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Chapter 4: The Global Economic Environment
Sony seeks to revive profitability
Few brands in electronics have the
enduring brand reputation that Sony
enjoys. Yet the Japanese company has
found it difficult to maintain profits in
an increasingly competitive
environment. Its history of innovative
products goes back to the Walkman in
1979. It invested heavily in flat-screen
televisions, but competitors such as
Samsung and LG have challenged it in
quality and price. Sony has not been an
inward-looking company. It was among
the first Japanese companies to have
foreign board members, and its
Chairman and CEO, Sir Howard Stringer,
is British. It has globalized production
and sought to locate manufacturing
facilities near markets. However,
competitive pressures and global
economic downturn have taken their
toll. Sony’s CEO has embarked on a
widespread restructuring programme,
targeting its television factories in
particular.
Sony started manufacturing televisions
at its factory in Slovakia since 2006, and
built up production capacity, but it has
now decided to slim down to save
costs. Overall, Sony’s electronics
business, which includes audio, video
and televisions, is being reduced from
57 factories to 42. It is shedding four of
its eight TV factories. The Nitra plant in
Slovakia was sold to Hon Hai of Taiwan,
an outsource manufacturer making TVs
under licence. Hon Hai also bought
Sony’s TV factory in Mexico. Hon Hai’s
attractiveness as an outsourcer stems
partly from its acquisition of an affiliate
specializing in liquid crystal display
(LCD) panels. Hon Hai should thus be a
strong competitive position in TV
assembly, as it can benefit from
transaction costs savings. Still,
competition from Samsung is stiff, and
Samsung has an in-house supply of LCD
panels.
Sony’s loss-making Barcelona factory
poses another challenge. The Barcelona
operation is small in comparison to
Nitra, and therefore a natural
candidate for closure, but it will be
costly. The factory is unionized, and
Spain has strong employment
protection laws. Who would buy the
Barcelona factory? An outsourcing
manufacturer would be deterred by the
small scale and high costs. Of the other
TV plants, Sony is intent on keeping the
‘mother factory’ in Japan, which is
important in design and feedback. Its
factories in Brazil and China, both
growing markets, will also be kept:
these are large markets and both
countries have high import duties on
TVs.
Small LCD panels for use in mobile
phones and digital cameras are still
manufactured at Sony factories in
Japan, even though they are not
profitable. It sold one of these factories
to Kyocera, but has kept two. Its
reasoning is that it wishes to develop
display technologies for the future, as
these help to differentiate its products.
Sony has faced criticism that it has lost
its leadership role in innovation as
other companies, such as Apple, with
its iPad, have taken the limelight. Sony

is considering a rival to the iPad, and it
has been somewhat cheered by
increased sales of its Vaio PCs.
However, quality problems with the
new PS3 PlayStation were
disappointing, especially coming at a
time when Toyota was also
experiencing quality problems.
Production of the PS3 is outsourced to
China. Sony has traditionally justified its
premium prices on its reputation for
quality. With its TV manufacturing
increasingly outsourced, will consumers
still be willing to pay for the Sony
Questions for discussion:
 What trends are apparent in the global electronics industry, which are having
adverse effects on Sony?
 What are Sony’s core competencies?
 What are the risks of outsourcing from Sony’s perspective?
2016 update:
Sony continued to struggle to maintain
competitiveness in global markets. In
smartphones, Apple and Samsung have
taken leadership of the premium
market, while Chinese manufacturers,
Huawei and Xiaomi have led in the
lower-price products. Sony embarked
on cost-cutting in its smartphone
business, in order to improve
profitability in targeted markets, rather
than chasing market share in the
competitive markets of China and India.
Sony had already outsourced its TV
business, and it has sold its PC business
due to competitive pressures. It has
struggled to cope with losses in its
smartphone business, and the company
was clearly in need of a turnaround
strategy. A new chief strategy officer,
2
brand, even though someone else has
made the product? Sony executives are
hoping the answer is ‘yes’.
Sources: Harding, R. and Soble, J.
(2010) ‘Japanese fret over quality of
manufacturing’, Financial Times, 3
March; Harding, R (2010) ‘Stringer’s
Sony restructuring has unfinished
business’, Financial Times, 1 April;
Harding, R. and Gelles, D. (2010) ‘Sony
plans to compete against Apple iPad’,
Financial Times, 5 February; Sony
Annual Report 2009, at www.sony.net
appointed in 2013, and a new CEO,
appointed in 2015, have built a strategy
for regaining competitiveness that
focuses on the company’s innovative
strengths, rather than attempting to
compete in volatile markets for
consumer goods. Imaging products,
video games and entertainment are
areas in which the company has
strengths which can lead it back to
profitability. The business areas
targeted by the new strategy are game
and network services, pictures and
music. It has invested in its PlayStation
platform, and it has hoped to increase
its market in music, especially in
streaming services.

The turnaround strategy seems to have
worked so far. In 2016, the company
reported a 600% rise in profits due to
the success of the PlayStation 4. And
the smartphone business, in which
losses had been a serious concern, also
showed a dramatic improvement. Its
Xperia phone, while not selling in large
volumes, was showing renewed market
Alibaba aiming to shape the world
Online sales amounting to the
equivalent of $8 billion in 10 hours on
11 November 2015 gave Alibaba,
China’s ecommerce champion, a world
record for a single day’s trading. The
news of the record made global
headlines for its charismatic founder,
Jack Ma, who received a congratulatory
phone call from the office of China’s
president. For a private-sector Chinese
company, global admiration combined
with praise from the communist
political establishment could be
interpreted as the pinnacle of success.
Certainly, achieving sales that exceeded
the ‘black Friday’ record for equivalent
sales in the US (falling the day after
Thanksgiving) was an achievement that
its billionaire founder could be proud
of. But celebrations on the day should
be tempered by consideration of where
the company is going – and how. Only
two months previously, when Alibaba
was celebrating the first anniversary of
its listing on the New York Stock
Exchange (NYSE), doubts about its
business, its governance, and the
impacts of country factors associated
with China were scattered across the
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strength. The camera businesses also
showed good financial results. On a
bleak note, however, an earthquake in
Japan in 2016 caused the temporary
closure of its factories for image
sensors and digital cameras. The CEO
had cause to be upbeat, but the
company still faced challenges in
maintaining its competitiveness.
world’s media. Those reservations
remain, despite the euphoria of 11
November.
Ma’s Alibaba IPO on the NYSE in 2014
was indeed a success. The first day’s
trading valued the company at $235
billion, and the share price saw a ‘pop’
of a 35% rise in value on the listing
price on the first day. US investors were
keen to own shares in Alibaba, and the
backing of large banks, such as JP
Morgan, Goldman Sachs and Citi Group,
reinforced their confidence. It seemed
not to be misplaced: the shares soared
77% in the first two months after the
IPO. But since then, the price has
halved. Weakening economic data from
China’s economy have been a factor,
and share prices on China’s stock
exchanges have tumbled. As a Chinese
company, Alibaba would not be
immune from these movements. Ma
has grown the ecommerce giant in a
business environment that has seen
growing demand from Chinese
consumers. Alibaba has had a dominant
position in the Chinese market, with its
Tmall business (similar to Amazon) and
Taobao business (similar to eBay). Their

popularity has risen among the middle-
class consumers who have benefited
from China’s growing prosperity. Ma
aims for global markets, but so far
these have been limited, accounting for
9% of overall sales. He has also been
astute in catering to consumers who
use smartphones for shopping, by
increasing mobile sales and acquiring
companies with expertise in mobile
apps. By 2014, the time was ripe for
listing Alibaba. But the method was
unconventional, and Alibaba had had a
previous listing that had misfired.
Alibaba was listed on the Hong Kong
Stock Exchange in 2007, but the
financial crisis soon followed, along
with a corruption scandal that engulfed
Ma. It was delisted five years later. In
the meantime, Ma searched for
another way to go public. He looked to
Silicon Valley where, in companies such
as Google and Facebook, the founders
have relatively small shareholdings but
retain control of the company. The
Hong Kong Stock Exchange rejects such
structures as a departure from one-
share-one-vote. He turned to New
York, which proved amenable to close
control. The company, Alibaba Group,
is registered in the Cayman Islands, an
offshore Caribbean jurisdiction with
light disclosure requirements. The
ownership structure was to raise
eyebrows.
Ma and 30 individuals have a
partnership among them that gives
them the right to name the people on
the board of directors. These insiders,
some of whom do not work for the
company, own altogether only 13% of
the shares. The investors who buy
shares in the company have no say,
and, what is more, their holding is not
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one of shares directly in the company,
but in a number of offshore-registered
intermediary entities that ‘simulate’
ownership. These are all private
companies controlled by Ma. Critically,
Ma also owns Aliplay, the payment
company (similar to PayPal) that is the
lifeblood of Alibaba. It, too, is a private
company under his control. He justifies
this arrangement on the grounds that
Chinese law requires that non-bank
payment systems must not be foreign
owned. But there are clearly big risks
for ordinary investors in these
arrangements, as their ownership is
indirect. Ma assures investors and
consumers that he has their interests to
the fore, but these promises have no
force in terms of legal obligation.
Shares listed in New York are
purchased by institutional investors
such as pension funds. Although
Alibaba shares were eagerly bought by
investors and backed by prestigious
institutions, there were risks. As an
online company, Alibaba is particularly
affected by internet controls and
regulations imposed by government.
Alibaba has encountered criticism for
tolerating the sale of counterfeit goods
and other goods of marginal legality.
Although there are international
agreements to control the trade in
nuclear-sensitive materials that could
be used to make bombs, active trading
has appeared to be relatively
unhampered on Alibaba’s websites
(Clover, 2014). Ma’s warm relations
with top political leaders are valuable.
But when the leadership changes, new
leaders might pose threats, especially if
he has been associated with leaders
that have fallen out of favour. China’s
market reforms have allowed talented

entrepreneurs like Jack Ma to build
empires and accumulate fortunes, but
the ultimate control of the economic
levers by authoritarian political rulers
remains intact.
Sources: Clover, C. (2014) ‘Weapons of
mass ecommerce’, Financial Times, 27
September, at www.ft.com; Pratley, N.
(2014) ‘Alibaba’s stock market listing a
risky prospect as insiders hold all the
cards’, The Guardian, 18 September, at
www.theguardian.com; BBC (2015)
‘China’s Alibaba breaks singles day
record as sales surge’, BBC News, 11
November, at www.bbc.com; Financial
Times (2014) ‘How Alibaba turned itself
into a different type of company’, 19
September, at www.ft.com; Schaefer, S.
Ethiopia’s economic growth comes at a price
Ethiopia is now experiencing economic
growth, but until just over two decades
ago, it was grappling with recurring
drought and famine, combined with
violent ethnic tensions. The famine of
the 1980s precipitated the fall of the
communist dictatorship that had ruled
since the 1970s; 1991 saw the
overthrow of the communist dictator
and the ushering in of a new era of
hope for the economy and new
constitutional democracy. Under the
political leadership of the dominant
party, the Ethiopian People’s
Revolutionary Democratic Front
(EPRDF), which is still in control, the
country’s economic accomplishments
have attracted praise from all parts of
the world. Economic growth has been
in region of 10%, an unusually high rate
for an economy without large energy
resources. The economy has diversified
5
(2015) ‘On its first birthday, Alibaba’s
stock is a battleground’, 17 September,
Forbes, at www.forbes.com.
Questions for discussion:
 What are the risks for private-
sector companies in China’s
economic environment?
 What aspects of Alibaba’s IPO in
New York could be criticized,
and why?
 Is Alibaba a good model for a
modern Chinese company?
 Would you invest in Alibaba
shares?
away from its primarily agricultural
base. Flower growing has become an
important industry. The availability of
low-cost labour has attracted
manufacturers, including textile and
leather companies. H&M, the world’s
second-largest fashion retailer, is now
manufacturing in Ethiopia. The
government is spending public money
on health, education, agriculture and
roadbuilding. One of the biggest
projects is a huge hydropower project,
the Grand Ethiopian Renaissance Dam,
which is government funded and will be
the continent’s largest such project.
The government is both guiding
development and becoming the largest
investor in Ethiopia’s future. The risks
of drought remain, but it is hoped that
there is now less risk of widespread
famine. Ethnic tensions remain, and

human rights issues are raising
concerns.
With its strong state leadership driving
economic growth, Ethiopia is an
example of the development state, a
model of development that has been
successful among the emerging Asian
countries, such as China. But China’s
development is guided by an
authoritarian political system. Ethiopia
has democratic political institutions,
making its development policies
potentially more accountable to a
democratic electorate, while ‘building
capitalism from above’ (KushKush,
2015). However, the formal democratic
institutions are dominated by one
party, the EPRDF; there is only one seat
in the legislature held by an opposition
member. The NGO, Human Rights
Watch, has reported that political
dissidents, such as bloggers, protesters
and opposition parties, suffer from
repressive tactics by the government
(HRW, 2015). Moreover, the EPRDF is
dominated by the Tigre ethnic group.
The many other minority ethnic groups
in the country are concerned about the
authoritarian tendencies of the
government.
Ethiopia remains predominantly a rural
society. Four out of five Ethiopians live
in rural areas, and agriculture accounts
for half of the country’s GDP. Despite
the government’s policies for improving
well-being, its plans for regenerating
agriculture have given rise to concerns
of social justice. In southern regions of
the country, where minority ethnic
groups are prevalent, people have been
moved away from their homes so that
the land can be leased to foreign
investors engaged in commercialized
agricultural production. Some 1.5
6
million people have been forcibly
moved to new ‘model’ villages in this
process, which is effectively land
clearance. The displaced groups
complain that they have been moved to
areas that are infertile and that have
inadequate social services, schools and
healthcare. They are left without their
traditional agricultural livelihoods.
These groups have little political voice
and, although the constitution
guarantees them the right to choose a
livelihood, this seems to have been
overridden in the interests of
development at the national level. One
displaced Ethiopian says of the new
foreign investors, ‘This is not the way
for development. They do not cultivate
the land for the people. They grow
sorghum, maize, sesame, but all is
exported, leaving none for the people’
(Smith, 2015).
Despite its impressive economic
growth, Ethiopia still has a lowly
ranking of 173rd in the UN’s Human
Development Index (UNDP, 2015).
Poverty remains an overriding issue.
Although the percentage of people
below the poverty line has fallen from
37% to 26% in the decade to 2014, the
absolute number (25 million out of a
total of 86 million people) is roughly
the same, due to population growth.
People hovering around the poverty
line remain vulnerable to food
insecurity. The UN has pressed for
‘inclusive growth’, but it finds that in
Ethiopia, the benefits of growth have
not been widely distributed throughout
society. There are high rates of
unemployment and under-employment
in both urban and rural areas. Hence,
poverty and international migration
remain worryingly high. It urges policies

that will promote private-sector
economic activity, to create productive
and sustainable jobs.
Ethiopia’s GDP per capita is just $550.
The government was aiming to raise
Ethiopia to the level of a middle-
income country by 2015. However,
economic growth will not automatically
resolve the inequalities: the people
who are growing richer are mainly the
business élites. The number of
millionaires in Ethiopia grew 108%
between 2007 and 2013 – the fastest
growth in the number of millionaires of
any African country. They are a tiny
proportion of the population, only
2,700 people. For development to be
sustainable, focus would need to shift
to goals of raising levels of human
development and inclusive growth.
Sources: UNDP (2015) ‘National Human
Development Report 2014: Ethiopia’, at
www.undp.org ; Dori, D. (2014)
‘Ethiopia’s “African tiger” leaps towards
middle income’, The Guardian, 22
Sweden: an economic model for others to follow?
Sweden, along with its Scandinavian
neighbours, has become identified with
an economic model that combines a
market economy with social welfare.
The thinking behind this combination
acknowledges the benefits of the
market, but recognizes that policies can
be put in place to temper its
inequalities and promote social well-
being. The political underpinning of this
thinking is most evident in the policies
of the social democratic parties that
have been at the forefront of politics in
7
October, at www.theguardian.com;
KushKush, I. (2015) ‘Ethiopia, long
mired in poverty, rides an economic
boom’, New York Times, 3 March, at
www.nyt.com; Smith, D. (2015)
‘Ethiopians talk of violent intimidation
as their land is earmarked for foreign
investors’, The Guardian, 14 April at
www.theguardian.com; HRW (2015)
‘World Report 2015: Ethiopia’, at
www.hrw.org.
Questions for discussion:
 Summarize the main drivers of
economic growth in Ethiopia’s
economic development model.
 What gains in social well-being
are occurring in Ethiopia?
 In what respects are social goals
being set back by government
policies?
 Is Ethiopia’s development
model a good one for other
emerging economies to follow,
and why?
all the Scandinavian countries. To
critics, there are inherent
contradictions in these twin ideals.
They maintain that high levels of social
welfare inevitably entail high taxes,
which discourage enterprises, while, at
the same time, generous welfare
benefits discourage people from
seeking productive employment. The
result can be increased public spending
that spirals out of control, leading to
possible economic crisis. The critics
would note that this is roughly what

happened to Sweden’s economy in the
1980s. A financial crisis in 1991 saw the
ruin of two banks that had to be
nationalized. Economic recession and
high unemployment led to growing
pressure on public expenditure. The
virtues of the so-called ‘Nordic’ model
were looking more like myth than
reality. It looked as if the critics had
been right.
However, Sweden’s government took a
firm hand and guided the country out
of its economic woes. Did this mean the
old model would be abandoned? In
fact, much of what the government did
certainly seemed inconsistent with the
old model (Stenfors, 2015). For
example, privatization was introduced
in many services, such as healthcare
and education. And taxes were
lowered. This did not seem to fit the
picture of social-democratic orthodoxy,
as markets appeared to be supplanting
the state. However, in the Swedish
context, the strength of the nation’s
cultural commitment to equality, full
employment and individual freedoms
remained the foundation for the
reforms. Market forces and financial
innovations were seen as means of
restoring economic growth, not as ends
in themselves. Hence, for example,
privatization of services was introduced
where efficiencies could be made,
without sacrificing quality and without
undermining the overall system.
Welfare spending was reduced after
the crisis, but not drastically. Sweden
remains essentially committed to social
welfare. Government spending still
accounts for half its economy.
Government efficiencies were an
essential element of the newer version
of the Swedish economic model,
8
reining in the high levels of debt and
strictly controlling public spending.
Sweden was also alert to the changes
taking place in a globalized economic
environment. For businesses, Sweden
has been a good deal more competitive
as a location than might be imagined.
Whereas corporation tax in the 1980s
was 35%, it is now 22%, which is
considerably less than in the US.
Moreover, there are numerous tax
exemptions. The company enjoys
exemption from capital gains tax and
from tax on dividends from shares held
for business purposes, whether in a
listed or non-listed company. These
policies are favourable to the holding
company structure, which is common
among Swedish businesses. Sweden’s
economy is dominated by the large
holding companies that are run as
family dynasties, the most notable one
of which is the Wallenbergs.
The Wallenberg family, now in its fifth
generation, controls a huge array of
businesses. Their holding company,
Investor, controls a business empire
worth in the vicinity of $250 billion.
They are famous for their long-term
perspective and for their active
management of the many companies
under their control. These include
Electrolux, the white goods
manufacturer; Saab, the aerospace
company; and Ericsson, the telecoms
equipment maker. Family members sit
on multiple boards, and control board
appointments. There are weighted
voting rights held by family members,
so that they can effectively control
board appointments. It is sometimes
said that this system creates too cosy
an atmosphere between managers and
the dominant shareholders (Milne,

2015). It could be argued that the
system works in Sweden, where there
is a high level of trust and those in
charge feel a strong sense of personal
responsibility. The family dynasty as it
operates in Sweden is seen as a source
of stability and long-term business
strategy.
Sweden’s economy suffered from the
financial crisis of 2008, as did other
European countries, which are the main
destinations of its exports. However, it
has been able to recover rather more
strongly than its European neighbours,
partly because its banks had been
recapitalized after the earlier crisis, and
its government had in place prudent
policies to keep public spending under
control. Is Sweden still enjoying the
social stability that reflects its
egalitarian values? Inequality is
growing, and the rise of the anti-
immigration political party, the Swedish
Democrats, suggests that the
consensus on the social aspects of the
Swedish model could be coming under
strain.
9
Sources: Stenfors, A. (2015) ‘The
Swedish model in 2015: A “safe haven”
or a “Nordic Noir”?’, Global Labour
Column, No. 201, May, University of
the Witwatersrand, at
www.column.global-labour-
university.org; Bergston, C.F. (2013)
‘Obama should take lessons from
Sweden to the G-20’, The Washington
Post, 29 August, at
www.washingtonpost.com; Sanandaji,
N. (2015) ‘The end of Nordic illusions’,
Wall Street Journal, 24 June, at
www.wsj.com; Milne, R. (2015) ‘Meet
the Wallenbergs’, Financial Times, 6
June, at www.ft.com.
Questions for discussion:
 What are the strengths of
Sweden’s economic model?
 How has Sweden’s economic
model changed since the 1980s?
 What criticisms could be made
against the dominant family-run
holding companies in Sweden?
 To what extent is Sweden’s
economic model a good one for
other countries to follow?
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