Breaking Up Is Hard To Do

In 1996, France’s Groupe Danone SA, a global leader in healthy food, partnered with China’s Wahaha Group, one of China’s leading beverage brands, to form five joint ventures (JVs) of which Danone owned 51%. Over the next 10 years, the number of JVs increased to 39, and revenues grew to $2.25 billion from $100 million. Both Danone and Wahaha pursued growth in China through business ventures that were outside of the JVs. Danone grew to be the largest beverage maker in China, while Wahaha controlled 70 subsidiary companies in China. All of the Wahaha companies used the Wahaha brand name, but only 39 of the 70 had a JV relationship with Danone.

Trouble started in 2006. The master JV agreement between Danone and Wahaha granted exclusive rights to the JVs to use the Wahaha brand. Danone felt that Wahaha’s non-JV subsidiaries were violating the agreement by selling product under the Wahaha brand. Wahaha claimed that Chinese trademark office never approved the brand, so that part of the master agreement never became effective. To complicate the relationship further, Wahaha claimed that Danone was investing in other companies that were competing with Wahaha.

The dispute became public in the press in 2007 with each sides criticizing the other. Lawsuits and counter suits followed.Finally, on September 30, 2009 a press release was issued stating that the two companies had reached an “amicable settlement” whereby Wahaha would buy Danone’s 51% interest in the JVs. The settlement was also reported in the China Daily.

The moral of this story is that if your company is going to enter a foreign market through a JV with a domestic firm, it is so important that both side fully understand the intent of the JV agreement. Every detail must be spelled out. It would also be wise to retain local legal representation, someone that understands the laws; institutions, both formal and informal; and the culture of the target market.

Danone and Wahaha had a very successful JV in terms of revenue and profit. However, there were significant costs associated with the breakup. Do your homework up front to avoid the headaches later.

Walmart vs. Amazon

These two global giant have decided to do battle over books in the US market. Recently Walmart announced that it would sell 10 new releases, which are expected to be best-sellers, on-line for $10 each. Amazon immediately matched the price. Walmart’s response was to lower the price to $9. Again, Amazon matched the price.

Not to be outdone, Target joined the fray by offering the same books on-line at $8.99. Walmart reacted by reducing its on-line price to $8.98. It is obvious that these giants have the economic power to lower prices on these 10 books to $.01 if they wanted to do it. For now it seems like the price has stabilized at about $9.

One thing is certain. In the short-run, these three companies will sell a lot of books. However, none of these companies can gain a clear advantage over the other two as long as they continue to match price. Collectively, these three have an advantage over other book sellers that don’t match their price. It will be interesting to see if others join the battle, and what long-term advantages, if any, are gained by the participants.

Rush Limbaugh, The St. Louis Rams and Branding

It does not make any difference whether you are ultra-conservative and believe that Rush Limbaugh is the voice of reason in the wilderness, or whether you are ultra-liberal and can’t stand the sound of his voice. It doesn’t matter whether you are in the vast middle, or whether you agree or disagree with his tactics. One thing is certain, Rush has done an excellent job building his brand. He has identified his target audience. His message is consistent to this segment of the market. At every point of contact, the brand image is reinforced.

Recently, Rush Limbaugh confirmed a report that he was part of an investment group that was interested in pursuing a purchase of the NFL’s Saint Louis Rams franchise. To the best of my knowledge, the Rams have not announced that they are for sale. However, the media frenzy that this confirmation created was astounding.

No one could have designed or funded a traditional marketing campaign that could have generated the kind of reach that the media buzz provided to Rush at no cost. Both sides, for and against, had something to say about this issues. Both sides kept the story alive. Both sides helped Rush continue to build his brand.

The NFL has a strong brand of its own, and eventually, Rush was dropped by the investment group. If, and how well, these two brands may interact in the future can provide fuel for debate for a long time. However, as long as any debate rages, the debaters will be helping to build the Rush Limbaugh brand.

Every organization, domestic or global, should be concerned with building a positive brand image with its target audience. It normally takes years combined with a lot of effort and money. It is wonderful when others, willingly or unwillingly, help you do it.

Trade Protectionism

In today’s Wall Street Journal the lead article is about the US placing “punitive sanctions” on Chinese auto tires. China, in return, is retaliating by restricting imports of US made auto and poultry products. Where does it end?

Protectionism is not the way out of a recession. While the sanctions may help some US tire manufacturers, it will hurt US consumers by causing them to spend more for tires. This is not the time to reduce the purchasing power of the US consumer. It will also hurt US exporters of auto and poultry products as these products will become more expensive in China, thus reducing demand.

Global trade increases the size of the pie for everyone. Protectionism was tried in the early 1930s as a means to protect jobs. It only made The Depression worse. Let’s hope we do not follow that same path now!

Global Sourcing – Rating the Factories

Your company has decided to outsource production of parts, subassemblies or finished products to an overseas factory. You have your design specifications completed. Now, you need to find a factory that can manufacture products to your specifications.

As a director of quality for a major department store, I had the opportunity to visit many domestic and overseas factories. There are many excellent factories overseas. There are many poor ones also. On a trip to China to review furniture factories, I visited the most technologically advanced wood furniture factory (they made bedroom and dining room furniture) that I had seen anywhere in the world. The factory had many processes in place to guarantee that the final product would meet their customers’ specifications. The day I was there, the factory was producing products for high-end American furniture manufacturers. The product was beautiful. It was a quality director’s dream.

In the afternoon on that same day, I visited the worst wood factory that I had seen anywhere in the world. There was so much sawdust in the air it was hard to breathe. There were no processes to ensure that the product would meet specifications. The goal of this factory was to get the product out of the door as quickly as possible. This factory had no possibility of producing furniture that could meet our specifications, but their initial cost for the product was lower than the factory I had visited in the morning.

This is a dilemma that many companies face. They outsource because the cost is lower. The temptation is to take the lower initial cost. However, a lower initial cost does not mean a lower total cost. Consider the cost of delayed shipments because product needs to be reworked before it can be shipped, or worse, the cost to liquidate product that does not meet specifications when it arrives in your warehouse.

How can you ensure that you place production in the stellar factories? You need a defined standard against which each factory will be measured. Standards must be defined for all parts of the manufacturing process. Start with the raw materials warehouse. Does the factory have processes in place to ensure that the raw materials it receives meets specifications? Walk through every part of the manufacturing process. Does the factory have the proper machines and capacity to produce the quantity of product that you need? Is maintenance regularly performed on the machinery? Is the product flowing smoothly through the factory? What quality systems are in place to ensure that the product will meet requirements when it is ready to ship? Are quality issues documented? Does management take action to correct the documented issues?

These are just a few of the many areas that can be rated in a factory. The benefit of this process is that factories can be rated on an objective scale. Factories should receive a minimum score before they would be considered for production. You can also compare factories using their ratings.

You must also be aware of the proposed factory’s supply chain. If the factory outsources subassemblies or final product that will be shipped to you, the same process needs to be performed for their supplier. Understanding the entire supply chain will help you select the good factories and to avoid questionable ones.

A Little Knowledge of a Foreign Language Can Go a Long Way!

During my professional career, I had the opportunity to travel to Italy often. My cultural background is Italian (Three of my grandparents were born in Italy. The 4^th was born in the US soon after her parents emigrated.) Therefore, after my 1^st trip to Italy, I decided to learn Italian. I purchased a series of cassette tapes, and listened to them diligently.

On future trips, I would speak Italian in situations where I was confident that I could communicate my thoughts clearly. However, I found it very difficult to understand the reply that I received. When I spoke Italian, the assumption by the native speakers was that I understood spoken Italian better than I did. While I wanted to speak the language, and therefore improve my skills, I always felt uncomfortable that I could not understand Italian as well as I could communicate my thoughts. I felt frustrated with my inability to understand spoken Italian better that I did. However, I also felt that the people appreciated my attempts to speak the language.

Having been raised in an Italian household in the US, I understood the importance of food in the Italian culture. One of the highlights of the trips for me was the meals. I thoroughly enjoyed the food in Italy. In the southern part of the country, they served a pasta called orecchiette. Literally translated, this means little ears. I ordered it every time I was there.

On one of my trips, I went to lunch with two native Italians that I had just met that morning. At a restaurant, my strategy was to order in Italian by asking what type of pasta, meat and fish that was being served. When the server answered in Italian, I would order the dish that I understood. On this afternoon I asked the server, Che tipo d’orecchiette avete? What type of orecchiette do you have? The reaction from my two Italian hosts shocked me. After I had ordered, they said to me in English, “You know orecchiette?” I answered yes, and that it was one of my favorite meals. Then they said, “If you know orecchiette, you know us!” And, they invited me to play soccer with them that evening.

I considered it a great honor to be asked to participate in their soccer game. I thanked them for the offer. Unfortunately, I had a 5 p.m. flight that afternoon to Milan and a flight back to the US early the next morning, so I could not participate.

I have always felt that I missed out on a unique cultural experience. As an American, I respected my schedule. I had a commitment to be back in the US on a certain date. Of course my company would never have approved, or paid for, an extra night overseas to play in a soccer game. Every once in a while I wonder how much better my relations with this company could have been if I had changed my plans. There would have probably been benefits for my company also that would have exceeded the extra costs that I would have incurred.

While there are some inherent risks in trying to conduct business in a foreign language, my experience has shown me that the effort to do so can have great rewards.

Global Sourcing – Define Your Specifications

This blog was originally posted on my other blog, Quality Sense – Big Dollars. It has been reposted here because the subject matter deals specifically with global commerce.

In my career as a Director of Quality with a major US retailer, I had the opportunity to visit factories on 4 continents. Our business relationship with these factories came in three forms: (1) American companies that produced product overseas, (2) European companies with American subsidiaries and overseas production and (3) our direct import program where our overseas offices dealt directly with the overseas factories. In the first two scenarios the suppliers had offices and representatives in the US. The suppliers were the importers of record, and recourse was relatively easy if something did not meet specifications. In the last scenario we were the importer of record. We owned the product as soon as it was sealed on the container. Recourse for products that did not meet specifications was difficult at best, or in the worst case, non-existent.

Companies that have the most success with their import programs define their specifications to the last detail. Every specification and every detail is documented for the factory in a way that leaves no room for doubt at the factory level. The factory understands what is to be made, how it is to be made, the materials that are to be used, and testing protocols that the product needs to pass.

If you are directly importing components or finished products from overseas factories, I cannot stress how important this is. Most overseas factories do not have the engineering and design skill needed to manufacturer products and components that will meet the specifications of the American consumer. However, if you select the right factory, they will be able to follow your specifications and engineered drawings and produce goods that will meet your standards. Apple® has had a lot of success with their iPhone®. On the box Apple® describes this process: designed in California; manufactured in China. I couldn’t agree more.

If you are relying on a supplier to be the importer of record, it is important to know that your supplier is following the above procedure. If you are giving the supplier your specifications and engineered drawings, you have this part of the process covered. If you are relying on your supplier for the specifications and engineered drawings (many retailers do this) make sure that your supplier is sending their specifications and engineered drawings to the factory. While you may have recourse with your supplier, non-conforming product is always a headache, and replacement goods to meet customer demand may be months away.

Global Sourcing

This blog was originally posted on my other blog, Quality Sense – Big Dollars. It has been reposted here because the subject matter deals specifically with global commerce.

Global sourcing is a fact of life in today’s global marketplace. If it is done properly, wonderful products can be manufactured in factories around the world. Think back to when Apple introduced the iPhone. The hype building up to the launch was phenomenal. In the final analysis the iPhone lived up to its expectations. This delighted Apple’s customers and shareholders alike.

Unfortunately, not all product manufactured overseas has enjoyed the same success. In the past we have witnessed contaminated pet food that led to the deaths of pets; toys with lead paint that caused the recall of millions of products; contaminated heparin, the main ingredient in a type of blood thinning medication, that caused a number of deaths among people that have received this medication.

To ensure success with sourcing product from overseas manufacturers, it is extremely important that due diligence be performed before the contract is signed. You need to know that the factory you select can manufacturer the product to your specifications. You need to ensure that the prototype meets your specifications, and that the product from the production run is the same as the prototype. You want to know that the factory you are using complies with basic human rights issues.

This may seem to be a daunting task when the factory is half a world away, but a program can be put in place to ensure that these things happen. The program would include: (1) your product design and specifications that are given to the factory; (2) an objective way to evaluate a factory’s ability to produce product to your specifications; (3) an objective way to evaluate a factory’s compliance with basic human rights; and (4) production audits and testing protocols specific to your product.

I cannot over emphasize the importance of having this type of program in place. It is the responsibility of the purchaser to ensure that the product received will perform as designed. You don’t want to be in a position to say, “The prototypes were great, but now I have 50,000 sub-standard pieces in my warehouse. What do I do now?” Unfortunately, there is no good answer to this question. The amount of money invested in a good due diligence program would be far less than the cost of liquidating the 50,000 sub-standard pieces. It will always be far less expensive to stop sub-standard product at the factory before it travels half-way around the world.

In future postings I will write about each of the program elements listed above. Check back for more thoughts and ideas about this important issue.

Is The Current US Economic Crisis Different From Past Crises

When viewed in the short-run, the past 3 decades, the financial crisis in the US appears very different from past crises. It is the most severe crisis since the Great Depression of the 1930s. However, when viewed over the long-run the picture is quite different. First, let’s compare the US financial crisis of 2008 and the Asian crisis of 1997 to see the similarities.

The US financial crisis of 2008 was marked by an unsustainable rise in asset prices, especially in the real estate market. Commodity prices rose sharply. There was a lot of speculative buying fueled by easy money, low interest rates. “Hot money” flows quickly into assets that are rising quickly, making the asset bubble worse. At the first sign of trouble, the “hot money” flows out as quickly as it flowed in, bursting the bubble. (Think of the .com bubble and bust of the early 2000’s.) When the bubble bursts, defaults rise as the assets are worth less than the balances on the loans used to purchase the assets. In addition, high government debt has put significant pressure on the dollar to depreciate.

The Asian crisis of 1997 has a lot of similarities to the current crisis. There was excessive speculation in real estate and other non-tradable assets driven by easy money, low interest rates. There were risky bank loans that were used to fuel this speculation. Asian currencies were overvalued. When the bubble burst, their currencies depreciated. The depreciated currency caused governments to default of their dollar denominated debt. (See The US Dollar – A Privileged Currency for an in depth discussion on the effects of currency depreciation and dollar denominated debt.)

An April 19, 2009 article entitled, Eight Hundred Years Of Financial Folly, by Carmen M. Reinhart, Professor of Economics, University of Maryland, details an analysis of 66 countries since 1800. It shows patterns that are very similar to the situations described above. She states that since 1800 there have been 5 such periods of high default rates and financial crises followed by economic slowdowns. Commodity prices and interest rates have been a predictor of past financial crises. These factors played a role in the current crisis. While the current economic crisis feels different that anything that has been experienced before, historical data shows that today’s situation is no different than what has occurred in the past.

While these cycles have existed before, one factor is different today. Global economies are more closely linked now than ever before. The crisis of 2008, which started here, has slowed growth in the US. This has hurt the export dependent economies such as China, slowing growth in those economies also. This has pushed the global economy into recession, diminishing global economic growth.

The US Dollar – A Privileged Currency

The US Dollar is currently the world’s reserve currency. A vast majority of the world’s transactions are denominated in US Dollars. This gives the US a significant advantage.

The US has a high debt structure. Currently the national debt is in excess of US$11.0 trillion. With a projected federal deficit of US$1.8 trillion, total debt could be in the high eighties or low nineties as a percent of GDP. Combine this with a weak economy and low interest rates (current yield on 3-month T-Bills is 0.10%, 1-year maturity is under 0.50%, 5-year maturity is under 2.0%), and there should be significant pressure on the Dollar to depreciate.

In past financial crises, such as the Russian crisis and the Asian crisis of the 1990s, money flowed out of their countries. Their currencies experienced rapid devaluation. Since their debt was denominated in US Dollars, it took more of their local currencies to pay back their US Dollar debt. This just compounded a bad situation, making it worse.

The US does not have this concern since US debt is denominated in its own currency, US Dollars. A depreciation of the Dollar will not require any more Dollars to pay back the debt. The countries that own US debt will be hurt if the Dollar depreciates, since each Dollar paid back will convert into less of the foreign currency.

This situation will have a future effect on US businesses. Some things to consider if the dollar depreciates:

• Will foreign investors be willing to continue buying US debt? If the debt is paying only 1% – 2%, but the asset depreciates by 10% in value, the holder of the debt will take significant losses. At some point in time, they will demand higher interest rates to compensate for the asset price risk. Higher interest rates will have a negative effect on the US’s ability to pull itself out of the current recession.
• If you are exporting, a depreciating Dollar can help. Your products will be less expensive to foreign markets, since their currency will be worth more relative to the US Dollar.
• If you are importing, the news is not as good. If your transactions are denominated in US Dollars, your immediate costs won’t be affected. However, you should expect foreign suppliers to start talking about price increases. If your transaction is denominated in a foreign currency, it will cost more US Dollars for the quantity of the foreign currency needed to pay the invoice. Consider some type of future currency hedging.

The US dollar is truly a privileged currency. However, since it floats freely against other currencies, it is not immune to macroeconomic pressures. Your organization needs to understand these pressures and take appropriate action.