Business Case

Baghaland: An Emerging Market Opportunity?

In January 2019, TexCom, a Chinese footwear manufacturer, was considering whether the company
should extend their operations to the emerging market of Baghaland. Since the late 1990s, economic
reforms and liberalization had opened opportunities for foreign direct investment, and businesses from
many countries were already active there. The top management of TexCom believed that they needed to
decide what to do soon. In a Beijing boardroom, the vice president of global sales commented, “The labor
costs in Baghaland are low. A factory there would give us a great cost position to serve the local and
regional markets. This would require significant expenditure and risk, but could establish us there.”

Historical Background
The Republic of Baghaland is a landlocked country in South Asia. Many Baghalandis believe their country
is distinct from its immediate neighbors and the rest of South Asia because of its religious and cultural
history. In 1998, the Baghaland’s Peoples’ Revolutionary Democratic Front (BPRDF) overthrew the
standing government. Following several years of transition, a new constitution was written in 2001. The
BPRDF was victorious when formal elections took place in 2002. The government had remained stable
since then and had run the country as a single-party state.

Industrial Policy and Market Opportunities

Between 2012 and 2018, Baghaland’s population increased by 20%, to 70 million people, and its GDP
increased from $7.6 billion to $42.5 billion. Economic growth had occurred relatively more in the service
and agricultural sectors than it had in the manufacturing sector. Massive public investments in
transportation, power, and telecommunications infrastructure were key drivers of economic growth.
Public investments accounted for nearly one-third of GDP. Yet, with public debt at 21% of GDP, the
government still had capacity to finance its projects.

Improvement of road infrastructure and power generation, in particular, was expected to pay long-term
dividends in fostering private-sector growth and attracting foreign capital. New rail and road corridors to
modern seaports in Bangladesh were intended to mitigate the challenges of being a landlocked country
and give access to a trade route that accounted for 25% of global container traffic. The government also
had a presence in sectors it considered important. The World Bank ranked Baghaland 139th of 189
countries in its global rankings for ease of doing business. However, Baghaland ranked within the top third
of countries in South Asia.

Investing in Baghaland
Foreign companies deciding whether to invest in Baghaland had to consider several other factors:

Infrastructure
Baghaland was near the bottom of the World Bank’s ranking of countries for facilitation of cross-border
trade and logistics performance. Even with a modern air-cargo terminal, Baghaland depended on the port
of Bangladesh for surface shipments. Although the road infrastructure between cities had improved, more
than one-third of the population still lived five or more hours from a city. Although the government was
constructing a high-speed rail and multi-lane highway connection to bordering countries, logistics costs
were expected to remain high in the near term. There were other infrastructure limitations. The power
grid had been upgraded, but power cuts remained frequent. Many businesses had to rely on expensive

This document is exclusively developed for Berger Paints Bangladesh Limited for the purpose of their recruitment process of their
potential employee. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the right authority.

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 Business Case
backup generators. Likewise, the quality of telecommunications was spotty and Internet outages were
frequent.

Human resources
Baghaland was cost competitive with China for light production. It also produced more than 12,000
university graduates each year, creating a supply of skilled, affordable employees. Some foreign
employers, particularly from the United States and Europe, believed that the gaps between expatriate
and local employees in work culture, management style, and communication were difficult to bridge.
Many foreign businesses viewed native Baghalandns who had worked elsewhere and returned as the
best-trained talent, but such hires were relatively scarce and costly.

Limited competition
Many Baghaland industries were still developing, so firms with greater marketing resources or superior
products could capture market share more easily. Yet the limited competition also created opportunities
for upstarts that could negate the advantages of an established multinational. Because Baghaland had
long been closed to foreign influence, global brands did not enjoy the same awareness among consumers.

Fragmented distribution channels

Distributors sourced many goods from Tercato, the large wholesale market in Phompen, the capital city,
and relied on sub-distributors to serve retailers outside cities to rural areas, where more than 75% of
Baghaland’s citizens lived. There were no international retailers and very few retail chains with a
significant footprint; small independent outlets and kiosks remained the largest channel. Servicing so
many small players was costly. Some wholesalers, particularly in consumer goods, argued that a realistic
estimate of the addressable market had to exclude households outside of urban areas. Because
wholesaling of any imported goods was restricted to domestic firms, importers had to work with local
partners. Any firm engaged in local manufacturing was free to manage its own wholesaling and
distribution, but some foreign companies found it difficult to navigate the distribution networks and
manage customer relationships without local partners.

Cross-cultural adaptation and customer relations

Entering Baghaland required an understanding of local customs, norms, and expectations. In consumer
marketing, for example, companies could inadvertently offend a particular group with the wrong choice
of music or spokesperson. Other companies, particularly those engaged in selling goods and services on a
business-to-business basis, reported challenges in building trust with potential customers. To mitigate this
risk, some global professional services companies had formed joint ventures with local firms.

Corruption
Public-sector corruption was suspected to be high. In 2013, Transparency International ranked Baghaland
121th of 177 rated countries in perceived public-sector corruption. Foreign investors had complained
about the lack of transparency in government tenders. Many believed that select firms received
preferential treatment.

Market Entry Options

Foreign businesses had four ways of entering the Baghalandn market.

Local agent or importer

This document is exclusively developed for Berger Paints Bangladesh Limited for the purpose of their recruitment process of their
potential employee. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the right authority.

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 Business Case
Non-Baghaland businesses were barred from wholesale trade and retailing, except for locally produced
goods. For multinational businesses that exported to Baghaland, working through a local partner was the
only way to sell. An Baghalandn partner had existing relationships and knew how to manage the local
distribution channels and other on-the-ground challenges. Although the multinational had less control
over sales and marketing, it was a low-risk way to enter the market.

Licensing arrangement
Foreign businesses could license their brand, technology, or products to local partners or designate a local
franchisee. Having goods produced locally allowed for more competitive pricing and access to the local
partner’s understanding of how to sell and distribute in local markets. The margins for this approach were
typically thinner, and there was risk of infringement on intellectual property. Licensing and franchising
were relatively rare compared to other modes of market entry.

Joint venture
In a joint venture, multinational corporations could maintain greater control while benefiting from the
advantages offered by a local partner. The local partner could be a private entity or the government,
which might keep an equity stake. However, multinationals that planned to export most of their output
or to reinvest profits in the joint venture were exempt from this requirement.

Subsidiary
A foreign parent could set up wholly owned subsidiary or branch as a limited liability company. With a
subsidiary, a multinational could avoid coordination and alignment issues with any local partners and
protect proprietary technology or know-how.

Opportunities for TexCom

TexCom had to consider whether it could succeed in Baghaland. See Exhibit 1 for a summary of projections
and estimates for entering Baghaland.

TexCom, a footwear manufacturer, had experienced modest success in exporting shoes to Baghaland
through a third-party distributor, and its management team believed it was time to move more
aggressively. Beatrice Chen, vice president of global sales, described the strategic decision faced by the
company: “The local market offers a significant growth opportunity, and having a factory will give us a
cost advantage over other importers, including our Chinese competitors, throughout the region.

Founded in China in 1991, TexCom produced a wide range of casual and formal leather footwear. Its
relentless focus on efficiency had enabled it to bid aggressively on new opportunities and grow quickly.
Its early success came through contract manufacturing for U.S. and European brands and providing
private-label goods for mass merchandisers and discount shoe retailers. Starting in 2003, TexCom also
began to develop its own brands for emerging markets. In expanding, TexCom had used third-party
importers and local manufacturing. A market that could be served by an existing offshore manufacturing
facility, preferably in the region, was a candidate for a third-party, import-only strategy, in which TexCom
usually established a long-term exclusive contract with an independent distributor. If the appropriate
conditions for local manufacturing existed, it could choose to establish a local manufacturing facility,
either wholly owned or as a joint venture. The case for local manufacturing was strengthened if TexCom
could profitably export to surrounding countries.

This document is exclusively developed for Berger Paints Bangladesh Limited for the purpose of their recruitment process of their
potential employee. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the right authority.

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 Business Case
Exhibit 1: Summary of key Baghaland projections for TexCom

Addressable market ($, millions USD) $120M

Market growth (10-year average) 10% to 15%
Projected market share (% share) Year 1: 5%, Year 7: 15%
Projected gross margins (% GM) Year 1: 50%, Year 7: 65%
Projected fixed costs ($, millions USD) Year 1: $12M, Year 7: $14M
Capital expenditure ($, millions USD) $30M

For the purpose of the case study, we are in February 2019 now.

Questions for group discussions:

1) Do a SWOT analysis for TexCom in relation to their decision to enter Baghaland.

2) What would be the best market entry option for TexCom out of the four mentioned? Why?

Questions for individual presentation:

1) If TexCom decides to set up a factory in Baghaland and manufacture locally, what distribution
channels should the company consider? What are the advantages and disadvantages of each of
these options?

2) What would be your top five recommendations for the TexCom sales team to maximise sales?

3) TexCom is considering direct selling to government offices, corporate houses, and educational
institutions. Please share some of your ideas for developing this channel into a successful one.

This document is exclusively developed for Berger Paints Bangladesh Limited for the purpose of their recruitment process of their
potential employee. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the right authority.

Strictly Confidential
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