What strategies have Japanese and American firms adopted to ensure access to the huge EU market? Essay

Accounting for close to 20 per cent of total global trade at nearly 2,000 million euros in 2002 the EU is one of the most competitive marketplaces in the world. (www.standards.org.au) The EU is the most advanced of all of Europe’s regional economic groupings. At the start of the year 2000, it had 15 member states. Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Switzerland and the United Kingdom and a population of nearly 376 million, which has now risen to almost 455 million.

The consolidation of these communities since the 1950’s reached a high point in 1993 with the completion of a single European market (SEM) between 12 member states. The SEM now provides for the freedom of movement of goods, services, capital and labour throughout the present membership of 15 EU member states and the wider European economic area. In January 1999 eleven of the EU-15 entered into the final stage of monetary union, adopting a single currency (Euro) and a unified monetary policy regime. (P29, Mercado et al, 2001) As a result of the SEM there was an assumption that Asian and US companies would tend to produce and manufacture locally in order to take advantage of SEM freedoms and to avoid paying import tariffs.

This can be seen to be true by the increase in inward investment since the start of the SEM. There were worries that the creation of the SEM would create a ‘Fortress Europe’, this along with wide spread reports that along with the new internal freedoms from competition across the EU, external trade policies, in the short term at least would be designed to protect the EU from external pressures in an effort to allow firms and industries alike to strengthen their position in the new Europe.

In the late 1980’s many foreign firms invested heavily in the EU as a means of evading trade restrictions that were inflicted against them. Japanese firms especially, opted to locate their production within the EU therefore evading the barriers altogether whilst other options were to form partnerships with EU firms thus acquiring a market presence and local involvement. An example of this is Japanese firms Sony and Matsushita Electric, by the early 1990’s Sony had established a number of committed manufacturing facilities throughout the EU whilst Matsushita Electric had set up a number of subsidiaries to manufacture and supply components as well as forming a number of joint ventures with EU competitors. These actions allowed Japanese firms to strengthen their positions inside the SEM before barriers were strengthened.

By the mid 1990’s the fears about ‘Fortress Europe’ had begun to disperse. Foreign multi-national enterprises (MNE’s) are adopting a variety of strategies to reserve a place in Europe. Some large MNE’s like Ford, Coca-cola and IBM are more European in terms of there geographical spread than many European companies are. The EU market cannot be treated like other global markets though; countries are quite culturally diverse, language, feelings of nationalism that all need to be considered by MNE’s, whilst also they need to assess the impact of these differences on customers and consumers in determining the proper balance between global, pan-European and national or regional marketing strategies as they consider the European community market integration process. (P294, Daniels & Radebaugh, 1998)

U.S and Japanese firms carried out a range of strategic options when entering the EU market, their main form of strategies carried out involved foreign direct investment (FDI) in the form of strategic alliances and joint ventures, for example in the food and drink sector where the market is vast and highly fragmented. US company, PepsiCo who had always pursued multiple routes to servicing European markets, through their Pizza Hut franchise whilst also maintaining their more conventional route of bottling plants and distribution through established retailing structures. In a strategic move PepsiCo joined forces with Unilever, a European rival to produce and distribute a new brand of Iced-Tea. This was a strange move for Unilever as it was in effect sharing access to marketing channels with a major international rival. Similar to this move was another merger between US company General Mills and Swiss conglomerate Nestle who created a 50:50 alliance to develop and produce a new ‘ready to eat’ breakfast market.

As well as these mergers with EU firms US firms also merged with each other thus in effect strengthening their weak individual positions in Europe, an example of this was PepsiCo and General Mills. Other mergers have also taken place within the highly fragmented waste disposal market whereby US Company Waste Management had established a merger with UK firm Wessex Water; this merger allowed the two firms to be better equipped to take on the French companies. (P60-1, Egan & McKiernan, 1993) Another strategy implied by Whirlpool where they ‘exported’ customer focus and competitiveness to the European market by acquiring Philips white goods business and the development of innovative design, this allowed them to establish themselves across all of Europe’s major markets, this strategy adopted by Whirlpool ensured the company had tripled in size allowing them to become the world’s largest major appliance manufacturer. (P53, Egan & McKiernan, 1993)

Many US MNE’s had secured their international business from European bases including Ford, IBM and Xerox to name a few. As a result of this many Japanese firms seen the benefits that US firms were gaining and rapidly started to establish bases within the EU in order to increase their global presence. An example of these were Toshiba who set out they were going to manufacture 60 per cent of their European laptop computers in Germany, another example was Nissan who a few years back revealed there new UK plant would become sole production source for Micras. (P63, Egan ; McKiernan, 1993)

Japanese firms used many different strategies to ensure their access in to the EU market; they merged with local businesses within Europe. Other strategies Japanese MNC would use would be making ‘friendly’ acquisitions by buying minority shares in European firms. An example was Honda who in 1990 purchased a 20 per cent share in Rover. Japanese firms tended to opt for these smaller investments rather than hostile takeovers which would draw sanctions from the EU, whilst also showing them in a bad light within Europe. US companies also followed these strategies. Both Japanese and U.S firms opted for these strategic alliances; these strategic alliances allow the firms to form networks with a variety of enterprises.

An example of a Japanese firm and a European firm forming a strategic alliance was between Nissan and Renault, by the end of the 1990’s Nissan had fallen on to hard times, they were in financial distress and had accumulated $16 million of debt, even though Renault were not one of the largest car producers, they were efficient. Renault transferred $5.4 billion of the Nissan debt in return for a 36.6 per cent stake in the Japanese firm. This alliance was seen by many as risky because of the huge investment by Renault, but by the end of 2001 Nissan was in the black. This alliance allowed Nissan to recover from their debt but also allowed them access into the EU market where with Renault they totalled sales of 2.4 million in the year 2001. (P463, White, 2004)

Fujitsu were another Japanese company who formed strategic alliances with European firms, in the late 1970’s they joined forces with Siemens of Germany in order to exchange information and supply computer systems whilst also in the early 1980’s they collaborated with International Computers Ltd (ICL) in Europe’s mainframe technology market, as well as this the two companies carried out joint research and development, these provided Fujitsu with the base from which to increase and grow within the European market.

Another strategy used by Japanese firms was mergers, for example with Fuji Xerox Co. Ltd and Rank Xerox Ltd of the UK, they formed a 50:50 partnership in 1989, a slight difference in this merger than other was the fact that the UK firm Rank Xerox Ltd was 51 per cent owned by U.S firm Xerox Corp. therefore the U.S and Japanese operations had main control over the U.K base, they ran the day to day aspect with the U.S and Japanese deciding budgets and capital expenditure. This merger in effect allowed both U.S and Japanese operations a foot in the European market. The overall benefits to these MNE’s is great, it allows them to reduce sourcing and distribution costs, avoid tariffs, quotas and other trade barriers faced by exporters. It also allows them to penetrate markets throughout the world from supply points in several different countries.

As the examples above have shown, Japanese and American firms have tended to use strategic alliances and joint ventures in there pursuit of success within the EU market. Some strategic alliances started out as simple contractual technology agreements for example the Honda/Rover alliance started in 1979 as a limited license agreement for Rover to assemble a Honda model badged as the ‘Triumph Acclaim’, as we have seen previously in 1990 the two companies exchanged 20 per cent minority shareholdings. (P248, John et al, 1997) Another reason for this alliance was Honda was looking for Rover to help it gain experience in the European market as this was the one ‘Triad’ market where it was poorly represented. Another factor was that it allowed Honda to gain an established distribution network relatively quickly and cheaply. (P320, Ellis & Williams, 1995)

These joint ventures were an opportunity for Japanese firms to enter the European market whilst also the alliances allowed firms to achieve competitive advantage in terms of technology and product development, cost reduction, or product differentiation and marketing. (P249, John et al, 1997) Also the alliances means the companies do not go into direct competition which can allow them to establish a solid base from which to direct operations. There are many reasons why the Japanese and American use these strategic alliances and joint ventures, for it allows them to acquire market knowledge and distribution channels within an unfamiliar market, for example a Japanese firm setting up for the first time in Europe, would not know best distribution channels, where the best workers are situated, they would be in unfamiliar territory but by setting up an alliance with an organisation already operating in Europe reduce the risks.

Other factors are by expanding using a joint venture allows them to share costs and risks whilst also by forming these alliances allows them access to certain markets where government legislation requires local participation. (P251, John et al, 1997) As F. Sato, President and Chief Executive Officer, Toshiba Corporation stated: ‘ Strategic alliances are attractive for a number of reasons, for example, the digital revolution and the development of multimedia can only reach fruition through the cross-fertilisation of technologies, bringing together partners from the media, communications and computing… Another consideration is cost. New technologies require enormous investments in research, plant and equipment. Alliances like ours with IBM and Siemens for development of 256-megabit DRAMs allow partners to maximise the use of their resources, realise cost of advantages and speed up development…Finally, the dynamic pace and vast extent of modern technology is just too much for any single company. Today, no company can avoid incorporating technologies from other companies in its products… (P323, Ellis ; Williams, 1995)

This has been completely true, many Japanese and American firms have formed strategic alliances within firms operating in the EU, firms like Ford, General Electric, PepsiCo in the U.S and many Japanese firms have selected this route to including Sony, Fujitsu and Toshiba. Another recent example of an American firm accessing the European market was in the case of Wal-Mart in 1999, with annual sales of $200bn they took over Asda. Asda remain under the same name but began to diversify the type of products they sold, not just meat and produce but now they sell televisions, DVD players, clothes and household appliances. (P372, Illustration 8.3, Johnson ; Scholes, 2002) This acquisition by Wal-Mart ensured price was continually driven down, a key strategy of Wal-Mart but also allows them a foothold in the UK supermarket industry for future benefits. Wal-Mart’s acquisition of Asda is once again an example of how U.S firms have entered into the European market by way of strategic alliances, either joint ventures or in the case above acquisitions.

As well as these forms of internationalization there have also been examples of more cautious approaches to gaining access to the European market through the likes of Coors, the large American brewer, that strategy towards market penetration has been to assume a marketing and distribution alliance with a UK regional brewer Scottish and Newcastle (S&N), this form of alliance allows Coors to drive their premium brands of lager into the large European market at a low cost and low risk route whilst also providing them with an established distribution network. (P69, Egan & McKiernan, 1993) These type of alliances are beneficial for American firms as the European market in brewing is very different to the American market, for example different attitudes towards beers, like in countries such as Germany, Belgium and Italy stronger lagers are more preferred, the likes of Stella Artois and Warsteiner are always preferred to than American brands such as Budweiser and Miller. By adopting these strategies firms take away the risk of launching products into different markets that are very risky and harmful to an organisation.

In conclusion American firms were the first to take advantage of the formation of the EU, by forming a series of strategic alliances with European firms, these firms including PepsiCo, Unilever and Ford formed mergers and alliances with European firms thus spreading and reducing costs, avoiding direct competition which could be damaging to the organisation, learning from their European allies which in the long run would prove valuable. The main aspects were it allowed firms to overcome legal restraints, diversify geographically but the main factor being it would minimize exposure in a potentially risky environment. (P574, Daniels & Radebaugh, 1998)

The success of US firms along with the notion that Europe may turn into ‘Fortress Europe’ Japanese firms began to move operations into Europe steadily with firms such as Toshiba, Sony and Nissan believing that targeting the third ‘Triad’ would ensure global success, Japanese firms again followed the path of forming alliances with smaller European firms allowing them to take advantage of distribution and marketing channels whilst also providing expertise in areas of manufacturing and production. Another factor that influenced Japanese investment in the EU was that rather than face external barriers, companies such as Sony and Hitachi believed that by locating production in Europe would bypass barriers altogether. This along with the notion they would avoid trade barriers whilst also building their global networks was seen to be an excellent strategy.

The success of these organisations ensured this process would be used by many others in the pursuit of globalisation and internalization and allows MNE’s from both Japan and the US to lead the way in technological innovation. Global MNE’s have proved able to transfer innovations, technologies and processes between markets with greater speed and efficiency. (P537, Mercado et al, 2001) Overall we have seen many strategies used by both Japanese and American firms to ensure access with main emphasis on forming strategic alliances with European firms in the form of joint ventures, mergers and acquisitions. These alliances have allowed Japanese and American firms to access the EU market whilst also enabling them to substantially grow and maximise profits. Penetration of these markets was seen to be imperative to a company’s position within the European but more importantly the global marketplace.

Bibliography

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Egan, C ; McKiernan, P (1993), Inside Fortress Europe, Strategies for the Single Market. Addison-Wesley

Ellis, J ; Williams, D (1995), International Business Strategy. Prentice Hall

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