The document discusses Cummins' entry and operations in the Chinese market from the 1970s to the early 2000s. It covers:
1) Cummins initially entered China through licensing agreements in the 1970s, which provided profits but lacked control and led to technology issues. Cummins later shifted to joint ventures in the 1990s which allowed greater control but faced challenges around foreign exchange drain and competency.
2) In the early 2000s, Cummins consolidated its various joint ventures and partnerships in China to streamline operations and prepare for increased competition upon China joining the WTO.
3) The document also examines China's historic prohibition on foreign companies distributing and servicing auto products within China, and
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(d) Explain any 5 efforts taken by the Malaysian Accounting Standards Board (MASB) to align the two sets of standards.
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In this presentation slide, we would like to discuss:
(a) Define the Multinational Company.
(b) What are the advantages and disadvantages of multinational companies?
(c) Explain how multinational companies benefits from the convergence/ harmonization of accounting standards.
(d) Explain any 5 efforts taken by the Malaysian Accounting Standards Board (MASB) to align the two sets of standards.
(e) Discuss the impacts that occur on the financial reporting of companies in Malaysia arising from the new Financial Reporting Standard.
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2. TAS
TAMING THE DRAGON
CUMMINS IN CHINA
MARKET ENTRY
BUSINESS CONSOLIDATION &
STREAMLINING
SERVICE & DISTRIBUTION
NETWORK
LEADERSHIP CONCERNS
APPLIED LEARNING
3. TAS
Scheme of the presentation
MARKET ENTRY
From the details available
in the case, discuss the
reasons for using a
Licensing or Joint Venture
approach for entering the
Chinese market.
Identify the underlying
challenges for each of the
market entry approach.
What other approaches
could have been explored
instead of those used?
If these market entry
approaches were used in
other developing
economies would they
have worked? Please
elaborate.
4. TAS
The Chinese Market: Auto Industry
• In 1978, Deng Xiaoping called for the modernization of agriculture,
industries, the military and science and technology.
• Prior to these reforms, Chinese state-owned automobile manufacturers
primarily focused on large commercial trucks and buses.
• China began to open itself to World trade and Economic reform ,change in
vehicle sector emerged as an important part of the modernization.
• The basis of achieving this objective was through importation of foreign
technology and expertise.
MARKET ENTRY
5. TAS
Entering the Chinese Auto Sector
Liberalization of the Chinese economy
Foreign Manufacturers
Looked for major developing
market opportunities for
expansion
Chinese Government
To lift millions out of poverty
by providing incentives to
peasants to increase
productivity and production
Technology transfer
MARKET ENTRY
6. TAS
Market Entry in 1979: Why
LicensingForeign Manufacturers
Provide substantial profit streams
from technical fees, royalties and
component sales at zero capital risk
and build a level of awareness and
credibility in the marketplace that
created opportunities for sale of
other products not produced in
China
Chinese Government
Technology licensing approach fit the
Chinese shortage of foreign
exchange plus their requirements
against foreign direct investment. It
was also a way to acquire foreign
tech to modernize operations in
China’s existing industries.
MARKET ENTRY
7. TAS
Challenges of Licensing
Thenext step
Continued participation required
direct investment and management as
the stream of profits from the
component sales declined due to
successful localization of
components
01 Tech leakand advancement
Licensees did not keep up with
Cummins’technical improvement
elsewhere in the world. They also
risked unauthorized transfer of
tech to third parties
02
Quality Control
The Licensor needs to assure that
the product produced by the licensee
falls within the acceptable range.
Localization of components needed
stronger check.
03 Slow Results
It proved to be a great drawback
to capital-poor nation such as
China, which desired rapid
modernization of their industrial
plants.
04
MARKET ENTRY
8. TAS
Market Entry: Why Joint Venture
• As an important step in the development of the industry was the 1994
Automobile Industry Policy.
• It aimed at attracting large internationally established manufacturers to
operate in China under JV, with foreign ownership restricted to no more
than 50 percent.
• Manufacturers also had incentives and pressures to source parts from
Chinese suppliers.
MARKET ENTRY
9. TAS
Challenges of JV
Forex Drain
The government’s objective at the
time was to stop drain on foreign
exchange reserve. However, JVs in
the auto sector involved a lot of
import, which hardly solved the
immediate problem of forex drain.
01 Crisis Situations
Certain JVs were not successful as
their Chinese counterparts faced
financial crisis such as the CNHTC’s
JV with Volvo and Caterpillar
Shanghai Engine Co. JV ceased due to
cost and price issues
02
Cummins’ Case
Though Cummins had negotiated to
limit it’s operation to the core
business, during approval, it had to
absorb all the assets of the company
which resulted in a significant
increase in amount of cash
required for 50% ownership
03 Competency challenges
Apart from the intensive management
and forward planning that was
required, language barriers and
cultural know-how were certain
crucial challenges. Cummins expected
export of engines to USA while local
parties wanted status quo.
04
MARKET ENTRY
10. TAS
Market Entry: Other approaches
Countertrade Agreements
• It encompasses a number of types of barter-like arrangements in which
capital imports are linked to future export products. It allows a developing
nation to avoid consuming scarce foreign exchange in order to finance
imports of expensive capital goods.
• It would result in actual capital investment rather than mere assembly or
processing contracts.
• It demonstrates a commitment necessary towards a long-term trading
relationship with China.
MARKET ENTRY
11. TAS
Market Entry: Other approaches
Cooperative production
• Both parties manufacture the components, appropriate to their technological
capabilities, from which an end-product is then assembled.
• The foreign firm would provide technology, training and supervision to the
Chinese firm and manage overall assembly.
• In practice, it has meant mere assembly and processing in China to take
advantage of lower labor costs.
MARKET ENTRY
12. TAS MARKET ENTRY
Market Entry in a similar
environment • In the 1990s, the collapse of USSR catalyzed in
the sharp decline of Russian Oil and gas industry
caused by lack of funds for investment.
• Foreign oil companies such as Shell, Exxon and
Total had the capability to provide technology,
management expertise and capital, while the
domestic players had access to reserves as well
as an understanding of Russian business
environment.
• A wave of JVs and technology transfers through
licensing occurred in the early 2000s due to it
pragmatic and protectionist economic policies.
.
RUSSIA
Oil and gas industry
Source : International Partnership in Russia: Conclusions from the Oil and Gas Industry; IJV, 2ND edition, Beiten Burkhardt
13. TAS MARKET ENTRY
Market Entry in a similar
environment • The Turkish auto industry started in the 1950s
with the approach to counterweigh the large
import volumes.
• Turkey was envisioned to be the low-cost, high-
quality location, bridging Europe and Asia
• By the late 1960s, the industry gained momentum
when the first joint ventures with foreign car
manufacturers were established. Companies
such as Renault, Ford and Fiat continued those
successful investments until the present time
• Example: In 1977, the Otosan factory in Istanbul
signed a license agreement with Ford, which later
named it as Ford Otosan.
TURKEY
Automotive industry
Source : automechanika ISTANBUL, Turkish Automotive Industry –An overview; http://www.ey.com/gl/en/industries/automotive/the-central-and-eastern-european-automotive-
market---country-profile--turkey
14. TAS
Scheme of the presentation
BUSINESS
CONSOLIDATION &
STREAMLINING
What were the compelling
reasons for Cummins to
consolidate its various JVs
and other partnerships?
Could these consolidations
have happened in a
different time frame (i.e.
before or after the time
period mentioned in the
case)? Explain why?
15. TAS Business Consolidation and Streamlining
Business Consolidation &
streamlining
Established a holding
company which could share
legal, finance, HR and other
resources among the JVs
and engage in currency
transactions among the JVs.
It also offered to engage in
direct sales and controlling
dealerships.
The average import tariff for
diesel engines in China would
be reduced to 4-5% from 9-
10%.
The potential for Cummins in
China seemed huge, with
further expansion in the heavy-
duty truck segment as long-
distance hauling projected to
become increasingly on trucks
rather than railways.
The deregulation in the U.S
trucking industry in 1980
triggered consolidation as
engine-producers and truck-
makers merged. Cummins
market share had slipped to
23% . China’s accession to
WTO would trigger a similar
effect of deregulation.
16. TAS Business Consolidation and Streamlining
The strategy was to foster
Joint ventures curtail the flow
of imports to the Chinese auto
market. It allowed the govt to
streamline JVs to produce for
the domestic and the
international market. Those
outside the zone were kept
under strict regulation.
Many investors had
overlapping production and
distribution networks and
sub-optimum logistics or
inefficient warehouse
operations.
The Chinese market was still in
a process of continuous
improvement due to limitations
in investment scales, venues
and modes of management.
Accession to WTO would
result in fierce competition
as it would no longer be
isolated in the world. Early
entrants had to end their
initial strategy of testing the
local market or establishing
a presence.
Business Consolidation : Timing
Source : International joint ventures: Theory and Practice-Aimin Yan, Yadong Luo; FDI in China- Xiaojuan Jiang.
17. TAS
Scheme of the presentation
SERVICE & DISTRIBUTION
NETWORK
Comment on the Chinese
policy of prohibiting
distribution and service of
auto products? What must
have been the compelling
reasons to do so?
Do you think servicing of
auto engines is a business
Cummins should be
worrying about? Please
justify?
Are any of your insights
applicable to other
products and services
across industry sectors?
18. TAS Service and Distribution network
China’s Distribution & Service
organization
Source : Distribution and Logistics development in China: the revolution has begun – Bin Jiang & Edmund Prater
Pre-reform
Prior to the mid-1980s, both
China’s production and
distribution were conducted
solely according to the dictates
of the State Plan.
01
Control
Factories manufactured what,
and how much, central
planners told them to produce;
distribution channels within
China were strictly controlled
02
Reason
This huge system was
formed in the socialist mode,
which is based on resource
allocation rather than
market demands. Given
China’s size and
complicated geographic
environment only the state
had the resources to build
and operate a costly,
national distribution system.
03
19. TAS Service and Distribution network
China’s Distribution & Service
organization
Protectionism
The prohibition of
distribution of auto products
can also be accounted for
regional protectionism.
Provincial tariff barriers
were put as tight state
control to ensure maximum
employment and efficient
use of resources. Thus each
province built its own steel
mill, chemical plant etc.
04 Existing SCM
The localization of suppliers
bought a lot of economic
growth and business and the
same strategy was used for
local distributors. They have
stronger relations with the
central or local governments
which would expedite the
entire process.
05
20. TAS
Aftermarket and Servicing
“Cummins was considering the option of initiating a stand-alone
service division that would own and operate the service divisions.
Management argued that , apart from alleviating the service and
quality problems, it would provide a steady stream of cash flow
to the company by providing value-added services to the end
customers.”
Service and Distribution network
21. TAS
Value-added Services
Service and Distribution network
Conducting repairs
and servicing
Installing
upgrades
Technical
support
Consulting
and training
Arranging
finances
Source : HBR: Winning in the Aftermarket- Morris. A. Cohen, Narendra Agrawal, and Vipul Agrawal.
22. TAS
Servicing as a Profit Centre
Service and Distribution network
Source : HBR: Winning in the Aftermarket- Morris. A. Cohen, Narendra Agrawal, and Vipul Agrawal.
• The longer the life of the asset, the more opportunities companies will find
down the line. Aircraft manufacturers, for instance, can reap additional
revenues for as long as 25 years after a sale
• Increasing sales of parts and service-related products costs businesses far
less than finding new customers.
• Successful cross selling and up selling occurs only if the support offered
satisfies existing customers
• Aftermarket support provides deep understanding of customers’
technologies, processes and plans which provides a sustainable advantage.
23. TAS
Servicing as a Business
Service and Distribution network
Source : HBR: Winning in the Aftermarket- Morris. A. Cohen, Narendra Agrawal, and Vipul Agrawal.
• One number that tells a company how loyal its customers are likely to be is
how high they rate the firm’s after-sales services.
• According to the research firm Aberdeen Group, the sale of spare parts and
after-sales services in the United States is at 8% of annual GDP.
• Accenture study reveals that GM earned relatively more profits from $9 billion
in after-sales revenues in 2001 than it did from $150 billion of income from
car sales.
• There’s a distinct correlation between the quality of after-sales service and
customer intent to repurchase. Brands like Lexus and Saturn inspire repeat
purchases by providing superior service, and they have overtaken well-
established rivals like Ford and Chrysler.
24. TAS
Servicing as a Business : Other
Sectors
Service and Distribution network
• The world’s leading manufacturer of networking
equipment generated $3.9 billion in revenues in
2005. It offers customers troubleshooting services
as well as hardware and software support for the
hundreds of products it supplies. These products
include warranty services that require Cisco to
provide spare parts to customers as well as
service contracts under which the company must
deliver spare parts and field engineers as
needed.
25. TAS
Servicing as a Business : Other
Sectors
Service and Distribution network
• The customizable services range from technical
support to security solutions to even having a
Samsung employee embedded in a client's
business as an on-site support manager and
technology consultant.
• Samsung 360 Services includes an initial focus
on mobility services and devices, and will quickly
expand to encompass the range of end user
devices in the enterprise.
26. TAS
Scheme of the presentation
LEADERSHIP CONCERNS
Comment on the
leadership approaches
adopted by Cummins for
emerging markets vs.
home market. What in
your opinion necessitates
such a differentiation?
Substantiate your answers
with facts and data from
the case.
What are the merits and
demerits of an expatriate
leader of a multi-national
corporation?
How could businesses of
Tata group companies
apply these learnings?
Take any business and
detail your proposal.
27. TAS
Leadership approach
Leadership Concerns
“As a country manager, your job is to maximize the profit stream for
Cummins. You don’t want to waste a lot of money creating an
empire or create local capabilities that already exist somewhere.
Your job is to create local capabilities, have them linked with the
functional leaders around the world and focus them on where you
are going.
YOU SET A LONG-TERM DIRECTION TO THE ORGANIZATION.”
-Steve Chapman
28. TAS
Emerging Markets vs. Home market
Leadership Concerns
Collaboration: Henry
Schacht along with Beijing
staff intervened for
Cummins’B series engines
in Nissan-licensed vehicles.
Establishment: Nurturing
business relations with
respective areas and deriving
maximum value.
Expansion & Competition:
Emerging as a powerful
player, with complementary
business units serving three
broad market segments. 60%
of total sales of Cummins
came from home
market.(Early 2000s)
Development of new
businesses: Acquisition of
Fleetguard, Nelson, Newage
and Holset.
Government Regulations
Competition
29. TAS
Expatriate Leader of a MNC
Leadership Concerns
Merits
• Understands company’s MVV
and goals.
• Better control on the newly
established venture.
• Bring back the learnings of
foreign markets for better global
strategy.
Demerits
• High costs of expatriate staffing.
• Locally faced hurdles for an expat
leader.
• Differences in language, culture,
management style and business
practices.
• Rare to find the rightly skilled
combination.
30. TAS Leadership Concerns
“I hope that a hundred years from now we will spread our
wings far beyond India, that we become a global group,
operating in many countries, an Indian business
conglomerate that is at home in the world, carrying the
same sense of trust that we do today.”
- Ratan Tata
31. TAS Leadership Concerns
Dr. Arup Basu
India Operations
President and CTO, new business and innovation Centre
Dr. Martin Ashcroft
International Operations
Managing director, Tata Chemicals Europe
Jack Muchira Mbui
International Operations
Managing director, Tata Chemicals Magadi
33. TAS
Leadership Proposal
Leadership Concerns
Source : A decade of excellence; July 2014- Cynthia Rodrigues
• Tata Motors was unfolding its strategy to be a world-class global player. The
acquisition of Daewoo proved to be the right step as the company had the
capability and the technology to manufacture world-class vehicles.
• The company has seen its sales figures rising every year since 2009, in
both domestic and exports sales. Production volumes and sales revenues
have both registered increases, and the market share has increased in
both heavy and medium commercial vehicle segments.
34. TAS
Leadership Proposal
Leadership Concerns
Source : A decade of excellence; July 2014- Cynthia Rodrigues
• TDCV’s business excellence journey has seen steady improvement. The
first time the company applied for the TBEM assessment in 2007, it won
the Serious Adoption Award.
• Its second TBEM application in 2008 netted it the Active Promotion Award.
The company also underwent the assessment process in 2010 and 2012.
• This commitment led to TDCV being recognized as one of the best
examples of an overseas subsidiary that was able to leverage the power of
TBEM in its quest to excel in its business.
35. TAS
Leadership Proposal
Leadership Concerns
Source : A decade of excellence; July 2014- Cynthia Rodrigues
• Instill varied skill sets required for understanding the core business as well
as companies goals of foreign markets through dynamic roles in Indian
wing of operations.
• Deploy Indian expats for foreign operations to learn International standards
of Operational and Business Excellence.
• Setting up of a common platform for TATA Motors and all its JVs to achieve
the highest level of Business excellence through knowledge-sharing.
36. TAS
Scheme of the presentation
APPLIED LEARNING
Do you think, Cummins
learned from its past and
could the present
approach work in future?
Support your arguments
with data within or
outside of the case.
If you were offered to take
up a leadership role of this
business, what skills,
other than knowing
Chinese, would be a must
have.
What would be your
recommendations for a
sustainable, profitable
growth for Cummins in
China in the next decade?
37. TAS Applied Learning
“If you don’t lookout, you become an old business. You get
to thinking, “We’re seventy-five years old!”. But it’s very
important that Cummins starts over every year. You learn
the lessons from the past, but you don’t fall in love with
the past.
We don’t really know what the 21st century is going to be
like, except that it’s going to be very different from the
past. The experience that we have is experience of a
world that has disappeared. It’s gone. It’s not coming
back. And that means we have to look forward.”
- Irwin Miller
Source : The Engine that Could: Seventy-five Years of Values-driven Change at Cummins - By Jeffrey L. Cruikshank, David B. Sicilia,
38. TAS Applied Learning
Major Learnings
Deregulation of US
trucking industry
and accession of
China in WTO
Cash infusion was
spread over several
years to minimize
financial exposure
of DCEC
Replacing
inexperienced expat
leadership with
skilled team
approach
39. TAS Applied Learning
Dual-leadership approach
Double costs may affect in the long run.
In many cases, such a team approach creates faulty
chain of command causing ineffective leadership.
Future leaders would be expected to possess both
technical and cross-cultural skills.
Source : Building effective International Joint Venture Leadership teams in China- Journal of World Business.
40. TAS Applied Learning
Leadership Skills required for the
jobSelf-management :
• Resilience
• Technical prowess
• Self-identity
Relationship:
• Collaborative
• Social Flexibility
• Interpersonal skills
Perception:
• Non- judgemental
• Tolerance of Ambiguity
• Cosmopolitanism
Source : Developing Global leaders for emerging markets; Journal of Strategic Management Studies.
41. TAS Applied Learning
Recommendations for Cummins in
China : Future lies in INNOVATION
• Agility towards govt regulations and staying afloat in the dipping economy.
• Agility in adapting to environmental regulations by generating knowledge for
cleaner engines (reduction in CO2 emissions and fuel consumption).
• Alternative fuels: For example, in the United States, about 15 percent of new
transit buses and 50 percent of new refuse trucks currently operate on
natural gas.
• Integrating power sources such as Wind and Solar.
46. TAS
CUMMINS Consolidation – Reasons
Source : International joint ventures: Theory and Practice-Aimin Yan, Yadong Luo; FDI in China- Xiaojuan Jiang.
48. TAS
Why companies shy away from servicing business
• Despite the aftermarket’s obvious charms, however, most organizations
squander its potential.
• They perceive after-sales services to be a necessary evil and behave as
though big business-to-business service contracts, small business-to-
consumer warranties, and everything in between were—like taxes—a
needless expense.
• That’s mainly because after-sales support is notoriously difficult to
manage, and only companies that provide services efficiently can make
money from them. It’s shocking to see how poorly large companies
manage service networks, which the production and sales functions treat
as stepchildren.
• In a study on the after-sales network of one of America’s biggest
automobile manufacturers, it was found that little coordination existed
between the company’s spare-parts warehouses and its dealers.
Roughly 50% of consumers with problems faced unnecessary delays in
getting vehicles repaired because dealers didn’t have the right parts to
fix them.
Source : HBR: Winning in the Aftermarket- Morris. A. Cohen, Narendra Agrawal, and Vipul Agrawal.
49. TAS
The Engine that Could: Seventy-five Years of Values-driven
Change at Cummins
By Jeffrey L. Cruikshank, David B. Sicilia
No resources available at that time : No Capital, no ability to make PV only CV (because of socialism), No skills, No technology and No machinery.
The Liberalization of the Chinese economy affected the two stakeholders, the foreign manufacturers and the Chinese govt. The Chinese govt wanted the people to have more jobs and higher pay.
Why licensing
A 40 per cent local-content rate bestowing reduced parts import duties of some 30 per cent on the foreign partner.
CNHTC: CHINA National heavy duty truck corporation. Also the economic downturn between 1995-98 slowed the demand and the relationship between the partners deteriorated.
Shorter timeframe and less complicated terms than a JV. Imports of capital equipment are paid for in part with the directly resulting finished product. Installment loan repayments with additional output in the form of interest. By 1981, approximately 500 agreements were in effect in China most involving goods worth US$ 500,000 or less.
The main advantage is that profit need not be proportionate to respective capital contributions , but is determined by the parties of the contract. Second advantage is that these agreements take lesser time to execute as they do not require the approval process of that of a JV. Also known as contractual JV.
Russia contained 10% of the Worlds proved Oil and gas reserves. Avtovaz : Russian Technologies +Renault Nissan.
Details from the case .
Market details and why business consolidation occurred during that time.
This huge system was formed in the socialist mode, which is based on resource allocation rather than market demands. There was a basic advantage to this model. Given China’s size and complicated geographic environment, only the state had the resources to build and operate a costly, national distribution system. Hence, despite the liberalization of the distribution sector since in the post-reform era, many Chinese and foreign suppliers still rely on this distribution system, because of its extensive network.
As China grew more interested in trading with the outside world, leaders recognized the need to liberalize this system. With the introduction of reforms in the mid-1980s, control gradually shifted away from central government control to the provinces and municipalities, which gained the right to establish their own trading companies.
For example, the Volkswagen Santana monopolizes the taxi fleet and car market in Shanghai. The Shanghai provincial government imposes huge “license fees” on competing Citroen cars from Hubei province to protect the locally made Santana. Not surprisingly, the Shanghai government owns a stake in the VW joint venture. Hubei retaliates by ordering all its government units to buy local Citroen cars.
Why aftermarket servicing is required
Value added services
American businesses and consumers spend approximately $1 trillion every year on assets they already own.
Steve Chapman
There are a lot of characteristics that overlap. The ones that don’t are stated.
Steve Chapman
Steve Chapman
Steve Chapman
R. K Krishna Kumar
Steve Chapman
Steve Chapman
In an Interview in 1993
Hybrid powertrains: ISX15; Cummins is a leading producer of natural gas engines and components for a wide variety of markets, including trucks and buses, oil and gas production and electric power generation.;