Question 5

Case: I am a manager at a US firm which has developed a Revolutionary new personal computer
that can perform the same functions as existing PCs but costs only half as much to
manufacture. The Company wants to expand its business in Western Europe and the CEO of
company has asked me to evaluate different ways in which this can be done. Currently I have 3
options
(a) To export from the United States,
(b) To license a European firm to manufacture and market the computer in Europe, or
(c) To set up a wholly owned subsidiary in Europe.

Facts and Info:

1. Currently there is no import Duty on import of IT products in Europe this was done on 1 st
of July 2016. This was done with a purpose to expand the access of cheaper IT products
in Europe.
Source: https://trade.ec.europa.eu/doclib/press/index.cfm?id=1522&title=EU-removes-
customs-duties-on-IT-equipment
2. How are other peers doing business
 Microsoft partnered with Sycor Group
 Apple Produces it Pc’s in Austin, Texas and then acquires startups in Europe to
distribute them.

Evaluating the Options:

(A) To export from the United States.
In this option the company will produce the goods in United States and export them to Europe.
There can be 2 situations in this as well 1) Having their own distribution Chain 2) Partnership
Agreement with local Distributer.
A) 1) Pros:
I. They don’t have any Tariff in Importing from US.
II. They don’t need to worry about the product quality as it’s produced in US.
III. They don’t need to expend on setting up a new factory in US.

A) 1) Cons:
I. They need to setup a Service center for servicing the products as they are produced in
US.
 II. They need to incur expenses for setting up the distribution chain in US.
III. The need to expend on training their employees in Europe and also deal with labor law
matters.

A) 2) Pros:
I. They don’t have any Tariff in Importing from US.
II. They don’t need to worry about the product quality as it’s produced in US.
III. They don’t need to expend on setting up a new factory in US.
IV. All the local matters and synergy with local labor will be taken care by the local partner.
V. Local distribution and marketing strategy will be done by local partner who knows the
market better.

A) 1) Cons:
I. Synergy between the businesses is very much necessary.
II. The local European company should work in the guidelines given by the US Company.

(B) To license a European firm to manufacture and market the computer in Europe.
Pros:
I. The US company need not incur any Transportation cost
II. The US Company can produce parts to service the products in Europe itself and after
sales Service will be faster and better.
III. The European local company will have a better idea of the economy and markets and
will be able to deal with all the labor, macro and political matters.

Cons:
I. The European Company needs to have a synergy with the US Company.
II. The company should not violate the agreement and work as the US Company wants.
III. The company should not misuse the Idea of innovation(This Is very unlikely because of
patents available)
IV. They should produce the Equipment’s as per the required Quality.

(c) To set up a wholly owned subsidiary in Europe.

Pros:
I. There won’t be a problem of getting synergy between two businesses.
II. No problem of leak of information related to business.
 III. The Employees will be both local as well as from US and the company will Function
better

Cons:
I. The company needs to expend the Incorporation charges of Subsidiary.
II. The company needs to work on all the Micro problems of that country and area.
III. Establishing a new business and making it success in market can be difficult as old
players will already have the grounds taken.

Conclusion
With all the listed down Pros and Cons, I as a manager of the company has come up with a new
plan that can profit the company as well as create synergies and mitigate the worries of leak of
information.
I recommend the company to buy a 40% stake in one of the European companies and get into a
partnership with them to manufacture and distribute this products in US. All the work will be
done by the European Company and only the setup of manufacturing Unit will be done by the
US Company to look after the quality of product. By having a 40% stake in the company the US
Company is making sure that there is a good control on the business of the European company
and the profits will fall back into the hands of the US Company. The distribution and marketing
will be taken care by the local company in a local manner which will be better and effective.
Also keeping a 40% stake will relieve the European company that the US Company is not trying
to have a hostile takeover and just wants to promote business in Europe by building Synergies.
Only problem here is that of synergy of business and for that purpose we suggest that one
member of the BOD should be from US Company but not the MD. The MD should be from
Europe company so that their employee support and synergy between them is better and the
US member BOD can monitor the activities and develop new plans for growth of Business in
Europe.