GREE Electric Appliances, Inc. of Zhuhai, established in 1991, is one of the largest specialized air conditioner enterprises in the world. From a small air conditioner factory with an annual production of less than 20,000 units, Gree has now become a famous multinational enterprise with four manufacturing bases in Zhuhai (China), Chongqing (China), Hefei (China) and Brazil.

Gree's success in founding its foreign facility in Brazil did not necessarily ensure success in foreign production. In its daily operation, Gree faced various problems such as cultural conflict and administration puzzles. 90% of the country is within the tropical zone. The staff from China had first to acclimatize to the weather. Brazil is a Portuguese-speaking country, but at that time, none of the Chinese staff could speak Portuguese, so inconvenience emerged everywhere.

Language barriers and communication difficulties, the difficulties in getting used to Brazilian food, the tropical climate, totally different way of thinking, strong homesickness, and the annoying mosquitoes. After less than a month, I had had enough. But we all soldiered on. (Mr Nie, a service manager who worked in Brazil for six years).

Thanks to the hard work of these Chinese employees, Gree Brazil was able to start its production quickly. Besides language differences, the Chinese managers also faced problems caused by cultural diversity. In Chinese enterprises, if it is necessary managers can arrange for workers to do different work as needed, but in Brazil, this is unacceptable. For example, in Brazilian enterprises, if a production line was shut down due to materials shortage; the workers would be given a break, and not asked to clean the workshop as Chinese enterprises sometimes do. If the workers were obliged to do so, they had the right to sue their company. Chinese managers were at first inflexible about this problem, but eventually accepted and respected this custom, which helped them obtain optimum production efficiency. Bureaucracy was a major problem: laws and regulations in Brazil are rather different from other countries. As a foreign-owned enterprise, the managers were not familiar with them and suffered as a result. Initially they could not grasp the idea that companies in Brazil must raise wages according to the annual inflation rate and their failure to do so was objected to by a labour union. Clearly, Gree Brazil has paid greater attention to such details. Brazil's tax framework is complicated; many enterprises are easily penalized for inadvertent tax evasion but Gree were able to resolve this problem. In 2006, the Manaus Inland Revenue Department audited Gree Brazil's past five years' account books and were more than happy with their findings.

In Gree Brazil's last five years of operation, the most intractable problem it experienced was the exchange rate crisis in 2002. The company imported various parts to satisfy production, and the products were then sold in the Brazilian market. In this transformation process, their imports were counted in dollars and sales were counted in reals. The 2002 elections led to uncertainty about the future of Brazilian policy, and many foreign companies withdrew their funds from the country. Brazil, a country once deeply dependent on foreign capital, was suddenly at the centre of a whirlpool of financial turmoil, which affected all of South America. At the beginning of the year, Reals experienced a significant depreciation, which was a severe financial shock to Gree Brazil. The exchange rate between dollars and reals, in early 2002, was about 1:2.1, but in June, it jumped to 1:3.2. The two figures mean that reals were devaluated by 35 per cent in only a few months. On the one hand, the continued devaluation heightened the production cost of Gree Brazil.

On the other hand, its selling prices, calculated in dollars, came down. Production lines were still running, and parts continued to be imported from China, so if the exchange rate kept declining, the product prices would even be below their transportation cost in a month. In this period, the exchange rate fluctuated more than 10 per cent, sometimes as much as 20 per cent each month. Constant devaluation was a fatal shock to every importer. Several famous air conditioner companies stopped their sales in the Brazilian market. Obviously, to continue selling meant a huge loss, but to cut and run meant giving up the achievements gained. Stick it out or give up? In order to make an accurate decision, the managers calculated the gains and the exchange rate carefully. Finally, they came to the conclusion that the exchange rate 1:4 would be the turning point - below this they would stop trading, above it, they would continue. The election ended on 28th October, and the exchange rate fell to the warning line: 1:4. Faced with this situation, Gree headquarters decided to give Gree Brazil another US$ 30 million loss to keep expanding. Three months later, as international investors came to terms with the election result, currency exchange rates began to rise steadily. Gree Brazil used this opportunity to utilize its market share.

The distribution channel is a crucial factor to the success of foreign production. In 2002, Gree Brazil faced a crisis in this area due to unacceptable requests made by Gree Brazil's exclusive agents, who insisted on increasing the market selling price and reducing the manufacturer's price at the same time. Being a young company, Gree Brazil depended deeply on its agents, had little negotiation power, and had to agree with the agents unreasonable request. However, a few days later, the agent came back and again requested price concessions that would have a damaging effect on Gree Brazil's profits. To resolve the issue as quickly as possible, Gree decided to hire this agent. However, in the negotiation process Gree found that their trademark in the Brazilian market had been registered by the agent company. Ultimately, they had to offer a higher price to buy back the trademark and acquire the agent company. With this acquisition, Gree quickly set up its own sales channels and rapidly continued to develop them. Besides challenges from the social and cultural environment, Gree also faced many challenges in the Brazilian market. Brazil was a power-poor country, so the concept of energy-saving is difficult. In the Chinese market, an air conditioner's energy consumption was measured by five levels; the entry threshold was grade 5. In the Brazilian market, the standard level was higher; its entry threshold level is 2.8, which is equal to grade 4 in the Chinese market. In these circumstances, Gree Brazil enhanced its advantages on R&D to meet the demand, improving its product's energy consumption by 1 or 2 grades voluntarily. These efforts helped Gree Brazil achieve the best energy-saving products of the air conditioner industry for five consecutive years.

QUESTION Businesses managers who are thinking of expanding abroad have many choices to go international. Explain and compare the various modes and strategies of international entry and expansion, discuss the attributes of each strategy and provide recommendations in relation to the case study