Mode of Entry, Location Decision and Cultural Management for “Catexhaust” for its East Asia and Pacific Region Operations.
The essay looks at the benefits which “Catexhaust GMBH”, Germany will gain from having its operations in South East Asia.It examines the various modes of entry available and recommends the most suitable one It considers the advantages and disadvantages offered by Indonesia and Thailand as countries of investment and further on this analysis recommends the one which suits it the most. Further it states the key cultural differences of the chosen country which “Catexhaust GMBH” needs to consider when it starts its operation in the chosen country.
Course 882N1 Autumn 2010 International Accounting and Financial Reporting for non-financial managers
Tutor: Mr. Christopher Stratford
Submitted by Reg. no:66701 M.Sc International Marketing Business, Management & Economics School University of Sussex
As cost of manufacturing is less in Asian countries exports from the location to the rest of the world would be cheaper.2 Contractual (Franchising and Licensing) Licensing involves transfer of products/product technology to the Licensee to produce while Franchising involves the transfer of the right to use brand name for a certain royalty fees (Hill.1 Exports (Agents.
All the information which has been both underlined and italicized is assumed and has been highlighted in yellow. Besides this apparent threat from “Gloexhaust” having a presence in Thailand would result in following benefits to “Catexhaust”. VAG had set up in manufacturing plant outside Bangkok as it wanted to gain a share in the growing Asian market and to compete with other car manufacturers like Toyota. though for low cost vehicles only. It will help in spreading the economic and currency risks.1Introduction
Catexhaust GMBH in Munich .2 supplier of the VW.
. Distributors.1.Besides importing catalytic exhausts from “Catexhaust GMBH” and “Gloexhaust GMBH” (no 1 supplier of catalytic exhausts) VAG also buys from Bangkok based manufacturer.1.
2. imposition of quotas and restrictions by Thailand/Indonesia will be eliminated. Germany is the no. New opportunities of supplying to car manufacturers in countries like China.While Franchising is good for service industry. • • • • • • • Reduction in manufacturing costs due to availability of cheap labour. Risks which exist at present due to chances of import policy changes like increase in the import duties. no:66701
1. This mode of operation is assumed to be already being used by “Catexhaust”.2
Reg.1Mode of Operation
“Catexhaust” may enter the Asian market (Thailand) through various methods each of which has certain and advantages and disadvantages 2. economy and operational set up of the country to which products are exported.VAG has been able to cut down its manufacturing costs cost which are quite high in Europe and gain access to Asian markets. Ford who have got a very strong manufacturing operations in the South East Asia. Sales force) Exports are generally the first step towards entry into new markets and provide an overall view to the exporter about the market demands. Skoda & SEAT(VAG) in Europe. It also has a plant outside Jarkata though it is very small as compared to the Bangkok one. 2. There is also a growing fear that “Gloexhaust “may open a plant in Bangkok which may make VAG rethinks its export operations and may source the “Gloexhaust Asia”only. India Korea and Thailand. Reduction in time period between orders and delivery. Audi. Licensing works well for manufacturing industry. 2008). GM. Huge savings on the transportation costs.
agreeing to move ahead and exist as a single new company(Peterson. V. • Every chance that franchisee may start supplying directly to other manufacturers after acquiring the required technology. & Yeaple. minimizing investment risks. Joint venture Strategic alliances and Joint ventures are formed when two partners want to benefit for each other experience and knowledge.).2007). • Generally used when entry restrictions exist in foreign markets.’ A new company is generally created and new stocks are issued to be traded and a single administrative section then manages the new union(Nocke. • Chances of technology leakage as no party had absolute control. Strategic Alliances. • Used by firms possessing some intangible assets which have business implications but do not want to develop the applications. It does not fit into the long term strategic goal of “Catexhaust” if it wishes to establish its presence in the East Asian and Pacific markets. b. Advantages • Resources shared by both partners. • Scale of commitment low. often of similar size. • Flexible and may latter lead to the acquisition of the local partner by the foreign investor.3
Advantages • Licensing/Franchising are low capex(personnel and capital) and the easiest modes of expansion to gain global market. M. 2. A merger is a result of two firms. S.Mergers and Acquisitions ‘Mergers as well as acquisitions involve one or many companies purchasing all or part of another company. manufacturing quality of goods and marketing. • Limited control over overall strategy. Disadvantages • The local partner may always feel the pressure of acquisition by the foreign partner.3Foreign Direct Investments a. In this type of partnership the local partner seeks to benefit from the technology of the foreign partner while the foreign partner seeks to gain knowledge of raw material resources and markets. • Successful only when good synergy exists between franchiser and the franchisee. • Chances of conflict of interests between the partners..1.
. As there is very little control over manufacturing and markets and there is a risk that in future licensee may supply the catalytic converters directly to car manufacturers in East Asia and Pacific region due to it having an access to the technological know how. Disadvantages • Less control as the franchisee holds the key to the success of the system.
Advantages • Generally a fast process. • Risks due to policies of the importing countries. Green field Investment Greenfield investment involves setting up new manufacturing plant. • Greater control over markets. • Desired role in managerial decisions is high. • Cultural clashes would be avoided. • Chances of making costly mistake due to very little knowledge of markets and cultures. • Generally not looked as favorable by the countries where acquisition takes place. no:66701
In acquisition generally the larger company takes over the smaller one and become one entity and the stocks of the larger company are traded. Legally the smaller company ceases to exist. The justifications for such a venture are: • • • • • A strategic alliance will be a low risk venture as “Catexhaust” has no knowledge of the market and the work atmosphere of Thailand. It will involve lesser amount of knowledge about country specific procedures as these will be handled by the local partner. Disadvantages • Initial costs are high. It provides an opportunity for the Acquisition of the partner at the latter stage. • New entity gets country specific knowledge like raw materials and markets if it is able to hold the on to the original managerial team. • Opportunities for extension. Advantages • Greater control over the management of the plant.4
Reg. Since “Catexhaust” does not have any operation in East Asia and Pacific the alliance will act as a learning experience before investing directly by means of Merger/ Acquisition or Greenfield investment.
. cultural practices and personal characteristics of the two companies. • Post acquisition cost can be high to achieve and organizational fit with relation to matching the administrative practices. currency fluctuations are eliminated. It will be the quickest mode of direct investment in Thailand as compared to Mergers/Acquisition or Greenfield investment and hence will remove the chances of “Gloexhaust” (competitor) of gaining access to the market. c. An alliance will lead to access to raw material sources market knowledge. Disadvantages • Needs lots of time and capital to establish a new investment. A Strategic alliance with the local Thailand based company which also supplies to VAG Asia should be the preferred mode of investment for “Catexhaust” in Thailand. • Uncertainty risks are high.
Some of the major differences in the key factors which generally favor investment and business set up in Thailand when compared with Indonesia are: 3.1. Further both of them belong to lower middle income group of countries and have a high rate of economic growth but Thailand during the last 12 years has been a more preferred choice of investment than Indonesia because of the of investment policies. competiveness) An over all view of the stability and growth prospects of the markets together with availability of technical and skilled labor with technology suggest that Thailand to be better place of investment rather than Indonesia which is obvious with the greater amount of foreign direct investment FDI( Fig.5
Reg.1Location decision for foreign direction Investment either in Indonesia or Thailand
Both Indonesia and Thailand are located in East Asia and Pacific region and both of them do have similar cultures and values..1Economic Conditions (Markets. reduction of business costs through reduction of taxes and investment facilitation approach.Source UNCTAD
. resources. Further look at key factors related to the growth of economy show an advantage towards investing in Thailand. 2)
Figure 1. (Table 1& Fig. no:66701
3. 1) made in Thailand over the last 7 years.
1.4 3893 4.6 138.1.6 2. no:66701
Country GDP growth annually GNI $US External Debt % of GNI 2008 GDP per capita $ US 2009 Inflation consmer prices % annually Total reserves in gold $ US 2009 Merchandise trade(% of GDP).Source World Bank
Indonesia 4. giving equal weight to each topics. literacy level.3Resources (Human .6 111 Thailand 4 3 1.
Table 2.(Table 3)
Table1. made up of a variety of indicators. private sector.The ranking has been derived as an index average of 9 topics.9
3. commerce and communication facilities.2 84
region1.Also on the latest report published by the world bank on doing business Thailand is at 3 rank while Indonesia stood at 19 in the south east Asia and Pacific
Country Export Documents(no) Import Documents(no) Lead time to export(days) Lead time to import(days) Total tax rate(% of profits) Corruption index2 Indonesia 5 6 2. FDI policies) A look as the policies and procedures showing that is easier to do a business in Thailand as compared to Indonesia (Table 2) . school colleges.4 37. Infrastructure & Facilities) A study of the infrastructure like transport.4 2349 4.916.6
Reg.000.Ranking parameters Country Overall Rank Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business Source:World Bank
Indonesia 19 21 12 14 15 7 24 6 21 18
Thailand 3 11 5 2 7 4 18 3 4 5
.419. trade and strategy.Source UNCTAD Figure 2.2Country policies (Macro policies.3 3760 30.118.8
Thailand -2.966 48.6 37.Source World Bank and Transparency International
3.1 5. Thailand seems to be a better location for starting business.000 11.6 66. banking facilities.5 2230 30. capable human resource.
Further risk analysis (sovereign risk. & CIA World source book. particularly the ones which are going to affect them. seem act as a deterrent from investing in Thailand but an overall investment scenario like ease of doing business. The cultural differences between to two countries can be classified into five different dimensions (Hofstede. political risk and economic structure)also favours investment inThailand. In Germany subordinates value the notion of being asked for their inputs and suggestions in decision making process and formation of rules and regulations. 1991. banking and currency etc. So preferences of individual appraisal over team importance do not fit into Thai working culture.(which can be explained to the fact that exports are merchandise based which have slowed down to economic recession)and political risks. which it makes greater sense of having a investment in Thailand .. telecom.e everyone is consulted before some decision is taken. infrastructure like roads . banking . country investment policies.2007). like that found in Thailand people are integrated in strong groups and the decisions taken are collective i. no:66701
Table 3. 2007).1Power Distance Index While German culture shows a very low power distance index level it is quite high in Asian societies. Hence loyalties are towards certain values rather than persons. 1993.
Although negative GDP growth. 4. On the collectivist side. In Thailand the persons working in the lower grade in an organization accept role of higher management in taking decisions and giving directions. still favor that “Catexhaust” should invest in Thailand rather than Indonesia.2Individualism Germany society has a strong individualist character wherein everyone is expected to look after him/herself and his/her immediate family.1Cultural Differences considerations
Cultural differences play a significant how should “Catexhaust” operate in Thailand particularly if the mode of entry is a strategic alliance. currency risk.
4. human resources. banking sector risk. 1980. cited by Stehle & Erwee.Fig.1.Source World bank.7
Reg. Also as assumed VAG operations are bigger in Bangkok . Looking at the car sector Thailand is the 15 largest car manufacturer in the world and has tremendous growth opportunities.3 4.
.1.Such participatory management is considered inappropriate and even incompetent by Asian employees (Stehle & Erwee.
.1.3Masculinity A low index is an indicator that the society is less assertive and competitive.Source :Lasserre(2007)
Thus it is important for the managers in the strategic alliance between “Catexhaust” and the local Thai company to understand to key cultural differences which can pose a challenge to the successful working of the alliance.5Long-Term Orientation In Short Term Orientation values are created due to respect for traditions and fulfilling social obligations while saving and planning for future and persistence is considered as long term orientation .Where Asian countries like Indonesia and Thailand have a very high value short term orientation Germany has the opposite.1.1Conclusion
So a strategic alliance with the local Thai manufacturer should be the first step towards investment which should be explored by “Catexhaust GMBH”.4Uncertainty Avoidance Index Though uncertainty avoidance is high in both German and Thai societies. 2002). while high Femininity approach as seen in Thai culture wherein importance is given to relationship costs also makes them seen as people who avoid issues to the German society (Brodbeck. in Germany it is an elaborate and formal system of rules. This generally has created an assumption of Germans being too rude and direct.
Figure 3. culture and behavioral norms controls the Thai environment. Where masculinity values are high the roles the male and female roles are well defined within the population. 4. 4. laws and standard procedures which are used to control and direct work and behavioral environment .1. Germany has a high masculinity value which implies that focus is usually placed on getting job done rather than thinking about emotional and relationship costs involved. no:66701
4. On the other hand in a highly masculine society greater importance is given to such values and are considered important.8
Reg.On the other hand European cultures like Germany are more open and accept to different ways of doing things and on the philosophical and religious level more easily accept different thought of view. whereas an elaborate informal system based on religion. Frese and Javidan. Asian cultures are uncertainty avoiding cultures and people try to avoid such situations by doing things per methods which are empirical and tested.
. 4th edn. Lassere. pp. No. Vol. The Quarterly Review of Economics and Finance.. P. Álvarez. & Raquel.16. Gilroy.
. No. Journal of International Management. (2010) Global Business Today. High on Performance’. Hill. & Kim.5 9. P.16-29. M. Issue 4. M. J.(Accessed on 11 November 2010). Mc Graw Hill. Hwang. (2002). 411-432. total (% of population ages 15-49)
Access to safe drinking water(% of rural population 2008) Mobile and fixed-line telephone subscribers (per 100 pl)2008 No. Palgrave Macmillan. 340-353. (1990) ‘An Eclectic Theory of the Choice of International Entry Mode’. 2010 from:http//www.. pp. No. K.1 1. Frese. F. Mc Graw Hill. (1998) Transnational Management:Text. 6th Edn. Cases and Readings in Cross-Border Management. Bell.transparency. Review of International Economics. J. G. Global Corruption Index 2009. 19.9 G. 2006. (2010) ‘Entry modes and National Systems of Innovation’. pp. J.doingbusiness. ASEAN Investment Report.org /documents / AIR2009. Brodbeck. 151-166. 18(4). pp. Vol. & Lukas. of cars per 1000ppl Port logistics and facilities5 Airport logistics and facilities5 Road networks5 Railway networks5
Arnold. Vol.. W. M. 17. B. H.2 71 75. and Javidan. Vol. (July 2006) ‘The choice between greenfield investment and cross-border acquisition: A real option approach’.aseansec. 46.Available from: http ://www. J. Kogut. (Autumn. Strategic Management Journal. Vol. S.C. Strategic Management Journal. Barkema. (Feb. I. M. Doing Business 2011. Ghoshal. Hill. 117-128. (2007) Global Strategic Management. & Singh.org/policy_research/ surveys_indices/gcb/2009.. and Learning’. 2nd Edn. total (% of total labor force) 2007 Prevalence of HIV. Retrieved November 15. Vol. ‘Leadership Made in Germany: Low on Compassion. A. Vol. 2010 from:http ://www. pp.Retrieved November 7. Cultural Barriers. B.4 98 102. (2010) ‘Exports versus FDI in German Manufacturing: Firm Performance and Participation in International Markets’.2 0.9
Reg.595–606. C. & Hussinger. pp. W L. M. W. L. H. 16.org/ ~/media/fpdkm/doing% 20business/documents/annual-reports/english/db11-fullreport. 3 pp. J. no:66701 Human resource Adult literacy
Indonesia 92 3.6 1. & Brikinshaw. 1996) ‘Foreign Entry. 11.pdf Bartlett. Academy of Management Executive. Issue 3. & Pennings. 1988) ‘The Effect of National Culture on the Choice of Entry Mode’. M.Journal of International Business Studies. C. Issue 1. 447-465.4 42 Good Good Good Good
Public expenditure on education4 Unemployment. H. C. E.pdf. 2.2 30 Poor Poor Fair Good
Thailand 93. C.5 4. 2.
S.org /country/indonesia World Bank Data. The Difference Between Mergers and Acquisitions.aspx? ReportId=89 World Bank Data.com/Article/Business/Business/200701/The-Difference-BetweenMergers-and-Acquisitions/ Stehle. pp. Greenfield foreign direct investment: The role of firm heterogeneity’. W. & Erwee. UNCTAD (2010) . 336–365. Peterson.2010 from:http://unctadstat.Retrieved Novenber 7. Vol. (2007) ‘Cultural Differences Influencing German HR Policies in Asia’. & Yeaple. 72.worldbank. 2010 from: http://data.unctad. V. Vol. 2. 2010 from: http://data. Thailand. no:66701 Nocke.org /country/thailand
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passenger/cargo 6. Total: 57. Prachuap Port. cargo 145.437 m: 1 914 to 1. Merchant marine: Total: 400 ships (1000 GRT or over) 2.523 m: 20 under 914 m : 5 (2006) Airports . refrigerated cargo 32. Si Racha Most containerized cargoes have been transshipped over Singapore.403 km Paved: 56. Mongolia 1.320 DWT by type: bulk carrier 60. and Sungai Kolok. Norway 30.Logistics Infrastructure Source: CIA The World Fact Book Ports Good
Ports and terminals: Bangkok. tanker 1 foreign-owned: 45 (China 1. Japan 4. Asian Highway is all completed. and Malaysia.with paved runways: Total: 66 over 3. Hat Yai. Laem Chabang.1% against total freight.071 km
. More than 60% of all Asian Highway sections meet high standards.523 m: 15 under 914 m : 26 (2006)
Road condition as a whole is in favorable. Indonesia 1. no:66701
Appendix 1 Thailand . Laos.047 m: 11 1. liquefied gas 29.437 m: 22 914 to 1.with unpaved runways: Total: 42 1.Chon Buri Motorway. Egypt 1. The new Suvarnabhumi will add 120 parkng bays (currently other airports have 179 bays in total) and can be accessed through the Bangkok .047 m : 8 2. specialized. Two international routes to Malaysia are avaiable through Padang Besar. Airports: 108 (2006) Airports . connection to neighboring Burma.11
Reg. Laem Chabang port has begun to receive direct calls in major East-West trade.438 to 3. Panama 9. partly because of the draft limitations that exist in the river port of Bangkok. Total: 4. passenger 1.317. petroleum tanker 91. Tuvalu 1) (2006)
Major international airports include Suvanabhumi. Chiang Mai. and Phuket.808. Chiang Rai.542 km Unpaved: 861 km
Railway plays a lesser role in freight transport with a share of 2.509 GRT/4.524 to 2. Singapore 22. Cambodia. chemical tanker 14. with more than 4 lanes. There is Heavy congestion between Laem Chabang to Lat Krabang ICD.524 to 2. UK 2) registered in other countries: 34 (Bahamas 1. container 21. Singapore 6.
narrow gauge: 4.437 m: 49 914 to 1. Manado and Palembang.771 GRT/4. Belize 2. with small handling capacity for vehicle cargo. cargo 451. Because of the insufficient sea and land transport networks. chemical tanker 21. Japan 3.887. livestock carrier 1. passenger/cargo 58. Tanjung Priok The major ports handling most of Indonesia's export and import cargoes are tanjung Priok. container 50. Palembang. Panama 50.523 m: 26 under 914 m: 471 (2006)
. Liberia 1.047 m: 4 2. Krueg Geukueh.Logistics Infrastructure Source: CIA The World Fact Book Ports Poor
Ports and terminals :Banjarmasin. Belawan. Hong Kong 4. and Makassar. Semarang.437 m: 6 914 to 1. Surabaya. Thailand 1. Singapore 17. Semarang. Belawan. Singapore 56. air freight transport is becoming increasing in demand of use.with unpaved runways: Total: 503 1. Germany 1.12
Reg. Merchant marine: Total: 824 ships (1000 GRT or over) 3. Bermuda 1. Tanjung Perak. Sungai Pakning.614 DWT by type: bulk carrier 43.
Major international airports are Jakarta.523 m: 49 under 914 m: 42 (2006) Airports . Medan. vehicle carrier 2 Foreign-owned: 30 (France 1. Ciwandan. Surabaya. UK 2) Registered in other countries: 122 (Bahamas 4. Also. liquefied gas 7. Operation of Tajung Priok is less efficient compared to to other major ASEAN Ports.with paved runways: Total: 159 over 3.524 to 2. petroleum tanker 132. because of it's relatively lower fares. Switzerland 3. roll on/roll off 12.438 to 3. refrigerated cargo 2.071 km 1. Terminal handling charges in the country are the highest among major ASEAN ports.000-m gauge (2005)
Appendix 2 Indonesia .773. Georgia 1. Norway 1. Cambodia 1. Airports: 662 (2006) Airports . unknown 1) (2006). Philippines 1.047 m: 15 1. passenger 41. South Korea 1. Panjang. Denpasar. specialized tanker 4.524 to 2.
497 km 0. fertilizer.961 km 1.711 km
Indonesia has four unconnected railway systems: one in Java.067-m gauge (125 km electrified). no:66701
Roads play most important roles in cargo transportation . heavy traffic congestion in central Jakarta and Surabaya is quite serious Poor accessibility to Tanjung Priok Ports causes stagnated freight transport Total: 368.360 km paved: 213. and three in Sumatra.13
Reg. The availability and reliability of service are low.750-m gauge (2005)
.458 km narrow gauge: 5. Especially.649 km unpaved: 154. traffic congestion in the cities has been a problem. cement and coal Total: 6. due to inadequate maintenance and lack of spare parts Freight traffic moved by the Java railways consists mostly of petroleum fuel.approximately 96% of total cargo Although the roads have been developed especially for access to may economic centers.