CESA International Business 2.1

Sources of Trade Regulation

GATT and WTO Set up to deal with tariffs and non tariff barriers to

trade Tokyo Round in mid 1970s

Tariff barriers reduced significantly Partial success with non-tariff barrier reduction mainly

due to complexity and sensitivity Uruguay Round – 1986-1993

Challenging problems addressed – technical barriers, trade in services, intellectual property rights, trade in technology etc.

More member countries – 117 Problems of developing countries addressed

WTO formed – meets every 2 years

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Slide 12-2INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig

Trade Agreements and Associations U.S. – Canada Free Trade Agreement

Formed January 1988 – world’s largest free trade area

Dispute resolution mechanisms established

NAFTA formed with Mexican representatives

Association of Southeast Asian Nations

ASEAN formed August 1967 with 5 member states, presently has 10 members

Regarded as a loose economic cooperation channel but expected to change, FTA with China expected

Move towards ASEAN FTA

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Trade Agreements and Associations (contd..) Asia-Pacific Economic Corporation

APEC established 1989, presently has 21 members

Primary vehicle for open trade and economic cooperation

Agreement to develop free trade yet to be reached

ANDEAN and MERCOSUR Composed of South American nations with an objective

of setting a common external tariff

European Union Slow process of European integration

Founded on the principle of supranationality

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Slide 12-4INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig

Opportunities and Threats

Threats Government Actions Opportunities

Increase costsReduce ROICompetitive disadvantageIncreased competitionCo-opt

RegulationTaxationExpenditurePrivatizationConsultation

Control competitionCompetitive advantageSubsidies, grants, customerLevel playing fieldInfluence policy

Opportunities and Threats from Government Actions

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Slide 12-5INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig

Political Strategy

Essential for a firm to form and implement political strategy

Formulation Objectives Issues Stakeholders (allies, opponents, targets) Position/Case (“public interest”)

Implementation Timing Techniques

Direct (negotiate, litigate) Indirect (advocacy advertising, political contributions)

Vehicles (e.g. coalition, Government Relations department, consultants)

Style (e.g., confrontation or conciliation)

McGraw-Hill

Slide 12-6

NAFTA

1991 1994 1998 2003 2008

Negotiations Started

NAFTA Signed Ratified

I Schedule II Final

Beginnings

• US-Canada auto pact 1965• Canada-USA FTA 1989 First tariff cuts on January 1, 1989. Tariff cuts of different magnitude across sectors. • maquiladoras - employing 1/2 million in 1980s• US proponents of NAFTA

- trade benefits - reduce immigration pressures- prosperity, stability, democracy for Mexico

NAFTA Provisions

General features• elimination of trade barriers

- in 10 years- 15 for special products (e.g. agriculture)

• no common external tariff• restrictive rules of origin

- goods must have “a substantial transformation”- e.g. 60% of autos must be locally made- e.g. textiles must be made from NAFTA yarn

Nafta Specific Features

Investment• national treatment• dispute settlement by international tribunals• exempt – Canadian cultural industriesEnvironment• Commission on Environment• fines or trade sanctions can be imposedSafety valve• pre-NAFTA measures allowed if import surgeTransportation• no barriers eventuallyNo permanent independence• NAFTA functions through meetings of country officials

Nafta Specific Features

Open Previously-Protected Sectors of Economy

Agriculture Energy Textiles Automotive Safeguards to deal with:

Subsidies and Unfair practices Private Commercial & Agricultural Disputes NAFTA Implementation Concerns

Textile

Shock of low-priced textile.

Diversification

More labor-intensive apparel production to Mexico and apparel imports from Mexico include:

U.S. – Mexico relative exchange rates

U.S. FDI flows to Mexico

(explained by relative costs of capital, differential wages and incomes)

Tariff rates levied by Mexico on U.S. exports

Textile

Textile

US: Provides jobs for more than 1.5 million workers.

(8% of domestic industrial workforce).

The industry complex is the largest manufacturing employer in North Carolina, Pennsylvania, Alabama, Virginia, Tennessee, and California.

Textile and apparel firms are often primary employers in rural areas.

Major metropolitan areas include middle Atlantic States and California.

Textile

Focus on non-price factors of competition (Abbott & Bredhal, 1994).

Firm’s strategy (sourcing);

Industry structure;

Quality of products.

Textile

The forces of globalization caused:

Overcapacity of production;

global financial crises;

emerging trade agreements;

changing price of cotton;

cheap imports from Mexico.

U.S. Textile and Apparel Trade with Mexico

0

2000

4000

6000

8000

10000

12000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Mill

ion

$

Textile Exports

Textile Imports

Apparel Exports

Apparel Imports

U.S. Textile and Apparel Trade with Mexico

0

2000

4000

6000

8000

10000

12000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Mill

ion

$

Textile Exports

Textile Imports

Apparel Exports

Apparel Imports

Mexico

United States

Pre-NAFTA Maquilla Networks

TextileMills

U.S. Manufacturer Retailer

U.S.Broker

Assembly Plants(U.S. & Mexican Owned)

Subcontractors

Full-packagenetworks (orders) Assembly networks

(cut parts)

Key

OMJC

Wrangler

Mexico

Aalfs

Wrangler de Mexico

Post-NAFTA Full-Package NetworksRetailer

JC Penney

Marketer ManufacturerU.S.Lead Firms-Retailers-Marketers-Manufactuers

Kentucky-Lajat

Siete Leguas

Libra

Textile Mills

TextileMills

Full-package networks (orders)

Full-package Manufacturers

Joint Ventures/U.S. Subsidiaries

The Gap

Textile Mills

United States

Key

Assembly networks (cut parts)

Assembly Plants/Subcontractors

Table 5

Plants in North Carolina, 1990-2003

0

250

500

750

1000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Textile (For Apparel)

Textile (Non-Apparel)

Apparel

Source: The Employment Security Commision of North Carolina, Employment and Wage Data by Industryhttp://eslmi12.esc.state.nc.us/ew/EWYear.asp?Report=1NAICS codes: 313 (Textile Mills -- Apparel), 314 (Textile Mills -- Non-Apparel), 315 (Apparel Manufacturing)

North Carolina in the Global Economy http://www.soc.duke.edu/NC_GlobalEconomyDuke University, Durham, NC - Fall 2004

Employees in North Carolina, 1990-2003

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Textile (For Apparel)

Textile (Non-Apparel)

Apparel

Source: The Employment Security Commision of North Carolina, Employment and Wage Data by Industryhttp://eslmi12.esc.state.nc.us/ew/EWYear.asp?Report=1NAICS codes: 313 (Textile Mills -- Apparel), 314 (Textile Mills -- Non-Apparel), 315 (Apparel Manufacturing)

North Carolina in the Global Economy http://www.soc.duke.edu/NC_GlobalEconomyDuke University, Durham, NC - Fall 2004

Latino70%

Asian20%

White8%

African American, American Indian, or Two

or more races2%

Am ong As ian sChinese 4 4 %Korean 2 5 %V ietnamese 1 2 %Fi l ipino 7 %

Am ong Lat ino sMe x ican 7 2 %Guatemalan 7.4 %Sal vadoran 7 %

Garment Workers in Los Angeles, by Race

SUPERMARKETS

Economic Integration

Direct Investment

Strategically Alliances/Joint Ventures

Horizontal and Vertical Integration across borders

Similar business practices

Connection of production-marketing- procurement chains

Market 5729 Food and Beverage Retail Stores

No including tiendas

Sales increased 7% 2002 -2003

Floor Space increased 5.4% in 2002, 8.9% 2003

Top 4 retailers invested 233 million 2004 and 300 million 2005

Top 4 Wal-Mart, 9 percent; Soriana, 7 percent Comercial Mexicana, 4.9 percent; Gigante, 3.2 percent

Changes

1. Arrival of Foreign Retail Chains. Wal Mart, Sams, Carrefour, Auchan,

HEB, Safeway.

2. Modernization of domestic supermarket chains.

Changes

5. Decline of average food shopping trips/week (11-12 in 1995 to 7.5 in 1999).

6. Increase in variety and convenience offered to Mexican consumers.

Changes

3. Four fold increase in number of self -service food retail chain stores (1998/1993).

4. Increase on consumers preference of supermarket format. (60% of Mexicans by 1999).

Changes

7. Decline in number and sales of traditional food retail outlets.

8. Aggressive expansion plans of main food retail chains for the next five years (10-15% square feet/year).

9. If pattern continues, in 10-15 years, Mexico would have the same square feet/ capita as the US.

Challenges

1. Regional Distribution Centers (private chains)

2. Less Government-build Wholesale (terminal) markets.

3. Increase in volume, quality and consistency requirements on suppliers. Contract pricing.

4. Shortages on adequate transportation, storage and refrigeration services.

5. Need of enforceable quality grades and standards system.

6. Increased demand for a more diverse, higher quality, value added food supply.

Changing Demand

Mexico Quality/freshness Variety/Novelty Appropriate Packaging Convenience Safety Consumer services Reasonable prices

US Ethic Food Greater variety Multilingual Packaging, Services and marketing

Competitive advantage of modern supermarkets vs. traditional retail outlets

Changing Demand

Mexico Quality/freshness Variety/Novelty Appropriate Packaging Convenience Safety Consumer services Reasonable prices

US Ethic Food Greater variety Multilingual Packaging, Services and marketing

Competitive advantage of modern supermarkets vs. traditional retail outlets

Changing Demand

MexicoShort Supply: Milk powder, poultry, red meat, canned fruits, sugar, cereals and pet

food cannot meet domestic demand (Source: Bancomext). Communication: Supplier, distributor and end-user: cited often by interviewees as one of

the most important components to building a successful distribution network

NOM Norms (Mexican Official Norms)

USSanitary Sanitary needs high, with significant change from state to stateSupply: Fresh Fruit, vegetables (especially tomatoes) are high dollar and

seasonal

Wal-Mart de México, SA de CV Supercenters (89), Supermarkets (48), Clubs (61), Warehouses (162)

Wal-Mart, 62.4%

12,547 360 All major cities

Direct, local distributors; importers

Grupo Gigante, SA de CV Hypermarkets (61), Supermarkets (100), Clubs (3, closing 2/05), Warehouses (52), Gigante USA (8)

Local 2,736 224 All major cities and California

Direct, local distributors; importers

Supermercados Internacionales HEB, SA de CV Hypermarkets (8), Supermarkets (12)

US owned

801 20 Northern Mexico

Direct, local distributors

04/10/23

Typical Mexico Produce Distribution System

Producer Wholesale Market

Public Markets

Grocery Stores

Street markets

Supermarkets

Distribution Centers

Middlemen

04/10/23

International Distribution

US Exporter

US Exporter

US Exporter

04/10/23

Typical US Produce Distribution System

Packer/Shipper

Chain Distribution

CenterSupermarket

Independent WholesalersTerminal Markets

HEB

1997: San Antonio Company. First store opens in Monterrey, NL

1998: Second Store opens in Monterrey

1999: Five stores in Monterrey

2002: 18 stores open in 3 Mexican States

2004: 40 stores projected

HEB

2 Distribution Centers under implementation

30% of Mexican stores sales are IMPORTED

Growing number of “store brands” H-E-B Hill Country Fare EconoMax “Personal Expressions” Tierra Linda (Mexican products) 4% non perishable

Hypermarket

45,000 - 100,000

Almost a full line of merchandise and additional services.

Supermarket

5000 – 45,000

Food items (perishables and dry goods) limited services, pharmacy.

Megamarket

More than 100,000

Full line of merchandise and additional services such as a pharmacy.

Hypermarket

45,000 - 100,000

Almost a full line of merchandise and additional services.

HEB

WalMart

HEB

Highly advertised store brands (20% cheaper)

Processing: bread, tortillas, sodas, ice cream, yogurt, milk etc.

Starting new format “home stores” (Via Hogar)

Texan HEB suppliers exporting indirectly

Walmart

Joint Venture Strategy:

Combined with Cifra.

Concept Adaptation: First Wal Mart Supercenter in Mexico.

Force Competition: Force Mexican Monopolize.

Replicate US Logisitcs.

Introduce Warehouse.

Walmart

Initial Problems. Lack of leverage with Local Suppliers. Inefficient Distribution in Mexico. Merchandise:

Ice Skates. Leaf Blowers. Fishing.

Automated Information System: Auto reorder.

Higher Prices.

04/10/23

Wal Mart Stores In Mexico

0

100

200

300

400

500

600

91 93 94 95 96 97 98 99 0 1 2

04/10/23

Wal Mart Mexico Sales Growth

6.1%4.7%4.8%% Net Profit/Sale

s

17%15%12%SALES GROWTH

RATE

2002*20012000Year

Walmart

Consolidación 1997 WalMex.

Precio bajo Diario.

2do mas grande negocio (Volumen De Ventas).

3ro El patrón más

grande.

485 minoristas, 285 restaurantes.

1997 Consolidation WalMex.

Everyday Low Price.

2nd Largest Company (Sales Volume).

3rd Largest

employer.

485 Retailers, 285 restaurants.

Walmart Bodega Aurerra

Walmart Bodega Aurerra

Walmart Bodega Aurerra

Gigante

Horizontal and Vertical Integration across borders

Market Niche: Mexican Nationals and Ancestry, Mexican Sympathetic.

Product Transfer

Adaptive Corporate Culture and Logistics.

Gigante

3 Billion USD Annual Sales.

475 Stores in 31 States.

20 Stores in US.

Product Promotions.

Adaptive Corporate Culture and Logistics.

Gigante

1994: Strategic Alliance with Radio Shack and Office Depot.

1997: Strategic Alliance with Carrefour.

1999: Stores in San Diego.

2002: Anti Gigante Legislation eliminated in Orange.

2003 Alliance with Comercial Mexico and Soriana.

Gigante

Technology - Cultural Transfer.

Logistics.

Buying.

Marketing.

Cleanliness.

Gigante

Improve Logistics Originally “Seat of the pants” ordering

Inefficiency. Large Margins. Reports on a Weekly Basis.

Modern Logistics 9 Central Distribution Centers. 2000 introduced Data Warehouse. Went from 3 or 4 days to solve query to 15 minutes. Automatic POS transfer. Vendor Data.

Gigante

Collective Buying: Sinergia. Limitend Liability Company.

Target: Bodega Gigante:

Blue Collar. Super G:

High End. Gigante.

Promotion: Redecorating Stores: Beatles month. Classic songs played. Sold Beatles CD's, movies and T-shirts.

Gigante US

7.

Gigante US

Target: Latin. Latin Interested.

Brand: Gigante. Superprecio.

Product: Bimbo. Ariel Detergent. Tampico Juice. Jaritos Soda. Flavored Tortillas. Marinela Bread. Chilis (Variety). Meats. Larger Produce Section.

Gigante US

Buyer Behavior: US Consumer 2.2 visits a week. US Latin Consumer 4.4 visits a week. Latin’s spend 3rd more of income on food. Driving.

Price: For Mexican consumers. 15% below average.

Promotion: 70% name recognition among latinos. Spanish Language. Spanish Adds. Mexican Music.

Gigane US

Opposition: Union:

Hire Spanish Speakers. United Food & Commercial Workers Union. Clerks make 10.79 hr. Union 17.59 hr.

Residents: Anaheim Planning Commission. Liquor Laws.

Vendors: Personal Guarantees.