 results showed substantial progress towards meeting the joint
venture’s strategic goals adopted in 1994 as part of a five year plan. One of the goals
was that exports should account for half of the total orders by 1999. (Exports had
accounted for more than a quarter of the PBS business before 1989, but most of this
business disappeared when the Soviet Union Collapsed). In 1995 exports increased as a
share of total orders to 28 per cent, up from 16 per cent the year before.
The external service business, organized and functioning as a separate business
for the first time in 1995, did not meet expectations. It accounted for five per cent of
all orders and revenues in 1995, below the 10 per cent goal set for it. The retrofitting
business, which was expected to be a major part of the service business, was disappointing
for ABB-PBS, partly because many other small companies began to provide this service in
1994, including some started by former PBS employees who took their knowledge of PBS-built
power plants with them. However, ABB-PBS managers hoped that as the company introduced new
technologies, these former employees would gradually lose their ability to perform these
services, and the retrofit and repair service business, would return to ABB-PBS.
ABB-PBS dominated the Czech boiler business with 70 per cent of the Czech
market in 1995, but managers expected this share to go down in the future as new domestic
and foreign competitors emerged. Furthermore, the west European boiler market was actually
declining because environmental laws caused a surge of retrofitting to occur in the mid -
1980 s, leaving less business in the 1990 s. Accordingly ABB-PBS boiler orders were flat
in 1995.
Top managers at ABB-PBS regarded business results to date as respectable, but
they were not satisfied with the company’s performance. Cash flow was not as good as
expected. Cost reduction had to go further. The more we succeed, the more we see our
shortcomings” said one official.
Restructuring
The first round of restructuring was largely completed in 1995, the last year
of the three-year restructuring plan. Plan logistics, information systems, and other
physical capital improvements were in place. The restricting included :
Renovating and reconstructing workshops and engineering facilities.
Achieving ISO 9001 for all four ABB-PBS divisions. (awarded in 1995)
Transfer of technology from ABB (this was an ongoing project)
Intallation of an information system.
Management training, especially in total quality assurance and English language.
Implementing a project management approach.
A notable achievement of importance of top management in 1995 was a 50 per cent increase in
labour productivity, measured as value added per payroll crown. However, in the future
ABB-PBS expected its wage rates to go up faster than west European wage rates (Czech wages
were increasing about 15 per cent per year) so it would be difficult to maintain the ABB-
PBS unit cost advantage over west European unit cost.
The Technology Role for ABB-PBS
The joint venture was expected from the beginning to play an important role in
technology development for part of ABB’s power generation business worldwide. PBS a.s. had
engineering capability in coal – fired steam boilers, and that capability was expected to
be especially useful to ABB as more countries became concerned about air quality. (When
asked if PBS really did have leading technology here, a boiler engineering manager
remarked, “Of course we do. We burn so much dirty coal in this country; we have to have
better technology”)
However, the envisioned technology leadership role for ABB-PBS had not been
realized by mid – 1996. Richard Kuba, the ABB-PBS managing director, realized the slowness
with which the technology role was being fulfilled, and he offered his interpretation of
events.
“ABB did not promise to make the joint venture its steam technology leader. The
main point we wanted to achieve in the joint venture agreement was for ABB-PBS to be
recognized as a full-fledged company, not just a factory. We were slowed down on our
technology plans because we had a problem keeping our good, young engineers. The annual
employee turnover rate for companies in the Czech Republic is 15 or 20 per cent, and the
unemployment rate is zero. Our engineers have many other good entrepreneurial
opportunities. Now we’ve begun to stabilize our engineering workforce. The restructing
helped. We have better equipment and a cleaner and safer work environment. We also had
another problem which is a good problem to have. The domestic power plant business turned
out to be better than we expected, so just meeting the needs of our regular customers
forced some postponement of new technology initiatives.”
ABB-PBS had benefited technologically from its relationship with ABB. One
example was the development of a new steam turbine line. This project was a cooperative
effort among ABB-PBS and two other ABB companies, one in Sweden and one in Germany.
Nevertheless, technology transfer was not the most important early benefit of ABB
relationship. Rather, one of the most important gains was the opportunity to benchmark the
joint venture’s performance against other established western ABB companies on variables
such as productivity, inventory and receivables.
Questions:
1. Where does the joint venture meet the needs of both the partners? Where does it
fall short?
2. Why had ABB-PBS failed to realize its technology leadership?
3. What lessons one can draw from this incident for better management of technology
transfers?
NO. 5.
CHINESE EVOLVING ACCOUNTING SYSTEM
Attracted by its rapid transformation from a socialist planned economy into a
market economy, economic annual growth rate of around 12 per cent, and a population in
excess of 1.2 billion, Western firms over the past 10 years have favored China as a site
for foreign direct investment. Most see China as an emerging economic superpower, with an
economy that will be as large as that of Japan by 2000 and that of the US before 2010, if
current growth projections hold true.
The Chinese government sees foreign direct investment as a primary engine of
China’s economic growth. To encourage such investment, the government has offered generous
tax incentives to foreign firms that invest in China, either on their own or in a joint
venture with a local enterprise. These tax incentives include a two – year exemption from
corporate income tax following an investment, plus a further three years during which taxes
are paid at only 50 per cent of the standard tax rate. Such incentives when coupled with
the promise of China’s vast internal market have made the country a prime site for
investment by Western firms. However, once established in China, many Western firms find
themselves struggling to comply with the complex and often obtuse nature of China’s rapidly
evolving accounting system.
Accounting in China has traditionally been rooted in information gathering and
compliance reporting designed to measure the government’s production and tax goals. The
Chinese system was based on the old Soviet system, which had little to do with profit or
accounting systems created to report financial positions or the results of foreign
operations.
Although the system is changing rapidly, many problems associated with the old
system still remain.
One problem for investors is a severe shortage of accountants, financial
managers, and auditors in China, especially those experienced with market economy
transactions and international accounting practices. As of 1995, there were only 25,000
accountants in china, far short of the hundreds of thousands that will be needed if China
continues on its path towards becoming a market economy. Chinese enterprises, including
equity and cooperative joint ventures with foreign firms, must be audited by Chinese
accounting firms, which are regulated by the state. Traditionally, many experienced
auditors have audited only state-owned enterprises, working through the local province or
city authorities and the state audit bureau to report to the government entity overseeing
the audited firm. In response to the shortage of accountants schooled in the principles of
private sector accounting, several large international auditing firms have established
joint ventures with emerging Chinese accounting and auditing firms to bridge the growing
need for international accounting, tax and securities expertise.
A further problem concerns the somewhat halting evolution of China’s emerging
accounting standards. Current thinking is that China won’t simply adopt the international
accounting standards specified by the IASC, nor will it use the generally accepted
accounting principles of any particular country as its mode. Rather, accounting standards
in China are expected to evolve in a rather piecemeal fashion, with the Chinese adopting a
few standards as they are studied and deemed appropriate for Chinese circumstances.
In the meantime, current Chinese accounting principles present difficult
problems for Western firms. For example, the former Chinese accounting system didn’t need
to accrue unrealized losses. In an economy where shortages were the norm, if a state-owned
company didn’t sell its inventory right away, it could store it and use it for some other
purpose later. Similarly, accounting principles assumed the state always paid its debts –
eventually. Thus, Chinese enterprises don’t generally provide for lower-of-cost or market
inventory adjustments or the creation of allowance for bad debts, both of which are
standard practices in the West.
Questions:
1. What factors have shaped the accounting system currently in use in China?
2. What problem does the accounting system, currently in sue in China, present to
foreign investors in joint ventures with Chinese companies?
3. If the evolving Chinese system does not adhere to IASC standards, but instead to
standards that the Chinese governments deem appropriate to China’s “Special situation”, how
might this affect foreign firms with operations in China ?
NO. 6
UNFAIR PROTECTION OR VALID DEFENSE ?
“Mexico Widens Anti – dumping Measure …………. Steel at the Core of US-Japan Trade
Tensions …. Competitors in Other Countries Are Destroying an American Success Story … It
Must Be Stopped”, scream headlines around the world.
International trade theories argue that nations should open their doors to
trade. Conventional free trade wisdom says that by trading with others, a country can
offer its citizens a greater volume and selection of goods at cheaper prices than it could
in the absence of it. Nevertheless, truly free trade still does not exist because national
governments intervene. Despite the efforts of the World Trade Organization (WTO) and
smaller groups of nations, governments seem to be crying foul in the trade game now more
than ever before.
We see efforts at protectionism in the rising trend in governments charging
foreign producers for “dumping” their goods on world markets. Worldwide, the number of
antidumping cases that were initiated stood at about 150 in 1995, 225 in 1996, 230 in 1997
, and 300 in 1998.
There is no shortage of similar examples. The Untied States charges Brazil,
Japan, and Russia with dumping their products in the US market as a way out of tough
economic times. The US steel industry wants the government to slap a 200 per cent tariff
on certain types of steel. But car markers in the United States are not complaining, and
General Motors even spoke out against the antidumping charge – as it is enjoying the
benefits of law – cost steel for use in its auto product ion. Canadian steel makers
followed the lead of the United States and are pushing for antidumping actions against four
nations.
Emerging markets, too, are jumping into the fray. Mexico recently expanded
coverage of its Automatic Import Advice System. The system requires importers (from a
select list of countries) to notify Mexican officials of the amount and price of a shipment
ten days prior to its expected arrival in Mexico. The ten-day notice gives domestic
producers advance warning of incoming low – priced products so they can complain of dumping
before the products clear customs and enter the marketplace. India is also getting onboard
by setting up a new government agency to handle antidumping cases. Even Argentina, China,
Indonesia, South Africa, South Korea, and Thailand are using this recently – popularized
tool of protectionism.
Why is dumping on the rise in the first place? The WTO has made major inroads
on the use of tariffs, slashing tem across almost every product category in recent years.
But the WTO does not have the authority to punish companies, but only governments. Thus,
the WTO cannot pass judgments against individual companies that are dumping products in
other markets. It can only pass rulings against the government of the country that imposes
an antidumping duty. But the WTO allows countries to retaliate against nations whose
producers are suspected of dumping when it can be shown that : (1) the alleged offenders
are significantly hurting domestic producers, and (2) the export price is lower than the
cost of production or lower than the home – market price.
Supporters of antidumping tariffs claim that they prevent dumpers from
undercutting the prices charged by producers in a target market and driving them out of
business. Another claim in support of antidumping is that it is an excellent way of
retaining some protection against potential dangers of totally free trade. Detractors of
antidumping tariffs charge that once such tariffs are imposed they are rarely removed.
They also claim that it costs companies and governments a great deal of time and money to
file and argue their cases. It is also argued that the fear of being charged with dumping
causes international competitors to keep their prices higher in a target market than would
other wise be the case. This would allow domestic companies to charge higher prices and
not lose market share – forcing consumers to pay more for their goods.
Questions
1. “You can’t tell consumers that the low price they are paying for a particular fax
machine or automobile is somehow unfair. They’re not concerned with the profits of
companies. To them, it’s just a great bargain and they want it to continue.” Do you agree
with this statement? Do you think that people from different cultures would respond
differently to this statement? Explain your answers.
2. As we’ve seen, the WTO cannot currently get involved in punishing individual
companies for dumping – its actions can only be directed toward governments of countries.
Do you think this is a wise policy ? Why or why not? Why do you think the WTO was not given
the authority to charge individual companies with dumping? Explain.
3. Identify a recent antidumping case that was brought before the WTO. Locate as many
articles in the press as you can that discuss the case. Identify the nations, products (s),
and potential punitive measures involved. Supposing you were part of the WTO’s Dispute
Settlement Body, would you vote in favor of the measures taken by the retailing nation? Why
or why not?
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