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)
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Toyota’s Activities in the US
from 1957 till Today
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Toyota’s Activities in the US in Numbers
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Toyota’s Foreign Direct Investment in the US
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Toyota’s Locations in the US
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Toyota’s US-Production
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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
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In June 2006, outside Japan Toyota has a total of 52 overseas
manufacturing companies in 27 countries / regions. Toyota markets
vehicles in more than 170 countries / regions.
Source: Toyota.com
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Supplier country features –
Production and procurement
Choose supplier countries for competitive advantage
• Worker wages and productivity
• Technology
Why did Toyota choose to
produce in the US in
• Finance capital
comparison to Japan or
• Factor supplies
Mexico?
• Supplier industry
• Political, legal, regulatory climate
• Operating costs/risks
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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
supply-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
Television (Sony)
Flat panel design
(Samsung)
Sony-Samsung JV: S-LCD
Tang-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
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
• 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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International modes of entry
Options
Sourcing
Serving
Spot
(Suppliers)
Buy from others
Sell to others
Contract
(Suppliers)
Repeated purchase
contract
Distribution contract
Licenses
Technical licenses to
producers
License brand or
copyright to distributor
Alliance, Joint Venture
(Partners)
Supply-side partner
Demand-side
partner/distributor
Growth
(Vertical integration)
Establish operations
Sell through own
network
M&A
(Vertical integration)
Merge with supplier
Merge with distributor.
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MIX and MATCH
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
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
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
• 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
• 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
• 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
• 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
and 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
• 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
The global
market for
petroleum
Choosing supplier
and partner
countries
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Petroleum
starts as
a local
phenomenon
Gusher in Spindletop, Texas, 1902. Photo by Trost,
courtesy of the Texas Energy Museum, Beaumont, Texas
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Petroleum becomes a global market
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Largest oil companies by production:
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
• 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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Recoverable Crude Oil Futures (in billions of barrels)
0.1
Eckert VI Projection
0.1 to 1
1 to 10
10 to 20
20 to 100
> 100
U. S. Geological Survey, C. Masters & R. M. Turner 1994
World of Petroleum 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
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Extraction costs
• 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/nonrenewable/offshore.html
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World oil reserves
25
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Cost of 15
extraction
$/per barrel 10
5
0
CRUDE OIL
DEEP OIL
HEAVY OIL
Type of oil supply
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Oil has political dimensions that can increase costs
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Source: American Petroleum Institute Prices adjusted for inflation (2006 = 100).
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Source: American Petroleum Institute. Prices adjusted for inflation (2006 = 100).
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OPEC
• 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
• 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
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