STRATEGIES FOR MARKET ENTRY: Fast Moving Consumer Goods Companies in Emerging Markets

Mark Sorgenfrey Lasse Munch

M.Sc. Strategy, Organisation and Leadership Academic advisor: Mai Skjtt Linneberg
Aarhus School of Business 2009

Abstract
Multinational enterprises (MNEs) are increasing their presence in the lives of more and more consumers as companies seek to expand and promote their products to a still wider range of markets globally. As markets change and develop, so does the strategy used to enter them, and companies must be able to choose the correct way to enter markets in order to remain competitive. This thesis takes a look at how MNEs in the FMCG industry enters new markets, more specifically emerging markets. In order to gain an understanding of this we look at three specific markets, namely Russia, India and China. We attempt to answer if the way MNEs enter emerging markets is in keeping with what would be expected from the OLI framework (Dunning 2000) as well as the work done by Buckley and Casson (1998). Additionally we try to gain an understanding of why any discrepancies exist and whether they can be explained by the nature of emerging markets as well as the characteristics of the FMCG industry. An ability to adapt and tailor specific strategies to individual markets gains more importance, especially with regard to emerging markets, as the difficulties and obstacles presented when entering these markets often proves both new and unique. In many cases there are difficulties in underdeveloped markets, specifically concerning consumer spending power and brand awareness, as well as logistics and infrastructural inadequacies compared to western markets which serves to make the correct approach to entering emerging markets of high importance. The methods first employed when entering emerging markets are often unsuccessful and needs to be modified as market knowledge is gathered and opportunities present themselves. In the three markets analysed in the thesis to illustrate emerging markets, Carlsberg is used as an example of a company present on all three markets. Examples of entry strategies followed by Carlsberg in the three markets are analysed and the reasons for their success or failure as well as the lessons learned are discussed in relation to the individual markets. In importance, this thesis contributes to the understanding of how MNEs enter emerging markets as well as to which challenges they face.

Contents
1 Introduction ............................................................................................................... 1 2 Problem statement .................................................................................................... 2 3 Objectives and research method ................................................................................ 2 3.1 Selection of cases for analysis .............................................................................. 3 4 Market entry modes for FMCG firms .......................................................................... 6 5 Reasons for conducting foreign direct investment ..................................................... 7 6 Internalization level and form of market entry ........................................................... 8 6.1 Transaction cost theory ....................................................................................... 8 6.2 The Resource Based View and internalization .................................................... 10 6.2.1 The Resource Based View and mergers and acquisitions ............................. 12 6.3 The OLI framework ............................................................................................ 13 6.4 Model of foreign market entry........................................................................... 21 7 Fast moving consumer goods ................................................................................... 24 7.1 Choice of the supplier side of the FMCG industry .............................................. 26 8 Emerging markets .................................................................................................... 27 8.1 Circumventing infrastructure problems in emerging markets ............................ 29 9 Market analysis of the FMCG industry ...................................................................... 30 9.1 Threat of new entrants ...................................................................................... 30 9.2 Rivalry among existing competitors ................................................................... 31 9.3 Bargaining power of suppliers............................................................................ 32 9.4 Bargaining power of buyers ............................................................................... 32 9.5 Threat of substitute products ............................................................................ 33 10 Carlsberg Breweries A/S ......................................................................................... 33 11 Markets .................................................................................................................. 35 11.1 India ................................................................................................................ 35 11.1.1 Infrastructure ............................................................................................ 37 11.1.2 Indian retail and the Indian consumer ....................................................... 40 11.1.3 Five forces analysis of the Indian FMCG industry ....................................... 43 11.1.4 The Indian beer market ............................................................................. 46 11.1.5 Carlsberg India .......................................................................................... 47 11.1.6 OLI framework .......................................................................................... 49 11.1.7 Discussion ................................................................................................. 55 11.2 China ............................................................................................................... 56 11.2.1 Special economic zones and growth .......................................................... 56 II

11.2.2 Current state of the Chinese economy ...................................................... 57 11.2.3 Rural-urban wage gap ............................................................................... 59 11.2.4 Infrastructure ............................................................................................ 60 11.2.5 Chinese business culture and the importance of guanxi ............................ 62 11.2.6 Chinese retail ............................................................................................ 63 11.2.7 Chinese consumers ................................................................................... 64 11.2.8 Five forces analysis of the Chinese FMCG industry .................................... 66 11.2.9 OLI framework .......................................................................................... 68 11.2.10 Discussion for China ................................................................................ 71 11.3 Russia .............................................................................................................. 73 11.3.1 Market analysis for Russia ......................................................................... 76 11.3.2 The Russian beer market ........................................................................... 80 11.3.3 Carlsberg on the Russian market ............................................................... 82 11.3.4 OLI framework .......................................................................................... 83 12 Discussion and findings .......................................................................................... 87 13 Conclusion ............................................................................................................. 95

Appendix
Appendix 1 FMCG retail markets and supplier industries

III

Figures and tables

Table 3.1 Table 4.1 GDP per capita and growth rate for emerging countries. Market entry modes

Table 11.1 Market segments in the Indian market Table 11.2 Carlsberg Indias facilities Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan)

IV

1 Introduction
This text is the final chapter of our education at the Aarhus School of Business, University of Aarhus. As M.Sc. students within strategy, organization and leadership, we have spent a considerable amount of time for the past two years learning about and working with the concept of strategy. The vast majority of this time has been focused on strategy regarding the choice of which product markets to be in as well as how to develop these markets not concerning which geographical markets would be worth while pursuing and how best to enter these markets. As we find the geographical aspect just as interesting as the product market aspect however, we decided to spend our final semester delving into the topic of market entry strategies. That market entry strategies should be the main topic of our thesis was not our first thought though as we discussed the first ideas for the thesis in the autumn of 2008. We settled relatively quickly on the idea of involving the major Danish brewer, Carlsberg, in the thesis however. Carlsberg had at that time only just completed the joint acquisition of Scottish & Newcastle together with Dutch rival Heineken in the biggest foreign acquisition by a Danish firm ever made. This deal reinforced Carlsbergs position among the leading global brewers and increased their activities in high growth foreign markets as well as their dependence on these. This made Carlsberg a highly interesting case for analysis in our perspective. Based on our desire to delve into the topic of market entry strategies as well as our interest in Carlsberg, the idea for the thesis thus became to evaluate the options available to Carlsberg and similar multinational enterprises when entering high growth foreign markets as well as the actual entry strategies pursued by Carlsberg in such markets. The thesis draws information and data from academic articles and books, corporate websites, and news reports as well as governmental and other publicly available statistics. Additionally, we attended Carlsbergs annual general meeting in Copenhagen in March of 2009. In importance, this thesis contributes to the understanding of the challenges faced by MNEs in emerging markets. Additionally, it adds to the knowledge on how MNEs enter emerging markets and on the conceivable reasons behind choosing the respective modes of entry in different emerging markets. This is relevant due to the increasing globalization of markets as especially western MNEs look to emerging markets for growth as they face stagnant growth in their core markets in the west. 1

2 Problem statement
A great deal has been written about strategies for market entry and we will present some of the more important contributions in this thesis in order to offer the reader an overview of relevant theories. When it comes to entry strategies in emerging markets the amount of literature is limited however and is often confined to investigating single economies. This study will therefore contain a comprehensive analysis of a small number of emerging markets in order to offer a better indication of the challenges firms face when entering emerging markets in general. The objective of the thesis will be to make a contribution to the understanding of the challenges and problems associated with entering emerging markets, and why these strategies are implemented and carried out in the way they are. The main focus will be on the differences between what are to be expected based on theoretical approaches and what is actually observed. In order to shed light on this subject, the thesis will analyze three cases covering Carlsbergs strategy on the Russian, Chinese and Indian markets respectively. The main question which this thesis will seek to answer is the following: Can the choice of market entry strategies for FMCG producers in emerging markets be explained through the OLI framework (Dunning 2000)? Secondary question: If differences between actual and expected market entry strategies exist, how are these explained by the special characteristics of emerging markets and/or the FMCG industry?

3 Objectives and research method

The primary objective of this thesis is thus to determine whether firms within the FMCG industry follow the theories on market entry in emerging markets. That is, can the market entries of FMCG firms in emerging markets be explained through the theories presented in this thesis; transaction cost theory (Coase 1937, Williamson 1975; 1985), the resource based view (Wernerfelt 1984, Peteraf 1993), the eclectic paradigm (Dunning 2000) as well as the model on foreign market entry developed by Buckley & Casson (1998). Providing this is not the case, the secondary objective of the thesis is to determine whether FMCG firms follow a different pattern in market entries compared to non-FMCG firms due to the characteristics of their particular industry or alternatively; 2

can the differences be explained based on the differences between established and emerging markets. In order to answer these questions, we have chosen to analyse a total of three cases of market entry by the Danish multinational FMCG firm, Carlsberg A/S.

3.1 Selection of cases for analysis

When the numbers of emergent markets are so large and diverse the question becomes what markets are worth taking a closer look at in order to define the problems and challenges facing FMCG manufacturers and to test their adherence to the theories on market entry. In this thesis we have taken the approach of looking at the three largest emerging economies, namely Russia, China and India, who amongst them represents a significant percentage of the world population as well as the world market. We believe that these countries will provide an interesting view of emerging markets. In our view their size make them more interesting than smaller markets which has less influence on the world, since these three countries could very well be the engines that drive the economy of tomorrow. Additionally, the three markets shows themselves to be interesting in the context that they, despite their large size, shows significant differences in their market structure as well as the challenges entrants and domestic companies face. This means, that these markets will give a fairly representative picture of the numerous challenges faced by the companies operating in emerging markets. In addition to the above mentioned reasons for our case selection, we have further justification for our choices. Looking at the cases in a more scientific view, we consider the Russian, Chinese and Indian markets to be diverse cases with regard to wealth (Gerring 2007 p. 97), which is evident by the differences in GDP per capita in the three countries. As can be seen from table 3.1 below, the Russian GDP per capita was estimated at $15,800 in 2008, the Chinese $6,000 and the Indian $2,800 (CIA 2009). Russia is thus among the wealthiest third on FTSEs list of emerging countries ( FTSE 2009) and given the markets size and Carlsberg heavy involvement in the country, it is as a result a logical case to include in our analysis. At the same time, Russia has shown considerable growth in recent years and is part of the upper third of the emerging countries in terms of growth. China is on the other hand part of the lowest third of emerging countries when it comes to GDP per capita. China is however likely to advance on the list in the coming years as it has the highest GDP growth rate of all the emerging countries, and has sustained this 3

growth rate for a number for years. For this reason, we consider it fair to use China as our median case, also because Turkey is the only market among the middle third where Carlsberg is active and we do not consider Turkey particularly interesting compared to China. This is primarily due to its more limited size, GDP growth and market potential compared to China. As stated, our final case is the Indian market. India is like Russia and China among the upper third of the emerging countries in terms of growth, but it is however also the one with the second lowest GDP per capita, only slightly superior to Pakistan. These facts combined with a population in excess of 1.1 billion people and a very low consumption of beer makes India an intriguing case for analysis. Table 3.1 GDP per capita and growth rate for emerging countries. Rank Country GDP per capita Country GDP growth rate 1 Taiwan $31.900 China 9,8% 2 Czech Republic $26.100 Peru 9,2% 3 South Korea $26.000 Argentina 7,1% 4 Hungary $19.800 Egypt 6,9% 5 Poland $17.300 India 6,6% 6 $15.800 Indonesia 6,1% Russia 7 Malaysia $15.300 Russia 6,0% 8 Chile $14.900 Morocco 5,9% 9 Mexico $14.200 Pakistan 5,8% 10 Argentina $14.200 Brazil 5,2% 11 Turkey $12.000 Malaysia 5,1% 12 Brazil $10.100 Poland 4,8% 13 South Africa $10.000 Philippines 4,6% 14 Colombia $8.900 Chile 4,0% 15 Thailand $8.500 Czech Republic 3,9% 16 Peru $8.400 Thailand 3,6% 17 China $6.000 Colombia 3,5% 18 Egypt $5.400 South Africa 2,8% 19 Morocco $4.000 South Korea 2,5% 20 Indonesia $3.900 Taiwan 1,9% 21 Philippines $3.300 Turkey 1,5% 22 India $2.800 Mexico 1,4% 23 Pakistan $2.600 Hungary -1,5% Countries in italic type are Advanced Emerging Countries Source: CIA 2009 and www.ftse.com

When using the diverse case selection method, the chosen cases should in combination be somewhat representative of the population due to the selection of high, low and median value cases. It is should therefore also be fair to say that diverse case selection is often more representative than other forms of case selection as it encompasses a greater range of variation (Gerring 2007 p. 101). This requires however, that GDP per capita values are fairly evenly distributed between high and low values. When this is the case, it should be representative of the population to pick one low, one median and one high. If the majority of the population had a low GDP per capita however, that is if there were more low than high cases, it would perhaps be more representative to add an additional low score case (Gerring 2007 p. 101). Since the GDP per capita values seems to be somewhat evenly distributed between the high and low values in the population of emerging countries, it should be fair to select one high, one median, and one low case.

4 Market entry modes for FMCG firms

Root (1994) and Buckley & Casson (1998) have identified 15 and 20 different modes of market entry respectively. These can however be categorized in the five main classes in table 4.1, which are ordered in accordance with increasing control of the entrant (Johnson 2007) and in general also with increasing commitment and investment. Table 4.1 Market entry modes Export
The perhaps simplest form of market entry is to export products from the domestic market to a company or individual in the foreign market who then sells the products on. In addition to being a simple form of market entry it does not require any particular investment either and it is highly flexible. On the other hand, the exporting firm has very limited (if any) control over functions such as marketing and distribution in the target market(s). Licensing and franchising agreements permit an incumbent to produce and sell the foreign firms product(s) in the markets agreed upon. The agreement thus allows the incumbent to use the foreign firms proprietary technology and/or knowledge. The incumbent then pays the foreign company compensation for the right to do so, which could for instance be through a fixed annual fee or as payment per unit sold. In licensing and franchising agreements, the vast majority of the necessary investment lies with the incumbent. In a strategic alliance a foreign and an incumbent firm agree to collaborate in the foreign market in order to reach specific goals while remaining independent organizations there are no equity investments. A strategic alliance is often aimed at attaining synergies through combined effort and can additionally involve knowledge and technology transfer as well as shared expense and risk. As opposed to joint ventures, which are described below, strategic alliances require limited upfront investment. In a joint venture, a foreign firm and an incumbent in a target market agree to share activities in the target market. This collaboration can for instance take place through a subsidiary owned equally by both parties. Such an agreement would in most cases involve a substantial investment from the foreign firm although not as much as an acquisition or green field venture. At the same time, a joint venture can benefit from knowledge and technology of both parties. A wholly owned subsidiary can either be obtained in a foreign market by acquiring an entire firm or part of a firm in the target market or it can be started as a green field venture; that is building production and/or distribution facilities from scratch in the target market. Since all costs associated with this sort of entry mode lies upon the entrant, this is naturally the one which requires the largest upfront investment. In case of a green field investment, the entrant cannot rely on an incumbents knowledge on the foreign market. A major advantage to a wholly owned subsidiary is that the entrant will retain full control of the venture.

Licensing and franchising

Increasing control as well as commitment and investment

Strategic alliance

Joint venture

Wholly owned subsidiary

5 Reasons for conducting foreign direct investment

In general, doing business in a companys domestic market, or in markets geographically and culturally close to this market, should be much simpler than expanding globally. If a company do wish to sell to distant foreign markets, it should likewise be simpler to export products rather than engage in FDI and setting up subsidiaries with production facilities abroad especially since this incurs costs of communicating the companys technology (Buckley et al 1998). However, businesses seem to increase their international focus year by year, which can be driven by a number of different reasons according to Robock and Simmonds (1989 p. 310). The following six points are focused on reasons for conducting foreign direct investment (FDI). The search for new markets. Expanding internationally through FDI will often be caused by companies seeking to increase turnover and, hopefully, profits by entering new markets. Entering new and distant markets is often not feasible through export due to factors such as logistical costs and import taxes as well as lack of knowledge on local consumer demands. The search for new resources. These resources1 could be unskilled labour, agricultural products or natural resources such as minerals (Dunning, 2000 p. 164). FDI is in this case not necessarily conducted in order to reach new customers but instead aimed at servicing current customers (Hitt et al 2005 p. 468). Production-efficiency seeking. Where economies of scale are present, it makes sense to increase the customer base internationally and thus increase production volumes, as this will lead to lower average costs for products which will increase the companys competiveness (Ghoshal 1987 p. 434). This is especially the case when it is feasible to concentrate production at a few international locations, preferably where production and logistics costs are lowest, which can then supply nearby markets. Technology seeking. Larger firms often buy smaller firms in order to acquire new technologies, a common occurrence in the medical and biotech industries for instance. In this way the acquiring firm can take advantage of the often more entrepreneurial and innovative culture in smaller firms which often lead to development of superior
1

By a resource is meant anything which could be thought of as a strength or weakness of a given firm. Examples of resources are: brand names, in-house knowledge of technology, employment of skilled personnel, trade contacts, machinery, efficient procedures, capital, etc. (Wernerfelt, 1984 p. 172).

technologies. According to Ghoshal (1987), doing business in a global market may also in itself aid development of diverse capabilities as companies are subjected to a multitude of stimuli by operating in different environments. This should, ceteris paribus, provide multinationals with greater opportunities for organizational learning. The search for lower risk. Companies may seek to lower their risks by diversifying into additional markets through FDI and thus lowering their dependence on the business cycles of single markets (Hitt et al 2005 p. 468). For this reason, MNEs generally diversify their FDI investments geographically so as not to put all their eggs in o ne basket (Rugman 1979). Other risks which could be lowered by FDI are policy risks from unfavourable national legislation, competitive risks from lack of knowledge on competitors actions and resource risks such as dependence on a single source of an important raw material for production (Ghoshal 1987 p. 430). Countering the competition. Companies can also engage in FDI as a reaction to competitor moves, for instance as part of a tit for tat strategy (Frank 2003 pp. 461-462). An example could be, that company X enters an important market of a competitor and the competitor could then choose to retaliate by entering one of company Xs important markets making both parties worse off. This should then deter X from engaging in such actions again.

6 Internalization level and form of market entry

As discussed in the previous section, a company wishing to sell their products abroad can either engage in FDI or choose to license the right to sell the products to a third party when they do not find it advantageous to export. The first question then becomes whether the company should produce and sell the product itself on the foreign market or if it should sell a license. Then, if the company estimates that FDI would be the best solution, then which form of FDI should be used? Some of the theoretical attempts to answer these questions will be covered in the following sections.

6.1 Transaction cost theory

One of the theories, which seek to answer why transactions are handled within a firm instead of between independent parties in the market, is transaction cost theory. The theory was introduced by Ronald H. Coase in his 1937 paper The Nature of the Firm (Coase 1937). Though the theory is more than 70 years old, the concept of transaction 8

costs is still highly relevant today and is used within the field of industrial organization where Coases theories have been elaborated on. To put it simply, transaction cost theory states that a company will grow if the internal transaction costs are lower than the external transactions costs. For this to make sense, it is necessary to define what is meant by transactions costs. Coases 1937 paper mentions three overall types of costs related to external transactions: Costs associated with information gathering when searching for prices on external offerings, e.g. components or services. Costs related to negotiating contracts between the firm and external providers in order to specify terms and conditions. Some taxes and quotas, which have been established by governments for transactions in the market, may not apply to transactions within firms. As mentioned, Coase and others have elaborated on Coases original paper and have specified additional forms of transaction costs. First and foremost, even the most comprehensive contract cannot cover every possible contingency (Williamson, 1975; 1985). This means that after a contract has been settled on after a highly meticulous, and thus costly, negotiating process there will still be many issues that the parties can disagree on later on. A contract may be excellent when times are good and both parties are in a solid financial state but in times of economic difficulty, one or both parties may attempt to attain a bigger slice of the pie by reinterpreting the contract. Even if it was possible to make the perfect contract the amount of work involved with completing it would most likely entail that it would not be cost effective to do so. The fact that contracts must always be considered incomplete and thus unable to cover every eventuality means, among other things, that both parties to the agreement must monitor whether the other party is acting in accordance with it. Furthermore, if one or both parties fail to comply with the terms and conditions of the agreement, and thus behaves opportunistically, they may need litigation to settle the dispute. Both monitoring a contract and settling disagreements in court can bring about considerable costs. If the parties do not have a relationship built on trust, the uncertainty of future costs may make it impossible to ever get to an agreement at all and it will thus be necessary to internalize what would otherwise be done by the other party or find another, less suitable, supplier if at all possible. The fact that Williamson attributes 9

opportunistic behaviour solely to human nature has been criticised by Ghoshal and Moran (1996). However, the fact that humans and organizations have a tendency to behave opportunistically can hardly be disputed, especially in the current economic climate. As an example, the majority of larger Danish firms are currently renegotiating contracts with their suppliers in order to lower prices and achieve better terms (Bjerrum 2009). To summarise, transaction cost theory states that if internal transaction costs are lower than the above mentioned costs associated with transactions in the open market, then the transaction should be handled internally. This is however only valid if other factors do not change this recommendation for instance it the company prefers the often higher level of flexibility of using the market. While transaction cost theory is highly relevant when deciding between using the market and producing internally in a company, its focus is primarily on make or buy decisions within markets. However, when the question is whether a company should export to a foreign market or set up production there, a number of other factors need to be considered and decided on. A later segment in this thesis will cover J. H. Dunnings OLI framework (2000) which includes factors relevant to this decision. Before getting to this, the next segment will turn to the resource based view and its views on internalization.

6.2 The Resource Based View and internalization

While transaction cost theory mainly focuses on external circumstances and the quantifiable, the resources based view is concerned with the firms internal factors and the more intangible subject of resources, also called firm-specific factors. In some of the more classical writings on the resource based view, focus is mostly on the competitive advantage of firms and thus not specifically with theory on market entry (Wernerfelt 1984; Peteraf 1993). However, the resource based view offers some interesting insights with regard to the latter. For this reason, scholars have applied the resource based view on subjects like the timing of market entry in recent years (see for instance Geng et al 2005; Frawley et al 2006). This thesis will use some of the resource based view s insights on the choice between using the market and internalizing transactions; that is, as an alternative view to transaction cost theory which we have covered above. Moreover, transaction cost theory ignores the medium and long term strategic 10

considerations with regard to sustaining and expanding t he firms competitive advantage. This is on the other hand central to the resource based view as it explains the possession of competitive advantage from the control of superior resources. Additionally, it highlights the importance of building competitive advantage and suggests possible routes to this by acquiring new superior resources (Wernerfelt 1984). Transaction cost theory is on the other hand focused on short term considerations and profitability. According to Wernerfelt (1984), a firm can use the possession of one or a number of resources as a barrier, shielding its superior profits from entrants as well as from other incumbents as long as these behave rationally. This shield comes from the fact that new acquirers of a resource can be adversely affected, when it comes to costs and/or revenues, by the fact that another company is already in possession of a resource. Given this, the company already in possession of the resource thus has a competitive advantage and a potential for superior profits. Wernerfelt has termed this a resource position barrier as it is somewhat analogous to Porters (1980) barriers to entry, although Porters entry barriers in product markets only protects against possible entrants not against other incumbents. Having satisfied and loyal customers could be an example of a resource position barrier against entrants and incumbents, as it is a lot easier to maintain such a position than it is to attract otherwise loyal customers from a competitor. A resource position barrier can of course be based on a number of different resources besides having loyal customers. As mentioned above, the resource however needs to be able to offer a competitive advantage, which means that the following four requirements need to be met (Peteraf 1993): 1) There has to be heterogeneity in the resource bundles and capabilities underlying production among firms. With heterogeneity, superior resources exists which results in the potential of earning rents. 2) There has to be an imperfect market for the resource, as well as for substitutable resources, so that such resources cannot readily be acquired by other firms. That is, there has to be ex post limits to competition. Ex post limits to competition results in rents being preserved as they cannot be competed away in the short term.

11

3) Before the resource is acquired by the firm, there has to be limited competition for that resource, that is, there has to be ex ante limits to competition. This prevents the costs of acquiring the resource from offsetting the rents. 4) Finally, there has to be imperfect mobility in the market for the resource meaning that the resource has to be more valuable in the firm where it is currently in use than it would be elsewhere. Imperfect mobility is often caused by the fact that transferring the resource to another firm will incur costs. This ensures that the rents are sustained within the firm. A wide range of things can be considered a resource. Many of these are also able to comply with the above mentioned requirements for a resource to offer a potential competitive advantage. Besides the example of customer loyalty stated above, such examples include managerial skills, technological leads, and access to raw materials as well as production capacity and experience (Wernerfelt 1984 pp. 173-174). We will expand on some of these examples in later chapters of this thesis, including a few with relation to our chosen cases. All of this relates to market entry decisions because it is too short-sighted to only look at the short term optimization of transaction cost theory. When entering a new market and having to choose between the different modes of entry, it is important for the long term success and profitability of the firm to consider the impact on the firms future resource position. It may be that the alternative with the lowest cost is to license a firm in the target market to produce and distribute the product. This short-term optimization may however restrict the firm from developing new favourable resource positions thus decreasing the firms competitive advantage later on. For instance, licensing instead of internalizing the activities in foreign markets could mean that the firm would not benefit from the organizational learning and innovation which can be achieved by being present in foreign markets as the organization is subjected to societal and managerial differences (Ghoshal 1987). This duality between optimizing in the short and the long term is also what Tallman is talking about in Hitt et al (2001 p. 475-480) when he discusses capability leverage and capability building strategies and the multinational firm. 6.2.1 The Resource Based View and mergers and acquisitions While not referring directly to market entries, Wernerfelt (1984 p. 175) offer some interesting thoughts on the subject of mergers and acquisitions, which are highly 12

relevant to market entry decisions. One of his points is for instance, that when a firm acquires another firm, it can be likened to buying a bundle of resources. The market for these bundles of resources is highly imperfect as there are few buyers and targets and a low degree of transparency due to the heterogeneity of firms. It can be extremely difficult to assess the value of a possible acquisition, especially since such an assessment must often be done discretely so as not to alert competitors or the organization of interest. At the same time, the value of an acquisition is dependent on the acquiring firm and whether synergies can be achieved or not (Wernerfelt 1984). Additionally, when a MNE plans to expand in current markets or enter new ones, the resource-based acquisition strategies are either to get more of the resources the firm already has or alternatively to get access to resources which complements the ones it already has (Wernerfelt 1984 p. 175). These reasons for acquisitions corresponds well with the resource seeking, technology seeking and production-efficiency seeking reasons to conduct FDI stated by Robock and Simmonds (1989 p. 310).

6.3 The OLI framework

The OLI framework, or eclectic paradigm, has been developed by John H. Dunning and dates back to 1958 but it has been revised continuously through the years (Dunning, 2000 p. 168). OLI is an abbreviation for ownership, location and internalization, which are the three sub-paradigms in the framework. The OLI framework combines a number of theories such as transactions cost theory and the resource based view of the firm and in this way serves as an envelope for complementary theories of MNE activity (Dunning 2000 p. 183). The framework describes the three above mentioned factors which are relevant for companies engaged in international expansion. We will give further details about these sub-paradigms below. The ownership sub-paradigm is about the ownership of unique resources, skills or capabilities which can lead to a sustainable competitive advantage (Tallman in Hitt et al 2001). If a company is to expand from its home market into foreign markets successfully, it must of course have some advantage, something to offer, which is not available in the foreign markets already it must have a unique and sustainable competitive advantage (Dunning 2000 p. 164). This corresponds with the resource based view discussed in the previous segment. These advantages can of course take many forms but can in general be grouped into three segments (Dunning 2000 p. 168): 13

Possessing and exploiting monopoly power. Having scarce, unique and sustainable resources and capabilities, based on the superior technical efficiency of a particular firm relative to its competitors.

Having competent managers who are able to identify valuable resources and capabilities throughout the world and who are likewise able to exploit these resources and capabilities to the long term benefit of the firm in which they are employed.

Firstly, companies in a monopoly position on a market are often able to use their position as a barrier to entry to potential competitors. This advantage could for instance consist of economies of scale for the monopolist. I could also be the presence of cost disadvantages for entrants independent of their size such as the possession of proprietary technology by the monopolist (Porter 1980 p. 37). The advantage could likewise be due to product differentiation by the monopolist, for instance when it comes to superior brand power. According to Porter, brewers generally use a combination of scale economics and superior brands to keep potential rivals out of their markets: To create high fences around their businesses, brewers couple brand identification with economies of scale in production, distribution and marketing (Porter 1980 p. 37). Possessing and exploiting monopoly power can thus be considered a competitive advantage since it gives the monopolist a cost advantage relative to its competitors and raises barriers to entry. Secondly, a company is generally able to earn superior profits if it possesses scarce, unique and sustainable resources and capabilities internally in the firm and are able to apply these in the marketplace (Tallman and Fladmoe-Lindquist 2002). This is central to the resource based view and is acknowledged by Dunning in the OLI framework. However, it should be beneficial for the firm to persistently develop new resources and capabilities, not just exploiting existing ones, in order to be competitive in the long term. That is, striking a balance between exploiting existing resources and developing new ones is important in order to achieve optimal growth (Wernerfelt 1984 p. 178). Tallman and Fladmoe-Lindquist (2002 p. 118) expresses this by stating that: the multinational firm will sustain its competitive advantage only if it can continue to develop new capabilities in the face of changing environments and evolving competition. But how does the possession of scarce, unique and sustainable resources 14

and capabilities result in superior profits? As mentioned previously in the segment on the resource based view, when a firm is in possession of a resource, this resource can in some cases act as a so-called resource position barrier (Wernerfelt, 1984). This means that new acquirers of the resource can be adversely affected, when it comes to costs and/or revenues, by the fact that another company is already in possession of this resource. Given this, the company already in possession of the resource thus has a competitive advantage and as a consequence superior profits. Finally, besides being in a monopoly position or having scarce, unique and sustainable resources and capabilities, a company wishing to expand internationally can also rely on competent managers to identify and exploit resources and capabilities internationally. According to Hamel and Prahalad (1994 p. 78), To get to the future first, top management must either see opportunities not seen by other top teams or must be able to exploit opportunities, by virtue of preemptive and consistent capability-building, that other companies can't. Research has also shown that top managers really do have significant influence on the performance of firms (Priem et al in Hitt et al 2005 p. 497). Managers are thus in itself a resource that companies can own and benefit from in international expansion and they can of course be considered unique since no two people are alike. However, skilled managers can hardly give a sustainable competitive advantage since they can be employed by another company and even by a competitor. Peteraf (1993 p. 187) exemplifies this by stating that a brilliant, Nobel prize winning scientist may be a unique resource, but unless he has firm-specific ties, his perfect mobility makes him an unlikely source of sustainable advantage. It is however not enough for a company to have a unique and sustainable competitive advantage for FDI to be attractive, it must also be preferable to invest directly in the foreign market instead of simply just exporting or employing the advantage solely in the home market. This is the subject of the next section. The location attractiveness sub-paradigm states that the foreign market must in some way favour local production to export from the companys home market or other markets where the company is present with production facilities. Many factors influence whether local production is preferable to exporting. Examples of these factors could be lower labour costs, more favourable legislation, high transportation costs, governmental trade barriers, superior production processes or consumers preferring products with a 15

local image (Hitt et al 2005 p. 472). The following will expand on the above mentioned factors. Low labour costs. In recent years, the transfer of jobs from high wage western countries to low wage regions such as Asia and Eastern Europe have attracted considerable attention as well as some anger and hostility from western workers. This has especially been the case when production is outsourced to low wage countries only for the products to be imported back to the home market. As mentioned above there are however other factors which influences the attractiveness of different locations. For instance, many less developed countries are more lenient than western nations when it comes to legislation on environmental protection as well as worker safety. This leniency can in some businesses lead to significant cost savings through outsourcing although the overall effect on profits is somewhat unsure given the potentially adverse effect on company reputation. Superior production processes. Low labour costs is however not the only reason why companies move production abroad. In some cases other countries or regions have capabilities which offer superior production processes compared to other locations. This could for instance be due to a workforce which is particularly skilled within a certain field such as it has been the case for Germany within engineering. Other examples could be superior skills within wind turbine development and manufacture in Denmark or within manufacture of electronics in South East Asia. Governmental trade barriers. Besides their influence on issues such as worker safety and environmental protection through legislation, governments also play their part in determining the attractiveness of different locations via governmental trade barriers. Among other things, governmental trade barriers include import tariffs, licenses and quotas as well as subsidies to local producers. In some countries it may not even be possible to sell imported goods as they require at least part of the final product to be of local origin, the so-called local content requirements (LCRs). LCRs are often used by governments in less developed countries in order to protect local intermediate product companies from foreign competition (Belderbos et al 2002). Ceteris paribus, when a country impose trade barriers on importers in one way or the other, it becomes more attractive to produce locally instead of exporting to this country thus raising the location attractiveness of the market. 16

Preference for local products. Another factor which can make it more attractive to produce in a given market is the fact that products with a local image are often favoured by consumers. Firms, industry organizations and even governments sometimes attempt to increase this form of loyalty by calling upon consumers to buy domestic products through campaigns, often in order to support the local economy. Besides the patriotic reason for preferring local products, when consumers have consumed a certain product for a long time perhaps their entire adult life it is often very difficult to convince them to switch to an alternative product. A good example of this is in fact the beer industry where consumers have often preferred to buy from the local brewery. In China for instance, there is generally a high level of patriotism when it comes to beer drinking (Heracleous 2001 p. 43). Combined with other factors, the preference for local beers have made it highly difficult for the majority of the global players in the beer industry to gain a foothold in China based on non-local brands (Heracleous 2001 p. 37). Another example could be the Danish market for fresh dairy products where there is a strong preference for Danish products among consumers with only limited competition from mostly German products which has been introduced in recent years. Due to the preference for products manufactured locally, it can often be beneficial for MNEs to acquire or join forces with local producers. In this way, the companies can combine their respective competences and in this way improve the competitiveness of both. An example of this could in this case be the strong local brands of the incumbents in conjunction with the superior manufacturing and marketing skills of the MNE. Transportation costs. Last but not least, transportation costs are a major factor when determining whether it is beneficial to produce locally as opposed to exporting to a given market. In a short term perspective, one should choose to export if the combined costs of producing the goods and transporting them to the foreign destination are lower than the costs of producing them locally. Otherwise it would be beneficial to set up production locally in some way. There are a number of different costs related to shipping products across large distances and these are not just related to the price of shipping a container from for instance Asia to Europe. These other costs include all sorts of handling costs, spoilage during 17

transport as well as inventory carrying costs2 which also include carrying costs during the eight weeks of shipping from Asia to Europe. Besides these costs, exporters are also vulnerable to changing demands of consumers due to their long supply lines as demand may change before the products reach their target customers. These changes in demand can make it necessary to lower sales prices in order to sell products or can make it impossible to sell them altogether. Customer service can also suffer from long supply lines especially since companies try to minimize inventories as much as possible due to the above mentioned inventory carrying costs. With long supply lines, average inventory needs to be larger than with short supply lines due to the higher need for safety stock3, if the inventory service level4 is to be maintained. In case some part of the long supply line minimizes safety stock excessively, perhaps to avoid perishable products going beyond their sell by date, this is likely to lead to occasional stock outs here as well as further down the supply line. Products will thus periodically become unavailable to retailers and final consumers leading to lower perceived customer service and loss of sales. With other things equal, shorter supply lines can minimize the problem of stock outs considerably. Finally, some products are more or less perishable and have a sell by or freshness date. If the products have been transported from the other side of the planet, they have a relatively limited time left on the shelves near the final consumer when they eventually get there before they have to be discarded. An example of this could be beer as beer often has a sell by date or in some cases a freshness date, which indicates the date of production or the recommended final date of consumption. The amount of time between time of production and freshness/sell by date is mostly between four months for a standard lager and 12 months for stronger brews (The Beverage Testing Institute). This amount of time, the so-called shelf life, is however dependent on correct storage of the products. If the products are not stored correctly the actual shelf life will be lower as product quality will decrease at a faster pace in poor storage conditions.

Inventory carrying costs include the cost of money tied up in inventory, storage space, loss and obsolescence, handling, administration, insurance etc. (Waters 2003 p. 257). 3 Safety stock/inventory is a reserve inventory held in addition to the expected needs in order to add a margin of safety. (Waters 2003 p. 267). 4 The inventory service level is the probability that a demand is met directly from inventory thus avoiding backorders. Having safety stocks increases the service level (Waters 2003 p. 268).

18

Since shipping a container by container vessel from for instance Italy to China takes at least three weeks (Maersk Line 2009), and in most cases considerably longer, exporting beer across such distances limits the shelf life at retail stores considerably. This will not only decrease the average quality of the products sold to end consumers but will also increase the number of products which are not sold before the sell by date. Lower quality will first of all lead to lower customer satisfaction but also to more products which has to be discarded as they go beyond their sell by dates. All in all, shipping perishable products over long periods of time incurs considerable costs besides the cost of the transport fee itself. Finally, companies can also seek to attain strategic resources they are currently lacking by investing in foreign countries. In this case, investment in foreign countries is conducted in an attempt to enhance their knowledge and global competitiveness, not to use current advantages in new markets to earn higher returns (Chen & Chen 1998 p. 446). The presence of companies in possession of complementary competences in a given country or region can thus attract FDI as foreign companies seek to attain these competences (Dunning 2000 p. 178). The internalization sub-paradigm concerns whether entry into foreign markets is preferable through some sort of inter-firm non-equity agreement such as licensing, by engaging in FDI through investing in green field production facilities, or by purchasing a company in the target market (Dunning 2000 p. 164). As described in the section on transaction cost theory, this decision can be based on a somewhat simple assessment of whether an arms length market transaction incurs the lowest cost or whether conducting the activity internally is the less costly alternative. That is whether activities in a foreign market should be handled internally or should be performed by a partner in the market. The cost of conducting transactions in the market is in most cases positively correlated with the imperfections of the market (Dunning 2000 p. 179) as this will often allow companies to charge higher prices. Examples of these imperfections could be information asymmetries between the parties to an exchange as well as common property resources, public goods and externalities (Lipsey in Dunning 1999 pp. 83-84). The former is in this case the most relevant, as information asymmetries has a highly significant influence on the costs of conducting transactions in the open market as described earlier on in this thesis in the section on transaction cost theory. Information 19

asymmetries between buyer and seller leads to costs associated with gathering information, negotiating deals, monitoring compliance to these deals as well as costs due to litigation in order to settle disputes between the parties to an agreement. Since the transactions are to be performed between a domestic and a foreign market, information asymmetries are likely to be more prevalent and significant than between parties in the same market. This is of course due to the fact that firms will in general have less knowledge of foreign markets than they have of their domestic market which is exacerbated by language and cultural differences. In addition to information asymmetries as a reason for internalization, it may also, as mentioned earlier, be cost effective to internalize functions when certain governmental taxes or quotas can be avoided by doing so. While a transaction cost based analysis of where the boundaries of the firm should be drawn is valid, it does however ignore other reasons why firms may choose to internalize functions in foreign markets aside from pure cost optimization (Dunning 2000 p. 180). As covered previously in this thesis, Robock and Simmonds (1989 p. 310) state six reasons for conducting FDI: the search for new markets, resources, technology, production-efficiency or lower risk as well as countering the actions of competitors. Consequently, a firm entering a foreign market can choose to set up its own production in the market even though it at first glance would be more cost-effective to allow a local producer to produce the companys product(s) on license. This could for instance be relevant if the firm needs qualified engineers and these are in limited supply domestically. The company could then attempt to gratify two needs at the same time by reaching a new market through FDI while also gaining better access to competent engineers. In order to do so, the firm could seek to establish itself in an attractive foreign market, which at the same time maintains a high-quality education system, as this could secure a steady flow of potential candidates. The firm may be able to market their products in this market at a lower cost through a local partner via a licensing agreement than through internalizing the function. But since this would not enable them to access well educated labour in the same way, the overall benefit of internalizing could be larger than the benefit of an arms length market transaction. The eclectic paradigm has managed to remain the dominant paradigm within MNE activity and market entry as a result of regular revisions and updates. It is however, due 20

to its complexity, difficult to apply in the business world and it is at the same time not particularly useful when it comes to advising on research designs and hypothesis testing in academic research (Dunning 1980). By simplifying and expanding on Dunnings framework, Buckley & Casson (1998) have constructed a model intended to guide decisions on foreign market entry. This model will be the subject of the next section of the thesis.

6.4 Model of foreign market entry

When firms plan to enter a new market, the decision of entry mode is an important one since it can be of considerable significance to the firms success in the market (Woodcock 1994 p. 268; Yigang 1999 p. 98). Under all circumstances the entry mode chosen will constrain the marketing and production strategy of the firm (Johnson 2007). Thus if firms could make use of a simple model or a complicated one for that matter in order to find the correct form of entry, this model would of course be of great value. However, the world is seldom so simple and neither are decisions on market entry. Buckley & Casson (1998) have nevertheless contributed with a model on foreign market entry strategies which offer advice on which entry modes are preferable under different circumstances. Unfortunately, the simplification process required to make a model has involved the inclusion of a large number of assumptions. These assumptions can however be relaxed although this increases the complexity of the analysis (Buckley & Casson 1998 pp. 543-547). Because of the large number of assumptions in Buckley & Cassons model, it is beyond the scope of this thesis to describe them in detail but we will however shed light on some of the more important assumptions. First of all, the firm is engaging in its first foreign market entry and thus lacks knowledge on this subject as well as knowledge related to the chosen market. It is thus relevant for the company to attain this knowledge at as low a cost as possible which among other things depends on the mode of market entry. Secondly, the model distinguishes between production and distribution of goods in the target market as these functions can be owned independently. There are thus four different possibilities of ownership or in the final case of non-ownership: The firm can own both distribution and production facilities in the target market. It can own the production facility solely, either in the target market or at home, and then franchise the right to distribute the products to a local company 21

It can own the distribution facility solely and import products from its home market to supply it or alternatively subcontract a local facility to handle production.

Alternatively, it can choose to own neither production nor distribution. In this case the firm leaves both production and distribution to an incumbent in the market.

Finally it is assumed that the firm faces a single local rival in the target market. The incumbent firm, who would of course have to be a monopolist, owns the only existing facilities which can meet the needs of the market. In case the MNE chooses acquisition as the mode of market entry, the incumbent firms monopoly power can thus be acquired by purchasing a majority equity stake in the firm. Whether acquisition or green field investment is the most attractive option is also dependant on the costs of technology adaption. If the MNE and the single incumbent have very similar technology it is always more profitable to enter the market through acquisition instead of green field investment. This is because green field investment in this case will lead to low profits as the entrant will not be able to outperform the incumbent directly. If the incumbent is acquired on the other hand, the entrant will yield monopoly profits. If the MNE and the incumbent have sufficiently different technologies however, the entrant should be able to outperform the incumbent through green field investment, and the cost of technology adaptation can be avoided. Nevertheless, if green field investment costs are too high, it may not be profitable to enter the market in this way or through acquisition at all (Mller 2007 p. 98). The assumptions stated in Buckley & Cassons model can as previously mentioned be relaxed, but this will however add additional complexity. At the same time the assumptions do not limit the applicability of the model per se but serves more as a checklist for researchers and practitioners of things to consider when applying the model (Buckley & Casson 1998 p. 543). With the assumptions defined Buckley & Cassons model lines up the possible ways of entering a foreign market, which amounts to 20 different possibilities. This follows from the five dimension of foreign market entry that they set forth (Buckley & Casson 1998 p. 547); the question of 1) where production is located; 2) whether production is owned by the entrant or the incumbent; 3) whether distribution is owned by the entrant or the incumbent; 4) whether facilities are fully owned or shared through an IJV; and 5) whether ownership is obtained through acquisition or green field investment. The cost 22

structure of the 20 different combinations can then be compared with a profit norm as well as to each other. The profit norm is defined as market entry through green field production and distribution facilities in a market without competition. The profit norm will thus be; revenues at monopoly price, less the costs associated with a fully owned green field venture, less the cost of internal transfer of goods (Buckley & Casson 1998 p. 550). This is considered the ideal form of foreign market entry meaning that every other form of entry incurs additional costs. Since such an ideal entry in a market without rivals is a rare occurrence, if at all possible, focus is primarily on finding the alternative with the lowest costs among the 20 alternatives when entering already occupied markets. This is initially done by eliminating alternatives which are strictly dominated by other alternatives. What is meant by one alternative dominating another is, as an example, that two alternatives, A and B, each lead to the same costs; W, X and Y. However, alternative A additionally leads to cost Z and will thus always be more costly than alternative B since changes in W, X and Y influences A and B in the same way. When comparing the different market entry strategies, the assumptions are important to keep in mind since the process of elimination will get increasingly difficult if the situation under analysis fails to be as it is assumed in the model. When the assumptions are not satisfied, the alternatives must be weighed more carefully against each other as the effect of each deviation must be considered. The process of elimination reduces the number of alternatives to a more manageable amount, which can then be compared to each other by assessing the major tradeoffs. Buckley & Casson (1998 p. 552) concludes that, given their set of assumptions, there are three superior strategies to choose from: Green field production combined with acquired distribution. Green field production combined with franchised distribution. Licensing.

The choice between these possibilities in any particular situation depends on six different types of costs. If the cost of acquisition is low, green field production combined with acquired distribution is attractive compared to the other options as these do not involve acquisitions. In contrast, green field production combined with franchised distribution involves market transactions of intermediate products between the MNE and a local franchisee. If these costs are low, this will make this option 23

relatively more attractive. Since this option leaves the incumbent in a position to compete, as the incumbents production facility has not been acquired, the potential cost of losing monopoly status must also be considered. If this cost is low, green field production combined with franchised distribution becomes yet more attractive. The attractiveness of the final option, of licensing the right to produce and distribute the product to a single incumbent that is, is dependent on two types of costs. If the transactions costs of licensing a technology and the costs of adapting local production are low, this will make licensing a viable way of entering the market. The relevance of adaptation costs is due to the fact that this is the only option among the three, which requires already existing production facilities (Buckley & Casson 1998). In order to find the most attractive solution for entering the market, these six types of costs must be estimated and weighed against each other in order to find the option with the lowest costs. This estimate can then be used in the final analysis where other factors are considered including the long term strategic consequences of each possible solution. In this thesis, we will make use of Buckley & Cassons model as a checklist for things to consider in a market entry situation when analysing our chosen cases, especially the Chinese market. The thesis will thus not use it as a step by step guide since the cases under analysis do not comply with the assumptions set forth in their model. This use of their model fits nicely with their own opinion on how researchers and practitioners can make use of their work (Buckley & Casson 1998 p. 543). The OLI framework will be used as the primary reference in our analysis as it, like Buckley & Cassons mode l, encompasses many of the thoughts brought forward in transaction cost theory as well as the resource based view. From the theoretical part we now turn to description and analysis of the FMCG industry as well as the emerging markets. Hereafter we turn to Carlsberg and our selected cases.

7 Fast moving consumer goods

The fast moving consumer goods (FMCG) sector is a large and important part of almost every economy in the world, insofar as the products associated with the industry represents a big part of every consumer budget. The goods produced by the industry are basically necessities and the inelastic nature of the goods makes their impact on economies worldwide significant. The FMCG are sometimes referred to as consumer 24

packaged goods and the various products are characterized by being sold quickly, in large quantities, and at low costs and include almost all consumables regularly bought by consumers. According to the International Standard Industry Classification, the retail part of the industry are classified into 7 different categories and the supplier part into some 22 categories (appendix 1), meaning there are many diverse products that are part of the industry as a whole. The diversity of the industry is evident from the fact that a typical European retail chain will have up to one or two thousand suppliers. The FMCG industry consist of both a supplier side that manufactures the goods and a retail side such as wholesalers or supermarkets, that sell the products produced by the suppliers. The link between the manufacturers of FMCG and the retailer side are logistics providers and intermediaries that constitute a smaller but significant part of the industry. Few industries rely more on efficient logistics systems than the FMCG industry (ATKearney 2009). In a modern economy, an efficient transportation system is of great importance and it can perhaps be considered especially important for FMCG firms. This is because most FMCG firms would ideally want their products to saturate the market by being available at practically every outlet in order to increase sales 5. In the soft drink industry for instance, consumers may have a preferred brand. If this brand is not available however, they will in most cases simply purchase a rival or substitute product not go to another store to buy their preferred brand. You can thus have a high value product and spend heavily on advertisement, but if the product is not widely available in stores, revenues will be limited as consumers will mostly buy their second choice product instead. Being able to distribute your products widely in the market, making them accessible when and where a customer wishes to purchase it, is as a consequence highly important to FMCG firms. The higher sales connected with intense distribution of FMCG should of course increase profits in itself, and since it also leads to higher production it should also lead to better opportunities for economies of scale. This should then result in even higher profits. As intense distribution is highly difficult, or at least expensive to attain in a market with poor infrastructure, profits should, all other things being equal, therefore be lower in such markets compared with comparable markets with better infrastructure. The
5

Firms selling high-end FMCG may only want their products to be available at selected outlets in order to maintain an exclusive image. Since these products may not be fast moving with such low distribution intensity they may not be considered as FMCG however.

25

negative effect of poor infrastructure on sales should especially be evident when it comes to a poor transportation system and to a lesser degree on for instance poor sanitation and communications infrastructure. This is simply because only the former influences distribution directly. A consequence of this is that many FMCG companies spend large amounts on maintaining and running distribution networks, either by themselves or with partners, in order to assure they have the necessary options for bringing their products to markets. The products in the FMCG industry are by nature defined as bulk products, meaning they are produced and consequently sold in large quantities to wholesalers and retailers. Additionally there are many customers, both directly downstream from the production company as well as the end user. This means that the consumers bargaining power goes down as they are not concentrated and buys in relatively small amounts compared to amounts produced. Mainly this is true for FMCG retailers and less for FMCG suppliers, since the latter sells to the former to a large extend. As previously mentioned, a large part of the income of most households are set aside for FMCG products since there are so many of the products that consumers use on a daily basis and which needs to be bought regularly. This results in a very high number of products being produced and consequently sold by the FMCG industry at all times. The enormous sales in the FMCG industry combined with relatively low entry barriers in many parts of the industry results in stiff competition and often low margins. The FMCG industry is largely dependent on macroeconomic factors such as oil prices, and this makes long term forecasts difficult and often dangerous as the economic climate changes rapidly in this regard (Russia today 2007). This means that the industry can be very hard to predict at the moment, as the fluctuations in oil prices, inflation and spending power as well as most other significant variables tend to be prominent as the economic climate adjusts to the recent upheaval. This will make the situation on individual markets different both from each other but also from what the markets usually looks like.

7.1 Choice of the supplier side of the FMCG industry

While the FMCG usually gets mentioned as a whole there are in fact several different aspects of it that display significant differences compared to one another. The retail side is what most often gets mentioned when talking about the industry and while retailers 26

undoubtedly constitutes a large part of the industry, the supplier side which manufactures the goods plays as significant a role. While retailers tend to be quite similar with their marketing strategy and customer bases with differences mainly attributed to size the supplier side will often contain a wide variety of companies both large and small with a multitude of products being manufactured. We find that the supplier and manufacturing side of the FMCG industry to be more interesting than the retail sector, both as far as entry and development strategy goes, but also with regards to scope and differences between companies in the individual segment of the industry. While it seems that the other parts of the industry have received comparatively greater attention with regards to being mentioned and analysed the manufacturing companies often gets treated as outside the FMCG industry and as part of other industries as for example the beverage or canned goods industry, where the similarities between companies is far greater. For instance, Carlsberg and Heineken display rather more similarities than for example Carlsberg and Sara Lee Corporation does, even though they are all part of the FMCG industry. Based on these facts and observations we will mainly be analysing and using the supplier companies for the FMCGs as we progress with the thesis.

8 Emerging markets
The term emerging market is commonly used about markets or economies that fit into a narrow description about size, growth rate and development. The term emerging in relation to markets or economies stems from the 1980s, but came into common usage around the 90s and is now a more or less accepted term when des cribing certain types of markets (Authers 2006). The emerging markets differ from emerging economies specifically in the fact that markets are not constrained by geographical boundaries or national borders in the same way that emerging economies are, but generally there are widespread differences in how exactly to define a market as emerging. One way to look at emerging markets is to define them as markets that are not developed, in the sense that first world countries such as most western European nations, the USA, Canada and Japan are. This however would make most countries qualify in some way as an emerging market, so it is necessary to keep in mind that several different criteria must be met in order to distinguish between emerging and non-emerging markets. This 27

includes factors such as growth rate, level of income and infrastructure as well as other related measurements As can be seen from lists commonly available, markets that are considered as being emerging markets are not necessarily the same between different lists. MSCI classifies 22 countries as emerging (MSCIBarra 2009), FTSE Group have 23 countries as emerging markets (FTSE group 2009) divided into two categories while some companies and institutions such as ISI Emerging Markets lists more than 80 markets as emerging (Emerging Market Information Service 2009). This fact goes to shows that there are indeed different definitions and as such some confusion as to which group of markets does qualify as emerging. Without trying to come up with a new list of emerging markets this thesis will work from an assumption that emerging markets are prevalent in most regions where there are countries experiencing economic transformation and change on a broad scale. Meyer & Tran (2006) define emerging economies as economies with high growth or growth potential, but lacking the institutional (infrastructure, legislation, experience) framework prevalent in European and other western markets. As such, this makes the term emerging economy dependent on the immediate economic circumstances in a country or market, making the term emerging economy applicable to any country or region at a given time if they fulfil the criteria set. The term will be used in this thesis according to the definition and not based upon a pre-existing list of markets. Despite the different definitions of emergent markets there is generally an agreement that certain countries, such as the BRIC-countries (Brazil, Russia, India and China) are to be included, as well as some other large and populous countries. Together they constitute a large portion of the global consumers, more than 50% of the world population according to globalEDGE (2008), and represent a rapidly growing part of the world consumption and production output. This makes the emerging markets both interesting as well as significant for the world economy as a whole. One of the factors that make emerging economies interesting at the moment stems from their apparent ability to come through the economic downturn and credit crisis better than most other economies. The counter-cyclical policies are seen more often in emerging economies, and they are a more or less the norm in richer countries. What counter-cyclical means in this setting is basically that a rich country will endeavour to 28

diminish the fluctuations in their economy so that in bad times they try to stimulate their economy and try to minimize the losses, while they in god times they try to slow the economy down and prevent it from overheating. Emerging economies on the other hand often tries to amplify their business cycles and one of the main reasons for this is that they often struggle to fight the cycles, since the peaks and conversely also the lows are more pronounced in smaller or less mature economies. One of the reasons for trying to amplify the economic cycles are that since they are more pronounced in emerging economies they are also harder to fight since they must do so on a smaller tax base and often on revenues more susceptible to outside influences. Since this makes emerging economies less robust than their richer counterparts, they often experience that investors are reluctant to buy into bonds during downward trends and this in turn leads the economies to be unable to borrow to smooth the economic cycles. Since they are unable to borrow they naturally tend to save more in times where this is possible. This have caused the somewhat curious case that many emerging economies are rather better prepared for the current economic downturn than their western countries, since they have greater fiscal strength due to this saving. In part due to the above mentioned factors, the GDP in most emerging markets are still expected to grow or at least remain stable, as opposed to most other markets around the world (AT Kearney). In many cases this leads to the fact that with comparatively faster growing buying power and faster growing markets, emerging economies represents advantageous markets to invest and operate in. Emerging markets will generally be influenced by changes in the growth in more mature markets to a degree but they will also experience a lessening of the impact declining or negative growth has on them. This is because this will often be accompanied by rising prices of the natural resources that many emerging economies export, leading to an increase in the intake of foreign investments and currencies, increasing reserves and lessening the impact of economic influence from other markets (Rahlf 2007).

8.1 Circumventing infrastructure problems in emerging markets

As mentioned above, the infrastructure of emerging markets is generally in a poor state compared to established markets. But a well functioning infrastructure, especially with regard to the transportation network, is highly important if goods are to be distributed efficiently beyond the major metropolitan areas by FMCG companies. It can therefore 29

be attractive to enter limited geographical areas with a high density of potential customers which will most often mean large urban areas for FMCG firms. Given the usually larger per capita income of urban consumers compared with rural consumers, city dwellers are also often more attractive customers to companies; especially to foreign companies who often sell premium products targeted the middle and upper classes. The thought of entering concentrated markets within larger national markets, such as the major Indian cities, instead of entering the entire market is consistent with Drejer (2009). Drejer mentions entering so-called hotspots which could be cities like Berlin or New York or regions such as Eastern China, as these hotspots may be more attractive to enter instead of entering entire national markets.

9 Market analysis of the FMCG industry

In order to develop an understanding of the industry as a whole we will use the framework developed by Michael Porter (1980; 2008) to develop a brief description of the factors that influence and shape the market for FMCG. This five forces analysis will provide an overview of the industry and a starting point for further analysis, which will focus on the individual emerging markets chosen for study in the thesis.

9.1 Threat of new entrants

In the FMCG industry, as well as in several other industries, the nature of the products and the technology necessary for the production process naturally gives rise to economies of scale. Economies of scale in this instance relates to the fact that if obtained, the unit costs goes down as output rises. Following from this it can be concluded that these scale economy industries provide a substantial barrier for new entrants, as there is a likelihood that not all companies will be able to obtain economies of scale in a given market to a degree where they are effectively competing. There is some difference between the various sectors of the industry with regard to the impact on competitiveness of not obtaining sufficient economies of scale. But ultimately it will influence both supplier companies as well as retailers and will result in consolidation of the industry as markets become more mature. This will be less of an obstacle for entrants on emerging markets in most industries, including the FMCG industry, as they are defined as being markets in growth and thereby has more room for new companies. 30

This includes the production or supplier companies in the FMCG industry, which will likely not be as affected at the early stages in market development as they will later on. In the FMCG industry there are few or no patents and little proprietary knowledge to consider when entering the market. What exists in this category mainly relates to brand names and production methods that are next to impossible to copy for any company willing to attempt this. This negates to some degree the restriction of access suffered in some industries.

9.2 Rivalry among existing competitors

Mainly there are many firms operating in the FMCG industry on all markets, due to the rather diversified number of products being produced and sold. Largely the retail part of the industry will be fairly consolidated and competition will be between few but large retail chains that, as mentioned above, sell all of the different categories of FMCG. While the firms in the retail segment are generally large and have few real competitors, there does exists the smaller individual retail stores usually present in the form of convenience stores in the cities, or small independent retail shops in rural areas, where the larger chains are not present due to lower customer concentration. These independent retailers are especially prevalent in undeveloped areas as well as in countries with a historical and cultural bond with small retailers and street vendors. As the markets develop, these will in most cases be outcompeted by organized retail however. As distribution and by extension infrastructure are so important in the FMCG industry the ability to control the delivery and transport of goods are of vital importance to most companies in the FMCG industry. This will lead to increasing competition and concentration of logistics suppliers in the same way as in the retail part of the industry, as the economies of scale as well as the ability to provide services across an entire market will become of high importance to most companies. There are more supplier companies in the FMCG industry than retailers, as they tend to specialize in certain parts of the industry instead of being involved with all aspects. Individual companies will concentrate on a certain type of product, or in some cases several different types, and only in a few cases large conglomerates will produce most of the goods that are attributed to the FMCG industry. Conglomerate type firms will make it possible to operate on the same market, the FMCG market that is, without cannibalizing on their 31

own products as the products in the industry are as different as it is the case. On the other hand, they will be able to take advantage of considerable synergies in areas such as logistics and marketing as well as adding market power as all their products are sold to the same wholesalers and retailers. The FMCG industry offers different competitive conditions for many of the categories even though they display the same characteristics and developments to a large extent. Mainly there will be a tendency towards few large companies to dominate the individual categories as can be seen in the case of the market for beer, where only four companies have any meaningful size worldwide. As is the case with the industry as a whole, economies of scale in production plays a part but as mentioned the benefits of size are also present when it comes to successful branding, which will serve to make the number of companies competing in the industry larger and fewer. As a result of the characteristics of the FMCG industry, it is often associated with significant risk to attempt to compete in the industry as it does not offer newcomers much in terms of revenue initially. Thus the competition in the industry as a whole is very high in general an even though this is more pronounced in mature markets, the less developed markets will become more and more competitive as they develop their economies.

9.3 Bargaining power of suppliers

Since so many and completely different goods and materials goes into producing most FMCG products, it is generally hard for suppliers to obtain any significant bargaining power over most companies in the industry. Often the scarce resources needed to produce some FMCG are either directly controlled by the companies utilizing them, such as quality malt and barley in the beer industry, or acquired and controlled by legal contracts and long term association between companies, although this is not as prevalent in emergent markets. While this can give suppliers some power over FMCG producing companies, there are relatively few resources that are sufficiently rare for suppliers to obtain much power over their customers. Examples of such resources can be extremely diverse depending on location and the produced goods, but usually they can be obtained from other sources if the local suppliers are not competitive.

9.4 Bargaining power of buyers

Given the nature of the goods produced by FMCG firms, the customer base represents most households and persons giving relatively low bargaining power to the final 32

consumer due to the sheer amount of customers. Additionally the large part of total expenses used by households to buy FMCG as well as the necessity of these goods lessens the customers re lative power with regards to companies in the industry. The fact that customers overall have easy access to any given FMCG, due to the many retail stores and other access points, gives the customers some degree of power since it is easy for them to chose where to buy, and to switch to another product or retailer if they so desire. Of course switching to another FMCG supplier or retailer would still mean the customer is buying the products and as such it is not really feasible for customers to stop buying the products offered by the industry. In the industry the retailers hold considerable power, often directly related to their size, for example Wal-Mart that has very great control over most of its suppliers. As the consolidation in the retail sector of the industry continues, meaning fewer and larger retailers, they attain greater power over both their suppliers and customers. Overall the customers hold significant power as group, but little power as individuals, in the industry, since the degree of competition in the industry are very high and as often as not the margins are low and retention of customers are important for survival.

9.5 Threat of substitute products

Due to the nature of fast moving consumer goods there are inherently some threats of substitution, not from outside goods but from the industry itself. To a large extend the goods produced are interchangeable, which is one of the reasons branding and differentiation plays such a large role in the industry. When many of the products are virtually indistinguishable from competitors in a strictly physical aspect other methods exists to differentiate a product. As can be seen on the retail part of the market and in the market concentration in various segments of the industry, the trend is toward concentration into fewer but larger firms, leading to a smaller variety of products and minimizing the threat of substitutes from small local competitors and firms. Aside from inter-industry competitors the threat of substitute product is therefore negligible.

10 Carlsberg Breweries A/S

The Danish brewer Carlsberg is the fourth largest brewer in the world, and an internationally recognized brand name in all of its markets. Carlsberg is present on most markets in the world, including Northern and Western Europe, Eastern Europe and Asia. Additional markets include Africa and the Middle-east, while notable exceptions 33

are North and South America. Originally Carlsberg mainly followed a strategy of diversification on its domestic markets, while the main focus was on the two prominent brands Carlsberg and Tuborg in foreign markets, to the exclusion of local brands. The company has gradually shifted from this strategy and now prefers to depend on the companies core competencies in order to market and produce beer in local markets and often with local brands. This has generated a significant shift in the production of the companys brands and products, and a large part of the beer brewed by Carlsberg is brewed in the same country or market where it is sold. Additionally the focus is now mainly on beer as this is where Carlsberg believes it has its core competencies. Carlsberg produced 109.3 million hectolitres of beer in 2008, a rise of almost 33% compared to 2007. 47% of the total volume produced and sold annually is sold in the mature markets in Northern- and Western Europe, 43% in Eastern Europe including Russia, Carlsbergs biggest market , and 10% in Asia (Carlsberg group). The companys net revenue reached DKK59.9 billion in 2008, also a significant rise compared to earlier years, which makes Carlsberg one of Denmarks biggest companies as well as the fourth largest brewery in the world, behind AB InBev, SABMiller and Heineken. The main reason for Carlsbergs recent growth was the joint acquisition of Scottish & Newcastle with Heineken which transferred complete control over Baltic Beverages Holding to Carlsberg (Carlsberg annual report 2008). This and other acquisitions made by Carlsberg follow the trend of consolidation and concentration in the global beer industry in recent years into fewer, more international companies 6. This trend is perhaps most obvious in the merger between the two largest beer-makers by sales, AnheuserBusch and InBev, that took place in late 2008, and created the biggest beer company as well as one of the biggest FMCG firms in the world. Additionally, SABMiller has combined their U.S. operations with Molson Coorss Brewing Co. in order to better compete on the North American markets (SABMiller 2007) . Carlsberg has accumulated substantial knowledge on entering markets, rarely as first mover, but often as an early mover, in Eastern European countries such as the Baltic nations and Poland. This is valuable in their goal to maintain their position as one of the biggest and most significant global players. Even though Carlsberg follows a strategy of
6

In 2003 the beer market were far more fragmented, with the biggest 10 beer producers only accounting for around 45% of the total volume sales, as opposed to a volume share of around 65% in 2009 (Euromonitor 2005).

34

expansion they rarely follow the same template when entering different markets. Foothold strategies have been pursued in some Asian markets such as China, where Carlsberg have a limited presence, or the two joint ventures that marked the companys entry into Vietnam. As opposed to this, Carlsberg has sometimes followed a more aggressive strategy aiming for market leadership with large scale acquisitions in for example Russia and Poland. Carlsberg has amassed considerable experience with marketing, producing and selling beer and their excellence programs draw on these strengths to enable the company to systematically improve and develop their abilities in different markets. The Excellence programs help Carlsberg deal with their customers as well as minimize costs and standardise processes (Carlsberg Group 2006) and is a strong tool for the company with their strategy in entering new markets as well as developing more mature markets. As it is the case with most FMCG companies, Carlsberg depends strongly on their distribution network and logistics in order to be competitive in its markets. Carlsberg spends around 15% of its total costs on logistics and logistics related activities, and it is therefore a highly important function when it comes to the profitability of the firm.

11 Markets
In order to describe the situation on the chosen markets and come to an understanding of the implications their individual characteristics have on entry strategies for foreign firms, we will first look at the macroeconomic level. Afterwards there will be a micro analysis building upon the Porter analysis above in order to describe the factors a foreign company would face in the FMCG market, and further the understanding of the specific factors and challenges in each market.

11.1 India
India is the worlds second largest nation by population after China and is the worlds largest democracy. India has been among the worlds fastest growing economies in recent years with an average GDP growth of 9% for the last four years (CIA 2009) but has however felt the current downturn in the world economy following the financial crisis. Since a considerable part of the Indian GDP growth is driven by domestic consumption (Das 2006), the effects of the economic crisis on India was initially expected to be limited. However, the crisis caused a sharp decline in the Indian stock 35

market followed by foreign institutional investors withdrawing funds. This drop in available venture capital from foreign investors led to greater demand for capital from the domestic market and eventually to soaring interest rates (Kannan 2009). This greater cost of capital put negative pressure on the output of the Indian economy. Indias GDP growth rate was thus significantly lower in the final quarter of 2008 compared to previous years at around 5.3% (World Bank). While this rate of growth is still relatively strong in a global perspective, it is not enough to sustain the current rate of employment in the country as the normal growth rate of India is likely to be higher than 5.3%7. This has also been confirmed by surveys in the country indicating significant job losses recently (World Bank). The Indian government has sought to minimize the impact of the economic crisis on India by means of two stimulus packages totalling US$8 billion, which is less than 1% of the countrys GDP. These have however widely been seen as insufficient to boost economic growth. In comparison, the Chinese government intends to spend in excess of US$ 586 billion in order to stimulate domestic demand (Candelaria et al 2009). The amount of FDI in India is estimated at $142.9 billion in 2008, which is only slightly more than FDI in Denmark. Compared to the other BRIC countries, India is also lacking in foreign investment as Brazil receives almost twice as much, Russia more than three times as much and China more than five times as much FDI (CIA 2009). In our discussion on the Indian FMCG market, we will spend considerable time on the countrys infrastructure. This is because infrastructure is one of the areas which separate India the most from other major emerging markets such as China and Russia, as these countries in many cases offer infrastructure significantly superior to that of India. Poor infrastructure is also a likely reason for the comparatively low amount of FDI in India. We will therefore describe Indias infrastructure in some detail in the subsequent segment of this thesis. This also means that the thesis will focus less on Porters five forces in the analysis of the Indian market compared to our analysis of the Russian market as we find it to be more useful in somewhat more established, less turbulent markets.
7

Given a productivity growth rate around 8% and a population growth rate of 1.5% (CIA 2009) the normal growth rate should theoretically be around 9.5% (Blanchard 2003 p. 183). Since the Indian unemployment rate has declined in the last four years with an average GDP growth rate of 9%, the real normal growth rate should however be less than 9%.

36

11.1.1 Infrastructure The current state of infrastructure in India makes the country a challenging environment for foreign firms in the market as well as for firms who are considering a market entry. As will be elaborated on in this chapter, the Indian infrastructure is in general under pressure from the growing wealth and population in the country as development projects struggle to keep up with the rate of change. The poor infrastructure often cripples Indian and foreign businesses through the absence of adequate and consistent power supply, inadequate port capacity as well as an insufficient transportations system (Kumar 2007). Another example of the struggle to keep up with the countrys growth can be witnessed in Indias airports, which are for most travellers the first impression they get of India when they arrive in the country. This first impression is rarely a particularly pleasant one as Indias airports are for the most part in appalling condition, but recent privatisation of the largest airports has lead to heavy investment and as a result to great improvements in capacity and service (Cook 2009). Upgrading Indias airports to standards worthy of the worlds bi ggest democracy thus seems to be successful. Unfortunately, other parts of the countrys infrastructure do not seem to be able to follow this success story as we will expand on in the following. Road and rail network. Given the importance of a well-developed infrastructure to FMCG firms, as discussed previously in this thesis, the poor state of Indias transportation system is naturally a major concern for foreign FMCG firms. Indian roads in general are in a poor condition except for the newly constructed expressways (Makar 2008 p. 43) and there were only around 200 kilometres of these in the entire country by 2006 (CIA 2009). While the overall state of the countrys road network remains poor, improvements to the Indian highway system are however under construction and additional kilometres of high-quality roads have been added to the highway grid in the last couple of years. The primary transportation project in India currently is the so-called Golden Quadrilateral, a diamond shaped highway system connecting Indias major population centres; New Delhi, Mumbai, Chennai and Kolkata. The Golden Quadrilateral is a multi-billion dollar project intended to give the Indian economy a boost by connecting the major cities with each other as well as with smaller communities in between.

37

While these new additions to the Indian road network are of vastly superior quality compared with the general state of roads in India, this nevertheless does not change the Indian traffic culture. Even though you are driving on a six-lane express highway, it is not unusual to come across oxcarts, rickshaws, water buffalos and sacred cows in considerable numbers. At the same time, it is not unusual to meet traffic head on although you are on an express highway, as fellow travellers take a shortcut in opposing lanes or simply because they are confused (Belt 2008). This combination of poor roads and chaotic traffic means that you should only expect truck shipments to reach an average of maximally 30 kilometres an hour in India on the countrys better roads, that is (Runckel 2009). The Indian road network is thus in no respect comparable to western standards; or Chinese standards for that matter as they in comparison have in excess of 41,000 kilometres of expressways (CIA 2009). But with the amount of funds invested in Indias roads currently, and with constant improvements in the quality of Indian road vehicles, the efficiency of road transportation should improve significantly in the coming years. It is however unsure whether the improvements are able to keep up with the rapidly increasing number of road vehicles in the country. The developments in the Indian road network and the shift from collective to individual modes of transport are putting the countrys rail network unde r pressure. India has in excess of 63,000 kilometres of rail making it the fifth largest in the world (CIA 2009). It has been a highly important part of the Indian infrastructure since it was introduced by the British in the 18th century but is expected to lose influence to road and air transport in the future (Civil Engineering News 2008). For FMCG firms, rail transport is in many cases too inflexible to be used for distributing finished products but it may be relevant for transporting raw materials for production. Since Indian road vehicles, including trucks, are very often underpowered, large shipments of goods could still be transported most cost-effective by rail for years to come. This situation is prolonged by the congestion on the road network. Bulk shipments are also expected to be the only area where rail transport can remain in a dominant position in India (Civil Engineering News 2008). Other parts of a countrys infrastructure besides airports and the road and rail networks are of course also a major consideration for FMCG firms. For instance, the capacity and 38

efficiency of seaports is highly relevant to firms engaged in importing or exporting goods and will be discussed in the following section. Seaports. India has 12 major seaports along their 7,000 kilometre coastline with the port of Kandla in the western corner of India currently handling the most cargo. The biggest seaport when it comes to container traffic is the ports of Mumbai however, which handle around 58% of Indias container traffic (Indian Ports Association). As it is the case with other parts of the Indian infrastructure, the capacity of the countrys ports is insufficient to cover demand efficiently. To illustrate this, the Jawaharlal Nehru Port Trust of Mumbai has berths for nine container vessels to load or unload simultaneously while the port of Singapore can handle a total of 40 vessels at the same time (The Economist 2008a). This lack of infrastructure, combined with a highly inefficient bureaucratic system, leads to very lengthy turnaround times for container vessels in Indian ports. It takes around three days to turnaround a container vessel in Mumbai. In comparison, it takes only around eight hours to turnaround the same ship in Shanghai (Runckel 2009). This difference in turnaround times of course ads cost to the users of Indian ports but also ads unpredictability since turnaround times are likely to vary considerably more than in more efficient ports. The inefficiency of Indian ports does not stop with slow turnaround times however. When goods have been unloaded in India it takes an average of 21 days to clear the imported cargo, most likely due to time-consuming customs clearing, while the same is done in Singapore in just three days (The Economist 2008a). FMCG firms importing perishable goods to the Indian market will thus loose almost three weeks of shelf life on their products compared to more efficient markets. Indias Hotspots. Since India has a large urban population concentrated in very large cities, it is possible to reach a significant number of Indian consumers by entering a few major cities what could be defined as market hotspots. For instance, cities like Mumbai, New Delhi and Kolkata has a population around or in excess of 15 million people each and the 10 biggest cities in India have a combined population of more than 86 million people (City Mayors). This is more than the entire population of Germany. As these consumers can be reached by means of the countrys better developed roads and railways, it is possible to service a considerable market in India without the hassle of long haul transports to distant rural regions at less than 30 kilometres an hour. Firms 39

hesitating to launch a full-scale market entry on the Indian market due to infrastructure concerns can thus perform a limited entry to the market in the countrys hotspots. Other issues concerning Indias infrastructure . Besides the challenges India faces with worn down and too small airports, seaports and transportation systems, the country have two additional problems relevant to foreign companies. First of all, Indias overstressed power grid leads to power failures on a daily basis all around the country, sometimes hour long, and even in the most developed areas (Runckel 2009). The country suffers from a chronic shortage of electricity as new additions to the grid have failed to meet the increasing demand due to the high level of economic growth. The power shortages are expected to persist in the coming years (Trusted Sources 2009) and should therefore be taken into consideration before engaging in FDI in India. When establishing new facilities in the country, whether it is administrative or associated with production or distribution, firms should make sure to install a reliable generator with adequate fuel storage to handle power supply when, not if, the grid fails (Runckel 2009). Secondly, the availability of freshwater is expected to become a major problem in India in the not so distant future when industrial consumption rises and running water becomes accessible to the majority of the population. Water shortages are most likely to hit the poorest part of the population though while most businesses and their workers are unlikely to be affected. In industries where water consumption is especially high, the lack of a steady supply of freshwater may however become a problem. Some parts of the FMCG industry are likely to be among companies with a significant need for good quality freshwater. Examples of these could be producers of beverages or food products for instance. In order to secure a steady supply of needed freshwater these firms may need to equip facilities with water reservoirs and this of course adds costs. 11.1.2 Indian retail and the Indian consumer From the analysis of the Indian infrastructure, we now turn to the countrys consumers and the retail sector. Since FMCG are sold primarily through retail outlets, the characteristics of the retail sector in a target market are important when deciding on a market entry strategy for a foreign firm. As previously discussed, a companys sales will be reduce if products are not widely available at retailers as there is a direct link between number of outlets and sales. It is thus important to know how you achieve 40

intensive distribution in the marketplace before entry as this will influence the attractiveness of each entry method. This is especially important to discover when entering an emerging market since retail sector characteristics tend to be somewhat different and less organized in comparison to well known developed countries. The Indian retail market is dominated by street-side vendors and small neighbourhood shops, the so-called kirana stores, which are primarily family owned and independent (Mishra 2008). Organized retail is a relatively new concept in the country and accounted for only around 5.9% of the total retail industry in India in 2007 (India Retail 2008). Due to the somewhat low standard of living in India, the food and grocery category accounted for 59.5% of the total retail industry in the country (India Retail 2008) which is a high percentage in comparison to developed markets. As an example, the equivalent share in Denmark is around 39.7% (Danmarks Statistik 2002). This difference of course comes from the fact that low-income consumers will make sure to serve a basic need such as food before other, less necessary goods are purchased. The result of this is that from the total amount of money an average Indian consumer spend on retail items; they spend the majority on food and groceries and these to a large extent falls under the FMCG category. The Indian market for FMCG is as a consequence larger than the countrys GDP per capita testifies. Although the Indian FMCG market is of considerable size, it is not a straight forward market to enter however. Given the extremely fragmented nature of the retail market caused by the low share of organized retail, India is a considerable challenge for FMCG firms entering the market as a fundamentally different approach to distribution is often needed. In developed markets, FMCG firms will in many cases only have to deal with one or perhaps a few major retailers if they wish to achieve nationwide market coverage. In India on the other hand, it is necessary to tailor your distribution to the segment of the population you wish to target and you may need to interact directly with a large number of local wholesale and retail firms in order to reach the chosen segment effectively. Mishra (2008) has divided the Indian market into four segments based on the level of difficulty associated with supplying the markets as well as the per-capita demand. These segments are summarised in the figure below and then expanded on subsequently.

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Table 11.1 Market segments in the Indian market Per-capita demand

High Easy Low

Market access

Urban and semi-urban market Oasis market

Emerging market Bottom of pyramid market

Hard

Source: Mishra (2008 p. 177). Edited by the authors.

Urban area consumers. The urban and semi-urban market primarily consists of consumers from metropolitan areas in and around major cities. Urban and semi-urban markets are usually supplied by relatively efficient distribution channels due to high population density and superior infrastructure compared with rural areas. At the same time, this market has high per-capita demand compared with the Indian market as a total. The characteristics of this market segment also make it the only one where organized retail is realistically possible at present. The combination of easy access and high per-capita demand make the urban and semi-urban market the first choice of most market entrants. There is an unfortunate side effect to this fact however, as the attractiveness of the market has a tendency to increase the number of entrants and consequently competition. So what at first glance seems attractive may not be that attractive after all as superior profits may be competed away. The emerging market, which is not to be confused with the primary definition of emerging markets in this thesis, is defined as consumers in satellite towns around the major metropolitan areas. The term emerging is used because such satellite towns often blossom when the adjacent metropolitan area grows in population and wealth, as this increase the demand for labour and goods in the satellite itself. Income and thus percapita demand is lower in the emergent market than in urban and semi-urban market, but given the close proximity to a major metropolitan area, such areas have better than average infrastructure and fairly efficient distribution channels. Rural area consumers. Another market segment in India which is not normally the first choice of market entrants within FMCG is the so-called oasis market. The oasis market is, as the name implies, small areas with relatively high demand situated in low demand areas often villages in rural areas. This is caused by the fact that a large group 42

of Indians live and work abroad and transfer funds to family members in India. These Indian expatriates have to a large extent found work in Middle Eastern countries but also in recent years in Europe and in The United States. While the village populations are somewhat prosperous, this has rarely influenced the infrastructure in and around these remote oases of wealth. Reaching these consumers is thus a considerable challenge for FMCG firms as established distribution channels are missing. Therefore, it often requires innovative distribution practices to be successful in the oasis market. The final segment in the Indian market is the so-called bottom-of-pyramid (BOP) market. This market segment is characterised by having low per-capita demand as well as being difficult to access. The BOP market consists of low income consumers in rural areas who are without support from expatriate family members. As these consumers have extremely low purchasing power, it is a highly difficult market to earn a profit. For this reason, successful FMCG firms in the BOP market have often had to find highly alternative ways of raising sales and frequently a long time perspective with regard to profits is needed (Mishra 2008 p. 180). 11.1.3 Five forces analysis of the Indian FMCG industry Threat of new entrants. Because of the enormous size of the Indian market and the high level of growth, India should be considered attractive for most major international FMCG producers. Such firms not yet in the country should thus be considered potential entrants. In addition to the major international players on the FMCG market, India has a large number of regional producers serving narrow geographical markets due to the poor infrastructure in rural areas. These regional firms have adapted to the specific demands of consumers and the difficult conditions for efficient distribution in less developed areas (Mishra 2008). As the infrastructure in rural areas is unlikely to be improved significantly in the foreseeable future due to investments being concentrated on highway construction and urban areas, such producers can continue to emerge and offer considerable competition locally. While Indias poor infrastructure leads to an increased threat of dome stic entrants to the FMCG market in the country, it is on the other hand also likely to dampen the eagerness of foreign companies who are considering a market entry. At the same time, the lack of an organized retail sector is also likely to keep possible international entrants out since this can make it necessary to deal with a very large number of small retailers. This 43

problem as well as the problem with poor infrastructure can be amended by entering major metropolitan areas in the country; the so-called market hotspots. Rivalry among existing competitors. As mentioned above in the segment on buyer power, the Indian government has attempted to deny entry for foreign retail giants like Wal-Mart and Carrefour by excluding multi-brand retailers. With regard to producers on the other hand, India is more open to FDI. Therefore, a considerable number of large well-known MNEs are active in the country including Procter and Gamble, Nestl, Cadbury, Unilever (Mishra 2008) as well as PepsiCo, Coca-Cola and SABMiller. As mentioned earlier, India also has a large number of regional FMCG producers in addition to the multinational producers. These serve narrow geographical markets, predominantly in rural areas, and as they are adapted to the characteristic of their local markets they will often have a competitive advantage. This advantage is likely to be based on a well-established and intensive distribution system thus reaching a large number of consumers in their region. For others, the competitive advantage is not so much in distribution but instead in their ability to skilfully copy the brands of the wellknown MNEs. The presence of a number of large multinational producers in combination with a large number of regional producers should lead to a relatively low industry concentration in a nationwide sense. However, the focus on hotspots for multinationals may lead to high industry concentration in the major metropolitan areas while diversified regional producers can result in high industry concentration in rural areas. This means that while the industry concentration may be low in a national sense signifying a very competitive market, the competitiveness of the market is in fact likely to be somewhat lower due to the difficulties of reaching the final customer for MNEs in less accessible areas. Bargaining power of suppliers. India produces a wide range of agricultural products due to the countrys size and its diverse agro -climatic conditions, and is ranked first or second in the world when it comes to the production of livestock, milk, sugarcane, rice, wheat, fruits and vegetables. Additionally, the country has an abundant supply of the raw materials in the production of soaps and detergents. Consequently such products, which are used extensively in the production of many forms of FMCG, are widely available in the country and potentially at low prices due to low wages (IBEF 2006), although agricultural productivity is low in comparison to neighbouring countries. As 44

an example of this, rice yields in India are one third of Chinas and about half of those in Vietnam and Indonesia (World Bank 2009). Suppliers of FMCG firms are also likely to be unorganized, as it is the fact among retailers, resulting in low concentration and thus limited supplier power. This is certainly the fact among producers of food products. While the majority of raw materials should be available internally in India, some products may need to be sourced from abroad or may be available at a lower cost elsewhere. In order to protect local businesses however, India has maintained tariffs on a number of imports, especially on agricultural products where tariffs average 30-40% (World Bank 2009). Nevertheless, India has reduced controls on foreign trade and investment in recent years (CIA 2009) and if this development continues, sourcing from abroad should become easier in the coming years. Bargaining power of buyers. As mentioned previously, the neighbourhood kirana stores and street vendors are the dominant retailers in India. They have very limited buyer power due to their small size and because they are unorganized. If these retailers were to organize joint buying they would be able to increase their buyer power and achieve quantity bonuses as well as better terms. Such initiatives could also help in the competition against organized retail chains which are expected to show considerable growth in the coming years. In any case, the level of organization of the Indian retail sector will rise in the coming years. This rising share of organized retail will increase average buyer power in the future as order sizes increase and suppliers become increasingly dependent on a number of large retailers. The move from independent stores to chains can be speeded considerably if global retail giants such as Wal-Mart and Carrefour are allowed to enter. Currently only single brand retailers are allowed to conduct foreign direct investment in the country which has kept out the likes of WalMart and Carrefour, as they offer a large number of different brands (Mishra 2008). It remains to be seen whether the legislation limiting FDI will persist or will be softened with time. Threat of substitute products. Illegal copying of products and fake brands is not only a problem in fashion, electronics and music in India but also within FMCG, especially in rural areas with a low education level (Mishra 2008). The loss of revenue caused by copy producers is not the only problem for original manufacturers as such copy products will often be of inferior quality compared to the original products. This is 45

likely to give consumers negative experiences which could transfer to the original product by reducing brand image and customer loyalty (Kannan 2006). 11.1.4 The Indian beer market India is not your average market for beer or other alcoholic beverages as alcohol consumption is limited due to cultural and religious reasons. As an example, it is in general unwelcome to appear under the influence of alcohol in public. This is especially the case among the Hindu population as well as the Muslim population, which make up around 80.5% and 13.4% of the entire population respectively (CIA 2009). There is also general agreement among experts that alcohol use is low in the population as a whole. The National Household Survey of Drug and Alcohol Abuse 2000-01 (Ray et al 2004), conducted on a nationally representative sample of males, estimated that 26% of male adults had ever used alcohol, while the prevalence of current users was 21.4% (WHO 2004 p. 27). Consumption of alcoholic beverages is even more limited among Indian women since women drinking alcohol is generally frowned upon (Raffensperger 2008). Besides a low consumption of alcohol in general, the Indians do not have a beer drinking culture. When they do consume alcohol, they mostly prefer to drink distilled spirits and the average Indian drinks around one litre of distilled spirits each year. Therefore, the consumption of beer per capita is extremely low at only around 1.4 litres per person (Mitra 2009). The low consumption of beer compared with distilled spirits is not so much a matter of taste however. The reason is primarily a high average tax level on beer making up 49% of retail prices compared to 33.6% on average globally (Mail & Guardian Online 2008). At the same time, legislation and taxes across states varies greatly and there are even import and export taxes on beer between states. Legislation has been changed slightly in recent years in favour of the breweries however and Carlsberg expects that many of the restrictions and taxes will be eased in the coming years (Kastberg 2008). The Indian consumption of beer is thus likely to increase significantly in the coming years, especially if legislation becomes more favourable. Carlsberg expects a growth rate of 15-20% per year between 2008 and 2013 (Kastberg 2008), although the current economic downturn could cause these percentages to drop temporarily. Although the Indian beer market is relatively small at present on a global scale, around the same size as the Dutch market, it is showed a lot of interest by the worlds major 46

breweries. SABMiller, The worlds second largest brewer after AB InBev, is present in the Indian market and has a market share around 35% (Mail & Guardian Online 2008; Mitra 2009; Nielsen 2008). The biggest player in the market is however the local firm United Breweries with its highly successful brand Kingfisher. United Breweries is owned in part by Heineken, who acquired Scottish & Newcastles 37. 5% share through their joint purchase with Carlsberg, and Heineken brand products are therefore produced by United Breweries in India. Besides SABMiller and Heineken, AB InBev is also present in India as well as Carlsberg, who entered the market in 2006. Mohan Meakin, an Indian brewer with a long history, is the final large brewery in the country (Canadean 2008) which additionally has around 60 smaller breweries (Mail & Guardian Online 2008). 11.1.5 Carlsberg India Carlsberg entered India through a joint venture with the Danish governments Industrialisation Fund for Developing Countries (IFU) and a group of investors led by the Lion Brewery Ceylon. The joint venture was initially named South Asia Breweries but was renamed to Carlsberg India in 2009. Carlsberg holds 45%; the IFU holds 10%, while the remaining is held by the Lion Brewery Ceylon and other investors (Mukherjee 2009). Carlsberg additionally owns 25% of the Lion Brewery Ceylon

(www.carlsberggroup.com). The unique selling proposition for Carlsberg in the Indian market is that their products are the only all-malt beers in the market and so they will attempt to create a niche category for such products (Mukherjee 2008). At the same time, Carlsberg has priced their products in the gap between low quality local beers and the prices charged for imported beers in the premium segment. The Indian market is price sensitive due to the low per capita income and firms doing business in India should thus price products with this fact in mind (Kumar 2007). By offering their products at relatively low prices, Carlsberg will be within economic reach to a larger share of the Indian population compared to the competitors in the premium segment (Kastberg 2008). The product portfolio currently consists of three beers; Carlsberg, Tuborg and Okocim Palone (Majumder 2009). Carlsberg India has invested heavily in marketing in order to launch the brands, especially Tuborg which is considered the power brand in the portfolio (Sayal 2009). While a considerable amount has been invested, around 500 47

million DKr in total (Denta 2008), Carlsberg has still opted for a relatively cautious form of entry however by entering through a joint venture so that the investment is spread on more parties. It could also prove to be too much of a gamble to invest additionally in India since the possibility of profit rests greatly on the expectation of political reforms. While these reforms are likely to come eventually, it may require a long period without adequate profits before the necessary changes are made. It seems however that Carlsberg India is willing to accept the risks as they are looking into expanding their business to South India in the medium term (Brsen 2009). Carlsberg India currently has four breweries in operation and is headquartered in the New Delhi satellite of Gurgaon. The table below shows an overview of the firms four breweries. Table 11.2 Carlsberg Indias facilities
Location Ponta Sahib, Himachal Pradesh Alwar, Rajasthan Aurangabad, Maharashtra Kolkata, West Bengal Total Operational Q3 2007 Q1 2008 Q2 2008 Q2 2008 Mode Acquisition Green field Green field Green field JV Capacity (hl) 150.000 450.000 500.000 120.000 1.220.000

Source: Carlsberg Group 2008; Denta 2008 The construction of the brewery in Alwar in the state of Rajasthan was the first to be initiated followed by the facilities in Aurangabad and Kolkata. The latter is a 60/40 joint venture between Carlsberg India and local partners. It has limited capacity but it is possible to expand the facility significantly in case of increasing demand (Carlsberg Group 2008). Before any of the three brewing facilities became operational however, Carlsberg India acquired a small brewery in Ponta Sahib, Himachal Pradesh, 280 kilometres north of New Delhi. The brewery is one among a few breweries in northern India which has European standard brewing equipment and can also be expanded if necessary (Carlsberg Group 2007). The relatively high technology level at the acquired brewery corresponds well with the previously stated fact that Carlsberg attaches importance to this factor when evaluating acquisitions in order to minimize postacquisition investment. With the acquisition, Carlsberg India was able to launch their products in the Indian market around six months earlier than previously planned and could thus begin to build brand recognition and image earlier. The expected growth in demand resulting from the 48

increased brand recognition and image, combined with a positive response to all-malt products and aggressive pricing, could then be met by the green field facilities already under construction at the time. Given the amount of interest in the Indian market by competitors and the inflow of investments, it seems to be a sensible move to acquire the brewery in Ponta Sahib. Carlsberg India can in this way take advantage of pre-emption of assets as well as the learning curve effects of being in the market earlier than originally planned (Finney et al 2008). Besides these positive effects, Carlsberg has also achieved a market share of 5-8% already in its first year of operations in India (Denta 2008) and expects to reach 10% by the end of 2009 (The Hindu Business Line 2009) and around 15% by 2010/11 (Nyhedsbureauet Direkt 2009). A 5-8% share is quite impressive already since the vast majority of the investment has been done through green field facilities and no established brands in the market have been acquired. It remains to be seen whether Carlsberg India are able to increase their market share further and it is likely to require entering South India as well, as this part of the country accounts for 55-60% of the total domestic beer consumption (The Hindu Business Line 2009). Given the undeveloped status of the Indian beer market, Carlsberg has entered the market relatively early. However, since the two major breweries in the market has been there for a considerable amount of time, it can perhaps to some extent be possible for Carlsberg to free-ride on the efforts of United Breweries and SABMiller. This is for instance with regard to their lobbying on changing regulations for sale, distribution and consumption of alcoholic beverages and beer in particular. At the same time these firms have spent heavily on advertisement, not just to increase their respective market shares, but also in order to increase beer consumption in the country in general. Carlsberg will of course also be able to profit from the strong market growth caused by the investments of their competitors through recent years. 11.1.6 OLI framework The following segments will evaluate Carlsbergs opportunities for entering the Indian market using the three sub-paradigms of the OLI framework; ownership, location and internalization. The findings will subsequently be compared with Carlsbergs actual market entry.

49

Ownership. The question here is whether Carlsberg is in possession of unique resources, capabilities or skills which can give them a competitive advantage in the Indian market. The following is primarily a comparison of Carlsberg compared to domestic firms, not compared with the MNE competitor SABMiller, as we in general expect SABMiller to be as competitive as Carlsberg. First of all, Carlsberg has a competitive advantage in production and product quality. Domestic beer production in India is in many cases of poor quality and Carlsberg is therefore able to offer products of superior quality (Kastberg 2008). At the same time, they have superior production processes and technology compared to domestic firms and should thus be able to produce with greater efficiency leading to lower costs. Carlsberg has worked intensively with production efficiency in recent years through their Excellence programmes and claim to have saved 500-1,000 million DKr over a three to four year period from 2005 in production alone. The excellence programmes spread best practice to acquisitions and joint ventures in order to minimize costs (Olsen 2008). At the same time, given the size of the acquired brewery in Kolkata, the local breweries are likely to have limited capacity. This should make it possible for Carlsberg India to take advantage of economies of scale in production by an intense marketing effort to increase volumes. Carlsberg has for instance used considerable funds on advertisement during their launch of the Tuborg brand in India in 2009 (Sayal 2009). With larger volumes the current capacity can be utilized to a lager degree and the capacity of the firms smaller facilities can be expanded. Expanding the smalle r facilities should lead to lower unit costs and thus increased benefits from economies of scale as minimum efficient scale is extremely high within brewing. It has been estimated at above 4.5 million barrels, around 5.3 million hectolitres (Tremblay 2005), which is more than ten times Carlsberg Indias largest brewery. Secondly, Carlsbergs managers and board members have been involved in a substantial number of joint ventures, mergers and acquisitions in recent years. Most notable are the merger with Orkla in 2001 followed by Carlsbergs buyout in 2004 and later the joint acquisition of Scottish & Newcastle with Heineken in 2008 (www.carlsberggroup.com). Besides these major deals, Carlsberg has been involved in a large number of joint ventures and acquisitions primarily in Asia involving smaller breweries. Through 50

these activities the Carlsberg organization, and its managers and board members in particular, should have developed skills in identifying the right targets for mergers, acquisitions and joint ventures as well as handling the transition, and finally in optimizing operations subsequently. This is in itself a capability that can offer a competitive advantage. Carlsberg has a third competitive advantage through their excellent capabilities within logistics (www.carlsberggroup.com) which is likely to become especially important in a market like India where the infrastructure is particularly poor. In spite of the poor conditions, Carlsberg India has thus managed to achieve more than 80% market coverage, only missing the southern part of the country, just 18 months after becoming operational (Sayal 2009). Keeping logistics costs low is highly important since these costs account for 15% of Carlsbergs total costs (www.carlsberggroup.com). Carlsberg India is however not able to use their logistics capabilities to save costs freely as some states have local distribution monopolies for alcoholic beverages (Mitra 2009) and some of these use highly inefficient manual loading and unloading of goods. At the same time, while Carlsberg is likely to have a competitive advantage within logistics in India compared to local firms, this advantage is likely to be minimal matched up to the market leader United Breweries as they have superior knowledge of the market and are of considerable size. In conclusion on the ownership sub-paradigm, Carlsberg has a competitive advantage compared to domestic firms through superior product quality, logistics and technology in production as well as through economies of scale. They do not have an advantage with regard to economies of scale compared to United Breweries however it may on the other hand be that the opposite is true. With regard to management and board member capabilities and knowledge, especially on handling mergers, acquisitions and joint ventures, Carlsberg should be far superior compared to domestic firms. Ultimately, Carlsberg may not be superior to all their competitors in the Indian market with regard to the resources, skills and capabilities discussed above. However, the combination of these is likely to give them an overall competitive advantage. Location attractiveness. As discussed above, it seems clear that Carlsberg has ownership advantages compared to incumbents in the Indian market and it should thus be possible for the firm to enter and compete successfully. The question is then whether 51

the Indian market favours local production or production abroad as this can influence the mode of entry. It is hard to find a definite answer to this question or to whether it is cost-efficient or not for Carlsberg to produce in India however. First of all, Carlsberg needs huge amounts of malted barley in their production, especially since they produce all-malt beers. Other producers in the market use malted barley as well but in smaller amounts since they supplement with other types of grain such as maize or rice. However, the barley produced in India is not of the same standard as available abroad and therefore fails to meet Carlsbergs strict quality standards. For this reason, Carlsberg imports all the malt used to make their products (Mitra 2009). This is sure to bring about some logistical challenges, especially for breweries far from the coast such as the one in Ponta Sahib, since the nearest seaports from Ponta Sahib capable of handling bulk shipments is more than 1,100 kilometres away. This brings into play the poor status of Indias transportation system and the inefficient seaports which adds to the complications Carlsberg faces of sourcing raw materials for production. The Indian railways should however be able to handle the bulk shipments of barley relatively reliably and efficiently since bulk shipments are their primary expertise. While it is difficult for Carlsberg to source raw materials for production in India, they are likely to face similar problems regarding the countr ys infrastructure should they have chosen to import their products instead. In this case they would also face the inefficiencies of customs clearing which are likely to be especially difficult due to the alcoholic content of the products. As mentioned previously, the inefficiencies in customs clearing means that mainly finished products and intermediate goods can remain in custody of customs authorities for weeks. As beer is a perishable product, the loss of shelf life caused by this delay adds costs which are not brought upon firms that produce domestically. Clearing imported goods through customs can be a lengthy and thus costly process but for the brewing industry the import duties laid upon imported beer play an even bigger role nevertheless. Import duties of 100% (InfodriveIndia 2009) effectively eliminate any thought of importing beer for breweries that wish to be among the dominant players in the Indian market. Largely thanks to the import duties, imported beer only accounted for 1% of beer sold in India in 2008 (Euromonitor 2009). In addition to import duties on 52

beer entering the country, breweries also face taxes between states within the country. This is also likely to add additional costs when beer is distributed throughout the country. The only way to avoid these taxes is to have a brewery in every state where you wish to sell products which of course leads to limited opportunities for economies of scale. For this reason, the biggest brewing facility in India has a capacity around 1 million hectolitres (Mitra 2009). In comparison, Carlsbergs single brewery in Denmark has a capacity of 4.3 million hectolitres (Holt 2009) and the biggest brewing facility in the world, located in Mexico, has a capacity of 60 million hectolitres (Mitra 2009). A factor which makes it attractive to produce in India is the low labour cost in the country which is also indicated by the low GDP per capita. These low labour costs may also be the primary factor which makes it possible to earn a profit in a market where only slightly more than one third of the sales price goes to the producer (Mail & Guardian Online 2008). Another factor which makes it attractive to produce locally is the poor state of Indias infrastructure as this has a huge impact on the logistics costs. Ceteris paribus, the closer production facilities are to the final consumer geographically, the lower the cost of distributing products to these consumers will be. The cost of supplying a larger number of breweries, especially with barley as it has to be imported, will of course rise with the number of breweries. In the end however, for breweries that intend to reach a double digit market share, producing in India for sale domestically is likely to be considerably less expensive than producing abroad even in a country with similar low cost labour. This is because import taxes, transportation costs and costs associated with customs clearing exceeds the savings by producing abroad which primarily consist of lower sourcing costs and increased economies of scale. Internalization. In the two latest segments of this thesis we have found that Carlsberg possess resources, skills and capabilities making them competitive in the Indian market and we have determined that it would be advantageous to produce the firms prod ucts locally instead of importing from abroad. In this segment, the question is whether Carlsberg should produce their products in India themselves or should license the right to do so to an incumbent. As discussed in the segment on Carlsbergs reasons for conducting FDI, we regard the firms search for new markets as the primary motivation for entering foreign markets. 53

This is definitely also the case with regard to Carlsbergs entry in India as they see it as a highly interesting market for the brewing industry. This is due to a population of 1.1 billion where 60% are below 30 years of age and the middleclass is growing steadily (Kastberg 2008). As mentioned previously, good quality malted barley is an essential ingredient in Carlsberg beer and the same is the case for hops. Neither of these is available from Indian producers and it can also become a problem to get a steady supply of freshwater in some areas of the country. All things considered, India is hardly an ideal place for beer brewing and Carlsberg have therefore not decided to initiate production in the country due to the availability of raw materials. It is also unlikely that Carlsberg are attempting to access superior technology and the tax system makes it impossible to reach significant economies of scale in production. Finally, the market entry in India has served more to increase rather than decrease the companys risk and it is difficult to see that it is a response to actions by a competitor. This clearly leaves the search for new markets as t he dominating reason for Carlsbergs entry into the Indian market. It is however not necessary to invest directly in order to reach the Indian market as it can also be done through a licensing agreement and Carlsberg could therefore just as well serve the Indian market through a partner in the market. There are however two circumstances which prevents Carlsberg from using licensing. First of all, a potential partner would have to be able to produce to the quality standards set by Carlsberg and at the same time be able to offer extensive market coverage for their products. Another major brewery would thus be the only probable candidate which in practice leaves only United Breweries, which is owned partly by Heineken, and global competitor SABMiller. However, it is difficult to see why any one of these two would be willing to produce and sell Carlsberg products in the Indian market. Another fact which inhibits an entry to the Indian market through licensing by Carlsberg is that they rely on meticulous information gathering from retailers, down to every single shop carrying Carlsberg products. This gives Carlsberg excellent market knowledge, updated on a day-to-day basis by the firms sales representatives. The information also helps the sales representatives to advise the customers on marketing, advertisement and prices as well as which products the customer should be selling (www.carlsberggroup.com). If Carlsberg licensed both production and distribution to an incumbent in the Indian market, it is highly unlikely that such a program could be carried out. 54

Finally, the transaction costs involved with agreeing on a licensing contract between Carlsberg and an Indian firm, as well as monitoring compliance with the contract afterwards, could be quite considerable due to huge cultural and economic differences. The language differences are however unlikely to be a problem due to the good English skills of Indians in general. Nevertheless, internal transaction costs should be lower than external transactions costs. It thus seems attractive for Carlsberg to internalize their Indian business and a licensing agreement with an incumbent therefore seems unattractive. 11.1.7 Discussion In conclusion to Carlsbergs entry on the Indian market, based on the evaluation of their possibilities through the OLI framework above, the expected market entry strategy for Carlsberg would be to enter through green field investment. We concluded that Carlsberg has ownership advantages compared to incumbents; that it would be most attractive to produce locally, and finally that transactions should be internalized as this should minimize costs. This means that Carlsberg should enter the Indian market through acquisition or green field investment. Entry through acquisitions seems difficult however. Among the approximately 60 small breweries in India, there are none with a dominating position in a local market through strong local brands. This means that there are no obvious acquisition targets in India. In China on the other hand, as will be discussed subsequently in this thesis, beer production and consumption is highly regionalized which has made it possible for Carlsberg to acquire local breweries who has monopoly status in specific Chinese regions. The lack of such options in India is primarily due to the strength of the two major breweries in the country, United Breweries and SABMiller, as these breweries hold a combined market share around 80%. While we have found green field investment to be the most attractive option, Carlsberg has chosen to enter the Indian market through a joint venture with a non-domestic firm of which Carlsberg currently owns 25%, the Lion Brewery Ceylon. Carlsberg has thus only partly internalized their Indian business which should lead to additional transaction costs compared to a fully owned subsidiary. Therefore, the market entry would perhaps have been handled differently if attractive acquisition candidates were available in the Indian market. The Lion Brewery Ceylon is nevertheless likely to have considerable 55

market knowledge on the Indian market due to the close geographical and cultural closeness to its home market, Sri Lanka. This market knowledge is likely to be the primary reason for Carlsbergs decision to enter India through a joint venture as it would be costly and time consuming to obtain this knowledge single-handedly through experience in the market. The joint venture has until now primarily entered the Indian market through green field facilities but also through an acquisition and a joint venture with a domestic brewery. The market entry thus seems to follow the OLI framework to some degree by focusing primarily on green field investment, but at the same time Carlsberg India attempts to take advantage of other opportunities as they arise. This was for instance the case with the acquisition of the brewery in Ponta Sahib as this allowed the joint venture to initiated production earlier than previously planned.

11.2 China
The most populous country in the world, China offers some unique opportunities as well as challenges for most companies that chose to do business there. Generally China is viewed as one of the most successful and rapidly growing of the emerging economies around the globe, and the sheer size of the markets present in China along with their current development, promises to make the country one of the most important in the years to come. 11.2.1 Special economic zones and growth In later years, Chinas economic growth has been averaging a growth of around 8% annually in GDP, and has achieved a position as the worlds second largest economy only surpassed by the USA when measured in purchasing power parity (Sino Daily 2009). This economic growth has been occurring steadily for the last 30 years and if it continues unabated will make China the worlds largest economy within this century. Despite this impressive growth the average consumer in China does not have nearly the same spending power as most west ern countries consumers (EconomyWatch) and the relative difference between consumers in the Chinese markets have widened in later years. It is likely that this is a result of the Chinese way of liberalizing their markets and encouraging growth by establishing so-called special economic zones (SEZ). The SEZs date back to the 1980s and mostly encompasses coastal communities and capitals of inland regions. The Chinese SEZ program has grown steadily through the years with 56

additional SEZs being opened and these zones serves as the main driver of the growth in the Chinese economy. The special benefits granted to these areas include tax incentives, more independence with regards to international trade and focus on attracting foreign capital and FDI to the zones (Richard Wang & Co 2006). Some of the most notable amongst these SEZs are Shenzen, Xiamen and Zuhai and a common characteristic amongst most SEZs are the fact that they mostly are coastal areas and in the south of the country, or more recently along the Yangtze River. Like the major Indian cities of Mumbai, New Delhi and Kolkata and the cities of Moscow and Saint Petersburg in Russia, the SEZs can in many cases be considered as market hot spots. As it is the case with the above mentioned cities, the population of the SEZs have above average incomes and growth compared to the country in general and especially compared with rural areas. This makes the SEZs attractive markets for MNEs that do not wish to enter the entire Chinese market. 11.2.2 Current state of the Chinese economy While China has been affected by the recent and ongoing economic crisis, the country as a whole has been affected far less from this than almost any other economy in the world. The growth of the Chinese economy is currently lower than previous years and according to some sources it could be the lowest for the country since 1990. In spite of this, the Chinese economy maintains a growth rate far above what most western countries would consider high. The Chinese economy thus remains relatively healthy as can be seen from sources such as The Economist, which has raised its estimate of growth to 7.2% for 2009. The World Bank estimates the Chinese growth rate at 7.5% (The Economist 2009). The effects of the economic crisis on the Chinese market have mainly been through failing demand from foreign markets and foreign companies that have suffered from the crisis. This in turn has translated into problems in China where the level of FDI as well as export of Chinese goods and services has been impacted. Mainly the markets for Chinese goods in Europe and the USA have dramatically decreased which influences most companies in the SEZs to some degree, as they are mainly geared towards export and foreign trade. The Chinese government has recently passed a stimulus package of some four trillio n yuan ($586 billion) that are to be implemented over a two-year period. The stimulus 57

package aims primarily at strengthening domestic demand and spending in order to counteract the lower growth rate in 2008 due to the economic crisis. Initially, the package focuses heavily on reconstructing damaged or destroyed property from a recent earthquake in the country as well as investing in public infrastructure. Additionally technology advancement, sustainable development, educational- and culture-projects, rural development and social welfare are part of the package, the composition of which however is amendable as the economy, both domestic and foreign, changes (Candelaria et al 2009). This stimulus package has served to keep Chinas economy stable and more or less free of many of the problems affecting other economies of its size. While the package is big by most international standards and compared to all other countries, the Chinese economy can afford the expenses better than most countries. A sign of this strength can be seen in the fact that China sits on the worlds largest foreign reserves; $2,132 trillion according to the Federal Reserve. In addition, these currency reserves continues to rise as foreign investments continues to flow into the country as investors perceive that the Chinese economy will emerge from the current crisis better than most other economies. The Chinese federal bank, Peoples Bank of China, mainly acquires dollars in order to prevent exchange rates from increasing (Bloomberg) and a concern is that the dollar will suffer further destabilization as a result of the recent crisis. Lending from Chinese banks has, as a response to government orders, remained high, and new loans has actually risen in the first three months of 2009 making many of the problems experienced by other countries with regards to financing and loans almost nonexistent on the Chinese markets. In conjunction with this fact, the stimulus package and the general strength of the economy, makes China seem like an attractive market for investment for foreign FMCG companies at this time. China has also made great progress in developing human capital which has been one of the main reasons why China has experienced such an explosive growth in recent years, compared to most other developing nations and emerging markets. The heightening of general education and reduction of illiteracy makes the countries potential for growth strong compared to many other nations. As well as maintaining strong growth of its economy China has also managed to keep its currency relatively stable, and has kept it at a very close and stable level with the dollar throughout recent years. This has served to make China attract foreign investments and capital due to a level of stability not 58

offered by most other emerging markets and has made the country able to survive turbulent crises such as the 1997-98 Asian economic crisis better than most of its competitors (Nanto 1998). 11.2.3 Rural-urban wage gap One of the potentially troublesome areas with regards to the rapid growth and expansion of the Chinese economy is the rising gap between urban and rural areas in the country. During the last thirty years where Chinese growth has been very high, the differences between incomes for rural and urban citizens have increased to a point where rural earnings are around five to six times lower than urban earnings. This makes for vast differences in living standards between urban areas, especially the SEZs, and rural areas, where the growing modernization and efficiency in the agricultural sector makes large numbers of rural workers unemployed. This development has driven more people to the cities and coastal areas. Both between and inside the regions in China the differences in income are high and this could very well become a rising problem for Chinas economic growth in the future if nothing is do ne. Although the possibility for problems are present there are also benefits derived from this inequality in incomes, as seen in the migration to the larger Chinese cities. This has in some way contributed to the economic growth as additional personnel became available in the cities and more consumers were created. The latter is because, to some degree, rural areas produce and manufacture most of the consumption goods they need themselves and therefore do not contribute as much to the state economy as urban areas (Economic Observer 2009). The main hindrance for a larger scale population shift towards urban zones is the Chinese Hukou system, which is a system of residency wherein every Chinese national is classified as resident of a specific area. This is an old system, implemented at the time where the Communist party took control over mainland China, and it were meant to prevent residents from rural areas migrating to the cities and thereby depleting the agricultural workforce. While the system is much less rigorously enforced presently, it is still a major hindrance for free factor mobility in the form of labour in China, and serves to maintain the big difference of income between regions. Under the system any change in location, originally anything longer than a month, necessitates a change of hukou to be able to work and relocate to the new region. This permit can only be granted by the government with all the associated bureaucracy resulting in this being a time consuming and expensive exercise (Candelaria et al 2009) 59

While the inequalities between regions can put both an economic and political strain on the government and economy, there has been no real effort to lessen the problems caused by them. Only in the latest 10 years or so, the problem has been recognized as important to China, as it can be seen by the latest five-year plan put forth by the Chinese government (Candelaria et al 2009). 11.2.4 Infrastructure While China is a populous country it is also defined by the great distances and area it covers. This poses some challenges for most companies when entering China as there are vast differences between different regions as to what opportunities and challenges that must be faced. As previously mentioned, the coastal regions and larger coastal cities remain the drivers behind the Chinese economic growth while most of the rural areas show a more modest development. There are huge differences in buying power and habits between regions in the country and in conjunction with the vast distances in China, this makes local production and distribution much more manageable for most companies. Transportation system. The Chinese infrastructure in the form of roads is relatively well developed in the more urban areas of the country and especially along the coastal regions. The road network in the country as a whole, measured in total length of the road network, is in a much less developed state however and is vastly inferior to other emerging economies like India and Brazil (CIA 2009). As mentioned in the segment on Indias infrastructure, China is nevertheless quite well equipped in terms of expressways as the country has in excess of 41,000 kilometres of these compared with just a few hundred in India. With regard to rail transport on the other hand, China is in a comparable state to India as the Chinese rail system is also used for bulk shipments; primarily for transporting coal from the inner regions of the country to the more populous and productive coastal regions. In addition to the road and rail network, the Yangtze River, Huang River and a number of other rivers and waterways are an important part of the Chinese transportation system. China thus has the worlds longest network of navigable waterways at 110,000 kilometres, slightly ahead of Russia (CIA 2009). The length of the Chinese waterways is more than twice the total for the entire European Union and they are able to offer

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inexpensive and easy access to some areas of the country which would otherwise be relatively isolated due to the shortcomings of other areas of the transportation system. More remote areas of China thus still suffer from an underdeveloped transportation system. This, combined with considerable distances between regions, provide a solid incentive to localize production and manufacturing of goods for FMCG companies both foreign and domestic, since logistics could otherwise prove prohibitively expensive and time consuming. Seaports, power and water supply. With regard to seaports, China is among the best equipped in the world. It has been necessary for China to invest heavily in seaport capacity due to their export driven economy, especially within shipment of containers, and for that reason eight of the worlds 30 biggest container ports are located in China (Swedish Trade Council 2008). All in all, China has the worlds largest port capacity which helps to offset that these are somewhat inefficient (US Army Corps of Engineers 2006). The Chinese supply of electric power has been increased tremendously in recent years and as opposed to India, China seems to be able to meet the rapidly increasing demand. This does however come at considerable cost to the environment as a significant part of the Chinese power comes from fossil fuels; primarily coal. The supply of water however may be the biggest challenge of all for China as the country only has a naturally available annual water flow of 2,114 cubic meters per capita. This may sound like a lot, but it is only a third of the world average and the water is very unevenly spread across the country as the northern part of the country has only one sixth of the water available to the southern part. This means, that the entire northern part of China home to 680 million people suffers from water scarcity, which is defined as receiving less than 1,000 cubic meters of water per capita annually. This means that more than 400 out of Chinas 600 cities are believed to be short of water and it has caused previously arable lands to yield no output as well as to over-extraction of underground water (Yusuf 2008). Sourcing freshwater of adequate quality can thus be challenging for FMCG firms in China, as well as it is likely to become in India in the not so distant future. Therefore, securing a reliable water supply will in many cases need to be included in the analysis when deciding on a market entry in China.

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11.2.5 Chinese business culture and the importance of guanxi As China continues its rapid economic growth, the many foreign companies wishing to enter the Chinese market and those who are already there, must take into consideration the unique Chinese characteristics that influence and determine whether a firm is successful or not. More than most other cultures, the Chinese encourages the personal relationship and it is almost a prerequisite for newly started enterprises in mainland China to employ someone with a deep knowledge of the local area and customs. The relationship network, termed guanxi, can be described as a personal connection between two people and it carries great weight in the Chinese way of doing business, and many foreign companies has learned to put great weight on this fact. This personal relationship when viewed through an organizational optic takes the form of a continual exchange of favours between individuals and can be applied in most levels of a company. This is significant in that a highly placed representative of a foreign company can significantly ease the entry into a Chinese market if he or she can establish the right relationships with partners and officials in the area of interest. The guanxi network of a company tends to be most important in the start-up or beginning phase of an enterprise (Jiang 2003) but even though the vital significance diminishes over time a good personal network is viewed as a key aspect of a successful venture in China by many established companies. This can often lead to foreign companies to employing managers that has previous experience with China or Chinese nationals themselves in order to obtain this important network for the enterprise. One of the reasons why a good guanxi network is of great importance when doing business in China is the countrys bureaucratic system. In Chinese culture, it is highly important not to lose face as this will bring about the contempt of society. You lose face for instance, if you make a costly mistake which you alone are accountable for. This has great influence on the work of Chinese officials as their main priority is not to lose face, which means that they will generally avoid making decisions if possible as these decisions could lead to costly mistakes. For this reason, officials will in most cases leave decision making to executives or better yet, a group of executives, which will then reach a decision through negotiation and compromise and thus share responsibility for the decision (Zinzius 2004). As decisions can be pushed upwards in the bureaucracy a number of times, it can be valuable for a foreign company to have good contacts in the 62

very top of the decision making pyramid in order to attempt to speed the decision making process. 11.2.6 Chinese retail While the Indian retail market is dominated by small family owned businesses, the Chinese is in a much more modern state. While multinational retailers such as WalMart, Carrefour, Metro and Auchan have been excluded from the Indian market by not allowing FDI from multi-brand retailers, the Chinese market has been open to these companies since the 1990s (Wang 2009). In 1992 the first foreign retailers were allowed to enter as an experiment in selected cities in eastern China, but the first stores did not open until 1995 when restrictions were eased. The number of foreign retail stores increased gradually in the authorized areas until 2001 when China entered the WTO which opened the doors for FDI completely causing the number of foreign stores to increase sharply. Foreign retailers are however still more established in Eastern than in Western China. Besides the above mentioned retailers from western countries, China has also attracted retailers from Japan as well as from Southeast Asian countries. In 2005, the largest foreign retailers in China were Carrefour and Wal-Mart as well as the Taiwanese companies RT-Mart and Trust-Mart (Wang 2009). The western MNEs are still primarily in the eastern part of the country which is most densely populated while domestic firms still dominate in Western China. Domestic conglomerates such as China Resources, Shanghai Brilliance Group and Lianhua supermarkets are thus also significant players in the market (Barboza 2007). There are disagreements about the sales growth numbers in the Chinese retail sector as government sources claims growth was in excess of 20% in the later part of 2008 while private sources estimates growth around 10% in the same period (Fong 2009). There is however no doubt that the Chinese retail market is growing at considerable pace compared to the global average and this is likely to continue for years to come due to the strong growth in the Chinese GDP per capita. For this reason, the foreign MNEs continue to expand in the country at considerable pace and some have even increased the pace of opening new stores as the current economic crisis has caused a price drop for attractive retail locations. Thus companies like Carrefour and Wal-Mart expect double digit numbers of new store openings in 2009. In most cases, it takes around 3-5 63

years for stores to become profitable (Fong 2009). The majority of new stores are hypermarkets as this form of store outperforms other formats in the Chinese market by far. For this reason, the majority of western retail stores in the country are in the hypermarket format (Wang 2009). While foreign retailers have opened a substantial number of stores across China, the stores are confined to major cities and satellites around these and often with just one store in each city. Given the considerable geographic size of the country, this means that there are considerable distances between individual stores. This leads to difficulties with regard to distribution as retailers have been unable to replicate the efficient distribution systems used in more developed and concentrated markets (Wang 2009). The large distances between stores mean that it is difficult to supply them from central distribution centres, especially due to poor infrastructure in rural areas, and this often leads to vendors supplying stores individually thus adding additional cost. In order not to be affected by these extra costs, retailers have often pressured suppliers to bear the brunt of these (Wang 2009) In order to minimize the supply chain costs, it is relevant for retailers to increase the number of stores and decrease the distances between stores. This can of course be accomplished through opening new stores, but since the retail market is saturated in many parts of China already (Wang 2009), this will in many cases not be a costeffective solution. Acquisitions and mergers are on the other hand attractive as this does not add additional capacity. A wave of M&A activity is therefore expected in the coming years and has already been kicked off by Wal-Mart as they started a stepwise acquisition of the above mentioned Trust-Mart in 2007 (Barboza 2007). Other Southeast Asian retailers may also take part in the consolidation of the retail business in the future as many have partnered with western retailers in order to become more competitive. In time they are likely to be taken over completely. Western retailers have in general been most competitive compared to other foreign retailers as they have greater financial strength, more advanced information technology as well as retail formats better suited Chinese tastes (Wang 2009). 11.2.7 Chinese consumers As discussed in a previous segment in this chapter, there is a considerable and increasing wage gap between urban and rural consumers in China. This gap, as well as 64

the increasing difference between urban and rural consumers, is illustrated in the table below. Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan) 2000 Ratio 3,146 1 Rural income 1.36 Urban income 4,288 Sources: Wang 2009; Chen 2009 2004 4,039 10,128 Ratio 1 2.51 2008 4,728 15,828 Ratio 1 3.35

The rural-urban wage gap has increased considerably since 2000 where the difference was limited until now when urban Chinese on average earn more than three times as much as rural Chinese. The Chinese government has taken initiatives to lessen the gap but it is unlikely to have any significant effect yet. A large rural-urban income difference is as mentioned earlier also an issue in India and the Chinese and Indian market thus have this issue in common. Since the Chinese rural infrastructure is also significantly inferior to that of urban areas, the Chinese market can be segmented into rural areas with low income and poor infrastructure as well as urban areas with high income and adequate infrastructure. As it is the case with the Indian market, this division between rural and urban areas necessitates different strategies for each market segment. If a company were to choose a specific segment to focus on, it would also impact the geographic area of interest as Eastern China is considerably more urbanized than the western part. When the Chinese government opened up for foreign investment, the majority of foreign companies in the market targeted Eastern China with high-quality products in the small but growing premium segment (Gadiesh et al 2007). Therefore, the eastern market is likely to be significantly more competitive than the western market where fewer foreign companies have entered. This could make it interesting for FMCG companies to enter Western China targeting the rural population. This may be especially interesting currently as a significant part of the Chinese governments stimulus package to boost the economy has been earmarked rural development. At the same time, rural consumers spend 47% of their income on groceries while urban consumers spend 38% (Wang 2009). As groceries to a high extent can be considered equivalent to FMCG, this means that the rural population use a higher percentage of their income on FMCG compared to urban Chinese. 65

11.2.8 Five forces analysis of the Chinese FMCG industry Threat of new entrants. With a population in excess of 1.3 billion people and a very high level of economic growth, China must as a consequence be on the agenda for a large number of major multinational FMCG firms. The threat of new entrants must in this respect be quite considerable although many of these firms are already present in the market. The fact that many multinational FMCG firms are already active in China, due to the high attractiveness of the market, must however also deter other firms from entering. As previously discussed, this is especially the case in the eastern part of the country while the less urbanized inland regions are generally less competitive. While the FMCG industry has significant fixed costs associated with start up, the nature of the Chinese market, with rapid growth and possibilities serves to lessen this obstacle. Additionally the relative ease, with which China has passed through the economic crisis, has left the financial sector in the country able to provide loans and credit to a degree where it is actually easier in some cases to obtain them than before the crisis. This makes the entry barriers lower in China than most other countries in the world with regards to access to capital. Another factor influencing the threat from entrants is that the Chinese government are actively encouraging companies to expand to China making the threat from foreign companies greater than would be expected. Rivalry among existing competitors. FMCG producers face tough competition in eastern regions while competition is lower in inland regions. This general difference is pervasive in most Chinese markets and the rapid development experienced in SEZ and rapid growth regions serves to create a very competitive market in certain areas of China, while other areas exhibit lower competition. Even though the competition must be said to be high, the fact that the Chinese market is growing fast makes the competition less than would otherwise be the case. Market penetration for many areas of the Chinese markets are not high compared to more mature markets, and while the FMCG industry is usually defined as being a very competitive industry, this is slightly less pronounced in China, especially the western markets. As mentioned, the Chinese economy has suffered comparatively less than most other markets in the world and as a result the growth and potential on the Chinese markets are still high. This means that while the income and spending power of the consumer continues to rise, and the potential for growth exists, FMCG companies will be attracted 66

to the Chinese market and this will serve to heighten competition in the industry. As has been seen in other more developed economies, the industry will eventually become more consolidated and the concentration ratio will rise, meaning larger and fewer competitors as both the supplier companies as well as the retailers merge or leave the market. But as of yet there are still room for expansion on the Chinese markets. Bargaining power of suppliers. As is the case with FMCG markets generally the suppliers in the Chinese market suffer from the fact that the wide availability of their products as well as the relatively common nature of them gives them little power over their customers. China offers a wide range of agricultural products due to the sheer size and different climates which serve to make inputs demanded of the FMCG industry commonly available. Coupled with the few scarce resources and the comparatively few essential inputs required this diminishes supplier power. Additionally the demands of the different segments in the industry, such as dairy suppliers or paper products does not overlap with regards to input making the competition for supplies smaller but giving suppliers comparatively greater size compared to their market. However, the Chinese market is more restricted than most other markets, meaning that firms who produce locally gain somewhat more supplier power compared to more open markets. But to all intents and purposes the suppliers to the FMCG industry on the Chinese market are still lacking in bargaining power. Due to size, MNEs operating on the Chinese market gain some advantages compared to the smaller local companies since they are able to use more resources to acquire supplies. At the same time the inherent disadvantage non-Chinese companies experience on the Chinese market serves to lessen the bargaining power they have due to cultural factors that have to be learned in order to successfully operate on the Chinese market. The cultural aspect on the Chinese market serves to encourage strong ties between people and companies doing business together, partly due to the concept of guanxi which makes personal bonds that tend to be very important for the individual Chinese. This makes contractual and legal commitment between suppliers and companies in the FMCG industry stronger than could be expected by looking at Chinese business structure and legislation, often giving suppliers additional power through this tight bond.

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Bargaining power of buyers. The vast majority of FMCG products are bought by retailers. As discussed above, the Chinese retail sector is currently being consolidated through acquisitions and increasing cooperation between the major retail chains, both foreign and domestic. As the market concentration in the retail sector increases, the negotiating power of retailers will increase. This is especially the fact if the dominant future players turn out to be major international retailers such as Wal-Mart and Carrefour. Such global giants will in many cases be able to use their global market power as leverage when dealing with FMCG producers in the Chinese market. The end customer for FMCG producers, that is the Chinese consumers, generally has limited negotiating power and in most cases only has the choice between buying and not buying the products of a particular producer. In most case they will not be able to replace a FMCG product with a substitute but will have to buy a similar product from another FMCG producer. Threat of substitute products. While generally not an industry plagued by substitute products, China nonetheless offers more in this regard than most other markets. The widespread use of copying products gives the many brand names a greater degree of competition than in most other markets. Even though this heightens the competitiveness in the industry, there are, as mentioned in the general section on the FMCG industry, really no substitutable products, except within the industry itself. While the competition is very high in general the threat of substitutable products seems only marginally higher in China than in most other markets. 11.2.9 OLI framework Ownership. As is the case on most of the markets in which they operate, Carlsbergs main advantage when entering new markets is their knowledge and experience with marketing and producing beer. The close contact with consumers and general high level of logistical ability makes for additional advantages when considering competitors and especially smaller, more local competitors as is the case in the western Chinese markets. With the more efficient brewing methods utilized by Carlsberg, they will be able to make local breweries more effective and produce higher quality products compared to their competitors.

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Additionally the knowledge of when a venture becomes a liability and needs to be sold off seems an important aspect on the Chinese market, as Carlsberg demonstrated with their Shanghai plant and their realization that selling it would be for the best. The effectiveness of foreign sales and marketing methods are hindered to some extend in China as consumers are very price sensitive and not generally willing to pay more for higher quality products. This makes any form of competition not centred on price harder compared to other emerging economies as more often than not the local consumers must gradually be accustomed to new, higher quality and more expensive products. Carlsberg possesses some experience with developing local markets, garnered from entry into other markets where beer was not previously sold in large quantities. An example of this is the Russian market. In this regard, Carlsberg and most other foreign entrants have a need to advertise for their products to a larger extend than local companies, but then they also have both previous experience and financial strength to do so. Location attractiveness. As is the case with many large countries, the sheer size of the Chinese market is perhaps the greatest proponent of moving production facilities to the country. The weak infrastructure coupled with great distances makes local production a significant advantage compared to bringing products into the Chinese markets. One of the characteristics of China is the fact that it is difficult to think of the country as one market. Rather, the Chinese market are fragmented to a large degree into smaller geographically defined markets, and locating production facilities in the areas where the beer is sold would prove much less costly than attempting to export to the areas. The very low cost of labour as well as other important factor inputs is also an important factor when considering China. It also holds an abundance of low-cost labour and raw materials that serves as a powerful attraction when deciding whether to produce in China. The low labour cost is partly offset by the fact that while the lowest wages are paid in western China the workforce are comparatively poorer educated, making the investment in labour higher in industries where other than unskilled labour are required. A disadvantage when compared to other emerging markets are the fact that the Chinese government requires that foreign companies transfers state of the art technology and resources in order to be allowed to merge or make a JV with Chinese companies (Meyer 2001). This can hinder FMCG companies due to the fact that they have to spend more money on technology transfer than strictly necessary in order to be able to obtain a local 69

partner. While this strengthens the Chinese economy it also serves as a dampener for industries where modern technology or machineries are not needed in order to compete on the market. This is partly the case in the beer industry in china, specifically in the western markets, where the standardization and high quality attributed to high quality beer, specifically in the premium segment, are not in that high a demand. Mostly the Chinese consumers prefer their local, low-cost beer and transferring state-of-the-art brewing technology as well as facilities in order to acquire a local partner may in some cases be surplus to requirements. Internalization. As it is the case in most markets for beer, the Chinese exhibit strong brand loyalty, specifically to their local beers, which are mostly brewed by local breweries. In order to enter the market successfully foreign companies will often have to partner or acquire a local brand so as to have a starting base for its own brands. This makes licensing a poor choice for foreign brewers entering China as the prospects for sales are low without significant effort to develop the market and promote the foreign brand. As with most other emerging markets, the breweries in China are not that up to date with production techniques and quality, and this fact could prove detrimental to foreign brands, especially where they are more expensive than the local brands. Investing directly makes Carlsbergs advantages of marketing and production applicable for their Chinese operation, in a way that simply would not be possible if they were licensing their brand, or to some extend an alliance with a Chinese partner would make possible. Many Chinese companies would not possess the necessary technology or know-how to produce the kind of quality that foreign companies achieve, and this would seriously hamper the possibility of licensing products to them. Similarly, unless some sort of control or influence can be acquired, usually through a JV or merger, the incumbent has little incentive to uphold the standards and quality associated with foreign brands and products. This would be detrimental to both brand name and reputation. One of the strong reasons for entering the Chinese market through FDI is the strong brand loyalty exhibited by the Chinese consumer. By acquiring a local brand name and company, either wholly or as a partner, MNEs significantly eases the access to local markets in China and paves the way for development of the local markets to higher quality products and foreign brands. As an added factor speaking in favour of choices 70

offering most possible control in conjunction with a local partner, is the often difficult nature of navigating the legal system in China as well as the changing government policies, which makes local knowledge and the use of guanxi trough Chinese partners, an efficient way of doing business. 11.2.10 Discussion for China Carlsbergs initial entry into the Chinese market was characterised by small investment in Hong Kong leading to export of beer to the Chinese market since Hong Kong was not a part of China at that point. Originally the brewery was licensed to sell Carlsberg, but was eventually taken over completely. When this brewery was closed and moved to mainland China in the Guandong province, where the Chinese economic boom was most notable due to the SEZ in the vicinity, Carlsberg more substantially entered the market. By eventually acquiring a majority equity stake in the company the brewery have followed a standard pattern for Carlsberg of gradually increasing the commitment level in their markets to a total, or near as possible, ownership of their interests. By 2006 the Huizhou brewery has become the main presence on the eastern Chinese markets as well as the distributor of Carlsberg brand products in China (Carlsberg Group 2006). While this seems as a traditional entry mode for Carlsberg, the company also engaged in a green field investment with an $80 million new brewery built near Shanghai in 1998, breaking with their development of the Chinese market. With a new brewery mainly geared for production of premium segment beer on the eastern Chinese markets, Carlsberg hoped to capitalize on expected growth in this part of the market. The advantages with this expansion is that having total ownership of the new brewery Carlsberg would be able to transfer technology and expertise freely without risk of exposure to rivals or the danger of losing control of their company specific resources. In this regard the development in the strategy pursued seems as could be expected by Carlsberg, as the company from a comparatively small investment and low level of commitment became more confident in the market and raised their commitment level accordingly with a new brewery. Carlsberg no doubt overestimated the development of the premium segment of the Chinese markets as well as the ease with which they could introduce their products in a continuously more competitive eastern Chinese market. This ultimately led them to sell their high-tech brewery to the major Chinese competitor 71

Tsingdao. This to some extend seems like a serious miscalculation by Carlsberg but it was a mistake share by a number of their biggest competitors and they are likely to have learned from the experience. With the sale however, Carlsberg were suddenly in a relatively weak position compared to their most significant competitors in the Chinese market and the eastern Chinese markets consolidated quickly. The Huizhou brewery had only a strong presence on the local market and this seems at odds with Carlsbergs general position of aiming for being one of the two-three biggest players on their markets. Selling their Shanghai brewery after several years of continuous loss thus marked the end of Carlsberg as a major player on the eastern Chinese markets and by 2003 the new strategy in China became to focus on developing the western Chinese markets. While Carlsberg has been present in the Chinese market for many years, the shift to the western part of the country represents a virtually new entry since the markets are so different from the eastern markets. The western markets are mainly characterized by the much lower concentration of other MNEs and global brands, lower levels of income as well as logistical challenges and different consumption habits concerning beer. Since the Chinese market is so huge compared to most other markets, it naturally becomes more fragmented than smaller markets, and this enables Carlsberg to shift focus to the western markets without running into the problems they had experienced in eastern China. The ownership advantages of the firms in western China were close to insurmountable, mainly because of local breweries enjoying near monopoly status in their respective markets with strong local brands. For Carlsberg this was making most forms of entry without a local partner difficult. Realising this, Carlsberg in 2003 started acquiring equity stakes in multiple breweries on different markets in western China. This also makes sense when considering the location part of the OLI framework as the benefits gained from being located in these relatively remote and undeveloped markets both with regards to infrastructure and beer consumption outweighs the drawbacks. The choice of entering by establishing JVs with local partners or acquiring equity stakes in them, has led to Carlsberg having an increasingly strong position in the markets as they often are the only significant entrant and establishes themselves by alliances or takeovers of the strongest incumbents.

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The drawback of JVs and similar modes of entry in this case, is that Carlsberg relinquishes some control in order to easily enter markets, and thereby lowers the advantage they gain from their ownership and to some extend internalization advantages. With one of Carlsbergs main advantages being its technology as well as experience, the transfer of which should not be undue influenced by lack of control, the problem nonetheless exists for the company to be giving away some of its advantages to only partly owned foreign companies. With the overall strategy being one of gradual acquisition of its partners in China, as well as the multi-tier strategy generally followed by Carlsberg, their conduct in entering the Chinese markets seems conducive to attaining a very strong position in their chosen markets. This is because they can capitalize on both local brands as well as local distribution networks, and can introduce their own international brands. The fact that Carlsberg can sell both local and international brands means they can compete in all segments of the beer industry, and gives the basis for a very strong position in the market. The case of Carlsberg on the Chinese market serves to underline the importance of adaptability when entering foreign markets. The fact that Carlsberg initially entered the market in one way and later changed their strategy markedly with an ultimate move to the western markets in order to avoid competing in unfavourable conditions on the eastern markets, shows that in order to be competitive a company needs to be able to adjust their strategy continuously. Access to distribution networks and local brands are of significant importance in the beer industry, and the advantages gained by choosing the correct entry strategy can be of great importance with regards to the development and sustainability of the enterprise in new markets.

11.3 Russia
The market development in Russia has progressed rapidly in later years both with regard to a fast growing middle class, with the resulting increase in demand for goods and services to accommodate the increase in available spending, as well as a vast need for infrastructure and physical facilities in the country as a whole. In the last 10 years up until 2008, where growth in GDP was 6%, the Russian economy has averaged around 7% in annual GDP growth (CIA 2009b), making the Russian market one of the fastest growing economies in the world as a whole. 73

The recent economic crisis that have had wide ranging implications all over the world have dealt a severe blow to the Russian economy resulting in an expected budget deficit of around 5% and no discernable growth in the GDP for the first time in more than 5 years. As the Russian economy as a whole have been driven by the availability of cheap loans as well as foreign direct investment, the current economic landscape offers no immediate prospects of a resumption of the growth in Russia that has been the trend these last years. As with most developed countries in the world the Russian corporate system faces the reality of no immediate available credit, and certainly not the cheap loans usually attainable before the economic downturn. Also the creditors are demanding payment of outstanding loans in much greater numbers, as they try to salvage their own situation and avoid defaulters. Lastly falling commodity prices has lowered the earnings of the Russian economy as a whole, in large part because of the dependency of selling their abundant natural resources as a driving mechanism for the economy. Especially the fact that Russia has been dependent on their natural resources to a degree that makes the falling commodity prices have such a large influence on the economy makes the importance of a quick recovery all the more important. This is especially true given that the Russian situation largely resembles the world and other emerging economies as a whole with the problems and concerns being very similar. In the case of Russia, the counter-cyclical forces mentioned above, which often leads to an emerging economy being in a more favourable position than more mature economies during economic and financial crises, has a somewhat lesser impact. This is due to the fact that even though the country has the world s third largest reserves measured at approximately 475 billion dollars its debt is even higher than this, giving Russia a rather heavy debt burden to overcome (The Economist 2008b). Additionally the inflation in Russia (IMF rapport 2009) which in 2008 was at 13.3% according to the Russias state statistic service, is not expected to change markedly and may even rise as high as 14% in 2009. This has mostly been attributed to the devaluation of the Russian rouble which have lost nearly one third of its value during the months of late 2008 and early 2009. As so many other nations have done, Russia has cut their interest rates several times and used several billion dollars to try to stem the depreciation of the rouble as well as used trillions of roubles on trying to stimulate the Russian economy. It is estimated that up to 3 trillion roubles have been used by Russia for the anti-crisis measures, and of these 1.4 74

trillion ($46.7 billion) have come from the Russian oil-funds (Yu & Zhao 2009). It is estimated that the rising oil prices coupled with the money funnelled into the Russian economy by the government will help the Russian economy rebound in the foreseeable future. Russias current budget is based on oil prices of 41 dollars per barrel, but already the prices of crude oil have passed this point and if the trend continues this will bring additional strength to the Russian economy as oil is as important for the Russian economy as it is. The factors that mainly detract from the Russian situation as opposed to most other countries, are the rather underdeveloped market and financial systems as well as the still rising inflation in the country. One of the main problems for the Russian market development, as well as a concern for any entry into this market, is the huge geographical area covered by the country. More than 17 million square miles and covering 11 time zones this poses a significant obstacle for any overall analysis of the market, since the differences can be vast between areas of the country. Mainly the economic activity are focused around the western areas of the country, centred around Moscow and Saint Petersburg, as well as areas bordering the Black sea according to the Russian statistics bureau GKS, but even in these locations the infrastructure (Encyclopedia of the Nations) are characterized by being somewhat underdeveloped compared to European markets. The question of infrastructure should be considered a concern by any company willing to compete in Russia, and even established companies will be constrained by lack of developed infrastructure compared to more mature economies. Compared to other emerging economies Russia do have a fairly substantial advantage in that, even though the country suffers from underdevelopment and huge distances and rough environment at some locations, Russia are considered ahead of other resource rich economies and many other emerging markets. This can partly be explain by a tradition of education, science and industry in Russia as well as determined effort to exploit its natural advantages such as location and easy access to markets for its products and resources. Oil, timber, coal and natural gas constitutes more than 80% of Russian exports, and Russia is currently the world s second largest oil exporter (gtc 2002), but the number is steadily decreasing, and even though the resources mentioned represents such a large percentage of exports, oil and gas only contributed around 5.7% of Russias GDP before the economic crisis when energy prices were high, and were expected to 75

decrease even further in the future. This is of course the expected development if one were to disregard the effects of the current economic crisis, but even with this in mind, the share of GDP from these natural resources are going to be less as the Russian economy as a whole strengthens again. One of the reasons for this is the falling commodity prices experienced worldwide, and the relatively large impact this has an markets such as the Russian, that to a large extend depends on its abundant natural resources to drive the economy. Specifically oil and the rising oil prices have given Russia a resilience not enjoyed by many countries as the money from the oil funds and rising prises have been utilized to combat the economic crisis. Another important driver for the Russian economy are the FDI that for some time has been pouring into the country, as investors and companies from abroad seeks to benefit from the growth and opportunities represented in the Russian markets. The FDI investments have fallen drastically in the first quarter of 2009 to around $3.182 billion (Russia-media 2009) and this represents a significant point of concern for the economy as a whole considering the importance these investments constitutes. 11.3.1 Market analysis for Russia Threat of new entrants. As economies of scale have a significant influence on FMCG companies ability to effectively compete and even though the Russian market is classified as emerging it is still a factor that needs to be taken into consideration by entrant companies. This suggests that at most a handful of companies in each segment of the FMCG industry will ultimately be able to successfully operate on the Russian market. Given that the Russian market generally is in growth the constraints put upon entrants will be lesser than expected, as there are room to expand and the demands for economies of scale are not that difficult to realize. Foreign investors are welcome in Russia and, as mentioned earlier, FDI are a rapidly growing part of the Russian economic growth. As investments and specifically foreign investments have such a large part in the Russian economy, you find advantages such as tax concessions for investors in several regions. The 1991 investment code secures foreign investors the same rights as domestic investors in most industries, with a few notable exceptions such as oil and gas production, and the 1999 Law on Foreign Investment confirms this trend (LeBoeuf et al 1999). Unfortunately this seems likely to be changing as the Strategic Sectors law of 2008 limits the allowed foreign investments 76

in 42 sectors deemed strategic and only allows more than a set limit on investments in these sectors after a review by a special commission, chaired by the prime minister himself. Fortunately this doesnt seem to apply to the FMCG industry and this makes it somewhat easier to enter the Russian market as a foreign owned company in said industry. Especially in the FMCG industry where certain minimum requirements for production, needs to be fulfilled in order to be competitive this attitude can be construed as a policy of minimal interference by government, making this an insignificant barrier to entry. Unfortunately one of the barriers that has to be overcome for entry into the Russian market are widespread corruption that can be a severe hindrance to most companies seeking to enter the Russian market. This corruption, seen in conjunction with the cumbersome bureaucracy associated with dispute resolution and administrative problems, tends to significantly hinder foreign owned investors in the FMCG industry, as local knowledge and connections play a substantial part in a successful entry into the market. Often contracts and other agreements must seek to limit foreign investors exposure to an ever changing legislative landscape, often exemplified by more than usual focus on conforming to the often very complicated Russian laws and codes. This focus is both with regard to existing as well as coming laws. Many branches and offices of the government show little consistency in enforcing an applying regulations and laws which adds further difficulty to operating in the Russian FMCG industry. While this applies both to incumbent firms as well as foreign entrants this mostly affects new ventures as they will be most exposed in their start up phase. When entering the Russian market there is of course the countrys protection of intellectual property rights and similar rights to consider, but even though this can be an activity requiring some effort, the nature of FMCG goods limits this aspect somewhat, making this a negligible obstacle to overcome compared to other barriers. Related to this aspect is the fact that many companies entering the Russian market will be faced with a rather high degree of product loyalty from the consumers. As a nation Russia enjoys a fairly high amount of national patriotism which to some degree translates to buying Russian products before foreign. While this can be overcome by some entry strategies it will be a barrier to overcome for foreign companies aiming to sell their own brands or new products on the market. This especially holds true for goods such as 77

alcoholic beverages, where consumers tend to stick to what they know and buy from producers from their own country. Rivalry among existing competitors. There is no easily accessible and publicly available source or register where companies can seek information about competitors in Russia. Existing sources are out-dated, incomplete and overly formalized as to be almost useless. Because of this it can be rather difficult to be able to obtain reliable information about the Russian market concerning potential competitors. As mentioned in the section about entry barriers, there usually needs to be obtained economies of scale in order for a production company to be successful. This consequently means that in most segments of the FMCG markets there are only a handful of large companies present. While there is certainly room for localized or smaller producers, largely it is these few big companies that supply the market. Similarly to almost every country on the globe, Russia has suffered a slowdown of its economy due to the ongoing financial and economic crisis. As such the potential in the Russian market should be attractive to many FMCG suppliers as the economy starts to turn around and become stable again. According to research from Nielsen, Russia was posed to become the largest consumer market in Europe and the fourth largest in the world by 2025 (Nielsen 2007). The forecast was of course made before the current crisis and long range forecasts about FMCG are bound to be inaccurate due to the nature of the industry, but there seems no reason to expect that the Russian development should suffer any major changes because of this compared to the rest of the world. One of the main reasons mentioned was the development of FMCG manufacturers and retailers in Russia as well as a general growth of the consumers buying power. This has led to increasing competition as both domestic and foreign FMCG companies seek to capitalize on the expected boom in the market. As retail concentration will almost invariably cascade into some degree of supplier concentration at some point, the number of companies operating on the FMCG supplier market will increasingly tend to become fewer and larger and thereby decrease competition. Bargaining power of suppliers. Since Russia exhibits no overwhelming differences compared to most other countries when it comes to importing goods and services, there exists no hindrances that will help suppliers to take advantage of shortcomings or 78

beneficial circumstances to influence price and agreements between supplier and producer. The more open the market is to competition the harder the suppliers will have influencing price and gaining power through collusion and cartels. Since the legal and judiciary system in Russia lacks somewhat compared to more mature economies, the possibility of collusion and price agreements exist between suppliers in order to control the market and prices. But since import is quite possible in order to avoid dependency upon domestic suppliers and the diverse nature of the desired materials taken into consideration this seems like a remote threat. The bargaining power of the suppliers will remain relatively low. There are some powers in the hands of the suppliers stemming from things such as contracts and binding agreements that make switching suppliers higher, and in Russia it is often encouraged to make contracts very specific and elaborate in order to avoid misunderstandings. This means the cost of breaking contracts and agreements and making new ones with other suppliers will be relatively steep (US Commercial Service 2009) Bargaining power of buyers. The Supplier Industries in FMCG mainly sells their products to retailers through intermediaries and direct distribution. In later years Russia has experienced a development that has put pressure on the intermediaries, forcing them to diversify in order to remain competitive and survive. Intermediaries have seen increasing competition from brand owners and direct distributors something which forces them to increasingly focus on logistic capabilities and changes their focus to service providers (ATKearney 2005). As intermediaries become pressured by both ends of their supply chain they lose significant influence and power over their own suppliers which in this case are the supplier industries in the FMCG market, thereby decreasing the bargaining power this industry segment has to deal with from their customers. Mainly there has been an increase in bargaining power of retailers in Russia, both due to retailers become larger, with national and regional chains dominating, and fewer due to the same fact. This forces the supplier industry, especially branded goods manufacturers, to develop in an environment where they are losing bargaining power to their customers. While intermediaries and distribution providers represents the immediate outlet for the products produced by the supplier industry, the retail segment of the FMCG industry represents the more traditional customer, and as such have large 79

influence and power in the industry. As such the customer bargaining power has significantly increased following the greater concentration and size of the retailers. Factors detracting from the bargaining power of the retailers are the fact that the easiness of doing business with fewer customers and the perceived fact that the suppliers yet retain some degree of power in the relationship (Peeters 2008). This is however expected to change within few years as retail consolidation leads to an increase in their power as customers. It is highly unlikely that retailers and manufacturers in the FMCG industry in Russia will integrate both due to size and very different core competencies among other factors, but manufacturers will likely be tempted to integrate downstream in order to control the faltering distribution companies. This can give them added bargaining power as they acquire more of the supply chain and increase their size. Threat of substitute products. The Russian market for FMCGs exhibits no signs of being any different from other emerging markets with regards to substitute products, and factors mentioned in the general section for FMCG apply to a large degree. This means that the industry mostly faces the danger of substitute products from itself, and while this is not a threat for the industry, the individual companies in the FMCG industry faces significant pressure as many of the products and services can be interchangeable, leading to strong degree of diversification with regards to brands as well as competition on price. In Russia, where the economy has continued its growth compared to most other non-emerging markets, and in later years has expanded the middle class considerably, this results in a rising demand for premium brands and quality products instead of low-cost products. Consequently a move from low-cost goods to more individualized products have been taking place, reducing the threat from directly substitutable products. 11.3.2 The Russian beer market Russia has experienced growth of its economy and rising standards of living as well as higher incomes for much of its population in recent years. This has given rise to a very rapid expansion of its beer market, as consumers realise they can afford to be more selective with what they buy and as the Russian culture are rather conducive to alcohol consumption in general (www.beveragedaily.com 2004), even though vodka consumption is still larger than beer consumption. The Russian consumption of beer has 80

risen fast and steady and has risen from 33.5 litres per capita in 2000, to 60 litres per capita in 2005 and is expected to rise to 85 litres per capita in 2010 (AB InBev 2009). Combined with a big population and thereby consumer base and the fact that Russia is the third largest beer market in the world (www.carlsberggroup.com) Russia is an extremely attractive market to operate on for breweries that are able to compete effectively. Premiumisation is growing in the Russian market and the Russian consumers as a whole has become more discriminating as to which type and brand of beer they are drinking. The trend is towards consuming higher quality products and the premium segment of the beer industry has experienced growth recently. A major reason for this shift towards premium brands is the rising income and purchasing power available to more and more Russian household. This has caused a shift in the demand as consumers can better afford to purchase more expensive types of beer, which often are either imported beer or domestically brewed premium brands. Strong growth in the retail sector in the FMCG industry has eased the access of major breweries to remote markets and customers as the supermarket and retail chains offer a wide selection of beers and alcoholic beverages in general. Combined with this growing ease of access to the products of major breweries in Russia as well as imported beer brands, the customers have experienced beer of higher quality as well as a broader selection of choices as compared to the often rather limited selection offered by single store retailers or local groceries. These factors have made the premium segment of the Russian beer market both lucrative and expanding, and several major breweries have taken advantage of this fact to fulfil consumer demands. Amongst the major players in the Russian market are Carlsberg and AB InBev, respectively the worlds fourth largest and largest producers of beer. Carlsberg has through its acquisition of the Scottish & Newcastle brewery in cooperation with Heineken, gained control of the Russian company Baltika Breweries, which currently has a market share of more than 38% and is by far the largest company on the Russian beer market (www.carlsberggroup.com). AB Inbev has through its Russian brewery, SUN InBev, a market share of around 19% but are as of 2009 considering selling their Russian assets, in order to free up cash (corporate financing week 2009) and because they are not interested in operating in a market where they are not the market leader. Other major international breweries such 81

as Heineken are also present on the market, although in a lesser degree than the two market leaders. 11.3.3 Carlsberg on the Russian market Carlsberg owns their Russian business through the company Baltic Beverages Holding (BBH). Carlsberg acquired their initial 50% share in BBH in 2001 through their merger with the Norwegian FMCG group Orkla, with whom they split in 2004 gaining full control of Orklas holdings in the brewing industry (Kronenberg 2007). As previously mentioned Carlsberg gained full ownership of BBH through the joint acquisition of Scottish & Newcastle in 2008 as they owned the remaining 50%. The BBH JV included Baltika Breweries, a Russian brewer established in 1990 and privatised in a joint shareholder company in 1992 (Baltika 2009). Developing rapidly, Baltika soon became the leading company on the Russian market, and was since its founding envisioned as specializing mainly in high quality products and beer comparable to other top European brands. In 2006 the brewery merged with three other breweries; Vena, Pikra and Yarpivo, who were themselves part of the BBH, before finally in April 2008 becoming fully owned by Carlsberg. The beers brewed by Baltika is by Carlsberg described as the only national beer brand in Russia, and the large market share enjoyed by the company certainly seems to underline this statement (Carlsberg annual report 2008). Baltika is today the biggest European beer brand measured by sales volume as well as Russias biggest FMCG manufacturer (Baltika 2009). Through Baltika, Carlsberg includes beers from all four beer segments in its production and marketing, the four being discount, mainstream, premium and super premium. This has led to the company being able to profit by the growth of the entire market, as opposed to only some of the segments as its competitors have. Mainly it is the premium segment that is growing rapidly, and it is also in this segment that Carlsberg chooses to focus most of their efforts in order to develop its market share through both volume and value growth. One of the tools Carlsberg utilizes in their efforts to increase their market leadership is the rollout of their excellence program in Russia, including best-practise programs from their North- and Western-European markets (Carlsberg annual report 2008). This rollout is being done in conjunction with a strengthening and development of existing and new markets in the region.

82

As of 2009 Carlsberg has 12,266 employees in Russia, making the Russian market by far the largest part of Carlsberg group in terms of employees as well as the second largest in number of breweries. Although China has 19 breweries as compared to Russias 12, the Chinese produces and sells smaller volumes. As well as breweries Carlsberg also owns two malt houses in Russia, which makes the access to malt much easier and more controllable for the company, which is important since large quantities is required for beer production, and obtaining it on the market could well be both more expensive and expose the company to greater risk. The Russian market is the most important of Carlsbergs new markets and is responsible for the majority of Carlsberg profits in the last year, as well as most of the companys growth (Carlsberg annual report 2008). 11.3.4 OLI framework Ownership. As previously mentioned, Carlsbergs prime assets with regards to the companys core competencies are without a doubt its significant experience with both producing and marketing beer. This is specifically important in the context that Carlsberg can export their knowledge to other markets and thereby gain advantages on new markets that local breweries cannot easily duplicate. In the Russian market Carlsberg has evolved into the dominate market leader with regards to market share as Baltika Breweries holds a dominant position with more than twice the size of its closest competitors. Baltika has a wide product range and competes in all the segments of the beer market, and this is mostly done by competing on quality and the brand names of both their own and licensed beers. With the acquisition of Baltika Carlsberg also obtained what they themselves call Russias only national beer. This gives another advantage if they are able to brand their products as such, because this will by definition be very hard, if not impossible for other companies to copy. Baltika will thus have a lasting competitive advantage as long as their beers are perceived as Russian by the Russian consumers. Another of the ownership advantages for Carlsberg in the Russian market are in the fact that as the company follows a strategy of market leadership and expansion, the brewery continuously takes over or joins with other companies on the market as well as invests in new facilities and technologies. Most recently the breweries Vena, Pikra and Yarpivo became part of Baltika breweries in 2006-07. This fact gives Carlsberg an advantage in 83

most markets, specifically compared to incumbent companies, as Carlsberg brings with it a large sum of knowledge as well as experience with mergers and acquisitions in many markets, and the managers and executives the company has in Russia can draw on this knowledge when expanding. In Russia the specific challenges are more unique than in many other emerging or smaller markets, in the regard that Baltika, and through them Carlsberg, has such a dominant position on the market. This makes the market to some extend more like Carlsbergs more mature markets, in that they are able and willing to buy smaller companies and more extensively acquire support facilities such as logistics capabilities and malt houses, simply because the operation on the Russian market is so large. This also gives Carlsberg an advantage over most, if not all the local breweries, as they have limited or no possibility to copy or emulate Carlsberg s experience on other markets or its ability to finance and spend money based on its size. While this is an advantage over local companies, the advantage doesnt translate into a specific Carlsberg asset with regards to the other large breweries present in the Russian market, such as AB InBev through its company SUN InBev, because they have similar capabilities. Generally not trying to compete on its prices or follow a low cost strategy, Carlsberg mainly competes on quality and brand name. In Russia, Carlsberg does not rely on their internationally recognized brand names such as Tuborg and Carlsberg. As mentioned earlier, Carlsberg has move away from the strategy of promoting its own main brands to a more locally targeted brand strategy in a number of markets. In Russia, they focus on Baltika beers in most segments instead. Even though the local brands make up the majority of the sales in Russia for Carlsberg, the licensing segment are increasing rapidly as for example the sales of Tuborg increased by 43% last year compared to the year before. In Russia, Carlsberg has acquired a large part of the market very quickly, even considering the takeover of Baltika gave it a large market share as it entered the market and this gives Carlsberg economies of scale as well as the ability to realise synergies in their new breweries. The market leadership enjoyed by Baltika in the Russian market are important in the regard that it forces competitors that generally seeks to be the biggest company on their markets, to consider leaving the market since it becomes more

84

and more obvious that Baltika will continue to hold the largest market share in the near future. Location attractiveness. The location of the production facility is important, that for Carlsberg to be able to justify producing in Russia, the benefits of locating the facilities in Russia must outweigh the cost associated with foreign production. Additionally the benefits must be great enough that it is not more profitable to simply produce in already existing facilities or new domestically located facilities and then export the products to Russia. As is the case in most emerging markets, the cost of labour in Russia is lower than in more mature economies, making the attractiveness of moving production facilities to the country higher. However, while comparable to average labour cost in most of Eastern Europe, the labour cost in Russia are higher than can be found in other parts of the world such as India and China. This means that MNEs from more mature markets are likely to have higher cost of labour in their home market compared to in Russia but they should also be able to take advantage of lower cost labour in markets less develop than the Russian. However, Russia becomes more attractive with regard to labour when the availability of a well educated workforce is taken into consideration. This is a factor which serves to distinguish the economy from other emerging economies and makes it attractive for a company like Carlsberg to produce in the country. Another important factor, speaking in favour of producing in Russia, is the fact that the geographical area of the country makes distribution and logistics in general, a significant cost. Russia covers more square kilometres than any other country in the world by a significant margin, and the sheer size makes placing production facilities in the country a necessity for companies producing some products. In the case of FMCG the high level of saturation desired by suppliers as well as the potentially perishable nature of the goods make distribution highly important. While exporting to the Russian market is possible, in most cases the distances makes locating production plants near the markets a less costly alternative. This makes the transportation a significant factor in deciding whether or not to export to a country or produce there. Carlsberg uses around 15% of its total costs on logistics and its latest excellence program focuses specifically on logistics. Because of its great importance for Carlsberg it serves to underline the significance of this factor in choosing whether or not to export to a country or produce 85

there. In addition, Russia is rich on natural resources and the ability to acquire the necessary inputs in close proximity to a plant or production facility makes the location advantage strong as is the case with Carlsberg. The required factor inputs such as adequate quality water, barley and hobs are all available locally in Russia, more so since Carlsberg owns its own two malt houses there, and this serves to make the disadvantage concerning locating production in the country small with regards to this. For Carlsberg, market access seems the prime motivator with regards to Russia and the lower production costs are of less importance for the company. Considering all location aspects however, it is clear that the only feasible route to a substantial market share in the Russian market is through local production. Internalization. As earlier established, Carlsbergs core competencies are marketing and producing beer, as well as the extensive experience the company has gained with entering and developing new markets. This gives Carlsberg an advantage in the Russian market, and this advantage would be diluted and ultimately threatened if Carlsberg did not internalize BBH as they have done. While the advantages of having strategic partners in new markets can be and has been significant and necessary in Russia, some of Carlsbergs advantages would be diminished by sharing them with partners over whom they have no control. Looking back, producing on license in Russia in cooperation with an incumbent is unlikely to have been a feasible solution for Carlsberg. Carlsberg produces high quality beer using standards and practices developed over years on many markets. The local Russian breweries, with the exception of Baltika, have in no way been distinguished with regards to quality and high standards, and while Carlsberg could transfer the required know-how and technology to a partner in order to achieve a higher quality of beer, the less control Carlsberg have over their partner the less incentive the partner would have to maintain the Carlsberg bra nd. This could very well harm Carlsbergs reputation and brand, not only on the Russian market, but also on other markets. Alliances often reflects the foreign companies attempt and desire to maintain as strong a degree of control over their assets as possible, especially when the internalization advantage is high which is definitely the case for Carlsberg. Sometimes legislative or government interference with regards to foreign owned companies on its markets are what keep entrants from owning companies in the country. In Russia this has some 86

merit, but while the legislative aspect seems difficult to understand, as well as often changing, thus making entry into the market difficult, the Russian government have generally allowed foreign companies to acquire ownership of domestic firms. Additionally, meticulous planning is necessary for JVs (US Commercial Service 2009) in Russia, and in most cases retaining managerial control is preferable for foreign companies. Carlsberg has complete ownership of its interests in Russia through BBH making their legal status better as compared to an alliance or JV with a Russian partner where minority interests usually suffers in Russian courts. The cost associated with monitoring a licensing agreement as well as the difficulty in setting up such a venture seems disproportionate to the benefits given the relatively small size of the premium segment the Carlsberg brand would sell in, as well as the above mentioned factors involving quality control and management.

12 Discussion and findings

With regards to Carlsberg as an example of a FMCG company, the fact that it operates in the beer industry makes certain facts about the company and the way it does business and enters markets different than other segments of the FMCG industry. Specifically, the beer industry is a very brand conscious and dependent industry, and often the need for local partners and brands are greater than in other industries. Thus, foreign companies and their brands do not necessarily enjoy the competitive advantage as could have been expected based on their superior knowledge and technology. In relation to this and as previously discussed, the fact that technology and knowledge is not as easily distributable in the beer industry as compared to other FMCG sub-industries should favour green field entry ahead of other entry modes in the beer industry. With the beer industrys brand consciousness in mind however, the advantages of green field entry may be completely offset by the inability to take advantage of strong local brands with this entry mode. As can be seen from the thesis, the choice of entry strategy facing a company in emerging markets varies significantly between different locations. Following specific set strategies often engenders difficulties, and the need for adapting in individual markets remains of high significance to achieve success for any company. With regards to Carlsberg this has been specifically acknowledged by Jrgen Buhl Rasmussen, CEO 87

of Carlsberg, at the companys recent annual general meeting as he stressed the importance of adapting strategies to individual markets (Carlsberg annual general meeting 2009). In the FMCG industry specifically, the difficulties in emerging markets, markets often characterised by a lacking infrastructure and general lack of development, makes the need for specific entry strategies even more important. This makes the distribution and logistics capabilities of the companies very significant, especially when the markets for the produced goods are particularly large as it is the case with the economies analysed in this thesis. As can be seen from the case of Carlsberg on all the markets that are analysed in the thesis, the design of their entry strategy are tailored specifically to the individual markets, especially in the early starting phase, but ultimately aims at acquiring total control over the companies interests and facilities in the given market. Carlsbergs objective of acquiring dominant positions in foreign markets and full control of foreign subsidiaries is especially evident in Russia from the enormous investment made in order to reach full ownership and market leadership there. MNEs within the FMCG industry and brewers in particular need to achieve economies of scale vis--vis competitors in order to be competitive on foreign markets. In the FMCG industry, initial entry as well as the subsequent business development by MNEs in foreign markets is mostly made with the intention of eventually obtaining a position among the dominant players in the market. This is due to the relative importance of economies of scale within the FMCG industry. Should the attempt to become among the dominant players fail, MNEs will often choose to leave the market altogether. This is also the reasoning behind Carlsbergs objective to become first or second in any market. If this is not achievable, they will in many cases withdraw from the market and only maintain a presence with products produced on license (www.carlsberggroup.com 2009). The differences in the characteristics of markets of course play a part as to the size necessary to operate efficiently. The Russian market with its relatively more developed infrastructure makes the necessary size of companies operating in it greater than on the more inaccessible Indian and western Chinese markets. In these markets cheaper factor costs and the lesser developed nature of the markets, makes the size, necessary for a firm to be competitive, comparatively smaller. The scale of production facilities needed 88

in order to be competitive also varies significantly between markets, and between regions within market, and is influenced by the market conditions as well as the competitors present. The case of Carlsberg in the Chinese market demonstrates that the presence of bigger, entrenched competitors can force a large operation to close in the east, while production facilities of smaller size can comfortably exist in less developed inland regions where the conditions are different in terms of consumers and competition. The most important factor in this case is the poorly developed infrastructure and the strength of local brands. Carlsberg generally follows a multi-tiered strategy on the three markets, which means they seek to be present in all the segments on the beer market. Generally this is achieved with local brands in the lower priced segments and licensed as well as local premium brands covering the more lucrative premium segment on the markets. While focussing on the entire market in this way gives a good platform for obtaining market leadership, something Carlsberg states is their goal on all their markets, it also requires greater commitment and level of resources from the company compared with single-tier. The way Carlsberg enters markets with the intention of being among the dominant players makes this focus on every segment of the market seem reasonable when coupled with the intention of eventually obtaining full control over their assets in a given market. The Russian market is the best example of this with Carlsbergs full ownership of Baltika Breweries and their continuous acquisitions in the market. Carlsberg has full control over its operation in the country and both India and China show signs that Carlsberg aims to obtain full control of their partners and JVs. Carlsbergs strategy and actions subsequent to their entry in the case markets to a large extent seem less like planning than an emergent process (Mintzberg & Lampel 1999). This especially holds true on the Chinese market where Carlsberg showed a willingness to radically adapt their initial strategy on the market as knowledge of the market increased in order to pursue their goal of becoming one of the market leaders. In the Indian market, the overall plan of entering through green field facilities were supplemented by both an acquisition and a JV as the opportunities presented themselves. Carlsbergs operations on the Chinese and Indian markets are thus still in the process of adapting to the individual conditions on the two markets as well as accumulating market 89

knowledge, and have as of yet not achieved the size or scope to be expected from looking at Carlsbergs other markets. This is mainly due to the comparatively undeveloped markets for beer in the two nations as well as a smaller initial investment compared to the massive investment made in the Russian market with the takeover of Scottish & Newcastle. In this regard, Carlsberg to some extent follows the Scandinavian stages model (Buckley & Casson 1998 p. 541), which proposes a progressive deepening of the companys commitment levels as it enters new markets. The amount invested in internalizing the Russian business far outweighs the amount used on any other market and it can thus hardly be considered progressive deepening. The circumstances around Carlsbergs entry into the Russian market is however very different than the entries on the Chinese and Indian markets as their initial 50% share in BBH came from their merger with Orkla. This necessitated special action in order to become sole owner of the venture. The Russian entry thus seems more like an exception to the gradually increasing level of commitment exhibited in the other markets. Besides the three important factors inherent in the OLI framework there are certain similar features displayed in the way markets are entered in the FMCG industry and by Carlsberg specifically. Early market entry on emerging markets appears to be important with regards to attaining market share and brand awareness thereby enabling companies to achieve economies of scale as well as influence on the market. Especially on the Indian, but to a smaller degree also on the Chinese market, the early entrant reaps benefits compared to latecomers (Johnson & Tellis 2007). This is somewhat offset by the difficulties experienced by being the first or earliest entrant and having to blaze the way with government and customers in order to develop a market and avoid unforeseen difficulties in a new market. Later entrants can capitalize on the more developed market in India specifically with regards to beer, as the earlier entrant SABMiller as well as Indian brewer United Breweries have spend years accustoming customers to drinking beer instead of substitute products. This is also the case in other emerging markets where early entry often means benefits as well as drawbacks not experienced by firms entering later on. The opportunity of an early entry in a new market is only available in a limited time period, that is, before one or more competitors build a strong presence in the country. In Russia for instance, the window of opportunity came with the dissolution of the Soviet Union in the early 1990s as the country opened up to foreign investment. Carlsbergs involvement in the Russian market and BBH did not commence until their 90

merger with Orkla in 2001 however, so Carlsberg can thus not be considered an early entrant. Orkla on the other hand was. In China however, Carlsberg was among the early entrants in the mid-1990s as they invested in the brewery in Huizhou in 1995. As they shared their early entry status with a large number of competitors, they nevertheless reaped no benefits from it. Their re-entry in Western China was much more successful on the other hand as they faced very limited competition from foreign competitors in this part of the country. In India, Carlsberg did not enter the market until 2006 and are therefore facing a well-established incumbent as well as the early entrant SABMiller. Given the highly limited development of the Indian beer market however, Carlsberg should still to some degree be considered an early entrant. Based on Carlsbergs experiences, we find that they have benefitted from being an early entrant in Western China but also in the Indian market where they have gained a considerable market share in a limited time period. On the eastern Chinese market on the other hand, the large number of competitors who entered simultaneously with Carlsberg eliminated any chance of making a profit. In Russia, market leadership has only been achieved through enormous investment which illustrates the cost of a successful late entry. Generally the market entries made by Carlsberg on the three markets under analysis seem to conform to what would be expected by the OLI framework, although the broad number of options available when entering a foreign emerging market makes some adherence to theory probable. While the company is not necessarily thinking about it in specific terms, Carlsberg nonetheless seems to take into consideration the various aspects covered by the OLI framework when deciding how, when and where to enter markets. We have found that Carlsberg, and large MNEs within the FMCG industry in general, enjoy ownership advantages in most emerging markets and this is also the case in the Russian, Chinese and Indian markets. Producing locally would also seem to be an advantage as factors such as low labour costs, tax and tariff advantages as well as significant advantages in distribution would outweigh most disadvantages in this regard. Consequently, Carlsberg and other large MNEs should be competitive in the case markets and should choose to produce locally. Regarding the choice between FDI or licensing, the initial expectation of market entries would be by means of green field 91

facilities or acquisition so as to achieve full control over operations and fully realise the ownership advantages of MNEs compared with incumbents. In order to avoid problems with governments and legislation, ease access to the local markets as well as minimizing difficulties due to cultural difficulties, some sort of partnership with local companies would in many cases be advantageous. This would also serve to decrease the amount of capital needed by the MNE. In Carlsbergs case, the fact is that the company has chosen to enter the markets with localized production facilities, in all cases in cooperation with or through acquisition of local companies, and in this way adheres nicely to what would be expected. The amount of control gained by this entry mode is not as high as would be preferable in order to take advantage of ownership advantages, but considering that the commitment level should reflect the development of the local market conditions, this can be seen as an attempt to commit in a way that will permit a gradual raise of the level of investment if the market should prove profitable. The three markets analysed in this thesis demonstrate, that the differences in factors such as market development, infrastructure and openness to foreign investment, at least to some degree influence the way MNEs enter emerging markets. With regard to the way Carlsberg enters emerging markets, the characteristics of the individual markets seems to be as determining a factor as following a set plan for entering markets. In our cases, this has been especially evident in the Chinese and Indian markets. Entry strategies which rely on partners and JVs, while advantageous in the context of the individual markets, also serves to diminish the ability to transfer knowledge and technology for MNEs in general. This of course this also applies to Carlsberg though to a lesser degree than could be suspected. This is due to the fact that Carlsberg generally strives to eventually obtain full control of foreign subsidiaries, thus lessening the chance of losing company specific advantages. This means that even without controlling the local partner at the point of entry, they will be able to take full advantage of the company specific advantages in the foreign market by later acquiring this partner. The ability to enter markets with relatively low commitment and then gradually expanding it like the Nordic/Scandinavian model suggests is perhaps missing to some degree from the OLI framework. In this way MNEs are to some degree able to have ones cake and eat it too by gaining the benefits of a foreign partner initially and 92

then buying out the partner later on in order to gain the benefits of internalizing the subsidiary. As the MNE in most cases will have ownership advantages superior to that of the partners, the joint venture will be worth more to the MNE than to the foreign partner. This should make it possible for the MNE to acquire the JV at a price lower than the value it represents, as long as the partner acts rationally. Mainly ownership advantages coming from the entrant itself are the same in all three markets. The same advantages are relevant in all markets because they are all emerging markets and thus have somewhat similar characteristics. The company specific advantages utilized by Carlsberg, and by any other MNEs seeking to enter an emergent market, are of course static in the short term. The amount of emphasis put upon them is all that changes, as different markets demand different strengths. While the transfer of knowledge and technology is easier on the Russian market, where Carlsberg owns and fully controls Baltika, it is also to some extend of less importance there since the facilities in Russia closer resembles the technology levels found in Carlsbergs more mature markets. Conversely, the much less technologically developed facilities in Western China could benefit much more from a technology and knowledge transfer than Russian facilities. But in China, Carlsberg runs the risk of losing control of some of their ownership-specific advantages since they do not fully control their partners in the market. For instance, they run the risk of leaks when transferring intangible assets such as production and marketing practices as well as know-how to the local partners. Transferring state of the art technology is nevertheless demanded by the Chinese government, but this in general only requires the transfer of production equipment not necessarily intangible assets. In emerging markets where there a no such rules on technology transfer however, it must enter into considerations that if high quality products are not of significant importance to consumers when considering which beer or other product to buy, modern production techniques and technology may simply not be necessary in order to compete effectively. For breweries, this may especially hold true in China. Concerning the framework laid out by Buckley & Casson (1998) in regards to entry modes and strategies, the many assumptions in the model makes its application difficult in the markets analysed. Mainly the theory seems to be suited for the Chinese market where the change of strategy eventually led to a move from eastern to western China. 93

This almost constituted a whole new market entry in China since the predominantly rural inland market is significantly different from the much more densely populated eastern provinces. Buckley & Cassons model is mostly applicable in the western Chinese market because some of the most important factors are similar. This market can therefore to some degree be seen as what Gerring (2007 pp. 89-90) terms a crucial case where Carlsbergs entry is most-likely to correspond with the recommendations of the model. First of all, the model assumes that the entrant faces a monopolist in the target market and this is in many instances the case in the provinces in Western China where the local brewery in many cases enjoy a monopoly-like status. At the same time, like in the model, Carlsberg had little to no experience in the inner Chinese market and thus needed to acquire market knowledge in the most appropriate way (Buckley & Casson 1998 p. 544). Given these convergences, the western Chinese market thus roughly resembles the model and it should thus be fair to compare the suggestions of the model with Carlsbergs actual market entry. As discussed in the segment on the Buckley & Casson model, licensing or green field production combined with acquired or franchised distribution are the dominant strategies. In Western China however, Carlsberg has used a number of different entry modes ranging from purchasing minority and majority equity positions in local breweries to investing in green field facilities with local partners. The common denominator for these is that every entry in one way or the other involved a local partner. Thus Carlsbergs entry on the western Chinese market does not follow the recommendation of the model. The likely reason for this is first of all that the model ignores the role of the government in China (Buckey & Casson 1998 p. 556), which is very direct in many cases as a significant part of the breweries in Western China are fully or partly state-owned enterprises. This can in many cases have prevented Carlsberg from fully acquiring such breweries as the government is likely to prefer the control retained in JVs. At the same time, the considerable cultural distance between Denmark and China as well as the importance of guanxi in the Chinese market is likely to decrease the attractiveness of green field entries in favour of JVs.

94

13 Conclusion
In the previous chapters we have given an overview of the entry strategy pursued by Carlsberg as an example of a MNE entering emerging markets. The context specific challenges encountered and ways these where met and overcome, gives an understanding of the way entry strategies are created in a real world context compared to the expected strategies from a theoretical perspective. The relevance of the thesis exists in discovering where the MNEs utilize the strategy prescribed by literature and to which degree they create, design and adapt their own when confronted with emerging markets. Mainly, the findings were that the strategy used when entering emerging markets are dependent upon the relevant factors in the specific market, and that even though the literature and theories recommend one entry mode, the actual way entry is made is often different. The adaptation and design of a unique strategy becomes much more important than following a pre-described or even previously tested mode of entry when determining the most effective way to successfully enter a new emerging market. In the case of Carlsberg, as an example of a FMCG company entering three diverse emerging markets, we found that even though the expected strategy for entry was clear, the conditions and market-specific factors unique to the individual markets made choice of entry strategy diverge from what would be expected. On the basis of predefined entry strategies not being utilized in emerging markets, the thesis further finds that the eclectic paradigm, and especially Buckley & Cassons framework, are too rigid and focussed on discrete factors to adequately describe what FMCG companies choose as entry strategies in emerging markets. The thesis raises a number of questions that can become the focus of further analysis and research. Mainly considering that the data and sources used primarily concern the three markets as well as Carlsberg, a more quantitative approach to the subject covering more companies or markets would add to the understanding of the theory concerning entry modes and strategy in emerging markets. The challenges faced are also indicative of as well the beer industry as the conditions of the chosen markets. Even though the reasons and justifications for using the chosen markets in the thesis are relevant, the challenges faced on other markets would by definition be different given the above points, and thereby give additional insights into the problems and challenges faced by MNEs and their chosen entry strategies. 95

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