Vietnam Market Entry DecisionIBM - Case Study

Presenters:Balaji Chettiyar (Roll No 1410)

Chinmay Patil (Roll No 1443)

Deepak Kulkarni (Roll No 1428)

Devendra Pataskar (Roll No 1445)

Ganesh Patil (Roll No 1444)

Nikhil Tathe (Roll No 1455)

Ritesh Khadke (Roll No 1427)

Shivraj Pawar (Roll No 1447)

Vinayak Jaybhaye (Roll No 1423)

Vishal Vadkar (Roll No 1459)

Vietnam- PESTEL ModelPolitical

Communist Party(CPV) - Centralized control

over media, military, state

Special unnerving powers with government

Improved relationship with neighboring

countries

Trade embargo lifted by US government in

1994

Amended Constitution 1992 - Recognized the

role of private sector in the economy

Bureaucracy

Economical

Member of Association of SE Asian

nation (ASEAN)

Full diplomatic ties with China in 1991

Doi Moi economic reforms

SOE contributes 40% share in GDP

Significant contribution by private organisations

Expected high investment in coming years by

Japan

Joined Asia-Pacific Economic

Cooperation (APEC)

Average annual growth rate of 7.5% in FY1991-

96

Social

Economically efficient labor force

90% literacy rate

Attraction towards western brands

Young population (50% population < 21 years)

Hard working entrepreneurs

Socialist oriented market economy

High corruption

Technological

Major industrial growth in Oil &Gas, Power,

Real Estate, Hotels & telecommunication

Lack of communication channels (telephone,

television etc)

Lack of distribution network

Lack in capacity and equipment for increasing

imports

Vietnam - PESTEL ModelEnvironmental

Shallow water harbors

Lack of infrastructure and transportation

Developing tourist industry due to rich natural

and cultural heritage

Long coastal area and opportunity of marine

transport

Equidistantly located from emerging markets

viz. Malaysia, Indonesia, China, Thailand,

Singapore & Hong Kong

Legal

Allowed max 70% FDI

100% ownership approved only for large &

complex organisation as rare case

Benefits of re-exports

Foreign companies operating through local

dealer can establish office only for promotion

of international trade or technical support.

Trading / marketing / investment is prohibited

for such offices

Build-operate-transfer ventures allowed

Business Cooperation contract – Freedom to

design own contract

Chemical Corp- Overview World Leader in Chemical adhesives & sealants.

Superior replacement technology,

Diverse & fragmented customer base.

Highly trained sales force expert in value based selling.

Technological leadership (30% revenue from newly introduced products – Innovation).

Highly profitable business-61% Gross margin

International distribution - Strength. (56 Distributors in totality).

Strong & well dispersed global manufacturing presence – USA, Peurto Rico, Ireland, Costa

Rica, Japan, India, Brazil, China.

Existence in almost all neighbouring countries of Vietnam which are contributing handsome

revenues.

30% import duty in Vietnam for chemical products. Which will result into product pricing 3 to 4

times higher than present competition.

Incase of export to Vietnam through dealer network , no Direct marketing / Sales promotion is

allowed.

Chemical Corp - SWOTStrengths Weakness

Perception about US (Based on Wars in

history)

Faith in market

No experience as “JV”

Language Barriers

Opportunities

Trade Embargo lifted by US government

leading to new investments.

Huge Automotive, Power, Oil & Gas

industries with new entrants as prosperous

customers as well as vendors.

Vietnam became member of ASEAN in

1995.

Threats

30% import duty in Vietnam for chemical

products. Which will result into product

pricing 3 to 4 times higher than present

competition

Existing Competitors.

Loss of technology in case of JV

Communist government with single party

ruling having almost all controls on

corporate world..

Superior replacement technology

Highly trained sales force expert in value

based selling

Technological leadership (30% revenue

from newly introduced products –

Innovation)

Highly profitable business-61% Gross

margin

International distribution - Strength

Strong & well dispersed global

manufacturing presence – USA, Peurto

Rico, Ireland, Costa Rica, Japan, India,

Brazil, China

Chemical Corp – Six Forces

Rivalry amongst existing

Customers

Bargaining power of

Buyer

Threat of Substitute

Bargaining power of Supplier

Government Policies

Threat of New

entrants

•Highly skilled

•Trained Sales Force

•New market with increased demand

•Quality

•Cost competitive

•Superior technology

•New products - R & D

•Currency conversion

•Capture market by reducing

cost margins & eliminate

customers

•Technology Benefits

•Capital intensive

•Import duty 30 %

•Export benefits

•ASEAN Trade Group

•Raw material constitutes of

crude oil based products

•Crude Oil production.

Chemical Corp

0.8

15

32

50

80

106.23

120

140.51

173.3

0

20

40

60

80

100

120

140

160

180

200

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

TB

/D

YEAR

Production of Crude oil in Vietnam

Crude Oil Production Graphs

Chemical Corp – Recommendation

Start Manufacturing Plant - JV with SOE

1. Import Tariff eliminated (30%)

2. Localized Raw material Sources

3. Export benefits via ASEAN group

4. SOE influence in Govt policies & procedures

5. Labor cost

6. Currency 1$ = 15000 Dong

7. Rising Market ( Automobile, Oil & Gas & Power Industry)

8. Competitor impact is less as R&D is Innovative with new

products

Sports Corp- Simon’s Model

Sports Corp

•Intelligence

•Large & young population base

•No Competitor – First movers advantage

•Brand attraction in consumers

•Most famous sports: Football, badminton,

tennis, athletics, chess, volleyball, table tennis

•Increasing trend in Olympic participation

•Smuggled items as threat

•Competitors are planning to enter into market aggressively.

•Design

•Organization Determinants

•Social Forces

•Psychological Determinant

•Project characteristics

•Economic rationality

Sports Corp

Determinants Dealership Joint venture Subsidiry

Organization

Determinants

Compromise on core

competencies (Marketing)

Let the business be hand if

people who know the market

best

Mfg: Local POE

Mkt & brand promotion:

Sports corp.

No holds on growth

Mfg: Sports

Mkt & brand promotion: Sports

corp.

Social ForcesCost sensitive market &

price is higher

Low cost manufacturing

Price reduction upto 50%

Low cost manufacturing

Price reduction upto 50%

Psychological

Determinant

High brand awareness by

Viet Kieu

Profit realization from

agency

High brand awareness by

Viet Kieu

Local manufacturing will help

brand positioning

High brand awareness by Viet

Kieu

Local manufacturing will help

brand positioning

Project characteristics

Exclusivity & authority to

dealers

Better retail management

Selection of business partner

having manufacturing and

retail management is

essential

Retailing & Micro-

management is a challenge

Economic rationality

High import costs of 40%

Threat of low cost

counterfeits

APAC market share is just

7% but high growth potential

Market is futuristic and

infrastructure investment will

be not economical

Maximize or Satisfice?Minimum Maximize Satisfice

•Detailed design:

Sports Corp

•Feedback

•Enter or not to enter? If yes,

•Appointing independent distributor

•Joint venture

•Fully owned subsidiary

•Successful:

•Increase equity shares

•Convert into 100% subsidiary

•Failure:

•Wait and watch

•redesign

•Choice

•Joint venture with manufacturer in Ho Chi Minh city & enjoy the benefits of

low cost manufacturing, saving on taxation & ready set up of retail chain

•Focus on core competencies of innovation, segmented marketing &

branding/promotions

•Sponsorship to local teams, organizing sport events, endorsement by

celebrities, special discounts to school & university students

•Implementation

CONCEPTUAL MODEL

Why Conceptual Model ?

Directly Correlate the Forces / Factors ( Firm, Market & External )

Evaluation gives Timing, Location and Mode of entry,

Timing can be First / Second / Later mover

Location can be identified based on Market & External Factor

Mode of entry is overall judgment from all THREE forces / Factor

What is Conceptual Model ?

Model evaluating correlation between Factors / Forces predicting

overseas market entry order decisions.

CONCEPTUAL MODEL

Advantages of “Timing of Entry” ( Competitive )

- Entrepreneurial & Innovative,

- Initial Occupant ,

- Niche gains access to resources & Capabilities,

First Mover : Trend Setters

Second Mover : Trend Follower

Late Mover : Competitor / Product Differentiator / Opportunist

Advantages of “Location Selection ”

- Market Penetration,

- Market Share,

- Determine Demand,

- Profitability Judgment,

Advantages of “ Mode of Entry ”

- Avoid unwanted risks,

- Analysis can be done on “What might GO Wrong”

- Decision on Company Structure, Investments, Marketing Strategies & Future

Prospects.

Children CONCEPTUAL MODEL

External Factors

Firm Factors

Market Factors

- Concentrated Population in

Two cities,

- Lack of Infrastructure,

- Poor Network Connectivity,

- Poverty, Low Purchasing

Power,

- Smuggling, Corruption

- Legal Restrictions of direct

production or direct trading,

- Labor intensive market,

- Centralized Control over

Media ( Marketing /

Advertising Limitations)

- Market Leader & Branded

Toys,

- New Product Development,

- 15 Manufacturing Facilities,

- Understanding Consumer &

Play patterns,

- Competitive Price ,

- Well Managed Marketing &

Advertising,

- OEM to Assembler to

Subsidiaries,

- No Exp of Wholly Own

Subsidiaries,

- Extensive Marketing Practices

(Co-promotions, In-store

Merchandise, Advertisements )

- Presence of 2 SOE’s

- Low priced substitutes,

- Competitive products

- Rivalry companies with wide

distribution network.

- 50% Young population

- Children’s Corp toys

Available at Duty free Shops

at airports

- Market Price driven ( Price

dominated by two SOEs),

- Liking of western brands,

LOCATION DECISION OPTION

Children CONCEPTUAL MODEL LOCATION DECISION OPTIONS

Ho Chi

Minh City Hanoi CityInter-connected

Individual Individual

General Agents

Exclusive Agents

Distributors / Importer Company

Contract with Pvt. Enterprises

Licensing to Assemble product

(Own Brand name )

Wholly owned subsidiary(70% FDI)

Licensing to produce product

Market Entry Strategy OptionsTime to

Penetrate Market Share Profitability Risk

LOW

LOW LOW LOWHIGH

HIGH HIGH HIGH

Summary

Chemical Enter Immediately

JV with SOE.

Local Vendor Development.

Sports Enter Immediately

Joint venture with local manufacturer to gain first mover’s advantage

Follow core competencies

Take market feedback & decide the next move and long term strategy

Children Wait

Focus on 2 major cities Ho Chi Minh & Hanoi

1st Step = Appoint a distributor to start selling in Vietnam

Next step:

o Joint venture with SOE

o Processing contract with SOE

Vietnam is [Still] Hot, don’t get burned…

Don’t think they don’t know or wont know…

Don’t go in for a quick buck, it will be a quick-burn,

Work as diligently as you would elsewhere, once you

cross the Dark Side, you are safe.

The ATM syndrome. If you start to bribe, you will never

stop

GDP Growth does not equate to growth in earning

Look for gradual growth , at least 3 years ++

Learn to navigate the red tape and bureaucracy, there is

no escape

Integrate CSR ( Corporate Social Responsibility) into

strategy. The Authorities are sensitive to it..

THANK YOU!!!

APPENDIX

Vietnam- Markets in 1995

Conglomerates were created and state owned sector decreases greatly

Population is youthful and large, workforce most educated among Asian emerging economies

Vietnam joins ASEAN and signs cooperation agreement with EU, grants Most Favored Nation

to encourage trade with other countries

Regulations and tariffs are reduced to encourage foreign investments but the number of

licenses granted still monitored

Local entrepreneurs could not invest due to

o Underdeveloped banking sector

o Low availability of capital

o Country’s low saving rate

More than half population still lives in poverty

Vietnam-Other Factors Affecting Vietnam

Distribution

o Plentiful but concentrated only on specific area

o Company must choose between partly/wholly owned distributions vs small privately

owned distributor

o To distribute nationally require extensive network of partners

Corruption

o Rampant within industrial and government sectors

o Smuggling of goods

Infrastructure

o War and economic hardship left country in turmoil

o Difficult Transportation - Inadequate roadways & ports lacked capacity, goods were lost

& damaged

Costs

o Very low labor cost

o However, managerial talent was not readily available

o High Office Rents

o High telecommunication costs

Vietnam- Đổi Mới Economic Reforms

Efforts to stabilize the new currency “Dong”

Stimulate economy included:

o Deregulation of prices

o Subsidies to state enterprises, ends collective agricultural system

o New commercial ownership laws that encourage private enterprise

o New foreign investment laws

Foreign direct investments pour in

o Taiwan, Hong Kong, Japan and Singapore were largest sources of FDI

New private Vietnamese owned organizations increase greatly

o 20,000 Vietnamese private firms by end of 1995

Attempts to build market oriented economy controlled by the state or “Market socialism”

Chemical Corp- Opportunities

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