BPO – BANE OR BOON ?

Several MNCs are increasingly unbundling or vertical disintegrating

their activities. Put in simple language, they have begun outsourcing (also

called business process outsourcing) activities formerly performed in-house

and concentrating their energies on a few functions. Outsourcing involves

withdrawing from certain stages/activities and relaying on outside vendors to

supply the needed products, support services, or functional activities.

Take Infosys, its 250 engineers develop IT applications for BO/FA (Bank

of America). Elsewhere, Infosys staffers process home loans for green point

mortgage of Novato, California. At Wipro, five radiologists interpret 30 CT

scans a day for Massachusetts General Hospital.

2500 college educated men and women are buzzing at midnight at

Wipro Spectramind at Delhi. They are busy processing claims for a major US

insurance company and providing help-desk support for a big US Internet

service provider-all at a cost upto 60 percent lower than in the US. Seven

Wipro Spectramind staff with Ph.Ds in molecular biology sift through scientific

research for western pharmaceutical companies.

Another activist in BOP is Evalueserve, headquarterd in Bermuda and

having main operations near Delhi. It also has a US subsigiary based in New

York and a marketing office in Australia to cover the European market. As

Alok Aggarwal (co-founder and chairman) says, his company supplies a range

of value-added services to clients that include a dozen Fortune 500

companies and seven global consulting firms, besides market research and

venture capital firms. Much of its work involves dealing with CEOs, CFOs,

CTOs, CIOs, and other so called C-level executives.

Evaluserve provides services like patent writing, evaluation and assessment

of their commercialization potential for law firms and entrepreneurs. Its

market research services are aimed at top-rung financial service firms, to

which it provides analysis of investment opportunities and business plans.

Another major offering is multilingual services. Evalueserve trains and

qualifies employees to communicate in Chinese, Spanish, German, Japanese

and Italian, among other languages. That skill set has opened market

opportunities in Europe and elsewhere, especially with global corporations.

ICICI infotech Services in Edison, New Jersey, is another BOP services

provider that is offering marketing software products and diversifying into

markets outside the US. The firm has been promoted by $2-billion ICICI Bank,

a large financial institution in Mumbai that is listed on the New York Stock

Exchange.

In its first year after setting up shop in March 1999, ICICI infotech spent

$33 million acquiring two information technology services firms in New Jersy-

Object Experts and ivory Consulting – and command Systems in Connecticut.

These acquisitions were to help ICICI Infotech hit the ground in the US with a

ready book of contracts. But it soon found US companies increasingly

outsourcing their requirements to offshore locations, instead of hiring foreign

employees to work onsite at their offices. The company found other native

modes for growth. It has started marketing its products in banking, insurance

and enterprise resource planning among others. It has earmarket $10 million

for its next US market offensive, which would go towards R & D and back-end

infrastructure support, and creating new versions of its products to comply

with US market requirements. It also has a joint venture – Semantik Solutions

GmbH in Berlin, Germany with the Fraunhofer Institute for Software and

Systems Engineering, which is based in Berlin and Dortmund, Germany –

Fraunhofer is a leading institute in applied research and development with

200 experts in software engineering and evolutionary information.

A relatively late entrant to the US market , ICICI Infotech started out

with plain vanilla IT services, including operating call centeres. As the market

for traditional IT services started wakening around mid-2000, ICICI Infotech

repositioned itself as a “Solutions” firm offering both products and services.

Today , it offers bundied packages of products and services in corporate and

retail banking and include data center and disaster recovery management

and value chain management services.

ICICI Infotech’s expansion into new overseas markets has paid off. Its

$50 million revenue for its latest financial year ending March 2003 has the US

operations generating some $15 million, while the Middle East and Far East

markets brought in another $9 million. It new boasts more than 700

customers in 30 countries, including Dow Jones, Glazo-Smithkline, Panasonic

and American Insurance Group.

The outsourcing industry is indeed growing form strength. Though technical

support and financial services have dominated India’s outsourcing industry,

newer fields are emerging which are expected to boost the industry many

times over.

Outsourcing of human resource services or HR BPO is emerging as big

opportunity for Indian BPOs with global market in this segment estimated at

$40-60 billion per annum. HR BPO comes to about 33 percent of the

outsourcing revenue and India has immense potential as more than 80

percent of Fortune 1000 companies discuss offshore BOP as a way to cut

costs and increase productivity.

Another potential area is ITES/BOP industry. According to A NASSCOM

survey, the global ITES/BOP industry was valued at around $773 billion during

2002 and it is expected to grow at a compounded annual growth rate of nine

percent during the period 2002 – 06, NASSCOM lists the major indicators of

the high growth potential of ITES/BOP industry in India as the following.

During 2003 – 04, The ITES/BPO segment is estimated to have achieved

a 54 percent growth in revenues as compared to the previous year. ITES

exports accounted for $3.6 billion in revenues, up form $2.5 billion in 2002 –

03. The ITES-BPO segment also proved to be a major opportunity for job

seekers, creating employment for around 74,400 additional personnel in India

during 2003 – 04. The number of Indians working for this sector jumped to

245,500 by March 2004. By the year 2008, the segment is expected to

employ over 1.1 million Indians, according to studies conducted by NASSCOM

and McKinsey & Co. Market research shows that in terms of job creation, the

ITES-BOP industry is growing at over 50 per cent.

Legal outsourcing sector is another area India can look for. Legal

transcription involves conversion of interviews with clients or witnesses by

lawyers into documents which can be presented in courts. It is no different

from any other transcription work carried out in India. The bottom-line here is

again cheap service. There is a strong reason why India can prove to be a big

legal outsourcing Industry.

India, like the US, is a common-law jurisdiction rooted in the British

legal tradition. Indian legal training is conducted solely in English. Appellate

and Supreme Court proceedings in India take place exclusively in English.

Due to the time zone differences, night time in the US is daytime in India

which means that clients get 24 hour attention, and some projects can be

completed overnight. Small and mid – sized business offices can solve staff

problems as the outsourced lawyers from India take on the time – consuming

labour intensive legal research and writing projects. Large law firms also can

solve problems of overstaffing by using the on – call lawyers.

Research firms such as Forrester Research, predict that by 2015, more

than 489,000 US lawyer jobs, nearly eight percent of the field, will shift

abroad..

Many more new avenues are opening up for BOP services providers. Patent

writing and evaluation services are markets set to boom. Some 200.000

patent applications are written in the western world annually, making for a

market size of between $5 billion and $7 billion. Outsourcing patent writing

service could significantly lower the cost of each patent application, now

anywhere between $12,000 and $15,000 apiece-which would help expand the

market.

Offshoring of equity research is another major growth area. Translation

services are also becoming a big Indian plus. India produces some 3,000

graduates in German each year, which is more than that in Switzerland.

Though going is good, the Indian BPO services providers cannot afford

to be complacent. Phillppines, Maxico and Hungary are emerging as potential

offshore locations. Likely competitor is Russia, although the absence of

English speaking people there holds the country back. But the dark horse

could be South Affrica and even China

BOP is based on sound economic reasons. Outsourcing helps gain cost

advantage. If an activity can be performed better or more cheaply by an

outside supplier, why not outsource it? Many PC makers, for example, have

shifted from in – house assembly to utilizing contract assemblers to make

their PCs. CISCO outsources all productions and assembly of its routers and

witching equipment to contract manufactures that operate 37 factories, all

linked via the internet.

Secondly, the activity (outsourced) is not crucial to the firm’s ability to

gain sustainable competitive advantage and won’t hollow out its core

competence, capabilities, or technical know how. Outsourcing of

maintenance services, date processing, accounting, and other administrative

support activities to companies specializing in these services has become

common place. Thirdly, outsourcing reduces the company’s risk exposure to

changing technology and / or changing buyer preferences.

Fourthly, BPO streamlines company operations in ways that improve

organizational flexibility, cut cycle time, speedup decision making and reduce

coordination costs. Finally, outsourcing allows a company to concentrate on

its core business and do what it does best. Are Indian companies listening ? If

they listen, BPO is a boon to them and not a bane.

Questions :

1. Which of the theories of international trade can help Indian

services providers gain competitive edge over their competitors

?

2. Pick up some Indian services providers. With the help of

Michael Porter’s diamond, analyse their strengths and

weaknesses as active players in BPO.

3. Compare this case with the case given at the beginning of this

chapter. What similarities and dissimilarities do you notice ?

Your analysis should be based on the theories explained.

No : 2

PERU

Peru is located on the west coast of South America. It is the third largest

nation of the continent (after Brazil and Argentina) , and covers almost

500.000 square miles (about 14 per cent of the size of the United States).

The land has enormous contrasts, with a desert (drier than the Sahara), the

towering snow – capped Andes mountains, sparkling grass – covered

plateaus, and thick rain forests. Peru has approximately 27 million people, of

which about 20 per cent live in Lima, the capital. More Indians (one half of

the population) live in Peru than in any other country in the western

hemisphere. The ancestors of Peru’s Indians were the famous incas, who

built a great empire. The rest of the population is mixed and a small

percentage is white. The economy depends heavily on agriculture, fishing ,

mining, and services, GDP is approximately $15 billion and per capita income

in recent years has been around $4,3000. In recent years the economy has

gained some relative strength and multinationals are now beginning to

consider investing in the country.

One of these potential investors is a large New York based bank that is

considering a $25 million loan to the owner of a Peruvian fishing fleet. The

owner wants to refurbish the fleet and add one more ship.

During the 1970s, the Peruvian government nationalized a number of

industries and factories and began running them for the profit of the state in

most cases, these state – run ventures became disasters. In the late 1970s

the fishing fleet owner was given back his ships and allowed to operate his

business as before. Since then, he has managed to remain profitable, but the

biggest problem is that his ships are getting old and he needs an influx of

capital of make repairs and add new technology. As he explained it to the

new York banker. “Fishing is no longer just an art. There is a great deal of

technology involved. And to keep costs low and be competitive on the world

market, you have to have the latest equipment for both locating as well as

catching and then loading and unloading the fish”

Having reviewed the fleet owner’s operation, the large multinational

bank believes that the loan is justified. The financial institution is concerned,

however, that the Peruvian government might step in during the next couple

of years and again take over the business. If this were to happen, it might

take an additional decade for the loan to be repaid. If the government were

to allow the fleet owner to operate the fleet the way he has over the last

decade, the fleet the way he has over the last decade, the loan could be

repaid within seven years.

Right now, the bank is deciding on the specific terms of the agreement.

Once theses have been worked out, either a loan officer will fly down to Lima

and close the deal or the owner will be asked to come to New York for the

signing. Whichever approach is used, the bank realizes that final adjustments

in the agreement will have to be made on the spot. Therefore, if the bank

sends a representative to Lima, the individual will have to have the authority

to commit the bank to specific terms. These final matters should be worked

out within the next ten days.

Questions :

1. What are some current issues facing Peru ? What is the climate

for doing business in Peru today ?

2. What type of political risks does this fishing company need to

evaluate ? Identify and describe them.

3. What types of integrative and protective and defensive

techniques can the bank use ?

4. Would the bank be better off negotiating the loan in New York

or in Lima ? Why ?

No : 3

RED BECOMING THICKER

The Backdrop

There seems to be no end to the troubles of the coloured – water giant Coca

Cola. The cola giant had entered India decades back but left the country in

the late 1970s. It staged a comeback in the early 1990s through the

acquisitions route. The professional management style of Coca Cola did not

jell with the local bottlers. Four CEOs were changed in a span of seven years.

Coke could not capitalize on the popularity of Thums Up. Its arch rival Pepsi

is well ahead and has been able to penetrate deep into the Indian market.

Red in the balance sheet of Coke is becoming thicker and industry observers

are of the opinion that it would take at least two decades more before Coke

could think of making profits in India.

The Story

It was in the early 1990s that India started liberalizing her economy. Seizing

the opportunity, Coca Cola wanted to stage a comeback in India. It chose

Ramesh Chauhan of Parle for entry into the market. Coke paid $100 million

to Chauhan and acquired his well established brands Thums Up, Goldspot and

Limca. Coke also bagged 56 bottlers of Chauhan as a part of the deal.

Chauhan was made consultant and was also given the first right of refusal to

any large size bottling plants and bottling contracts, the former in the Pune –

Bangalore belt and the latter in the Delhi and Mumbai areas.

Jayadeva Raja, the flamboyant management expert was made the first

CEO of Coke India. It did not take much time for him to realize that Coke had

inherited several weaknesses from Chauhan along with the brands and

bottlers. Many bottling plants were small in capacity (200 bottlers per minute

as against the world standard of 1600) and used obsolete technology. The

bottlers were in no mood to increase their capacities, nor were they willing to

upgrade the trucks used for transporting the bottle. Bottlers were more used

to the paternalistic approach of Chauhan and the new professional

management styles of Coke did not go down well with them. Chauhan also

felt that he was alienated and was even suspected to be supplying

concentrate unofficially to the bottlers.

Raja was replaced by the hard – nosed Richard Niholas in 1995. The

first thing Nicholas did was to give an ultimatum to the bottlers to expand

their plants or sell out. Coke also demanded equity stakes in many of the

bottling plants. The bottlers had their own difficulties as well. They were

running on low profit margins. Nor was Coke willing to finance the bottlers on

soft terms. The ultimatum backfired. Many bottlers switched their loyalty and

went to Pepsi. Chauhan allegedly supported the bottlers, of course, from the

sidelines.

Coke thought it had staged a coup over Pepsi when it (Coke) clamed the

status of official drink for the 1996 Cricket World Cup tournament. Pepsi took

on Coke mightily with the famous jingle “Nothing official about it”. Coke could

have capitalized on the sporty image of Thums Up to counter the campaign,

but instead simply caved in.

Donald Short replaced Nicholas as CEO in 1997. Armed with heavy

financial powers, Short bought out 38 bottlers for about $700 million. This

worked out to about Rs 7 per case, but the cost – effective figure was Rs 3 per

case. Short also invested heavily in manpower. By 1997 , Coke’s workforce

increased to 300. Three years later, the parent company admitted that

investment in India was a big mistake.

It is not in the culture of Coke to admit failure. It has decided to fight

back. Coke could not only sustain the loss, it could even spend more money

on Indian operations. It hiked the ad budget and appointed Chaitra Leo

Burnett as its ad agency. During 1998 – 99, Coke’s ad spend was almost

three times that of Pepsi.

Coke is taking a look at its human resources and is taking initiatives to

re – orient the culture and inject an element of decentralization along with

empowerment. Each bottling plant is expected to meet predetermined profit,

market share, and sales volumes. For newly hired management trainees, a

clearly defined career path has been drawn to enable them to become profit

centre heads shortly after completion of their probation. Such a decentralized

approach is something of a novelty in the Coke culture worldwide.

But Alezander “Von Behr, who replaced Short as Chef of Indian

operations, reiterated Coke’s commitment to decentralization and local

responsiveness. Coke has divided India into six regions, each with a business

head. Change in the organization structure has disappointed many

employees, some of whom even quit the company.

Coke started cutting down its costs. Executives have been asked to

shift from farm houses to smaller houses and rentals of Gurgaon

headquarters have been renegotiated. Discount rates have been

standardized and information systems are being upgraded to enable the

Indian headquarters to access online financial status of its outposts down to

the depot level.

Coke has great hopes in Indian as the country has a huge population

and the current per capita consumption of beverages is just four bottles a

year.

Right now, the parent company (head – quartered in the US) has bottle

full of problems. The recently appointed CEO-E Neville Isdell needs to

struggle to do the things that once made the Cola company great. The

problems include –

Meddling Board

Coke’s star- studded group of directors, many of whom date back to the

Goizueta era, has built a reputation for meddling.

Moribund Marketing

Once world class critics say that today the soda giant has become too

conservative, with ads that don’t resonate with the teenagers and young

adults that made up its most important audience.

Lack of Innovation

In the US market , Coke hasn’t created a best – selling new soda since

Diet Coke in 1982. In recent years Coke has been outbid by rival Pepsi Co for

faster growing noncarb beverages like SoBe Gatorade.

Friction with Bottlers

Over the past decade, Coke has often made its profit at the expenses of

bottlers, pushing aggressive price hikes on the concentrate it sells them. But

key bottlers are now fighting back with sharp increases in the price of coke at

retail.

International Worries

Coke desperately needs more international growth to offset its flagging

US business, but while some markets like Japan remain lucrative, in the large

German market Coke has problems so far as bottling contracts go.

When its own house is not in order in the large country, will the

company be able to focus enough on the Indian market ?

Questions :

1. Why is that Coke has not been able to make profit in its Indian

operations ?

2. Do you think that Coke should continue to stay in India ? If yes ,

why ?

3. What cultural adaptations would you suggest to the US

expatriate managers regarding their management style ?

4. Using the Hofstede and the value orientations cultural models ,

how can you explain some of the cultural differences noted in

this case ?

NO. 4

THE ABB PBS JOINT VENTURE IN OPERATION

ABB Prvni Brnenska Stojirna Brno, Ltd. (ABB-PBS), Czechoslovakia was a

joint venture in which ABB has a 67 per cent stake and PBS a.s. has a 33 per

cent stake. This PBS share was determined nominally by the value of the

land, plant and equipment, employees and goodwill, ABB contributed cash

and specified technologies and assumed some of the debt of PBS. The new

company started operations on April 15, 1993.

Business for the joint venture in its first two full years was good in most

aspects. Orders received in 1994, the first full year of the joint venture’s

operation, were higher than ever in the history of PBS. Orders received in

1995 were 2½ times those in 1994. The company was profitable in 1995 and

ahead of 1994s results with a rate of return on assets of 2.3 per cent and a

rate of return on sales of 4.5 per cent.

The 1995 results showed substantial progress towards meeting the joint

venture’s strategic goals adopted in 1994 as part of a five year plan. One of

the goals was that exports should account for half of the total orders by 1999.

(Exports had accounted for more than a quarter of the PBS business before

1989, but most of this business disappeared when the Soviet Union

Collapsed). In 1995 exports increased as a share of total orders to 28 per

cent, up from 16 per cent the year before.

The external service business, organized and functioning as a separate

business for the first time in 1995, did not meet expectations. It accounted

for five per cent of all orders and revenues in 1995, below the 10 per cent

goal set for it. The retrofitting business, which was expected to be a major

part of the service business, was disappointing for ABB-PBS, partly because

many other small companies began to provide this service in 1994, including

some started by former PBS employees who took their knowledge of PBS-built

power plants with them. However, ABB-PBS managers hoped that as the

company introduced new technologies, these former employees would

gradually lose their ability to perform these services, and the retrofit and

repair service business, would return to ABB-PBS.

ABB-PBS dominated the Czech boiler business with 70 per cent of the

Czech market in 1995, but managers expected this share to go down in the

future as new domestic and foreign competitors emerged. Furthermore, the

west European boiler market was actually declining because environmental

laws caused a surge of retrofitting to occur in the mid -1980 s, leaving less

business in the 1990 s. Accordingly ABB-PBS boiler orders were flat in 1995.

Top managers at ABB-PBS regarded business results to date as

respectable, but they were not satisfied with the company’s performance.

Cash flow was not as good as expected. Cost reduction had to go further.

The more we succeed, the more we see our shortcomings” said one official.

Restructuring

The first round of restructuring was largely completed in 1995, the last

year of the three-year restructuring plan. Plan logistics, information systems,

and other physical capital improvements were in place. The restricting

included :

Renovating and reconstructing workshops and engineering facilities.

Achieving ISO 9001 for all four ABB-PBS divisions. (awarded in 1995)

Transfer of technology from ABB (this was an ongoing project)

Intallation of an information system.

Management training, especially in total quality assurance and English

language.

Implementing a project management approach.

A notable achievement of importance of top management in 1995 was a

50 per cent increase in labour productivity, measured as value added per

payroll crown. However, in the future ABB-PBS expected its wage rates to go

up faster than west European wage rates (Czech wages were increasing

about 15 per cent per year) so it would be difficult to maintain the ABB-PBS

unit cost advantage over west European unit cost.

The Technology Role for ABB-PBS

The joint venture was expected from the beginning to play an important

role in technology development for part of ABB’s power generation business

worldwide. PBS a.s. had engineering capability in coal – fired steam boilers,

and that capability was expected to be especially useful to ABB as more

countries became concerned about air quality. (When asked if PBS really did

have leading technology here, a boiler engineering manager remarked, “ Of

course we do. We burn so much dirty coal in this country, we have to have

better technology”)

However, the envisioned technology leadership role for ABB-PBS had

not been realized by mid – 1996. Richard Kuba, the ABB-PBS managing

director, realized the slowness with which the technology role was being

fulfilled, and he offered his interpretation of events.

“ABB did not promise to make the joint venture its steam technology

leader. The main point we wanted to achieve in the joint venture agreement

was for ABB-PBS to be recognized as a full-fledged company, not just a

factory. We were slowed down on our technology plans because we had a

problem keeping our good, young engineers. The annual employee turnover

rate for companies in the Czech Republic is 15 or 20 per cent, and the

unemployment rate is zero. Our engineers have many other good

entrepreneurial opportunities. Now we’ve begun to stablise our engineering

workforce. The restructing helped. We have better equipment and a cleaner

and safer work environment. We also had another problem which is a good

problem to have. The domestic power plant business turned out to be better

than we expected, so just meeting the needs of our regular customers forced

some postponement of new technology initiatives.”

ABB-PBS had benefited technologically from its relationship with ABB. One

example was the development of a new steam turbine line. This project was

a cooperative effort among ABB-PBS and two other ABB companies, one in

Sweden and one in Germany. Nevertheless, technology transfer was not the

most important early benefit of ABB relationship. Rather, one of the most

important gains was the opportunity to benchmark the joint venture’s

performance against other established western ABB companies on variables

such as productivity, inventory and receivables.

Questions : 1. Where does the joint venture meet the needs of both the

partners ? Where does it fall short ? 2. Why had ABB-PBS failed to realize its technology leadership ?3. What lessons one can draw from this incident for better

management of technology transfers ?

NO. 5.

CHINESE EVOLVING ACCOUNTING SYSTEM

Attracted by its rapid transformation from a socialist planned economy

into a market economy, economic annual growth rate of around 12 per

cent, and a population in excess of 1.2 billion, Western firms over the

past 10 years have favoured China as a site for foreign direct

investment. Most see China as an emerging economic superpower,

with an economy that will be as large as that of Japan by 2000 and that

of the US before 2010, if current growth projections hold true.

The Chinese government sees foreign direct investment as a primary

engine of China’s economic growth. To encourage such investment, the

government has offered generous tax incentives to foreign firms that invest in

China, either on their own or in a joint venture with a local enterprise. These

tax incentives include a two – year exemption from corporate income tax

following an investment, plus a further three years during which taxes are

paid at only 50 per cent of the standard tax rate. Such incentives when

coupled with the promise of China’s vast internal market have made the

country a prime site for investment by Western firms. However, once

established in China, many Western firms find themselves struggling to

comply with the complex and often obtuse nature of China’s rapidly evolving

accounting system.

Accounting in China has traditionally been rooted in information

gathering and compliance reporting designed to measure the government’s

production and tax goals. The Chinese system was based on the old Soviet

system, which had little to do with profit or accounting systems created to

report financial positions or the results of foreign operations.

Although the system is changing rapidly, many problems associated

with the old system still remain.

One problem for investors is a severe shortage of accountants, financial

managers, and auditors in China, especially those experienced with market

economy transactions and international accounting practices. As of 1995,

there were only 25,000 accountants in china, far short of the hundreds of

thousands that will be needed if China continues on its path towards

becoming a market economy. Chinese enterprises, including equity and

cooperative joint ventures with foreign firms, must be audited by Chinese

accounting firms, which are regulated by the state. Traditionally, many

experienced auditors have audited only state-owned enterprises, working

through the local province or city authorities and the state audit bureau to

report to the government entity overseeing the audited firm. In response to

the shortage of accountants schooled in the principles of private sector

accounting, several large international auditing firms have established joint

ventures with emerging Chinese accounting and auditing firms to bridge the

growing need for international accounting, tax and securities expertise.

A further problem concerns the somewhat halting evolution of China’s

emerging accounting standards. Current thinking is that China won’t simply

adopt the international accounting standards specified by the IASC, nor will it

use the generally accepted accounting principles of any particular country as

its mode. Rather, accounting standards in China are expected to evolve in a

rather piecemeal fashion, with the Chinese adopting a few standards as they

are studied and deemed appropriate for Chinese circumstances.

In the meantime, current Chinese accounting principles present difficult

problems for Western firms. For example, the former Chinese accounting

system didn’t need to accrue unrealized losses. In an economy where

shortages were the norm, if a state-owned company didn’t sell its inventory

right away, it could store it and use it for some other purpose later. Similarly,

accounting principles assumed the state always paid its debts – eventually.

Thus, Chinese enterprises don’t generally provide for lower-of-cost or market

inventory adjustments or the creation of allowance for bad debts, both of

which are standard practices in the West.

Questions : 1. What factors have shaped the accounting system currently in

use in China ?2. What problem does the accounting system, currently in sue in

China, present to foreign investors in joint ventures with Chinese companies ?

3. If the evolving Chinese system does not adhere to IASC standards, but instead to standards that the Chinese governments deem appropriate to China’s “Special situation”, how might this affect foreign firms with operations in China ?

NO. 6

UNFAIR PROTECTION OR VALID DEFENSE ?

“Mexico Widens Anti – dumping Measure …………. Steel at the Core of

US-Japan Trade Tensions …. Competitors in Other Countries Are Destroying

an American Success Story … It Must Be Stopped”, scream headlines around

the world.

International trade theories argue that nations should open their doors

to trade. Conventional free trade wisdom says that by trading with others, a

country can offer its citizens a greater volume and selection of goods at

cheaper prices than it could in the absence of it. Nevertheless, truly free

trade still does not exist because national governments intervene. Despite

the efforts of the World Trade Organisation (WTO) and smaller groups of

nations, governments seem to be crying foul in the trade game now more

than ever before.

We see efforts at protectionism in the rising trend in governments

charging foreign producers for “dumping” their goods on world markets.

Worldwide, the number of antidumping cases that were initiated stood at

about 150 in 1995, 225 in 1996, 230 in 1997 , and 300 in 1998.

There is no shortage of similar examples. The Untied States charges

Brazil, Japan, and Russia with dumping their products in the US market as a

way out of tough economic times. The US steel industry wants the

government to slap a 200 per cent tariff on certain types of steel. But car

markers in the United States are not complaining, and General Motors even

spoke out against the antidumping charge – as it is enjoying the benefits of

law – cost steel for use in its auto product ion. Canadian steel makers

followed the lead of the United States and are pushing for antidumping

actions against four nations.

Emerging markets, too , are jumping into the fray. Mexico recently

expanded coverage of its Automatic Import Advice System. The system

requires importers (from a select list of countries) to notify Mexican officials of

the amount and price of a shipment ten days prior to its expected arrival in

Mexico. The ten-day notice gives domestic producers advance warning of

incoming low – priced products so they can complain of dumping before the

products clear customs and enter the marketplace. India is also getting

onboard by setting up a new government agency to handle antidumping

cases. Even Argentina, China , Indonesia, South Africa, South Korea, and

Thailand are using this recently – popularized tool of protectionism.

Why is dumping on the rise in the first place ? The WTO has made major

inroads on the use of tariffs, slashing tem across almost every product

category in recent years. But the WTO does not have the authority to punish

companies, but only governments. Thus , the WTO cannot pass judgements

against individual companies that are dumping products in other markets. It

can only pass rulings against the government of the country that imposes an

antidumping duty. But the WTO allows countries to retaliate against nations

whose producers are suspected of dumping when it can be shown that : (1)

the alleged offenders are significantly hurting domestic producers, and (2) the

export price is lower than the cost of production or lower than the home –

market price.

Supporters of antidumping tariffs claim that they prevent dumpers from

undercutting the prices charged by producers in a target market and driving

them out of business. Another claim in support of antidumping is that it is an

excellent way of retaining some protection against potential dangers of totally

free trade. Detractors of antidumping tariffs charge that once such tariffs are

imposed they are rarely removed. They also claim that it costs companies

and governments a great deal of time and money to file and argue their

cases. It is also argued that the fear of being charged with dumping causes

international competitors to keep their prices higher in a target market than

would other wise be the case. This would allow domestic companies to

charge higher prices and not lose marketshare – forcing consumers to pay

more for their goods.

Questions

1. “You can’t tell consumers that the low price they are paying for

a particular fax machine or automobile is somehow unfair.

They’re not concerned with the profits of companies. To them,

it’s just a great bargain and they want it to continue.” Do you

agree with this statement ? Do you think that people from

different cultures would respond differently to this statement ?

Explain your answers.

2. As we’ve seen, the WTO cannot currently get involved in

punishing individual companies for dumping – its actions can

only be directed toward governments of countries. Do you

think this is a wise policy ? Why or why not ? Why do you think

the WTO was not given the authority to charge individual

companies with dumping ? Explain.

3. Identify a recent antidumping case that was brought before the

WTO. Locate as many articles in the press as you can that

discuss the case. Identify the nations, products (s) , and

potential punitive measures involved. Supposing you were part

of the WTO’s Dispute Settlement Body, would you vote in favor

of the measures taken by the retailing nation ? Why or why

not?