ABC Chemical Company Goes Global[*]
Driven by competitive pressures, and the attractiveness of the industry’s fastest growing market in the world, a U.S.-based chemical manufacturer, ABC Chemical Company (name changed to maintain confidentiality) considered expansion into Asia, specifically, China.
William Smith is the International Marketing manager for ABC Chemical Company. William has been tasked with expanding ABC’s manufacturing and distribution to the Asia Pacific region. Many changes in the powder coating industry have forced ABC to reconsider its their global strategy. To date, they have exclusively manufactured and exported from the Americas. Higher costs and tougher competition have forced ABC to look to the Asia Pacific Region to reduce these costs (specifically shipping) and remain competitive.
ABC Chemical Company is a U.S.-based business that manufactures and distributes specialty chemicals to various industries for use in manufacturing finished products. ABC Chemical Company’s powder coating division needs to expand into Asia to remain competitive. Many of the powder coating division’s customers are moving their plants to Asia in an attempt to expand their markets and lower their production costs. As well, all of ABC Chemical Company’s competitors are opening production facilities in Asia to meet their customer’s needs, to expand their markets and lower their costs. For Asian and some European manufactures, powder coatings are a commodity with no specific qualities or competitive advantages to differentiate one from another. ABC Chemical Company believes that in the future, many of these manufacturers will need more specialized products moving away from a commodity. Gaining a foothold in Asia at this time is critical to ABC Chemical Company’s future. As a commodity, powder coatings are purchased strictly based on price. Shipping costs to Asia have raised prices to a point where ABC Chemical Company would eith`er lose money if they met their competitor’s price or lose customers if they did not. As an example it costs ABC Chemical Company $1.50 per pound to manufacture in the U.S. and ship to Asia and only $0.50 per pound to manufacture in Asia.
Following the lead of many of their competitors, ABC has chosen to manufacture in China. Entering China has many benefits including a large relatively untapped market, lower overall costs, lower restrictions on production and a central proximity to the rest of Asia. Many of ABC Chemical Company’s direct customers are either moving to or are already located in China. As well, China and Asia are underserved markets for ABC Chemical Company and many of their competitors. Moving to China is necessary to maintain market share as well as seek incremental business from new markets. One of ABC Chemical Company’s goals is to become a global supplier of specialty powder coatings. To achieve this goal, they must expand into Asia through China.
ABC Chemical Company has chosen to build its own plant in China rather than to form a partnership or acquire an existing company. When seeking partners, ABC Chemical Company encountered a number of issues surrounding business practices in China. These business practices violated ABC Chemical Company’s code of conduct and ethical objectives. While these specific business practices are common in China and have been accepted and adopted by competitors, ABC Chemical Company has chosen not to follow suit. Instead, ABC Chemical Company has chosen to build their own facility. While building has a number of advantages, there are a number of disadvantages to consider as well. Advantages include:
· Full control of the facility
· Building to exacting standards rather than adapting an existing facility
· Maintaining quality standards similar to other ABC Chemical Company plants
· Maintaining company code of conduct and ethical standards
Disadvantages include:
· One to two years to build a facility, slowing speed to market (competitors already producing, include North American and European manufactures who have partnered with local firms as well as thousands of small local competitors)
· Exporting from US facilities at a loss
· Lack of local partners and knowledge may impede entry into market
While ABC Chemical Company builds their factory in China they will continue to supply Asian customers from its North American manufacturing facilities, at a substantial loss due to logistical and transportation costs.
Company Overview
ABC Chemical Company is one of the world’s largest manufacturers of specialty chemicals – technologically sophisticated materials that find their way into applications in a variety of major markets. Consumers never see most of ABC’s products; rather, they are used by other industries to produce better-performing, high quality end products and finished goods. The history of ABC Chemical Company has been a series of innovative technical contributions to science and industry, usually taking place behind the scenes.
Markets where extensive use is made of ABC's products include the paint and coatings industry, electronics, household products/detergents/personal care, water treatment, adhesives, plastics and salt. In every corner of the world, ABC products are Quietly Improving the Quality of Life.™
In the late 1990s, ABC acquired two great companies – Ronlea (name changed), a maker of electronic chemicals, and Tomro International (name changed), a global producer of specialty chemicals and salt.
ABC has sales of approximately $6 billion and more than 17,000 employees. It operates nearly 140 research and manufacturing locations in 27 countries. The company has more than one hundred ISO 9000 and more than twenty-five ISO 14000 EMAS registrations around the world. Worldwide headquarters are located in the United States. ABC is a Delaware corporation whose stock is traded on the New York Stock Exchange under the symbol ABC.
ABC is committed to being a good neighbor and responsible corporate citizen. At various places on their web site there are discussions of a number of initiatives, including Responsible Care®, Community Advisory Committees, and activities centered on the health and safety of employees, customers, the communities where they are located, and the environment.
ABC Chemical Company’s Code of Conduct
ABC Company stresses the importance of its code of conduct to each employee worldwide. The code is strictly embraced and enforced at all levels of the organization: from the CEO and the Board of Directors to each entry-level salaried staff position. In fact, once a year each salaried employee is asked to: 1) sign the Code of Conduct and certify that he/she has not violated any of the ethical provisions contained in it; and 2) certify that he/she is not aware that any other employee has violated the code.
Portions of the Purchasing section of the code of conduct are reported below:
Relationships between ABC Company and its suppliers should be based on mutual respect and integrity. These relationships should be maintained at the highest standards of business ethics. […] Under no circumstance may an ABC employee misrepresent a competitive situation to a supplier.
ABC Company does not require nor does it expect any form of entertainment, promotional gifts or holiday cards as a condition for doing business. It is strictly prohibited for an ABC purchasing agent to solicit any gifts or entertainment or accept spontaneous nominal gifts valued in excess of $50; accepting any cash gift; traveling at a supplier's expense or participating in a supplier-sponsored training seminar that is extravagant in nature. […] Any supplier or employee who suspects that an ABC employee is not operating within the Code of Conduct, should promptly report their suspicion anonymously to the ABC Compliance Hotline at 1-800-123-4567.
The General Code of Business Conduct repeats, in part, the provisions mentioned in the Purchasing Code, and adds the following:
Gifts of cash or property may not be offered or made to any officer or employee of a customer or supplier or any government official or employee unless the gift is legal, nominal in value (less than $50) and approved in advance by a Director or Business Executive (n most countries it is illegal to make gifts to government officials).”
Conflicts of interest: any employee who has a financial interest or performs work for a company with which we do business or compete, must disclose such conflict to the respective Director or Business Executive.
Securities Transactions: at times, some ABC employees may become aware of confidential information that has not yet been disclosed to the general public. In those cases, the information must be held in strict confidence. Those who became aware of such information may not buy or sell company stock, nor advise others to do so, until the information has been made available to the general public.
Safety, Health and Environmental laws: ABC conducts its worldwide operations and manufactures its products in a way as to not harm the environment and the health and safety of its employees, customers and the public. ABC is also committed to complying with all local applicable laws and regulations.
Accounting records: ABC's financial statements and the books of record on which they are based must accurately reflect all corporate transactions. All receipts and disbursements must be accurately reflected on the accounting books, and ABC's records must disclose the nature and purpose of all corporate transactions. […] ABC employees are instructed to cooperate fully with both internal as well as external auditors and withhold no information from them.
Other accounting and internal control provisions pertinent to the case study are as follows:
1. Bank accounts: the corporate treasurer must approve the establishment of all bank accounts.
2. Financial arrangements: the corporate treasurer must approve all financial arrangements with banks such as: loans, sales or purchases of securities; dealing in foreign currency; etc.
3. Cash disbursements: every disbursement (with the exception of petty cash) must be supported by an approved Purchase Order or Check Request. The full name of the payee must be recorded on the payment. Checks may not be made payable to "cash", "bearer" nor the individual approving the transaction.
4. Employee compensation: all payments to employees must be justified based on services rendered. Employees may not be asked to refund a portion of their compensation or spend it in an illegal or unethical manner.
5. Billing: all shipments must be billed promptly and accurately.
6. Cash Receipts: all checks made payable to the Company must be deposited in an ABC checking account promptly. Checks received from customers may not be endorsed to a third party as a means of payment for our purchases.
7. Sales agents and commissions: only respected and competent agents or distributors may be hired to represent ABC Company. All commission payments must be properly recorded on the accounting books with full documentation including the name of the payee, the commission rate, the product sold and the customer orders involved. Cash payments, payments to unnamed individuals or disguised bank accounts are not permitted.
8. Consultants: all engagements with consultants and advisors must be based on ABC's needs for technical or professional assistance. The background and professional ability must be scrutinized carefully before engaging a new consultant. All invoiced received and paid must accurately describe the services rendered and the basis for the fees charged.
9. Unusual business transactions: all transactions outside the normal course of ABC's business (sale of scrap material, leasing of buildings and equipment, entering into a new business activity, etc.) must be authorized by a Business Unit Manager or a Vice-President.
10. Accounting records: all corporate transactions must be reflected in the accounting records. Any fictitious or unauthorized entries are strictly forbidden.
Industry Overview
Powder Coatings (dry paint), a relatively new technology, is an economical and environmental improvement over the traditional liquid paint. It is mostly used by Original Equipment Manufacturers (OEMs) and by small custom "job-shops."
The application characteristics of powder coatings provide superior consistency and uniformity of finish. They provide extremely tough, durable coats, enhancing the high quality, value-added image of consumer products. In general, performance properties, such as impact resistance and corrosion resistance of powder coatings are better than liquid paints. Powder coated parts resist cracking and peeling during handling and normal service use. In many cases, merchandise is specifically being advertised as "powder coated" because of the quality image it projects.
"Environmental issues are of significant interest and importance to the government and general public today. Unlike many liquid paints, powder coatings are compliant with environmental regulations. Liquid paints often contain solvents, which can contribute to air pollution and, in some cases, ozone depletion. Powder coatings are free of such pollutants. Wet painting processes can generate sludge, which must be disposed of into hazardous waste landfills. Properly formulated powder coatings generate no such hazardous waste. The consumer can feel good about buying a powder-coated product, which is environmentally responsible." [1]
The Global Powder Coatings market registered an estimated $ 3.5 billion in sales in the year 2002. The three major markets are Europe (with sales of $1.3 billion), North America (with sales of $1billion) and Asia Pacific (with sales of $0.85 billion) (See Exhibit 1).
The global powder market is dominated by three major players (See Exhibit 2):
1. Wooden Shoes, a Dutch company, is the market leader commanding 13% of the worldwide market. Wooden Shoes is the leader in Europe and in Asia Pacific.
2. Delco, a U.S.-based corporation, owns 11% of the global market, with a second-place position in all three major markets, including Asia.
3. ABC holds a 6% global share, with a narrow number one position in the USA, and the second position in Europe. ABC's presence in Asia is negligible at 0.2%.
4. Eight other smaller producers own 26% of the market. These Powder Coatings manufacturers operate in select regional markets, concentrating their efforts on single-type customers and speed of delivery.
5. The remaining 44% of the market is comprised of over 1,000 single-plant producers who serve a handful of local customers and specialize in a narrow line if products. They compete on speed and price, since their low-tech and high-volume production of similar products allow for economies of scale.