Selling Abroad: Location, Control and Branding

Location, Control, and Branding 1.Location: where to produce? 2.Control: who should be in charge? 3.Branding: which brand?

Produce at home (export) Produce abroad Distribute through sales subsidiaries Integrate into production subsidiaries Contract with agents, distributors Sale of advantages through licence, franchise Where to produce?Who is to produce?

Where to produce: the Acer case (1) Initially manufacture in Taiwan and export to Asia, Europe and the US This takes advantage of the lower Taiwanese labor costs and of scale economies in components

Where to produce: the Acer case (2) But four problems with this solution: 1.High inventory costs 2.Too far from the consumer: difficult to make quick changes 3.Potential logistical disruptions 4.Trade barriers Solution: Fast food system

Factors that determine home or host market production 1.Relative production costs (unit labor costs) 2.Trade barriers 3.Transportation and inventory costs 4.Need for host market presence 5.“Made in” product images 6.Investment barriers and political risk 7.Size of host and home market

Average hourly manufacturing wage USA: US$ China: US$ 0.61

Output Matters, Too Productivity, wages and unit labor costs, relative to the U.S., total manufacturing, 1990

Factors that determine home or host market production Relative production costs (unit labor costs) 2. Trade barriers 3. Transportation and inventory costs 4. Need for host market presence 5.“Made in” product images 6.Investment barriers and political risk 7.Size of host and home market

Non-tariff barriers Quotas Anti-dumping arbitrary calculation of domestic prices Health, safety, environmental standards

Control: do it yourself or contract? Agents/distributors vs. sales subsidiaries Licensing/franchising vs. investment

Produce at home (export) Produce abroad Distribute through overseas sales subsidiaries Integrate into foreign production subsidiaries Contract with foreign agents and distributors Sale of advantages to foreign firms through licence, franchise Where to produce? (location) Who is to produce? (governance) Location and governance Source: Hennart, 1991

How to organize Chinese exports to the USA US firms control distribution and know the market Chinese firms have cheaper costs but may not know how to adapt product to US conditions Challenge: how to manufacture goods and services in China that sell profitably in the US?

============================================================== ScenarioChinaUnited Statesbrand in US ============================================================== 1. Export withIndependent ChineseIndependentChinese Independent USmanufacturersUS distributors Distributors 2. Chinese foreignIndependent ChineseAffiliate of ChineseUS or Chinese Direct investmentmanufacturermanufacturer 3. US foreign directAffiliate of USUS distributorUS Investmentdistributor 4. OEM/ODMIndependent ChineseIndependent US ManufacturersUS distributors Coordination Manufacturing and Distribution of Chinese-made Products

Branding has two functions: Bonding Symbolic Attributes

Premiums paid for branded desktop PCs over clone vendors IBM$364$339 Compaq Apple Digital19810 AST17617 Dell HP145260

Requirements for successful branding Consistent quality Good service network Distinctive product Good market intelligence Good brand image

1. Export to independent US agents/distributors reselling under Chinese brands Pro: Scale economies Con: potential contracting difficulties

Contracting with independent distributors Conflicts of interest Transaction-specific investments –Physical –Intellectual Marketing feedback Performance inseparability

Consumer cannot separate performance of manufacturer from that of distributor quality can be affected by both parties (ice cream)

2. Chinese manufacturers integrate into US distribution Pro: Potential greater control of marketing Con: 1. High management costs, especially if culturally distant country; 2. Potential sacrifice of scope economies

3. US distributors integrate into Chinese manufacture Pro: greater control of manufacturing Con: High management costs, especially if culturally distant country

4. OEM/ODM contracts OEM= Original Equipment Manufacture ODM= Original Design and Manufacture Contracts under which a good is bought from an independent manufacturer and resold under the brand of the buyer

OEM/ODM contracts Distributors: -provide designs (and hence marketing info) -provide technical advice -control marketing and are fully responsible for quality

OEM/ODM Can potentially solve conflicts of interest between manufacturers and distributors Relieves manufacturers from the need to manage distribution Teaches manufacturers market and technical knowledge

Determinants of the choice OEM vs. Integration Controlling distributor performance Controlling product quality easyhard easy hard OEM Manufacturer/ distributor Integrates Into distribution/ manufacturing Distribution contract

OEM vs. Own Brand? Own brand gives higher margin and higher differentiation Establishing brands is slow, costly, risky, and difficult to manage Doing both OEM and Own brand is difficult

Acer Aspire in US Original multimedia PC Positioned between IBM and Packard Bell Sold through retail channels Unable to obtain brand markup Cost advantage matched by rivals through OEM

Samsung Branded exports started in early 1980s Now ranked 20th brand worldwide (from 64th in 2000) Wants to be the “Mercedes of Home Electronics”

The Top 100 Brands Rank 2006/2000 Brand Value $Billions Percent Change 2006/2000 Country 11 Coca-cola 67, %U.S. 22 Microsoft 56, %U.S. 33 IBM 56, %U.S. 44 GE 48, %U.S. 56 Intel 32, %U.S. 65 Nokia 30, %Finland 714 Toyota 27, %Japan 87 Disney 27, %U.S. 99 McDonalds 27, %U.S Mercedes Benz 21, %Germany 2064 Samsung 16, %S. Korea Source: Business Week

How Samsung did it Communication Quality Innovation Design and consumer orientation

Companies with the most US patent grants in Five-year average Note: Data are for utility patents only (patents for inventions) Source: U.S. Patent and Trademark Office

Industrial Design Excellence Awards (Japan, South Korea, China and Taiwan),

Strategies for brand building Establish own brand Access local brands –Through acquisitions –Through joint ventures

“Fifty years ago your brand name was probably as unknown as ours is today. Today I decide the first stage for the next fifty years of my company. In fifty years I can promise you that our name will be just as famous as your company’s is today”. Reason given in 1955 by the chairman of Tokyo Tsuhin Kogyo to the CEO of an american firm why he would not supply 100,000 transistor radios to that firm under OEM