Koren Y. The Global Manufacturing Revolution: Product-Process-Business Integration and Reconfigurable Systems
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Chapter 13
Enterprise Globalization
Strategies
The pace of globalization is accelerating and shows no sign of reversing course. With
the growth of manufacturing capacity in developing countries and advances in
communication and transportation, it has become economically attractive for many
manufacturing enterprises to consider becoming global. A global company may
design a product in one country, buy parts in another country, assemble the product in a
third country, and sell it elsewhere. Therefore, we define globalization in the context
of this book as:
Globalization is the integration and interdependency of world markets and resources
in producing consumer goods and services
Market integration means opening markets of countries around the globe for buying,
producing, and selling with minimal government interference, a process that is greatly
facilitated when the countries are members of the World Trade Organization (WTO).
1
Government interference might otherwise include import taxes, domestic production
subsidies, trade quotas, or import licenses. The absence of government restriction,
combined with the low cost and expediency of commun ication technologies, makes
global access to buyers and sellers easy, and generally reduces product and service
pricing for consumers.
Market interdependence means that, in order to prosper, local markets are more
dependent on markets in other countries for buying, selling, or producing not only the
parts and products they need, but also knowledge and R&D capabilities.
The Global Manufacturing Revolution: Product-Process-Business Integration and Reconfigurable Systems
By Yoram Koren
Copyright Ó 2010 John Wiley & Sons, Inc.
331
For manufacturing, to a large extent, the pace of globalization is control led by large
enterprises. The successful global manufacturing enterprise typically designs pro-
ducts for different regions on the globe, has manufacturing capabilities in several
countries, and sells its products in multiple markets in many countries. Therefore,
large manufacturing enterprises in the twenty-first century, whether they like it or not,
must prepa re strategies for (1) product design that fits multiple cultures and regula-
tions, (2) cost-effective, globally distributed manufacturing plants, and (3) a business
strategy that serves a global multi-cultural market. The overall growth of a global
manufacturing enterprise depends upon the entire worldwide integration of its
successful product development, manufacturing, and business strategy.
13.1 WHY ENTERPRISES BECOME GLOBAL
Globalization enables all enterprises to operate at an international level, a status once
reserved for only the very elite. The development of new communications technol-
ogies (e.g., undersea fiber-optic cables, high-speed Internet, fax, CD, etc.) and the
acceptance of English as the international language for science and business facilitate
the integration of international trade and enable the easy exchange of knowledge
among the peoples of the world. People can now cooperate more easily; but they can
just as easily com pete.
Globalization of the manufacturing sector is occurring at an accelerated pace. The
removal of trade and financial barriers as well as the reduction of the cost of
communications has paved the way to the creation of global “multi-national”
enterprises that move not only capital and goods from country to country, but also
knowledge and R&D across international borders. Moving products, capital, knowl-
edge, and people across borders creates whole new arenas of security, prosperity, and
property rights questions and problems but the benefits are equally compel ling.
13.1.1 Benefits for Global Enterprises—Markets Without Borders
Becoming a global manufacturing enterprise has several benefits:
1. Globalization can reduce manufacturing costs by building plants in low-
labor-cost countries and shipping parts from cost-effective suppliers in these
countries to assembly plants in countries where the product is assembled and
sold.
2. Globalization is a new source for enterprise growth achieved by accessing
new markets, enlarging the customer base, and avoiding trade barrie rs by
producing within the new market countries.
3. Globalization can reduce the business risk since it may smooth the impact of
regional business cycles on the revenues of a global enterprise, thereby
spreading the business risk across a wider, more diversified market. (See
Appendix C: Business Cycles)
332 ENTERPRISE GLOBALIZATION STRATEGIES
4. Globalization filters currency exchange fluctuations because having reve-
nue sources in many different currencies (e.g., dollar and Euro) smoothes
currency exchange variations and brings more stability to enterprise earnings.
“Procter & Gamble (P&G) entered the Chinese market in 1989 with its Head &
Shoulders shampoo,” wrote our graduate student Hui (John) Wang. “Around 1990,
P&G at North American had serious financial problems. But at the sam e time the
Chinese P&G profit and market share increased dramatically because of the big
market of China. This is the advantage of spreading a business risk by a global
enterprise across a diversified market.”
Global markets are complicated, however. The global enterprise must carefully
monitor currency exchange rates. A company’s profit margin, of say for example 9%,
in one country can be completely wiped out by an equal fluctuation of 9% in the
exchange rate of the country in which products are sold or made. The fluctuations
between the dollar and the Euro during the 4 years 2001–200 5 were over 40% (on
January 1, 2001: Euro/$ ¼ 0.94; and on January 1, 2005: Euro/$ ¼ 1.36; a 42%
change). So if a German company invested in the United States (or in China, whose
currency was linked to the dollar until 2005) in January 2001 and made a 9% annual
profit on its investment (totaling 36% over 4 years), it still lost money in Euros in 2005
(assuming that the company cashed in on its investment in 2005).
During the same period, ex-
ported commodities from the
Euro-financed bloc became
40% more expensive in the dol-
lar-linked financial bloc. Such a
financial environment is very
dangerous to business, and so
investing globally spreads out
the risk.
Fluctuations in currency exchange rates can weaken or even eliminate the low-cost
advantage of countries like China. China had maintained an exchange rate of 8.28
Yuan to one U.S. dollar for over a decade until 2005. (On July 21, 2005 China finally
acquiesced to continuous pressure from the United States, and agreed to detach the
Yuan from the dollar. China linked it instead to a basket of foreign currencies.)
Before 2005, China’s concern was that a higher exchange rate (i.e., fewer Yuan per
dollar) would result in a cost advantage to countries like Vietnam, Malaysia,
and Thailand, and this could hurt China’s growth, in creasing their own u nemploy-
ment rate.
Currency exchange rates can also affect domestic business cycles. When the dollar
is weak abroad, U.S. exports to Europe are cheaper, thus more attractive, and their
demand increases; U.S. factories work harder to supply the new demand, and the
WHY ENTERPRISES BECOME GLOBAL 333
business cycle in the United States climbs out of a slump. Clearly, the four benefits of
globalization mentioned above are not independent from one another. However,
globalization has also potential risks.
13.1.2 The Risks of Globalization
The pressures on an enterprise to consider globalization are unavoidable, and the
benefits often make it worthwhile. However, unl ess an enterprise plans carefully,
the risks and pitfall s of moving into the global arena can erode all of those benefits.
A global enterprise must prepare itself by investigating all aspects of its business as
it t ries to fit into a global tem plate and then it must constantly monitor itself to
survive.
1. Locating Factories Offshore: Settings up manufacturing operations, espe-
cially in “low-labor-cost” and typically developing countries, can have unex-
pected risks attached that do not arise until the investment is already made.
Sometimes the local work rules and ethics of a so-called “low-cost” workforce
are so different they can offset much of their cost savings. In some cultures for
example, it is customary for workers to take a day off if they feel they have
earned enough money in the preceding week. A whole assembly line can be
idled even if only a few key workers decide to skip work. In other cultures, work
rules limit the number of working hours. In these cases, a surge in demand
cannot be met by offering workers an overtime surcharge. Another big issue
concerns infrastructure and communications at the overseas plant site. Most of
the developing world is struggling with overloaded transportation, communi-
cation, and electricity infrastructure. Currently the biggest drags on economic
progress in India and China are the capacity and reliability of their power grids,
although they are working mightily to improve them. Offshore manufacturing
may not be such a simple replacement for domestic production.
2. Interdependency of World Markets: The spread and interconnectedness of
production, and communication around the world brings about an interlacing of
national economies. An economic downturn in one country can quickly affect
the econom ic situation in other nations. The financial crisis that started in the
United Stated in September 2008 quickly spread throughout the world. The
abrupt downturn in retail purchasing in the United States has caused factories in
China to sudden ly shut down and send their workers home. In the twenty-first
century, the peaks and valleys of business cycles in different countries are linked
more than at any other time in history.
3. Currency Exchange Rates: We have already discussed how currency ex-
change rates can have unexpected and devastating impacts on a company’s
profitability. Currency exchange rates can change dramatically within just a
few months, and volatile exchange rates can wreak havoc on complex global
supply chains that take years to establish. Exchange rates are often a dominant
reason why manufacturers choose to abandon the natural advantages of their
334 ENTERPRISE GLOBALIZATION STRATEGIES
home country, and move operations to the country where their largest markets
reside. One of the reasons why Toyota and Honda decided to open automotive
plants in the United States was to avoid the hazards of fluctuating exchange
rates.
4. Changing Economic Rules: In the past, the U.S. government invited its
citizens to go shopping to stimulate the economy. This could work in the old
economy, when most products were manufac tured in the United States.
However, in the twenty-first century economic reality, it has had very little
of the desired effect, since the money spent is actually used to buy products
manufactured overseas. Often, the only contribution to the domestic U.S.
economy is in retail sales, shipping, and handling. The bulk of the purchase
enriches offshore manufacturers. The new economy cannot be built on spending
alone; it must be based on producing good s domestically.
5. Standards and Norms of Imported Products: Like infrastructure, product
reliability cannot be taken for granted with globalization and neither can quality
and product safety. Standards that are part of the landscape of a developed
country might be quite rare and difficult to establish in an offshore vendor.
Writing quality specifications into an offshore contract are not the same as
imposing norms of behavior on the factory floor. For example, if the local
workforce sees your standards of hygiene and purity as exotic, accidental
contamination of the process will be harder to avoid. If the quality of parts for
airplanes and heavy equipment, or the purity of foods and pharmaceuticals is
not up to the required standard, disastrous consequences may occur. Increases in
inspection, oversight, and control can impact the profitability of an offshore
contract as much as any other cause, with the added threat of litigation and
liability.
6. National Sovereignty: Chief amo ng the risks of gl ob alization are those that
challenge a nation’s sovereignty over its own conduct and commerce.
Globalization impinges on a nation’s sovereignty by imposing international
rules on the local business landscape. The emergence of institutions such as
the WTO, the World Bank, the European Union (EU), and the European
Central Bank add constraints that may have been ignored in the past, but
arenowpartofthemajorityofalltrade transactions, especially in
manufacturing.
“Another risk of immense globalization is that it broadens the environmental problems.
Production was shifted to new countries, and brought with it local environmental problems.
But these local problems quickly became global environmental problems. Global problems
require global solutions, and it is not possible to solve them with the local mindset of local
governments. Therefore, it is a concern that not all countries have accepted the Kyoto
protocol.”
—Selin Kurnaz, Ph.D., Associate, PRTM (Our former student).
WHY ENTERPRISES BECOME GLOBAL 335
Globalization also encourages the growth of multinational corpo rations that
become less subject to any one country’s trade laws, and these can exert economic
influence with no oversight but the marketplace. This reduces a country’s ability to set
its own economic policies since these are all largely market driven and vulnerable to
external influences. Governments can no longer expect to manage their economies in
isolation, and must increasingly adapt their operations to the pressures and impera-
tives of the global market. For those countries whose culture evokes a history of
industrialization this can come as a serious blow to their identity as well as their
prosperity.
To become global, it is not enough to buy inexpensive parts from a low-labor-cost
country. The global enterprise needs a global growth strategy that addresses issues
such as:
.
Which countries are potential new markets? Is the new market large enough to
justify adapting produc ts to its regulations and culture?
.
Which countries are best for producing products, and which countries are better
economically suited for producing the components for these products?
.
How can a product be designed to save production cost so that it sells in many
countries while minimizing regional modifications?
We will elaborate on these issues and provide some guidelines.
13.2 COUNTRIES OF POTENTIAL NEW MARKET S
Globalization can increase the per capita earning potential in developing countries.
This can boost the purchasing power of their population, thereby growing the customer
base for new products. This becomes evident when looking at a previous generation of
developing countries. In the late 1970s, South Korea, Taiwan, Singapore, and Hong
Kong were developing countries. At that time, international manufacturers began
building plants in these countries.
As Korea, Taiwan, Singapore, and Hong Kong have shown, the road to prosperity
begins with low wages and cheap exports. As skill s increase, the value of exported
products rises, allowing salari es to increase. Table 13.1 shows the change in salaries in
TABLE 13.1 Salary Growth in Four Countries
1975
(%)
1995
(%)
South Korea 5 43
Taiwan 6 34
Hong Kong 12 29
Singapore 13 43
336
ENTERPRISE GLOBALIZATION STRATEGIES
these countries as a percentage of U.S. salary during 20 critical years.
2
Accordingly,
we have every reason to expect that the wages of knowledge workers in China and
India will rise substantially (perhaps up to 30–40% of U.S. levels) within a few years.
This already happens (in 2006) in Bangalore, India, where competition for software
writers pushed wages up towards U.S./European levels.
3
Such salary increases in such
large populations will dramatically change the globalization landscape.
Global enterprises must be prepared for substantial wage increases when planning
factories or long-term R&D in China and India. At the same time they have to look at
the potential market expansion opp ortunities there. Expansion into these new markets
represents an important positive element of the strategy and the business model for
global enterprises.
Table 13.2
4
compares a list of nations with emerging markets (population in
millions) and helps enterprise strategists identify growing markets and potential
market expansion opportunities. Note that in 2005 it was estimated that only 10% of
the populations of China, India, and Brazil had a purchasing power of over $20,000/
year. Within a few more years this percentage will probably double and expand to
TABLE 13.2 World’s Largest Countries by Population, and Estimates for the Year 2025
Rank
Developed
Country
Developing
Country
Potential
New Market
2004
Population
2025 Estimated
Population (in M)
1 China v 1300 1450
2 India v 1065 1390
3 United States 293
4 Indonesia v 238 280
5 Brazil v 184 220
6 Pakistan 159
7 Russia v 144 130
8 Bangladesh 141
9 Nigeria 137
10 Japan 127
11 Mexico v 105 130
12 Philippines v 86 120
13 Vietnam v 80 110
14 Germany 82
15 Egypt 73
16 Turkey v 69 80
17 Iran 68
18 Ethiopia 68
19 Thailand v 65 70
South Africa v 43 37
Malaysia v 23 33
Total estimated population in emerging markets in 2025 is 4050
The wealthiest 20% of these 4050 million people create an emerging market that is two and a half times
larger than the U.S. market. The potential for market growth in these 12 countries (marked by v) is higher
than in the mature economies of the United States, Europe, and Australia combined.
COUNTRIES OF POTENTIAL NEW MARKETS 337
perhaps 500 million people, which will create a huge new market for consumer
products o f all kinds.
Of course political stability, the availability of talent, and the working habits in
each country also have to be considered when predicting emerging new markets in
these count ries. Political stability is usually achieved in democratically empowered
countries, but this is not a necessary condition (consider China, for example). In
Table 13.2, the symbol v indicates, in the author’s opinion, 12 countries that have
achieved a sufficient level of political stability, and its people have an appropriate
work ethic, to establish both a manufacturing base and potential new markets.
The estimated total population (for the year 2025) of these 12 developing countries
alone is about 4 billion people. Assuming that even if only the top 20% of these
people have a median income comparable to the U.S. median, it will still represent an
emerging market two and a half times larger than the total current U.S. market. The
potential for market growth in these countries is far higher than in the mature
economies of the Unite d States, Europe, and Australia. Considering this, who will
build the products all these consumers will want to buy?
The global opportunities for growth, especially in China, India, Indonesia, Brazil,
Russia, and Mexico, are enormous, but the opportunities in these countries come with
significant business risks. The dilemma for the global enterprise is that it can neither
ignore these opportunities nor disregard the risks.
There are considerable differences in the political system, culture, climate, and
geography of these 12 countries, and these differences must be accounted for when
preparing a long-term strategy. For example, Indonesia is a Southeast Asian, Muslim
country distributed among many islands and located close to the equator. Their needs
are likely very different from Russia (Christian, a temperate to arctic climate on one
huge country). A major difference between the two is their geography—islands versus
one huge landmass—that makes the logistics and distribution systems substantially
different (Indonesia is made up of 17,500 islands, and Russia is one country with the
largest continuous landmass in the world, comprising 11.5% of the terrestrial earth
and spanning 11 time zones). A globally oriented strategy must take into account all
these various factors.
In just recent years, the globalization phenomenon has caused a huge shift of
wealth and economic power to China and India. Together they make up about half of
the world’s population, and their integration into the global market has changed the
playing field and brought tremendous business opportunities and challenges.
13.3 PRODUCT DESIGN FOR GLOBALIZATION
In all enterprises, strategies for globalizati on must include three aspects: (1) a business
plan built on the four benefits mentioned above in Section 13.1, (2) the strat egic
location of man ufacturing plants, and (3) products that can be customized to fit the
requirements of each world market. Products designed for one country may be
completely inappropria te for sale in another, and product offerings must always match
the culture and needs of the local market. Strategically designed products that can be
338 ENTERPRISE GLOBALIZATION STRATEGIES
sold in multiple markets with small changes are critical for the global company. In
these designs, the product base platform may be identical, but the add-on modules
should be tailored to respond to regional culture and local regulations, and also fit the
purchasing power of the target population. Below are examples of how cultural and
regional differences can affect product design.
The Japanese buy almost no American cars. U.S. automakers have complained for
years that the reason is because of trade barriers imposed by the Japanese government
to block foreign companies from competing in Japan. It was not until the late 1980s
that a Japanese expert pointed out that the reason was that U.S. automakers tried to sell
cars with the steering wheel on the left side (U.S. production), but in Japan
automobiles drive on the left side of the road (like in England). To compete globally,
U.S. manufacturers must customize their products to fit the regulations and require-
ments in the destination market.
The world may be “getting smaller” but it is still not reasonable to expect that a
single design will serve all potential markets. One size does not fit all. Africa and
India, for example, may likely need products with similar basic functionality because
large areas of both have similar climate, infrastructure, and topography. However, the
purchasing power of those markets and their performance expectations may vary
considerably. While a product in India may need certain aesthetic qualities in order to
sell, the same basic platform in Tanzania may value reliability or extended range more
highly. And neither may be interested in luxury features, common in the USA or
Europe, because they put the product out of the price range of their average buyer.
The market for low-cost cars is booming in Brazil, Russia, India, and China (BRIC
countries). These low-cost vehicles typically sell for $3000 to $7000. This market
grew by about 13% in 2006, and is projected to grow an additional 26% by 2016. Such
low prices are possible mainly because of reduced safety standards and the elimi-
nation of extraneous features. However, these cars must include interior functions
such as storage space, radios, and airflow devices. Interior features for cars in the
$3000 range are of course different than for cars in the $5000 or $7 000 range. The
manufacturer might use design one modular and scalable design to fit the entire price
range. However, in all designs, the interior must be aesthetically pleasing and aimed at
the particular target market.
Global manufacturers should also be prepared to customize their product offerings
to match the life style and culture of their target markets. For example, the size and
structure of home appliances depend on living conditions and shopping habits.
Apartments in Hong Kong, Israel, and in major European cities (e.g., Paris, Milan)
are small, and therefore clothes dryers are commonly installed on top of the washing
machine. The typical top loading washing machine in the United States would not fit
these markets.
Another example is the size of refrigerators that people buy, which usually depends
on the size of the living quarters and shopping habits. Americans tend to have larger
homes and do most of their food shopping once a week in supermarkets. In many
European cities, the apartments tend to be smaller and there are many neighborhood
grocery stores. Europeans do not mind shopping more often and they prefer their
foods fresh and not canned or frozen.
PRODUCT DESIGN FOR GLOBALIZATION 339
To assist in global product development, many enterprises (e.g., GM, Microsoft)
have opened global networks for product design. Their goal is only to access the best
talents from different countries and to develop real global products. Designers from
different cultures think in different ways that can collectively lead to enhanced
product design and innovation.
Ordinarily, as products are more customized, their prices should increase. But,
sometimes the global market does not allow this to happen. Manufacturers need to
appreciate the tradeoff between levels of customization and the manufacturing cost.
Microsoft, for example, develops customized, regionalized products to serve its
customers in many countries. This is a strategic decision that may not, in itsel f,
generate a profit.
For the most part, customization of their Office software means making it
operational in languages other than English. However, when the user population of
a particular language is small, Microsoft does not profit by that customization. For
example, Microsoft offers its products in Hebrew, although the only country in the
world that uses Hebrew is Israel with a population of only 7 million people. This
customization by itself is not profitable, but it maintains the company’s position as a
leading global company.
13.4 LOCATION OF MANUFACTURING PLANTS
Where should a global manufacturer locate its manufacturing facilities? If you were a
global manufacturer of cell phones, would you consider Finland (the home of Nokia)
as the main location for your plant? Should enterpr ises locate their manufacturing
plants in countries with the lowest labor rates or in the countries where the final
products will be sold? What other factors should be taken into account when making
this decision?
Determining plant loca tion is one of the most critical decisions since “brick and
mortar” investments are expensive to build and the hardest to change. Choosing the
right location can provide a strategic advantage to the enterprise. In 1999, Ford Motor
Company decided to build an advanced engine plant in Windsor, Ontario, Canada,
only 5 miles from the United States to Canada border. The engines are shipped from
there to automotive assembly plants in Michigan across the Detroit River. The wage
rates at that time were lower in Canada than in the United States, but this was not the
deciding factor at the time. The main issue was the cost of employee health insurance.
Canada has a national health insurance plan, while in the United States health
insurance is private, expensive, and a major concern in labor contracts between the
employer and the employees.
Historically “the Big-3” automakers have provided gener ous health benefits to
their employees. Mr. Gary Cowger, Group Vice President for Global Manufacturing at
General Motors confirms that the price of every car sold in the United States during
2004 included $1200 in health insurance costs for GM employees and retirees. Unlike
its main competitor, Toyota U.S. does not have this burden of employee heal th
insurance, and this enhances its competitive advantage. Health insurance coverage
and other fixed costs can easily become deciding factors.
340 ENTERPRISE GLOBALIZATION STRATEGIES