When a market becomes saturated, it becomes more difficult to sell new items; there is a limit to replacement sales, and even adding 'bells and whistles' has limited appeal. In addition, in the cellular phone market, because of both technology improvements and manufacturing cost decline, the margin of profit on the innovations -- the bells and whistles -- declines rapidly as well. An example of this is the picture phone: when first introduce just a couple of years ago, a low consumer price was about $200; now they are sold as 'twofers' with prices for a pair as low as $40 or so.
The cellular phone market in the United States is mature, perhaps even on the verge of decline. So it makes sense to look for profitable markets elsewhere. Chile is an appropriate choice.
Beginning to sell our ABC Cellular phones and service in Chile will offer several benefits. First, because of the method by which we are entering the market in Chile, our labor costs in this country will decline in the production units, and probably remain flat in sales units because so much of the expense is underwritten by the sales themselves.
Economies of production will reap significant benefits. Over the past ten years, the cheap labor, lenient government regulations and minimized costs of outsourcing produced nine percent cost savings and 15% increases in capacity for manufacturers (Urso 2005, unpaged) who went international. We would expect similar results.
In addition, the expanded market opportunities, may make it possible to us to develop as a market leader in a significant portion of Latin America, a position we cannot hope to reach, as a midsize company, in the mature and highly fragmented United States market.
Methods of going international
There are five methods through which companies can initiate international business. They are:
1. "Marketing Abroad Directly
2. "Cooperative Contractual Arrangements
3. "Building and Buying Overseas Operations
4. "Strategic Alliances Without Equity Investment
5. "Strategic Alliances with Equity Investment" (James and Weidenbaum, 1993, 16).
Following are the pros and cons, in brief, of each method.
Marketing abroad directly
This method is especially workable for small and mid-size companies facing competition in their domestic markets, certainly true for us. This method saves on the financial resources needed for full-scale global business operations. Within this major category, however, there are two methods: exporting and setting up turnkey operations, the latter involving construction of facilities and so on (James and Weidenbaum 1993, 16). Exporting is attractive because the investment in facilities and even personnel is much less substantial than in the case of turnkey operations. However, tariffs would apply, affecting the cost basis of the goods and the ultimate profitability. Setting up a turnkey operation would avoid the tariffs, in most cases, but would be initially costly as well as contributing ongoing costs in terms of personnel, compliance and so on. On the other hand, it would offer opportunities in repatriating, or not repatriating, profits.
Cooperative contractual arrangements
In this form of doing business, a domestic firm can gain access to global markets "without making the large financial or technical investments often required to establish exporting links or wholly owned subsidiaries located on foreign soil. Instead of producing products or services, either domestically or abroad for overseas sales, firms contract the right to produce directly to foreigners" (James and Weidenbaum 1993, 28). The advantage is the low-cost market entry; the disadvantage is loss of control and the necessity of sharing the profits, not to mention building relationships that will be workable over time.
Building and/or buying overseas operations
This can offer great benefits in terms of currency management, and it offers another investment for the parent company, if the overseas operations are wholly owned subsidiaries, as they often are. Moreover, many nations offer assistance to a company that wishes to build facilities in terms of grants and other valuable help. On the other hand, the host country can place restrictions on the extent of investment allowed, and it can also apply its own rules and regulations, which may be difficult for a foreign country to accept and comply with (James and Weidenbaum 1993, 48). However, because of the financial strength of Chile, and its recent political stability, as well as its market forecast (see below for more information on all these factors), this is the method of choice.
Strategic alliances without equity investment
"Strategic alliances are cooperative, flexible arrangements, born out of the mutual needs of firms to share the risks of an often uncertain marketplace by jointly pursuing a common objective" (James and Weidenbaum 1993, 61). Those are the advantages: The disadvantages are the possible loss of technology to a company that may later become a rival (James and Weidenbaum 1993, 62) and the need to build and maintain a complex relationship.
Strategic alliances with equity investment
This type of alliance has an advantage over the 'without equity' type in that each participating firm "has in invested equity stake in the partnership" and thus might be more willing to extend itself more in order to make it work (James and Weidenbaum 1993, 83).
Risks of going international
Hymer proposed that a company must own some unique advantage to offset the added costs of going overseas (Kogut 1998, 152+); since cellular phones have become a commodity, that is a risk for us. Indeed, it is the major risk for us, although there are also risks associated with the global perception of the United States as a bully. In addition, capital will be at significant risk because of the necessity of building a facility in a nation with a history of hostile and unstable governments (CIA World Factbook 2005). It pays to note that hostile governments have imperiled U.S. investment in other places, notably in some of the ASEAN nations (Howell 1997, 35); it is not inconceivable that GATT nations might act similarly. These risks are likely to far outweigh the competitive risks because Chile, unlike the United States, is still relatively immature market for cellular phones.
The case for going to Chile
Despite its historically 'rough and tumble' political situation, Chile "has a market-oriented economy characterized by a high level of foreign trade. During the early 1990s, Chile's reputation as a role model for economic reform was strengthened when the democratic government of Patricio Aylwin -- which took over from the military in 1990 -- deepened the economic reform initiated by the military government" (CIA World Factbook). In fact, Chile continued to grow its economy despite a severe drought that exacerbated a recession already underway, maintaining a reputation for "strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America" (CIA World Factbook).
In addition, its telephone usage is attractive. Its telephone system is modern, with 3.467 land lines in use in 2002, and 6,445,700 cellular phones in 2002. The nation has "extensive microwave radio relay facilities" (CIA World Factbook), making it possible to enter the market without major investment in infrastructure; fee-based usage seems obvious.
Soong noted, in a 1999 book, Telecommunications in Latin America, that "While the (cellular) technology exists in only 7% of Latin American telephone households, cellular phone usage is growing by leaps and bounds. Since 1993, according to our study, the number of Latin American households with cellular phones has increased by over 1300%, faster than any other single telecommunications technology in Latin America" (Soong 2003, unpaged).
The reasons for choosing Chile extend beyond the financial strength of the country, however. First of all, cellular phones are attractive to many Latin Americans because they offer mobility, especially important in mountainous regions such as Chile. They also can be used anywhere, anytime, which makes staying in touch, important culturally, much easier. Also, in much of Latin America, the…