Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

Подождите немного. Документ загружается.

It is difﬁcult for new ﬁrms to enter Russia. The

market has a great deal of structural and institu-

tional impediments.The impediments include: hor-

izontal dominance (signiﬁcant seller and buyer

contraction in regional markets), a high degree of

vertical integration and exclusive buyer–seller rela-

tionships in certain industrial sectors, geographic

segmentation, interregional barriers to trade and

investment, and policies that make entry difﬁcult for

new ﬁrms. The anticompetitive market structure,

coupled with the existing dominant ﬁrms’ anticom-

petitive conduct, does not leave enough structural

economic space for new entrants.

Power and coercion

The “least dependent person” hypothesis, men-

tioned in Chapter 11, states that the one party with

resources and alternatives can demand more

because it needs the other party less. As such, the

least-dependent member of the channel has more

power and may be able to force other channel

members to accept its plan.This hypothesis explains

why it has been difﬁcult for Japanese and Korean

semiconductor manufacturers to recruit US distrib-

utors to reach customers who are too small to buy

directly from computer chip manufacturers. The

major US semiconductor manufacturers have long

adopted a tacit policy of not allowing their distrib-

utors to sell Japanese competitors’ products.Avnet

Inc., the largest distributor in the USA, had to stop

buying chips from Japan’s NEC Corp. Samsung

Semiconductor was initially happy when Arrow

Electronics Inc., the nation’s second largest distrib-

utor of semiconductors, agreed to sell its products.

Arrow abruptly terminated the agreement a few

weeks later, citing changing business conditions.

What happened was that Intel Corp. and Texas

Instruments reduced the amount of business con-

ducted with Arrow. It is thus not surprising that only

one of the electronics industry’s top ten distributors

distributes Japanese or Korean chips.

Conceivably, dealers in a developing country

do not retaliate against a manufacturer’s use of coer-

cive inﬂuence strategies. When dealers are highly

dependent on manufacturers, they have higher tol-

erance than dealers in other channel contexts.

One must be careful in applying Western models

overseas because their impact may differ in devel-

oping countries. The applicability of those models

may vary from country to country as well. How dis-

tributors perceive inﬂuence can affect control and

conﬂict in the relationship. Consequently, inﬂuence,

as practiced in Western channels, may not be effec-

tive in relationships with Asian or Latin American

ﬁrms.

One study investigated how resource- and mar-

ket-based assets inﬂuenced power in international

relationships.Based on a sample of distributors from

Canada, Chile, Great Britain, and the Philippines, a

distributor’s power is inﬂuenced by asset speciﬁcity,

predictability, and market knowledge gap. Invest-

ments in assets speciﬁc to the relationship that

cannot be easily obtained by an American manufac-

turer provides an overseas distributor with power

over its US manufacturer.

Control

If it has a choice, a manufacturer that wants to have

more control over its product distribution may want

to both shorten and narrow its distribution channel.

The EU integration and competitive pressures may

encourage manufacturers to get closer to ﬁnal cus-

tomers by setting up sales subsidiaries instead of

relying on distributors or agents. Absolut vodka, a

product of Vin and Sprit (a company in Sweden), is

distributed in the USA by Future Brands. The

product is distributed in Europe by Maxxium. To

maintain a measure of control, it bought 49 percent

of a joint venture with Future Brands, and it became

a fourth partner in Maxxium.

In conclusion, there are a number of factors that

affect channel decisions. Some of these factors are

interrelated. Empirically, it has been shown that

overseas distribution channel choice is affected by

culture and other product constraints. One study of

269 manufacturers also found that a choice between

foreign-based agents and distributors is affected by

market diversity, type of transaction-speciﬁc asset,

366

CHANNELS OF DISTRIBUTION

and production cost economies. Agents are used

only to ﬁnd customers when manufacturers want to

safeguard technology by self-performing most of

the export functions.

DISTRIBUTION IN JAPAN

One good way to understand how a foreign distri-

bution system might differ from that of the Western

world is to examine Japan’s distribution system.

Japan’s many-layered distribution system appears

to be counter-productive. In modern societies

where production is revered, Japan’s distribution

system seems ancient and inefﬁcient. Employing 8.6

million people, the system consists of multiple

layers of overstaffed intermediaries – overstaffed in

part due to nepotism.The distribution network has

more wholesalers and retailers per capita than any

of the advanced industrial nations.

At the wholesale level, Japanese wholesalers

perform the warehousing and ﬁnancing functions in

great detail. Because retailers are small and inade-

quately ﬁnanced, the retailers shift warehousing

and ﬁnancing responsibilities to their suppliers by

placing frequent but small orders.Wholesalers are

expected to extend lengthy credit and to accept the

risk of selling on consignment.Wholesalers are also

expected to stock an extensive assortment of goods

and to provide rapid delivery. Supplier reliability

and wholesaler ability to deliver with a short lead

time outweigh any concern about price advantage.

Another distinctive feature of the Japanese

wholesaling business is the close and frequent inter-

action among wholesalers. It is common business

practice for wholesalers there to resell products to

other wholesalers. Distribution channels in Japan

are characterized by multiple layers of wholesalers

and many small retailers. Japanese wholesalers have

close, personal relationships with other whole-

salers, manufacturers, importers, and retailers.

Because of these intimate relationships which serve

as an informal barrier, foreign ﬁrms have difﬁculties

in directly reaching end users or retailers. Even

though the population of Japan is about half that of

the USA, and Japan is smaller in geographic size

than the state of California, the number of retail

outlets in Japan is nearly the same as that in the

USA. Overall, the Japanese system of distribution is

both complex and inefﬁcient.

The Japanese distribution system exists to serve

social as much as economic purposes, and the social

or societal goal sometimes overshadows economic

logic. Channel members are not altogether differ-

ent from family members, with all levels and

members being tightly interlocked by tradition and

emotion. It is a traumatic and sometimes tragic

decision if channel members have to be dropped,

and such members may be unable to bear the social

consequence of losing face.

The familial relationship of ﬁrms makes doing

business easier, and it is customary for members of

the same family unit to prefer sourcing from one

another to sourcing on the outside.This tightly knit

vendor–customer family relationship is perceived

by some foreign ﬁrms as a trade barrier, but it is

more likely that these foreign manufacturers have

failed to understand the system. However, it is not

as much a case of the Japanese versus foreign sup-

pliers but rather a case of an insider against an out-

sider.Any newcomer, Japanese or foreign, will have

a difﬁcult time penetrating the family unit’s close

organizational ties.The key to succeeding within this

network is to work long and hard to become part

of the family.

Compared to corporate groups in Germany,

Spain, France, and Korea, the well-diversiﬁed indus-

trial groups of Japan called keiretsu are similar but

larger.There are six major keiretsu in Japan: Mitsui,

Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi.

The keiretsu system has three major characteristics:

(1) cross-ownership of equity (which allows the

costs of a negative industry-speciﬁc shock to be

shared by all other member ﬁrms from other indus-

tries), (2) close ties to the group’s “main bank”

(which provides the majority of the ﬁrm’s debt

ﬁnancing), and (3) product market ties with the

other ﬁrms in the group (which limit competition

by discriminating against outside buyers/sellers).

Legal barriers pose a problem for distribution

efﬁciency. Foreign car makers have to contend with

1111

10111

20111

45111

367

CHANNELS OF DISTRIBUTION

the high cost of opening dealerships in Japan.

Japanese regulations prohibit local automobile

dealers from sharing facilities with importers even

though these dealers may sell products that have

nothing to do with automobiles. In the USA,

Japanese exporters have no difﬁculty in lining up

American dealers to share their outlets.

For almost thirty years, Japan’s controversial

Large Scale Retail Store Law protected small and

medium-sized retailers by restricting a larger store’s

size, hours, and operating days. Large retailers,

those ones most likely to carry imported goods,

were thus unable to modernize the distribution

system. One has to be careful about what one may

wish for, however. Because of the pressure from the

USA to open its economy to more efﬁcient inter-

national competitors, Japan ﬁnally abolished the

law in 2000. Unfortunately, Japan has replaced it

with the Large Scale Retail Store Location Act that

has even more restrictions. Store developers must

build enough parking spaces so that, even on the

busiest shopping day, no shopper will ever have to

wait for a parking space.This requirement is easier

said than done.After all, in Japan, land is expensive

and lot sizes are narrow, not to mention a burden-

some task of land transfer. On top of all these obsta-

cles, it is exceedingly difﬁcult for any developer to

do enough to reduce trafﬁc so as to win building

approval.

In spite of the apparent rigidity which exists in

Japan, it must be pointed out that Japan, as a “hot”

country, is ripe for changes. Japanese retailing, once

highly weak and fragmented, has been evolving

rapidly. Small retail ﬁrms have declined in number

by 20 percent, and the total number of retail estab-

lishments has decreased as well. These develop-

ments clearly show a consolidation of the Japanese

retail sector.

Due to structural change in Japan, foreign manu-

facturers may want to experiment with alternative

distribution channels. It is possible to circumvent

the Japanese distribution system.Instead of cracking

Japan’s multitiered distribution system, foreign

marketers may want to employ certain alternative

distribution channels. One channel is to use direct

marketing (e.g., telemarketing, mail order, and

door-to-door selling). Amway Japan Ltd. has been

spectacularly successful by adopting the parent’s

highly successful direct sales technique. The com-

pany rewards Japanese distributors for performance

and gives them such titles as Diamond Direct

distributors.

Another alternative channel is to establish a retail

store.This is what Toys “ ” Us has done. Costco has

followed suit. Costco operates more than 390

outlets worldwide to sell merchandise in big pack-

ages under a membership system. It will take time

for Japanese consumers to get used to this type of

distribution. Many Japanese are accustomed to go

on foot to shop daily at local stores. In addition,

Japanese homes are small and have only limited

storage space. In the end, though, the convenience

of driving to big stores and stocking up at lower

prices may change their attitudes.

SELECTION OF CHANNEL MEMBERS

Because the success of a product depends so much

on the efforts of channel members, manufacturers

must carefully screen all potential members. Most

Hong Kong trading companies handle such a wide

range of products that they may have inadequate

time to devote to any additional product. To make

matters worse, some agents in Hong Kong are

known to take on a new product line for the sole

purpose of denying it to other agents, knowing

full well that they are not capable of being of much

assistance to the new client.

Manufacturers and their intermediaries should

determine whether their marketing plans are

compatible. It is unwise to assume that a common

European (or Asian) business mentality exists across

European (or Asian) countries.

Since it is difﬁcult for a manufacturer to learn

about distant potential dealers, short of a personal

and lengthy visit, there is a need to depend on other

sources of information. Countries with export pro-

motion programs usually have local ofﬁces in their

major foreign markets that can provide information

on how exporters may contact importers in such

368

CHANNELS OF DISTRIBUTION

markets. Figure 12.6 illustrates how Hong Kong

tried to attract US importers.

One good source of information in the USA is

the International Trade Administration, which has

available trade lists by industry and country.The US

Department of Commerce’s Agent/Distributor Service

(ADS) is designed for ﬁrms seeking to identify

potential foreign agents or distributors interested in

a business relationship. It is a customized overseas

search for interested and qualiﬁed foreign repre-

sentatives on behalf of a US client. US commercial

ofﬁcers abroad conduct the search and prepare a

report identifying up to six foreign prospects that

have personally examined the US ﬁrm’s product

literature and have expressed an interest in repre-

senting it.

REPRESENTATION AGREEMENT AND

TERMINATION

Firms often assume that, in the absence of provi-

sions to the contrary, clauses appointing foreign

distributors or agents are nonexclusive. Actually,

the opposite is often the case. Indonesia prohibits a

1111

10111

20111

45111

369

CHANNELS OF DISTRIBUTION

How the Hong Kong Trade Development Council helps you trade with Hong Kong

Figure 12.6

A trade inquiry service

Source:

Reprinted with

permission of Hong Kong Trade

Development Council.

supplier from appointing more than one distributor

or representative in the same territory. Colombia

presumes that a sales agent’s appointment is exclu-

sive unless the agreement speciﬁcally states that the

appointment is a nonexclusive one.

It may not be easy to terminate a representation

agreement. Based on the assumption that an agent

or distributor often invests considerable effort and

money to develop the local market for the princi-

pal, many countries have enacted agency termi-

nation laws to protect the interests of agents and

distributors. Such laws have a tendency to penalize

unilaterally foreign principals that have terminated

the agency relationships.These laws often forbid a

manufacturer from terminating its relationships

with even incompetent channel members without a

lengthy notice in advance or without an expensive

settlement. For example, without just cause, Bolivia

may not allow a principal’s product to enter the

country. In Abu Dhabi, an agent with a compensa-

tion claim pending can legally prevent the importa-

tion of the former principal’s products.

Despite some variations, contract termination

laws of various countries have several common char-

acteristics. First, these laws are constructed in such

a way that they provide the agent with considerable

leverage. The principal can terminate or refuse to

extend an agency agreement without being penal-

ized economically only upon a showing of just cause.

For example,the reasons and situations under which

the agreement may be validly terminated in Chile

are: (1) expiration of the contract term, (2) agent’s

resignation, (3) death, (4) bankruptcy or insolvency

of either party, (5) legal incompetence of either

party, (6) marriage of a woman agent, and (7) ter-

mination of the functions of the principal, if the

agency was based on the exercise of such functions.

Second, the principal is obliged to compensate

the agent when the relationship is terminated

without just cause. If a ﬁxed-term contract has run

for more than one year, Mexico sets the compensa-

tion at the value of six months’ remuneration plus

twenty days’ remuneration for every year of service

after the ﬁrst year. In Austria, the damage payment

may amount to between one year’s and ﬁfteen years’

average commission. Puerto Rico’s required com-

pensation in the event of unjust termination can be

excessive, since it includes (1) actual value of

expenses incurred by the agent in setting up and

running the business, (2) value of the agent’s inven-

tories and stock, (3) loss of the agent’s proﬁts, and

(4) value of the agent’s goodwill.The agent may also

claim an amount equal to the agent’s proﬁt experi-

ence for the previous ﬁve years or ﬁve times the

average annual proﬁt.

Third, the compensation and other rights

granted to the agent may not be waived in some

countries. Sweden, for instance, does not allow the

agent to waive the termination notice requirements.

Fourth, the agency contract may not allow the

parties to elect another country’s law to govern

the contract. Bolivia voids choice-of-law clauses

since Bolivian law is the sole applicable law.

Fifth, the agent may be considered as an

employee of the principal and is thus entitled to the

protection of local labor laws concerning dismissal

and compensation.The compensation may take the

form of a pension.

Sixth, the principal may be required to give

notice prior to termination, and the agent may have

the right to contest the termination decisions.

Sweden stipulates that the notice term be three

months when an indeﬁnite-term agreement has

been in effect for at least one year. In Switzerland,

the law requires a two-month minimum period

for termination notice after the ﬁrst year, and the

termination can be effective only at the end of each

calendar quarter.

To minimize risk and problems, the principal

should carefully structure the representation agree-

ment. In general, certain contract terms must be

included. The written contract should identify the

parties and their rights and obligations. A time

period during which the agreement will be in effect

should be stated.When legally permissible, the con-

tract should specify the jurisdiction to handle legal

disputes. Arbitration clauses specifying the arbitra-

tion body should be included.To avoid ambiguity, it

is highly advisable to have an English version that

is expressly allowed to prevail.

370

CHANNELS OF DISTRIBUTION

In Italy, most distribution agreements involve

repeated sales of stock to distributors because there

is no compensation upon expiration of the contract

unless otherwise stipulated. It is more favorable for

a manufacturer to avoid an agency relationship

which will entitle an agent to certain guarantees.

When an agency relationship is established, the

manufacturer must make a contribution to an

agent’s insurance fund (ENASARCO) in order to

provide sickness, termination, and pension beneﬁts.

Upon termination, the agent receives compensation

for the termination itself from the ENASARCO

fund. In addition, the agent will also receive com-

pensation for the clientele already provided to the

principal, and the compensation is based on the

annual value of clientele served by the agent.

MNCs should avoid evergreen contracts,

which allow agreements to remain in effect or to be

automatically renewed until terminated by one of

the parties.

Such a contract may substantially

increase the potential compensation obligations of

the exporter under foreign laws on termination of

distributors and sales representatives. Exporters

should therefore have speciﬁc expiration dates in

their foreign distributorship and sales representative

agreements. Many countries regard the third or

fourth renewal of even one- or two-year agreements

as evidence of an evergreen contract.When renew-

ing agreements, it is thus a good practice for the

exporter to change the language of prior texts sufﬁ-

ciently in order to avoid creating the appearance of

an evergreen contract. Another useful method of

reducing or avoiding compensation payments is to

include “just cause” termination provisions. The

agreement should have the legally permissible

grounds (just causes) for terminating distributors

and sales representatives in the foreign country in

question.

BLACK MARKET

Economic activities in search of proﬁt will always

take place regardless of what the laws say. Naturally,

virtually all countries, regardless of their religious,

political, and legal orientations, must contend with

the black market. For millennia, smuggling has been

a way of life in land-locked Afghanistan. Smuggling

is facilitated by the Afghan Trade Transit Agreement

(ATTA), signed in 1950, that allows goods to pass

from the port of Karachi through Pakistan and over

the Afghan border duty-free. Almost all goods

bound for Afghanistan make a “U-Turn” and end

up back in Pakistan. As an example, a buyer in

Afghanistan may import air-conditioners through

the Karachi port and move them across the Afghan

border 620 miles away. After the trucks unload the

appliances on the Afghan side, they go back to

Pakistan and wait for the very same appliances to re-

enter Pakistan illegally, carried by donkeys, camels,

or on tribesmen’s backs. Such goods sell for

much less in Pakistan than legally imported items.

Incidentally, a trucking industry controlled largely

by Afghan refugees is used for the transportation of

these products. According to the World Bank, this

illegal trade amounted to $2.5 billion in 1997.

While the legality of a gray market is uncertain,

a black market is most certainly illegal. While a

black market usually conjures up an image of small-

time crooks and maﬁa-type organizations, several

large multinationals have been accused of smuggling

or abetting it. JTI-Macdonald, a Canadian tobacco

manufacturer, and its four US-based afﬁliates were

charged with fraud and evasion of hundreds of mil-

lions of dollars in duties and taxes.These companies

were accused of supplying Canada’s black market.

The scheme involved exporting their Canadian-

brand cigarettes, manufactured in Canada and

Puerto Rico, to the USA,“knowing that these prod-

ucts were being smuggled back into Canada and

onto the commercial market.”

GRAY MARKET

A gray market exists when a manufacturer ends up

with an unintended channel of distribution that

performs activities similar to the planned channel –

hence the term parallel distribution. Gray

market goods move through this extra channel,

internationally as well as domestically. In an inter-

national context, a gray market product is one

1111

10111

20111

45111

371

CHANNELS OF DISTRIBUTION

imported by an unauthorized party. Products

notably affected by this method of operation include

watches, cameras, automobiles, perfumes,and elec-

tronic goods.The problem is particularly acute for

Seiko, because one out of every four Seiko watches

imported into the US market is unauthorized.

A gray marketer can acquire goods in two prin-

cipal ways (see It’s the Law 12.1). One method is

to place an order directly with a manufacturer by

going through an intermediary in order to conceal

identity and purpose.Another method is to buy the

merchandise for immediate shipment on the open

market overseas. Asian countries in general and

Hong Kong in particular are favorite targets because

the wholesale prices there are usually much lower

than elsewhere.The importance of the gray market

even persuades some countries to specialize in han-

dling such goods for the third country, primarily the

USA. Germany stimulates the practice by rebating

all import duties and local VAT for re-exports. Paris’

Roissy Airport is popular with international brokers

because of its duty-free warehouse space for trans-

shipments, which are not taxed either. The airport

also allows quick delivery because goods simply

move through it without any intermediate delivery.

The existence of the gray market has stimulated

a great deal of debate. Complaints are made, and

responses to the charges are offered. At least four

questions must be asked. First, why does the gray

market exist? Second, are gray market goods illegal?

Third, do gray marketers perform any useful func-

tions? Fourth, are gray market goods inferior?

Causes

Gray marketing of a product within a market often

takes place because of the channel structure and

372

CHANNELS OF DISTRIBUTION

Japan is Coca-Cola’s most lucrative market, earning

the company $1 billion in proﬁts before taxes. About

50 percent of Coca-Cola’s products in Japan are sold

through vending machines, resulting in a proﬁt of

$1.26 in proﬁt per case – compared with 94 cents in

Germany and only 28 cents in the USA. Some entre-

preneurs want to share that proﬁt. As a result, con-

sumers in Japan can buy either Japan-made Coke or

Coke that comes from the USA.The price of American

Coke is about 40 percent lower, in spite of the ship-

ping cost. Coca-Cola certainly does not like it and has

gone after two small exporters – Omni Paciﬁc and

Dependable Vending. Coke’s lawsuits state that sale

of its products outside the speciﬁed regions raises

quality control issues, infringes its trademark rights,

and violates bottlers’ contracts.

The exporters have fought back and ﬁled a coun-

tersuit contending that Coca-Cola itself has provided

some Japanese bottlers with the discounted American-

made Coke so as to undercut the exporters. Coca-Cola

is accused of unfairly trying to control prices world-

wide by using such methods as threats of legal action,

requiring bottlers not to do business with suspected

transshippers, and blacklists of certain companies

that distributors cannot sell to.These methods violate

foreign fair-trade laws and American antitrust

statutes. Ironically, Dependable Vending gets its goods

from Coca-Cola Enterprises, the biggest bottler, that

eagerly sells to anyone in order to meet its numbers.

Coca-Cola also went after Mushi Pardhan, a

Tanzanian immigrant in Canada. Pardhan bought

Coke products wholesale in Canada and shipped the

“gray goods” to Hong Kong and Japan for a 14 per-

cent proﬁt margin. He bought a case for $4.25 (plus

transport cost) and resold it for more than $6. The

sales reached $4.8 million on a weekly basis. Coke,

suing for trademark infringement, shut Pardhan down

in 1995. A federal judge subsequently ruled that

Pardhan bought and sold the products legally, and the

Canadian Supreme Court refused to accept Coke’s

appeal.

Sources:

“Coke Flips Its Top over Japan Sales,”

San

José Mercury News

, January 26, 2000; and “Distributor

Dilemmas,”

PROMO

, August 2000, 20.

MARKETING ETHICS 12.1 AMERICAN COKE VS. JAPANESE COKE

margins. A manufacturer who wants to eliminate

the potentially proﬁtable gray marketing activity

should restructure its pricing and discount policies.

Parallel importation of trademarked products

occurs for several reasons: (1) gray marketers can

easily locate sources of supply because many trade-

marked products are available in markets through-

out the world, (2) price differences among these

sources of supply are great enough, and (3) the

legal and other barriers to moving goods are low.

Although there are several causes, price differ-

ential is the only true reason for the gray market to

exist. There is no justiﬁcation for the existence of

the gray market unless prices in at least two domes-

tic markets differ to the extent that, even with extra

transportation costs, reasonable proﬁts can be

made. This is a good example of the economic

force at work. Gray market goods may be pur-

chased, imported, and resold by an unauthorized

distributor at prices lower than those charged by

manufacturer-authorized importers/distributors.

As a result, identical items can carry two different

retail prices.

Legal dimension

At one time, whether or not gray market goods are

illegal could not be answered with a great degree of

certainty. Unlike the black market, which is clearly

illegal, the gray market, as its name implies, is

neither black nor white – legality is in doubt. For

the US market, all US-registered trademark owners

are protected under the Tariff Act of 1930 and

Section 42 of the Lanham Act. The law protects an

independent American trademark owner who invests

money in promoting a brand to the extent that the

owner becomes identiﬁed with that brand in the

USA.The protection is granted to protect the mark

owner from unfair competition by those seeking

to sell the same goods without authorization. If

the owner of a US trademark bought distribution

rights from an “unrelated” foreign manufacturer,

that owner is thus able to obtain an exclusion

order from the Customs Service to forbid entry of

goods bearing his brand name. Thus, only indepen-

dent American ﬁrms are entitled to seek this protec-

tion. An exclusion order is not granted to foreign

1111

10111

20111

45111

373

CHANNELS OF DISTRIBUTION

The European Union ﬁled lawsuits against Philip

Morris and R.J. Reynolds, accusing them of organiz-

ing and running a multibillion-dollar international

cigarette smuggling operation. The federal civil rack-

eteering lawsuits alleged a conspiracy that evaded

billions of dollars in customs payments, duties, fees,

and taxes from the EU. To facilitate smuggling,

these tobacco giants knowingly mislabeled or did not

label their cigarettes, and they arranged practically

untraceable payments for smuggled cigarettes that

included money rerouted to Swiss bank accounts. In

the case of R.J. Reynolds, the smuggling trail started

in its Miami ofﬁce. Winstons were sold there to

Copaco, a Panama company. Cigarettes were shipped

from North Carolina to Panama and then to the

Netherlands. Shippers in the Netherlands next

attached documents to show that the cigarettes were

sent to Canary Islands or Easter Europe. Actually, the

shipment was trucked to be sold in Spain.

The European Union later ﬁled another lawsuit in

New York against R.J. Reynolds to seek compensation

for money laundering. According to the EU’s esti-

mates, it lost several billion dollars in taxes every year

due to smuggling cigarettes from Eastern Europe and

the Middle East into the EU. American companies

supposedly and intentionally oversupplied Eastern

European countries and elsewhere so that the surplus

could be smuggled into the EU.

Sources:

“Two Tobacco Giants Accused of Smuggling in

Europe,”

San José Mercury News

, November 7, 2000; “EU

Files New Suit Against R.J. Reynolds,”

San José Mercury

News

, November 1, 2002.

IT’S THE LAW 12.1 BLACK MARKET

companies, and this includes those using their own

US subsidiaries to import their goods into the USA.

As a result, Canon and Minolta were unable to reg-

ister their trademarks with the US Customs for the

purpose of banning entry of gray market goods.

At present, the law seems to be more on the side

of parallel distributors. The US Court of Appeals

ruled that a trademark owner receives no injury to

its reputation because there is no confusion about

the product’s origin,and that a manufacturer is capa-

ble of labeling and advertising to inform the public of

the lack of warranty of gray market merchandise.

Courts in other countries often take the same posi-

tion.Japanese judges rule repeatedly for gray market

importers. The British Fair Trading Act allows

wholesalers to sell to any retailers, who in turn can

buy from any wholesalers. The Ninth US Circuit

Court of Appeals held that “this country’s trademark

law does not offer [the manufacturer] a vehicle for

establishing a discriminatory pricing scheme simply

through the expedient of setting up an American

subsidiary with nominal title to its mark.”

The US Supreme Court’s rulings on two sepa-

rate cases, though somewhat contradictory, appear

to endorse gray marketing. Sharp Electronics Corp.

stopped selling calculators to Business Electronics

Corp., a Houston discount retailer, after receiving a

complaint from a full-price retailer. The Supreme

Court rules that such a cut-off is not an automatic

violation of federal antitrust law because Sharp did

not explicitly set prices.The high court, arguing that

higher prices lead to better service which beneﬁts

consumers, held that manufacturers can cut off “free

riders” who take unfair advantage of the greater

service provided by full-price ﬁrms.In a ﬁve-to-four

vote in another case, however, the Supreme Court

legitimized the gray market.The Tariff Act of 1930

allows imports to be blocked only when requested

by a US ﬁrm that was authorized by an unafﬁliated

foreign trademark owner to distribute its products.

Foreign goods may be imported when the foreign

and domestic trademark holders are “subject to

common ownership and control.”

At one time, certain exclusive sales territo-

ries were supported by nontariff barriers between

member states of the European Union. However,

the EU’s elimination of nontariff barriers and border

controls has made it possible for parallel imports to

move freely across the EU, resulting in price com-

petition. Under the EU concept of parallel imports,

suppliers and distributors of products in one mem-

ber state cannot use exclusive sales arrangements to

conspire to block parallel imports of identical prod-

ucts from dealers in other member states. Such

actions are a violation of EU antitrust laws.

The only industry-speciﬁc exception to the EU’s

normal competition principles is the automobile

industry.The rules governing new car sales, known

as “block exemption,” restrict car dealers’ competi-

tion. Even then, the rules still require the car

makers to sell their cars to any EU citizens regard-

less of where they live. Volkswagen was found to

have prevented Germans and Austrians from

buying Volkswagen and Audi cars in Italy where the

prices were cheaper. The European Commission

ﬁned Volkswagen a massive amount of €102 million.

The amount was later reduced to €90 million

because the EU’s Court of First Instance ruled

that the European Commission did not prove that

Volkswagen cancelled some dealer franchises so as

to punish them for facilitating cross-border sales. In

the end, the European Court of Justice, the EU’s

high court, upheld the ruling in 2003.

Ethical dimension

To manufacturers and authorized dealers, parallel

distributors are nothing but freeloaders or parasites

who take advantage of the legitimate owners’ invest-

ment and goodwill. Manufacturers also feel that

these discounters deceive buyers by implying that

gray market goods have the same quality and war-

ranties as items sold through authorized channels.

Gray marketers naturally see the situation differ-

ently. They feel that manufacturers try to have

it both ways – tolerating gray marketing when

they need to get rid of surplus merchandise and

condemning gray marketers when that need sub-

sides. Gray marketers also accuse manufacturers

of not wanting to be price competitive, and view

374

CHANNELS OF DISTRIBUTION

manufacturers’ distribution restrictions as a smoke-

screen for absolute price control. Parallel distribu-

tors claim to align themselves more with consumers

by providing an alternative and legal means of

distribution, a means capable of delivering the

same goods to consumers at a lower but fair price

under the free enterprise system. Some parallel

distributors have even sued Mercedes-Benz for

restraint of trade, which is a violation of the

Sherman and Clayton Acts.As pointed out by them,

trademarks are designed to counter fraud rather

than limit distribution.

Product quality

With regard to the charge that gray market goods

are inferior, manufacturers and authorized dealers

refuse to service such goods by pointing out that

gray market goods are not for US consumption.

Therefore, such goods are adulterated, second-rate,

or discontinued articles, and consumers may be mis-

led into believing that they receive identical prod-

ucts with US warranties. Gray marketers, however,

do not buy this argument.According to them, there

is really no proof that the products they handle are

inferior. It is inconceivable that a manufacturer

would stop a production line just to make another

product version for the non-US market. As such,

gray market goods are genuine products subject to

the same stringent product control. Concerning the

inferior warranty and the manufacturer’s refusal to

service gray market goods under warranty terms,

parallel distributors show no concern, since they

have their own warranty service centers that can

provide the same, if not better, service.Their service

offers are often closer to the market being served.

Gray marketers also point out that they would not

survive in the long run if they did not provide

service and quality assurance.

Manufacturers’ marketing strategies

The arguments used by both sides are legitimate

and have merits. Only one thing is certain: autho-

rized distributors are adversely affected by parallel

distribution. They lose market share as well as

control over price.They may have to service goods

sold by parallel competitors, and the loss of good-

will follows when consumers are unable to get

proper repair.

Manufacturers and authorized distributors deﬁ-

nitely see the need to discourage gray marketing.

There are several strategies for this purpose, and

each strategy has both merits and problems.

Although tracking down offenders costs money, dis-

enfranchisement of offenders is a stock response.

This move sends loud signals of commitment to dis-

tributors who abide by the terms of the franchise

agreement.A one-price-for-all policy can eliminate

an important source of arbitrage, but it ignores

transaction costs and forecloses valid price discrim-

ination opportunities among classes of customers

who are buying very different beneﬁts in the same

product. Another strategy is to add distributors

(perhaps former gray market distributors) to the

network, but this approach may create disputes

among current distributors.

There are both reactive and proactive strategies

that may be employed (See Tables 12.1 and 12.2).

Reactive strategies to combat gray market activity

are strategic confrontation, participation, price cut-

ting, supply interference, promotion of gray market

product limitations, collaboration, and acquisition.

Proactive strategies are product/service differentia-

tion and availability, strategic pricing, dealer devel-

opment, marketing information systems, long-term

image reinforcement, establishing legal precedence,

and lobbying.

Certain strategies warrant further attention.

When they want to track the trail of gray market

goods, manufacturers can use serial numbers on

products and warranty cards to identify those who

are involved in unauthorized distribution.There are

two problems related to this strategy. First, using

special model numbers or identifying special model

numbers or identifying marks on products increases

inventory cost and affects the manufacturer’s ﬂexi-

bility in rerouting products quickly and cheaply to

markets with a sudden surge in demand. Second,

even when unauthorized dealers are identiﬁed,

1111

10111

20111

45111

375

CHANNELS OF DISTRIBUTION