Incoterms 2010 and International Business - 101
International Business: Environments and Operations, 15e (Daniels et al.)
CHAPTER SEVEN: CROSS-NATIONAL COOPERATION AND AGREEMENTS
CHAPTER SEVEN: CROSS-NATIONAL COOPERATION AND AGREEMENTS
OPENING CASE: TOYOTA’s EUROPEan Drive
Known for its low-cost, efficient production operations, Toyota surpassed GM as the largest car manufacturer in the world in 2008. Toyota was also the most profitable; however, 2009 brought a loss and corresponding layoffs. Toyota has 53 production facilities located in 27 countries, including 8 in Western and Eastern Europe. Prior to 2002, Toyota had not posted a profit in Europe for more than three decades. However, during that time there was an agreement in effect between the Japanese government and the then European Community to severely limit the number of Japanese vehicles that could be exported to Europe. When the quota system and other restrictions were lifted in 1999, Toyota responded by establishing a European Design and Development center in southern France and capturing distinct cost advantages by setting up additional production centers in East Europe. Toyota’s European market share and profitability began to grow steadily, as Europeans became less loyal to their own regional brands in their search for more economical, higher quality cars. In fact, in 2005 Toyota’s environmentally friendly hybrid vehicle, the Prius, was voted European Car of the Year.
Questions
- Why did the Europeans try to protect their auto industry from Japanese imports, and do you think this was fair to European consumers?
The policy has its origin at the end of World War II when the Japanese governments asked the European automakers to curtail exports to Japan to help them rebuild its industry. The Europeans reciprocated by limiting the access of Japanese autos to their market. The more recent voluntary quota on the number of cars imported into Europe was set up to allow European carmakers to become more competitive as the EC made the transition to a common market. The primary disadvantages to the European consumers were probably a combination of fewer choices and higher prices. (LO: 2, Learning Outcome: To discuss the pros and cons of global, bilateral, and regional integration, AACSB: Dynamics of the Global Economy)
- Toyota has established production facilities in Europe to service European markets. Has Hyundai, Kia, or Honda followed the same strategy? If so, in which countries have they set up manufacturing, and are they the same ones where Toyota is manufacturing?
Honda has manufacturing facilities in the United Kingdom, Belgium, France, Italy and Turkey. For Hyundai, almost all of the cars designed for Europe are developed at the European Technical Center in Russelsheim and 70% of the cars sold in Europe are manufactured either in the Czech Republic or Izmit, Turkey. Kia Motors Europe is headquartered in Frankfurt, Germany; it is a design center and is responsible for marketing the brand all over Europe. Kia opened its first European plant in Zelna Slovakia in 2006. (LO: 3, Learning Outcome: To describe the static and dynamic impact of trade agreements on trade and investment flows, AACSB: Analytical Skills)
Teaching Tips: A useful Web site for the opening case is www.toyota.eu/ where students can explore the European operations of the company in greater detail. Carefully review the PowerPoint slides for Chapter Seven.
CLOSING CASE: Walmart Goes South
Because of its sheer size and volume purchases, as well as its unique distribution system, Walmart has been able to reduce its prices so successfully that in 2001, it became the largest company in the world. Mexico’s first Sam’s Club, a subsidiary of Walmart, opened in 1991 in Mexico City. Mexico’s retail sector has greatly benefited from the increasing trade liberalization under NAFTA, as well as the improvements to its transportation infrastructure encouraged by NAFTA. In addition, NAFTA improved opportunities for foreign investment in Mexico. One of the country’s largest retail chains, Comercial Mexicana S.A. (Comerci), has found it increasingly difficult to remain competitive since Walmart’s aggressive entry into its market. Walmart’s strong operating presence and low prices since the lifting of tariffs under NAFTA have put such strong competitive pressures on Comerci that it must now decide whether its participation with the recently formed purchasing consortium, Sinergia, will be sufficient for its survival.
Questions
7-3 Walmart tried to be successful in Germany and failed. However, it has been very successful in Mexico. How has the implementation of NAFTA affected Walmart’s success in Mexico?
The implementation of NAFTA has facilitated Walmart’s success in Mexico in various ways. First, it reduced tariffs on American-sourced goods from 10% to 3%. Second, it encourages Mexico to improve its transportation system and infrastructure, thus helping solve Walmart’s logistical problems. Third, it eases restrictions on foreign direct investment; as a result, many of Walmart’s foreign suppliers have built plants in Mexico, where they can better serve the whole of the NAFTA region. (LO: 2, Learning Outcome: To discuss the pros and cons of global, bilateral, and regional integration, AACSB: Dynamics of the Global Economy)
7-4 How much of Walmart’s success is due to NAFTA, and how much is due to Walmart’s inherent competitive strategy? In other words, could any other U.S. retailer have the same success in Mexico post-NAFTA, or is Walmart a special case?
The same benefits that have accrued to Walmart following the implementation of NAFTA are also available to other competitors. However, Walmart uses its sheer size and volume of purchases to negotiate prices to rock-bottom levels that are not available to smaller competitors. It also works closely with suppliers on inventory levels, using an advanced information system that informs suppliers when additional merchandise will be needed, thus allowing them to plan production runs more accurately and pass along the captured cost reductions. Then, rather than pocketing the accrued cost savings, Walmart reduces its prices. Retailers who wish to compete with Walmart will either have to meet Walmart’s prices or position themselves in a different segment of the market. (LO: 3, Learning Outcome: To describe the static and dynamic impact of trade agreements on trade and investment flows, AACSB: Analytical Skills)
7-5 What has Comerci done in its attempt to remain competitive? What are the advantages and challenges of such a strategy, and how effective do you think it will be? What else do you think Comercial Mexicana S.A. should do, given the competitive position of Walmart?
Comerci has attempted to lower its prices, but for many items, it simply lacks the negotiating power with its suppliers to get prices as low as Walmart’s. Faced with extinction, Comerci has banded together with two other Mexican supermarket chains, Soriana and Gigante, to form a purchasing consortium (Sinergia) that allows them to jointly negotiate better bulk prices from suppliers. To prevent price fixing and monopolistic behavior, Mexico’s Federal Competition Commission (CoFeCo) requires that Sinergia issue regular reports regarding the nature of its purchasing agreements and that it sign confidentiality agreements with the participating retailing chains. As a representative body with no assets, Sinergia’s purchases are currently limited to local suppliers; its future is uncertain. Whether students feel that such a strategy will be effective or not will depend on the perspective they take. If they focus primarily on costs, they may be of the opinion that the strategy will be sufficient. If, however, they are also concerned about issues such as product and store differentiation and the regulatory role of government, then they may be of the opinion that it is insufficient. (LO: 3, Learning Outcome: To describe the static and dynamic impact of trade agreements on trade and investment flows, AACSB: Analytical Skills)
Comercial Mexicana is considering three basic options as it tries to survive in the new competitive environment driven by the presence of Walmart in Mexico: remaining independent, merging with a local retail chain, or merging with a foreign retail chain. First, the firm needs to carefully examine the market and determine (a) ways in which it can differentiate itself from Walmart (such as Target’s slightly upscale market approach) and (b) whether it possesses or at least has access to sufficient assets to survive in the current environment. As part of that decision-making process, Comercial Mexicana also needs to consider both the available sourcing and market opportunities it enjoys, given its location within the NAFTA region. Finally, it should assess (a) what it can offer and (b) what it would desire from a local or foreign partner. With that information in hand, Comercial Mexicana will be in a better position to make effective operating decisions. (LO: 3, Learning Outcome: To describe the static and dynamic impact of trade agreements on trade and investment flows, AACSB: Reflective Thinking)
7-6 What do you think of Walmart’s strategy in Mexico and Central America and how have bilateral agreements and geographic proximity played a role in its success? What impact do you think the allegations of bribery in Mexico will have on the company’s future expansion?
NAFTA eliminated tariffs and other import controls on goods moving between the three countries, This meant that Walmart’s suppliers could send products to be assembled in Mexico where labor is cheap, environmental protections weak, taxes low, and protection from further regulation and government oversight even greater than in the U.S., and then send the finished products back home to sell at prices far cheaper if produced in the United States. The impact in Central America will be similar now that the CAFTA-DR agreement has been ratified by Congress. Walmart Stores were accused of illegally bribing Mexican officials to speed up getting building permits and to gain other favors. This will force Walmart to incur a loss to ongoing investigations by itself and government agencies. The expansion will continue, however at a slower pace. (LO: 3, Learning Outcome: To describe the static and dynamic impact of trade agreements on trade and investment flows, AACSB: Reflective Thinking)
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