Introduction
Aoki Corporation is a Japanese company that manufactures semi-finished products. Its director, Hiroshi Aoki, is upset by the lack of expansion prospects in the Japanese market due to the lack of potential for consumption growth. Another critical problem for the company is the steady rise in production costs. Therefore, after discussing the problem with managers, the boss decided to consider the proposal to export products to the European market and move part of the production to Vietnam. This paper aims to provide the case analysis for the Aoki Corporation and discuss the perspectives of moving the production abroad and entering new markets.
Propositions and Details
The idea of entering the European market seems self-evident, given the traditional European confidence in Japanese products and the relatively high demand for Japanese food. Sales in the European market will allow the company to generate income due to the comparable level of consumer prices in Japan and Western Europe. Equally important, France, Germany, Great Britain, Poland, and other countries are long-term partners of Japan and there are well-established trade relations between these countries based on respect and partnership. Creating a joint venture with a local firm will allow you to bypass bureaucratic obstacles, pay the optimal level of taxes and keep simplified accounting. At the same time, moving part of the production to Vietnam to reduce costs is a good idea due to the lower expected costs and the proximity of the market for raw materials for the production of semi-finished products.
Benefits and Risks of a Joint Venture
In implementing the solutions described, management needs to consider the goals and risks of internationalization through joint ventures. Internationalization risks in joint ventures may be associated with the expansion of the scope of activities and include strategic challenges when entering new markets. At the same time, joint ventures offer advantages such as a local customer base, product distribution opportunities, and experienced local employees (Nagel, 2018). Equally important, the joint venture allows the use of the partner’s brand, which increases consumer recognition and trust. Notably, the joint venture model is less risky than a direct acquisition, as the capital investment will be about half of the direct investment.
It is noteworthy that to minimize risks, it is necessary to take into account such issues as the level of control over the enterprise and the features of the processes that the enterprise will provide. Also, hiring local staff may create the risk of some misunderstanding between the central office and the subsidiary joint venture. Therefore, it is important to clarify and agree on the level of supervision and control over the work of employees (Nagel, 2018). Equally important, the central office needs to determine how the culture of the new enterprise matches the existing corporate culture, and learn about the reputation of the partner in the local market. Also, the central office management will need to achieve operational clarity in terms of when and what investments the parties plan to invest, how revenues and rewards will be distributed, and to whom employees will report. Ways to resolve disputes and disagreements should also be discussed in advance, and possibly included in the joint venture agreement.
Difficulties in Food Marketing and Distribution
Sales and production of food products is a special area of business since food production is associated with an increased level of quality control by the state. Consumers also pay increased attention to the quality of food products, and this factor is decisive when making a purchase decision. Therefore, the main element in deciding on cooperation will be the reputation of a local European company and consumer confidence in its brand. Interestingly, as a food producer, the company should consider its role in forming the customers’ diets (Cuevas et al., 2021). No less important, the trend of community-supported agriculture (CSA) has recently gained popularity. This is a widely used approach by farmers that sells farm products directly to consumers. To successfully implement this approach, scientists recommend using the 4P tool of product, place, price, and promotion (Morgan et al., 2018). Notably, consumers have a preference for organic over mass-market products, and Aoki Corporation should regard this trend when developing its marketing strategy.
Trust and a sense of connection with the manufacturer influence the purchase decisions. This means that Aoki Corporation should share information about its history and production processes. Scientists emphasize that social networks and the word of mouth today significantly influence consumers (Morgan et al., 2021). Given the foregoing, Aoki Corporation may need to review certain manufacturing practices if they do not comply with ethical or product quality requirements. Presumably, since Aoki Corporation will spread its culture and values, the European partner may not necessarily have a marketing advantage. On the contrary, Aoki Corporation can act as the initiator and creator of the marketing strategy and added value of the products.
Benefits of Establishing a Manufacturing Base in Vietnam
Choosing the destination for the FDI, the companies usually consider the infrastructure, politics, profit retention, human resource, and other factors. The choice of Vietnam as a new venue for production is primarily due to a significant difference in wages since local salaries are lower than in Japan. Given the need to comply with ethical pay principles, Aoki Corporation will pay 20% higher wages than the regional average, with subsequent growth. Given the well-established processes and schemes for production and marketing, the company can afford this. Respect for labor will pay off as the company will hire more professional specialists.
There are several basic types of FDI – horizontal FDI, vertical FDI, conglomerate FDI, and platform FDI. Aoki Corporation should choose the platform FDI, the only investment type that implies operations in another country when the business inputs are exported from the third country (Moritz et al., 2019). The vertical FDI type is also applicable to the current situation since it implies that a business is expanding into a new country while also changing the supply chain. Aoki Corporation will need new supply chains of raw materials in Vietnam due to the high cost of transporting raw materials from Japan, and new supply chains in Europe will also be needed.
Advantages and Disadvantages of Manufacturing in Vietnam
The relocation of the production capacity has the primary goal of reducing costs. This will be driven by lower raw material prices and labor costs in Vietnam. Therefore, such transfer can be considered as “non-conventional FDI for financial hedging” which is said to “enhance MNEs’ domestic employment” (Lee et al., 2020, p. 2). A positive impact on the overall economic situation in the company is an advantage for relocating production. However, scientists note that the relocation of production to counter trade barriers or look for tax incentives reduces the domestic employment of multinational enterprises (Lee et al., 2020). Therefore, when implementing a decision to relocate production, Aoki Corporation should consider how it will compensate for the potential negative impact on the central office.
The outflow of funding to other countries will negatively affect the company’s potential and opportunities in Japan. Although Aoki Corporation will benefit from sales revenue, the transition period may be accompanied by financial difficulties due to the redistribution of funds. In this regard, management should first develop tactics for paying salaries and rewards to employees of the central office so that the changes are perceived positively.
Aoki Corporation may outline and discuss employee development prospects and expected salary increases, as well as pay bonuses, and explain that funding will be focused on outside investment over the next few months. Remarkably, the company can use the talents of employees in the central office to manage processes abroad. The finance department should make projections and calculations of future expenses, and this information should be made available to employees to reduce uncertainty. Considering that the central office will later become a role model for a new joint venture, the mood and corporate culture should be high.
Conclusion
Thus, the Aoki Corporation case was analyzed and the perspectives of moving the production abroad and entering new markets were discussed. Establishing a joint venture would be the most optimal solution for entering European markets, given the advantages such as customer base, supply chains, and experience in the local market that the joint venture will provide. Selling food products is a special kind of business, so Aoki Corporation will have to adjust some of its practices and corporate image to match the perceptions of local consumers. Relocating production to Vietnam will have cost-savings benefits, but under such conditions, the employment situation at the headquarters will require additional attention.
References
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Lee, I. H. I., Hong, E., & Makino, S. (2020). The effect of non-conventional outbound foreign direct investment (FDI) on the domestic employment of multinational enterprises (MNEs). International Business Review, 29(3), 101671.
Morgan, E. H., Severs, M. M., Hanson, K. L., McGuirt, J., Becot, F., Wang, W., & Seguin, R. A. (2018). Gaining and maintaining a competitive edge: evidence from CSA members and farmers on local food marketing strategies. Sustainability, 10(7), 2177.
Moritz, M., Hecht, V., Noska, P., & Schäffler, J. (2019). Types of FDI and determinants of affiliate size: the classification makes the difference. 30 Demokratie und Marktwirtschaft – Session: International Economics II No. G09-V1.
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