International Economics Assignment

Case – Pepsi’s Entry Into India – A Lesson in Globalization
Ankur Sikka PGDM – IB Roll No. 007

To acquire resources a. Pepsi shifted its focus from saturated U. there are three primary reasons a company like Pepsi engages in international business: 1. b. Companies like Pepsi need a lot or resources at lower cost in order to have more profitability while keeping up with the demand for raw materials. This also helps them to procure materials and components from other countries in case if sourcing from one country is badly affected due to certain reasons. (E. NEED FOR GLOBALIZATION Depending on the strategy that a company follows. extraction or cultivation of these resources at a much lower cost than the current ones (in operation) with minimal tariffs and other barriers. Pepsi looked at the extremely low per capita consumption of soft drinks as a great opportunity to create a new growth phase for its soft drinks rather than exploiting the mature markets in other countries) 2.g. Economies of Scale A company like Pepsi usually operates on the principle of Economies of Scale. thus allowing global sourcing. To Increase sales/ Sales Expansion a. In order to achieve a larger market canvas and operate on this minimum efficient scale of operation. To leverage International Product lifecycle A product in one country maybe at a different phase of its lifecycle in another country and this difference can be exploited by a company to direct their product supply to a more demanding market.g.ANSWER 1. . A. market to nascent Indian market in order to expand) b. These companies thus target those countries which can provide the production.S. (E. it is very essential that the company covers more market and potential customers by moving from a saturated market to an unsaturated one.

Contract Manufacturing – (E. Total ownership not allowed (100% FDI was not allowed) 6. Strategic Alliances and Turn Key Projects 7. HURDLES AND PROBLEMS FACED BY PEPSI DURING ITS ENTRY 1. Joint Ventures – (E.g. b. Prohibition to use foreign brand name 4. differences in Industry cycle or simple geographic risk for that matter. Most of these companies tend to diversify when entering other countries in order to minimize their risk from factors such as political hurdles.g. Pepsi in new proposal committed to export half of its production and maintaining export – import ratio of 5:1 for a period of 10 years) 2. Punjab Agro Industrial Corporation (36.3. Direct and Indirect Exports – Possible when transportation costs and tariff barriers are low. Management Control and Wholly owned subsidiaries C.8%). to President of PepsiCo) 2. which was a venture between PepsiCo (36. Licensing 5. Opposition by many political parties and factions (including a letter of non conformance by George Fernandes.g. Primary focus on development of Agricultural Sector . It is also essential that risk due to existing rivals is minimized by investing into non developed areas so as to counter investing by competitors. STRATEGIES TO ENTER FOREIGN MARKET 1. Reducing Risk a.11%) and Voltas India Ltd. Rejection of clause regarding the cola import 3. Pepsi entered as Pepsi Foods Ltd. It provides higher competitive advantage. B. Lack of liberalization 5. General Secretary of Janata Dal. Pepsi entered into agreements with a few big farmers and began growing tomatoes through the contract farming route) 3. Mergers and Acquisitions 6. (24%)) 4. (E.

Since the company was able to strike directly on the prevailing needs of the ailing society in line with government’s expectations. Moreover it would also bring the Punjabi terrorists into mainstream society by creating more employment opportunities. 4. It then made several key commitments that clinched the deal. it was able to enter into Indian market as a Joint venture. 6. PepsiCo claimed that it would play a major role in the agricultural revolution in the state and would create many employment opportunities. It also wouldn’t use foreign brand names under the rules of the game. 3. Moreover it also made commitments to bring in advanced food processing technology to India which would boost India’s image in the world market. An agricultural research centre was to be established under the deal and creation of jobs for 50. PepsiCo exploited the sensitive issue concerning the political and social problems to devise a new proposal that would fit with the existing ‘Politics’ and ‘Public Opinion’.000 people across the nation of which 25. 5. It promised to focus on food and agro-processing and only 25% of the investment would be directed towards the soft drinks business. One essential commitment was to bring advance food processing technology to India along with the promotion of Indian made product’s image in foreign market.000 were to be in Punjab. Commitment to maintain 5:1 export – import ration for a period of 10 years and entering the market as a new brand ‘Lehar Pepsi’. Strategies adopted by Pepsi 1. The new proposal gave a lot of emphasis to the effects of PepsiCo’s entry on agriculture and employment in Punjab. .ANSWER 2. 2. 7.

It established a whole owned subsidiary called PepsiCo.ANSWER 3.5 % of PHI’s exports. The company had promised to create 50000 jobs while it had only created 783. 3. 2. 1. 4. 5. It created an illusion that it had actually created 26000 jobs through indirect employment. 3.) resulted in high emission of toxic materials that was polluting the areas around the factory. Its fruit/vegetable-based products business formed a miniscule 1.) were as high as 67%. Post Liberalization Change 1. whereas plastics exports (via Futura Polymers Ltd. Voltas sold off its stake and PAIC‘s stake was reduced to less than 1%. In packing and promotion. PHI’s turnover surpassed Pepsi’s turnover by 1. It sold off its tomato paste plant to Unilever which attracted fair amount of stick. (PHI). Ltd. . HLL used bulk of the paste for its Ketchup and puree offerings while the rest was handed over to Pepsi for exports. where the product name was visible. The removal of various restrictions meant that it no longer had to fulfil many of the commitments it had made at the time of its entry. 6. The Company in 1994 bought off its partners in the venture. 2. It changed its name from ‘Lehar Pepsi’ to ‘Pepsi’ as foreign brand names were allowed in India. The government removed the restrictions that bounded Pepsi’s investments in the soft drinks business to 25 % of the overall investments and required it to export 50% of its production.25 billion. It was alleged that plastic bottles business (Futura Polymers Ltd. Holdings India Pvt. This company had an agenda of replacing workers with machines thus affecting the number of people employed as direct labour. Later all of its investments were being routed through this company. Allegations 1. which was completely devoted to soft drinks business. 2. the name Pepsi was given a prominent position while the Lehar part of it was relegated to the background.

rice and shrimps which were already being exported in order to meet its export obligations. fruit juices and mineral water in order to increase their business profitability. 2. Pepsi entered into chili contract farming also but failed because of South Asian crisis which was the major market for its chili paste. agro-research centre was not established until late 1990’s. Expansion of contract farming network from Zahura to districts of Amritsar. B. . Pepsi joined hands with Pagrexco to identify. MP and UP. 6. Contract Farming Initiatives 1. ground nut and potatoes in various cities of Punjab. 3. 5.4. Rationale The main intention of the company was to develop the area for cultivation of those crops which were directly or indirectly related to their business of soft drinks. It failed to adhere to its commitment to export 50% of its production and began to export products such as tea. ANSWER 4. It entered into contract to produce tomato. Pepsi also began contract farming of seaweeds in Tamilnadu used to make carrageenam (a product used in many FMCG products). PepsiCo supplied high yield tomato and low sugar potato seeds (‘Pepsi Agri Bakcward Integration Program’) to farmer to increase the per hectare production which in turn enabled Pepsi to meet its input requirement for tomato paste and potato chips manufacturing. 7. 4. 5. Sangrur and later to Karnataka and Maharashtra. Allegations included that majority of the company’s employees were working for concentrate and bottling business and not for food processing business. The promised. Patiala. 6. Pepsi provided its contract farmers advanced equipments such as transplanters and seeding machines to help them carry out their tasks efficiently and effectively so that raw material supply to Pepsi would be fast and continuous. source and process citrus fruits for its juices venture Tropicana. snacks. A.

Help it win votes of appreciation and goodwill of public and government. the two important players in any business landscape. Spending in infrastructure development like roads. . educational sectors so that HDI of the society will increase.C. Importance to work towards betterment 1. schools. community centers. Try to contribute to healthcare. other investments etc 2. Development of economy of host country will in return strengthen the consumer economic level and hence will bring opportunity for further business expansions in long run. Increase in trade so that host country can get duties and increase its foreign reserve 3. Ways that to improve the economy of host country 1. D. 2.

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