Andrey G. Medvedev, Professor

INTERNATIONAL BUSINESS STRATEGIES

CEMS MIM Programme December 8, 2009 9. INTERNATIONAL OPERATIONS STRATEGY

GLOBAL LOCATION OF MANUFACTURING 1 FACILITIES

INTERNATIONAL MANUFACTURING 2 CO-OPERATION

3 GLOBAL SOURCING

4 INTERNATIONAL INDUSTRIAL PROJECTS

Responsibilities of International Manager:

 Substantiate effective types of international production co-operation and estimate an effectiveness of international production co-operation agreements  Establish a plan for international production co-operation  Select a foreign partner for production co-operation  Select a pricing method for co-operated products  Select transportation modes for goods; manage stocks; decide on packing of goods and stock warehousing

 LOCATING MANUFACTURING FACILITIES ABROAD MAY BE REGARDED AS ENTRY INTO A FOREIGN MARKET OR FOREIGN PRODUCTION

 REALISING LOCATION ECONOMIES – VALUE CREATION ACTIVITIES ARE LOCATED IN COUNTRIES WHERE CONDITIONS ARE LIKELY TO ENHANCE COMPANY’S COMPETITIVE ADVANTAGE

 CRITERIA OF SELECTING LOCATIONS – COUNTRY CRITERIA – TECHNOLOGICAL CRITERIA – PRODUCT CRITERIA

 INTERNATIONAL CO-OPERATION MODES – CONTRACT MANUFACTURING – SUBCONTRACTING – FOREIGN ASSEMBLY – SUPPLYING OEM-COMPANIES – TRADE IN SEMI-PROCESSED GOODS AND TOLLING – PRODUCTION SHARING

 THE EMPLOYMENT BY ONE FIRM OF AN ESSENTIALLY UNRELATED FIRM TO MANUFACTURE SPECIFIED PRODUCTS FOR DELIVERY BACK TO ITSELF

 HORIZONTAL CO-OPERATION

 SERVES AS A FOREIGN ENTRY MODE OR AS FOREIGN SOURCING

 Nokian Tyres plc and Giti Tire (China) have signed an agreement according to which Giti Tire starts to contract manufacture car tyres in its factories in China. Giti Tire is the biggest producer and market leader in tyres in China.  The co-operation started with Nokian branded car summer tyres which will mainly be sold in North America.  The start-up of the production was in October 2004. The target for 2005 was 500.000 tyres and the volume should be gradually increased up to 1,5 million tyres.

 INTERNATIONAL SUBCONTRACTING

 A DEAL WHEN SOME PARTS OF THE FINAL PRODUCT ARE MANUFACTURED FY FOREIGN CONTRACTEES AND GO IN THE PRODUCTION PROCESS OF THE CONTRACTOR

 SUBCONTRACTING IS BASED ON COMPONENT SPECIALISATION

 Boeing is the world's largest manufacturer of commercial jet aircraft. Despite its large market share, in recent years Boeing has found it tough going competitively. First, Boeing faces a very aggressive competitor in Europe's Airbus Industrie. The dogfight between Boeing and Airbus for market share has enabled major airlines to play the two companies off against each other in an attempt to bargain down the price for aircraft. Second, some of the world's major airlines have gone through very rough years, and many now lack the finance required to purchase new aircraft. Instead, they are holding onto their used aircraft for much longer than has typically been the case.  This translates into lower orders for new aircraft. Confronted with this new reality, Boeing has concluded that the only way it can persuade cash-starved airlines to replace their used airliners with new aircraft is if it prices very aggressively. © Andrey Medvedev US (non-Boeing) Boeing Japan ROW

 COST EFFECTIVENESS

 SPECIALISED INVESTMENT

 AVOIDING STRATEGIC RISK OF OUTSOURCING AN ACTIVITY (PROPRIETARY PRODUCT TECHNOLOGY PROTECTION)

 HEDGING OPERATIONAL RISK (DEPENDENCE ON A SINGLE OUTSIDE SUPPLIER) – STRATEGIC FLEXIBILITY, IMPROVED SCHEDULING

 OFFSETTING (SECURING ORDERS)

 FOREIGN ASSEMBLY OF FINAL PRODUCTS

 THE FIRM PRODUCES DOMESTICALLY ALL OR MOST OF THE COMPONENTS OF ITS PRODUCT AND SHIPS THEM TO FOREIGN MARKETS FOR ASSEMBLY

– COMPROMISE BETWEEN EXPORTS AND LOCAL PRODUCTION – AUTOMOTIVE, FARM EQUIPMENT, AEROPLANE INDUSTRIES

 LOCALISATION (ECONOMIC AND LEGAL REASONS)

 ASSEMBLY PLANT LIFE CYCLE

DEALER MNC

ASSEMBLY

 In 2005, South Korea’s Kia Motors launched an assembly line producing its mid-priced sedan Spectra model at the Izhavto factory in the city of Izhevsk, about 1,000 kilometers east of Moscow.  The full capacity of the plant is 40,000 cars.  Kia has agreed to outsource welding and painting to local companies within 18 months and to cut imports of components by at least 30 percent over five years.

 When the German BMW came to the conclusion that it was necessary to start producing its vehicles in Russia, it established the BMW Russland Trading that became the BMW representative in Russia.  In 1999, the Kaliningrad-based Avtotor Holding, being a partner of BMW Russland Trading, started producing BMW sedans, each one costing 12 percent lower than the cost of cars assembled in Germany.  In 2001, Avtotor was awarded the international “Certificate of Production Quality System Compliance with the Standard ISO 9002”. The paper was issued by the company TUV Management Service GmbH, the world authority in certification of industrial enterprises.

 In March 2002, assembly of Scania buses started in St. Petersburg.  Localisation level: 18% of the bodywork is made by Russian firms, Scania wants 50%.  The same generation of products are produced world-wide.

 CHASSI  ENGINE  BODY  ASSEMBLY

 LiAZ, a Russian company located in Moscow Region, signed an OEM-agreement (original equipment manufacturer) with American giant Caterpillar.  Manufactured by the company LiAZ-5256 is a big size bus designed for short- and long-distance suburban routes.  The bus is equipped with Caterpillar 3116 engine produced at Caterpillar plant in Belgium.

DEALER MNC

ASSEMBLY

 As leading international carmakers move to build assembly plants in Russia, Canadian car parts maker Magna International has formed joint ventures with GAZ Group and signed co-operation deals with AvtoVAZ, both in Russia.  The Magna-GAZ ventures would make car parts in Russia and help adapt foreign cars for the Russian market.  The Magna-AvtoVAZ deals have to help the Russian partner with product engineering, vehicle assembly and a supply chain for the vehicles."  Magna owns plants in 22 countries and make parts for 71 car models, including Toyota, Nissan, Ford, GM.

 GRADUAL PROCESSING – IS BASED ON PROCESS SPECIALISATION – VERTICALLY INTEGRATED ACTIVITIES ARE LOCATED IN SEPARATE COUNTRIES

 OPERATIONS BASED ON FOREIGN TRADE CONTRACTS IN SEMI-PROCESSED MATERIALS

 INDUSTRIES – CHEMISTRY PHARMACEUTICAL INDUSTRY METALLURGY WOOD PROCESSING FOOD INDUSTRY (SOFT DRINKS)

 TOLLING – A LOCAL COMPANY DOES NOT BUY A RAW MATERIAL TO PROCESS IT. THE MATERIAL IS PERMANENTLY AN OWNERSHIP OF THE FIRM WHICH GIVES FOREIGN PARTNER AN ORDER TO MAKE SOME MANUFACTURING OPERATIONS WITH THE MATERIAL AND BRING IT BACK TO THE OWNER – INTERNAL TOLLING

 IN RUSSIA, A SPECIAL CUSTOMS REGIME HAS BEEN INTRODUCED FOR TOLLING, NAMELY “PROCESSING”

 INDUSTRIES – METALLURGY SHIP REPAIR CLOTHING INDUSTRY

CUSTOMER CLOTHING PLANT

TEXTILE PLANT © Andrey Medvedev COMPETITION FOR LOCAL RESOURCES

 RAW MATERIALS

 COMPONENTS AND PARTS

 SERVICES

 ELECTRICITY AND INFRASTRUCTURE

 HUMAN RESOURCES, QUALIFIED MANAGERS

 SOURCES SUPPLY COMPOSITION, BY COUNTRY CRITERIA

 LACK OF RAW MATERIALS

 COMPETITION FOR RAW MATERIALS

 Electrolux will not invest in its second factory in the Northwest region until it can find enough parts producers locally to make the project worthwhile, general director of Electrolux St. Petersburg Nicholas David told 80 St. Petersburg manufacturers at a St. Petersburg Chamber of Commerce meeting organised by city officials.

 COST OPTIMISATION – PRODUCTION RATIONALISATION; SCALE ECONOMY – LOWER TARIFF BARRIERS – GOVERNMENT INCENTIVES – LOWER TRANSPORTATION COSTS – ACCELERATED DELIVERY OF GOODS TO LOCAL CUSTOMERS

 TAX OPTIMISATION

 EXCHANGE RISK COVERAGE

 COMBINATION OF INPUTS – EFFECT PROVIDED BY CO-OPERATING COMPANIES IN TWO OR MORE COUNTRIES

 THE COMBINATION RESULTS IN SYNERGY – EACH PARTICIPANT OF A CO-OPERATION AGREEMENT CONTRIBUTES WITH ITS MOST EFFECTIVE COMPONENTS, INGREDIENTS, PROCESSES, OF FACTORS OF PRODUCTION

 IMAGE AND SKILLS IMPROVEMENT – BETTER IMAGE OF A FOREIGN COMPANY AS A LOCAL PRODUCER – INTERNATIONALISATION OF A LOCAL COMPANY

 OPERATIONS

– FOREIGN TRADE AGREEMENTS IN GOODS – FOREIGN TRADE IN SERVICES AND PROPERTY RIGHTS

 ORGANISATIONS

– TRADE BETWEEN INDEPENDENT PARTNERS IN DIFFERENT COUNTRIES – TRADE BETWEEN PARENT COMPANY AND ITS SUBSIDIARIES – TRADE BETWEEN SUBSIDIARIES OF MNC

 REQUIREMENTS FOR CO-OPERATION PARTNER – CONFORMITY BETWEEN THE ENGINEERING STANDARDS – IMPROVEMENT IN TECHNOLOGY LEVEL OF A PARTNER LAGGING BEHIND (EXTRA INVESTMENT IF NEEDED)

 PRELIMINARY ACTIVITIES

 PRODUCTION SCALE OPTIMISATION

 HARMONISATION OF TECHNICAL STANDARDS

 LOCAL IMMOBILITY  MARKET INERTIA  IMPOSSIBILITY OF RE-ADDRESSING  LONG-TERM DECISION-MAKING  LONG-TERM IMPLEMENTATION  LIFE CYCLE TRENDS

 INFRASTRUCTURAL PROJECT OF CREATING, EXPLOITATION, AND DEVELOPMENT OF A PIPE SYSTEM

 SPECIAL FEATURES:

 TECHNOLOGICAL COMPLEXITY  INTERNATIONAL AND INTER-GOVERNMENTAL NATURE – COVERS TERRITORIES OF SEVERAL COUNTRIES – PARTICIPANTS ARE RESIDENTS OF SEVERAL COUNTRIES (THEY COULD BELONG TO SEPARATE MNCs)  HIGH CAPITAL-INTENSITY AND LONG-TERM REALISATION  HIGH RISKS  QUALITY AND ENVIRONMENT REGULATIONS

 In February, 2006, the managing company of Morskoy Fasad (Sea Facade) has chosen contractors for the passenger port at the western part of Vasilievsky Island. Dutch company Van Oord will create land to extend Vasilievsky Island by about 146 hectares and build a passenger terminal on it.