CESA International Business 2.1

Sources of Trade Regulation GATT and WTO Set up to deal with tariffs and non tariff barriers to trade Tokyo Round in mid 1970s Tariff barriers reduced significantly Partial success with non-tariff barrier reduction mainly due to complexity and sensitivity Uruguay Round – 1986-1993 Challenging problems addressed – technical barriers, trade in services, intellectual property rights, trade in technology etc. More member countries – 117 Problems of developing countries addressed WTO formed – meets every 2 years McGraw-Hill McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved. Slide 12-2 INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig

Trade Agreements and Associations U.S. – Canada Free Trade Agreement Formed January 1988 – world’s largest free trade area Dispute resolution mechanisms established NAFTA formed with Mexican representatives Association of Southeast Asian Nations ASEAN formed August 1967 with 5 member states, presently has 10 members Regarded as a loose economic cooperation channel but expected to change, FTA with China expected Move towards ASEAN FTA McGraw-Hill McGraw-Hill © 2003 TheMcGraw-Hill Companies, Inc. All rights reserved. Beamish, Morrison, Inkpen and Rosenzweig

Trade Agreements and Associations (contd..) Asia-Pacific Economic Corporation APEC established 1989, presently has 21 members Primary vehicle for open trade and economic cooperation Agreement to develop free trade yet to be reached ANDEAN and MERCOSUR Composed of South American nations with an objective of setting a common external tariff European Union Slow process of European integration Founded on the principle of supranationality McGraw-Hill McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved. Slide 12-4 INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig

Opportunities and Threats Opportunities and Threats from Government Actions McGraw-Hill McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved. Slide 12-5 INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig Threats Government Actions Opportunities Increase costs Reduce ROI Competitive disadvantage Increased competition Co-opt  Regulation   Taxation   Expenditure   Privatization   Consultation  Control competition Competitive advantage Subsidies, grants, customer Level playing field Influence policy

Political Strategy Essential for a firm to form and implement political strategy Formulation Objectives Issues Stakeholders (allies, opponents, targets) Position/Case (“public interest”) Implementation Timing Techniques Direct (negotiate, litigate) Indirect (advocacy advertising, political contributions) Vehicles (e.g. coalition, Government Relations department, consultants) Style (e.g., confrontation or conciliation) McGraw-Hill Slide 12-6

1991 1994 1998 2003 2008 Negotiations Started NAFTA Signed Ratified I Schedule II Final

Beginnings • US-Canada auto pact 1965 • Canada-USA FTA 1989 First tariff cuts on January 1, 1989. Tariff cuts of different magnitude across sectors. • maquiladoras - employing 1/2 million in 1980s • US proponents of NAFTA - trade benefits - reduce immigration pressures - prosperity, stability, democracy for Mexico

NAFTA Provisions General features • elimination of trade barriers - in 10 years - 15 for special products (e.g. agriculture) • no common external tariff • restrictive rules of origin - goods must have “a substantial transformation” - e.g. 60% of autos must be locally made - e.g. textiles must be made from NAFTA yarn

Nafta Specific Features Investment • national treatment • dispute settlement by international tribunals • exempt – Canadian cultural industries Environment • Commission on Environment • fines or trade sanctions can be imposed Safety valve • pre-NAFTA measures allowed if import surge Transportation • no barriers eventually No permanent independence • NAFTA functions through meetings of country officials

Nafta Specific Features Open Previously-Protected Sectors of Economy Agriculture Energy Textiles Automotive Safeguards to deal with: Subsidies and Unfair practices Private Commercial & Agricultural Disputes NAFTA Implementation Concerns

Textile Shock of low-priced textile. Diversification More labor-intensive apparel production to Mexico and apparel imports from Mexico include: U.S. – Mexico relative exchange rates U.S. FDI flows to Mexico (explained by relative costs of capital, differential wages and incomes) Tariff rates levied by Mexico on U.S. exports

Textile US: Provides jobs for more than 1.5 million workers. (8% of domestic industrial workforce). The industry complex is the largest manufacturing employer in North Carolina, Pennsylvania, Alabama, Virginia, Tennessee, and California. Textile and apparel firms are often primary employers in rural areas. Major metropolitan areas include middle Atlantic States and California.

Textile Focus on non-price factors of competition (Abbott & Bredhal, 1994). Firm’s strategy (sourcing); Industry structure; Quality of products.

Textile The forces of globalization caused: Overcapacity of production; global financial crises; emerging trade agreements; changing price of cotton; cheap imports from Mexico.

Mexico United States Pre-NAFTA Maquilla Networks Textile Mills U.S. Manufacturer Retailer U.S. Broker Assembly Plants (U.S. & Mexican Owned) Subcontractors Full-package networks (orders) Assembly networks (cut parts) Key

OMJC Wrangler Mexico Aalfs Wrangler de Mexico Post- NAFTA Full-Package Networks Retailer JC Penney Marketer Manufacturer U.S. Lead Firms -Retailers -Marketers -Manufactuers Kentucky-Lajat Siete Leguas Libra Textile Mills Textile Mills Full-package networks (orders) Full-package Manufacturers Joint Ventures/ U.S. Subsidiaries The Gap Textile Mills United States Key Assembly networks (cut parts) Assembly Plants/ Subcontractors

Garment Workers in Los Angeles, by Race

Economic Integration Direct Investment Strategically Alliances/Joint Ventures Horizontal and Vertical Integration across borders Similar business practices Connection of production-marketing- procurement chains

Market 5729 Food and Beverage Retail Stores No including tiendas Sales increased 7% 2002 -2003 Floor Space increased 5.4% in 2002, 8.9% 2003 Top 4 retailers invested 233 million 2004 and 300 million 2005 Top 4 Wal-Mart, 9 percent; Soriana, 7 percent Comercial Mexicana, 4.9 percent; Gigante, 3.2 percent

Changes 1. Arrival of Foreign Retail Chains. Wal Mart, Sams, Carrefour, Auchan, HEB, Safeway. 2. Modernization of domestic supermarket chains.

Changes 5. Decline of average food shopping trips/week (11-12 in 1995 to 7.5 in 1999). 6. Increase in variety and convenience offered to Mexican consumers.

Changes 3. Four fold increase in number of self -service food retail chain stores (1998/1993). 4. Increase on consumers preference of supermarket format. (60% of Mexicans by 1999).

Changes 7. Decline in number and sales of traditional food retail outlets. 8. Aggressive expansion plans of main food retail chains for the next five years (10-15% square feet/year). 9. If pattern continues, in 10-15 years, Mexico would have the same square feet/ capita as the US.

Challenges 1. Regional Distribution Centers (private chains) 2. Less Government-build Wholesale (terminal) markets. 3. Increase in volume, quality and consistency requirements on suppliers. Contract pricing. 4. Shortages on adequate transportation, storage and refrigeration services. 5. Need of enforceable quality grades and standards system. 6. Increased demand for a more diverse, higher quality, value added food supply.

Changing Demand Mexico Quality/freshness Variety/Novelty Appropriate Packaging Convenience Safety Consumer services Reasonable prices US Ethic Food Greater variety Multilingual Packaging, Services and marketing Competitive advantage of modern supermarkets vs. traditional retail outlets

Changing Demand Mexico Short Supply: Milk powder, poultry, red meat, canned fruits, sugar, cereals and pet food cannot meet domestic demand (Source: Bancomext). Communication: Supplier, distributor and end-user: cited often by interviewees as one of the most important components to building a successful distribution network NOM Norms (Mexican Official Norms) US Sanitary Sanitary needs high, with significant change from state to state Supply: Fresh Fruit, vegetables (especially tomatoes) are high dollar and seasonal

Wal-Mart de México, SA de CV Supercenters (89), Supermarkets (48), Clubs (61), Warehouses (162) Wal-Mart, 62.4% 12,547 360 All major cities Direct, local distributors; importers Grupo Gigante, SA de CV Hypermarkets (61), Supermarkets (100), Clubs (3, closing 2/05), Warehouses (52), Gigante USA (8) Local 2,736 224 All major cities and California Direct, local distributors; importers Supermercados Internacionales HEB, SA de CV Hypermarkets (8), Supermarkets (12) US owned 801 20 Northern Mexico Direct, local distributors

03/23/11 Typical Mexico Produce Distribution System Producer Wholesale Market Public Markets Grocery Stores Street markets Supermarkets Distribution Centers Middlemen

03/23/11 International Distribution US Exporter US Exporter US Exporter

03/23/11 Typical US Produce Distribution System Packer/ Shipper Chain Distribution Center Supermarket Independent Wholesalers Terminal Markets

HEB 1997: San Antonio Company. First store opens in Monterrey, NL 1998: Second Store opens in Monterrey 1999: Five stores in Monterrey 2002: 18 stores open in 3 Mexican States 2004: 40 stores projected

HEB 2 Distribution Centers under implementation 30% of Mexican stores sales are IMPORTED Growing number of “store brands” H-E-B Hill Country Fare EconoMax “ Personal Expressions” Tierra Linda (Mexican products) 4% non perishable

HEB WalMart Hyper market 45,000 - 100,000 Almost a full line of merchandise and additional services. Super market 5000 – 45,000 Food items (perishables and dry goods) limited services, pharmacy. Mega market More than 100,000 Full line of merchandise and additional services such as a pharmacy. Hyper market 45,000 - 100,000 Almost a full line of merchandise and additional services.

HEB Highly advertised store brands (20% cheaper) Processing: bread, tortillas, sodas, ice cream, yogurt, milk etc. Starting new format “home stores” (Via Hogar) Texan HEB suppliers exporting indirectly

Walmart Joint Venture Strategy: Combined with Cifra. Concept Adaptation: First Wal Mart Supercenter in Mexico. Force Competition: Force Mexican Monopolize. Replicate US Logisitcs. Introduce Warehouse.

Walmart Initial Problems. Lack of leverage with Local Suppliers. Inefficient Distribution in Mexico. Merchandise: Ice Skates. Leaf Blowers. Fishing. Automated Information System: Auto reorder. Higher Prices.

03/23/11 April First Store Opens Cifra 563 Wal Mart Stores In Mexico

03/23/11 Wal Mart Mexico Sales Growth 6.1% 4.7% 4.8% % Net Profit/Sales 17% 15% 12% SALES GROWTH RATE 2002* 2001 2000 Year

Walmart Consolidación 1997 WalMex. Precio bajo Diario. 2do mas grande negocio (Volumen De Ventas). 3ro El patrón más grande. 485 minoristas, 285 restaurantes. 1997 Consolidation WalMex. Everyday Low Price. 2 nd Largest Company (Sales Volume). 3 rd Largest employer. 485 Retailers, 285 restaurants.

Gigante Horizontal and Vertical Integration across borders Market Niche: Mexican Nationals and Ancestry, Mexican Sympathetic. Product Transfer Adaptive Corporate Culture and Logistics.

Gigante 3 Billion USD Annual Sales. 475 Stores in 31 States. 20 Stores in US. Product Promotions. Adaptive Corporate Culture and Logistics.

Gigante 1994: Strategic Alliance with Radio Shack and Office Depot. 1997: Strategic Alliance with Carrefour. 1999: Stores in San Diego. 2002: Anti Gigante Legislation eliminated in Orange. 2003 Alliance with Comercial Mexico and Soriana.

Gigante Technology - Cultural Transfer. Logistics. Buying. Marketing. Cleanliness.

Gigante Improve Logistics Originally “Seat of the pants” ordering Inefficiency. Large Margins. Reports on a Weekly Basis. Modern Logistics 9 Central Distribution Centers. 2000 introduced Data Warehouse. Went from 3 or 4 days to solve query to 15 minutes. Automatic POS transfer. Vendor Data.

Gigante Collective Buying: Sinergia. Limitend Liability Company. Target: Bodega Gigante: Blue Collar. Super G: High End. Gigante. Promotion: Redecorating Stores: Beatles month. Classic songs played. Sold Beatles CD's, movies and T-shirts.

Gigante US Target: Latin. Latin Interested. Brand: Gigante. Superprecio. Product: Bimbo. Ariel Detergent. Tampico Juice. Jaritos Soda. Flavored Tortillas. Marinela Bread. Chilis (Variety). Meats. Larger Produce Section.

Gigante US Buyer Behavior: US Consumer 2.2 visits a week. US Latin Consumer 4.4 visits a week. Latin’s spend 3 rd more of income on food. Driving. Price: For Mexican consumers. 15% below average. Promotion: 70% name recognition among latinos. Spanish Language. Spanish Adds. Mexican Music.

Gigane US Opposition: Union: Hire Spanish Speakers. United Food & Commercial Workers Union. Clerks make 10.79 hr. Union 17.59 hr. Residents: Anaheim Planning Commission. Liquor Laws. Vendors: Personal Guarantees.

CESA International Business 2.1

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