CASE: I UNFAIR PROTECTION OR VALID DEFENSE?
Mexico Widens Anti-dumping Measure…Steel at the Core of US-Japan Trade Tensions…Competitors in Other Countries Are Destroying an American Success Story…It Must Be Stopped”, scream headlines around the world.
International trade theories argue that nations should open their doors to trade. Conventional free trade wisdom says that by trading with others, a country can offer its citizens greater volume and selection of goods at cheaper prices than it could in the absence of it. Nevertheless, truly free trade still does not exist because national governments intervene. Despite the efforts of the World Trade Organisation (WTO) and smaller group of nations, governments seem to be crying foul in the trade game now more than ever before.
We see efforts at protectionism in the rising trend in governments charging foreign producers for “dumping” their goods on world markets. Worldwide, the number of antidumping cases that were initiated stood at about 150 in 1995, 225 in 1996, 230 in 1997, and 300 in 1998.
There is no shortage of similar examples. The United States charges Brazil, Japan, and Russia with dumping their products in the US market as way out of tough economic times. The US steel industry wants the government to slap a 200 per cent tariff on certain types of steel. But car makers in the United States are not complaining, and General Motors even spoke out against the antidumping charge—as it is enjoying the benefits of low-cost steel for use in its auto production. Canadian steel makers followed the lead of the United Sates are pushing for antidumping actions against the four nations.
Emerging markets, too are jumping into the fray. Mexico recently expanded coverage of its Automatic Import Advice System. The system requires importers (from a select list of countries) to notify Mexican officials of the amount and price o a shipment ten days prior to its expected arrival in Mexico. The ten-day notice gives domestic producers advance warning of incoming low-priced products so they can complain of dumping before the products clear customs and enter the marketplace. India is also getting onboard by setting up a new government agency to handle antidumping cases. Even Argentina, China, Indonesia, South Africa, South Korea, and Thailand are using this recently-popularised tool of protectionism.
Why is dumping on the rise in the first place? The WTO has made major inroads on the use of tariffs, slashing them across almost every product category in recent years. But the WTO does not have the authority to punish companies, but only governments. Thus, the WTO cannot pass judgments against the individual companies that are dumping products in other markets. It can only pass rulings against the government of the country that impose an antidumping duty. But the WTO allows countries to retaliate against nations whose producers are suspected of dumping when it can be shown that: (1) the alleged offenders are significantly hurting domestic producers, and (2) the export price is lower than the cost of production or lower than the home-market price.
Supporters of antidumping tariffs claim that they prevent dumpers from undercutting the prices charged by producers in a target market and driving them out of business. Another claim in support of antidumping is that it is an excellent way of retaining some protection against potential dangers of totally free trade. Detractors of antidumping tariffs charge that once such tariffs are imposed they are rarely removed. They also claim that it costs companies and governments a great deal of time and money to file and argue their cases. It is also argued that the fear of being charged with dumping causes international competitors to keep their prices higher in a target market than would other wise be the case. This would allow domestic companies to charge higher prices and not lost marketshare—forcing consumers to pay more for their goods.
1. “You can’t tell consumers that the low price they are paying for a particular fax machine or automobile is somehow unfair. They’re not concerned with the profits of companies. To them, it’s just a great bargain and they want it to continue.” Do you agree with this statement? Do you think that people from different cultures would respond differently to this statement? Explain your answers.
2. As we’ve seen, the WTO cannot currently get involved in punishing individual companies for dumping—its actions can only be directed towards governments of countries. Do you think this is a wise policy? Why or why not? Why do you think the WTO was not given the authority to charge individual companies with dumping? Explain.
3. Identify a recent antidumping case that was brought before the WTO. Locate as many articles in the press as you can that discuss the case. Identify the nations, product(s), and potential punitive measures involved. Supposing you were part of the WTO’s Dispute Settlement Body, would you vote in favour of the measures taken by the retailing nation? Why or why not?
CASE: II WAITING IN NEW DELHI
Richard was a 30-year-old American, sent by his Chicago-based company to set up a buying office in India. The new office’s main mission was to source large quantities of consumer goods in India: cotton piecegoods, garments, accessories and shoes, as well as industrial products such as tent fabrics and cast iron components.
India’s Ministry of Foreign Trade (MFT) had invited Richard’s company to open this buying office because they knew it would promote exports, bring in badly-needed foreign exchange and provide manufacturing knowhow to Indian factories.
Richard’s was, in fact, the first international sourcing office to be located anywhere in South Asia. The MFT wanted it to succeed so that other Western and Japanese companies could be persuaded to establish similar procurement offices.
The expatriate manager decided to set up the office in the capital, New Delhi, because he knew he would have to frequently meet senior government officials. Since the Indian government closely regulated all trade and industry, Richard often found it necessary to help his suppliers obtain import licenses for the semi-manufactures and components required to produce the finished goods his company had ordered.
Richard found these government meetings frustrating. Even though he always phoned to make firm appointments, the bureaucrats usually kept him waiting for half an hour or more. Not only that, his meetings would be continuously interrupted by phone calls and unannounced visitors as well as by clerks bringing in stacks of letters and documents to be signed. Because of all the waiting and the constant interruptions, it regularly took him half a day or more to accomplish something that could have been done back home in 20 minutes.
Three months into this assignments, Richard began to think about requesting a transfer to a more congenial part of the world. ‘somewhere where things work’. He just could not understand why the Indian officials were being so rude. Why did they keep him waiting? Why didn’t the bureaucrats hold their incoming calls and sign those papers after the meeting, so as to avoid the constant interruptions?
After all, the government of India had actually invited his company to open this buying office. So didn’t he have the right to expect reasonably courteous treatment from the officials in the various ministries and agencies he had to deal with?
1. Why did Richard not able to jell with local conditions?
2. If you were Richard, what would you do?
CASE: III THE P&G FIASCO
The break-up of the joint venture between the American FMCG (Fast Moving Consumer Goods) giant, Procter and Gamble (P&G) and the leading Indian business group, Godrej in 1996 is a case that goes down in the history of corporate India as an event few would like to forget. It was a shortlived marriage. The year was 1992 and the two firms announced the formation of a strategic alliance that seemed to hold great promise for both companies. As part of the deal, the two companies set up a marketing joint venture, P&G- Godrej (PGG) in which P&G held a 51 per cent stake and Godrej the remaining 49 per cent. David Thomas, P&G’s country manager was appointed the CEO while Adi Godrej, the head of the Indian company became the chairman.
To begin with everything looked bright and promising for the alliance. Both the partners were well-known names in the consumer goods industry.
Modalities were worked out very well. P&G paid Godrej nearly Rs 50 crore to acquire its detergent brands—Trilo, Key, and Ezee. P&G, on its part, gave a commitment that it would utilize Godrej’s soap making capacity of 80,000 tpa. Godrej was allowed to complete its existing manufacturing contracts for two other MNCs, Johnson and Johnson and Reckitt and Coleman, but could not take up any new contracts. P&G, on its part, would not appoint any other supplier until Godrej’s soap making capacity had been fully utilised. Godrej transferred 400 of its salespeople to the joint venture. P&G acted quite fast in finalizing the alliance lest arch rival Hindustan Lever would move in, if it did not.
P&G gained access to the manufacturing facility of Godrej. It would have taken a couple of years to set up to implement a project on its own. Godrej also had expertise in vegetable oil technology for making soaps. Vegetable oils like palm oil and rice bran oil can only be used in India for making soaps as beef tallow is banned. Godrej also had network of retail outlets which were thrown open for P&G. Even though P&G was not a stranger to India, its Indian operations were essentially those of the erstwhile Richardson Hindustan, which was mainly known for the famous Vicks, a pharmaceutical product. The non-pharma distribution network of Godrej was of immense benefit to P&G. Godrej had excess manufacturing capacity, which proved to be a burden and the company was struggling to find ways of utilizing the excess facility. Godrej also hoped to access superior technology and managerial skills of P&G.
The alliance became operational in April 1993. Around this time, P&G increased its stake in its Indian subsidiary P&G (India) from 51 per cent to 65 per cent, while Godrej, having functioned for several years as a private limited company, went public. As soon as the alliance became operational, P&G engineers introduced new systems such as Good Manufacturing Practices and Materials Resource Planning in Godrej plants. The two companies seemed to show a considerable amount of sensitivity to the cultural differences between them. For about a year, it looked as though things were going fine. Thereafter, elements of distrust began to surface and the two firms found the differences in management styles too significant to be brushed aside. By December 1994, rumours were rife that P&G and Godrej did not see eye to eye on many key issues.
One reason why the relationship soured was that the performance did not match expectations. In 1992, Godrej had sold 29,000 tonnes of soap. This increased to 46,000 in 1994 but fell sharply to 38,000 tonnes in 1995. While sales did not rise as expected, costs were increasing. Due to the cost plus agreement, Godrej had little incentive to cut costs. Informed sources were of the opinion that Godrej was charging Rs 10,000 more per tonne than the expected processing costs.
To compound the problem, Godrej expressed its dissatisfaction on the ground that P&G did not promote brands like Trilo and Key. It was also unhappy with P&G’s methodical and analytical approach as opposed to its own intuitive method of launching brands at great speed. P&G, on its part, felt that there was little logic or coordination in Godrej’s brand building exercises. By mid-1994, differences became sharp between the partners, and a senior executive, HK Press, on deputation to the joint venture, was quietly eased out and sent back to the Godrej group company.
The year 1996, as stated earlier, saw the termination of the alliance. The two companies would have little to do with each other, except for Godrej continuing to make Camay for P&G for two more years and providing office space to P&G at its Vikhroli complex. PGG would be taken over by P&G, which would also retain the detergent brands, Trilo, Key, and Ezee. Most of PGG’s 550 people and the distribution network consisting of some 3000 stockists would stay with P&G. Godrej would absorb about 100 salespeople and get back its seven soap brands, which had been leased to PGG.
1. What according to you, are the factors that favoured the alliance between P&G and Godrej?
2. What went wrong with the joint venture? Why did it break up within four years of its formation?
3. What signal s does this joint venture fiasco send to other foreign investors?
CASE: IV CHINESE EVOLVING ACCOUNTING SYSTEM
Attracted by its rapid transformation from a socialist planned economy into a market economy, economic annual growth rate of around 12 per cent, and a population in excess of 1.2 billion, Western firms over the past 10 years favoured China as a site for foreign direct investment. Most see China as an emerging economic superpower, with an economy that will be as large as that of Japan by 2000 and that of the US before 2010, if current growth projections hold true.
The Chinese government sees foreign direct investment as a primary engine of China’s economic growth. To encourage such investment, the government has offered generous tax incentives to foreign firms that invest in China, either on their own or in a joint venture with a local enterprise. These tax incentives include a two-year exemption from corporate income tax following an investment, plus a further three years during which taxes are paid at only 50 per cent of the standard tax rate. Such incentives when coupled with the promise of China’s vast internal market have made the country a prime site for investment by Western firms. However, once established in China, many Western firms find themselves struggling to comply with the complex and often obtuse nature of China’s rapidly evolving accounting system.
Accounting in China has traditionally been rooted in information gathering and compliance reporting designed to measure the government’s production and tax goals. The Chinese system was based on the old Soviet system, which had little to do with profit or accounting systems created to report financial positions or the results of foreign operations.
Although the system is changing rapidly, many problems associated with the old system still remain.
One problem for investors is a severe shortage of accountants, financial managers, and auditors in China, especially those experienced with market economy transactions and international accounting practices. As of 1995, there were only 25,000 accountants in China, far short of the hundreds of thousands that will be needed if China continues on its path towards becoming a market economy. Chinese enterprises, including equity and cooperative joint ventures with foreign firms, must be audited by Chinese accounting firms, which are regulated by the state. Traditionally, many experienced auditors have audited only state-owned enterprises, working through the local province or city authorities and the state audit bureau to report to the government entity overseeing the audited firm. In response t the shortage of accountants schooled in the principles of private-sector accounting, several large international auditing firms have established joint ventures with emerging Chinese accounting and auditing firms to bridge the growing need for international accounting, tax, and securities expertise.
A further problem concerns the somewhat halting evolution of China’s emerging accounting standards. Current thinking is that China won’t simply adopt the international accounting standards specified by the IASC, nor will it use the generally accepted accounting principles of any particular country as its model. Rather, accounting standards in China are expected to evolve in a rather piecemeal fashion, with the Chinese adopting a few standards as they are studied and deemed appropriate for Chinese circumstances.
In the meantime, current Chinese accounting principles, present difficult problems for Western firms. For example, the former Chinese accounting system didn’t need to accrue unrealized losses. In an economy where shortages were the norm, of a state-owned company didn’t sell its inventory right away, it could store it and use it for some other purpose later. Similarly, accounting principles assumed the state always paid its debts—eventually. Thus, Chinese enterprises don’t generally provide for lower-of-cost or market inventory adjustments or the creation of allowance for bad debts, both of which are standard practices in the west.
1. What factors have shaped the accounting system currently in use in China?
2. What problems does the accounting system, currently in use in China, present to foreign investors in joint ventures with Chinese companies?
3. If the evolving Chinese system does not adhere to IASC standards, but instead to standards that the Chinese governments deem appropriate to China’s “special situation”, how might this affect foreign firms with operations in China?
CASE: V THE JUGGERNAUT ROLLS ON – BUT THE ROAD AHEAD IS HUMPY AND BUMPY
It al started with the takeover of Tetly in 2000.Then became Daewoo Commercial Vehicles (2004); Tyco Global (2004); Natsteel (2005); Teleglobe (2005); Brunner Mond (2006); Millienniums Steel (2006); Eight O’Clock (2006); Ritz Carlton (2006); Corus (2007); PT Bumi Resources with 30 per cent stake (2007); and General Chem Partners (2008). The latest in the acquisition spree is the takeover of Jaguar and Land Rover (March 2008). The stake involved in all these buyouts is a whopping Rs. 81,527 crore.
It is a moment of glory which any Indian should be proud of—particularly because of the timing of the Jaguar and Land Rover deal. Compared to the Corus deal, which carried a price tag of Rs. 53,850 crore, the buyout of the two brands, with Rs. 9223 crore, is miniscule. But what makes it breath taking? First, the deal has been struck when the world economy is dipping and companies everywhere are facing falling fortunes. Viewed against this background, Tata deal demonstrates how resilient and vibrant Indian companies are. Second, the brands acquired are no mean “also rans”. Jaguar and Land Rover are world’s top class brands with a long history. Land Rover was born in 1880s and Jaguar in 1930s. Third, the acquisition of the two brands marks a paradigm shift of the balance of power in financial and technological arenas. The power is shifting form West to East. Finally, from now onwards, Tata’s name (read India) will be seen and heard on the premier markets of Europe and Americas.
Sentiments apart, challenges before Tata’s are going to be hard nuts. Tata Motors, the flagship company of Tatas which deemed to have acquired Jaguar and Land Rover, has no experience in managing luxury brands. The Indian car maker is well-known for offering rugged cheap cars, buses, and trucks suiting to Indian buyers and Indian roads. Its costliest passenger vehicle, the Safari Dicor, is about Rs. 1 lakh cheaper than the least expensive Land Rover. Will Tata Motors be able to sustain the quality of the two brands?
The Indian market for luxury cars is growing but is still small. The cheapest luxury cars available in India, such as Honda Siel Cars India Ltd’s Accord, cost around Rs. 15.5 lakh. It is believed that some 5000 luxury cars are sold in India every year. True some Indians do own and use high-end foreign brands, such as BMW, Mercedes-Benz, Audi, and Lxus, but their numbers are still in thousands, a fraction of the 1.4 million cars sold each year in the country’s exploding automobile market. Nor the markets in Europe and America are promising because of the recession in their economies.
The not so profitable brands (Jaguar has been making losses) and commitments made to British labour unions in a slowing economy could compound problems for Tata Motors. Trade unions, representing the 16,000—strong Ford workforce in UK, have in a way paved the way for Tata takeover. It is these unions that, in principle, picked up Tatas as their “preferential choice” as the bidder. The Tatas have now assured job and better working conditions to the British workforce. Going by the domestic track record of Tatas, the British workers feel reassured about their future under the Indian management.
Ford has agreed to use its finance arm to help its dealers and Tatas sell their cars for another 12 months. It will also supply engines, transfer some intellectual property and offer engineering support, Inspite of this, Tata might be required t pump in more money to develop new and improved products as the EU gets tougher about controlling pollution, especially from cars made and driven in Europe.
Also, refinancing debt is likely to pose a big challenge to Tata Motors. The company may find it difficult to raise long-term debt in the current environment. While Tatas managed to get a bridge loan of $3 billion for a period of 12 months, it may have trouble raising debt to repay that loan as lendors have grown jittery over extending credit.
Thus, the road ahead of Tata Motors is humpy and bumpy.
But going by the clout enjoyed by Tata Motors, the challenges may not be insurmountable. Tata Motors is a $5.5 billion company and is the leader in commercial vehicles in each segment, and the second largest in the passenger vehicles market with winning products in the compact, midsize car and utility vehicle segments. The company is the world’s fifth largest medium and heavy commercial vehicle manufacturer.
The company’s 22,000 employees are guided by the vision to the “best in the manner in which we operate, best in the products we deliver and best in our value system and ethics.”
Established in 1945, Tata Motors’ presence indeed cuts across the length and breadth of India. Close to four million Tata vehicles ply on Indian roads, since the first vehicle rolled out in 1954. The company’s manufacturing base is spread across Jamshedpur, Pune and Lucknow, supported by a nation-wide dealership, sales, services and spare parts network comprising over 2,000 touch points.
The foundation of the company’s growth over the last 50 years is a deep understanding of economic stimuli and customer needs, and the ability to translate them into customer-desired offerings through leading edge R&D. With 1,400 engineers and scientists, the company’s Engineering Research Centre, established in 1956, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, in India, and in South Korea, Spain, and the UK.
With the announcement of the launch of one lakh rupee car Nano, Tata Motors has gained the attention of people around the world.
1. Do you think the challenges listed above are genuine? If yes, how do you think the Tatas will face them?
2. With the widest range of cars (from the cheapest to the costliest) under its belt, how do you think Tata Motors will manage and sustain?