ABC Chemical Company Goes Global (Case #33, Notes)
Overview
The case of ABC Chemical Company's attempt to enter the Asian powder coatings (dry paint) market via operations in China highlights some serious marketing and management issues. The managerial strategy component of the case is highlighted by ABC Chemical's difficulty in assimilating to business practices in China that are not in line with its moral code of conduct. The marketing issues involved include global sourcing of raw materials, logistics/distribution and pricing. All issues are discussed in a business-to-business context since ABC's end product is sold to other businesses rather than consumers.
Case Review
The case presented shows the dilemma faced by an executive of ABC Chemical named William who was in charge of recommending an entry strategy for China. The company had no previous operations or experience with the Chinese market and as such wanted to partner with a company indigenous to China in order to utilize that company's know-how of business operations and customs. However, William was slowly coming to the conclusion that he could not find a suitable partner. All of the Chinese companies he had reviewed regularly practiced accounting techniques that violated ABC Chemical Company's Code of Conduct. The most common violation was under reporting of revenues in order to lower tax burdens. The Code of Conduct was held sacred and the moral premises on which it was based were considered to be one of the foremost reasons why the company has prospered throughout its history.
ABC Chemical Company is a US based chemical company. It manufactures and distributes specialty chemicals to various industries for use in manufacturing finished products. ABC Chemical Company's powder coating division has decided upon the need to expand into Asia to maintain its position as one of the global market leaders in this industry. Many customers of ABC Chemical's powder coating division are opening plants in Asia in an attempt to expand their markets and lower their production costs. As well, all of ABC Chemical Company's competitors are opening production facilities in Asia to meet their customer's needs, expand their markets and lower their costs.
Because of changes enacted by ABC Chemical's customers and competitors, ABC's hand was forced to act. As shown in the case, ABC felt it needed to have production operations in Asia, specifically mainland China, in order to stay competitive amongst its customers and with its competitors. The costs involved were just too compelling. The cost per pound to produce powder coatings in China was $0.50 per pound. The cost to produce the product in North America and ship to China was about $1.50 per pound. Based on these market prices, the company is faced with a choice: a) lose money by meeting their competitor's price or b) lose customers by not supplying the Asian market.
If the company chooses option A, they will lose money with no apparent benefit other than the temporary good will of its customers. If the company chooses option B, the firm loses all potential market share in China and runs the risk that China based manufacturers of powder coatings begin to export to the U.S. at prices that undercut ABC's North American prices. Neither option is financially feasible or prudent; therefore ABC Chemical has made the decision that it needs to be in China.
Intended Case Objectives
Market Entry Strategy
Factors on the ground abroad, usually stemming from differing cultural, political and legal environments often lead to roadblocks in establishing foreign operations. The options available for global entry are exporting, licensing, franchising, contract manufacturing, joint ventures, wholly owned subsidiaries and strategic alliances. Depending upon the nature of the differences in the cultural, political and legal environments, there is often a global entry strategy that is likely to be more effective than another.
The primary objective of the case was to demonstrate the different manner in which business is done in China compared to the United States. ABC may do well to remember the mantra that "globalization is really localization." ABC's reluctance to partner with a Chinese firm via a joint venture (or other means) may prove to be a long term negative as they will give up the expertise that a local partner can provide.
In the end, the firm chose to enter China as a wholly owned subsidiary. The rationale was primarily to stay in line with the company's Code of Conduct. However, other benefits such as complete control of the decision making and building a new factory with high engineering and design standards were considered important. The major drawback of not partnering with a domestic concern is that ABC loses local insight and that ABC may have to reinvent the wheel on some occasions as it sets up business in China.
Global Pricing
The issue of global pricing is what caused this entire case to come about. Without this force, ABC's need to enter China would not be so exigent. The principal drivers of global pricing are customers, competition, company goals and costs, channels and government policies. Most important among these factors in this case is customers. ABC's customers were moving to China and other Asian markets to take advantage of lower costs for all factors of production. The customers in Asia saw powder coatings as a commodity and thus are interested almost exclusively in getting a low price. Because ABC's customers and potential customers in Asia viewed ABC's product as a commodity, the only way ABC would be able to compete would be by developing operations in Asia that could be price competitive with other suppliers.
Furthermore, because manufacturing in China could be accomplished at such a discount to North American production prices, ABC faced a very serious risk that in the future it would be undercut on its North American turf by products produced in China and exported to the United States. Without having operations in China, ABC Chemical faced the risk of not being able to compete in the powder coatings market anywhere on the globe within a number of years.
Discussion Questions
1. Should ABC enter the Asian market?
2. Because of the Code of Conduct that ABC adheres to, there were no appropriate joint venture candidates with which to partner. Thus, the question that could be posed is...Why not operate in Taiwan or Korea and then export to China?
3. Is there anything that ABC can do to enter China with a Joint Venture partner and still operate within its Code of Conduct?