Group G, 200413392, 309315611, 310035397, 308037413, 309052939

[Core Consulting]

[Samurai, Eagle and

Vaterland - Proposed
Market Entry Brief:
Asia]
[Home Appliances and Consumer Electronics Industry]

Harvandna Singh
Robin Chan
Mari Turhanen
Hanrui Li
Jingjing Bai
 Group G, 200413392, 309315611, 310035397, 308037413, 309052939

Table of Contents

Executive Summary .................................................................................................................................... 3

1. The Internal and External Environment ............................................................................................. 4
1.1 Value Creation Logic .................................................................................................................... 4
1.2 Partnership Structure ..................................................................................................................... 5
1.3 Management Analysis ................................................................................................................... 6
2. Regional Analysis ................................................................................................................................... 8
2.1 Why China? .................................................................................................................................. 9
2.2 Why Malaysia? ............................................................................................................................. 9
3. Industry Analysis ................................................................................................................................. 11
3.1 Industry Overview – Why Asia?................................................................................................. 11
3.2 Competition................................................................................................................................. 11
4. Parent Venture Recommendations..................................................................................................... 13
4.1 Formation of Holding Company - SEV ...................................................................................... 13
4.2 Headquarter Location – SEV ...................................................................................................... 13
4.3 Decision-Making......................................................................................................................... 14
4.4 Competitive Strategy .................................................................................................................. 16
4.5 Management & Cultural Learning .............................................................................................. 16
5. Region-Specific Recommendations: China ........................................................................................ 18
5.1 Partner & Location .................................................................................................................. 18
5.2 Product Range ......................................................................................................................... 18
5.3 Distribution ............................................................................................................................. 18
5.4 Future Expansion .................................................................................................................... 18
6. Region-Specific Recommendations: Malaysia ................................................................................... 19
6.1 Partner & Location .................................................................................................................. 19
6.2 Product Range ......................................................................................................................... 19
6.3 Distribution: ............................................................................................................................ 19
6.4 Future Expansion: ................................................................................................................... 20
7. Appendices ............................................................................................................................................ 21
Appendix 1: Business Management Analysis ......................................................................................... 21
Appendix 2 - China and Malaysia Regional Analysis ............................................................................ 26
CHINA ................................................................................................................................................ 26

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MALAYSIA ....................................................................................................................................... 30
Appendix 3: Asia-Pacific Market Overview ........................................................................................... 34
Appendix 4: Competition Snapshot ........................................................................................................ 35
Appendix 5: Legal Considerations for the Joint Venture........................................................................ 37
8. Works Cited........................................................................................................................................... 39

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Executive Summary

Core Consulting were commissioned to research into the viability of a joint venture in the home
appliances and consumer electronics industry entering into Asia. Our research and findings suggest
that the alliance of Samurai, Vaterland AG and Eagle Electric possesses unique competencies
which are complementary to forming a strong value proposition. The proposed entry into Asia is
an ideal choice due to an emerging middle class in much of Asia Pacific and specifically – China
and Malaysia – have been recommended as ideal entry locations to establish a base of operations.
Regional analysis highlights that FDI is encouraged in these two countries and there exist certain
benefits for foreign entrants. Along with the initial alliance local partners Red Dragon and
Bumiputera have been assessed to be experienced and having extensive knowledge of these markets
and will be extremely beneficial in helping the proposed venture navigate legal considerations
concerning laws and business practices. We identify that some key areas of concern will be the lack
of experience in dealing with international cooperation and the potential conflict of culture and
management styles between partnership firms. Finally, we offer detailed recommendations
concerning management structure, venture structure, how to minimise cultural conflict through
effective use of pre-departure briefings, local manager expertise, ideal headquarter location.
Market entry into Asia will be ideal for the 3 firms to establish an international presence and
increase brand recognition globally as well as offset domestic competition and saturation.

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1. The Internal and External Environment

1.1 Value Creation Logic

It is necessary to first assess the alliance logic between Samurai, Eagle and Vaterland. As such we
have assessed the key factors currently facing each parent firm. From our analysis, we believe each
possess a unique competency which is quite complimentary. Possessing unique capabilities as well
as being strong financial firms can contribute to successful alliances (Peng, M 2006, p372) therefore
we find the alliance logic and value proposition of the venture as this:

Leveraging the core competencies of high innovation and industry standard setting production
processes (Samurai), with the engineering expertise of design and manufacturing(Vaterland AG)
along with a superior supply chain management system and logistics(Eagle Electric), deliver to
Asia-Pacific competitively priced product of superior quality and design.

By leveraging these unique capabilities the venture hereafter called SEV should be able to reduce
costs in its operations by quickly achieving economies of scale in manufacturing and production with
efficiently designed products.

We analysed the Strengths and Weaknesses of the parent firms, which we detail below:

Samurai Electronics KK

Internal
Strengths Weaknesses
 Major Japanese firm of electronics  Production still located within Japan,
 „Industry Standard‟ in production line thus facing higher labor costs.
processes in Electronics.
 Experience in both consumer electronics
and home appliances -diverse product
range consisting of both.
 Highly innovative with experience in
altering foreign products for Japanese
and Asian markets.
 Experience in exporting to South East
Asia markets.

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Eagle Electric Inc.

Internal
Strengths
 Experience – large producer of home
appliances in US
 Advanced supply chain management
system allowing flexibility in shifting
products to responses of demand and
tracking orders.
Experience in previous international firm
collaboration
Weaknesses
 Limited experience in consumer
electronics and smart appliances.
 No experience with dealing with Unions.
 Limited experience in working jointly
with Asian firms.
 Little knowledge of Asian market trends,
consumer behaviours.

Vaterland Elektro AG

Internal
Strengths Weaknesses
 World renowned for engineering  Limited ability to penetrate other EU
expertise nations due to inability to adapt products
 CEO epitomizes its company - to differing demands.
understanding its history having worked  No experience with Asian markets.
for 20 years and a background in
electrical engineering.
 Experience in previous international
collaboration.

1.2 Partnership Structure

It is recommended that SEV form the venture with the proposed local partners as Red Dragon in
China and Bumiputera in Malaysia are very strong candidates. Both have experience within the
industry of consumer electronics and electronics and both firms have extensive knowledge of not
only the market but also business practice and processes. Their local and governmental ties would be
invaluable in ensuring smooth start of the venture‟s operations. Following an analysis of the
competitors in Section 3, we further believe that Red Dragon and Bumiputera offer an excellent
mode of entry into the Asian market.

Research and Development should be overseen by Samurai‟ and Vaterland to combine their
engineering expertise and innovation. Manufacturing, Sales and Marketing should be a joint effort
through the SEV and the 2 local partners and distribution of and management of supply chain should

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be managed by Eagle Electric Inc with use of local partner human resources. Bumiputera have
proposed sub-contracting to Low Key and this will be addressed in our recommendations. We have
proposed a management structure below.

1.3 Management Analysis

We are dealing with quite a complex venture proposal where a key focus is the management of the
firms. From our analysis (See Appendix 1) and to further illustrate the complexity of cultural
differences we have given detailed information on the differences between US, Japanese and German
styles in Appendix 1.1. It is therefore paramount that all parent firms:

Understand how each other differ in culture and management and how to best blend the different
cultures together to work not only with each other but with the local partners.

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A significant difference found is the role and responsibility of managers. “The manager is not a
cultural hero in Germany. If anybody, it is the engineer who fills the hero role” emphasizing the fact
that technical expertise and qualifications are particularly important and expected in Germany
(Hofstede 1993). US managers „do not perform manufacturing operations‟ (Koen 2005) therefore are
limited to supervisory roles in teams. In Japan there is little formalization of specific titles leaving
job descriptions very vague (ibid.). There are other concerns which may also arise and we explore in
more detail in Appendix 1 and 1.1. They cover:
- Negotiation Style
- Employer and Manager Relationship
- Decision Making Process
- Team Management

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2. Regional Analysis
We conducted a detailed analysis of the two countries the partners are looking to expand into, and the
following is a summary. (Please see Appendix 2 for detailed information)

ADVANTAGES CONCERNS
- China encouraged FDI since 1970, special - China increased the tax rate of
economic zones were set up in four coastal foreign firms from 15% to 25% in
cities 2008 due to the long complain from
- After joined in WTO in 2001, more open Chinese manufacturers
fields and low tariffs came up - Weak intellectual property rights
Political & - Tax concessions had been offered, protection
Legal preferential tax rate was 15% for foreign
investors compared with 33% for domestic
firms in a long period
- Many FDI friendly policies have been issued
by national and local governments
CHINA - China kept fast pace of economy since 1978 - The rising labour costs especial in
- The forecast of the real GDP is 10.5% major cities
growth in 2010 - The government formed minimum
- The cheap and sufficient labour base on the wage legislation to give the legal
huge population support for increasing wages in 2008
Economic - The great potential market and investment
& Financial opportunities
- A series of reforms in Chinese banks and
many foreign banks entering increased the
sufficiency of capitalization

- FDI friendly policy - Export barriers including tariff and

- Reorganising commercial courts to dispose non-tariff barriers
of interlocutory matters more propmtly - Contract enforcement and
- Establishing a new one-stop shop to increased transaction costs related to
streamline registration of business start-up starting a business
- Reducing company incorporation charges - Regulatory system governing trade
Political &
and corporate fees and investment lacks transparency
Legal
- Increasing staff and enforcing deadlines in - Weak intellectual property rights
the courts in order to improve contract protection
enforcement and to decrease case filing times - Weak democratic institutions
from 45 days to 30 days
MALAYSIA - Ease investment regulations and reduce taxes
- Very effective investment and security laws
- The forecast of the real GDP is 4.7% growth - Corruption and bureaucrats
in 2010
- Good infrastructure and high innovation
capacity
Economic - Malaysia is the easiest country to obtain
& Financial credit in the world. Malaysia‟s banks have
survived the financial crisis very well, and
remain well capitalized and liquid.
- Cheap labour costs

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We reached the decision that both the nations are very viable for this project for the reasons detailed
below: (All data marked in italics is quoted directly from the appendices.)

2.1 Why China?

Due to its rapid economic growth, investors are aware of China‟s increasing economic power. Our
researches indicate that China has various FDI policies which tend to attract more foreign investors
and the Chinese government has reaffirmed its commitments continue to improve its intellectual
property regime and the efficiency and fairness of its court system. Historically tax concessions have
benefited foreign corporations in China. While the tax rate of foreign firms increased by 10% since
2008, we still believe China has vast market potential for foreign investors. Since 2006, foreign
banks and financial institutions have been allowed to operate in China improving the efficiency of
the financial system and increasing the sufficiency of available capital.

Its large population and rising middle income along with a low cost and high availability of labor are
key factors. Base on its huge population and the increased consumption demands, we‟ve identified
that now is a good time to enter the Chinese market. Along with WTO membership and subsequent
treaties, China promises a change for Samurai, Vaterland AG and Eagle Electric to capture
increasing rents offsetting domestic competition and saturation. (See Appendix 2: China)

2.2 Why Malaysia?

Since the global financial crisis, Malaysia has engaged in a series of reforms designed to attract FDI
and financial arrangements available for the purposes of raising capital are relatively flexible and
market-oriented. The ASEAN Free Trade Agreement and investment tax allowance helped Malaysia
recover from its original decreasing FDI. The Malaysian Multimedia Supercorridor and its benefits
to foreign entrants are also promising for entry. There are some concerns about Malaysia‟s legal
environment, such as the weak intellectual property rights protection and the increased transaction
costs related to starting a new business. However, the Malaysian government has made efforts to
cover those shortcomings by reducing company incorporation charges and corporate fees, and more
effective security laws. As a member and signatory to the World Trade Organization and its related
treaties, Malaysia must comply with international standards in relation to protection of intellectual
property rights as well as being a party to Party to the Convention for Settlement of Investment
Disputes (the ICSID Convention) which provides legal venue for arbitration and conciliation of legal
disputes arising between an investor and the Government of Malaysia.

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Like China, there is an availability of low cost labour, and the economy is one of the region‟s most
stable ones. Its membership of the ASEAN treaty suggests that it could be an ideal launching pad for
expansion into more of South East Asia as „foreign investors are interested in serving the vast
external market of South East Asia instead of the limited domestic market‟ (See Appendix 2:
Malaysia)

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3. Industry Analysis

3.1 Industry Overview – Why Asia?

The conditions for entry into Asia-Pacific and establishment of a base of operations in China and
Malaysia are quite positive. While consumers are able to switch easily based on prices between
similar products, there exists a preference to international quality brands for the more necessity
products such as fridges and washing machines. The threat of substitutes in the form of more
traditional methods exists in the more rural areas but will only compete with a few product lines of
this venture. There are many suppliers and retailers present to distribute products and switching costs
for SEV are relatively low. With the rise of middle incomes and growing disposable income, there
may be more new entrants as the years progress. However, the market forecasts are positive that
most firms will be able to capture significant value without too intense degree of rivalry. With retail
forecasting growth for both China and Malaysia, the opportunities that exist within these markets
from an industry and value perspective outweigh the threats. (Please see Appendix 3)

3.2 Competition

As brought up in the Industry Overview, there are many local and international competitors
operating in Asia Pacific with a diversified product range. While consumers in both China and
Malaysia have some degree of brand loyalty to large readily available international brands – it is
important to note that local brands are still popular and offer ‘similar product quality at lower prices,
often better addressed to local needs, and satisfy desire and nationalism of local pride’ (Bell, S.
2008) This section contains a brief snapshot of few of the key players in Asian Pacific markets.

From an assessment of our competitor snapshot, (Please see Appendix 4) we strategically group key
competitors. The strategic positioning chart shows the proposed initial entry position and eventual
ideal position. As per our value creation logic initial entry should be to establish brand name and
recognition with a smaller product range of higher quality at competitive price and eventually expand
that to the ideal position behind large internationals such as LG Electrics. SEV Holdings will need a
strong marketing strategy and distribution channels to ensure sales and rent capture. Most key
competitors are operating on a domestic and international front and carry large product diversity
from low end to high end home appliance which as per our industry overview predicts - emerging

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new entrants can capture value from certain sectors as most operate on a diversified strategy without
reliance on a single product segment.

We predict that fiercest competition will be faced with local competitors initially, however we have a
strong belief in the quality of product, technology and brand transfer that the SEV Holdings will
carry before it. This strategy will be considered in more detail in our recommendations.

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4. Parent Venture Recommendations

4.1 Formation of Holding Company - SEV

Our recommendation is that the three parent companies jointly establish a holding company
registered in a country with favorable tax regime. This should be an equity based venture with each
partner contributing equally. A major advantage of such a system would be that by putting each
partner‟s specific expected contributions in the venture contract, the partners can ensure that their
interests are protected and the venture goes forward as expected.

‘An incorporated joint venture forming a separate legal entity is often suitable for a new business
that has long-term prospects (International Trade Centre 2005). The joint venture arrangement is
governed by a joint venture agreement or shareholders' agreement hence a joint venture having a
separate legal entity diminishes the financial responsibility of the partners. (Burnett and Bath 2009)
(Please see Appendix 5 for legal analysis)

While venturing into the Asian market, the holding company should then form a Joint Venture with
the local partner of choice. The specific contributions expected from each parent should be included
in the joint venture contract as well. Again, contractually stipulating the specific inputs required from
each partner, (including the local partner) will ensure smooth operations.

4.2 Headquarter Location – SEV

In order to eliminate issues with double taxation, it is recommended to establish the holding
company into a country that has several bilateral double tax treaties worldwide and a favorable tax
regime. This means that companies resident in these jurisdictions can reduce taxes collected on
interest, royalties, dividend and capital gains income from foreign subsidiaries (Van Dijk, Weyzig
and Murphy 2006). Holding company structure with relatively autonomous foreign subsidiaries
would enable minimum administrative burden for the ultimate parent companies and ease the
investment flow from parent companies through the holding company, reduce the risk for the
owners, allow ownership of several companies and relatively flexible transfer of ownership or
inclusion of new shareholders without cumbersome changes to the ownership of the underlying
assets of the company or joint venture. (International Trade Centre 2005)

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The Netherlands has been identified as one of the suitable tax havens in Europe that could serve as
the holding company headquarters. The Netherlands is an attractive country because of the following
factors (van Dijk, Weyzig and Murphy 2006):
 The „participation exemption‟ that exempts dividends and capital gains from subsidiary
companies abroad from corporate income tax in the Netherlands.
 The unusually large Double Taxation Treaty (DTT) network that substantially reduces
withholding taxes on dividend, interest and royalty payments between treaty countries and the
Netherlands.
 The advance tax ruling system that gives certainty to multinationals about how the income of
their Dutch subsidiaries will be taxed.
 Other reasons include general factors such as legal security and political and economic
stability.

The Netherlands also is in cultural proximate to Germany, population generally has good English
language skills and the country has long experience dealing with headquarters of multinational
companies. Establishing a holding company in a low-tax jurisdiction is a common strategy for large
companies with overseas operations (van Dijk, Weyzig and Murphy 2006). When considering
specific jurisdiction as an attractive holding company location, exemptions regarding taxes on
dividends, royalties and capital gains from foreign subsidiaries should be evaluated. Based on the
aforementioned criteria, participation exemption and large network of tax treaties, the Netherlands as
an optimal location to establish the headquarter (holding company) that will manage the Asian joint
ventures. (van Dijk, Weyzig and Murphy 2006)

4.3 Decision-Making
Since the parent firms will have equal control over the operations, the best way to avoid problems of
control would be for representatives of the parents jointly appoint an independent Alliance Manager
who, along with a Board at the holding company level would oversee the venture. Ideally, this
manager should be well-versed with local marketing, legal and human resource experience for each
of the ventures. The Manager can then help the parent representatives‟ work productively with local
team heads to assist in operating processes and to ensure that the required inputs from the parents are
forthcoming. The Board and the Alliance Manager may choose to have strategic meetings with each
regional team at least twice a year for the first couple of years. These meetings would ensure that the
regional alliances are always working in sync with the vision of the parent firms. These meetings

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may also in the future be the setting where the decision to enter into new markets or work with
different partners is analysed.

The following is a suggested Alliance Structure that may be adopted (Bamford et al. 2003):

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4.4 Competitive Strategy

Taking a page out of Haier‟s „Good, Better, Best‟ strategy, our recommendation is that initial focus
should be on a wide product line of competitive priced and higher quality products, by leveraging
the parent firms‟ competencies of production process design, engineering expertise and supply chain
and operating logistics to ensure reduced costs in production and manufacturing and on time
delivery. Beginning with this strategy, SEV can also leverage the brand name and associated
reputation of each parent firm in the new venture to capture consumer loyalty.

While the perception of „western brands dominating Asian markets‟ (Temporal, P 2006,) are
beginning to lessen with the increased competitiveness and strong local players such as Haier and
Pensonic, we believe that the association with International parent firms can still be leveraged. With
this in mind, the initial entry should place SEV slightly behind Pensonic with a focus on mid range
quality products. At around year 6-8, if the partnership remains competitively placed, the position
that SEV should have worked itself is similar product breadth of Haier Group but with a price point
and matching quality similar to big internationals such as LG Electronics.

4.5 Management & Cultural Learning

There are several concerns raised in Section 1.3 (Management Analysis) which may affect the
working relationship of the partnership teams. To reconcile this we feel that several steps may be
taken:
 The first step is ensuring that all parties are in agreement and understand the nature of the
relationship and the role expected of each is to stipulate everything using a contract. This
arrangement should be followed between the parent firms and also at the local partner level to
ensure smooth cooperation. In this way, some of the cultural differences can be overcome as the
contract will ensure critical topics such as decision making, hierarchical responsibility,
management composition, labour policy etc are addressed. We recommend that a German
member of the holding company management team work in conjunction with local partners and
generally act as intermediary as they are most familiar with intercultural cooperation and have
elements in the management style which all can relate to. ‘they combine concepts of profits and
social responsibility’ we also feel that the key points highlighted in Appendix 1.1 – greater people
orientation, higher level of internal negotiation, greater skill at managing international diversity
and the capability to manage between extremes make a German member ideal for this position.

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 It is also recommended that the senior decision makers appointed at the Asian alliance level not
be an existing employee of either parent. In this way, the decisions may be made impartially with
only a view on the necessary performance indicators of the alliance.
 Pre-departure briefing sessions should be held in headquarters detailing cultural differences that
may be expected between all the partners. The attendees to this session should include every
employee working for the alliance, including the partners at the headquarters level, the holding
company and the joint venture employees.
 The success of this alliance will rely on the capabilities of the partners to come together and work
with a common aim of alliance profitability. This will be difficult to achieve without building
trust between the parents, who are also competitors. To facilitate this building of trust, SEV may
choose to begin the alliance with a closed approach where there they do not have to share
proprietary information with each other.

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5. Region-Specific Recommendations: China

5.1 Partner & Location

Red Dragon has emerged as a very good partner in our analysis in section 1.2. Its prior experience in
electronic products, and political connections would help this venture navigate the legal issues in the
country. Hence, our recommendation is to build a manufacturing plant in the Nanjing area, or
another mid-size city located near the coast such as Suzhou, Hangzhou or Dalian.

5.2 Product Range

Due to the existence of a high number of cheap, local competitors, our recommendation is that only
the good quality but basic home appliances with low technological sophistication be introduced in
the Chinese market initially. Since the lower end of the market is more price-sensitive, the alliance
with low prices will be able to penetrate the market faster, gain local knowledge, and build a stronger
brand value.

In addition, we believe such a mode of entry will be very helpful in mitigating the issue of
Intellectual Property Rights for the parent company‟s more sophisticated and valuable products. As
assessed earlier establishing a superior low end product line will have greater rent and consumer
capture. As the alliance continues and there is growth in trust between the holding partners and the
local firm, higher end product entry may be considered.

5.3 Distribution
The Chinese plant should only be used for distribution in the China region. A primary reason being
the high number of potential customers in the lower and lower middle class population in the
country. With the Chinese operations having cheaper and basic appliances, the manufacturing facility
can focus on this target population segment.

5.4 Future Expansion

It will take the venture a couple of years to gain a foothold in the country and form a strong name for
itself. In addition, having worked with a partner for that time, they would have built a stronger
relationship based on trust and mutual cooperation rather than only on contractual terms. The joint
venture can then move towards a higher-end product range including more sophisticated electronic
and AV equipment. With a growth in product range, the alliance will also start gaining a higher
customer base and can compete with the large firms with multiple product lines such as LG.

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6. Region-Specific Recommendations: Malaysia

6.1 Partner & Location

As discussed in our analysis in section 3, the two partners chosen by the company, Bumiputera &
Low Key Corporation are a very good choice. Their involvement in the Multimedia Supercorridor
project makes them particularly attractive. Hence, we recommend SEV follow through with a joint
venture agreement with Bumiputera and set up a manufacturing facility in the Supercorridor to avail
themselves of the government concessions. The contract should stipulate all critical inputs required
as well as the party that has to provide them.

However, issues may arise due to Bumiputera‟s partnership with Low Key, which will be a third
party in this venture. We therefore recommend that Low Key Corporation be a signatory party to the
joint venture contract to ensure their commitment and loyalty to the venture.

6.2 Product Range

We recommend entry in this region via two product ranges. One product range would be similar to
the one in China, focused towards the lower and lower-middle class of the population, and would
consist of basic and lower cost home appliances. To ensure a high branding of the holding company
name, the lower-end products should be sold under the name of the local competitor or via a new
joint nomenclature for the joint venture. In this way, the holding company can maintain its strong
parent value within the higher-end market.

The second product range would include the more sophisticated and higher end products focused on
the middle and upper-middle class of the population. This range would benefit from the branding of
the holding company and the reputation of the international parents.

6.3 Distribution:
The ASEAN treaty would be very helpful for the venture‟s expansion into Asia. Our initial
recommendation is to start distribution within the ASEAN nations and gain from the trade treaty
between these 9 nations of Indonesia, Philippines, Singapore, Malaysia, Myanmar, Cambodia, Laos,
Thailand and Vietnam.

An analysis of the ASEAN region (Appendix 3) has made it clear that all these countries differ in the
terms of economic growth, and especially purchasing power. Hence, we suggest the entry of both the

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brand lines in the countries of Malaysia, Singapore, Thailand, Vietnam, Philippines and Indonesia.
This recommendation is due to the presence of a large population of the lower and the middle class
in these regions. Hence, a wider range will help attract a greater market segment.

However, only the lower end brand should be introduced in the rest of the treaty nations (Myanmar,
Cambodia & Laos) as there is a definite lack of high end purchasing power, political and socio-
economic problems and also stronger competition from lower priced competitors.

6.4 Future Expansion:

Following the successful entry into the ASEAN nations, further expansion into other countries such
as India who recently signed a trade agreement with ASEAN, and Korea may be considered.
(Euromonitor (d) 2010)

Along with future market expansion, SEV must also „proceed with an eye toward projecting future
offerings‟ (Aaker 2008). Expanding its product line to reach its ideal positioning within the industry
is of utmost importance. As each parent firm has already developed smart technology in relation to
home appliances, the Malaysian market may be an ideal segment for the introduction of these
product lines due to market preferences for not only imported brands but those of a higher innovative
nature. (Euromonitor (g) 2010)

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7. Appendices

Appendix 1: Business Management Analysis

Corporation Expression style Corporate Hierarchical Decision Making Labour Relations

structure Ownership Orientation Process
Japan Hierarchical „keeping face‟ Largely seniority(nenko) Prefer group Easier to manage
Unwillingness of owned by wages decision making
competing within Financial -life-time
themselves. institutions, employment(shus
like banks hin koyo)
- enterprise
unionism(kigyobe
tsu rodo kumiai)
United The mode of Straightforward, multiple Individualism and Decisions are often Individual‟s
States communication Americans tend to egalitarianism made by person competence,
across aim to get the best used in context of holding the chief professionalism and
corporation results in the American people authority. Top- accountability for
levels is formal, shortest possible down style. individual
the hierarchy time. performance are
within the highly valued.
company is still
very important.
Germany Greater Higher level of multiple Take more time to Participatory Maintaining
orientation internal negotiation. reach conclusion decision-making effective labour
towards Consult, convince and obtaining process relations. Managers
employees. and negotiate more worker consent are expected to
Respect for to reach an through higher delegate the
authority, high acceptable level of internal responsibility of
detail- resolution. negotiation. hands-on
orientation, Loyal managers production
hierarchical management to
structures in technically capable
meetings and team members.
careful planning
of business.
China Authoritative Senior management multiple Employee follows Managers are More vocal in terms
and directive gives orders to orders from expected to make of unacceptable
those reporting manager decisions on behalf expectations
directly to them. of the group.
Chain of command
systematically gets
passed down the
hierarchy.
Malaysia Hierarchical, Extreme politeness Familial Family business, Group orientation Working together
Family structure and diplomacy with control over „father-son‟ towards a goal.
with manager tendency towards 40% of listed relationship Concept of teams is
acting as a head formal and companies most important.
boss protocolistic forms.
avoid subordinate
to lose „face‟.
[Sources preceded by a * contributed to this chart]

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1.1 Business Management Analysis Cont. 1

Parent Firms
Although German business management styles are distinct from those of the other European countries,
there are common characteristics between their management styles, that differ to some degree from those
of the US and Japanese management style:

i. Greater orientation towards people

In comparison with the US or Japanese top management, German executives generally share a
common disposition towards the employees of the firm. Greater orientation towards employees has
consequences on the management of the firm on different levels. This is due to combining the
concepts of profits and social responsibility, attitudes towards employment such as seeing firing as
the last resort (instead of 'hiring & firing' practices of those of the US firms) and sense of
responsibility to take precautions to mitigate adverse impacts on the workers.

ii. Higher level of internal negotiation

Typically European managers have developed skills in negotiation due to efforts and time spent on
negotiating inside the firm between different levels of stakeholders such management, works,
labour unions, headquarters and subsidiaries. Decision-making process is participatory rather than
top-down style of that of US firms, or consensual process of Japanese firms. US and Japanese top
management ultimately hold the power whereas their European counterparts have to consult,
convince and negotiate more to reach an acceptable resolution. Codetermination is a special feature
of German firms that increases the internal negotiation among the management and differs greatly
from the US where workers have nearly no role in management. Higher level of internal
negotiation is a time-consuming process of decision-making hence it may take more time to reach
conclusion and obtaining worker consent in German firm than in US or Japanese firm.

iii. Greater skill at managing international diversity

Generally, German firms are fairly tolerant to the risk of intercultural management and have less
imperialistic tendencies like that of the Americans and the Japanese who may still have an
inclination toward exporting their own management models to host countries. Nationals of the host
country are appointed at the head of foreign subsidiaries and expatriates located overseas have a
strong interest in learning and bear limited coherence with corporate culture to avoid any possible
cultural conflict in the overseas subsidiary. Whereas, Japanese and US firms may still try to export
their home country management and reproduce their corporate culture in host country. Relationship
between headquarters and foreign operations takes a frm of partnership with decentralized control.
Decentralization of foreign operation often lead to forming a partnership between headquarters and
overseas subsidiaries instead of centralized HQ domination. As a result, it can be argued that
subsidiaries have considerable autonomy and are not dominated by the headquarter, as least not to
the same extent as typical to US firms.

1 Points 1-4 in Business Management Analysis section in reference to Calori et al, 1995

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iv. The capability to manage between extremes

Managament practices in the United States and Japan are often seen as two extremes of a spectrum,
short-tem orientation of the US compared with long-term orientation of the Japanese. Germany is
often characterised to resemble more of Japan than of the US in regards to profit and firm
orientation. Balancing individualisn and collectivistic orientation is particularly important for
international managers and German management style seems to combine effectively individualism
with team spirit, thus influencing positively on to two levels: the perceptions of balance of
personal life of employees in relation to the commitment to the firm, and employee involvement in
the firm. The United States is characterised as a highly individualistic country whereas the Japanese
have strong collectivistic tendencies, distinguishing them from German workplace in relation to
employee loyalty and importance of in-house training. Differences in time orientiation between
German, Japanese and US firms may require closer consideration of the time spans needed to
strategic decision making, investments and the stability of relationships between supplier, clients
and within the firm itself. (Section adapted from Calori et al, 1995).

Greater orientation towards people can also be seen as continuous investments in human resources,
especially with a focus on technical and professional competencies. This feature, combined with a strong
emphasis on quality and innovation, form the foundation of German management style. Labour relations
and formalized production management act in supporting roles or are outcomes of wide span of control
within the firm and loyalty of managers. (Glunk et al. 1995)

The table below summarizes the main characteristics of German-style management.

Table 1
Unique features of German-style management
 Fostering vocational training
 Emphasizing the technical expertise of managers
 Showing respect for competence
 Wide span of control
 Loyal managers
 Focusing on quality and innovation
 Maintaining effective labor relations
 Formalized, hands-on production management
Source: Glunk et al. 1995

What is a significant difference in comparison to US and Japanese firms, is that ”[t]he manager is not a
cultural hero in Germany. If anybody, it is the engineer who fills the hero role” (Hofstede 1993).
Technical expertise and qualifications are particularly important and expected in Germany. Managers are
expected to delegate the responsibility of hands-on production management to the most technically
capable team members, and team performs the tasks based on clear instructions independently without
undue interference from management (World Business Culture 2010). This supports the main

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characteristics of formalized production management, respecting competencies and wide span of control
without undue interference in the performance of tasks.

In addition to discussing German style of management in, it is also important to pay attention to German
culture and especially how business is carried out in this cultural context. Some most prominent features
of German business culture are formality in relationships inside the firm and in business etiquette,
punctuality, respect to authority, high detail-orientation, hierarchical structures in meetings and forward
thinking culture as well as careful planning of business, typically, when decision is made it will not be
changed and contracts are strictly followed and honoured (Kwintessential 2010).

Dealing with Locals

Chinese and Malaysian management styles draw a lot from Confucian, Islamic and Hindu ideology. They
are also complex in nature and differ from the styles used by the parent firms. There are some similarities
between the Japanese and these Asian counterparts but some key differences can be highlighted to help
improve the relations between local partners and SEV Holdings.

One of the key areas to be aware of is communication style between management and employees between
all parties involved in this venture. „Westerners are more direct and explicit‟ (Abdullah 1996) in relation
to job tasks, reprimands and decision making etc. Our German and US parents are quite used to this style
however will face difficulty with the Chinese and Malaysian counterparts. Similar to the Japanese,
Chinese and Malaysian management styles draw from the ideal of „respect‟ that is held in such high
regard in Confucian, Islamic and Hindu Ideology. They prefer „indirect and ambiguous modes‟ (Niikura
1999) of communication and expressing „negative feelings is deeply disrespectful‟(ibid.) For the Asian
management, disagreements and reprimands need to be done diplomatically and politely and often quite
indirectly to avoid „losing face‟. Ting-Toomy 1992 suggests that this is due to the collectivist nature of
these Asian Cultures that „value interpersonal harmonious relationships‟ rather than the „individual
autonomy of individualistic western societies‟ that contribute to this form of „face need‟ form of
communication. The Japanese team will be extremely useful for the US and German side to adjust to this
form of communication due to the few similarities.

Another aspect and benefit of the local partnerships is to understand is local laws and regulations which
the Chinese and Malaysian counterparts will be best at dealing with. Western laws are quite explicit and
clear, offering high measure of protection however this is not the same practice in China or Malaysia.
(Please see Appendix 2 for a legal and economic overview of China & Malaysia) In the case of China
there is a high flexibility of laws due to „open interpretation by officials‟ (Chen 2008). Vaterland AG and
Eagle Electric will be quite used to clearly setting out regulations however „official interpretation of the
laws and regulations might deviate‟ (ibid.) from what is codified, and this may lead to a „high degree of
uncertainty‟ (ibid.)

It is essential to build trust with our local partners to ensure a minimum of cultural and managerial
conflict. We have recommended certain steps be taken to ensure smooth operation in Section 4, however
we are quite positive that conflict will be minimum as Vaterland AG like many German firms are „fairly
tolerant to the risk of intercultural management and have less imperialistic tendencies that the

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Americans’ (Appendix 1.1) along with some similar management traits with the Japanese, the only distinct
opposite is Eagle Electric used to the US mode of management and communication. Conflict should
therefore be mitigated by the presence of the other two.

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Appendix 2 - China and Malaysia Regional Analysis

CHINA

Political & Legal

Historically, China issued encouraged FDI policy began at the end of 1970in which China set up four
special economic zones located in coastal cities. ‘in June 1995, China first promulgated the Provisional
Regulations Upon Guidance for Foreign Investment Orientations and the Guiding Directory on
Industries Open to Foreign Investment (Moran et al. 2005). Meanwhile, China‟s domestic companies
were not strong, therefore, solely foreign-owned enterprises replaced joint ventures as the most popular
form of FDI in China, because of policy forbidding wholly owned foreign firms.

China became a WTO member in 2001 and began attracting foreign companies invest money to China.
Subsequently, the government eliminated most of these compulsory requirements to conform to the
TRIMs Agreement, reduced import tariffs, supported local market scale and scope for domestic
enterprises to be competitive with foreign enterprises. However tax concessions were offered within
economic and free trade zones. The regular tax rate is 33%, composed of a 30% national plus a 3% local
corporate income tax. (Lin and Kenny Z. 1999)

Post Global Financial Crisis, Premier Wen Jiabao reaffirmed the fundamental macroeconomic targets –
economic growth, employment and inflation in his work report to the National People's Congress (NPC)
delegates. The goal is therefore to manage the Chinese economy so that there will be no negative impact
from the global economic crisis (Dan 2009) China continues to comply with the strict requirements of its
WTO commitments. It will remain open to Greenfield investments in manufacturing, retail and service
businesses. It will continue to improve its intellectual property regime and the efficiency and fairness of
its court system.

China now has specified sectors for foreign direct investment which were previously closed. The foreign
investors manufacturing in China produce half of the Chinese exports. The countries total foreign
exchange and gold reserves are $2.033 trillion. This is the largest in the world after Japan. Foreign direct
investment in China has grown by 24.7% in April 2010 as compared to the last year‟s April month. This
amounts to $7.35 billion in a month. The increase is 12.1% in the foreign direct investment in March
2010(Yadav 2010)

Economic & Financial

Economic Outlook
In the last three decades, China has become a major engine for growth. Last year real GDP only rose by
8.7% which was the lowest growth recorded pace in nearly a decade. However, the great market demand
and public investment followed up by aggressive fiscal and monetary policy drove the economy back on
track soon. The forecast of the real GDP is 10.5% growth in 2010. (Euromonitor 2010)

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Business Environment
Figure 1 shows a positive picture of FDI in China from 2003 to 2008. The inflows of FDI continued to
increase during six years. Besides, through the data of the first quarter of 2010, inflows of FDI kept rising
which reflects the remaining confident of investors about China‟s economic prospects. (Euromonitor
2010)
Figure 1

Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics
and World Economic Outlook/UN/UNCTAD/national statistics

Key factors for China‟s attractiveness

- high speed growth

- low cost and availability of labour
- the FDI friendly policies
- Potential market value and opportunity

Financial System
Chinese banks reformed in the past decade. The big four banks in China - Industrial and Commercial
Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB), and Agricultural Bank of
China (ABC) were previously government owned (Ferri 2003). After reforms, they are commercially
oriented and listed on stock market. Figure 2 shows market capitalization between 2004 and 2009 in
China. Generally, it presents an upward tendency, which means it has positive outlook for capitalization.

Since 2006, foreign banks and financial institutions now operate in China. The present foreign banks may
improve the efficiency of domestic banking systems (Claessens et al., 2001; Focarelli and Pozzolo, 2001).
Foreign banks such as Citibank, HSBC and Standard Chartered Bank increase the sufficiency of
capitalization.

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Figure 2

Concerns
China has a complex business environment. There are two main concerns that arise at the start of a new
business in China.
- The Chinese government has increased the tax rate of foreign firms from 15% to 25% in 2008
due to pressure from Chinese manufacturers. For a significant period, foreign firms were taxed at
15% compared with a 33% rate for domestic corporations (Euromonitor 2010). New policy
direction is increasingly becoming more supportive of national firms.

- The second major concern is rising increasing labour costs. Figure 3 shows the increased
minimum monthly wage in China from 2004 to 2007. In January 2008, minimum wage was
enacted for legal protection of wages. While not actively enforced (Euromonitor 2008), this
presents a slightly less welcoming picture. Crucial to the attractiveness of the Chinese market is
1) availability of low labour costs and 2) government‟s willingness to absorb foreign investors.
The increasing wages would force some firms to leave China and look for other cheaper countries
in Asia Pacific such as Vietnam, Thailand, the Philippines or India. (Euromonitor 2008)

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Figure 3

However, China still has advantages such as large population which provides stable work force, or
relatively cheaper high-skilled technical workers which satisfies the requirements of manufacturing and
high-end electronic goods. (Euromonitor 2008)

A tendency is the rising labour cost especial in major cities in China forced foreign companies move their
productions to secondary level cities. The high purchasing power in Beijing, Shanghai, Shenzhen, these
first tier cities asked for higher payments. Compared with that, the second tier cities have lower labour
costs and incentive policies. (Euromonitor 2007) Investing business in second ties cities gradually
become new preferential options for foreign investors. Nanjing is a good destination for FDI, because its
coastal location and cheaper labour costs compared with Beijing, Shanghai, Shenzhen or Guangzhou.

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MALAYSIA

Political & Legal

International trade has a significant impact on Malaysian economy and to a large extent, the Malaysian
economy has been dependent on foreign trade to achieve its economic goals (Yusoff 2005).

Malaysia's favorable trade policy has enabled ”greater flows of foreign direct investment”, however
typically foreign investors are interested in serving the vast external market of South East Asia instead of
the limited domestic market. Export barriers including tariff and non-tariff barriers are a particular
concern for Malaysian exports. In addition to trade barriers, Malaysian manufacturers face fierce
competition from other developing countries such as Indonesia that can impact the competitiveness of
goods manufactured in Malaysia. Developed countries, such as the United States and the European
Community, have imposed tariffs on Malaysian electrical and electronic goods (for example tariffs are
imposed of over 20% on electric goods but none on electronic components). (Julian and Ahmed 2009)

According to the World Bank Group, Malaysia ranks at 23 out of 183 economies on the scale of the
overall 'Ease of Doing Business' (The World Bank Group 2010a). Per the World Bank Group statistics
and data available, specific areas of concern are highlighted such as contract enforcement and increased
transaction costs related to starting a business in Malaysia - it takes more than the world average of 19
procedures and 234 days to obtain a business license in Malaysia (Datamonitor 2009). Notwithstanding,
Malaysian investors enjoy relative good investor protection per legal and regulatory mechanisms and
access to credit has been ranked according to the World Bank Group in respect to legal rights (in relation
to how bankruptcy law protect the rights of borrowers and lenders) among the best practice economies
(e.g. New Zealand and Singapore). Notwithstanding that Malaysia ranks high per the World Bank Group
(The World Bank Group 2010a) on the scale of investor protection, regulatory system governing trade
and investment lacks transparency that can lead to ill-documented provisions which interpretation rests at
the discretion of bureaucrats (TradeChackra 2008). Excessive and unhealthy competition within
established industries is restricted in The Industrial Co-ordination Act 1975 that allows government
intervention under such circumstances (Datamonitor 2008) to use protective measures. Favourable
treatment of indigenous and ethnic Malay firms in form of trade policies and restrictions may hinder the
prospectives of foreign investors succeeding in Malaysia hence as a result foreign investors are typically
forced to take on a local partner in order to overcome this impediment (Datamonitor 2008). Latest
competition policy inclusion to legal framework of Malaysia was approved by the Parliament in April
2010 prohibiting cartels ”abuses of a dominant market position” (Jones Day, H. Stephen Harris Jr and
David P. Longstaff 2010 ). There are various forms of business entities that can conduct business in
Malaysia, most popular being limited companies that are regulated by The Companies Act 1965
(Datamonitor 2008).

Despite of the shortcomings in legal and judicial systems, Malaysia has made progress in alleviating the
issues adversely affecting the business environment by (The World Bank Group 2010a):
 reorganising commercial courts to dispose of interlocutory matters more promptly
 establishing a new one-stop shop to streamline registration of business start-up
 reducing company incorporation charges and corporate fees

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 increasing staff and enforcing deadlines in the courts in order to improve contract
enforcement and to decrease case filing times from 45 days to 30 days .

Corruption remains to be an issue in Malaysia, and Transparency International's Corruption Perceptions

Index 2009 has ranked Malaysia 56th out of 180 countries comparing to 2008 index when Malaysia was
ranked 47th (Transparency International 2009). This provides an indication of possibility of issues arising
when dealing with government officials (such as delays in obtaining necessary approvals and
permissions) and increased transactions costs involved with judicial and bureaucratic processes. Weak
contract enforcement is interrelated to the lack of transparency in judicial proceedings, and poor
efficiency of the court system. The aforementioned deficiencies combined with corruption, is an element
in Malaysian legal context that may create additional costs and be time-consuming if dispute is settled
through litigation. Instead of litigation, arbitration is often used to settle international commercial
disputes, however foreign companies frequently specify in their contracts foreign legal venue and
jurisdiction in case any potential litigation arises from the contract (New Zealand Trade & Enterprise
2010).

Malaysia has in place laws that protect intellectual property of both domestic and foreign companies,
however, intellectual property rights protection is a concern for foreign investors in Malaysia. Despite of
recent improvements in legislation and enforcement, IPR infringements still occur frequently and
according to the Office of the US Trade Representative's Watch List 2009 enforcement of IP rights have
declined in recent years (Office of the United States Trade Representative 2009). The degree of the IPR
protections should be on the top of the list for foreign investors when looking for joint venture partners
and strategic alliances in Malaysia (New Zealand Trade & Enterprise 2010). Malaysia is a member of the
World Intellectual Property Organization (WIPO 2010) and a signatory to the Agreement on Trade
Related Aspects of Intellectual Property Rights (TRIPS) that provide investors the conformity of
Malaysia's aspirations to comply with international standards (The World Trade Organisation 2010).

Malaysia enjoys a relatively stable political landscape but suffers from weak democratic institutions to
restrain the growth of authoritarian regimes (Datamonitor 2008). Datamonitor also lists internal security
and government's ability to curb corruption as future risks for the country – these would inevitably
increase the possibility of business operations being negatively affected by tension between ethnic groups,
terrorism or economic standing hampered by preferential treatment of companies close to the ruling
political regime. Investment policies are favorable in high technology industry (Datamonitor 2008) that
gives a positive indication that obtaining approvals and licenses should not be overly cumbersome
process. Laws and regulations around labor provide relatively flexible environment to maneuver, however
high costs are related to termination of employment (Datamonitor 2008). Overall, government approach
to high-tech FDI is encouraging and is assumed to further develop according to government's 'vision
2020' (Datamonitor 2008; The World Bank Group 2010a).

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Economic & Financial

Economic Outlook
The recent financial crisis led to increasing trade inter-dependence among the Asia Pacific nations to
counter the economic downturn in North America and Europe. (Euromonitor (c) 2010) Malaysia, like
other Asian nations suffered setbacks in FDI, exports and economic stability. Malaysia has since
continued to ease investment regulations and reduce taxes in an effort to boost the economy and
investments. (Euromonitor (b) 2010)

Due to government stimulus spending and an increase in the export sector, the economy is expected to
resume growth in 2010 with the GDP growth forecast of 4.7% and a rising expected number for the future
years. (Euromonitor (b) 2010) According to the Malaysia Institute of Economic Research, GDP growth
strengthened to +10.1% y-o-y in Malaysia. This change was primarily led by a revival in the
manufacturing sector, especially export-oriented industries. (Malaysian Institute of Economic Research
2010) Figure 4 provides the results of a Business Conditions Survey with 350 manufacturing businesses
in 11 industries in Malaysia. The survey was aimed at inferring emerging economic trends in the nation.

Figure 4: Business Conditions Index – BCI 2Q2010

Source: Malaysian Institute of Economic Research 2010

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Business Environment
There is now a rising confidence amongst foreign investors in the Malaysian economy following its
recovery after the financial crisis as well as due to the government efforts to encourage FDI through
liberalisation of investment regulations. As seen in Figure 5, the economy saw a slight decrease in 2007-
2008 due to the crisis, but the expected FDI growth for the economy is rising. (Euromonitor (b) 2010)

Figure 5: FDI Intensity & FDI Flows 2003-2008

Source: Euromonitor International 2010

Malaysia continues its competitiveness globally due to its infrastructure and high innovation capacity. It
was ranked 24th out of 133 countries in the 2009-2010 World Economic Forum‟s global competitive
index. An Anti-Corruption Commission and Bill were also introduced in 2008 to introduce better anti-
corruption measures and reduce business costs. However, corruption remains an important issue.
Malaysia ranked 56th out of 180 countries in the 2009 Transparency International‟s corruption perceptions
index. (Euromonitor (b) 2010)

Financial System
According to World Bank‟s 2010 report, Malaysia is the easiest country to obtain credit in the world. The
nation‟s financial system provides a wide range of financing options for businesses. The country also has
very effective investment and security laws. As a result, it ranks 4 th out of 183 countries in World Bank‟s
2010 report in terms of protecting investors. (Euromonitor (b) 2010) Malaysia‟s banks have survived the
financial crisis very well, and remain well capitalized and liquid. (The Heritage Foundation 2010)

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Appendix 3: Asia-Pacific Market Overview

We assessed the attractiveness of the home-appliances and consumer electronics industry within Asia
Pacific. Existing industry conditions are currently particularly favourable for entry into recommended
markets. For our analysis we used predicted market values of both industries within Asia Pacific and
correlated it with data showing rising consumer purchasing trends within China and Malaysia. With
strong overall growth in this industry, entry into Asia Pacific and specifically establishing bases of
operation in China and Malaysia are essential to a long-term strategy geared towards reaping the rewards
of a vast market.

The key driver of these markets are an emergence of an Asian middle class which „has increased rapidly
in size and purchasing power‟ with „previously poor households [now] into the middle class‟ (Asian
Development Bank 2010) especially in China which has seen an increase in GDP (ibid) and a significant
rise in income and growth from urban towns and cities. Their disposable income grew by 151% from
2000-2008 (Economist Intelligence Unit 2010) With a national policy of “expanding domestic demand to
maintain growth,” (Dai 2010) China‟s middle-class income group represents an opportunity for SEV to
enter and capture significant market value and provide necessary home –appliances. However home-
appliances still remain important purchases and require a “long lifespan with a focus on efficiency and
quality, as well as cost” (Datamonitor, 2010) which SEV must be aware of in the development and
marketing strategy of its products.

In home-appliances, the Asia-Pacific market had revenues of $82.4bn in 2009, which represents a
compound annual growth rate (CAGR) of 6% (Datamonitor 2009) spanning from 2005-2009. The
Chinese market grew with CAGRS of 7.9% with a value of $49.8 billion. (Datamonitor, ibid.) While
growth is expected to be slower, the market is still predicted to grow steadily. China accounts for 60% of
the Asia-Pacific home-appliance market value. China‟s market demand for electrical appliances and
house wares, according to the Economist Intelligence Unit, is forecasted to grow on average around 12%
per year.

In Malaysia‟s retail sales are forecast to grow by an average of 9.2% a year in 2010-2014 (Economic
Intelligence Unit 2010). Another opportunity that should be taken of is that Malaysia‟s purchasing power
is second only to Singapore in the South-East Asian region and the „vast majority of home appliances are
imported‟ (Brandt, T et al 2010) coupled with a rising standard of living and a rise in the net income of
rural households of 11% between 2000-2008 (Economic Intelligence Unit 2010)) signs for potential to
capture significant market share are present. Consumers in both China and Malaysia have a growing
preference for „favouring international brands‟ (Ibid.)

While the disposable income in the ASEAN nations has increased over the past couple of years, high
levels of poverty, political strife and inequality still exist. As a result, products aimed for these regions
may have to be tailored based upon whether the country has a mature market for higher-end products.
(Euromonitor (f) 2010) Vietnam, Indonesia, Phillipines and China are expected to see a huge growth in a
middle class with discretionary income to buy high-end products. (Euromonitor (g) 2010) In addition, the
nations of Malaysia, Thailand, Indonesia, Philippines & Vietnam have seen a strong recovery from the
financial crisis. (Euromonitor (h) 2009)

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Appendix 4: Competition Snapshot

LG Electronics

Key Financials: 2nd quarter fiscal sales of USD12.4bn and profit of USD 108mn (LG Electronics
company website 2010)

Product Diversity: 5 business segments consisting of Home Entertainment, Mobile Communications,

Home Appliances, Air Conditioning and Business Solutions. Diversified product portfolio.

Potential Degree of Rivalry: Initial competition is predicted to be minimal. SEV will be competing
across basic product lines. As SEV develops its own brand strength in future may overlap into higher
end product lines.
Brand Strength: LG Electronics is „one of the global leaders in consumer electronics and home
appliances‟ (Datamonitor 2010) and with its vast product portfolio commands a very strong global
presence and consumer loyalty.

Haier Group

Key Financials: revenues in 2009 of 11.5Bn RMB and gross profit of 3.4mn RMB

Product Diversity: Haier Group is the world‟s 4th largest home appliances maker and largest
refrigerator maker (Bell S 2008, p 157) and has a diversified product portfolio from low end to high
end products in consumer electronics and appliances in China, however more slightly more specified
range internationally (ibid. p 160)

Potential Degree of Rivalry: Initial competition is considered moderate as SEV will be competing
across basic necessity product lines within China along a similar strategic route.

Brand Strength: Assessed on a domestic and international level.

 National : Considered China‟s leading brand however competes now with Lenovo as
China‟s top brand (Bell, S. 2008, p159). Domestic strength and brand loyalty is therefore
very strong. Haier leadership position has been solidified with domestic market share of
21% for overall appliances (Gartenfeld et al 2009, p7)
 International: Within the US Haier competes in the top bracket of home appliances
(Engardio & Arndt 2006) with Electrolux and Whirlpool and is quite successful in niche
markets. They are also relatively known in Western Europe however are not as strong in
either US or Western Europe as they are domestically.(Bell S 2008, p158) however have
had difficulties with their portfolio. There still exists a common perception of Chinese
brands with „shoddy quality‟ (Engardio & Ardnt 2006). International brand strength is
considered to be moderate.

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Pensonic Holdings

Key Financials: Total Revenues of Malaysian Ringgitt $303mn and gross operating profit of 3.35mn
Ringit (Bloombergs Business Week 2010)

Product Diversity: Diversified product portfolio with a large range of home appliances and high
quality audio-visual equipment.

Potential Degree of Rivalry: Initial competition is considered to be moderately strong. SEV will
compete with Pensonic across basic home appliance product lines and higher end lines in Malaysia
and other South East Asian countries.

Brand Strength: Considered one of „Asia‟s star brands‟ is very strong within Malaysia and South
East Asia (Temporal, P 2006), with majority percentage of exports to Thailand and Indonesia.
(Business Times 2006). It commands a reputation of being quite „local‟ and specifically the first
„Made in Malaysia‟ successful company (Pensonic Website 2010)

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Appendix 5: Legal Considerations for the Joint Venture

The first task prior to determining the legal form of joint venture is to decide what it is that the parties
want to achieve with the joint venture. The goals of the joint venture ultimately determine the structure
and form how the joint venture shall be established within the legal framework of the jurisdiction in
question. Parties needs to carefully consider "the relevant national laws affecting investment, exposure to
liability vis-a-vis other participants, tax, remission of profits, ownership of assets, transfer of interests,
management, and competition policy". (Burnett and Bath 2009, pp.421)

In addition to domestic law, parties needs to thoroughly examine multilateral and bilateral trade
agreements such the ASEAN free trade agreement (AFTA), WTO treaties and any relevant double tax
treaties that may hinder the benefits for foreign direct investment or provide additional incentives to
invest in certain industry, location or engage in exporting to other member states of the multilateral or
bilateral treaties. Prior to disclosing any confidential information to the prospective joint venture partner,
it is highly recommended to execute non-disclosure agreement setting out the terms and conditions of
trade secrets as well as other confidential information that is disclosed in the course of negotiating the
actual terms of the joint venture. (Burnett and Bath 2009)

An incorporated joint venture forming a separate legal entity is often suitable for a new business that has
long-term prospects (International Trade Centre 2005). The joint venture arrangement is governed by a
joint venture agreement or shareholders' agreement hence joint venture having a separate legal entity it
diminishes the financial responsibility of the partners (Burnett and Bath 2009). Typically, an incorporated
joint venture connotes limited liability for the shareholders, a distinct identity for the new legal entity,
ability to transfer ownership, employment framework and in most jurisdictions an established legal
regime in relation to corporate law (International Trade Centre 2005).

Briefly, the joint venture agreement should cover the following points (Burnett and Bath 2009, pp. 425-
431):

1. Objectives and scope of joint venture

2. Parties and contribution of parties
3. Share allotment and voting rights of the shareholders
4. Constitution and composition of the board
5. Responsibilities of the board – operational responsibilities
6. Rights of a party to transfer its interests
7. Default provisions (such as insolvency, breach of agreement, failure of the joint venture to make
profit, failure of a party to meet financial commitment)
8. Deadlock breaking and termination
9. Dispute resolution and governing law
10. Allocation and distribution of income
11. Funding including future funding
12. Conflict of interest
13. Confidentiality
14. Protection of intellectual property and proprietary information

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As mentioned above, considering double tax treaties is an essential factor in establishing an incorporated
joint venture overseas. An incorporated joint venture creates the preconditions for double taxation due to
the establishment of new legal entity firstly on the corporate profits of the JV company and secondly on
the dividends transferred to the shareholders. Therefore, it is well advised to consult a tax specialist when
choosing the legal form and structure of the JV. (International Trade Centre 2005)

Table 1 - Country specific legal incentives and considerations

Malaysia
INCENTIVES
ASEAN Free Trade Agreement (lowered or eliminated tariffss for all member countries)
The World Trade Organisation and related multilateral agreements
The National Green Technology Policy to promote sustainable development and to mitigate any adverse impact
on the environment due to manufacturing and production
Tax exemptions (Pioneer Status,
Investment Tax Allowance, Reinvestment Allowance, Multimedia Super Corridor and
High Technology Industries)
Guarantees against
expropriation of property without compensation
Investment Guarantee Agreements
Party to the Convention for Settlement of Investment
Disputes (the ICSID Convention) which provides for arbitration and conciliation of legal
disputes arising between an investor and the Government of Malaysia
Financial
arrangements for the purposes of FDI and raising capital are rather flexible and market-oriented
CONSIDERATIONS
Pluralistic legal system defined by customary law, Islamic law and English law tradition
Issues with WTO and ASEAN agreements and challenges in relation to incorporating the provisions to domestic
regime and ensuring enforcement and compliance
Lack of judicial independency
FDI restrictions in relation to ownership and foreign entity forms governed by the Companies Act 1965
Time-consuming process of obtaining business license and approvals
High degree of uniformity and certainty in labour-related laws and policies
Regulatory burden in relation to environmental matters
FDI regulations and laws must be considered agains economic-social-political background exercised in favour of
the bumiputras (ethnic Malays and other indigenous people)
Adequate protection of intellectual property rights
Inefficient contract enforcement
Source: Rajenthran 2002; New Zealand Trade & Enterprise 2010, Malaysia Country Brief

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