Introduction
Globalization has changed trade patterns around the world, thereby instigating many companies to expand beyond their domestic markets. International business expansion is a risky strategy that is associated with considerable investments. To tap into foreign markets, it is necessary to ensure that new revenue streams will be added efficiently. Therefore, a company that is willing to use expansion as a means for growing its revenues must be capable of exerting control over managerial and marketing skills, technology, and resources in a new location (Farrell 2015). The challenges of international business expansion include, but are not limited to, cultural barriers, legal compliance issues, tax codes, local competitors, political tensions, surcharges, currency values, and reputation management (Sitkin & Bowen 2013). It means that before expanding their operations, businesses have to thoroughly investigate prospective markets to determine whether the acquisition of a new customer base is feasible.
This paper aims to analyze the US as a market for the international expansion of ARB Corporation Limited (henceforth ARB). The paper will include detailed analyses of the country-specific factors to facilitate the internationalization decisions of the company. It will be argued that the US is associated with a unique confluence of economic, legal, political, cultural, and other factors that creates a propitious business environment for ARB.
Country
The US has the largest consumer market in the world; therefore, it has been chosen for the expansion of the company’s operations. The country’s GDP exceeds $18 trillion, which facilitates a high level of household consumption that accounts for the third of all goods purchased in the world (World’s largest n.d.). By opening new locations in the US, ARB will obtain access to more than 325 million consumers with high purchasing power (World’s largest n.d.).
Industry
The company operates within the auto industry, which is characterized by an exceptionally high annual rate of return—14.8 percent (Parkin et al. 2017). The global sales of automobiles surpassed 88 million in 2016, which makes the industry particularly attractive for investors (Parkin et al. 2017). The car accessories is a rapidly growing market within the industry that was valued at $360.8 billion in 2016 and is expected to surpass the $500 billion mark by 2022 (Global car accessories 2017). Recent advances in technology provide substantial growth opportunities for the highly segmented market. The industry has been chosen because it is associated with the ever-growing demand from both developed and emerging economies. Increasing awareness about four-wheel-drive accessories stimulates sales across all segments of the market. According to a report issued by SEMA, “each product segment showed improvement in 2014, with handling products displaying a particularly strong increase of almost 12 percent” (cited in Deloach 2015, para. 7).
Organization
ARB is the largest producer and seller of four-wheel-drive accessories in Australia (ARB story n.d.). The company’s international reach extends more than one hundred countries around the world (ARB story n.d.). ARB’s total sales revenues in 2016 amounted to $356, 905, 000, which represented 8 percent increase from the previous year’s figure of $329, 755, 000 (Annual reports n.d.). ARB has been selected because it is a company with a wide distribution network and established presence on the market, which can afford to increase its level of foreign presence.
Product
Four-wheel drive accessories are non-essential auto parts that increase the functionality of a vehicle. The company produces a wide range of products that fall into the following market subcategories: protection equipment, vehicle lighting, and rear vision, suspension, canopies, and UTE lids, drawers and cargo barriers, roof racks and roof bars, frontier long-range tanks, recovery equipment, air lockers, compressors, fridges and camping accessories, batteries, snorkels, and general accessories (Products n.d.). The product has been chosen because four-wheel-drive accessories are becoming increasingly popular with consumers, which provides ARB with multiple expansion opportunities.
Political System
Opportunities
The direction of the American political system is closely aligned with the company’s expansion efforts. The political environment of the country is formed by a confluence of factors affecting social and economic outcomes (Political factors n.d.). These factors differ at federal and state levels; therefore, ARB can critically analyze the political characteristics of the market to choose a location that will facilitate the rapid growth of the business. For example, the company can set its outlets in states with low tax rates, thereby substantially decreasing the cost of conducting its operations.
The political system of the country is conducive to the free functioning of a market economy. The US government protects the private property rights of its citizens and foreign entities operating on American territory, which means ARB can explore a high degree of economic freedom of the country to increase its customer base (Political factors n.d.).
Challenges
The American political system is relatively volatile, which presents a considerable challenge for the company. The US is a federal republic with a bicameral legislative power and two dominant political parties (United States n.d.). It follows that the country’s tax rates regularly change under the influence of either socially conservative or socially progressive politics. Such fluctuations impede long-term financial predictions, which are essential for conducting business. The political environment of the US is affected by miscellaneous pressure groups that change the landscape of the country’s economic environment. The American government regularly alters its rules and regulations, thereby making it hard for international companies to mitigate risks associated with their operations. The following political factors present additional challenges for ARB: bureaucracy, tariffs, trade control, employment law, discrimination law, competition regulation, governmental regulation of trade unions, and health and safety law among others (Political factors n.d.).
Economic System
Opportunities
The US has a mixed economic system, which is a synthesis of capitalistic and socialistic systems. It means that while the government protects private property, it restricts the economic freedom of its citizens by regulating the majority of their economic activities. Governmental interference in the economy helps to level the competitive environment to eliminate complete domination of the market by certain companies. By entering the market regulated by the government interested in the protection of customer rights, the company can benefit from a fair operating environment in which rival firms adhere to legal competitive practices (Drews & Lamson 2015).
The US is the largest economy in the world that produces almost 25 percent of global services and products in nominal terms (Chafuen 2017). It follows that by establishing its presence in the US market, ARB will have access to a customer base that is characterized by a low level of financial inhibition.
Challenges
Excessive governmental interference can result in the mediocre economic performance of ARB. Chafuen (2017) argues that a high cost of regulatory restrictions reduces the growth of the country’s economy. One can infer that the effectiveness of the company’s operations will be reduced by the excessive regulation of the economy. Another negative aspect of the system is that economic interdependence between the US and the European Union can influence the demand for ARB’s products (Surugiu & Surugiu 2015).
Legal System
Opportunities
The US legal system is conducive to the company’s intention to expand its operations. Taking into consideration that the foreign investment in the automotive industry is not heavily controlled in comparison with other industries such as aviation, banking, and broadcasting, ARB can engage in commercial transactions without having to adapt to special commercial laws not regulated by the Uniform Commercial Code (UCC) (Doing business 2013). Another opportunity associated with the country’s legal system is its decentralization. The company can select locations for its outlets about laws and regulations, thereby choosing the most beneficial legal regime.
The country’s legal authorities do not restrict foreign business entities’ use of financial instruments, which presents the company with an opportunity to arrange the financing of its branches in an economically feasible manner. By conducting its operations in a legal jurisdiction of its choice, ARB will be able to use “any desired combination of equity financing and related or unrelated debt financing” (Doing business 2013, p. 3). Furthermore, the US dispute resolution system features an alternative dispute resolution instrument—arbitration. Parties to a contract can use arbitration to resolve their legal disputes without having to resort to trial courts.
Challenges
If the company decides to export its goods in the US, it will be confronted with numerous federal laws and regulations of substantial breadth and complexity (Drews & Lamson 2015). In such a case, ARB will have to ensure that its products comply with the country’s safety requirements, which will pose another challenge for the endeavor. Also, four-wheel-drive accessories imported in the country will be subject to duties and tariffs. Complicated laws regulating labor-relations in the US can also diminish the company’s efficiency. The following areas of the employment law are associated with strict regulations that might result in costly errors: “performance review, termination, discipline, at-will employment, harassment, personal and vacation time, and sick leave” (Doing business 2013, p. 15).
Cultural Characteristics
Opportunities
Despite a recent drive for telecommuting and biking, the US remains an auto-dependent country (Florida 2015). More than 86 percent of Americans rely on cars when traveling to work (Florida 2015). American society is characterized by a high level of autonomy, which means that being dependent upon others is not appreciated by the nation that emphasizes the importance of individualism. High regard for self-sufficiency can explain why less than 10 percent of Americans carpool to work and only 5 percent rely on mass transit (Florida 2015). This cultural characteristic is an opportunity that should be explored by ARB in their endeavor to add new revenue streams.
Another cultural characteristic that provides the company with growth opportunities is a predilection for large vehicles. According to Richtel (2016, para. 4), “falling gas prices have made big, heave cars fashionable again.” The love for heavy-duty vehicles is a long-standing cultural trait of many Americans. Ownership of a truck, SUV, or a van is often associated with American pride and a “gung-ho mentality” (Solomon 2015, para. 3).
Challenges
American culture also poses several challenges that might undermine the effectiveness of the company’s expansion efforts. Americans believe that they have a moral responsibility to take an uncompromising position on global climate change (Glaser 2014). While this approach is undoubtedly beneficial from an environmental point of view, it might endanger the long-term success of the ARB’s expansion. Both American print culture and public discourse of the nation are inundated with climate change rhetoric, which will inevitably lead to a decrease in sales of large, fuel-inefficient vehicles (Glaser 2014). Also, American triumphalism and the tendency to innovate can accelerate the emergence of electric vehicles, hybrids, and other safe means of transportations, thereby reducing both the nation’s carbon footprint and the demand for ARB products.
Manufacturing
Opportunities
The loss of manufacturing jobs in the US has slowed down during the last years. It has to do with the fact that foreign companies recognize the benefits of the Trans-Pacific Partnership agreement and low economic volatility (Bryson, Clark & Vanchan, 2015). ARB can use the opportunity of establishing production in the USA, thereby benefiting from reliable energy sources and tax exemptions. Furthermore, the company can explore the proliferation of automation and robotics in the US manufacturing industry, which will help it to better balance many aspects of its large-scale operations (Baily 2016). Many areas of production that involve repetitive actions can be reinforced with automatic machinery and software systems to streamline manufacturing processes.
Challenges
The biggest challenge of manufacturing in the US is the maintenance of the low cost of products. Despite substantial technological advances, the country’s manufacturing industry is associated with considerable operating expenses. The average hourly wage in the US is incomparably higher than that of developing countries; therefore, American-made goods are more expensive than those manufactured abroad (Baily 2016). For example, the advanced industries requiring the involvement of a STEM workforce had an average salary of $90, 000 in 2013 (Hessman 2015).
Another barrier to manufacturing in the US that has to be considered by ARB is a skill gap (Hessman 2015). The company will have to invest in talent management and exert considerable retention strategies, which might further increase the cost of production.
Research and Development
Opportunities
The US accounts for the largest share of research and development (R&D) expenditure in the world (Rothberg 2014). The most significant consequence of the high level of R&D spending, which can be explored by the company, is the US scientific infrastructure. The country’s research institutions can help the company to innovate, which is essential for retaining its competitive edge. The creation of intellectual capital necessary for the cheap and efficient production of four-wheel-drive accessories can be supported by the deployment of the country’s scientists specializing in industrial R&D. Furthermore, industrial innovation in the US is supported by intellectual property rights that are protected by the government (Crescenzi & Rodriguez-Pose 2013). Utility, plant, and design patents are reliable intellectual property instruments that will help the company to secure the results of its innovation.
Challenges
The company’s innovation efforts might be derailed by the functional and geographical borders of the country’s R&D network. Specifically, American states differ in their capacity to “combine local knowledge resources more or less efficiently” (Crescenzi & Rodriguez-Pose 2013, p. 289). Therefore, ARB will have to adjust to the spatial distribution of scientists to ensure a high quality of knowledge production, which will be needed to increase the functional value of its products. This strategy will result in additional operating expenses that will increase the cost of the company’s products.
Global Marketing
Opportunities
Many American consumers are closely familiar with four-wheel drive accessories, which substantially decreases marketing costs associated with the initial stage of the product market cycle—introduction. The company can explore this marketing opportunity by directing its marketing budget towards the growth and maturity stages of the market cycle. There are many areas of overlap between the market profiles of the US and Australia (ATIC 2015). It means that it will not be difficult for the company to readjust to the new marketing landscape.
The demand for four-wheel drive accessories in the US is restricted to geographically-delineated areas, which provides ARB marketers with an opportunity to prioritize their promotion efforts, thereby overcoming possible resource constraints. The American market holds unlimited product positioning prospects that can be explored by the company. The key product attributes of the accessories produced by ARB will be easily recognized by Americans whose views, beliefs, and values do not differ substantially from those espoused by Australians (ATIC 2015). When it comes to advertising, the company will also be in a beneficial position in the US because it will not have to overcome language differences.
Challenges
The company faces the challenge of local customization in terms of pricing and positioning. Coordination of market activities in the country with a large population can also be difficult to manage. Localized execution of ARB’s marketing efforts might be impeded by the promotion of fuel-efficient vehicles, which is another considerable challenge for the company.
Capital Financing
Opportunities
The US is the largest beneficiary of foreign investment in the world (McBride 2016). A report issued by the Department of Commerce shows that more than thirty thousand companies were owned by foreign entities in 2013 (cited in McBride 2016). The country offers numerous capital financing options for foreign investors willing to expand their businesses. When it comes to external debt financing, ARB can satisfy its short-term working capital requirements with the help of operating loans. Medium-and long-term capital needs can be covered by term loans (Lipman 2016). Domestic and foreign banks, as well as non-bank financial institutions such as insurance companies, can provide the company with debt financing.
The car accessories manufacturer has an opportunity to explore numerous external equity financing options available in the US. Taking into consideration the fact that ARB has high growth potential, it can finance its expansion through private equity funds (Lipman 2016). The company can also participate in federal and state government assistant programs.
Challenges
Regulatory barriers might substantially inhibit the process of capital financing for the company. Given that ARB needs to raise a large amount of capital, it will have to consider equity financing. However, this capital financing option will result in the company partially losing control over its operations (Lipman 2016). Also, equity financing is a time-consuming method of raising capital.
Logistics
Opportunities
The logistics and transportation in the US are a highly-developed $1.48 trillion industry (Logistics and transportation n.d.). ARB will benefit from exploring integrated supply chain links of the country to deliver its products to consumers. The US logistics services are provided through multiple modes of transportation: freight rail, maritime, trucking, and air delivery (Logistics and transportation n.d.).
Even though the company can afford to operate its supply chain, it would be better off relying on services of third-party logistics (3PL). There are many providers of such services in the US who can offer the company a high level of flexibility, which cannot be achieved with in-house logistics (Capgemini n.d.). The partnership with American providers of 3PL is associated with volume discounts and beneficial shipping rates; therefore, many companies turn to the outsourcing of their logistics. 3PL revenues in the US amounted to $177.3B in 2013, which is a testament to the effectiveness of the industry (Capgemini n.d.).
Challenges
The company may face a challenge of the lack of coordination when establishing a supply chain in the new country. The need to maintain a flexible supply of accessories can raise operating costs. Another challenge associated with logistics in the US is time zoning, which might pose barriers to the flexibility of ARB’s operations (Waters & Rinsler 2014). The geographic scale of the country can also substantially increase transportation costs. Furthermore, the company will have to create a compliance department to deal with government regulations and custom compliance laws (Waters & Rinsler 2014).
Distribution
Opportunities
In the US, ARB can approach the distribution of its products in several ways. When selecting distribution channels, the manufacturer of four-wheel drive accessories can either opt for an intermediary or export directly to its dealerships or retailers. The US has a large number of export intermediaries whose experience on the market and high level of automation will help ARB to lower its carrying costs (Frederick-Ross 2015). The country provides foreign businesses with numerous channel design options, which makes it an extremely prospective location for expansion.
Challenges
When entering a new market, it is extremely difficult to select a proper distributor. Adjustment to the new system of sales tax collection can also pose a significant challenge to ARB. Another distribution bottleneck is a high level of market segmentation (Frederick-Ross 2015). Also, the company might have to negotiate with multiple distributors in several states to strike the most lucrative deal.
Overall Assessment
The US is a country that can align nicely with the company’s global growth vision. The size of the market will help ARB to meet its revenue generation goals. The US is culturally similar to Australia; therefore, ARB’s marketing professionals will be able to effectively position the company’s product. The US has favorable legal, economic, and political conditions confluence of which creates a favorable business climate that will help the company to become a bigger player in its industry.
International Strategy
The company is recommended to pursue the international strategy because differences between the home and the foreign markets are minuscule (Peng 2016). It follows that ARB will not be under pressure to adapt to the unique characteristics of the new business environment. Furthermore, four-wheel-drive accessories serve the aesthetic and functional needs of customers, which are homogeneous to a great extent. Thus, the manufacturer of car accessories will be able to locate its R&D facilities at home, thereby using its already established facilities. By doing so, ARB will not have to adjust to a regulatory framework of the US and hire R&D specialists, which is associated with additional operational expenses.
The international strategy will allow ARB to enter the market without having to substantially change its operations, thereby incurring considerable expenses (Peng 2016). The pursuit of the strategy might not be feasible in the long term; therefore, after establishing itself in the US, the company can adopt a limited localization strategy to better adjust to the preferences of American consumers.
Entry Modes
ARB is recommended to enter the market through exporting. This mode of entry will allow the company to increase its revenues by not having to rely on partners and intermediaries. By either directly or indirectly exporting its products the company will be able to better control its brand and products. Exporting will allow ARB to realize orders as they received, which is associated with a relatively low financial risk (Drews & Lamson 2015; Peng 2016). By not entering into cooperative relationships with other companies, ARB will not have to rely on export partners and manufacturing contractors. It is extremely important since such cooperative alliances might diminish the company’s negotiating capacity and potentially lead to conflicts of interest. Given that the company can afford to have dedicated personnel, it should establish an export department and engage in direct exporting.
Conclusion and Recommendations
The paper has outlined the analysis of the US as a potential market for global expansion of the Australian manufacturer of auto accessories—ARB. It has been argued that the country’s culture, political institutions, and the legal environment are suitable for the relocation of business activities planned by the company. Based on the assessment of ARB’s capacities and needs, the company is recommended to pursue the international strategy and direct exporting to minimize risks for its profitability.
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