SM 3.01.6 Case Topics

SAV
SDC
Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: SAV@netnam2.org.vn /swissait@hotmail.com
COURSE TERM LECTURER
: SM 3.01 INTERNATIONAL BUSINESS MANAGEMENT : 3/2000 (January 2000) : Dr Godwin Nair TUTORIAL ACTIVITY - 2
Week: 3 Date: Wednesday, 26 January 2000 Topic: Globalisation Activity: Case Study Analysis and Presentation Group 6
THE GLOBALISATION OF BHP
The Globalisation of BHP

Prepared by Shannon Mooney and Tony Peloso Based on the paper "The Globalisation of BHP", by Dr B.R. Stewardson, Chief Economist, BHP Limited. In Carroll, P(ed) (1998) Marketing and International Business, Sydney: Prentice Hall. Background First incorporated in Melbourne back in 1885, BHP (The Broken Hill Proprietary Company Limited) has a long history as one of Australia's great companies. It began as a base metals mining company. BHP diversified into steel making in the early 1900's and petroleum in the 1960's. Today, it is one of the world's largest diversified resources companies, with operations, plants and offices in 59 countriesi. Although BHP had been a major exporter from Australia for many decades, the past 15 years have seen BHP making the transformation into a global company. The scope of BHP's operations include steel manufacturing, mining (iron ore, black coal, manganese ore, copper), crude oil and condensate, natural gas-and shipping. As well, BHP conducts significant levels of mineral, oil and gas exploration. Historically, the primary industries, including mining, have been a major source of Australia's wealth. While there has been a dramatic rise in the contribution of the service sector to Australia's GNP, industries in which BHP operates continue to have a considerable impact on the national economy. Approximately 80% of Australia's mining production is exported. Traditionally there have been high levels of foreign investment in the Australian gas and petroleum industries. In June 1993, this stood at $A32.8 billion, in the form of both direct investment (45%) and portfolio investment (55%)ii The resource sector in Australia is a major export eamer, and its performance has close links with the nation's balance of payments situation. Over time, successive Australian governments protected many Australian industries from foreign competition, which did little to create competitive Australian companies. Since 1985, these policies have been changing, and the economy has been rapidly deregulated. Many steps have been taken to improve Australia's competitive position and to encourage exports. Mining and steel making are capital-intensive industries, with much investment in highrisk ventures, often over significant periods of time. They are also dependent on world supply and demand, fluctuating prices and global economic conditions. The demand for energy and steel is high in many rapidly growing economies in Asia, where industries such as ship building, car manufacturing and construction are continuing to develop. Prices of minerals, steel and energy commodities are set on world markets. Prices generally have been trending down, largely as the result of world supply exceeding demand, as many sites in many countries have been discovered and developed, new technologies have been introduced, and production has begun in low cost countries. In Australia, inflation has grown faster than commodity prices since the mid-1980's, and commodity prices have fallen in real terms. This has increased pressure for on-going improvements at each stage of the production and distribution processes.
BHP has an long history of exporting its steel and other products. However, changes in the political and economic landscape leading up to and following World War II greatly changed the way BHP conducted its business, and it largely stopped its exporting programs. In the early 1960's BHP began to re-build its overseas activities by resuming exports of steel. Into the 1980's it exported varying quantities. These exports tended to be excess production which could not be sold in the local market, particularly during slow economic cycles. By the 1990's BHP Steel's approach was to "establish a permanent and continuous presence in the export market for steel with only marginal quantities fluctuating inversely with Australian domestic demand. BHP Steel's attitude to capital investment also nowreflected a 'long term exporter' philosophy.iii BHP aims to "create a unique world steel business that operates from raw material to finished product'. iv The Road to Globalisation In 1970, BHP began a program of acquisitions. (Chart 1) These commenced with 50% of John Lysaght Australia; the balance was acquired in 1979. This purchase included major cold rolling and coating operations in Australia, and a number of small roll forming mills in Asia, which produced coated and painted steel sheet shapes such as corrugated profiles for roofing. These small plants, plus a tin mine in Indonesia and a small stake in a steel rope manufacturing plant in Malaysia, formed the beginnings of a major expansion in global operations. BHP has continued to build many more roll fomiing mills in various countries. In Australia, BHP developed or acquired a number of major mines, from the mid 1960's to the mid 1980's, largely for export. These included the Groote Eylandt manganese mine in the Northern Territory in 1966, a large iron ore mine in the Pilbara, (Mt. Newman), 58% of the Moura and Kianga export coal mines in Queensland, and the Gregory and Riverside coal mines (also in Queensland) in the early 1980's. 1984 saw the size and nature of BHP's global push change, with the acquisition of Utah; a large US corporation; and the commissioning of gold mining at Ok Tedi in PNG; a joint venture in which BHP had a 30% share. The Utah purchase included export oriented coal mines in Queensland, large domestic steaming coal mines in the US, a copper mine in Canada, a 49% share in a large iron ore mine in Brazil, and various exploration properties, including the Escondida copper deposit in Chile. In 1985 BHP acquired 2 US companies with petroleum reserves and production; Energy Reserves Group and Monsanto Oil Company. An oil refinery, gas utility and petrol retailing business; Pacific Resources Inc., in Hawaii; was added in 1989.
CHART 1: BHP's Overseas Expansion Year 1960 Steel Overseas sales offices for steel reestablished Minerals Petroleum Copper
1966 1969 1970 1976 1979 1980 1983 1984 1985 1987 1989 1990 1991 1992 1995 100% New Zealand Steel acquired Remaining 50% John Lysaght acquired 50% John Lysaght acquired
Groote Eylandt manganese mine commissioned Mt. Newman iron ore mine opened 58% Moura and Kianga export coal mines acquired Gregory Coal mine opened Riverside coal mine opened Utah acquired. Ok Tedi gold production commissioned Energy Reserves Group and Monsanto Oil Co. acquired 51 % Hamilton Oil acquired Pacific Resources Inc. acquired Escondida Copper production begun Remaining 49% Hamilton Oil acquired
Acquisition of Magma Copper
Escondida was a big new mineral development for BHP, which began production in 1990. In 1991 BHP completed its purchase of Hamilton Oil, (with production and significant reserves in the North Sea) which allowed it to become a world leader in oil drilling and production techniques. Other purchases and developments included 100% ownership of New Zealand Steel, acquisition of USbased Magna Copper, and continued exploration in oil (in the Irish Sea and the Dai Hung oil field off Vietnam), liquid natural gas and minerals. In the 1996/97 financial year, BHP budgeted to spend over $A400 million on oil exploration alone. With the purchase of Magma Copper in December 1995 BHP became the world's largest nongovenunent copper producer. Magna Copper holds mines in the US and Peru, and copper smelting
and processing competencies. Despite Magma's first quarter loss in 1995/96, Largely due to rising production costs and falling copper prices, analysts were confident BHP could turn the performance around. Bruce Foskey, of Shares, argued that the diversity of BHP's overall operations placed it in a better position than its competitors for withstanding a difficult market. v Many changes illustrate the development and globalisation of BHP over the past 15 years. In 1981, less than 1% of BHP's employees worked overseas. Overseas employment now accounts for almost one third of BHP's total employment. vi (Table 1) Table 1: BHP Employment by Location (percent) Australia Overseas 1981/82 >99 <1 100 1984/85 N/A N/A 1995/96 72 28 100
BHP's total sales from 1984/85 to 1995/96 more than doubled, to $AI9.8 billion. In 1984/85 88% of BHP's sales were provided from Australian sources and 12% from overseas sources. By 1996 37% of sales were sourced off-shore. vii (Table 2) Table 2: BHP Sales by Source (percent) Australia Overseas 1981/82 99 1 100 1984/85 88 12 100 1995/96 63 37 100
Since 1984/85, overseas assets have grown from 22% to 41% of total assets in 1995/96. viii (Table 3) Table 3: BHP Total Assets (percent) 1981/82 Australia N/.A Overseas N/A 1984/85 78 22 100 1995/96 59 41 100
Similarly BHP's markets have become more international. By 1995/96 66% of sales were in overseas markets, up from 47% in 1984/85 ix (Table 4; Table 5 shows a more detailed split of BHP's overseas sales). Table 4: BHP Sales by Market (percent) Australia Overseas 1981/82 77 23 100 1984/85 53 47 100 1995/96 34 66 100
Table 5: BHP Sales by Market - Detailed; to 1993/94 (percent) Australia New Zealand US Japan South East Asia Other Asia Europe Middle East Other 1984/85 53 1 12 17 4 4 4 1 4 100 1993/94 35 2 18 14 5 10 8 1 7 100
Sales in the US increased significantly due to the petroleum sales of the Hawaiian refinery. The sales share to Japan fell as other markets increased faster than BHP's Japanese market. However, Japan remained the largest market for BHP minerals. Sales of steel and minerals to South East Asia increased. This reflected the increasing importance of South Korea, Taiwan and China as markets for BHP. The share of sales to Europe more than doubled, reflecting growth in mineral and petroleum sales. BHP's share register also changed, with a trend to global financing. 21% of shares were foreign owned in 1995/96, almost a 50% increase since 1990. BHP's shares have been fully listed London and New Zealand for many years. BHP listed in New York, Frankfurt and the Swiss Exchanges in 1987 and in Tokyo in 1988. Why has BHP Globalised? Several issues hold to the key to why BHP has globalised. BHP outgrew the Australian market in many of its business activities. To continue to achieve growth to increase shareholder value, BHP had to increasingly sell internationally. To be competitive, firms must often produce internationally because many finished goods are costly to transport, can be easily damaged, or are best produced close to the market. This allows the firm to respond quickly and flexibly to changes in demand. Basic commodity products, such as raw materials, are most competitively supplied from lowest cost ore deposits, regardless of location. As they grow, many companies need to spread risk by diversifying their markets and products. The mining industry has become a global one: companies look for the best resources to develop wherever in the world they can be found. To compete effectively in the international market BHP focused on producing as efficiently as possible, largely by operating low cost mines, with high grade ore and low extraction costs. Australia had many excellent mineral deposits. Increasingly however, mining companies were looking worldwide for the best deposits to develop.
Dr Stewardson, BHP's Chief Economist, has pondered the question of why BHP didn't start operating mines overseas earlier. He suggested there may be a minimum size at which a mining company can support overseas operations and exploration. Perhaps BHP passed that size long before it undertook significant overseas operations. The acquisition of Utah, with its worldwide operation and exploration areas, established a platform for -further activity overseas. At this time, the Australian economy began to become more focused on the world economy. As well, BHP became aware that some of its Australian deposits were beginning to be exhausted. However, some events, such as the reforms to the taxation of petroleum production in Australia, motivated BHP to re-focus a portion of its exploration efforts in Australia. As well, liquid natural gas exploration in and around Australia continued at significant levels. Increasingly, sophisticated steel production technology and methods are allowing a wide range of qteel products to be produced on a small scale basis. It is becoming technically and economically more possible to operate small scale production operations in developing countries. Italian steel companies have developed 'mini' steel plants, and countries such as Mexico and Brazil produce steel in highly advanced and efficient plants. The developing Asian countries are also quickly focusing on steel production as a means of increasing their wealth and efficiency. As well, tariffs in many Asian countries increase as the level of value-adding to the product increases. This encourages steel producers to consider finishing the processes in the host nation. The ASEAN countries also are providing incentives through lower tariffs to member nations. BHP has also considering moving further back up the production chain with small production plants located in overseas markets. The company began developing small scale production plants, to allow flat steel products to be produced in an electric furnace, in conjunction with scrap-based mini-mills. BHP realised it must continue to take advantage of its leading position as a technological and production innovator in steel. The pressures for BHP to globalise remain: the Australian market is small, there are economies to be realised by supplying competitively to an international market, diversification of products and markets spreads risks, and downstream development allows access to more markets internationally. Because of its size, BHP must operate globally to continue to grow. An examination of BHP's management provides an interesting contrast. BHP has not fully globalised its management. While changes are taking place, most senior managers are Australian. Dr Stewardson notes, "So though our heads may require us to go global, our liearts are still Australian and many of us still call Australia home, as well as head office". x BHP is focusing on developing global management talent and providing access for all managers to the knowledge and resources located at the most established sites. The importance of formal and informal networks and other mechanisms is acknowledged, to enable the rapid learning necessary to enhance BHP's global strategies.
Discussion Questions
1. Identify the motives for the globalisation of BHP. Which, if any, was the most dominant motive: market-based, cost-based, or political? 2. How could the degree of globalisation by a firm be measured? 3. What were the markets entered by BHP? How has BHP entered these markets? Why was the particular method of entry chosen? 4. What role did technological developments play in the globalisation process? 5. Evaluate the possible impacts on the Australian economy of the globalisation of BHP.
SAV
SDC
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: SAV@netnam2.org.vn / swissait@hotmail.com
Week: 6 Date: Wednesday, 1 March 2000 Topic: International Business and Centrally-Planned Nation States (Economies in Transition) Activity: Case Study Analysis and Presentation Group 4
POLANDS DRAMATIC GAMBLE: FROM CENTRALLY-PLANNED TO FREE-MARKET ECONOMY
SAV6/SM 3.01-IBM/TA5-Case Study-PDG/Nair/Jan2000
POLAND'S DRAMATIC GAMBLE: FROM CENTRALLY PLANNED TO FREE-MARKET ECONOMY1

Over the last few years scholars, policymakers, and international business executives have studied the dramatic developments in eastern Europe. Poland was one of the first countries to attempt a move from a planned, centrally run economy to a market economy. Many still ask: Can the Poles do it? What happens if they fail? And what's the impact on us? Poland's troubles began at the end of World War II when the Russians liberated the country from the Germans. The Communists implemented Stalinist Central Planning. Production was determined by, state decree, not by markets. Huge state-run monopolies, such as Lenin Steel, dominated the economy. Prices and wages were set by the state. There was a saying in Poland, "We pretend to work, and the state pretends to pay us." To achieve the communist goal of full employment, everyone was given a job whether or not it was necessary. To employ so many people, wages had to be kept low. Therefore, subsidies were put in place for farmers and factories. This plan resulted in government budget deficits, a nonconvertible currency, low productivity, and shortages of almost everything. According to one Polish citizen, "There was no food. We were lucky, if we could find a kilogram of sausage . . . many times the last two kilograms of sausage were bought by the person in front of us in line." By 1989, coping with continuing shortages and inflation running at more than 500 percent, the communists were forced to negotiate with Lech Walesa and the Solidarity Trade Union. The result was a Solidarity-led coalition government. The new leaders did not choose a path of gradual reform. Instead, Finance Minister Leszek The
Balcerowicz, with the assistance of western economists, came up with a radical plan of economic reform that would move Poland from central planning to free markets virtually overnight. profit, or face the possibility of bankruptcy. government reduced its budget deficit by slashing government subsidies. Enterprises had to show a Many state-run enterprises were privatized, sold to investors. Prices were allowed to rise to whatever the market would bear, but wages were held in
check. And the Polish currency, the zloty, was devalued as the first step toward making it compatible with western currencies. To eliminate long lines and shortages, the new plan allowed prices to rise so that producers would produce more. Prices went up for almost everything including gasoline. With gas prices and insurance so high, thousands of Poles stopped driving. Bread prices went up, electric bills
quadrupled. Meanwhile, salaries only went up slightly, held in check to fight inflation. As a result of these events, the country was forced into recession. Fortunately, many enterprising Poles figured out ways to beat the old system. People sold goods from their cars and trucks, circumventing the state distribution system to lower prices on their products. In the new free markets, farmers sell directly to customers. And industrious entrepreneurs have gone into business to bring products to market. One woman buys wheat from farmers, brings it to a mill to be ground, and sells the flour in Warsaw. Even students have gone into business for themselves. According to a Warsaw student, "It's great! We have a lot of customers, the business is growing. This is how it should be. This is a different market. And I'm sure, you know, in the United States it's the same. everything. The profit motive is also one of the new laws at large state-run enterprises throughout Poland. Under the old communist system, factories sold as many products as the Central Committee told it to. Managers didn't actually know how much each product cost, and they didn't have control of costs. At the end of each fiscal year, managers would determine the loss, send it to the government, and the government would print the money to pay for it. Under that system, line workers and managers had little or no incentive to be efficient in their work. There was little motivation for them to work harder because they were all paid the same wage. Employees who worked less got the same money as those who worked hard. Qualifications weren't important. It was more important to have a communist party card. Many party members were given jobs as directors at the factories. trustworthy." The general rule was that managers were "mediocre, but The market should be for the customer. If there is a demand, then we provide
Factories have been learning to operate under new rules.
According to Jan Buczkowski, a
production director, "now we have more problems than we had in the past. There are different troubles. We have to think about costs of our production. We have to think about the costs of spare parts. And we must think about our customers. It is a new market." In the old days, workers didn't care if a line shut down for lack of parts, their jobs were guaranteed. Now if the factory doesn't turn a profit, it will be allowed to lay off workers, or worse, go bankrupt. In spite of personal hardship, many Poles seem to support the government's program. According to Konstanty Gebert, a political analyst, the Polish people 'reason in terms of a national emergency and are willing to accept sacrifices as long as they think that these sacrifices serve a general national cause. As long as they have trust and confidence in their leaders, who for the first time since the war they could democratically elect.' Privatization has been an important step on the road to reform. Laws for selling state enterprises to private investors were enacted. One of the first privatized firms was Omig, a maker of electronic components. As a private company, Omig operates more efficiently than it did before. According to Omig's Marek Ogradzki, "I think that the only way for Poland is privatization. In the future I think it will be 80 percent private sector and 20 percent state or government sector. Right now, it's the opposite way." Privatization also includes ways of allowing workers and the public to buy shares in these companies, such as a stock exchange. However, not all Poles are eager to buy into the reforms. Zbigniew Holdys is one of Poland's most famous rock stars. In the early 1980s his band, Perfect, filled stadiums until it was banned by the government. In spite of his position as a progressive artist, he is uneasy about life in the new Poland. Holdys stated that, "In my generation-I am 38 years old right now-even people who are a little bit younger than me, I mean, about 30 years old feel that we are a loss for this country. I don't think anyone from our generation is ready to stand this situation. You have to learn to work in a different way, in a capitalist way."
According to Holdys, "there are hundreds, thousands, maybe even millions of people who were working in the old system. To take a man who worked in the Ministry of Culture and tell him that he must now be a manager-it's impossible. People are afraid. I don't think older generations are ready to change everything in a very short time. Probably this kind of Eden-this beautiful picture-will belong to my 2-year-old son when he is older." Many Poles have not waited. They are learning the ways of capitalism and markets through another growth industry in eastern Europe-entrepreneurship education. For example, young managers are attending courses at the International School of Management in Warsaw that are taught by visiting professors from the United States. The school teaches English and western management skills, but the most important training is in developing an entrepreneurial mindset. Many institutions in Poland such as Solidarity have established links with universities in the United States to promote entrepreneurship and trade. Poland needs western management skills, modern western technology, and, above all, western capital to succeed with its dramatic transformation. Official U.S. investment has increased through U.S. congressional legislation called the S.E.E.D. Act. However, new private investment is the key to long-term development. According to Dr. Jeffrey Sachs, a Harvard economist, "If the plan fails, I think there could be a terrible calamity, not only for the Poles, but for the West. There would be an explosion of political unrest and a loss of faith that moving toward a market economy is the right direction. It could lead to a rise in populism and an explosion of new hyperinflation in Poland and in the rest of the region. The crisis could become very deep and ugly, given all the ethnic and national tension in the region. And eastern Europe and the former Soviet union could be thrown into a cauldron of violence and nationalist conflict because they've lost a clear way out. I think their hope and belief-creating a market economy and integrating with western Europe-is the direction for the future. If they lost heart in that strategy, what comes next? All sorts of terrible things could happen." It's hard for Americans to comprehend a society in which you have to stand in line to buy everything, where the waiting time is 21 years for a telephone and 30 years for an apartment. In Poland, the
lines are gone now, and so are the secret police and some of the communist apparatus. But it takes time to change the habits and the thinking of a people. Poland's national anthem begins, "Poland has not yet perished." After surviving more than 50 years of oppression by Hitler, Stalin, and the Soviet Communist party, the Polish people clearly have the courage and commitment to rebuild and prosper. It may, however, take a generation to change the collective consciousness of the people. Do Polish people still have the patience to survive? Will the rest of the world invest for the long term?
DISCUSSION QUESTIONS
1. Explain the Polish expression, "We pretend to work and the state pretends to pay us. How have the Polish people adapted to market reforms and unemployment? Discuss. 2. How did the old system of controlled management affect productivity and motivation in Poland's factories? Discuss. 3. What have been the benefits of privatizing state-owned enterprises in Poland? Discuss. Draw some similarities with Vietnam. 4. How had the Polish economy evolved since this program aired? Have the rapid reform programs succeeded in creating a free-market economy? Discuss. 5. A democratic political system is an essential condition for sustained economic progress. Discuss this statement.
SAV
SDC
Week: 8 Date: Wednesday, 15 March 2000 Topic: International Business Strategy : Strategic Alliances Activity: Case Study Analysis and Presentation Group 3
SINGAPORE AIRLINES (SIAS) ALLIANCES : THE STAR ATTRACTION

SAV6/SM 3.01-IBM/TA7-Case Study-SIA/Nair/Jan2000
1. Should SIA join the Lufthansa-led Star Alliance? 2. What are the benefits of forming strategic alliances for airlines and their customers? 3. Why did SIA dissolve its alliance with Swissair and forge a new alliance with Lufthansa? 4. What are the strategic and operational consideration for SIA joining the Star Alliance? Why is SIA reluctant to join the larger Star Alliance? 5. Are strategic alliances better than acquisitions as an international business strategy?
SIAs Alliances: The 'Star' Attraction

CCC 0218-9275/99/03065-06 1999 by John Wiley & Sons (Asia) Ltd
This case was prepared by Prem N. Shamdasani, Department of Marketing, National University of Singapore as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative or business situation. The case is based on public and published information. 'Joining an airline alliance will not cure a sick carrier', said SIA chairman, S. Dhanabalan when questioned about the wisdom of forming strategic alliances in an interview with The Straits Times on October 19, 1997. 'Basically, each airline must be viable, competitive and efficient. Putting two weak airlines into an alliance is not going to help. 1 Soon after this interview, aviation circles were rife with talk that SIA may abandon its alliance with Swissair and Delta Airlines. Swissair group chief executive Philippe Bruggisser was reported telling a Geneva newspaper that, I don't want to rule out that it could come to a new Lufthansa-Singapore Airlines alliance'. In a report published by Bloomberg, Lufthansa chief executive Juergen Weber said he hoped to add two Asian carriers by year-end to the Star Alliance. He declined to name the potential alliance partners but many airline sources believed that SIA was a strong prospect. The Star Alliance, which was established in May 1997, was made up of Lufthansa, Thai Airways, United Airlines, Air Canada, Scandinavia's SAS and Varig of Brazil. 2 Bruggisser acknowledged that the partnership with SIA was not working because ties were not deep enough. In late October 1997, SIA chairman Mr. S. Dhanabalan had also echoed similar sentiments where he noted that although SIA was one of the first airlines to enter a tie-up with Swissair and Delta in 1989, it had become more realistic about the potential benefits of an alliance. He pointed out that airlines still preferred to retain their distinct 'branding' and that a 'cautious approach' should be taken in forming alliances despite recent trends which showed this was gaining momentum.
BACKGROUND
THE LOGIC OF AIRLINE ALLIANCES As of May 1996, there was a total of 389 airline alliances worldwide. Equity was involved in 62, or 16% of these alliances. 3 The nature of these alliance relationships ranged from code sharing arrangements to full-fledged cooperation and complete mergers of ground services and frequent flyer programs. The motivation to form alliances depended on the advantages partners wished to obtain from their cooperation both from an airline service provider and passenger points of view. Advantages to passengers included the ability to travel to a greater number and variety of destinations in a 'seamless' manner on one ticket with convenient connecting flights through
harmonization of partner airlines' schedules. Additionally, the integration of frequent flier programs and benefits enabled passengers to redeem awards on any of the partners' flights. Benefits for partner airlines included the cost savings realized primarily from the capital-intensive services such as the sharing of ground services including baggage handling, check-in, and business lounges. Other operational cost savings could be realized with partner airlines spacing providing each other maintenance, catering services and exchange of personnel in times of need. Additionally, through joint purchasing agreements, the alliance's bargaining power vis-a-vis suppliers would be increased. Generally, proponents of airline alliances believed that the passengers stood to benefit from better service, convenience and improved perks. However, to get the most benefit from alliances, partners needed to make a variety of changes in their organization, strategies and operations. For example, to benefit from joint purchasing agreements, the equipment bought by the partners (e.g., airplane type, cockpit design, inflight systems, etc.) had to be similar. Additionally, to extend their reach effectively, partners had to better coordinate their flight schedules. However, there was no guarantee of commercial success for airlines that entered into these alliances. For example, Air France, the airline with the most strategic alliances, 31 according to the Airline Business Survey, was struggling financially SIA'S ALLIANCES STRATEGY SIAs alliance strategy continued to evolve in response to changes in the competitive environment in the aviation industry. In 1989, SIA entered into a trilateral alliance called the Global Excellence Alliance with Delta Airlines and Swissair to form a global network spanning 300 hundred cities in more than 80 countries. From SIA's point of view, the alliance enabled it to effectively service a greater number of destinations both in the US and Europe. By the end of 1990, the three airlines had created a marketing campaign that highlighted the alliance, the carriers' excellent customer service and specific products such as Swiss skiing packages and vacation packages in both Europe and the US. In June 1995, SIA, Delta Airlines and Swissair set up DSS World Sourcing, a joint purchasing agency equally owned by all three airlines. However, after the formation of the Global Excellence Alliance, all three partners also tied up with other airlines, including competitors. For example, in 1996, Delta had a trans-Atlantic alliance with Air France, a neighbor and strong competitor of its primary alliance partner, Swissair. On the other hand, Swissair had an alliance with Sabena and Austrian Airline, and SIA had code-sharing agreements with American Airlines (e.g., Singapore-Chicago route) and Austrian Airlines (e.g., Singapore-Vienna route). Additionally, SIA also operated joint cargo services with British Airways, KLM and Lufthansa, among others. SIA had entered a partnership with SAS that allowed joint marketing of an all-cargo service between Copenhagen and Singapore. SIA also formed an alliance with Aerolineas Argentinas to offer one of the cheapest round-the-world economy fares for a trip via the South Pacific. On 20 June 1997, Singapore Airlines, Air New Zealand, Ansett Australia and Ansett International announced plans for the formation of the Asia Pacific region's biggest international alliance. With a combined fleet of 223 aircraft, the enlarged network of the airline partners would cover 200 cities in 47 countries. The South-Pacific alliance also planned to introduce new 'around the world', 'around the Pacific' and around Asia' travel packages.
Besides air and cargo cooperative arrangements, SIA was one of the pioneering members of the group that created Abacus, the Asian Computerized Reservation System. Realizing that, by itself, it did not have the critical mass, SIA enlisted eight partners including Cathay Pacific, China Airlines, DragonAir, Malaysian Airlines, Philippine Airlines, Royal Brunei Airlines, SIA's SilkAir and WorldSpan Global Travel Information Services to form Abacus. Additionally, in line with the growing importance of frequent flier programs in retaining and rewarding loyal customers, SIA together with Malaysian Airlines and Cathay Pacific set up Passages, a frequent flier reward program jointly administered by the three alliance partners. In doing so, SIA was able to share the high costs and administrative overheads incurred in running a viable frequent flier program. THE STAR ALLIANCE ATTRACTION Despite market talk of the impending break-up of the Global Excellence Alliance in October 1997, Swissair reported that it was discussing with SIA how to broaden their code-sharing arrangement. The code-sharing agreement would allow SIA and Swissair to share flight codes and sell each other's tickets. Swissair's Chief Executive Mr. Bruggisser commented that while losing Singapore Airlines as a partner would not affect its corporate results, it preferred to stay with SIA. 2 Lufthansa announced on November 21, 1997 that it was setting up its regional office in Singapore to oversee its entire operations in the Asia Pacific. The Singapore office would coordinate its operations, including marketing and sales and services currently being performed by its regional offices in Tokyo, New Delhi, Hong Kong and Bangkok. Lufthansa already had a cargo and maintenance division in Singapore, and the setting up of a regional office in Singapore would help to consolidate its operations and give it the flexibility to expand cargo operations in the future. 4 Soon after, on November 25, 1997, SIA announced that it had dissolved its eight-year, three-way alliance with Swissair and Delta Airlines and teamed up with Lufthansa in a bilateral alliance to boost its international competitiveness. Dr. Cheong Choon Koong, SIA's deputy chairman and chief executive officer admitted that the Global Excellence Alliance with Swissair and Delta had not provided the benefits it wanted and the three partners were parting ways amicably He emphasized that the newly formed alliance between IA and Lufthansa was purely a bilateral cooperation and not a decision to join Lufthansa's SIA-airline Star Alliance. The primary objective was to strengthen the Singapore-Frankfurt route as the premier trunk route between Europe and Southeast Asia. Other benefits of the bilateral alliance included code sharing on flights on the Singapore-Frankfurt route and on services beyond both hubs; joint frequent flyer programs and benefits; access to both carriers' airport lounges for qualified members; ticketing and service assistance worldwide at offices of both airlines; and improved siting of airport facilities in both Frankfurt and Singapore to reduce transit times. SlAs alliance with Lufthansa came hot on the heels of the trilateral alliance with Air New Zealand and Ansett earlier in 1997 and raised the question of whether SIA would eventually join Lufthansa's SIAairline Star Alliance with Thai Airways, Lufthansa, United Airlines, Air Canada, SAS and Varig. Joining the Star Alliance would not only extend SIA's global market reach and help it to cut costs by pooling resources with partner airlines but also provide it with a competitive safety net against other large alliances that may be formed in the future Additionally, SlAs customers would also benefit by
being part of the Star Alliance network in the form of reciprocal lounge privileges, better scheduling, convenient ticket purchase, check-in and boarding, improved access to affordable shares and improved customer service. Despite these benefits of being part of a global alliance, SIA needed to be concerned about the transaction costs in negotiating and maintaining multiple alliances, schedule coordination and operational problems, and the cannibalization of business on certain sectors, for example those served by SIA and Thai Airways in Asia. Additionally, the lack of consistency in service delivery of any of the Star Alliance members could have a negative effect on SIA's strong brand positioning. As of December 1997, there was already talk in aviation circles of the likelihood of at least two large alliances being formed by the end of this decade. One such global alliance would be led by British Airways and American Airlines and the other would be led by Northwest and KLM. Global alliance networks such as the Star Alliance made strategic and operational sense since they offered major benefits to both partner airlines and their customers. However, despite the changes in the airline alliance landscape that favored the formation of large global alliances, when asked to comment, SlAs deputy chairman and chief executive officer, Dr. Cheong refused to be drawn on the issue of joining the Star Alliance. 5
ENDNOTES
1. The Straits Times 1997. Tie-ups won't help sick carriers. October 19. 2. The Straits Times 1997. SIA mum on whether it will dump Swissair for Lufthansa. October 27. 3. National Aviation Press Club of Australia 1996. Global Aviation Trends. Speech by Dr. Cheong Choong Kong, Deputy Chairman & CEO of SlA. December 3. Http://wwwsingaporeaircom/ corpinfo/press/augO498.htm 4. The Straits Times 1997. Lufthansa will open new regional office here by year-end. November 21. 5. The Straits Times 1997. SlA opts for Lufthansa, ending 8-year pact with Swissair, Delta. November 25.
SAV
SDC
Week: 9 Date: Wednesday, 22 March 2000 Topic: Entering Foreign Markets Activity: Case Study Analysis and Presentation Group 2
DOING BUSINESS IN THE PEOPLES REPUBLIC OF CHINA
SAV6/SM 3.01-IBM/TA8-Case Study-DBPRC/Nair/Jan2000
DOING BUSINESS IN THE PEOPLE's REPUBLIC OF CHINA

Jim Hoffmann, President of Seneca Cold-Drawn Steel, Inc., is considering possible ways to overcome the severe difficulty that his company has encountered in its domestic market. Seneca is a small cold-drawn precision-steel factory located in western New York. The company was founded in 1974 when a nearby large steel mill closed down its production line as part of a strategic contraction plan resulting from the oil crisis. Hoffmann seized the opportunity and set up Seneca three miles away from the larger mill. In its first five years, Seneca's business involved buying hot-rolled steel bars from the large steel mill and "cold-drawing" them according to customers' required specifications, such as round, square, flat, or hexagonal bars. The cold-drawing process begins with the receipt of the "hot-rolled steel" in the form of bars or coils. The material is then shot-blasted to remove dirt, scale, and rust. Next, it is coated with a lime solution to prevent rust and improve lubrication when it is drawn through the dies used for cutting and shaping. The steel is then drawn through the dies, which size it to customer specifications. The steel bar is then straightened and cut to desired length. Whereas hot-rolled steel is usually dirty, rusty, and inconsistent in size, cold-drawn steel is sized within precise tolerances, stronger, and finished to a clean, semipolished surface. Finished cold-drawn products are then supplied to industrial users, mainly in the automobile and machinery industries. Seneca operated profitably in its first five years, primarily because of its ability to meet customers' fluctuating delivery and specification requirements. And because of its small scale, local market demand was sufficient to keep Seneca operating at full capacity. After 1980, however, increasing competition from Japanese automobiles and machinery-products manufacturers in Pacific Rim countries (principally Japan, Korea, and Taiwan) drove many of Seneca's customers out of business. Moreover, the supplier providing Seneca with raw steel was forced to reduce its production. In turn, this development forced Seneca to buy most of its raw steel from mills located more than 500 miles away, greatly increasing raw-material costs and reducing Seneca's ability to meet its customers' rapidly fluctuating requirements. faced an important turning point. Given these changing customer and supplier markets, Seneca
However, at the same time that Seneca encountered severe difficulties in its domestic market, many opportunities were developing in international markets. For example, China, a vast market and a land of great resources was opening its long-closed doors and attempting to. play a role in the global economy. Recently, China had greatly increased its international trade. Since 1979 - the year China implemented a new Open Door policy that allowed Western companies to establish joint ventures with Chinese investors-the Chinese government has encouraged direct foreign participation in order to develop its economy. Since then, the Chinese gross national product has grown at least 10 percent annually, and international trade has grown at an annual rate of 17 percent. By 1987, about 140 wholly foreign-owned enterprises were operating in China. There were also numerous other cooperative undertakings, including nearly 8,000 Joint-venture compan'es-300 of them American. Today, American-owned enterprises or Chinese-American joint ventures include both large, wellknown companies (Xerox, Union Carbide, IBM, and Occidental Chemical) and smaller, lesser-known companies (such as Mundi Westport Corp., Rochester Instruments, Pretolite Electric, and Kamsky Associates). The Chinese government encourages such enterprises in order to secure the technology, financial resources, and management systems needed in such strategically important industries as communication and transportation, machinery, iron and steel, biochemicals, food production and processing. As a member of an industry being courted by the Chinese government, Seneca may face a great new opportunity. With a population of more than one billion people and a geographic territory exceeding that of the United States, China is a potential market that few companies can ignore. To tap this market, however, Seneca must be willing and able to transfer its production technology to China in a way that will enhance the Chinese steel industry. In July 1988, Jim Hoffman had received a letter from an international management consulting firm asking that Seneca host a delegation of Chinese steel entrepreneurs. The Chinese delegation, known as the "China Entrepreneurs of Medium-Small Steel Plants Training and Studying Mission to U.S.A.," consisted of plant managers or directors of 45 medium to small steel plants located in 26 -major Chinese steel-industry cities. Hoffman had decided to participate in the program.
During the delegation's visit that October, Seneca provided a tour of its plant and arranged visits to two large steel mills. In a series of open discussions with the Chinese plant managers and directors, Hoffman identified several business opportunities: 1. A compensation-trading opportunity: Because of the availability of less labor-intensive equipment, some production lines used to make small-sized products at Seneca's plant are obsolete in the United States. Seneca could sell these production lines to interested Chinese firms. With easy access to suitable raw materials and lower labor costs, the Chinese may be in a better position to produce such small-sized products. Seneca could then buy back the finished products and resell them to its customers. 2. A processing-and-assembling trade opportunity: Seneca could acquire raw materials from Pacific Rim countries, send them to Chinese partners for cold-drawing, and then resell the finished products to its own U.S. customers. 3. A joint-venture opportunity: Seneca could enter a joint venture, using a Chinese partner's existing facilities to supply hot-rolled bars for its own U.S. plant. In addition, the joint-venture steel factory could further process hot-rolled bars into cold-drawn bars to serve the Chinese market. 4. A wholly foreign-owned enterprise opportunity: Seneca could set up a wholly-owned factory in China, taking advantage of the availability and lower price of Chinese raw materials and the huge potential market for cold-drawn bars in China. After the Chinese delegation had left, Hoffman faced an important decision regarding which opportunity, if any, to pursue. before making a decision: 1. Foreign exchange: Foreign exchange is perhaps the most important factor in any Chinadevelopment decision. Foreign exchange woes are common in developing countries that have not yet created an industrial base capable of producing exportable goods. This is particularly important in China, a regulated market and a country trying to balance its foreign exchange. Because Chinese currency, called "IMB, " has no value on international currency markets, To help with the decision, he hired a consulting company that specialized in U.S. -China trade. The consultants suggested that Seneca consider several factors
companies doing business in China insist on payment in a major international currency. The Chinese government, however, tightly controls the availability of foreign currency, ensuring that what little international currency it does possess is channeled to the payment of important strategic products. Such policies can result in great inefficiencies and hamper the growth of important enterprises. Thus, foreign companies must often develop counter-trade These arrangements and negotiate guarantees for payment in their own currencies. addressed early in contract negotiations. 2. Labor practices: Although China has abundant labor resources, the government is still wary of the foreign use of domestic labor, mainly because of memories of colonial exploitation. Foreign firms doing business in China do not pay workers directly: The money is paid to local governments that, in turn, pay the members of a particular "work unit." Thus, the Chinese labor force is neither cheap nor efficient. Although there have been recent signs of change toward more flexibility in hiring and firing practices, firms like Seneca must negotiate contracts that -provide as much control over labor issues as possible. 3. Legal considerations: China has no history of an international-style legal system. Its laws are vague and arbitrary, and there is always the concept of neibu-bureaucrats are not sure if they should give information about laws to foreigners and so will no openly discuss many rules and regulations. Foreign firms must thus negotiate patiently and adhere to their own basic principles and goals. The Chinese political system also continues to be highly personalistic in nature - there is often no commonly agreed-upon legal system, and government officials seldom interpret rules consistently. Therefore, it would be important for Seneca to develop key contacts and become active on the Chinese banquet circuit. However, with recent refinements in business law and the popularization of legal study among some of China's top leaders, the legal situation is slowly changing. Chinese leadership has traditionally been determined to maintain control over the political system, but this attitude has softened because of the remarkable recent turnover of leadership at all levels. Many younger, better-educated, professionally qualified leaders have reduced the bureaucracy that has for years been a major obstacle to foreign investment. 4. Relationship with the Chinese Counter-Party : The contractual relationship formed with a company's Chinese counter-party can be summarized as follows: Everything is negotiable. In
arrangements can be very complicated-the issue of foreign exchange should therefore be
general, the importance of guaxi-the building up of good favors-is perhaps the best strategy for negotiating. The negotiation process does not end with the signing of a contract-it simply begins there. In addition, it is important to consider carefully what type of Chinese counterparty is best for a given business: Firms should seek counter-parties with strong political affiliations-if indeed such affiliations can be determined. 5. Selecting a Business Location: Each area of China is unique. China is not homogeneous: Cities differ, provinces differ, and languages differ. Foreign firms are encouraged to locate in special economic zones where banking, transportation, and utility services are readily available. Some companies, for example, have made mistakes by trying to locate in areas where the cost of labor and materials were lower but the services necessary for doing business not sufficiently developed. A company entering China should carefully investigate the rules, regulations, and idiosyncrasies of different areas. Armed with this advice from his consultants, Hoffmann planned a business trip to visit several potential counterparties in China. On his return, he would make a decision about Seneca's first step into China1.
Source: This case was written by Mr. Ben Uu, Research Assistant at the China Trade Center, School of Management, State University of
New York at Buffalo. Although the case is based on an actual business situation, all names have been disguised to protect the interests of the company
1. Describe the marketing environment facing foreign firms in the People's Republic of China? 2. What criteria should be used to decide whether or not to pursue a business opportunity in China? 3. Evaluate the advantages and disadvantages of each business opportunity under consideration. 4. Which opportunity would you recommend to Hoffmann? Justify your choice and explain its implications for Hoffmanns company. 5. How has China progressed in its economic transition? Has China been successful in its economic reformation?
SAV
SDC
Week: 11 Date: Wednesday, 5 April 2000 Topic: Global Marketing Activity: Case Study Analysis and Presentation Group 5
FORD: EXPORTING TO JAPAN
SAV6/SM 3.01-IBM/TA10-Case Study-F:ETJ/Nair/Jan2000
FORD: EXPORTING TO JAPAN2
TURNING THE TABLES The 29-year-old customer wheels his old Toyota onto the lot at the Ford dealership and parks near the showroom. A polite salesman greets him and accepts the Toyota's keys. After some brief paperwork, the salesman and customer walk to another area outside the showroom. There, the salesman goes through the delivery checklist and then hands the customer the keys to a new, dark-green Ford Mustang coupe that sports a 3.8 liter V6 engine. What's so unusual about this story? Well this scene occurred in Tokyo, Japan and both the salesman and customer were Japanese. For much of the 1960s, '70s and '80s, Japanese car companies like Toyota and Honda pretty much had their way in the U.S. market. Meanwhile, American companies either had little interest in exporting to Japan or found the process very difficult. Ford has decided to change all that. The new Mustang that Seilchi Tsuzuki bought represents Ford's flagship model in a new line of cars it introduced in Japan in mid 1994. Although Japanese cars have their steering wheels on the right-hand side of the car, Ford's Mustang is a left-hand-drive model that targets a high-profile niche market. Ford is positioning the Mustang squarely against Nissan's Z cars and Toyota's Supra, cars that have dominated the "muscle car" niche in Japan. Along with the Mustang, however, Ford is introducing three right-hand-drive models - Probe, Laser, and Mondeo - that will target the compact-sedan market long ruled by Honda's Accord. This segment accounts for one-third of the Japanese market. Ford produced these new "world cars" as part of a $6-billion development effort. They represent the first time any American car company has offered right-hand-drive cars in Japan. Mr. Tsuzuki, a manager at a life-insurance company, believes that the Mustang is "sexy," and he appreciates the "roughness" of its mystique. The car's running-horse emblem, he notes, "is a symbol of the United States," and he finds the car's design very impressive. He also appreciates the fact that the Mustang offers safety features, like air bags and anti-lock brakes, that cost much more on Japanese cars. Another recent customer, 72-year-old Tadashi Okabe, points out that "People say bad things about foreign cars - that the service is bad and that they don't run efficiently. But the Mustang is not like that. It is big, cool, and durable, and it also has air bags." Although the Mustang offers image and accessories, its real advantage may be price. In recent years, the yen has gained strength relative to the U.S. dollar, falling from about 130 yen to the dollar to about 100. This means that Japanese consumers find American goods about 23 percent cheaper than they had been. For example, Mr. Tsuzuki's Mustang cost about 2.3 million Yen or about $22,000. That is at least $7,000 lower than a comparable Japanese sports car's price. Ford is pricing its world cars at $2,000 to $3,000 below comparable versions of the Nissan Altima or the Honda Accord. For years American car companies have complained about their market shares in Japan and asked the Japanese government for concessions. Now, Ford may finally have found the right formula - offer an American icon at a discount price and back it up with other models adapted for the Japanese market.
2
Adapted from PhiIip Kotler and Gary Armstrong Principles of Marketing, 7th Edition (Englewood Cliff's, NJ: Prentice Hall, 1996).
10
TAKING ON THE WORLD

This is not Ford's first attempt to crack the Japanese market. Until 1939, before World War II, the company sold about 10,000 Model A Fords annually in Japan. When Ford reentered the market after the war, in 1953, it imported only a limited number of cars each year. In 1979, Ford bought a 25-percent stake in Mazda Motor Corporation. This affiliation allowed Mazda to produce the Ford vehicles sold in Japan and gave Ford access to Mazda's 286 dealerships. To distinguish the relationship Ford and Mazda called the dealerships "Autorama." Despite the joint venture, however, Ford imported only 2,959 vehicles into Japan in 1991 and only 5,407 in 1993. Ford's interest in Japan and other international markets is just part of the American auto industry's growing interest in exporting. The weaker dollar and improved products are helping the company reverse U.S.-made vehicles' historically weak export sales. In 1994, analysts estimated that American and Japanese companies would have exported 529,000 cars and trucks from the United States, a 48.5 percent jump from 1993. The "Big Three," Ford, Chrysler, and General Motors, would account for 382,000 of those vehicles, up from 254,766 in 1993. Japanese companies operating in the United States would also increase their exports in 1994 by over 30 percent, but most of these exports would go to Taiwan. The stronger yen is also forcing Japanese companies to continue their investments in U.S.-based manufacturing. Toyota recently doubled its Kentucky plant's capacity to 400,000 vehicles per year. Like Ford, General Motors is also targeting Japan, although it has been less aggressive. In 1993, GM sold 17,400 vehicles in Japan, about one-half of them made in Germany by GM"s Opel Unit. By the mid- 1990s, GM plans to sell right-hand-drive Saturns and a right-hand-drive van that it manufactures in Georgia. Also, by 1996, it will offer Chevrolet Cavallers with a Toyota nameplate. GM owns 37 percent of the Japanese company Isuzu.
DRIVING FORD
Just introducing reasonably priced new cars to the Japanese market is not enough by itself Ford realizes it will need a full marketing mix. Ford is depending on Konen Suzuki, president of Japanese operations, to mange its marketing strategy in Japan. Suzuki stunned his superiors at Toyota when he jumped to Ford in 1991. Suzuki's first goal was to make Ford more sensitive to the needs of Japanese motorists. He knew that Ford offered roomier cars which the Japanese preferred for family outings and recreation. Improved fuel economy made the cars more attractive in a country, with very high gasoline prices. Suzuki also realized that Ford would have to back up its cars with better service than many local rivals provided. He issued Ford's first recall in Japan to replace broken steering hoses and malfunctioning fuel pumps on Tauruses. Japan's narrow, twisting roads and constant stopping and starting were too much for these parts, so Ford replaced them with more reliable substitutes. Keeping replacement parts in stock has been one of Ford's challenges. The typical Japanese consumer is also less interested in how a car drives than in how it looks. Because Japan has such a well-developed public transportation system, many Japanese use that system for day-to-day travel. The Japanese treat their car as an ornament to be polished and cared for but used only occasionally.
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Suzuki is also focusing on distribution. He wants to sign up an additional 1,000 dealers by the year 2000 to supplement the 286 Autorama dealers. He has even enticed one Nissan dealer to offer Fords at many of its dealerships. One problem, however, is that in Japan door-to-door salepeople sell about one-half of the cars sold each year, Because real estate is so expensive in Japan, most auto dealerships do not resemble American dealerships with their large buildings and massive car lots. They serve instead as bases of operation for the salesforce. Toyota alone has a 100,000 person salesforce - equal to about one-half of the entire U.S. auto salesforce - for a country the size of California. Toyota's roving salespeople help it capture two of every five car customers in Japan. The salespeople establish personal relationships with each of the 3,000 or so households in a typical sales area and make their sales pitches in their customers' living rooms. The salespeople primarily target homemakers who don't work outside the home. Because of the door-to-door salesforces. most Japanese never go to an auto dealership, and most are strongly brand loyal. Many Ford dealers don't like the time and expense involved in the traditional sales approach, but they yet to develop any better ideas. To entice consumers to visit the dealerships, Suzuki ordered a multimillion-dollar ad campaign that positions Ford's offerings as fun family cars. Two trends may help Suzuki's efforts. First. more Japanese women are working and are, therefore, not at home for traditional sales calls. Second, more consumers are willing to go to showrooms, to see the latest new cars. By 2000, Ford and Suzuki want to capture 5 percent of the Japanese market, roughly 200,000 cars. Ford would import about one-half of these, with its Mazda affiliate making the balance. Suzuki knows, however, that Nissan, Toyota, Honda, and the other Japanese car makers will not sit idly by. He knows that Chrysler and GM will want their shares of the Japanese market. How can he carve Ford a larger place in one of the world's most competitive markets?
Sources: Valerie Reitnam, "Mustang Leads Ford's Charge on Japan," Wall Street Journal, June 9, 1994, p. B I. Used with permission of the Wall Street Journal. Also see William Spindle and James B. Treece, "Have You Driven a Ford Lately - In Japan?" Business Week, February 21, 1994; Krystal Miller, "Exports of U.S.-Made Vehicles Surge as Big Three Offer Better Cars, Prices," Wall Street Journal, June 27, 1994, p. A3; Valerie Reitman, "GM is Planning to Make Inroads in Japan Market," Wall Street Journal, July 18, 1994, p. Ag; Oscar Suris, "Ford Lists New Line of Compacts Below Japan's Top Sellers," Wall Street Journal, July 21, 1994, p. B6; Valerie Reitman, "In Japan's Car Market, Big Three Rivals Face Rivals Who Go Door-to-Door," Wall Street Journal, September 28,. 1994, p. A1.
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1. How have Japanese and American car companies been alike or different in their exporting strategies? 2. How have Japanese and American car companies differed in their approaches to adapting their marketing mixes to foreign markets? 3. What social responsibility and ethics should Ford be aware of as it steps up its efforts in the Japanese market? 4. What marketing recommendations would you make to Ford to help it be successful in the Japanese market?
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Week: 5 Date: Wednesday, 23 February 2000 Topic: International Joint Venture and Cross-Cultural Communications Activity: Case Study Analysis and Presentation Group 1
MIDSTREAM AND PETROVIETNAM
SAV6/SM 3.01-IBM/TA4-Case Study-M&P/Nair/Jan2000
14
1. Who are the stakeholders in this project? 2. How would you evaluate the consortiums progress to date? 3. If Midstream continues with the joint venture, how can the consortium increase the probability of being selected for the project? 4. What cultural aspects of doing business in Vietnam should be considered? 5. What are some of the barriers to creating an international joint venture? 6. What do you understand from this case in relation to the objectives of doing business internationally?
SAV6/SM 3.01-IBM/TA4-Case Study-M&P/Nair/Jan2000
15
MIDSTREAM AND PETROVIETNAM
Professor Kathleen Slaughter prepared this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. Copyright 1997, Ivey Management Services Version: (A) 1997-10-20
In July of 1993, John Campbell vice-president of finance and administration at Midstream Gas Processing Ltd. (Midstream) in Calgary, and Clint Markson, manager of finance for Extensive Pipe Lines (EPL) in Calgary, were reviewing the expenses of the joint venture with PetroVietnam. They began to doubt whether the joint venture was even possible. What could they do to increase the probability of success? Should they be considering an additional partner or even a merger with other competitors? DESCRIPTION OF THE PROJECT In late 199 1, Midstream was invited to participate in making a proposal to the national oil and gas company of Vietnam, PetroVietnam, to construct a natural gas processing plant. The invitation came through Tom Higgins, president of Higgins Engineering, a small engineering firm that had joined an Alberta Government trade mission to the Socialist Republic of Vietnam early in 1991. The trade mission's objective was to identify business opportunities in Vietnam for Alberta companies. On this first visit, Higgins became aware of a fledgling oil and gas business, PetroVietnam. With Russian partners, the company had placed on production just three years earlier a huge oil field called the )White Tiger lying 120 kilometres off the southern coast. The unique feature of this reservoir was the co-existence of gas reserves; as a result, gas also rose to the surface during the extraction of oil. At the time of Higgins' initial visit, the gas was being flared at the offshore platform at a significant financial and environmental cost. Every day, 100 million cubic feet of natural gas extremely rich in liquids (propane, butane and condensates) was sent into the atmosphere. The resulting loss to the Vietnamese economy was estimated at US$500,000 per day or US$180 million per annum. A business opportunity existed to add a natural gas processing plant to the offshore oil facilities. This plant would use compression and refrigeration to extract the liquids which would then be stored under pressure at the platform until they could be shipped into the Asian market. The residual gas would be sent by pipeline to shore for use by PetroVietnam in various projects such as power production, fertilizer manufacture and other petrochemical applications. The plant itself and the process were similar to the Sherwood plant in western Canada which Midstream partially owned and fully operated. In Alberta, most of the liquids were stripped from the gas at a
16
processing facility, which was usually located in close proximity to the wells. Although the offshore location presented some complications not faced by the Alberta gas processing industry, an alternative was also being proposed to build the plant onshore. The more economical choice, however, was to build the plant offshore, because it would be more technically complicated and expensive to transport rich gas (i.e., laden with liquids) through a pipeline for a distance of 120 kilometres. The Vietnamese were very aware of the economic potential which lay in the offshore gas. The project offered many benefits: the generation of hard currency foreign exchange revenues from the start-up date; training and employment for Vietnamese operational staff; an ownership interest in the project at no cost; access to the very best gas processing technology in the world; and a solution to the environmental problems associated with the flaring of the raw gas. When Higgins returned to Canada, he approached Midstream to develop the project. DEVELOPMENT OF THE PROJECT Initially, Higgins assumed leadership of the project. In January, 1992, two representatives from Midstream accompanied him to Hanoi for the purpose of outlining the project details to PetroVietnam, a company which they understood reported to the Ministry of Heavy Industry and was responsible for awarding the project to the appropriate foreign company or joint venture. The Ministry of Heavy Industry and PetroVietnam were supported by the State Committee for CoOperation and Investment. To facilitate the basic requirements of operating in a foreign country, Higgins hired the services of a South Vietnamese woman, Minh Chau, who had reasonably good English language skills and whose business was similar to that of a travel guide. She arranged meetings, dealt with the customers and passport officials, provided transportation, etc. Although Minh Chau was competent and arranged many meetings, these meetings might accomplish absolutely nothing. Sometimes, the Canadian's trips to Vietnam consisted of remaining in the hotel and waiting for her to schedule a meeting The January 1992 visit to Hanoi lasted four days, during which Midstream and Higgins, with Minh Chau acting as interpreter, sprinted from one dilapidated building to another to outline their proposal to the Ministry of Heavy Industry and PetroVietnam. The Vietnamese had not received an advance copy of the proposal, which was written entirely in English; therefore, they listened attentively and requested some time to review the document. At a second meeting two days later, PetroVietnam requested classification and changes. At this point Higgins and the Midstream representatives returned to Canada to consider the next move. In February of 1992, Midstream and Higgins returned to Hanoi to continue discussions with PetroVietnarn. They made one-week trips in subsequent months, until in July they were informed that the project had been awarded to another company.
ANOTHER OPPORTUNITY Just when it appeared that the project was finished, PetroVietnam contacted Midstream and Higgins in late 1992. Because the company it had selected for the joint venture had experienced
17
difficulty in meeting PetroVietnam's terms and conditions, the project was again thrown open to bid. With greater knowledge of the project and some detailed cost estimates, Midstream had determined by now that several specialized skills were required and that the costs could be as high as $300 million. Therefore, Higgins and Midstream invited other companies from Calgary to form a consortium in order to spread the financial risk and to contribute skills to the joint venture. Higgins did not define what his role would be in bringing this consortium together but he attended meetings and invited EPL and Willet Engineering to take part in the consortium. He did not specify whether he expected a finder's fee or a percentage of profit. However, he was very familiar with Midstream and he had read 'in the newspaper that EPL had made an unsuccessful bid in Argentina. He knew, therefore, that EPL was interested in expanding internationally and had some experienced personnel. What emerged was a group of four Canadian companies, each of which brought a unique skill to the project: Higgins, an engineering company specializing in EPC work (engineering, procurement and construction) in relation to gas plants; Midstream, specializing in the operation of gas plants on an ongoing basis, after completion of the construction of the plant; Extensive Pipelines Limited, specializing in the construction and operation of pipelines (i.e. in moving the gas); and Willet Engineering, specializing in reservoir engineering and evaluation. These companies, which all had good reputations and were well known to one another, proceeded after a meeting to discuss interests. Higgins, an engaging man, used his facilitation abilities to lead this loose consortium. The project was estimated to bring in $70 million to $80 million and figures went as high as $300 million; the life of the project was estimated at 15 years. The consortium proposed giving the Vietnamese 20 per cent of the revenues before payout, although in Canada the usual procedure was to retrieve out-of-pocket expenses before commencing payout.
THE CONSORTIUM SOLIDIFIES Midstrearn and EPL travelled to Ottawa in January, February and March of 1993 to meet with the Vietnamese embassy officials who influenced Vietnam's Ministry of Heavy Industry. At this stage, the joint venture parties decided not to formalize or define the roles, but to proceed on an informal basis and to decide upon these details later. For now, the immediate concern was to win the contract with PetroVietnam; until then, each company would pay its own travel costs and contribute its own time and effort. The underlying assumption was that each company would participate in the project financially as well as lend its own expertise. Midstrearn assumed the per them and travel expenses for Higgins for six months and agreed to continue with only his travel expenses for the duration.
18
In April and May of 1993, the new Canadian joint venture travelled to Hanoi to meet with the Ministry of Heavy Industry and PetroVietnam and its various departments. As always, Higgins assumed the leadership role and was accompanied by three or four other representatives from the joint venture companies. Gradually, however, Clint Markson from EPL emerged as the Canadian spokesperson. He was an energetic man in his early 30s whose boyish good looks made him an easy person to talk to and a natural peace keeper in the consortium. He and various consortium members met with officials from departments within PetroVietnam, including the Economic and Planning Department, the Production Department and the Gas Department. Officials at the Ministry of Heavy Industry were also consulted with and informed of the project. The consortium continued to assure the Vietnamese that Alberta was the world leader in natural gas processing technology, and that the joint venture participants had considerable expertise in this technology. This combination provided the essential credentials to make the project a success. VIETNAMESE HISTORY After the French were defeated by Ho Chi Minh in 1954, Vietnam was a divided country with the northern provinces controlled by communist and the southern provinces heavily influenced by the United States until the latter's military withdrawal in 1973. As a result, the south continued to be characterized by a more entrepreneurial approach which still survived after 20 years of communist influence. Recognizing this, the communist party leaders in the northern city of Hanoi appointed a southerner, Vo Van Kiet, as prime minister to lead the country to a market-based economy Since the communist takeover in 1975, there had been little or no contact between the West and Vietnam. By 1990, the Vietnamese realized that their past policies had left them seriously behind in ten-ns of productivity and competitiveness in relation to their neighbors. As a result of the decision to model their previously government-controlled economy after the free-market economies of their Southeast Asian neighbors, the Vietnamese opened their doors and invited Western businesses to Invest in their country. In return, the Vietnamese hoped to benefit from Western business practices and technology, which would lead to increased productivity and employment. A growing concern was how to feed and care for a young population of 70 million people. In 1991, there was a window of opportunity for Canadian business as the trade embargo imposed by the United States was still in effect. UNDERSTANDING THE VIETNAMESE Because of cultural differences, the Canadians had to learn about Vietnamese attitudes towards business decisions. Time was not money and deadlines were irrelevant. Longterm control was very important and worth fighting for. One person made all decisions and rm'd-level technocrats had no decision-making power. Many Vietnamese thought that there were already enough foreigners in their country. Although the burning off of the gas was costing the Vietnamese as much as $500,000 US per day in lost revenue, they were not moved by a sense of urgency; because the large influx of foreign currency that they desperately sought was coming from the oil, the potential gas revenues were not urgent. PetroVietnam, was a puzzle. It seemed to be a state secret who was on various committees and when decisions would be made. Vietnam was still working with a war mentality. Which aspects of behavior were cultural and which were war mentality was not clear. The deference to authority and seniority were clear and they were committed to an ideal in the face of hardships. Because the Vietnamese were also learning English, they focused on numbers; therefore, the group used as many numbers as possible. The reports were a challenge for them to read. All the
19
negotiations were time consuming. Although the consortium had previously considered setting up an office in Hanoi, they changed their decision in order to control costs. In order to advance the project, the Canadians were required to deal with the Vietnamese stakeholders at both the business and the political levels. The business level included continuing the ongoing negotiations with PetroVietnam as well as investigating and understanding die recently established legal, taxation and banking systems. The political level included persuading the Ministry of Heavy Industry about the merits of doing business with Alberta's oil and gas industry. Contacts needed to be developed and maintained. The Canadian group had to cram all of this work into the four or five day visits which they made every month or six weeks. THE DECISION APPROACHES In early 1993, PetroVietnam informed all interested groups competing for the project that the successful bidder could be announced as early as July, 1993. As the deadline for project selection drew near and as the Canadian joint venture learned more about the project itself, it became apparent that one or two of the members wanted more influence. For example, Midstream thought that its area of expertise, gas plant operations, was now being coveted by one of the other members of the consortium. Nevertheless, the Canadian joint venture continued with its hectic trips to Hanoi. These culminated in a meeting in the first week of June, 1993, which they dubbed the "butterfly" meeting as the attendees were mesmerized by a huge butterfly that fluttered around the room throughout the meeting without drawing the attention of a single Vietnamese. At this meeting, PetroVietnam, through its consultant, Morgan Grenfell, grilled the Canadian joint venture on numerous aspects of its proposal. In late June, the consortium was informed that it had been selected as number one to proceed with the project. The joint venture in its present form had proceeded for almost six months without setting out each member's role in a formal agreement. The group had worked thus far as a Calgary "old boys" network. However, the obligation now surfaced to do feasibility studies. Midstream had done a financial feasibility study and the Canadian government had funded a technical feasibility study, but the project lacked a business principle approach; therefore, the group agreed to redo all studies because the financial feasibility had been based on the technical feasibility study, which was weak at best. Then, In July of 1993, Willet Engineering pulled out of the project after its new CEO proposed a change in direction and decided that the project was not consistent with the company's new vision. The loss of Willet Engineering, plus the shaky validity of the early feasibility studies left Campbell of Midstream and Markson of EPL with many concerns after many trips to Vietnam, and expenses of over $80,000 per company. How could they increase the probability the consortium's being selected as the partner? If it was selected, could they finance the project without Willet Engineering? Perhaps it was not too late to consider other options.
20
i ii
BHP Annual Report to Shareholders 1996, p.4 Mineral's Council of Australia, (1995), "Australia's Minerals Industiy: Its Role and Importance".
iii
' Stewardson, Dr B.R. (1995) "Tbe Globalisation of BHP", p. 51; in Globalisation: Issues for Australia, Commission Paper No. 5, Papers and Proceedings, Economic Planning Advisory Conunission, March 1995, Canberra.
iv
Gottliebsen, Robert (1996) "BHP Puts its Executives to the Test", Business Review Weekly, May 6, p. 32
Foskey, Bruce (I 996), "Stand Back and Take Stock", Shares, November, p. 15-19. BHP Annual Report to Shareholder 1996. vii BHP Annual Report to Shareholder 1996. viii BHP Annual Report to Shareholder 1996. ix BHP Annual Report to Shareholder 1996.
vi
Stewardson, Dr B.R. (I 995) "The Globalisation of BHP", p. 59, in Globalisation: Issues for Australia, Commission Paper No. 5, Papers and Proceedings, Economic Planning Advisory Commission, March 1995, Canberra.
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