The manufacturing and sales strategy

Mfg/Sales Strategy

There are a number of factors that need to be considered with respect to market entry into these three different markets. Some of the relevant factors include trade barriers, the cost and availability of factor inputs, cultural distance, foreign exchange rate risk, corruption, and the ease of shipping. Each of these factors will play a role in determining the best method of market entry. For this company, there are two considerations for each market -- manufacturing and sales. This paper will analyze the three markets -- the EU, India and the United States -- with respect to these different variables and offer some recommendations for the ideal method of market entry into each market.

For this company, a manufacturing and sales strategy for the European Union needs to take a few factors into account. The EU is a trading bloc, which implies that while there may be barriers to trade getting into Europe, production within Europe would allow for the goods to be shipped duty free anywhere within the EU. It is worth considering the differential cost of production in different centres as well. Hamilton can be relatively low-cost by Canadian standards, but there are some lower-cost countries in Europe, particularly in central, southern and eastern parts of the continent, that should be able to product video game devices. One should consider the factor endowment of these nations, however. It may be that the production of such devices is easier in a more developed European country such as Germany, in which case there may not be a cost advantage to European product.

However, there are also economies of scale likely at the Canadian plant that could allow the product to be produced there and shipped to Europe. The trade barriers between Canada and Europe may not be significant, especially if the company has some degree of pricing flexibility. It is recommended therefore that production remain in Canada for the European market, unless a suitable manufacturer in one of Europe's low-cost countries can be found. It is recommended that market entry to the EU be conducted via either a local partnership for production and marketing (if producing in the EU) or via a marketing subsidiary only, with production shipped from Canada. While the former strategy will create an operating hedge, the latter strategy will expose the company to foreign exchange rate risk. This risk can be hedged, however, as the C$-€ derivatives market is fairly liquid and there are a number of types of derivatives hedges available (Harper, 2011).

Moving into the Indian market presents a different set of challenges. The Indian market has low labor costs and low costs for many other factor inputs. In addition, India has much higher trade barriers than the EU in general. This implies that local production is likely to be beneficial. The Indian market is a difficult one for Canadians to operate in. There is a high rate of corruption (Transparency International, 2010) and unique cultural and labor market conditions. This necessitates a local partner, to help deal with the unique features of the Indian business landscape. Having more control over the mode of entry and having less cultural distance between the home country and the foreign country are correlated with improved market entry success, and a local partner can help lower the cultural distance (Johnson & Tellis, 2008).

India is becoming a popular destination for foreign FDI as a result of that country's large and growing economy and economic reforms (Chakraborty & Nunnenkamp, 2006), meaning that capital inflows to India are not likely to meet with major challenges. The country can also be used as a springboard to the rest of Asia, with Indian production going to other Asian nations. Entering the market with a joint venture for both production and sales is important as well because it creates an operating hedge, thereby reducing the amount of foreign exchange risk faced by the company, important given that the rupee is not a hard currency and the derivatives markets for the rupee are relatively illiquid as a result.

Entering the U.S. market is the most straightforward. Hamilton is no more than 90 minutes from the border and the I-90. Shipping westward is also easy, due to the plant's proximity to the 403/401. Other transportation links with the U.S. are also strong, and this trade corridor is among the busiest in the world. NAFTA has allowed Canada's consumer electronics business to flourish (Datamonitor, 2010) and although the C$ is expected to remain high vs. The U.S.$ (Johnson, 2011), the hedging market is highly liquid. There are few cultural barriers in the U.S. market. Shipping to the U.S. will also give the Hamilton plant the opportunity to build economies of scale that will help to lower the average cost of production. This can help with making the plant competitive with respect to shipping to Europe.

It is recommended therefore that the U.S. market is entered only with a sale arm, and manufacturing be conducted in Hamilton. It is also likely that this option will be used for the European market as well. Shipping can go through Lake Ontario/St. Lawrence, or via train or truck to Saint John or Halifax. It is worth looking for a local production partner in Europe, however, but setting up wholly-owned sales subsidiaries as European channels are similar to North American ones. The Indian market will require a manufacturing subsidiary and this should be a joint venture with a local firm. This JV will be responsible for sales as well.