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Of the many internationalization theories posited, the Uppsala model (Cavusgil, 1980, Johanson & Vahlne, 1977) stands out as the most popular and will form the basis of this analysis of this analysis of the internationalization strategy adopted by the companies mentioned in this case study.
This model hypothesizes the internationalization process is a result of an epistemic understanding of the internationalization market. The internationalization process is a result of a gradual improvement in the understanding of the international and takes place in a linear sequential fashion. In essence, The Uppsala model construes internationalization intent as an outcome of the psychic distance between two locations i.e similarities between markets in terms of business culture and market understanding influence the decision to penetrate that market (Johanson & Vahlne, 1977).
The Uppsala model consists of the following stages:-
• Need Based – Sporadic Exports
• Regular Exports through Independent Agents
• Creation of subsidiaries abroad to commercialize their product
• Producing their products abroad
2) Companies Analyzed
The companies that I have selected to analyze are:-
a. Essel Propack ( Indian sub-continent & Tubing Industry )
b. Suzuki ( Japan & Automobiles)
The companies have been selected primarily due to convenience of data available online and the fact that both companies are held by parents which operate in major international markets.
3) Essel Propack
The case study reveals how a company (Essel Propack) based in an emerging market transforms into an innovative, high-tech industry and a leading player in the tubing industry. A large number of firms from developing markets are now tuning into international markets with the intent of turning into multinationals. These firms are giving substantial competition to existing multinational companies from developed countries.
Starting from a developing country, Essel Propack today has twenty-four manufacturing facilities in 13 countries, and has a compelling 32 per cent (estimated) global market share. Clearly then, it has emerged as the leading specialty packaging company in the world. The key to the success of EPLs internationalization strategy has been to effectively use acquisitions to grow and rapidly expand. Acquisitions make it easy to quickly own market knowledge effectively. Access to market knowledge is facilitated by owning a subsidiary abroad as the first penetration point.
4.I. Packaging industry and market dynamics
With increasing competition and a wide spectrum of indistinguishable products the quest to own a differentiator has moved to packaging in several consumer product industries. Packaging has become a crucial part of the overall product and differentiation strategy. Companies are paying more attention towards packaging in a bid to garner more recognition/recall share which ultimately leads to realising better revenues.
The global packaging industry is estimated to be US $580 billion with a 5 per cent growth per annum. Polymers are central ingredient for modern packaging because polymers offer a number of advantages such as cost effectiveness including logistic cost, lower weight, convenient handling, minimum wastage, more compatibility with designs and aesthetics. Polymers are preferred to many other packaging options like glass, jute, paper, metals and wood. Such is the demand that packaging now accounts for about 25 per cent of total global polymer demand. Tubes are a special form of packaging and find application in oral care, healthcare, cosmetics and toiletries, hair care, pharmaceutical, food and some industrial products.
There are mainly three categories of tubes used for packaging applications namely aluminum, laminate and plastic. Tube packaging began with aluminum tubes which are now being increasingly replaced by laminated and plastic tubes. 36 billion tubes per year are manufactured globally out of which 42% are aluminum tubes, 39% billion are laminated tubes and 19% are plastic tubes.
The Tube packaging industry has become extremely competitive in recent years and several changes have occurred in its structure:
• Capacities have been consolidated by customers by global sourcing options
• Increased Competition that has led to downward pressure on pricing
• Increased bargaining powers of the buyers
• Pressure to keep up with the rapid technological change
This has led to regional players being marginalized and having to either merge with larger players or operate only in specialized niche markets. A direct outcome of the consolidation is that the global laminate industry is now dominated by big three players EPL, Alcan and Betts.
4.II. Essel Propack Origins & Growth Story
EPL is a part of the Essel Group headed by Subhash Chandra which also owns Zee Entertainment Enterprises (the largest media and Entertainment Company in India). EPL was incorporated in 1982 and started production in 1984. The company was the first in India to enter the laminated tubes business. In 2004, it entered the plastic tubes industry. 2006 saw the company make its first acquisition and forayed turned to business of medical devices by evolving 2 medical devices- one based in USA and the other in Singapore. Again in 2006, Essel Propack (EP) penetrated the specialty packaging materials industry by acquiring a South India based company.
As on today, EPL is the world’s largest packaging company with manufacturing of laminated and seamless tubes having a wide variety of applications in cosmetics, personnel care, pharmaceutical, oral care and food and industrial sectors. The client base is enviable with several multinational clients as well as domestic ones. Not only that, it has successfully managed to create production facilities in countries like China, USA, UK, Russia, Germany, Mexico, Colombia, Philippines, Indonesia, Egypt, Poland and Singapore and of course India. As mentioned earlier with an estimated 32% global market share it is the undisputable leader in the laminated tubes market.
In 2001, Essel Packaging (Guangzhou) Ltd, the Chinese subsidiary of EPL, was awarded the ‘‘Most Reliable Enterprise of 2001”;
In 2006, Essel Propack was a mentioned in Forbes Asia’s Annual Best Under Billion Companies.
Clearly, then Essel Propack has emerged as the one of the world’s best in a relatively short span.
From the revenue charts over the years, it can be clearly seen that growth has been incremental but real tapering off in recent years due to the economic slowdown.
The segment revenue as on 31.12.2008 is as follows:-
4.III. The phases of growth
The first phase was began in 1984, when the company began catering to the packaging needs of the oral care industry by manufacturing tubes and converting aluminum tube users into laminated tubes. Slowly the company also began to serve other related industries such as cosmetics, toiletries, industrial products etc. The second phase started in 1992 with setting up its first overseas venture in Egypt. The third phase saw EPL penetrate the plastic tubes industry with the acquisition of Arista Tubes, UK. The fourth phase marked the entry into medical devices in 2006 by acquiring Tacpro Inc., USA and Avalon Medical Devices, Singapore. It also entered into specialty packaging for personnel care and food industries with the acquisition of Packaging India Pvt Ltd, a leading specialty packaging material company in south India.
The company has largely followed Acquisition combined with setting up subsidiaries as a primary medium of rapid expansion. Following are the some of the milestones years in the growth path:-
• In 1993, EPL sets up its first overseas venture in Egypt.
• In 1997, the company forms a wholly owned subsidiary in Guangzhou, China
• In 1999, EPL set up a joint venture in Dresden, Germany.
• In 2000, EPL acquires the tubing operations of the Propack group (4th largest laminated tube manufacturer in the world).
• In 2003, EPL sets up a manufacturing plant at Danville, USA, to serve Proctor & Gamble’s North American operations.
• In 2004, EPL forms Beri-Essel Closures Pvt Ltd a joint venture with a German company Bericap Holding GmbH to manufacture hi-tech closures.
• In August 2004, EPL acquires Arista Tubes, UK’S leading seamless plastic tubes manufacturer
• In 2005, EP’s plant in Russia began its commercial operations. Acquires another laminated tube manufacturing company named Telcon Packaging Limited in UK
• In 2006, the company enters the Medical Devices industry by acquiring Tacpro Inc., USA, and Avalon Medical Services, Singapore.
• In August 2006, the company makes its plans known to set up a plastic tubes plant in Poland.
• In August 2006, EP acquired Packaging India, based in the southern part of India.
4.IV. Internationalization Strategy of Essel Propack
The Internalization strategy of Essel Propack is clearly the outcome of an aggressive acquisition led plan backed by the finances of the Essel Group. This suggests that the Internationalization process can be substantially accelerated with readily available funding. Each market that EPL serves has a manufacturing plant installed that serves the host country as well as others that are its neighbors. In the Uppsala model Essel Propack is at the 4th Stage where it has the capacity of producing its products abroad.
This has been the outcome of its market knowledge gathered since 1984 or over a period of 25 odd years. The clearly shows that Essel Propack has grown by incremental knowledge about the markets it operates in.
Suzuki Motor Corporation is the 9th largest Japanese automobile manufacturer in the world by production volume headquartered in Hamamatsu, Japan.
It specializes in manufacturing compact automobiles, the full range of motorcycles, all-terrain vehicles, outboard marine engines, wheelchairs and a many other small internal combustion engines. It has 35 main production facilities in 23 countries and 133 distributors in 192 countries
4.I. Maruti Suzuki Origins & Growth Story
Maruti Suzuki India Limited ( Based in Gurgaon) is Suzuki’s biggest subsidiary and has a yearly production of 626,071 units ( as on 2006). Suzuki has a majority stake (54.2% ) in the Indian auto giant with the remaining owned by the various Indian public and financial institutions. It is a joint venture in the name of Maruti-Suzuki incorporated in 1981 and listed on the Bombay Stock Exchange and National Stock Exchange of India. The company had a 54% market share of the passenger car market in India in 2005-2006.
Suzuki in its desire to penetrate the Indian passenger car market initially became a minor partner with the Indian Government as hence the joint venture – Maruti Suzuki was born as a Government of India company, with Suzuki as a minor partner. The clear objective was to make a people’s car for the humongous middle class India.
Suzuki in the 1980s already had major share in the wheeler segment and was looking to penetrate the Indian 4 wheeler segment. The socio- political situation in India existing at that point in time made the Indian Government scout for a foreign collaborator for the then Prime Minister Indira Gandhi’s pet project to produce a “Peoples Car”. A group of Indian technocrats was given the role to source out a collaborator for this project. Toyota, Nissan and Honda – the market leaders were all considered but Suzuki won the bid due to the persistence of Osamu Suzuki the CEO & Chairman of Suzuki. The Joint venture was so successful that it prompted Suzuki to increase its equity participation from 25% to the current 54.2% thereby becoming the controlling parent company. There have been other subsidiaries in India:-
SUZUKI POWERTRAIN INDIA LIMITED: Produces engines for cars
SUZUKI MOTORCYCLE INDIA PRIVATE LIMITED: Produces Two Wheelers under brand name ‘Suzuki’.
The first car was introduced in to India in 1898. Though imports of completely assembled cars were a recurring phenomenon in India, the local assembly of cars was missing until 1928. As a part of its internationalization plan, General Motors already had an assembly plant in Bombay in 1928 to reassemble cars and trucks using completed knocked down (c.k.d) kits sourced directly from USA. Ford Motor Company established also took the lead and rapidly established assembly plants in Madras in 1930 and Calcutta in 1931. However, full sledged manufacture of cars really started in 1942 with the Birla Group establishing Hindustan Motors Limited in Calcutta and the Walchand Group establishing Premier Automobiles Limited in Bombay. In the wake of these developments, the Standard Motor Products Limited was established to manufacture automobiles in Madras in the year 1948.
However in 1947, as the British rule in India was heading towards an end, the Government of British India created a ‘Panel on Automobiles and Tractors’ to recommend a framework for establishing manufacturing facilities in the country. The outcome of the panels study was its recommendation to encourage transport industry in India for her economic development. Due to the economic situation prevalent at that time, the Government of India viewed passenger cars as ostentatious and saw no real need to assign priority level to this industry. Nonetheless, the government did see merit in encouraging private investment in domestic manufacturing of passenger cars. The natural fallout of this thinking resulted in the government passing an ordinance that if the foreign players didn’t have any significant plans in manufacturing cars locally then they should exit India within a span of three years. This effectively terminated the Indian relationship with General Motors and Ford Motors and they stopped their operations. A point to be noted here is that internationalization should always be integrated with the existing government thinking and policies, a hostile government will generally not allow foreign players to effectively run their operations, as we have seen in the case of General Motors and Ford Motors.
With the exit of General Motors and Ford Motors, the car industry in India had just two main players: Hindustan Motors manufacturing under the brand name “Ambassador” and Premier Automobiles manufacturing under the brand name “Fiat”. However, the cars produced remained the exclusive purchases of the rich and famous and most people couldn’t afford to buy them. The quality of these cars was poor by international standards which further erected barriers in purchases. This resulted in a poor offtake and low volume providing little motivation for the other entrepreneurs in the automobile industry for the next thirty years and this industry grew at a really slow pace during these years.
As mentioned earlier it was not until the sixties that the government felt a need to produce small passenger cars. Sanjay Gandhi, the son of the then Prime Minister of India, Indira Gandhi was entrusted with the responsibility of manufacturing small passenger cars and he started a company called Maruti Limited to do realize government ambitions. However by 1977, the company was liquidated prompting the Government of India by an Act of the Parliament to acquire Maruti Limited and rename it to Maruti Udyog Limited (MUL). MUL became a public sector company fully owned by the Government of India. The political interest in the success of the project was great and a lot rode of the success of the newly reconstituted MUL. An optimistic production target for MUL was set at manufacturing 100,000 small passenger economy cars in a period of five years which required it to have the best technical team. The management of MUL started looking for a foreign collaborator that had the potential to satisfy its needs of providing a low cost fuel-efficient car engine of below 1000cc. 11 large established automobile companies from UK, France, West Germany, Italy and Japan were considered and invited to be partners. Most foreign partners however seemed highly cautious with the proposed joint venture. It seemed that Mitsubishi Motors of Japan was to be the likely winner in the race to partner the Indian Government. Surprisingly however Suzuki Motors’ was chosen amongst several of its more illustrious peers because of its attractive offer and high speed of working. The agreement finalized on October 2, 1982 formed the basic bedrock for the introduction of Suzuki and its long term successful partnership with the Indian Government.
4.II. Internationalization Strategy
Osamu Suzuki’s vision was central in Suzuki Motors bid to enter India. His commitment to the cause made managers from MUL comfortable discussing issues with Osamu Suzuki. The real reason for MUL selecting Suzuki was because of the quickness of making decisions. Clearly, Suzuki was more committed to the cause compared to Mitsubishi Motors which was mired in the bureaucracy of its working. Osamu Suzuki was quick to realize that the current demand for 50,000 cars per year was due to a poor product and inefficient manufacturing standards of Hindustan Motors and Premier Automobile. The real demand assessed by his team was pegged at least 2, 00,000 a year. This assessment was despite of the fact that in Japan at this time, Suzuki Motors was producing lesser cars (Greater than 800cc) than the target outlined by the government of India. It clearly took a calculated risk despite knowledge that it didn’t have a demonstrated competency in producing cars above 800cc. According to the terms of the agreement equity participation was the chief form of involvement. Suzuki agreed on a lower equity participation because it felt that India was under-served and also because of its desire to invest in the country which had the world’s second largest population.
Equity participation with Government of India has always been the chief internationalization strategy followed by Suzuki insofar as it relates to India. In many countries, Automobile is a regulated industry and FDI norms do not permit a foreign company to directly setup manufacturing facilities unless partnered with a local company. Many other bidders, barring Suzuki of course declined the lucrative joint venture due to this policy of the Government of India. They wanted to setup a directly controlled subsidiary and refused any equity participation with the Indian government. However, Suzuki Motors Company agreed to 26% shareholding in MUL in 1982 relinquishing its right to directly control the operations of the company. It gradually increased its equity stake after about six years to 40% in 1989 and then to 50% in 1992. It currently holds 54.2% and directly controls MUL as on date. This has been only possible due to gradually increasing its relationship and understanding of the Indian market further reiterating the Uppsala model of psychic distance as a possible explanation of internationalization strategy.
Celarly, here the initial production facilities were owned by the government of india, Suzuki has managed through equity pariticipation have a controlling stake in which was primarily a Government Owned enteprise. No company in the automobile segment has influenced the Indian Passenger Car market as much as Suzuki has done. Again, this bears a striking resemblence to the amount of time taken to internationalize. Clearly, since its genesis in 1983 it has taken roughly 25 years for Suzuki to become a an established major player in the Indian Sub-Continent, the same amount that was taken by Essel Propack.
The Internationalisation process has been a matter of scrutiny since the early days of international business (Aharoni, 1966; Root, 1987; Berkema and Drogendijk, 2007). Internationalisation is clearly a topic which lies at the heart of the international business field. Many questions in international business research emerge as a result of the interplay between the firm and the different locations (Hutzschenreuter et al., 2007). There are two major threads to internationalisation namely, the stages approach ( emodied in the uppsala model) and the born global approach. Firms face obvious disadvantages in competing with local firms in foreign markets and therefore here , internationalisation is all about surmounting inherent disadvantages that foreignness brings with it (Hymer, 1960, 1968; Hutzschenreuter et al., 2007). We saw clearly that Essel Propack needed to compete with the local pakaging suppliers and its primary intent was to surmounting this very barrier. Hence, it opted to have an acquistion strategy where local manufacturers are acquired instead of directly setting up subsidiaries. As mentioned earlier, the Uppasala model (Johanson and Vahlne, 1977, 1990) suggests that companies internationalise in small, incremental steps and the internationalisation of the firm should be interpreted as a sequential learning curve. (Cyert and March, 1963; Barkema and Drogendijk, 2007; Hutzschenreuter et al., 2007). International expansion for many companies is limited due to the lack of knowledge about markets. Such knowledge can only be acquired through experience from operations abroad (Forsgen and Johanson, 1992). We saw in the case of Suzuki that partnering with the Government of India was the only option available if it had to penetrate the Indian Passenger Car market. In terms of the Uppsala model both India and Japan are also culturally close and have a lot in common. The success of the JV is a testament to this. The “foreign” perception and lack of information were the major reasons for organizations to follow traditional forms of internationalisation. However, future research can also focus on the “born global” framework where global firms go to international markets soon after their operations and that too at a fast pace(McKinsey, 1993; Rasmussen and Madsen, 2002).
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