A Case Study of Thailand's CP Group

ASIA PACIFIC JOURNAL OF MANAGEMENT, VOL. 15, 1633184 (1998)

The international expansion process of MNEs from developing countries: A case study of Thailand’s CP Group

PAVIDA PANANOND’ AND CARL P. ZEITHAML’

This paper reviews different streams of literature on Third World multinational enterprises (MNEs), highlighting the necessity to maintain a balance between exploiting existing resources and accumulating new competence. Using a case study research methodology, empirical evidence is presented on the international expansion process of the CP Group of Thailand. The paper attempts to explain the sequential growth and expansion of the CP Group into different technological and geographical areas. While existing resources feature prominently in determining the direction and the success of expansion, the accumulation of new expertise becomes even more significant in the long run. The paper also suggests a variety of theoretical and empirical issues which may be relevant in future inquiry on the internationalization process.

1. INTRODUCTION

The study of the multinational enterprise (MNE) has been a fundamental component of the international business literature. Although the existence of MNEs can be traced back to the operations of international trading companies in the 17th and 18th centuries, the academic discourse on MNEs has generally been drawn from examples of MNEs originat- ing in advanced developed economies of the U.S. or Europe during the 1960s and 1970s. Since then, the world has witnessed the growth of foreign direct investment from newer sources such as those developing countries in East and Southeast Asia. Little is known, however, about these MNEs and their internationalization process into the world economy. Much of the early research studied firms that had already achieved a significant level of foreign investments. Many questions on the development process which preceded this stage remained unanswered (Welch and Luostarinen 19SS; Melin 1992; Smith and Zeithaml 1993; Yeung 1994a,b). This paper attempts to address such a gap. It describes and analyzes the internationalization process of Thailand’s largest multinational, the Charoen Pokphand (CP) Group, through a historical approach. The primary purpose of the paper is to extend the literature on Third World multinationals to include the dynamic aspect of the internationalization

CCC 0217-4561/98iO20163-22 0 1998 BY JOHN WILEY & SONS (ASIA) LTD 164 P. PANANOND AND C. P. ZEITlIAML process. The paper starts by reviewing relevant literature on a Third World multinational and on the internationalization process of the firm. Then the historical development and the international expansion of the CP Group are discussed. The paper concludes that maintaining a balance between exploiting existing resources and accumulating new skills form the key to the survival and growth of the CP Group. Although results from a single case study of a Thai multinational should not be generalized as representative of all developing country multinationals, the CP case reveals interesting insights which can contribute to the literature on Third World MNEs. Furthermore, it presents a theoretical framework against which subsequent research may be compared.

2. LITERATURE REVIEW

THEORIES OF THIRD WORLD /CIULTlNATlONAL ENTERPRISES

Since the growth of foreign direct investment from developing countries started in the 1960s and gained momentum in the 197Os, there has been a corpus of theoretical and empirical literature on developing-country multinational enterprises. Although the amount of studies is relatively thin compared to studies on multinational enterprises from developed countries, the existing literature does represent a distinctive and growing stream of research which can be further enhanced. Research on MNEs from developing countries has grown out of core theories on multinational enterprise. The main argument is that developing country MNEs are different from their counterparts in developed countries in their characteristics and behavior. The main area of difference, which has been the focus of most literature on Third World MNEs, stems from the nature of ownership advantages possessed by developing country investors. While MNEs from developed countries are portrayed as benefiting from a large capital base, advanced technology based on R&D, or superior management skills, those from developing countries are usually known to be endowed with cheap labor, lower level of technology or ethnic ties. There are, however, different views among scholars studying the emergence and growth of Third World MNEs. In this paper, two groups are differentiated based on their views on Third World MNEs’ sources of competitive advantages. While the first group suggests that ownership advantages of these firms are derived from external country specific factors such as the possession of natural resources or cheaper labor cost, making these MNEs rely more on the exploitation of existing resources, the second group pays more attention to the capability of Third World MNEs in building up their proprietary advantages through a gradual accumulation of skills, information and technological effort. Two major models sharing the former view are the Investment-Development Path (IDP) formalized by Dunning (1981, 1988); Dunning d al. (1997); and the Product Cycle Model (PCM) formalized by Vernon (1966) and applied to Third World MNEs by Wells IKTERNATIONAL EXPANSION PROCESS OF MlUES FROM DEVELOPING COUNTRIES 165

(1781, 1783; see also Khan 1786). The latter view is proposed by two other models: the Localized Technical Change introduced by La11 (1983a,b) and the Technological Accumu- lation view applied to Third World MNEs by Tolentino (1993) (see also Cantwell and Tolentino 1790). The IDP argument is, in fact, not an explanation of the existence and growth of the firm. Rather, it aims to illustrate which countries would engage in outward foreign direct investment (FDI), and how the nature and level of this activity is related to the stage of economic development of the home country (Dunning rt al. 1997). The model suggests that a country’s inward and outward investment is partly a function of its level of economic development, and that the levels of inward and outward FDI flows of any country goes through predictable stages as the economy develops. The PCM model relies on the comparative cost explanation of international trade and investment in explaining the relocation of production units from developed countries to their less developed counterparts. The model suggests that new products are initially introduced and produced in high-income markets. It is only when the product becomes matured and standardized that new locations of production are sought in less developed countries to benefit from their lower labor cost. Wells (1981, 1783) picks up this concept and suggests that developing country enterprises derive their competitive advantages from adapting mature technologies to situations in their markets. Examples of these adaptations include: downscaling technology to smaller markets; making production more labor- intensive and more flexible; and replacing imported parts with local inputs. Although the two previously discussed models differ in their focus, they share a similar view that competitive advantages of developing country firms are derived from external country specific factors, i.e., the level of economic development or the low labor cost. This implies that developing country firms need to rely on price competition, and that the only areas where they can exploit their competitive advantages are in countries with similar or lower levels of economic development. Such implication points to a rather pessimistic future for developing country MNEs, suggesting that their competitive advantages are short-lived and can be eroded over time as local competitors and affiliates of other MNEs soon catch up. The scenario offers little hope for sustainable development and growth of Third World MNEs over the long run. Contrary to the above discussion, the Localized Technical Change and the Techno- logical Accumulation views propose that developing country firms are capable of creating sustainable ownership advantages which allow them to compete with competitors from advanced economies. La11 (198ja,b) argues that competitive advantages of developing country MNEs do not lie in frontier technology. Rather, they can take the form of adaptation of imported technology; development of products suitable for developing countries; or innovations of small-scale production techniques. The importance of innovation is similarly stressed by Tolentino (1993) who contends that the significance and complex- ity of technological innovation of firms from developing countries are largely determined by the cumulative process of technological accumulation through experience in interna- 166 I’. PANANOND AND C. P. ZEITIIAMI tional investment. Both explanations are based on the view that the firm is an institution which could accumulate competence through an evolution of an internal learning process (Cantwell 1997). This notion shifts the discussion on international expansion from a mere exploitation of resources to a new focus on the development of capacity through learning and accumulation of competence. Such a view is consistent with the literature on the sequential internationalization process (‘Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977, 1990). Known as the ‘Uppsala’ school, this literature stresses the importance of the knowledge accumulation process throughout a firm’s international expansion. This implies that internationalization is a ‘learning-by-doing’ process in which experiential knowledge of foreign markets contribute to the accumulation of capability. The evolutionary view of internationalization was also supported in Smith and Zeithaml (1993) when they explained the internationalization process of the Regional Bell Operating Companies (RBOCs) after their divesti- ture from AT&T in 1984. The need to accumulate knowledge and competence through the process of learning becomes even more logical for developing country MNEs whose lack of superior technology poses as the biggest disadvantage in their internationalization process. As suggested by March (1991), this paper attempts to demonstrate how maintaining an appropriate balance between exploitation of existing resources and exploration of new capability is a primary factor in organization survival and prosperity.

3. METHODOLOGY

Because the main question addressed in this paper is hoist MNEs from developing countries internationalize, the case study methodology is adopted (Ym 1994). Qualitative and unstructured case studies have been promoted in research of an exploratory nature (Bettis 1991; Melin 1992; Boyacigiller and Adler 1991; Thomas rtal. 1994). This paper employs an embedded single case study design, using one case study with multiple units of analysis. An embedded design is developed to analyze more than one subunit of the single case. The subunits can often add significant opportunities for extensive analysis, enhancing the insights into a single case (Ym 1994). To ensure validity, this study collected data from various sources. While the primary source was semi-structured interviews with senior executives from the level of Assistant Vice President upward, secondary sources were also consulted. They include: company documents, e.g., interview reports, company newsletter, and annual reports; and other published documents, e.g., news clippings, industry reports, and academic theses. This paper is based on a historical study of CP’s overall growth and its internationalization process. The chronological sequence is adopted to trace the group’s evolution of international expansion (see Melin 1992; Yin 1994, for discussion on longitudinal research). IKIERNATIONAL EXPANSION PROCESS OF MKES FROM DEVELOPING COKNTRIES 167

SAAIPLE: THE CHAROEN POKPHAND (CP, GROUP

The Charoen Pokphand (CP) Group is a Bangkok-based multinational company with affiliated companies operating in 20 countries, employing more than 80,000 people and generating an estimated total group turnover of US$ 6-7 billion a year, Its affiliated companies total more than 200, with 14 listed in seven stock exchange markets around the world, i.e., Bangkok, Jakarta, Hong Kong, Taipei, Shanghai, London and New York (Chatkaew 1996; Winichagoon 19%; The CP Group 1995). The group has its strongest base in animal feed industry, with approximately 50 feedmills in 9 countries. Starting first as a small shop selling vegetable seeds, the company now operates nine different business groups, ranging from Agro-Industry; Aquaculture; Seeds, Fertilizer and Plant Protection; International Trading; Marketing and Distribution; Real Estate and Land Development; Petrochemical; Automotive and Industrial Products; and Telecommunications (see Figure 1 for company structure). The CP Group was chosen for several reasons, First, it originated from Thailand and has been aggressive in international markets, especially in China and Southeast Asia. Although there exists a number of studies on multinationals from Japan and East Asia, not much has been written on their Southeast Asian counterparts, especially those from Thailand. Second, CP has been among Thailand’s most internationally-oriented companies with a long history of international activities since the 1970s. Finally, with its aggressive diversification and internationalization, CP illustrates the necessity to maintain a balance between exploiting existing resources and exploring and accumulating new ones. The next section reveals the historical evolution of the CP group from its founding in 1921.

4. HISTORICAL DEVELOPMENT OF THE CP GROUP

INTERNATlONAL TRADING i 1921-54) ‘CP has been international from its inception’ Dr. Veerawat Kanchanadul’

The above statement defines the main strategy and vision that the CP Group has followed from its founding until present day. The origin of the CP Group can be traced to the founding of the Chia Tai Chung Shop in 192 1. Escaping the protracted economic down- turn of China during the 192Os, Chia Ek Chor (b. 1895) and his brother, Chia Seow Hui (b. 1905) came to Bangkok and established a seed trading shophouse in the city’s Chinatown area. While the younger brother stayed in Thailand, Ek Chor travelled to promote his trading business between Thailand, China, Hong Kong, Singapore and Malaysia. In Thailand, the business expanded and branches were set up in Hat Yai, a major city in Southern Thailand in 1939, as well as in Penang and Singapore.

‘Executive Vice President - The CP Group Untetview, July 25, 1995). CP Group

CEO and President Dhanin Chearavanont

Planning Office

Finance Office - Technology Offk

Advisors’ Office -

Agro-Industry ‘1(CP Feedmill*)

(company name) is the leadm~ company of each ,tpup *signifies listed companies Source: The CP Group

Fig. 1 Company structure 1KTERi-GATIOIVAL EXPANSION PROCESS OF MNES FP.O,W DEVELOPING COUNTRIES 169

Despite his move to Thailand, it appeared that Ek Chor was still attached to China, given that he named all his sons in connection with the greatness of China and that he sent two of his sons to study in China after the Thai government closed down Chinese schools in Bangkok during the nationalist movement against the Chinese in the 1930s (Suwanban 1993; Skinner 1957). Ek Chor himself returned to China in 1945 to assure the continuous supply of seeds to his trading business. His business in China was nation- alized after the communist takeover in 1949, and Ek Chor remained in China until 1958. He did not return to Thailand but stayed in Hong Kong and Singapore for health reasons (Suwanban 1993). The Chia Tai Chung shop in Bangkok initially focused on the trading of seeds and some agricultural chemicals, but later expanded into selling basic food items, e.g., chicken, egg, and pork, to China via its network in Hong Kong. Commercial trading remained their main business until Ek Chor’s eldest son started chicken feedmilling in 1954.

ANIlZfAL FEED (1934-70)

When Jaran, Ek Chor’ s eldest son, returned from China in 1948, he was looking to start up a new business apart from seeds trading. In 1954, Jaran set up his own feed shop named ‘Chareon Pokphand’. The family business became divided into two lines, with Jaran running the feed business, while his uncle was taking care of the original line of seeds, fertilizers and insecticides. Thanks to the government’s support and encouragement of commercial chicken farming after 1955, their feed business grew and enabled CP to set up their branch in Hong Kong in 1959. The branch in Hong Kong was managed by Ek Chor, who left China and was living in Hong Kong then. Previous networks established by Chia Ek Chor when he was trading seeds possibly helped facilitate the setting up of these overseas branches. The Hong Kong branch was set up partly because the political atmosphere in Thailand had been unstable and the government was strongly anti-Chinese, and partly because Hong Kong was becoming a significant distribution center for distributing food products into China in the late 1950s. During the 1950s and 196Os, the group’s main activity apart from trading was animal feedmilling. Diversification away from feedmilling started when Jaran and his Taiwanese friends started a gunny bag factory in 1961. The increased demand for gunny bags came mainly from Thai commodities exporters. The largest investment during this period came in 1968 when Bangkok Feedmill Co. was established with registered capital of 31.4 million baht. The newly set up feedmill was the largest in Thailand at the time (Suehiro 1985). One main feature of the Thai economic development of the 1950s was the alliance of Chinese business leaders with Thai political leaders (Skinner 1957). Although anti- Chinese sentiments during that time resulted in some discriminatory policy against the Chinese, Thai political leaders needed the economic and business knowledge of the Chi- 170 P. PAUANOSD AND C. P. ZEITIIA51L nese to enhance their economic base as well as to manage the many inefficient state-owned firms set up during the nationalistic policy of the 1940s (Suehiro 1985). CP did not hesitate to cultivate such relationships with the Thai government. Dhanin, the youngest brother, joined the government’s slaughterhouse monopoly since his return from Hong Kong in 1958 until 1963 when he went back to his family business as a general manager (Suwanban 1993). Although Dhanin was the youngest brother, he was the most outgoing and his close relationship with political leaders could have been the strength which gained him the leadership of the family business. Dhanin’s focus was to modernize the company through the recruitment of non- family staff, the development of compound animal feeds and investment in new machin- ery. By the end of the 196Os, the company became an important player in the animal feed industry, holding 90% of the market in 1968 (Suwanban 1993). The group’s development during the 1950s and 1960s was strongly agro- industry based. The family business was clearly divided into two sides: the original trading of seeds and agricultural chemicals; and the manufacturing of animal feeds. While the overseas Chinese trading networks contributed to the company’s trading expansion, modern technology and some political connection appeared to be beneficial to the development of the group’s manufacturing activities. Animal feedmilling remains the core activity of the group today.

INTEGRATED AGRO-INDlJSTKY (1970 --79)

Poultry farming was not an entirely new activity for the CP group. Their attempt to raise chickens was initially to export chicken and eggs to Hong Kong and China The potential of livestock industry had become clear since the late 1960s when, for example, the Board of Investment (BOI) chairman Pote Sarasin announced in 1967 that poultry farming will be strongly promoted to comply with the rural development policy of the government (Hewison 1989). The major problem for CP then was the lack of appropriate technology in chicken breeding. This led to a search for a technology partner and CP successfully convinced an American agricultural multinational Abor Acres to invest in a joint venture in 1970. The 60:40 joint venture, Abor Acres (Thailand) was established to import chicken breeding stock from the U.S. This joint venture proved most productive for CP, especially since it came at the end of the military regime. The 1973 collapse of the military regime meant that the state monopoly on livesrock slaughtering was gone, giving CP room to expand further into chicken slaughtering and processing. Attempts toward vertical integration were also enhanced with the knowledge CP gained from the experience of Abor Acres in the American market (Dr. Veerawat Kanchanadul, interview, July 25, 1995). In 1971, Bangkok Livestock Processing Co. and Bangkok Farm Co. were established to integrate the group into livestock farming and chicken slaughtering. This integration not only increased the demand for animal feeds, but also allowed the group to enter lucrative export markets of frozen chicken to Japan in the early 1980s. N’IERSATIOSAL T.XPASSION PRMFSS OF .LiNES FROM DIYELOPING COIWTRIFS 171

CP was able to expand its farming operation with the introduction of the ‘contract farming’ system. The group once attempted to operate its own farm but found wage payments and costs for land acquisition uneconomical. The ‘contract farming’ system allowed farmers to set up CP-standard chicken farms through loan guarantees. CP then provided credits to farmers for the purchase of breeding stock, feeds, veterinary and other technical services. In return, farmers were bound to sell their produce to CP at pre-

determined prices. Farmers could usually repay their b3dnS within 5-7 years, after which they were free to sell their produce to any buyer. However, there were not too many other buyers, forcing farmers to continue selling to CP at a generally lower price than when the contract was in force (Hewison 1787). This ‘contract Farming’ system ensured CP of quality and a steady stream of supplies at relatively low costs. While CP insisted that this system benefited farmers and helped increase rural employment, it was also perceived as an exploitative mono$y where CP controlled farmers through its superior technology and production chains. New companies were set up to provide farming related facilities during the 1970s. Examples included the 1771 establishments of Advance Pharma to import pharmaceuticals and veterinary drugs, and Kasetphand Industry to distribute animal f&i-m equipment. By the end of the 197Os, CP was able to secure a stronghold on the integrated agro- industry, controlling activities from animal feed production, livestock farming and meat processing. The most important factor contributing to this success was the introduction of modern technology achieved through CP’s American partner. Joint venturing with Abor Acres served the interest of both parties - CP was looking for superior technology and Abor Acres overseas opportunities. The American influence in the Thai economy during the 1770s was partly a result of the American policy to use economic development to curb communist threat in Indochina. The Thai government was also very receptive and took the opportunity to encourage the private sector to invest in manufiacturing industries, especially those based on agriculture. CP’s background in feedmilling already provided the company with a head start. The modern technology transformed the Thai agricultural sector from traditional small-scale farms into an organized corporation, and inevitably gave CP strong control over the industry.

FURTHER INTEGRATIOIV‘ Ah’D DWERSIFICATION (1WX - PRESENT)

Although CP enjoyed the success of chicken exports, they soon found out that their whole- bird frozen chickens were more expensive than those from the United States. The main reason for the higher cost was in animal feeds. CP has been reliant on imported raw materials, making their cost of production more expensive due to import tariffs and transportation costs. The intention to reduce their dependence on imported raw materials drove CP into a joint venture with another American firm, Dekalh Co., in 1781 to research and develop maize breeds. Most of CP’s partners in their agro-industry were American since Dhanin believed that the most advanced technology in agriculture 172 P. PANANOND AND C. P. ZLITHAML

came from there. American companies, on the other hand, could see opportunities in Thailand since the country had a strong base in agriculture and was trying to develop that sector. Investment privileges from the BOI were given in promoted industries within which agro-industry ranked highly. CP was also a leading company in the sector. So it seemed that a marriage of convenience was struck with different partners. The joint venture with Dekalb to develop the cultivation of mung beans and maize no doubt landed both partners a BOI package of privileges. Despite this diversification, domestic supply was still not enough and imported raw materials were still needed to meet local demand. In 1993, two-thirds of total consumption were still imported (Bangkok Post, February 28, 1994). With the production side of agro-industry pretty much under control, the CP group was looking for further expansion along the distribution line. In export markets, frozen chickens were the group’s major product. At home, the group launched its own brand, CP, for different processed meat products such as meatballs and sausages. Attempts at the retail level included vending grilled chicken from stands in high pedestrian trafftc areas near fresh markets and supermarkets, and later starting a fast food chain called Chester Grilled’. CP, however, did not develop all these on its own. Another significant partner in food processing was the Oscar Mayer group of the United States (Suwanban 1993). The joint venture, established in 1986, helped increase CP’s technology in food processing and enhanced its capability to increase its variety of processed food exports. The joint venture again received the BOI promotion since processed food was one of the promoted industries Meanwhile, changes in the economies and trade patterns in Asia during the 1980s resulted in Thailand’s position as a strong food exporter, with major markets in Japan and East Asia. As these Asian economies became wealthier, their demand for raw and processed food imports grew. The success in integrated poultry industry led CP to replicate their vertical integration in swine and shrimp farming in 1980 and 1988, respectively. CP supplied contracted shrimp farmers with lavae and feeds, a relatively high protein product which sold for four times the price of chicken feed and earned double the margin (Than Setthakij, August 8, 1992). When the shrimp are ready for harvesting, CP bought back the production for further processing, freezing and exporting to Japan, the U.S. and Europe. Shrimp farming was the fastest growing agribusiness in the late 1980s and frozen shrimp exports from Thailand grew tremendously until recently when the United States started to reduce imports from Thailand, arguing that Thai shrimp farms caused environmental pollution. The growth was also curbed when the European Union raised import tariffs on frozen shrimps from Thailand in 1997 (Bangkok Post, December 7, 1996). This time CP turned to a Japanese company as its technology partner and succeeded in convincing Mitsubishi Corporation to invest in Thailand. Again, it seemed that CP tried to select a partner with superior technology in the field. Mitsubishi Corporation was reportedly a leader in shrimp farming technology (Suwanban 1993). More importantly, Japan was the major market for shrimp exports so it might be in the Japanese interest in diversify into the production of INTERNATIONAL EXPANSION PROCESS OF MNES FROM DEVELOPING COUNTRIES 173 shrimps. CP’s shrimp farming was later expanded to Indonesia, Mexico, India, Vietnam and Cambodia. More details on international activities will be discussed later. Diversification during the 1780s was strongly based in agriculture. CP cloned their poultry operations with swine and shrimp (Winichagoon 1992). However, agribusiness and food processing might not hold much of a future for the group since the agricultural sector in Thailand was facing a decline. Diversification away from agribusiness became more apparent in the late 198Os, with CP’s move into the marketing and distribution channels. These new investments included Siam Makro, a joint ventute with the SHV group of the Netherlands, the owner of the cash-and-carry Makro stores in 1988; a licensing contract with Southland Corporation for the 7-Eleven convenience stores in 1989. The fourth and the latest chain store, Lotus Supercentet, started slowly and with poor management until CP recruited experienced managers from the U.S. Some of these expatriates are ex-WalMart employees who joined CP after the CP negotiation with WalMart for joint investment in China failed. WalMart had long used CP to help source Chinese-made goods to sell in the U.S., and WalMart had hoped CP’s access and knowledge of China would help the U.S. group make a strong entry into China. However, WalMart’s unwillingness to cede management control and technology to their partners, and the inability of both sides to match corporate cultures, led to a break up just as they were beginning to open China and Hong Kong outlets in 1995. Both WalMart and Lotus went on their own into China (Handley 1997). Apart from investing in the retail business, another move during the 1980s was the listing of its key companies in agro-industry. Although the group’s financing has never been transparent due to cross shareholding between different companies, CP’s financing was traditionally based on group financing, bank loans, and joint venture partners. Public listing in the Thai bourse started with Bangkok Agricultural Products in 1984, Charoen Pokphand Feedmill and Bangkok Produce in 1987, and Charoen Pokphand Northeastern in 1988. It was not clear where this money went but rapid expansion into retailing, and real estate development came soon afterward. CP’s activities in China were also expanding but Dhanin denied that he used money from Thailand in his Chinese ventures. He claimed that the group’s China activities were funded from reinvestment and from international sources and mainly from Hong Kong (Suwanban 1993). CP’s next waves of diversification share one common characteristic - they mostly involve infrastructural sectors which are being privatized. Petrochemical has been key to Thailand’s energy sector since the discovery of natural gas in the Gulf of Thailand in the late 1980s. However, the most controversial deal was clinched by the group’s TelecomAsia for concession to install two million telephone lines in Bangkok in 1991. The privatiza- tion of the Thai telecommunications industry turned the previously government-controlled sector into a lucrative and highly-politicized business. When first issued in 1990, CP Telecommunication (later changed to TelecomAsia) in a joint venture with British Telecom, won all the concessions for three million lines installation even without the cabinet approval. However, the deal was delayed when a military coup ousted the corrupt gov- 174 P. PANANOND ASD C. I’. ZtITtIAhlL ernment in February 1991. The next Prime Minister ordered investigation into several projects, and the telecommunication concession was the first to be scrutinized. This caused BT political embarassment, and BT’s shift in international strategy to fwus more on the developed regions of North America, Japan and Europe made the British company pull out of the joint venture. It was the U.S.‘s Nynex who took over the position of technological supplier and advisor. In return for a 25-year concession over the two million installed lines, CP offered the government 16% of revenue from the operation (Asiatz F~ZLXW, March 15, 1991). Telecom Holding, a 99.99% subsidiary, was set up at the same time to serve as the telecom group’s holding company and investment arm and later invested in other telecom- related projects in Thailand and other countries including China, Indochina and India (Dr.Veerawat Kanchanadul, interview, July 25, 1995). The group’s decision to use fiber optic rather than copper wires to install the telephone lines allowed CP to benefit from the versatility of the material. CP later set up cable TV networks and offered Thailand’s first pay-per-view programming and other interactive programs. Technology in telecommunication industry came from Nynex of the United States. The group plans to invest further in building an information highway whereby digitized information can be sent via fiber optic, and even in other media and telecom-related projects (Far Eastern Emm~i~- Reties*,March 2, 1995).

5. INTERNATIONAL EXPANSION

Although CP could claim that it was international from the beginning when the founding brothers were trading seed in the Asian region, CP’s committed international expansion did not begin until 1972 when its first overseas feedmill was established. Indonesia was suitable for CP operations for the country was ecluipped with plenty of raw materials for animal feeds and its large size ensured the market for food products. The growth of chicken consumption in Thailand validated the lesson that as an economy became more wealthy, its people ate more meat. CP’s entry into Indonesia was also led by the opening

LIP of poultry farming to corporate farmers after Suharto rule became stabilized (Handley 1997). Further investment in poultry farming and fisheries later followed in 1974 and 1976. During the same period, CP expanded its feedmill investment to Hong Kong in 1974, Singapore in 1976, and Taiwan in 1977. International investment during the 1970s also included an insurance company and at least three investment and finance companies in Hong Kong. All these investment companies served as sources of funding in CP’s ventures in China because Thailand still imposed a strong control over currency outflows during that time. Investment in China started soon after the O/XZ Door PO& was implemented. In 1981, Conti Chia Tai, a joint venture between CP, Continental Grain Co. of the U.S., and a local Chinese authority was set up. The established feedmill and chicken farm was IN’I’ERNATIONAL ESPANSION PRCKES 01. MNES FROM DtVtLOPlKG COI’NTRIES 175 reported to be the first foreign-invested firm in the newly established Special Economic Zones (SET) of the Shenzen area (FLZY Eastm Etano~~k Review, October 21, 1393). CP prided itself as a company that helped contribute to the process of economic development (Dr. Veerawat Kanchanadul, interview, July 25, 1995). In his own words, ‘CP wants to be wanted by the host government’. CP’s activities in China took three forms: joint ventures, wholly-owned subsidiaries, and cooperation where the Chinese partners do not put up cash but provided other support such as land (The N&on, May 4, 1995). CP’s investment in China followed its formula which had proved successful in Thailand and Indonesia. Feedmilling was used as a pioneer project before poultry farming and meat processing were later introduced. Today, CP operates feedmills in 27 out of 30 provinces in China (Fur Eustern E‘ronomii- RezYw’, January 23, 1997). The group’s first diversification away from the agro-industry came in 1985 when a motorcycle manufacturing plant was set up in Shanghai. As the Chinese people became wealthier, their vehicles changed from bicycle to motorcycle. Sompop Petaibanlue, Vice President of Ek Chor Investment (ECI), explained that motorcycle sales in China were partly sponsored by overseas Chinese who had relatives in China. Motorcycles which were produced locally by Chinese state firms would be paid for by relatives residing outside China through agents in Hong Kong. This payment method helped expand local sales and brought in foreign currency at the same time. CP’s branch in Hong Kong had served as an intermediary for the Shanghai Auto- motive Industry Corp. When the latter wanted to expand its production capacity and improve its technology. CP was ‘invited’ to invest in the venture. The lack of its own technology was not the problem. CP managed to license Honda technology for the venture. It is with this kind of matching technology partners in joint ventures which included local authorities that characterized CP’s non-agribusiness activities in China. Dr. Veerawat, the group’s Vice Chairman, even stressed that CP’s strengths lay in its ability to select good partners and good technology, and its ability to absorb and adapt that technology to situations in developing countries (Interview, July 25, 1995). CP’s activities in China during the 1980s were mainly in animal feed industry and motorcycle manufacturing. It was not until the 1990s that the group expanded their activities to include aquaculture, downstream petrochemical projects and real-estate development projects. Most of their activities are concentrated in the Shanghai area. CP operated its real estate development project through its Hong Kong Fortune, a joint venture with the real estate Univest Group of Thailand. Announced projects included a US$2 billion Shanghai satellite town project comprising office buildings, hotels, shopping arcades and sport facilities (Baqko& Post, July 12, 1993). However, the latest development was that the merger ended in divorce, with the two sides splitting the properties (Handley 1997). Other manufacturing investments in China included two beer breweries: one with the Heineken group (announced in 1993) and the other with the Boonrawd Brewery 176 P. PANANOND AND C. P. ZBITIIAML group from Thailand (announced in 1994). Several retail outlet projects, both operating on its own (Lotus Supercenter) and with partners (Makro, the Mall) have been announced. Other than that, CP also entered into banking through a joint investment with the M Thai group in 1996. International investment in telecommunications came in 1993 when the group jointly invested in the Chinese government-controlled Apstar Satellite. This project has not developed well due to their poor technology in comparison with other satellite firms in the region. Another international telecommunications project is CP’s 20% investment in the Fibre Optics Links Around the Globe (FLAG), a project led by Nynex (DrVeerawat Kanchanadul, Interview July 15, 1995). It is only in China that CP was involved in these diverse projects. In other countries, CP’s activities are limited to its core business, animal feed and integrated livestock industry. Perhaps one way to understand the extent of CP’s international activities is to look into CP Pokphand (CPP), a holding company listed in Hong Kong and London stock markets. Although not all international activities are consolidated in this company, most of the CP Group’s international investments in agro-industry are organized under CPP Apart from industrial activities in China, mainly in motorcycle manufacturing, CPP activities cover mainly agri-business in China, Indonesia, Turkey, Hong Kong and Thai- land (see Figure 2 for the geographical structure of CPP). Since 1990, the CP group expected to raise more money for its diversification plans through international listing. The group used CPP as its flagship for international investors, with its listing in Hong Kong and London. Although the London listing of CPP may increase its international prestige, there was some suspicion from investors that the real reason was to find cash to support the group’s voracious diversification into different industries (Far Eastern Economic R&u,, 25 October 1990; 21 October 1993). Investors’ distrust also resulted from internal shuffling and transferring of shares and assets among the group’s subsidiaries at questionable prices. An example was the sale of CPF shares to CPP at Baht 70 (US$2.801), much lower than its record price of Baht 87 and slightly lower than the last-trade price before the acquisition of Baht 74. Still, CPF recorded profit from the sale since its usual price averaged around Baht 50-60, the rate to which it returned immediately after the acquisition in the wake of the market crash during the Gulf crisis. CPP was also in need of frequent cash calls which were resolved by injections of assets from the Chearavanont family. In 1993 CPP bought the family’s interests in 16 agricultural joint ventures in China for US$37 million (Asian Wall Street Journal, 19 January 1993). CPP might serve the Chearavanont more than it does its investors. A closer look at CPP’s financial performance in Table 1 also reveals that CPP has not given back much in terms of dividends. Tables 2 and 3 show that CP’s international activities are dominated by its integrated agribusiness in China. Although its investment in motorcycles has become more significant over the years, the bulk of CPP’s profit remains domi- nantly in agribusiness. INTERNATIONAL EXPANSION PROCESS OF MNES FROM DEVELOPING COUNTRIES 177 178 P. PANANOND AND C. P. ZEITHAML

Table 1 CP Pokphand’s financial highlights

1990 1991 1792 1993 1994 1795 1996

Consolidated turnover IUSSm) 419 7 7x3.5 1,332-l Profits attributable to 3hartholders ILJSSm) 22 33 44 41 5x.5 65.5 7.1 Earning pet share, fully diluted (US cents) 1.75 1.99 2.22 1.99 2.60 2.90 0.33 Dividend (1IS cents) 1.15 1.15 1.28 1.28 0.18 ROAQ 1 1 .oo x.00 7 .oj 5.45 0.43 ROE?+ 19.78 13.62 16.38 15.58 1.59

Source: Cl’ Pokphand

Table 2 CP Pokphand profits by business type (US.% ‘000)

Business type 1792 1993 1994 1995 1996

Trading 1,626 431 (727) 326 (68’) Investment properties 430 417 I is (816) Motorcycle 10,760 14,215 21,501 21,891 2,871 Investment holding 1,67 3 8,486 26X 1,294 861 Feedmill & poultry operations ‘I 1,926 25,650 50,766 58,178 15,704 Retail & disrribution - (1,706) (1,243) 17,713) Tax 6,167 9,452 18,508 21,311 15,121

Total 52,582 56,65 1 X8,814 9x,x05 25,.345

Source: CP Pokphand

Table 3 CP Pokphand profits by country (US$ ‘000)

Country 1992 1973 1991 1995 1996

Turkey 1,867 2,701 2,351 1,905 4,652 Hong Kong (921) 7,863 (2,230) (6,018) (17,575) Thailand 15,518 11,680 l-3,671 11,517 12,63-i China 26,019 19,373 50,396 61,023 7 4’8 Indonesia 3,872 5,381 6,118 6,064 3:033 Tax 6,167 9,542 18,508 21,311 15,123

Tocal 52,582 56.65 1 88,814 98,805 2j,.345

Source: CP Pokphand

6. DISCUSSION

Although each period during CP’s historical development was underlined by different strategies, several characteristics are unique to the overall growth and the internationalization process of the CP Group. These characteristics reflect how the group has not only relied on the exploitation of existing resources, but also been able to accumulate new knowledge and skills which eventually can be turned into their strengths. Three distinc- INTERNATIONAL EXPANSION PROCESS OF MNCS FROM DEVELOPING COIKTRIES 179

Table 4 CP Group’s listed companies

Company Stock Exchange Market capiralizarion

CP Feedmill (CPF) Bangkok x.39 CP Northeastern (CPXE) Bangkok 60 Bangkok Produce Merchandising (BKP) Bangkok 49 Bangkok Agro-Industrial Products (BAP) Bangkok 118 TelecomAsia (TA) Bangkok 9,030 Siam Makro (MAKRO) Bangkok 875 Vinyrhal (VNT) Bangkok 46 CP Indonesia (CPIN) Jakarta 234 CP Protemaprima (CPPT) Jakarta 193 Surya Hidup Satwa, PT (SHSA) Jakarta n.a. CP Pokphand (CPP) Hong Kong, London 622 Hong Kong Fortune (HKF) Hong Kong 107 Orient Telecom & Technology Holdings (OTTII) IIong Kong 896 Ek Chor China Motorcycle (EK CHOR) New York 360 Shanghai Dajiang (SHD) Shanghai 141 CP Enterprise (CPE) Taipei 132

Source: CP Pokphand

Table 5 Financial information on selected listed companies

Company 1791 1992 1993 1774 1995 1996 CPF Turnover (Bt m) 10,l 76.50 10,937.10 2,337.90 20,992.OO 23,978.lO Profit 907.50 1,151.40 1,201.50 1,351.20 1.27830 ROA?? 11.01 14.91 13.11 11.55 10.40 ROE% 26.87 30.44 25.86 32.49 28.27 TA Turnover (Br m) 3.40 273.10 1 ,822.20 .4,795.60 9.734.30 Profit (31.70) 564.60 638.50 1.290.70 (1,92-1.10) ROA’Z (4.13, 1.38 1.62 2.31 (2.27) ROEV (6.97, 1.72 1.99 1.78 (4.93) VNT Turnover (Bt m) 484.40 1 ,x45.30 3,563.70 3,667.30 Profit (137.40) (4.38.20) 225.20 (I ,080) ROA% (2.20) (7.02) 3.18 (89.13) ROE% (7.38) (23.55) 15.62 (33.80) MAKRO Turnover (Bt m) 1,13/1.50 18,793./10 25,Oll.OO Profit 157.50 411.30 619.50 ROAP 4.44 11.22 11.49 ROE2 12.65 31.9’ 22.98 CPP Sales CUSS m) 199.90 237.80 449.70 783.50 1.332.20 Profit 44.30 44.30 58.50 65.50 7.10 ROA% 11.00 X.00 7.03 5.45 0.43 ROE% 19.78 13.62 16.38 15.58 1.59 CP INDO Sales (Rp bn) 105.40 128.40 121.60 1,446.50 Profit 0.60 2.60 9.90 13.30 ROA’Z 1.05 2.13 4.39 1.12 ROE9 12.08 54.69 2.3.4.3 6.00

Source: CP Pokphand 180 P. PANANON AND C. P. ZEITHAML

tive features are discussed here. First, both CP’s domestic and international expansion have been strongly based on diversification around the agro-industry production chain. CP’s ability to vertically integrate all the way from feed material production to retail distribution channels has certainly been their strongest competitive advantage which could hardly be matched in the domestic market and in those markets where they have entered. Although CP originally relied on foreign technology which was developed for animal farming in cold weather, they have since then been able to adapt the acquired technology to a tropical climate and even claim to be among the world’s leaders in tropical animal farming (Thirayut Phitya-Isarakul, President, Agro-Industry Business, interview, March 17, 1998). This expertise is most required when CP expand their operations abroad. Generally, the markets CP choose to enter are other developing countries whose level of technology is still lower than that of CP, for example, Indonesia, China, or Vietnam. Second, CP has been very market-driven in its diversification and internationalization. The lack of expertise in a new industry has not been the major concern for CP. Examples of diversification into areas in which they had no prior knowledge include telecommunications, motorcycle production, and brewery. On the surface, these investments may look totally unrelated. But on a closer analysis, these bold expansions are partly derived from CP’s understanding and knowledge of how the markets of developing economies evolve. Casson (1991) extends the interpretation of ‘knowledge’ by differenti- ating ‘know-what’ from ‘know-how’, According to Casson (1993), it is the know-how more than the ‘know-what’ that the firm learns from its experience in different markets. This implies that knowing how to do business in similar markets is as important to knowledge accumulation as knowing the business itself. CP have demonstrated that their understanding of developing country markets has been one of their key competitive advantages. Such understanding has opened up new opportunities which could later become the group’s new core areas. For example, CP’s move into Marketing & Distribu- tion could result partly from its ability to spot the market potential from the changing trend of Thai people lifestyle, and from its previous background in the mass-market food industry. Korsak Chirasmisak, Senior Vice-President, Marketing & Distribution, suggested that CP’s experience in the food industry enhances its skills in understanding the urbanization trend of the consumer market. He also commented that Marketing & Dis- tribution could become CP’s core business when agro-industry becomes matured (interview, July 24, 1995). The previous example demonstrates how CP has been able to develop their competitive advantage based on a sound understanding of the market in developing countries. Finally, the lack of cutting-edge technology in some industries in which they are involved necessitates the accumulation of management skills. In other words, CP needs to compensate for their lack of technology by strengthening their ability to identify a good strategic partner who can provide the required technology. As suggested by the group’s Chief Economist: INTERNATIONAL EXPANSION PROCESS OF MNES FROM DEVELOPING COIJNTRIES 181

‘Most multinationals in Southeast Asia are management and investment companies, not tied to specific products. Their procedure is to identify opportunities, recruit managers, borrow the money and then buy technology through a joint venture.’ (The Emmist, July 17, 1993)

The other skill needed is the ability to find the right people. Among Thai companies, CP has been second to none in recruiting capable professionals as well as in culti- vating good relationships with political leaders. Known to be the biggest contributor to all political parties, CP’s connections in Thailand are both controversial yet impressive. In Thailand, CP employees and advisors include: the former head of the Telephone Author- ity; the former head of the Petroleum Authority; the former head of the national planning agency, NESDB; the former army chief and former prime minister; wife of a political party leader; wife of the army chief of staff, former foreign minister and current privy counsellor; and daughter of former prime minister (Handley 1997). CP’s international connections are no less impressive. Mr. Dhanin was one of the advisors supervising the Hong Kong handover back in July, and he was one of the Asian businessmen to have had the ‘coffee discussion’ with the U.S. president in 1996. These three characteristics have highlighted how CP has blended its expertise in the agro-industry with the search for new areas of competence. The need to develop its existing capability and to accumulate new knowledge is becoming increasingly and more important to multinationals from developing countries as the world becomes increasingly integrated. Increased competition means these MNEs can no longer simply rely on price competition based on low-cost manufacturing. They need to be able to play by the rules set by their more experienced counterparts from developed economies.

7. CONCLUSION

This paper attempts to explain the sequential growth and expansion of the CP Group into different technological and geographical areas, While existing resources feature prominently in determining the direction and the success of expansion, the accumulation of new expertise becomes even more significant in the long run. Rapid diversification and expansion should, however, be undertaken with care and consideration. In boom times, any diversification may seem possible if the company can buy packaged technology and find financing. But reality has soured for those who expanded on borrowed money without the supporting capability The baht devaluation in 1997 has hurt many Thai companies with foreign debt. CP is no exception. Negotiations are underway to sell part of the many projects they have undertaken overseas. For example, CP is selling 40% of their share in the Shanghai motorcycle plant to its Chinese partner (Krzi&ep Tzmzkij, 23 March 1998). The difficulty currently facing many Asian firms, including CP, poses many challenges on their survival and growth. What remains after the crisis will have to be carried out in further studies. 182 P. PANANOND AND C. P. 7~lTHALfI.

This study can be extended in many ways. Perhaps most importantly, similar studies of MNEs in Thailand and other developing countries can be conducted to determine whether the preliminary conclusions of this paper may be generalized. CP’s internationalization process may also be explained from different theoretical perspectives. For example, resource-based theories can be applied to point out which types of resources are central to CP’s growth. Resource-based analysis sees the firm as a unique bundle of tangible and intangible resources. This view, however, stresses resources as valuable factors of production. The CP case study suggested that knowledge that is beneficial to the company may be derived from sources other than production, in this particular case, from CP’s knowledge of developing country markets. Finally, subsequent research should extend the comparison of international expansion among firms from both developed and developing economies. Such research should follow the continued expansion of these companies and examine similarities and differ- ences on the issues discussed above. Although the experience of the CP Group is but one case study, it reveals many characteristics different from MNEs in the West. Despite the lack of generalization, this study identifies possibilities that the existing literature may not adequately capture.

ACKNOWLEDGEMENTS

The first author would like to thank the Faculty of Commerce and Accountancy, Thammasat University, as well as the Kenan Institute of Private Enterprise for funding this study. The cooperation from CP’s executives and staff for granting and arranging interviews is highly appreciated.

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