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Supplier Country and Partner Country Features. © Professor Daniel F. Spulber. Japan’s domestic production and exports of cars– The turning point. VERs (early 80s -1995), High Yen (70s to 90s). Toyota’s Activities in the US from 1957 till Today. Toyota’s Activities in the US in Numbers.

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Supplier country and partner country features l.jpg

Supplier Country and Partner Country Features

© Professor Daniel F. Spulber


Japan s domestic production and exports of cars the turning point l.jpg
Japan’s domestic production and exports of cars– The turning point

VERs (early 80s -1995), High Yen (70s to 90s)







Toyota l.jpg
Toyota

  • 1980 11 production facilities in 9 countries

  • 1990 20 production in 14 countries

  • 2003 42 production facilities in 21 countries

  • Production facilities in Asia, Africa, China, North America, and South America, and plans for Russia

  • Plans to double overseas production to 6 million vehicles

    WSJ, 11/2/04, p. A3



Supplier country features production and procurement l.jpg
Supplier country features – Production and procurement

Choose supplier countries for competitive advantage

  • Worker wages and productivity

  • Technology

  • Finance capital

  • Factor supplies

  • Supplier industry

  • Political, legal, regulatory climate

  • Operating costs/risks

Why did Toyota choose to produce in the US in comparison to Japan or Mexico?


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Supplier country features – Production and procurement

Choose supplier countries for competitive advantage

  • Get close to customers

  • Can produce and procure in or near customer countries to improve distribution


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Partner country features – Demand-side and supply-side complements

Choose partners for competitive advantage

  • Complementary products

    Video game player and video games

    Andy Grove: “Complementors”

  • Complementary technology

  • Complementary capabilities


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Partner countries – Demand-side and complementssupply-side complements

Choose partner countries for competitive advantage

  • Proximity to customer markets

  • Partners provide knowledge of customers

  • Partners provide access to human capital

  • Political, legal, regulatory climate important for types of agreements

  • Contracts, JVs, formal and informal alliances


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Complementary technologies complements

Television (Sony)

Flat panel design (Samsung)

Sony-Samsung JV: S-LCDTang-Jeong, Korea

Seventh-generation technology plant: Capacity 90,000 panels/month

Eighth-generation LCD plant projected capacity

50,000 panels a month (2.2 x 2.5m) 2007

Cost: $1.9 bn Each firm will invest half.


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Partner countries complements

Joint venture:

Tata Consultancy Services (TCS) – Microsoft

  • TCS is India's largest IT outsourcing firm (majority partner)

  • Microsoft – US

  • JV to be based in Beijing,China

  • To provide IT outsourcing services and solutions to U.S., Europe, and the Asia Pacific region, and China.

  • Three Chinese firms are partners: Beijing Zhongguancun Software Park Development Co., Uniware Co., and Tianjin Huayuan Software Park Construction and Development Co.

  • The Chinese firms operate national software development parks in China.


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International modes of entry complements

  • Modes of entry are alternatives ways to produce and purchase products in supplier countries

  • Modes of entry are also ways to sell and distribute in a target customer country

  • Ownership of facilities in multiple countries makes the business a multinational corporation (MNC)

  • International businesses tend to be vertically integrated but this is likely to change



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MIX and MATCH complements

Modes of entry can differ:

  • Across supplier and partner countries

  • Across customer countries

  • Between production and distribution sides

    Example: GAP owns stores but outsources production


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International modes of entry and strategy complements

Advantages of vertical integration:

  • Greater internal coordination across international operations

  • Avoiding market transaction costs

  • Internal technology transfer

  • Avoid double marginalization


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International modes of entry and strategy complements

Disadvantages of vertical integration:

  • Operating costs/risks in supplier country

  • Less flexibility, greater organizational costs

  • Less market responsiveness

  • Lose benefits of focus on core competencies and outsourcing


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Political risk complements

  • Nationalization of assets by host country (oil companies in Saudi Arabia)

  • Imposition of restrictions on repatriation of profits after assets have been sunk

  • Renegotiation of contract terms by government of host country

  • Changes in employment requirements, regulations, taxes, tariffs, non-tariff barriers after start of project (also public corruption)

  • Subsidization of domestic producers after start of project


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Reducing political risk complements

  • Forecast potential changes in the policies of the host country – include domestic politics of host country and international relations

  • Understand objectives of host government – tax revenues, local control of investment, political control, employment, attracting investment, attracting technology

  • Understand public policy limits on market power, employment practices, environmental activities

  • Understand public policy differences toward international business operating abroad versus domestic business


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Contract risk: Suppliers and partners complements

  • Renegotiation of contract terms by supplier or partner in the host country

  • Renegotiation of contracts by foreign suppliers and partners often protected by government policy, legal system, or absence of business reputation effects

  • Local supplier or partner does not honor contract (low-quality production) or defaults on payments

  • Supplier or partner acts after investments have been sunk – hold-up problem


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Reducing Contract Risk complements

  • Long-term relationships with repeated exchange increase incentives for local supplier or partner to perform

  • Being part of a business network creates performance incentives for local supplier or partner

  • Use of trusted intermediaries in forming and maintaining business relationship

  • Evaluate legal and regulatory climate in host country


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Trade-off between political complementsand contract risks

  • Entry without local supplier or partner avoids some contract risks by going it alone – but increases political risk

  • Entry without local supplier or partner allows greater vertical integration and control

  • Sharing business with local supplier or partner reduces capital at risk and gains allies but increases contract risk

  • Sharing business with local supplier or partner reduces control and loses some benefits of vertical integration


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Overview and Take-Away Points complements

  • Manager should carefully consider features of supplier countries and partner countries in production and procurement decisions

  • Adjust mode of entry depending on features of supplier countries and partner countries

  • Mode of entry is critical for global competitive advantage


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Case study complements

The global market for petroleum

Choosing supplier and partner countries


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Petroleum starts as complements

a local phenomenon

Gusher in Spindletop, Texas, 1902. Photo by Trost,

courtesy of the Texas Energy Museum, Beaumont, Texas



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Largest oil companies by production: complements

Exxon Mobil (USA)

British Petroleum Amoco (UK)

Royal Dutch Shell (UK/Neth)

Chevron Texaco (USA)

Yukos (Russia)

Total Fina Elf (France)

Lukoil (Russia)

ConocoPhillips (USA)

Surgutneftegas (Russia)

ENI (Italy)


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International oil markets complements

  • Total proved reserves

    1.025 trillion bbl (1 January 2002)

  • Total production

    75.34 million bbl/day (2001 est.)

    Note: 1,025,000/75 = 13,666 days = 37 years

  • Oil and gas together supply 60% of world energy needs (API, 2004)

  • US imports over 56% of its petroleum consumption


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World of Petroleum complements by C.D. Masters, D.H. Root, and R.M. Turner, World map of petroleum basins showing estimated quantities of conventional crude oil future resources in six different categories. Future quantities include identified reserves plus undiscovered resources.


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World oil reserves complements


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Extraction costs complements

  • In 1897 the first offshore oil well was drilled at the end of a wharf, 300 feet out into the ocean in Summerland , CA .

  • Using floating platforms, wells have been drilled in 10,000 deep water

  • Increasing depth as prices of oil rise

    http://www.eia.doe.gov/kids/energyfacts/sources/non-renewable/offshore.html


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World oil reserves complements





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OPEC inflation (2006 = 100).

  • Eleven countries: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela

  • Supplies about 40 per cent of the world's oil output

  • Has more than three-quarters of the world's total proven crude oil reserves.


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What the future holds inflation (2006 = 100).

  • Sustained higher crude prices eventually

  • Greater aggregate demand due to economic growth

  • More discoveries and more new reserves as crude prices increase

  • Long-term usage of petroleum

  • Greater efficiency due to higher prices

  • Many new energy alternatives and technologies coming on line