Question

Q-Cells exemplifies the successes and challenges of global importing and exporting. Founded in Germany in 1999, the company became the largest manufacturer of solar cells worldwide. By 2010, however, it was experiencing losses due, in part, to mistiming some of the entry strategies.

First, it is important to know that Germany is a high-cost manufacturing country compared to China or Southeast Asia. On the other hand, Germany is known for its engineering expertise. Q-Cells gambled that customers would be willing to pay a premium for German-made solar panels. The trouble was that solar cells aren’t that sophisticated or complex to manufacture, and Asian competitors were able to provide reliable products at 30 percent less cost than Q-Cells.

Q-Cells recognized the Asian cost advantage—not only are labour and utility costs lower in Asia, but so are the selling, general, and administrative (SG&A) costs. What’s more, governments like China provide significant tax breaks to attract solar companies to their countries. Therefore, Q-Cells opened a manufacturing plant in Malaysia. Once the Malaysian plant is fully ramped up, the costs to manufacture solar cells there will be 30 percent less than at the Q-Cells plant in Germany.

Then, Q-Cells entered into a joint venture with China-based Lightweight Devise Co. (LDC), in which Q-Cells used LDC silicon wafers to make its solar cells. The two companies also used each other’s respective expertise to market their products in China and Europe. Although the joint venture gave Q-Cells local knowledge of the Chinese market, it also locked Q-Cells into buying wafers from LDC. These wafers were priced higher than those Q-Cells could source on the spot market. As a result, Q-Cells was paying about 20 cents more for its wafers than competitors were paying. Thus, in the short term, the joint venture hurt Q-Cells. However, the company was able to renegotiate the price it would pay for LDC wafers.

To stay cost competitive, Q-Cells has decided to outsource its solar-panel production to contract manufacturer Flextronics International. Q-Cells’ competitors, Sun Power Corp. and BP’s solar unit, also have outsourced production to contract manufacturers. The outsourcing has not only saved manufacturing costs but also brought the products physically closer to the Asian market where the greatest demand is currently. This has reduced the costs of shipping, breakage, and inventory carrying.

Case Exercises:

1. Explain the framework that help an organization to choose a country-entry mode.

2. Do you think Q-Cells could have avoided its current financial troubles? How?

3. Do you see import or export opportunities for entrepreneurs in the solar industry?

4. What advice would you give small entrepreneurs when they try to enter foreign markets?

Answer 1

1. For any organisation to go global or to enter the international arena there are four foreign country entry mode.

(a) No regular export activities- As and when demand arises export is done.

(b) Export the product through a local agent: Company's prodcts are manufactured in the home market or any other third country and are exported to the host country either directly or indirectly through an external agent which is mostly based out of the host country. This is a good strategy for companies entering completely foreign market in order to have a more practical experience of the foreign country by utlising the channels or network of the allied agency for setting up a brand imge of the product. Incase of indirect export the manufacturer can also give the product to another agency for export to hust foreign country.(Investment mode through competitive alliances/aquisitions/JVs etc): Licensing, franchising, JVs or contract manufacturing.

(c) Establishment of overseas sales subsidiary:  An entry mode where the manufacturing company completely owns the foreign entry mode. It establishes a subsidiary of the parent company and the subsidy runs as an indepenent entity generates revenue but policies and trademark used are of the parent company. This is through Merger & Aquisition mode.

(d) Overseas production/manufacturing unit

Based on the organisational structure of a company and its product demand cycle, its need for entering foreign market, how desperate the country is to put everything to place gives the basis for framwork for deciding entry mode.

A company may be in a growing industry where capital conservation is of utmost priority then the company may venture into a greefield project wherein it sets up a low cost and cheap labour costing manufacturing unit in an emerging market economy which promotes such investments from global companies to boost their economy.

A company might first want to study the market and assess the market's demand for the product. Thus it may enter the foreign market through Joint Venture wherein the partner from the host country's brand and network is utilised for its products and inturn establishing a brand image for the product in the minds of foreign consumers.

2. Q Cell was unable to study the parent market and the demand trends in foreign markets for the product i.e solar panels. The parent german market was an expensive manufacturing alternative since due to stricter labout laws cost of production rose and thus manufacturing solar panels started cutting revenue of the company. Q Cells failed to analyse that years after launch of solar panels many emerging market economies had also started manufacturing solar panels at chaeaper rates due to lower production cost in their countries and export promoting policies in place. Solar panels are no hi tech product which needs any niche technology or specialisation and thus the company suffered competition in Germany from the emerging market solar panel companies like China or South East Asian countries.

Q Cell could not realise that it was time to diversify bases and relocate manufacturing processes offshore to improve profitability and also to invade new foreign territory.

3. There are import and export opportunities for entrepeneurs in solar industry. The new business might establish alliance with a foeign brand to help them enter foreign market using the local player's name. Inturn new firms in the solar manufacturing industry might join hands with big established names in the business in foreign developed nations by providing them a generic manufacturing option or a job work outlet or a contrct manufacturing facility wherein the entrepreneurial firm receives a margin which inturn helps the firm to establish its name in the local market.

4. Small entrepreneurs from emerging market economies having a production line in place may enter foreign country through becoming a job work or offshore production unit for big established brands through a strategic alliance. THis mode is the most affordable for small players since they cannot afford a Joint Venture or Greenfield project because of costs involved in the foreign lands. But instead this way they can becoming experienced in production process for the big brand, generate revenue and inturn cater to their local market for establishing their brand image. This is the most optimum growth strategy for small players.