Selling Abroad: Location, Control and Branding

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Selling Abroad Location, Control and Branding
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Location, Control, and Branding

• Location where to produce?
• Control who should be in charge?
• Branding which brand?

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Produce at home (export)
Produce abroad
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Where to produce the Acer case (1)

• Initially manufacture in Taiwan and export to
  Asia, Europe and the US
• This takes advantage of the lower Taiwanese labor
  costs and of scale economies in components

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Where to produce the Acer case (2)

• But four problems with this solution
• High inventory costs
• Too far from the consumer difficult to make
  quick changes
• Potential logistical disruptions
• Trade barriers
• Solution Fast food system

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Factors that determine home or host market
production

• Relative production costs (unit labor costs)
• Trade barriers
• Transportation and inventory costs
• Need for host market presence
• Made in product images
• Investment barriers and political risk
• Size of host and home market

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Average hourly manufacturing wage

• USA US 16.14
• China US 0.61

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Output Matters, TooProductivity, wages and unit
labor costs, relative to the U.S., total
manufacturing, 1990
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Factors that determine home or host market
production

• Relative production costs (unit labor costs)
• 2. Trade barriers
• 3. Transportation and inventory costs
• 4. Need for host market presence
• Made in product images
• Investment barriers and political risk
• Size of host and home market

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Non-tariff barriers

• Quotas
• Anti-dumping
• arbitrary calculation of domestic prices
• Health, safety, environmental standards

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Control do it yourself or contract?

• Agents/distributors vs. sales subsidiaries
• Licensing/franchising vs. investment

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Location and governance
Where to produce? (location)
Who is to produce? (governance)
Produce at home (export)
Integrate into foreign production subsidiaries
Produce abroad
Sale of advantages to foreign firms through
licence, franchise
Source Hennart, 1991
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How to organize Chinese exports to the USA

• US firms control distribution and know the market
• Chinese firms have cheaper costs but may not know
  how to adapt product to US conditions
• Challenge how to manufacture goods and services
  in China that sell profitably in the US?

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Coordination Manufacturing and Distribution of
Chinese-made Products

Scenario China United States brand
in US
  1. Export with Independent
Chinese Independent Chinese Independent
US manufacturers US distributors Distributors
  2. Chinese foreign Independent
Chinese Affiliate of Chinese US or Chinese Direct
investment manufacturer manufacturer   3.
US foreign direct Affiliate of US US
distributor US Investment distributor   4.
OEM/ODM Independent Chinese Independent
US Manufacturers US distributors      
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Branding has two functions

• Bonding
• Symbolic Attributes

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Premiums paid for branded desktop PCs over clone
vendors
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Req uirements for successful branding

• Consistent quality
• Good service network
• Distinctive product
• Good market intelligence
• Good brand image

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1. Export to independent US agents/distributors
reselling under Chinese brands

• Pro Scale economies
• Con potential contracting difficulties

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Contracting with independent distributors

• Conflicts of interest
• Transaction-specific investments
• Physical
• Intellectual
• Marketing feedback
• Performance inseparability

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Performance inseparability

• Consumer cannot separate performance of
  manufacturer from that of distributor
• quality can be affected by both parties (ice
  cream)

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2. Chinese manufacturers integrate into US
distribution

• Pro Potential greater control of marketing
• Con 1. High management costs, especially if
  culturally distant country 2. Potential
  sacrifice of scope economies

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3. US distributors integrate into Chinese
manufacture

• Pro greater control of manufacturing
• Con High management costs, especially if
  culturally distant country

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4. OEM/ODM contracts

• OEM Original Equipment Manufacture
• ODM Original Design and Manufacture
• Contracts under which a good is bought from an
  independent manufacturer and resold under the
  brand of the buyer

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OEM/ODM contracts

• Distributors
• -provide designs (and hence marketing info)
• -provide technical advice
• -control marketing and are fully responsible for
  quality

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OEM/ODM

• Can potentially solve conflicts of interest
  between manufacturers and distributors
• Relieves manufacturers from the need to manage
  distribution
• Teaches manufacturers market and technical
  knowledge

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Determinants of the choice OEM vs. Integration
OEM
Manufacturer/ distributor Integrates Into
distribution/ manufacturing
Distribution contract
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OEM vs. Own Brand?

• Own brand gives higher margin and higher
  differentiation
• Establishing brands is slow, costly, risky, and
  difficult to manage
• Doing both OEM and Own brand is difficult

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Acer Aspire in US

• Original multimedia PC
• Positioned between IBM and Packard Bell
• Sold through retail channels
• Unable to obtain brand markup
• Cost advantage matched by rivals through OEM

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Samsung

• Branded exports started in early 1980s
• Now ranked 20th brand worldwide (from 64th in
  2000)
• Wants to be the Mercedes of Home Electronics

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The Top 100 Brands
Source Business Week
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How Samsung did it

• Communication
• Quality
• Innovation
• Design and consumer orientation

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Companies with the most US patent grants in 2006
Five-yearaverage
0
Note Data are for utility patents only (patents
for inventions) Source U.S. Patent and Trademark
Office
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Industrial Design Excellence Awards (Japan, South
Korea, China and Taiwan), 2000- 2006
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Strategies for brand building

• Establish own brand
• Access local brands
• Through acquisitions
• Through joint ventures

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• Fifty years ago your brand name was probably as
  unknown as ours is today. Today I decide the
  first stage for the next fifty years of my
  company. In fifty years I can promise you that
  our name will be just as famous as your companys
  is today.
• Reason given in 1955 by the chairman of Tokyo
  Tsuhin Kogyo to the CEO of an american firm why
  he would not supply 100,000 transistor radios to
  that firm under OEM