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Opportunities & barriers.

The key to success is adopting a strategy of localization and global interdependency.

Research on foreign investment cited earlier in this brief demonstrates that the success scale tilts in favor of global companies. But how does a company become global so it can achieve the higher earnings, faster growth, and greater return on investment promised by participation in this marketplace?

We believe a strategy of localization and global interdependency is essential for a company building global power. This requires leveraging the resources of the company globally while adapting marketing, distribution, and operations to build scale in local markets. Whether the company is destined to be an excellent Stage II company in its global development or whether it will strive to reach Stage IV, management must carefully select from among geographically dispersed local markets in which to leverage its competitiveness. This leveraging can include a range of activities such as sourcing, R&D, and local market penetration. It must manage each facility, affiliate, and resource both as local operations and as part of a globally interdependent group of activities. Such activities work to help the company achieve a competitive advantage by leveraging its distinctive strengths.

The key to global success is balancing global resources with local marketing, manufacturing, and distribution efforts. That means knowing what makes a particular market different and addressing these differences to achieve competitive advantage over other firms. Trailblazing global winners such as Hewlett-Packard understand the difference. To address the differences in Asian markets, Hewlett-Packard has introduced computer printers that print in Japanese, Chinese, or Korean. The company adapts the printers to local languages by leveraging its worldwide resources. These include a research lab in Japan and a plant in Singapore, plus joint ventures with software design and manufacturing companies.

Steelcase, a manufacturer of office furniture systems, successfully sells its Ellipse desk system in the U.S., Germany, and France. The company uses its design capabilities to modify for European sale the product sold in the U.S. It accomplishes this by making minor changes in color and desktop size and by repositioning the locations for wires and cables.

Such adaptation overcomes one of many barriers to success. In one form or another, such barriers exist in every country. They may be legal and regulatory--although these are diminishing. Barriers can also be fiscal, structural, or cultural. These barriers are often extremely difficult to surmount: They may not be established by a state but are quietly condoned or supported nonetheless.

In this article, we'll give an overview of some of the opportunities and trade and investment barriers in each of the world's major trading spheres--Asia, the Americas, and Europe. We'll highlight one market in each of the first two spheres that presents particularly interesting opportunities. In Europe, we will view the European Community and East Central Europe as a whole, although they are not a monolithic entity. We have seen great progress in the effort to unify Europe over the last decade, yet we recommend that prospective investors, while recognizing the unique characteristics of individual countries, look at investment in Europe as a whole.

The barriers in any one market differ from those of another, and the discussion here shows how carefully a company must analyze the local environment before deciding whether and how to enter the market. Also, in three sidebars, we'll provide examples of companies that have successfully overcome barriers. We'll conclude with insights into investment strategies and a list of questions that should be answered before investing in a foreign market.

As might be expected, the investment barriers between individual markets within each of the three trading spheres--and among the spheres themselves--are rapidly changing as former adversaries sign trading pacts designed to give them mutual economic benefits. Often these pacts significantly decrease the barriers and increase the investment opportunities for both companies that are already established locally and those that are not. But these changes may also strengthen the obstacles, so it is essential that companies striving to build a global base understand the challenges as well as the opportunities.

ASIA

Japan has long been the premier target market of foreign companies, because its high per capita GDP, sophisticated tastes, and market potential offer significant opportunities. Now, other countries have stepped into the limelight, particularly those in East and Southeast Asia--the vast region that includes China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.

Over the next decade, growth in the region is expected to at least double or triple that elsewhere. In fact, the Pacific Rim is quickly becoming the largest and most lucrative market in the world. The potential for investment is great, and like many foreign markets, there is always a window of opportunity for the astute businessman.

Already the six ASEAN (Association of Southeast Asian Nations) countries have signed the ASEAN Free Trade Area (AFTA) plan, which calls for a mutually supportive economic zone encompassing Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Brunei Darussalam. AFTA will promote free trade and cut almost all tariffs among these countries to 5 percent or less, and it will provide a competitive advantage for companies with ASEAN operations.

This agreement is but one of a number of local trade pacts under way in the region. Discussions also have started on a trade agreement covering all of Asia. The goal of this broad agreement is to do for the region what the North American Free Trade Agreement (NAFTA) and the EC 1992 Single Market initiative are aiming to accomplish in the other two major trading spheres. Its completion is a long way off, but most informed observers think it will be signed. Such an agreement would significantly boost intra-Asian trade, but it also may pose a threat to foreign companies by favoring Asian firms over outsiders.

The potential size of the Asian market--coupled with the speed of the region's development and its rapidly rising standard of living--make Asia a critically important investment target for companies wishing to be global competitors in the next century both from market and sourcing points of view.

A few pioneering Western companies have successfully established operations in Asia. An American maker of athletic shoes, for example, registers nearly 30 percent of its sales there. Its success is largely due to a carefully developed distribution system. In Thailand, the company targets only Bangkok, because the rest of the country is less interested in Western shoes. In the Philippines, it allows a licensee to produce a lower-quality, lower-cost shoe that meets the demands of that particular market.

China has 1.2 billion people and a real per capita income that's grown an average of 10 percent annually for more than a decade. Like all other Asian countries, it is encouraging foreign investment and reducing trade barriers. As a result, it is slowly becoming a market-driven economy. Last fall, The Economist said China "may prove to be the greatest economic miracle ever: the lifting of 1.2 billion people out of poverty and the creation, possibly within a generation, of an economy bigger than America's."

Nevertheless, China is still a centrally planned economy, and the equity in most major production enterprises remains state controlled. Over the past few years, this control has devolved from the national government to the major municipalities and provinces. Local control is not necessarily less restrictive. It has resulted in pockets of relatively open markets and pockets of strict control and restrictions. It is complex.

Protection of China's state-owned companies results in particularly strong barriers in three product areas: basic commodities and raw materials, such as steel and chemicals; items that are essential to survival, such as pharmaceutical end products; and start-up products, for example, automobiles. In the latter category, China is weak but perceives a need for its own industry.

The most pervasive barrier is hard currency export requirements, but import licensing is a means of control. Domestic or foreign companies operating in China are not permitted to spend hard currency or to import any of a broad range of products without first obtaining government approval. A company seeking to import parts or supplies may not be allowed to do so, for instance, if the import licensing agent determines the products are available locally.

Currency control and other financial restrictions pose formidable barriers to doing business in China. A company exporting products from China cannot receive payment in hard currency. Instead, the locally controlled foreign trade organizations (FTOs) allow payment in local currency for 100 percent of the value of the exports (usually at the low, official rate) and a bank credit for 12.5 percent of the value in hard-currency purchase rights. FTO approval must be obtained before the company can use that credit to purchase imported goods.

In addition, artificially low prices are set by local governments to protect particular industries, especially those in commodities and raw materials. National tariffs protect other industries: In the automobile industry, they can be as high as 250 percent. Intellectual property rights are frequently ignored. In fact, 90 percent of China's software may have been pirated; some high-technology labs are in business solely to reverse-engineer other companies' products.

Barriers like these exist in many parts of China. But in some regions, commerce is almost completely uncontrolled, and a strong market economy is emerging. But even companies established in these sections are not free to distribute their products throughout the country. Along with the localization of controls have come strong protectionist measures to defend local industries against intruders from other areas.

Nevertheless, foreign companies are overcoming China's trade and investment barriers and are succeeding there.

THE AMERICAS

The U.S. and Canada in 1988 signed one of the most liberal trade agreements in history (the U.S.-Canada Free Trade Agreement). Now, they are reaching south to bring Mexico into the fold. The three countries completed negotiations on the North American Free Trade Agreement last summer. If all three countries approve NAFTA in its present form, it will sweep away countless trade and investment barriers. The pact would create a market of 360 million consumers and $6 trillion in total annual production--a market that is even larger than the 12-nation European Community.

Anticipating legislative approval, meanwhile, many companies from around the world are taking advantage of the turnaround in Mexico's investment environment as well as the size and healthy growth rate of the market. Mexico's current population of about 82 million is growing at 2.5 percent a year, while GDP growth in 1991 was 4.8 percent.

Changes in the investment environment began in earnest in 1986 when Mexico joined the General Agreement on Tariffs and Trade (GATT) and began reducing import barriers. Today, the average tariff is still 10 percent, but it is far from the 1987 average of 90 percent. Dozens of other foreign investment restrictions have also been eliminated or eased significantly. Automobiles built in Mexico, for example, now must have 36 percent local content, about half the 60 percent level required a few years ago.

An A.T. Kearney study of the advantages and disadvantages facing foreign companies entering Mexico showed both pluses and minuses. On the positive side, the country offers a low-cost work force; a location providing easy access to world markets (especially the U.S., which is the largest individual market in the world); and a large and rapidly growing domestic market. On the negative side, Mexico has a poor infrastructure and lacks certain raw materials as well as highly skilled workers. Furthermore, a number of regulatory investment barriers remain, although they are diminishing. Most notable are regulations on intellectual property, foreign equity participation, foreign ownership of land, repatriation of capital and profits, and foreign-exchange controls. If NAFTA is approved, many of these advantages will become more important, while some of the disadvantages will fade.

NAFTA aims to create an open market while discouraging new barriers to non-participants. In some cases, however, the pact would continue to deny advantages to companies not established in North America. In automaking, for example, the agreement's origination requirement would grant tariff relief only to vehicles containing 62.5 percent North American parts and labor.

Over time, NAFTA would eliminate or reduce across the board many import/export and investment barriers, including those in the manufacturing, agricultural, and service sectors. If approved, NAFTA would:

* Grant U.S. and Canadian firms operating in Mexico equal treatment with Mexican-owned firms.

* Eliminate telecommunications investment restrictions by 1995.

* Allow U.S. and Canadian banks and securities firms to establish wholly owned subsidiaries in Mexico.

* Enable U.S. and Canadian insurance firms with existing joint ventures in Mexico to obtain 100 percent ownership by 1996.

* Ensure a greater level of intellectual property rights protection than exists under any current bilateral or multilateral trade agreement.

In addition, NAFTA will reduce or eliminate a number of other barriers, including restrictions on management control and foreign exchange, rules governing export performance, and requirements for local content and domestic sales.

Government leaders in the U.S., Canada, and Mexico believe NAFTA will boost the global competitive advantage of companies within their borders and will carry their combined market into a prosperous 21st century and beyond. They also envision the agreement as a springboard to creating a free American market that may eventually expand to the southern tip of South America.

National leaders throughout the Americas are embracing the idea of a united, free American market and are taking steps to pave its way. Chile, Colombia, and Venezuela have expressed an interest in joining a broader trade pact. Mexico and Chile have already agreed to launch a trade zone encompassing most of South America and the Caribbean. The U.S. has proposed the Enterprise for the Americas Initiative that would promote free trade and investment. Also, the U.S. and more than two dozen South American and Caribbean countries are working on specific agreements to open markets throughout the region.

EUROPE

The European Community's Single Market Initiative affects only its 12 member nations now, but countries throughout Europe are watching the EC's progress with great interest. Many countries beyond the EC are interested in becoming part of the integrated market that is developing in Western Europe.

Although the EC's December 31, 1992, deadline has passed, European Community officials continue to address a number of the 282 White Paper directives on which the EC is based. Some of the most complex remain to be approved, such as social welfare provisions for workers. Furthermore, the 12 EC member states continue to adopt at their individual paces the numerous directives already approved. Despite some recent snags in the unification process--including turmoil in the currency markets--EC officials believe all of these unresolved pieces of legislation will become law by the middle of this decade, bringing into reality the integrated market for which the Europeans have worked since the mid-1950s.

The Maastricht treaty, which is separate from the Single Market program, was signed by the 12 member states in December 1991. It calls for political union and for the formation of a single EC monetary policy and a single EC currency. All member states must approve the treaty by the end of the decade.

In the meantime, the EC has already created a freer and more open market than anyone would have expected only a few years ago. The benefits of this market, however, are enjoyed mostly by companies already established in the EC. These companies are positioning themselves to take advantage of nearly unrestricted movement and planned harmonization of products. Recent A.T. Kearney research reveals that non-domestic sourcing and sales for European companies should increase 30 percent from 1987 to 1997.

Foreign companies waiting to invest in Europe are giving their competitors on the continent a running start at building market share and competitive advantage. The odds may be stacked further against them by the Single Market program, among the primary goals of which is to strengthen the competitiveness of European companies. And even though EC leaders deny they are building a "Fortress Europe" to defend the continent against foreign companies, some program legislation does constitute barriers against non-EC companies. Therefore, competitive realities imply that a Fortress Europe will be the de facto result.

Like investment in Asia and the Americas, investment in the EC is essential to any company with global aspirations. Even though the 12 EC countries will be unified in many ways, the countries still possess unique cultures, socioeconomic factors, and cost structures. Prospective investors should look at each EC country as an opportunity to apply localization strategy. (See USG sidebar.)

The EC's realm of influence is spreading throughout Western Europe. For instance, the EC and the European Free Trade Association (EFTA), which comprises seven Western European countries, are discussing the formation of a 19-nation European Economic Area. The size of the EEA (365 million people and a $6.5 trillion GNP) would surpass that of the market being formed by NAFTA.

The EC also has entered membership discussions with a number of East Central European nations recently freed from communist domination. While it may take many years or even decades for some of these countries to become part of the EC, others--such as the Czech Republic, Hungary, and Poland--hope to gain admission well before the turn of the century.

Almost all East Central European countries are removing trade and investment barriers and aligning their practices with those of the EC and the rest of the global marketplace. They are adopting market-oriented reforms aimed at privatizing state-owned assets, commercializing the banking system, and modernizing capital markets. They are opening their borders to imported products and capital. They are eager to attract foreign companies and to cooperate with companies seeking business partners and opportunities.

Despite numerous difficulties, the wealth of opportunities is drawing major Western companies into the region. General Electric has invested $150 million to acquire a 50 percent interest in Tungsram, a lighting company in Hungary. Siemens AG is participating in a major modernization program for the Polish telephone company. And in former Czechoslovakia, Volkswagen AG has formed a joint venture with Skoda, and Dow Chemical has invested in Chemicke Zavody Sokolov.

Joint ventures may be the easiest avenue into East Central Europe, but they, too, present an array of barriers. For instance, domestic managers require their foreign partners to be on-site and personally involved in every aspect of the business. They demand their partners have a thorough knowledge of the company, its products, and its market. They want a long-term commitment because the business is not likely to be profitable for many years. They want heavy short-term investment in machinery, technology, and intellectual property. And above all, they need their executives and workers trained in business practices and concepts that were not stressed under the old state-controlled system: manufacturing and inventory control, distribution, cash and cost management, supply and demand, and most other Western business ideas.

But the longer-term payoff for investments in Western Europe and East Central Europe promises to be great.

INSIGHTS ON INVESTMENT STRATEGY

Opportunities for investing in foreign countries are wide open, but a thicket of obstacles awaits those who point their sights abroad. These obstacles are market specific, and they are changing as local trade pacts and trading-sphere agreements are signed. So if a company is to achieve the first step in becoming global--gaining success in selected strategic local markets--it must thoroughly understand the opportunities and barriers that affect the business in each market.

Developing this understanding is essential. Toward that end, we offer these insights on establishing an investment strategy.

Choose an offensive or defensive strategy. Companies need to determine the objective of going global--e.g., sourcing, market share penetration, access to technology and know-how, or cutting off a competitor's cash flow at the source in its domestic market. There are different motivations for going global, and they are not necessarily mutually exclusive. Nevertheless, understanding the goal is critical to setting targets, selecting the entry approach, and evaluating results.

Focus investment activities narrowly. Few companies have either the capital or the human resources needed to successfully invest in many countries. So selection of appropriate targets is vital. Each market must offer the company the possibility of establishing a sustainable competitive advantage. Some markets will be more important in the short term; others will be more important as entries to other markets.

Select an environment conducive to success. Not all markets offer equal investment opportunities. The established competition in them may be too great, the investment barriers too high, or the domestic market too small. If a market offers little opportunity for success, it offers a great chance for failure.

Invest aggressively. Developing a sustainable competitive advantage in a market that already has both strong local companies and aggressive multinationals is expensive. Acquisition investments often fail. The major companies investing in Asia, for instance, are increasing their investment by about 12 percent per year, and many feel that is not enough.

Recognize the risks and rewards of alliances. Joint ventures and other forms of alliances may offer foreign companies investment opportunities at lower initial costs. However, maintaining long-term mutual benefit and value is difficult. A.T. Kearney research worldwide shows most of these alliances do not last. When an alliance dissolves, the foreign company wanting to stay in the country often faces greater real replacement costs than it would have faced had it initially gone into the country alone.

Along with these insights is a range of questions that should be answered before a foreign company sets out to explore unfamiliar areas of the global marketplace. Careful, reasoned answers to these questions will help the company build scale in dispersed locations and leverage that scale into a global competitive advantage:

* What is our definition of global? Is being global critical to our competitive advantage?

* What are our distinctive strengths, and how can they be leveraged?

* Which resources (products, markets, technology, R&D, sales, etc.) can we leverage across geographic locations and business units?

* What resources (mix, scale, quality, and deployability) are available to support global initiatives?

* What is our current position, and how should it evolve?

* Where should we source, manufacture, conduct R&D, and seek market penetration?

* What timing would be most effective?

* What is required to be successful in terms of both business units and markets?

* How should corporate management develop and support the ability of geographically dispersed units to build and maintain competitive positions?

Thoughtful answers to these questions will start a company on the kind of careful global strategic analysis that can lay the groundwork for a successful program of localization and global interdependency.

As George S. Yip concludes in his book, entitled, "Total Global Strategy," the slogan, "Think global, act local," is wrong. It should read, he says, "Think and act global and local."

VOLKSWAGEN BREAKS DOWN BARRIERS IN CHINA

Volkswagen entered China in 1984 by forming Shanghai Volkswagen Automotive Company (SVW), a joint venture with four Chinese partners. After rough going in its early years, SVW has reached a high level of success.

In 1991, the company turned out 105,008 "Santana" vehicles, up 88 percent from the year-earlier period. Engine production soared 274 percent to 72,943 units. At the same time, Volkswagen gained market share and increased profitability. And for the fourth consecutive year, SVW was ranked first among the 10 most successful joint ventures in China, based on quality, profitability, output, and exports.

To a large extent, Volkswagen's success comes from addressing local investment barriers that often discourage other foreign companies from entering the country. For instance, the company has put together a network of more than 125 local Chinese suppliers. Through these suppliers, it now sources everything locally from spark plugs to seat covers to engine parts and is continuing to further localize its vehicles, aiming at a 95 percent localization target. In addition, SVW has the most comprehensive sales and service network of any vehicle producer in China, comprising more than 88 after-sales service stations.

Volkswagen's future in China looks bright. It plans to invest DM1 billion ($661 million) in a recently purchased plant and to produce 150,000 vehicles a year by 1995. The company says it will introduce six new models within the next three years.

IBM SUCCEEDS IN MEXICO

IBM was one of the first American companies to venture south of the border. It first established a presence there about 65 years ago.

Until recently, the barriers IBM/Mexico faced were daunting and cut into the company's profits and productivity. In the early 1980s--just before Mexico began to open its markets--gaining government approval to build personal computers required two years of negotiations. IBM/Mexico succeeded by devoting more than 20 people and millions of dollars to the task. Today, such effort is not required, because most investment restrictions have been eliminated, and government officials are hospitable to foreign investors. The company can get approval for an investment in a single one-hour meeting.

From the beginning, IBM had to contend with suffocating regulations. Pricing was regulated. The company had to export a certain percentage of its output, use a specified amount of local content, and spend a required amount of revenue on R&D. But it persevered. Now, these restrictions are gone. Additionally, tariffs have fallen from 100 percent to less than 10 percent, and corporate taxes have declined 7 percent.

Today, IBM/Mexico is a $450 million company. It exports 90 percent of its output, sending products to 44 countries around the world. It projects gross revenues of $1 billion by the end of the decade.

PLANNING FOR A UNITED EUROPE

USG Interiors, a $600 million subsidiary of USG Corp., began preparing for a united European market in the late 1980s. By getting an early jump, the company gained an advantage over competitors in the highly fragmented interior building industry. In 1986, USG Interiors acquired DONN, a Cleveland, OH, manufacturer with established manufacturing and distribution facilities.

DONN is a supplier of commercial ceiling suspension products tailored to the needs of markets in Germany, France, Scandinavia, and the U.K. The transaction marked the American company's first major move outside the U.S.

Fanning out from this beachhead--and mindful of the planned dissolution of national and local requirements hampering the cross-border distribution of products--USG Interiors in 1987 began rolling out a standardized, pan-European line of acoustic ceiling tile. This action countered the practice of the many small companies that concentrated on serving only regional markets. But the company believed a standardized product line offered significant opportunities in the coming unified market of the European Community.

The strategy is paying off--even ahead of complete integration. Revenues increased substantially between 1987 and 1991. The company's market share in key ceiling tile and grid systems improved throughout Europe.

In 1991, USG Interiors took its third step toward becoming a major player in the European interior building industry after it opened a new-technology, high-end ceiling tile manufacturing plant in Belgium, its first on the continent. From there, it ships products throughout Europe.
COPYRIGHT 1993 Chief Executive Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles; globalization of business
Publication:Chief Executive (U.S.)
Date:Jan 1, 1993
Words:4493
Previous Article:Stages of global development.
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