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International Business: Cases
Case 1: Whirlpool
Whirlpool’s Dramatic Turnaround through Internationalization Whirlpool exemplifies how internationalization can rejuvenate declining sales and optimize cost structures. Background Headquartered in Benton Harbor, Michigan, Whirlpool Corporation makes washers, dryers, refrigerators, dishwashers, freezers, and microwave ovens in 13 countries and sells them in 170 others, under brands names such as Whirlpool, Maytag, Magic Chef, Jenn Air, Amana, KitchenAid, Kenmore, Brastemp, and Bauknecht. In 2006, Whirlpool acquired competitor Maytag (horizontal integration) and its brands (Amana, Jenn Air, Magic Chef, and Maytag). Whirlpool generated over $19 billion in 2006 annual sales: 60 percent from North America, 25 percent from Europe, 15 percent from Latin America, and 2 percent from Asia. Operate with 60 manufacturing and technology centers worldwide and 80,000 employees. International Expansion Domestically: (1) The U.S. appliance market matured in the 1990s, and Whirlpool faced low profit margins, intense competition, and more demanding buyers, pressuring management to consider international markets. Internationally: (1) Trade barriers fell, consumer affluence grew, and capitalism flourished. (2) A “global” approach would yield economies of scale in manufacturing, assembly, appliance technology and distribution. (3) Whirlpool sought cost reductions in R&D, manufacturing, and services by locating plants in lower cost locations such as China, Mexico and Poland. Strategy Global expansion Whirlpool: Acquired the appliance giant Philips in Europe Bought 65 percent of Italian cooling compressor manufacturer Aspera Acquired control of Kelvinator of India Purchased Poland's second largest appliance maker Formed a joint venture in China to produce air conditioners. Established a corporate headquarters and product development/technology center in Shanghai Opened regional offices in Hong Kong, New Delhi, and Singapore Acquired Vitromatic, a former joint venture partner in Mexico Developed low cost versions of popular models to target customers in low income emerging markets such as Latin America, China, and India Created subsidiaries to sell and service appliances in Bulgaria, Hungary, Romania, Russia, Slovakia, and the Czech Republic Innovation 1999 Whirlpool launched a differentiation campaign to distinguish it from the other “sea of white” appliances. A knowledge management intranet site yielded high potential, innovative ideas from the global workforce. Since 2003 revenue has quadrupled annually. Local Preferences Cross regional R&D teams collaborate to adapt innovations to local demands.

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Whirlpool struggles to remain a world class player in a key industry, and continually faces new challenges. For example, Haier, China’s largest appliance maker, has captured 20% of the window air conditioning and 50% of the small refrigerator markets. The opportunities of emerging markets must be balanced with the threats of global rivals (from China and elsewhere) competing in their home market. 1. What is the nature of Whirlpool’s international business environment? What types of risk does the firm face? Environment: Complex and risky All FOUR types of risks in international business: Cross cultural risk Whirlpool manufacturers in 13 countries and sells in 170 others. Differences in language, lifestyles, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally valued mindset or behavior. Cultural blunders hinder the effectiveness of foreign managers. Language critical dimension of culture a window to people’s values Language differences impede effective communication. Cultural differences may lead to suboptimal business strategies. Country risk (also known as political risk) Differences in host country political, legal and economic regimes may adversely impact firm profitability. Also, laws, regulations and indigenous factors e.g. property rights, intellectual property protection, product liability, taxation policies, inflation, national debt, and unbalanced international trade, may encumber firm operations and performance. Government intervention: restricts market access; imposes bureaucratic procedures hindering business transactions; and limits the amount of earned income that firms may repatriate from foreign operations. Economic freedom differs among nations Hong Kong, Singapore and Ireland are known as having the highest levels of economic freedom, see: (http://www.heritage.org). Currency or financial risk Risk of adverse exchange rate fluctuations, inflation and other harmful economic conditions create uncertainty of returns. When currencies fluctuate significantly, the value of the firm’s assets, liabilities and/or operating income may be substantially reduced Commercial risk With Whirlpool’s global expansion, the following acquisition/ joint venture/ innovation strategies would be subject to commercial risk: Poor formulation/implementation in terms of partnering selections, market entry timing, pricing, product features, and promotional themes result in commercial risk. Failures in international markets are far more costly than domestic business blunders. Acquisition of the appliance giant Philips in Europe Bought 65 percent of Italian cooling compressor manufacturer Aspera Acquired control of Kelvinator of India Purchased Poland's second largest appliance maker Formed a joint venture in China to produce air conditioners. Established a corporate headquarters and product development/technology center in Shanghai Opened regional offices in Hong Kong, New Delhi, and Singapore Acquired Vitromatic, a former joint venture partner in Mexico Developed low cost versions of popular models to target customers in low income emerging markets such as Latin America, China, and India

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Created subsidiaries to sell and service appliances in Bulgaria, Hungary, Romania, Russia, Slovakia, and the Czech Republic 2. How can Whirlpool benefit from going international? What types of advantages can the firm obtain? What advantages acquired abroad can help management to improve Whirlpool’s performance in its home market? Whirlpool has reduced its costs of R&D, manufacturing, and service by locating plants and other operations in lower cost locations such as China, Mexico, and Poland. Management integrated the activities of regional subsidiaries so that Whirlpool’s most advanced expertise in appliance technology, production, and distribution could be shared with the firm’s divisions worldwide. Whirlpool is a leading exemplar of how internationalization revives declining sales and optimizes cost structures. It has developed international value chains that minimize expenses, leading to higher profits. 3. What actions has Whirlpool management taken to ensure that the firm succeeds in local markets throughout the world? To what extent is the appliance business local/regional rather than global? Whirlpool has thrived through sensitivity and commitment to consumers in diverse cultural and economic settings around the world. As part of its innovation strategy, cross regional teams collaborate to adapt Whirlpool offerings to local markets. Examples Spanish want refrigeration capacity for meats. British want well constructed units. French want refrigeration capacity for fruits & vegetables. Germans care about environmental features Danes spin dry clothing. Italians line dry clothing and care about child safety features. Indians (India) want a high level of cleanliness, whiteness=purity. The appliance industry can leverage global efficiencies in terms of appliance technology, production, and distribution. However, tailoring appliances to the local markets is also important, as exemplified above. Thus, this industry demands the integrated approach – global and local/regional. 4. How can Whirlpool effectively compete with new rivals originating from low cost countries, such as Haier from China? Should Whirlpool’s response differ in its home and its foreign markets? If so, how? Challenge Competing with Haier, China's largest kitchen appliance maker. Whirlpool may take the offensive and compete even more aggressively in their competitors’ domestic markets and/or implement a more defensive strategy in their own home market. Either way, innovation and market research will be key. Whirlpool’s strategy of innovation and differentiation underscores their flexibility and focus on distinguishing their offerings by emphasizing innovative, high value added products. For instance, Whirlpool developed microwave ovens that can grill steaks, bake pizzas, or slides out like a drawer for easy access. Cross regional R&D teams collaborate on innovations to adapt offerings to the demands of diverse international environments. For example, in India, Whirlpool developed a washing machine that delivers a higher level of cleanliness for consumers who believe whiteness of clothing expresses purity. Competition with low cost rivals dictates a strong emphasis on innovation, thus with low cost competitors, Whirlpool must seek out procurement and manufacturing sources with global economies. 5. The “Careers” section at Whirlpool’s website (www.whirlpool.com) advertises “opportunities you never knew existed…everywhere across the globe…..” Visit the site and report on the types of jobs available at Whirlpool and the locations of these positions worldwide. What positions interest you most? Would you like to work in Whirlpool’s international operations? Why or why not? For this question, there is no right or wrong answer(s). Whirlpool Career Areas: Brand Marketing

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Finance IT/IS Human Resources Supply Chain Legal Manufacturing Sales Engineering Procurement Design & User Experiences Whirlpool provides an opportunity to work for a Fortune 500 company with global operations. Internationally, you represent Whirlpool around the globe and impact the business of adding value to customers’ lives. Whirlpool Skills: Passionate, consumer centric professionals who focus on results for the customer and shareholders. Bachelors or higher degree from an accredited university in their discipline, with a user focused attitude and progressive view Potential leaders who believe in continuously striving for excellence through strategic design and user centered initiatives Leaders with integrity who drive change and deliver extraordinary results while always focusing on the customer. The Bottom Line at Whirlpool Whirlpool builds careers for individuals who want to be part of a progressive, growing company with a strong history and an eye firmly on the future. Utilize your skills in ways you never dreamed by joining the Whirlpool team. Check out open positions at www.whirlpool.com

Case 2: Diverse perspectives on globalization of markets Summary The interchange among the following three participants underscores the various issues pro and con embedded in globalization, and the commensurate diverse views of market globalization that any one of us might embrace. Players: Activist an anti international business advocate Business Executive with extensive international dealings Trade Official represents the federal government Activist Globalization: Ignores human rights and employs substandard working conditions low wages and exploited workers. Results in domestic job losses. Detrimentally affects on the natural environment, with increased international trade, the more irreparable the harm, e.g. pollution, ecological imbalances and deterioration of the ozone. Interferes with the sovereignty of national governments. Impedes with government policies, e.g. when a firm like General Motors is a nation’s biggest company, as it is in Canada; it is more difficult for governments to manage policies regarding taxes, monetary policy, social issues, and exchange rates. Imposes Western cultural standards on the rest of the world, e.g. McDonald’s everywhere. This effect is especially profound in the Middle East, where Islamic activists oppose MNEs due to the imposition

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of alien values in secular terms. They see the U.S. as a dominating power that uses globalization to its own advantage, harming the economic, cultural, and environmental interests of the rest of the world. Limits the benefits of technologies to those who can afford to access it. Widens the gap between rich and poor, i.e. weakening poor countries. Hampers infant industries in developing economies. Business Executive Participants in the global economy: Provide better paying jobs, have more profits, pay higher taxes, and stimulate purchases from local suppliers. Create new jobs, enhance local living standards, and challenge firms to stay competitive in a challenging global marketplace. Pay higher wages and provide better benefits than non exporting firms. Need access to foreign markets in order to recoup their return on investment, especially firms heavily invested in R&D, e.g. those in the pharmaceutical industry. Increase living standards worldwide through international trade Argue that a good economy and a clean environment are not mutually exclusive. The more affluent people are, the more they will care about their environment and pass laws to protect it. Recognize the importance of being good global citizens Motorola has profited from its business in China, but it has also contributed to the development of educational systems in that country. Bill Gates is going to do more than any government to get people computers and get them hooked up on the Internet. He has created the largest fund to combat malaria. He and Warren Buffett are tackling Aids. GlaxoSmithKline is working with the World Health Organization to find a cure for Elephantiasis. Trade Official Free trade is strongly valued by the current administration, as are freedom and democracy: The President strongly supported NAFTA, and this already had a positive impact on the U.S. economy, increasing exports to Mexico, creating jobs for Americans, and leading to improved investment opportunities. Canada recently completed a free trade agreement with Chile. Economic ties lead to cultural ties and more peaceful relations. Advocates negotiating trade agreements that take environmental factors into account. Globalization is complex and the pros and cons are intertwined. Since the 1980s, globalization has increased, and during this period, global poverty has declined. It is true that income disparities have increased dramatically over the last 50 years while international trade has integrated the world economy. It is better to live in a world in which 20 percent of the people are affluent and 80 percent are poor, than a world in which nearly 100 percent of the people are poor, as was the case throughout most of human history. The world has experienced a generally rising tide. Countries benefit from trade, but governments are responsible for protecting citizens from the negative or unintended consequences that may result from trade. Suggested Solutions to Questions 1. Do you think globalization and MNE activity are creating problems for the world? What kinds of problems can you identify? Are there some unintended consequences of international business? As the Activist Argues that Globalization is Cultural Imperialism with severe consequences on nations, cultures, people and the environment. Globalization: Ignores human rights and employs substandard working conditions low wages and exploited workers.

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Results in domestic job losses. Detrimentally affects on the natural environment, with increased international trade, the more irreparable the harm, e.g. pollution, global warming, ecological imbalances, and habitat destruction. Interferes with the sovereignty of national governments. Impedes with government policies, e.g. when a firm like General Motors is a nation’s biggest company, as it is in Canada; it is more difficult for governments to manage policies regarding taxes, monetary policy, social issues, and exchange rates. Imposes Western cultural standards on the rest of the world, e.g. McDonald’s everywhere. This effect is especially profound in the Middle East, where Islamic activists oppose MNEs due to the imposition of alien values in secular terms. They see the U.S. as a dominating power that uses globalization to its own advantage, harming the economic, cultural, and environmental interests of the rest of the world. Limits the benefits of technologies to those who can afford to access it. Widens the gap between rich and poor, i.e. weakening poor countries. Hampers infant industries in developing economies. 2. Summarize the arguments in favor of globalization made by the business executive. What is the role of technology in supporting company performance in a globalizing business environment? Economic "globalization" refers to the increasing integration of economies around the world. It also refers to the movement of goods and services (international trade), people (labor), capital and knowledge (technology) across international borders. Pro globalization arguments: Participants in the global economy: Provide better paying jobs, have more profits, pay higher taxes, and stimulate purchases from local suppliers. Create new jobs, enhance local living standards, and challenge firms to stay competitive in a challenging global marketplace. Pay higher wages and provide better benefits than non exporting firms. Need access to foreign markets in order to recoup their return on investment, especially firms heavily invested in R&D, e.g. those in the pharmaceutical industry. Increase living standards worldwide through international trade. Argue that a good economy and a clean environment are not mutually exclusive. The more affluent people are, the more they will care about their environment and pass laws to protect it. Recognize the importance of being good global citizens Motorola has profited from its business in China, but it has also contributed to the development of educational systems in that country. Bill Gates is going to do more than any government to get people computers and get them hooked up on the Internet. He has created the largest fund to combat malaria. He and Warren Buffett are tackling Aids. SmithKline Beecham is working with the World Health Organization to find a cure for Elephantiasis. Technology enables globalization: Technological advances in communications, information, manufacturing, and transportation have served as a remarkable facilitator of cross border trade and investment. The twin trends of globalization and technology transform national economies and promote outsourcing/offshoring. Information technology allows for more efficient adaptation to international markets as well as producing smaller lot sizes to target niche markets. Among the industries most dependent on technological innovation are biotechnology, information technology, new materials, pharmaceuticals, robotics, medical equipment and devices, lasers and fiber optics, and various electronics based industries. IT alters industry structure, changes the rules of competition, and creates new ways to outperform rivals, thus forming the basis for competitive advantage. Smaller firms can leverage IT to design and produce customized products that can be targeted to narrow, cross national niches.

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The impact of IT on our daily lives has been profound cell phones, Google, Yahoo, etc. IT supports strategic decisions such as the selection of qualified foreign business partners based on sound information and intelligence. 3. What are the roles of state and federal governments in dealing with globalization? Do you believe that government has a responsibility to protect its citizens from the potential negative effects of foreign MNEs conducting business in their countries? What kinds of government actions would you recommend? To minimize globalization’s harm and reap its benefits, governments should strive for an open and liberalized economic regime: Freedom to enter and compete in markets Protection of persons and intellectual property Rule of law Voluntary exchange imposed by markets rather than through the political process Regulation of credit, labor and business Transparency of the economic actors including businesses and regulatory agencies is fundamentally critical, e.g. Sarbanes Oxley Act of 2002 Advanced economies can play a role in reducing poverty by: Making their markets more accessible to low income countries; Facilitating the flows of direct investment, other private capital, and technology into low income countries; and Providing debt relief to heavily indebted poor countries. The unintended consequences of globalization place greater responsibility on governments to ensure that the fruits of economic progress are shared equally, and all citizens have access to improved welfare, living standards, and higher value adding, higher paying jobs. 4. What is the role of education in: addressing some of the problems raised in the previous discussion; creating societies in which people can deal effectively with public policy issues; creating citizens who can compete effectively in the global marketplace? Education has a responsibility to cultivate individuals who will become productive members of societies where diverse views such as those expressed by the Activist, the Business Executive and the Trade Official represented in this case are understood and respected. The role of education is to be objective, to present all relevant perspectives and to endow individuals with a skill set that will enable them to analyze, synthesize and draw conclusions based on facts. This means that a diverse and broad educational foundation is paramount for strong, global leaders. Part of this education is an understanding of global firm imperatives: 1. Configure the value chain globally. 2. Collaborate with foreign partners. 3. Coordinate operations on a global scale. 4. Target global markets. 5. Standardize products, services, and brands 6. Build global capabilities and a global organization.

Case 3: DHL International: An Ambitious Competitor in Global Logistics Services Summary [Identifying key issues] In 1969, Adrian Dalsey, Larry Hillbolm, and Robert Lynn founded DHL as a door to door express service between San Francisco and Honolulu, no one could have imagined the business evolving into a cross border express delivery group linking 120,000 destinations in more than 220 countries and territories.

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With the German parent company, Deutsche Post World Net, DHL offers express services, international air and ocean freight, contract logistics, and value added services. While DHL is the market leader for courier express delivery in Europe and Asia, the brand struggled to develop a reputation for quality service in the United States. Global Supply Chain and Logistics Industry Four trends are affecting the industry globalization, deregulation, digitization, and outsourcing. DHL’s Internationalization 1971 DHL entered the international express arena with services to the Philippines. 1972 DHL initiated services to Japan, Hong Kong, Singapore, and Australia. 1980 DHL entered China through an agency agreement with Sinotrans that was later upgraded to a 50/50 joint venture in 1986, making it the first international joint venture express company in China. 1973 DHL expanded into Europe with later entry in the Middle East and Africa. 1980s DHL was the first company to offer international air express services to Eastern European countries. 1985 1995 DHL established hub operations in Brussels, Cincinnati, and Manila. Strategically positioned facilities were located in Athens, Bombay, Hong Kong, Kuala Lumpur, Moscow, Osaka, Sydney, and Bahrain. DHL formed alliances with Japan Airlines, Lufthansa, and trading company Nissho Iwai. 2002 the German based company Deutsche Post acquired 100 percent ownership of DHL for $2.7 billion (Deutsche Post AG, formerly owned and operated by the German government, became a publicly traded company in 2000). Deutsche Post provides national and international services in four corporate divisions (mail, express, logistics, and financial services) under three brand names Deutsche Post, DHL, and Postbank. Since 2002, Deutsche Post has focused on integrating its express delivery and logistics units, which included Euro Express and Danzas, under the DHL umbrella. DHL maintains five main brands: DHL Exel Supply Chain, DHL Express, DHL Freight, DHL Global Forwarding, and DHL Global Mail. Global Positioning DHL has a 35 percent share of the International Express segment in the Asia Pacific region, and is the market leader in Japan and China. 2005 acquisition of 81 percent of the Indian express company Blue Dart strengthens DHL’s ability to offer customers domestic and international express services in the key Asian markets of China and India. DHL is the global leader in airfreight ahead of Nippon Express. DHL is able to offer airfreight in regions not served by competitors through its internal freight carrier and air fleet. It is also the leading provider of ocean freight and contract logistics. Client companies that have recently awarded contracts to DHL include Standard Chartered Bank, Deutsche Telekom, Philips, PepsiCo, Ford, BMW, Sun Microsystems, Unisys, and Electrolux. The Importance of the U.S. Market for DHL An important strategic market for DHL North American express traffic accounts for nearly half the worldwide total with highly attractive margins, reaching US $46.9 billion in 2004. More than one third of all global Fortune500 companies are headquartered in the United States where decisions on logistics and transport orders are increasingly made. The courier service market in the U.S. is highly competitive and consolidated with the top five companies in the market accounting for about 47 percent of the total market value. The largest sector is ground courier service, accounting for 61 percent of sales, worth about US $30 billion with the U.S. Postal Service as the largest provider. With the acquisition of Exel, DHL is the market leader of logistics in the United States. Challenges in the U.S. Market DHL has performed well in two NAFTA markets: Canada, DHL purchased a national business to complement international activities and were able to reach break even within less than two years. In Mexico, DHL is number one in the overall express and parcel market, with a strong market position.

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In the U.S., DHL’s goal is to be a strong number three in the market after UPS and FedEx, by focusing on the small and medium sized U.S. businesses that are increasingly involved in cross border trade. 2003 $1.1 billion acquisition of Airborne Express, the nation's No. 3 express service, is a strategic move in that direction. Threat rising fuel prices have shifted the industry toward ground transport. DHL's limited ground network has hurt its ability to attract domestic customers. North American infrastructure investments aimed at increasing ground delivery capacity by 60 percent and costing $1.2 billion resulted in losses of $630 million in 2004 and $380 million in 2005. DHL operations challenges: Start up difficulties in opening a central air hub in Wilmington, Ohio, that led to delivery delays and lost customers. 2005 the company was responsible for losing a computer tape with personal information of 2 million ABN AMRO residential mortgage customers. ABN later announced plans to use a “secure courier system” by FedEx in which drivers stay with the computer tape the entire time. DHL regulatory challenges from FedEx and UPS, both of which have repeatedly contested Deutsche Post's operation in the United States by petitioning the U.S. Department of Transportation to cancel DHL’s registration as a foreign owned freight forwarder. UPS argued that Deutsche Post would use its monopoly profits to engage in predatory pricing in the United States. FedEx and UPS also called for a formal enforcement investigation of DHL Airways’ citizenship alleging that foreign nationals, including Germany’s postal system Deutsche Post, would control DHL Airways. Under the U.S. law, citizens of the United States must own at least 75 percent of the voting stock of a U.S. airline, and U.S. citizens must manage the operations. After years of motions and hearings, regulators denied the petitions and ruled in favor of DHL. The new marketing strategy (yellow and red logo) contributed to a one percent rise in market share in the U.S., about $600 million in revenue.

Suggested Solutions to Questions 1. DHL is integrating international express and logistic services. What value added services does DHL provide? How do the services tie in to an organization’s value chain activities? DHL, as any logistics organization, makes globalization possible for the MNE, and especially the SME and born globals by enabling the international firm to outsource value chain activities that are not core competencies. DHL is a transportation specialist that arranges for physical distribution and storage of products on behalf of focal firms, also controlling information between the point of origin and the point of consumption. DHL provides a cost effective means for delivering cargo virtually anywhere in the world, as well as providing distributor functions such as warehousing, inventory management, order tracking, and overall supply chain management services. Thus, instead of the focal firm performing these value chain activities internally, DHL implements them more efficiently Can you anticipate changes to the supply chain that would further alter the express and logistic industry? Global demand appears headed towards more niche markets with consumer demanding specialized products/services. As such, the value chain and supply chain will both need to adapt by offering services that cater to these specialized niches, yet at a cost that still reflects their global efficiencies. Also, SMEs comprise the majority of internationally active firms. They tend to emphasize exporting and leverage the help of intermediaries and facilitators to succeed in international business. This trend will only increase. 2. Who are the target clients for a company like DHL? What factors would influence the customer to choose an express courier and logistics provider?

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DHL targets MNEs and more specifically, the small and medium sized U.S. businesses that are increasingly involved in cross border trade. The factors that may drive firms to outsource to a logistics provider include: A] Cost more efficient to outsource certain parts of a firm’s value chain, especially for smaller companies. B] Core competencies firms are not superior on all primary and support activities. This is one of the main reasons that firms outsource. C] Convenience cargo can be delivered virtually anywhere in the world. D] Limited resources to compensate for their limited financial and human resources, SMEs leverage the services of intermediaries and facilitators to succeed abroad. E] Distributor functions most firms are not vertically integrated, thus they hire an external supplier to be their distributor and perform warehousing, inventory management, order tracking, and overall supply chain management services. Let another firm own the ships, trucks, airplanes, and other transportation equipment used to transport goods around the world. 3. Given the importance of the U.S. market to the global express industry, what would you recommend to DHL for changing its position in the United States? Do you feel that DHL’s current strategies will be successful? Most people don’t know that DHL was initiated in the U.S. by Adrian Dalsey, Larry Hillbolm, and Robert Lynn as a door to door express service between San Francisco and Honolulu. A marketing strategy that would underscore these origins and perhaps use the music from “Back in the USA”, as background, might refresh DHL’s image and position them in a more positive light. 4. It appears that DHL needs to focus on improved customer satisfaction through better service quality and a more customer friendly workforce. In this increasingly competitive industry, personalized service and investment in a trained sales force seems to be critical in attracting clients. Would customers in the United States be willing to risk critical shipping activities to a fledgling operation? DHL is far from fledgling! DHL originated in the U.S. many are not aware of this fact. Americans like to bet on the underdog! Will patience run out for the parent company Deutsche Post? A subjective response is called for here, so any justifiable answer is acceptable. When Deutsche Post acquired 100 percent ownership of DHL for $2.7 billion in 2002, top strategic leaders must have employed due diligence prior to the acquisition, and decided that the potential synergies, increased market share, and access to certain growth markets would be profitable. As this is a strategic decision, which means long term, perhaps the few years since 2002 are simply not enough to ‘lose patience’ and divest DHL.

Case 4: Hyundai: the struggle for international success Summary South Korea's number one carmaker, Hyundai Motor Company (HMC) produces about a dozen models of cars and minivans, as well as trucks, buses, and other commercial vehicles. The Global Automobile Industry The automotive industry has been suffering from excess production capacity (production capacity at 80 million cars globally, with global demand at only 60 million) coupled with many competitors battling for market share, carmakers such as Toyota, Nissan, Honda, Hyundai, General Motors, Ford, DaimlerChrysler, Renault, and Volkswagen operate on thin margins. Industry Characteristics: Capital intensive with numerous mergers and acquisitions in recent years Ford and Land Rover, Jaguar and Volvo, Ford and Jaguar and DaimlerBenz with Chrysler (Daimler divested Chrysler). South Korea and the Auto Industry Demand in South Korea is too low to sustain indigenous automakers like HMC and Kia, thus exporting is a necessity to attain the economies of scale needed to remain competitive in a tough industry.

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South Korea enjoys various national competitive advantages in the provision of cars: abundance of production factors in cost effective labor, knowledge workers, high technology, and capital. The South Korean government devised a partnership system of close government/business ties, including directed credit, import restrictions, and sponsorship of specific industries. In part due to these efforts, Korea is home to a substantial industrial cluster for the production of cars and car parts. Gyeonggi Province is rapidly emerging as the center of Korea's auto parts industry. HMC’s Challenges The South Korean economy endured a recession in the late 1990s as a result of the Asian financial crisis. The economy comprises numerous family owned conglomerates, or chaebol. The combined sales of the nation’s five major chaebol Hyundai, Samsung, Daewoo, LG, and SK – account for roughly 40 percent of South Korea’s GDP and total exports. Kia Motors, South Korea’s third largest maker went bankrupt and Daewoo was sold off to General Motors. In 1998, HMC took control of Kia, becoming South Korea’s biggest carmaker and sustained three quarters of its domestic vehicle market while surpassing Japan’s Mitsubishi and Suzuki in world ranking.

Early Internationalization Efforts HMC was founded in 1967 by Chung Ju Yung, a visionary entrepreneur from a peasant background. Mr. Chung passed on his never give up values to his son, Chung Mong Koo, who took over as Chairman in 1998. First International Venture Unsuccessful 1983 HMC started its Canadian operation, but proved unprofitable and after four years was shut down. HMC began exporting to the U.S. market with the Excel at a $4,995 price tag. Ultimately Successful In response to complaints about product quality, HMC introduced a “10 year warranty” program. HMC built a factory in Turkey in 1997, in India in 2000, (with a second plant in 2007), and in China in 2002 main advantages of these locations is the availability of inexpensive, high quality labor and proximity to the Middle East and Western Europe. In 2006, HMC had more than ten production plants in Taiwan, Vietnam, Iran, Sudan, Venezuela, and in the U.S. (Alabama May 2005). To gain a competitive edge, HMC must not only seek out inexpensive labor, it must also source from locations that can supply low cost input goods (such as engines, tires, and car electronics). To control the manufacturing and marketing of its cars around the world, HMC has internalized much of its international operations. The cost effectiveness of suppliers is a matter of life and death in the global automotive industry. HMC has entered various collaborative ventures with partners to cooperate in R&D, manufacturing, design, and other value adding activities. Recent Events Currently, the firm generates about a third of its sales from North America and 10 percent from Europe. The firm’s profit margins are among the highest in the industry, worldwide. HMC invests heavily in various value chain activities and uses FDI to develop key operations around the world. HMC is developing environmentally friendly technologies that emphasize fuel efficiency. To capture 20 percent of the Chinese market, HMC has signed a $1.24 billion joint venture with Guangzhou Motor Group. Recent Challenges

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In 2004, South Korea indicted Hyundai CEO Kim Dong Jin on charges that he violated campaign finance laws and engaged in managerial negligence. In 2007, the government fined HMC $25 million for alleged unfair market practices. Chung Mong Koo received a three year jail term for embezzling the equivalent of more than $100 million in company funds. These events damaged HMC’s reputation with stakeholders suppliers, dealers, and customers. Unfavorable currency exchange rates caused net profit to fall by 35 percent. Sales in HMC’s domestic and foreign markets have flattened, and the firm is grappling with labor unions. Top management has been struggling to maintain HMC’s great promise. Suggested Solutions to Questions 1. In the intensely competitive global automotive industry, what factors provide comparative advantage to nations? Give some examples of natural advantages and acquired advantages that nations possess in this industry. Comparative Advantage: (Country advantage) The relative efficiency with which a country can produce a particular product or service, compared to other countries. Examples: Saudi Arabia oil Brazil coffee Australia wool United Kingdom financial services Automotive industry: source from locations that can supply low cost input goods (such as engines, tires, car electronics). Natural Advantages: fertile land, abundant minerals, and favorable climate were the initial areas of focus for comparative advantage. Examples: South Africa has extensive natural deposits of minerals, it produces and exports diamonds. Canada has much agricultural land and suitable climate, it produces and exports wheat. Automotive industry: source from countries with abundance of factor inputs, e.g. steel. Acquired Advantages: Over time, it has become clear that countries can also create or acquire new, comparative advantages, or such advantages emerge over time. Each nation’s bundle of advantages evolves over time. Examples Japan originally built an automotive industry at home, but had to seek lower cost production factors in Southeast Asian nations, Mexico, and Brazil. Germany had to relocate much of its mass manufacturing to Eastern Europe, to secure lower production costs. HMC built a factory in Turkey in 1997, in India in 2000, (with second plant in 2007), and in China in 2002 main advantages of these locations is the availability of inexpensive, high quality labor and proximity to the Middle East and Western Europe. Nations attempt to overcome their inefficiencies relative to other countries, via modernization, reduction of excess capacity, training, and upgrading human resource skills. 2. Thinking in terms of factor proportions theory, what production factors are most important in the automotive industry? Based on your answer, what countries would appear to possess the most advantages for manufacturing cars? Justify your answer.

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According to the Factor Proportions Theory, each country should export products that concentrate on its relatively abundant factors of production, and import goods that concentrate on its relatively scarce factors of production. Factors of Production: resources used in the production of goods and services, including natural resources, labor, capital, and technology. To gain a competitive edge, HMC must not only seek out inexpensive labor, it must also source from locations that can supply low cost input goods (such as engines, tires, and car electronics). 3. As a nation, what competitive advantages does South Korea offer to home grown automakers such as HMC? What are the specific national competitive advantages that have helped HMC succeed in the global car industry? Competitive advantage An individual company has a competitive advantage when it possesses one or more sources of distinctive competence relative to others, allowing it to perform better than its competitors. Instead of FDI as in Canada, HMC began exporting to the U.S. market with the Excel as an economical brand at a $4,995 price tag. The car was soon a big success with exports rising to 250,000 units per year. HMC introduced a “10 year warranty” program. HMC built a factory in Turkey in 1997, in India in 2000, (with second plant in 2007), and in China in 2002 main advantages of these locations is the availability of inexpensive, high quality labor and proximity to the Middle East and Western Europe. Automotive industry labor costs make up only 10 percent of total operational costs. To gain a competitive edge, therefore, HMC must not only seek out cheap labor, it must also source from locations that can supply low cost input goods (such as engines, tires, car electronics). HMC invests heavily in various value chain activities and uses FDI to develop key operations around the world. Management chooses foreign locations based on the advantages they can bring to the firm’s global business. R&D is targeted to developing safer, more convenient automobiles of superior quality. HMC is developing environmentally friendly technologies that emphasize fuel efficiency. HMC conducts market research to help with choosing designs, as well as interior and exterior styling of its cars. 4. Discuss HMC and its position in the global automotive industry in the context of Porter’s diamond model. That is, in regards to HMC’s international progress, what is the role of: firm strategy, structure, and rivalry; factor conditions; demand conditions; and related and supporting industries? a. Firm strategy, structure, and rivalry refer to the nature of domestic rivalry, and conditions in a nation that determine how companies are created, organized, and managed. The presence of strong competitors in a nation helps create and maintain national competitive advantage. HMC With many competitors battling for market share, carmakers such as Toyota, Nissan, Honda, Hyundai, General Motors, Ford, DaimlerChrysler, Renault, and Volkswagen operate on relatively thin margins. The automotive industry has been suffering from excess production capacity. Although there is a capacity to produce 80 million cars globally, total global demand runs at only about 60 million a year. Thus, car manufacturers typically employ only 75 80 percent of their production capacity. Industry Characteristics: Capital intensive with numerous mergers and acquisitions in recent years Ford and Land Rover, Jaguar and Volvo, Ford and Jaguar and DaimlerBenz with Chrysler (Daimler preparing to divest Chrysler). Their “10 year warranty” strategy was a major turning point for Hyundai, and they set about designing and building cars based on much higher quality standards. While still maintaining low prices, HMC was able to provide substantial extra value to consumers.

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Geographic diversification HMC built a factory in Turkey in 1997, in India in 2000, (with a second plant in 2007), and in China in 2002 main advantages of these locations is the availability of inexpensive, high quality labor and proximity to the Middle East and Western Europe. b. Factor conditions describe the nation’s position in factors of production, such as labor, natural resources, capital, technology and know how. Consistent with the Factor Proportions Theory, every nation has more of certain factor endowments and less of others a situation that determines the nature of national competitive advantage. By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. During its lifetime, Kia had managed to acquire a substantial base of highly knowledgeable workers, engineers, and design staff. Together, the two firms created synergies and economies of scale in R&D, engineering, purchasing, quality control, and marketing. HMC also invested in R&D centers in North America, Japan, and Europe. To gain a competitive edge, HMC must not only seek out cheap labor, it must also source from locations that can supply low cost input goods (such as engines, tires, car electronics). HMC invests heavily in various value chain activities and uses FDI to develop key operations around the world. Management chooses foreign locations based on the advantages they can bring to the firm’s global business. R&D is targeted to developing safer, more convenient automobiles of superior quality. HMC is developing environmentally friendly technologies that emphasize fuel efficiency. HMC conducts market research to help with choosing designs, as well as interior and exterior styling of its cars. c. Demand conditions refer to the nature of home market demand for specific products and services. The strength and sophistication of buyer demand facilitates the development of competitive advantages in particular industries. Domestic demand in South Korea is some two million vehicles; total productive capacity had reached five million. Exporting was a necessity. Late 1970s HMC began an aggressive effort to develop engineering capabilities and new designs. Instead of FDI (as in Canada), HMC began exporting to the U.S. market with the Excel as an economical brand with a $4,995 price tag. The car was soon a big success with exports rising to 250,000 units per year. HMC produces about a dozen models of cars and minivans, as well as trucks, buses, and other commercial vehicles. Popular exported models are the Accent, Elantra, and Sonata. d. Related and supporting industries refer to the presence of clusters of suppliers, competitors, and complementary firms that excel in particular industries. Operating within a mass of related and supporting industries provides advantages through information and knowledge synergies, economies of scale and scope, and access to appropriate or superior inputs. The economy comprises numerous family owned conglomerates, or chaebol. The combined sales of the nation’s five major chaebol Hyundai, Samsung, Daewoo, LG, and SK – account for roughly 40 percent of South Korea’s GDP and total exports. The cost effectiveness of suppliers is a life and death matter in the global automotive industry. HMC is cooperating with DaimlerChrysler to develop new technologies and improve supply chain management. Projects include a new four cylinder engine and a joint purchasing plan. 5. Discuss HMC and its position in the global automotive industry in terms of the eclectic paradigm. That is, for HMC, what is the role played by: ownership specific advantages; location specific advantages; and internalization advantages?

a. ownership specific advantages (firm specific advantages) R&D By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. During its lifetime, Kia had managed to acquire a substantial base of highly knowledgeable workers, engineers, and design staff. Together, the two firms created synergies and economies of scale in R&D,

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