Management Summary
Introduction to the research
Ford dealer Sietsma B.V. wants to take advantage of new export sales opportunities in the European car market. The European Commission has liberalized the car market for dealers.
The underlying goal is an increased competition on the long protected car market that will result on short term lead to a harmonization of netto-car prices within Europe. The management has asked me, a student International business with knowledge of other functional area's as Marketing and Small Business & Entrepreneurship, to investigate this opportunity by making a selection of a few markets for export, and by giving recommendations on how to enter these, considering possible internal adaptations too.
Therefore the research objective for this research is:
“To recommend Sietsma B.V. how to exploit the temporary parallel trade in the European car market.”
The problem owner is Mr. L.P. van der Molen, Managing Director of the company. The export department has little knowledge and experience in exports and in selecting new markets.
In a preliminary research, information is collected to clarify the management question to distill a problem statement for a research on entering the right markets, and entering them right. Decided is to focus on the selection of two markets concerning the short term that the opportunity lasts and time running for a "first-mover advantage" on the new markets. In consultation with the Rijksuniversiteit of Groningen the research question is as follows:
The research question is accordingly: “Which markets within Europe have the best export potential for Sietsma B.V, and which export marketing strategy is most suitable for Sietsma
B.V.?”
Country selection
After pre-selecting a number of European countries, seven countries are analyzed for possible attractiveness in exploiting new car sales opportunities in Europe. Switzerland and Austria appear to the best markets for exporting cars mainly for their high market potential, low entry- barriers, and highest differences in car pricing compared to the Netherlands.
Analysis results
-When Sietsma B.V. uses its strengths, competitive prices and its entrepreneurial orientation, to use opportunities like the extra two years that price- differences are expected to last and when Sietsma B.V. tries new marketing channels like the Internet to increase market access export success can be large. But also her small firm size can be used for reacting quickly on changes in the European car market, as a means to fend off possible threats of new forms of competition in the car market, which are Internet Sales, Multi-brand sellers, Car-sector unrelated dealers, Direct sales from manufacturer, Agent or Re-importer or Intra-brand competition in the make self ( other franchise dealers like Sietsma B.V.)
-When also improving experience and commercial insight in foreign markets, besides creating
an environment of stimulation and rewards, innovation to increase market access with new
marketing channels, like the Internet, is possible for the next two years, when the opportunity
of profiting from car price differences is expected to last. Besides, when creating this kind of
environment Sietsma B.V. can prevent possible threats from strategic errors from short-term
policy with no long-term investments, like improving export skills, that lowers export profits and endangers continuity (of exports and/or the company).
-The last but very important result is the need for an improvement in reputation at foreign clients, just like (after- sales) service for clients abroad and the need for a better communication with foreign clients in order to prevent decreasing numbers in clients and a corresponding high dependency on a few remaining large un-contracted and therefore financially riskful clients.
Export marketing strategy
Sietsma B.V.'s best option is to use a focus strategy on niche markets in both selected countries by using its low car prices as a competitive advantage. Focus is mainly on consumers as end-users in both selected countries that are interested in very low car prices, but accept lower service.
The best option to enter the new markets is by means of an agent, because of his know-how of export issues and knowledge of and entrance to the close markets. But also investment needed for this form of internationalisation is low, and the possibility to find many small business customers abroad to spread risk and avoid dependence on fewer customers is high.
Distribution: Transporting the cars is cheapest by car-ambulance from the logistics company of the Dutch Ford importer. The channel to use is hiring an agent for personal contact and for being a local service point for clients and use the Internet for promotion support, information and easy online client contact.
Pricing: Discount policy: clients get more discounts on larger cars or on larger quantities like rental companies. Wished situation is more clients with low discounts. Credit: the best option for the check of credit-worthiness of business clients is to ask the local Chamber of Commerce since this is a free and quick service.
Promotion: Public relations for being a good but free promotion and allowed for parallel trade too. Trade fairs are a good means to join the relatively close local car market network in both markets, next to finding an appropriate agent too. Visiting the new markets gives more experience, feeling and knowledge of markets. Online selling is also recommended for Sietsma B.V. as the fastest growing shopping form, the growing number of Internet connections, low investment needs, provision of unlimited and easy access to objective information, and enabling quick price-comparisons for customers, possibility for virtual brochures without real inconveniences for customers. Further easy contact via email and language tools for friendly communication. Room for testimonials of satisfied customers gives potential Swiss and Austrian Internet buyers, who still perceive some risk on Internet selling in buying abroad, trust .
Product: three models of Ford selected for export to the two new markets: Ford Fiesta, Ford
Focus and Ford Mondeo, because they meet most of the demands in both markets. Product
adaptation is not needed because of the acceptation of International automobile standards in
both markets. Service/Warranties: Since 2002, a 2-year warranty is legally obliged for
consumer purchases everywhere in Europe. Further the official Ford dealers in both markets
are obliged to give the service needed as the imported car is less than two years old. Take-
back actions are therefore not necessary. Other service improvements needed are service-
books in the foreign language, the importer is obliged to provide this extra service, quick car
replacement for a wrongly placed order and acceptation of extra costs for extra options to
keep the customer satisfied, because satisfied customers are good advocates and loyal that
enlarges profits.
Internal recommendations
-Keep the company well informed on car market developments and consider quick action to keep ahead of increased competition.
-Spend time for information gathering of new markets for more commitment. The expected 2- year time-period for exploiting parallel car trade asks quick reaction. Agents must provide the company with much market information. Visits of the markets, attending Dutch market information meetings and collect country profiles on the Internet for knowledge too.
-Arrange a working environment of stimulation of creative thinking to learn and therefore innovate constantly in export to increase foreign market access. Extra time is needed for information gathering on new marketing channels and possibly implementing them. Bonuses and other rewards are useful instruments for increased motivation of export employees for improved export processes and a more profitable export venture.
- A better management policy and extra export staff enables more learning, innovation, export processes to be structured and a better working atmosphere. Experience in foreign markets increases efficiency in serving markets. A receptionist to relieve export staff, an inventory manager for efficient stock planning and flexible employees to help over come fluctuations in demand save at least twenty percent of wasted problem solving and increases motivation.
-"Island departments" can decrease and with that efficiency and general export attitude and risk perception for export can improve when committing and letting contribute all export involved employees, to major decisions and (new market-) strategies.
-Improve export skills by investment in language courses, juridical, financial and administrative education, and teaching international business etiquette.
-More export structure control points to decrease negative financial effects of early mistakes.
-Improve management quality on international business or hire and export manager to take care of complete responsibility of export venture (international strategy making, operational systems and human resources.
- Improve client contact for better reputation again, avoid miscommunication, improve (after- sales) service and prevent high dependency on few left-over clients by decreasing numbers of clients. Therefore take time for improvement of client contacts with investment in more client visits too.
-Investment in information and communication systems to enable more efficient communication in the organization self and with foreign clients.
The results of this research offer a means to exploit the temporary parallel trade opportunity in the European car market for the next two years as is expected.
Not only a selection of markets with a high potential at the moment, but also a means to enter these markets, considering all relevant country factors, is provided, in the hope for a successful expansion of export sales.
Considering the fast pace of competitive activities abroad, it is advised to undertake quick
action to gain from the in marketing so-called "first-movers" advantage.
Preface
En dan is het ineens zover. Zit je eerst maandenlang gekluisterd achter je pc, roept ineens de vrijheid. Niet langer op elk willekeurig moment van de dag overdenkingen en ideeën voor mijn scriptie, ’s nachts geen spontane ingevingen meer. Ook tijdens de volgende vakantie mag er geen laptop meer mee zoals afgelopen zomer”vakantie” toen ik gedurende veertien Europese landen in de auto naast mijn vriend zat te typen. Voor dit onderzoek hoorde ik regelmatig wat een heftig proces dat afstuderen eigenlijk kan zijn. Dat wilde ik toen nog niet geloven.. Naast het feit dat zo’n individueel onderzoek nogal wat geduld van jezelf én niet te vergeten van je directe omgeving vraagt, kom je jezelf gegarandeerd een paar keer goed tegen. Maakte ik van tevoren harde afspraken met mijzelf dat ik niet teveel bij het onderwerp en het betreffende bedrijf betrokken zou raken, dat ik het onderzoek goed zou afbakenen, dat ik maximaal zeven maanden zou uittrekken voor het klaren van deze klus, dat ik minstens elke dag negen uur effectief aan het onderzoek zou werken, ging dat toch iets anders!
Maar ik stond er niet alleen voor. Henk Venema, mijn vriend, is echt een kanjer. Heel veel engelengeduld, een meester in relativeren en opbeuren in mindere tijden, en grafisch gezien een professionele hulp. Hij beweert verder, als de harde schijf van mijn pc ooit staakt, dat hij dit verslag inmiddels compleet kan overschrijven, dankzij mijn vele verhalen die hij moest aanhoren. Hoe vaak hij ook niet voor mij gekookt heeft; ik vrees dat ik voor de rest van het jaar het eten zal regelen. Dank je wel lieverd. En als er naast hem ook iemand regelmatig haar rotsvaste vertrouwen in mij en mijn onderzoek liet blijken dan was het wel mijn geweldigste nicht, Ina Wildeboer. Mijn (schoon)ouders wachtten ook met vertrouwen en spanning af wanneer het einde van dit onderzoek zou naderen. Had ik niet al drie definitieve deadlines doorgegeven? Ik wil dan ook zeker mijn ‘schoonvader’ bedanken voor al het printwerk, waar ik hem mee opzadelde voor dit rapport, in zijn copyshop ‘Qualitycopy’. En dan Zhen Shan Tan, die mijn conceptuele model even kunstig neerzette met haar computerkennis. Ik kijk terug op een beginperiode van elke ochtend treinen richting Zwolle rond halfzeven, tot gelukkig Nathan Jongkamp, die mij ook had geïntroduceerd bij de opdrachtgever, woonruimte beschikbaar stelde. Ik ben benieuwd wat jij, die dit bedrijf als geen ander kent, van dit plan vindt.
Mijn beide docenten wil ik ook bedanken voor hun geduld. Jullie waren vast verbaasd dat ik na acht maanden radiostilte ineens een compleet rapport thuis afleverde. Ik bedank ook de directeur van Sietsma B.V., Luurt Pieter van der Molen, voor de kans om mijn afstudeeronderzoek voor zijn bedrijf te kunnen verrichten en voor de ruime ervaring die ik heb kunnen opdoen bij deze Ford dealer. Dit rapport is geschreven voor een autodealer die benieuwd was naar nieuwe kansen die zich voordeden in de Europese automarkt. Met veel plezier heb ik mij verdiept in export en alle grote ontwikkelingen op de automarkt als gevolg van nieuwe Europese wetgeving met als doel een liberalisering van de altijd wettelijk beschermde automarkt. Ik heb onderzocht hoe een klein bedrijf als Ford dealer Sietsma B.V.
hier het beste op in kon springen. Eerst heb ik een selectie gemaakt van meest geschikte landen om Ford auto’s naar toe te exporteren en vervolgens heb ik een export marketingplan met interne aanbevelingen opgesteld als handvat om deze landen met de meeste kans van succes te benaderen. Ik hoop dat dit rapport bij zal dragen in een gunstige en evenwichtige groei van exportactiviteiten voor Sietsma B.V.
Ik ga op zoek naar een volgende uitdaging en laat het hierbij. Aan u lezer zeg ik: enjoy this
paper!
Table of content
Management Summary X
Preface XX
Chapter 1 Introduction
1.1 Introduction to the research 1.2 Contents of the thesis
Chapter 2 Organisation, Market and Export 2.1 Introduction
2.2 Organisation
2.3 Markets, export and parallel trade
2.4 Distribution legislation on the car market Chapter 3 Research Framework
3.1 Introduction
3.2 Background to the problem 3.3 Research Objective
3.4 Research restrictions 3.5 Definitions
3.6 Research steps 3.7 Research method
3.7.1 Type of research
3.7.2 Sources in the research process 3.7.3 Data collection and analysis Chapter 4 Theoretical Concepts
4.1 Introduction
4.2 Explanation of the conceptual model 4.3 Theoretical overview and selection
4.3.1 Country Selection 4.3.2 Internal analysis 4.3.3 External analysis
4.3.4 SWOT-analysis
4.3.5 Export marketing strategy Chapter 5 Country selection
5.1 Introduction 5.2 Delimitations
5.3 Pre-selection of countries
5.4 Measuring the Selection variables
5.5 Country attractiveness analysis for each pre-selected country 5.6 Ranking most attractiveness countries for export
1 2
4 4 6 8
12 12 12 13 14 15 16 16 17 18
21 21 24 24 24 27 29 30
32
32
33
35
37
48
Chapter 6 Internal analysis 6.1 Introduction
6.2 Strategy evaluation 6.3 Export barriers 6.4 Export attitude
Chapter 7 External analysis 7.1 Introduction
7.2 National environmental diagnosis for Sietsma B.V.
7.3 Environmental analysis if Switzerland 7.3.1 Technological environment
7.3.2 Governmental and legal environment 7.3.3 Economic environment
7.3.4 Socio-Cultural environment 7.3.5 Demographic environment 7.4 Environmental analysis of Austria
7.4.1 Technological environment
7.4.2 Governmental and legal environment 7.4.3 Economic environment
7.4.4 Socio-Cultural environment 7.4.5 Demographic environment 7.5 Competitive analysis
7.6 Customer analysis
7.6.1 Different customer groups 7.6.2 Needs of customer groups
Chapter 8 SWOT-analysis 8.1 Introduction
8.2 Swot-identification 8.3 Swot-analysis
Chapter 9 Export marketing strategy and internal recommendations 9.1 Introduction
9.2 Entry mode
9.3 Export marketing mix
9.3.1 Distribution method 9.3.2 Pricing
9.3.3 Promotion 9.3.4 Product
9.4 The export marketing tools combined into a strategy 9.5 Internal recommendations
Chapter 10 Conclusions 10.1 Introduction
10.2 Answering the research question 10.3 Evaluation research
References/Sources Appendices
49 49 51 58
63 63 64 65 65 66 66 67 67 68 68 69 70 72 73 76 77 78
82 82 86
89 89 92 93 95 97 99 100 102
105
105
109
1
Chapter 1 Introduction
1.1 Introduction to the research
This thesis is written for Ford car dealer Sietsma B.V. in Zwolle. The company wants to take advantage of new export sales opportunities in the European car market that have been created recently in the European car sector. My task, as a student International Business with knowledge of other functional area’s as Marketing and Small Business & Entrepreneurship, is to investigate these new international market opportunities for this Dutch Ford dealer, and give the company export strategic and partly operational recommendations in order to exploit this (parallel trade) opportunity in a most profitable way.
The background for this investigation lays in 1992 during the Unification of Europe, when the business climate changed for European entrepreneurs. Price-differences between EU countries turned transparent and most entry-barriers vanished because of a unification of governmental laws. The major cause of these differences on cars lies in the different tax rates for new cars.
In paragraph 2.4 "Distribution legislation on the car market" all relevant developments in the European car market for this research are discussed. The newest European distribution regulation (1400/2002) enables Dutch car dealers to profitize of price-differences in the EU by selling cars abroad (by export) parallel to the official dealer network route of distributing cars, also called "parallel trade". For an explanation of this phenomenon and its influence on new Passenger car trade in Europe see paragraph 2.3 "Markets, export and parallel trade."
Even though parallel trade on new European cars became interesting from 1985 when the first liberating regulation was formed in a former strongly protected car market and even more when country borders opened up, it was not until the end of the nineties, that car sellers started exploiting the parallel trade opportunity on cars.
For Sietsma B.V., as a Ford car dealer from a high car tax country, that wants to exploit this export opportunity in a profitable way in European low tax countries, I investigate which European countries have the best export potential. Accordingly I look for the most suitable approach of both selected countries for Sietsma B.V.
The research objective for this research is: “To recommend Sietsma B.V. how to exploit the temporary parallel trade in the European car market.”
The research question is accordingly: “Which markets within Europe have the best export potential for Sietsma B.V, and which export marketing strategy is most suitable for Sietsma B.V.?”
The main aspects in this research are: selecting the two best countries for parallel trade (see
Chapter five: Country selection), analyse internal aspects that influence forming the most
suitable approach of the selected countries (see Chapter six: Internal analysis), and analyse
external factors in the environment of the home country and of new potential countries, that
also influence forming the most suitable market approach (see Chapter seven: External
analysis). Focus is on two years of exploiting temporary parallel car trade in Europe. Reason
for this is the period that this opportunity is expected to last according to many international
car trade experts (for more delimitations see paragraph 5.2). After a pre-selection of countries
in paragraph 5.3, seven countries are analysed on their attractiveness for parallel trade in
paragraph 5.5. In the last chapter, an export marketing strategy will be formed (see Chapter
nine) out of the results from the analyses including a SWOT-analysis (see Chapter eight).
2
1.2 Contents of the thesis
In the second chapter, Chapter 2 Organisation, Market, and Export, the organisation is introduced first (see paragraph 2.2). Then the current markets in which Sietsma B.V. operates and its current export activities including the selected form of distribution to exploit the new car market opportunities called "parallel trade" are explained in paragraph 2.3. In the last paragraph (2.4), the, for this research relevant, developments in the European car distribution legislation are mentioned and discussed to consider the legal "playfield" for Sietsma B.V. in exploiting the new car export opportunity in Europe.
The next chapter, Chapter 3 Research Framework, starts with the background for the research on opportunities for parallel trade and changing distribution legislation (see paragraph 3.2).
The research objective and research question and sub- research questions are explained in paragraph 3.3. Restrictions and definitions, to set the research boundaries, are found respectively in paragraph 3.4 and 3.5. All leads to a Research Framework starting in paragraph 3.6 (Research steps) to form the research setting. After this an indication of the way of performing the research is given in paragraph 3.7 (Research Method).
In the following Chapter 4 Theoretical Concepts, after a literature overview for each research element, a selection of theories is explained (see paragraph 4.2/4.6) and used for operationalizing all relevant elements of the research and combined into a conceptual model.
After this, the model and all research steps are explained in paragraph 4.7.
Then, in Chapter 5 Country Selection, seven European countries are investigated in their potential for parallel car trade for Sietsma B.V. After a delimitation (see paragraph 5.2) and a pre-selection of countries to analyse (see paragraph 5.3), the method of measuring the selection variables for country-attractiveness from the theories used (see paragraph 5.4), are combined in a grid matrix. The analysis (see paragraph 5.5) will lead to a ranking of two most interesting target countries for Sietsma B.V. for parallel trade (see paragraph 5.6).
By making an internal analysis, a company can set the overall rationale for its international activities (Daniels & Radebough, 1998). In Chapter 6 Internal Analysis, the business strategy is evaluated on general business needs and export, human resources, production capacity and financial limitations (see paragraph 6.2). This is useful for investigating export opportunities for a relatively small company that involves limitations on human resources and financial means on large scale exports. Then export barriers in juridical instruments, knowledge of foreign markets and company policy are discussed in paragraph 6.3. After this the export attitude is discussed with export priority, -risk and destinations perception. At last Sietsma B.V.'s export success is discussed on absolute export sales, relative export sales, relative profitability of the export compared to local sales, the average export result development on the last few years and satisfaction with regard to the export result. The last aspect of this chapter is a discussion of possible pitfalls for new exporters that apply for Sietsma B.V. All internal aspects provide relevant strong and weak points in the organisation that influence export of cars highly.
Besides an inward look belongs an investigation of the environment and its influence on the
export venture. In Chapter 7 External Analysis, the direct environment of Sietsma B.V. is
discussed first (see paragraph 7.2). Then the macro-economic environments of both selected
export markets are investigated in paragraph 7.3 (Switzerland) and 7.4 (Austria). Then
competitive forces (see paragraph 7.5) and customer needs in both selected markets (see
3
paragraph 7.6) are investigated in order to gain a proper insight in the country business environment for an suitable market approach.
Chapter 8 SWOT-analysis gives a structured overview of the results of the internal and external analysis by means of a Swot-identification (see paragraph 8.2). Based on the identified Strengths, Weaknesses, Opportunities and Threats, the main issues are collected, discussed and confronted with each other in a confrontation-matrix in paragraph 8.3). The most interesting findings are distilled from the matrix and analysed then. In the last step, for each quadrant from this confrontation-matrix the main attention points are selected as a foundation for the most suitable export marketing strategy in the next chapter.
In the next chapter, Chapter 9 Export marketing strategy, all required information of Sietsma B.V. and its export environment that got structured and analysed in chapter 8 are translated into a strategic plan for a suitable market approach. In this strategy, different forms of direct and indirect export are discussed to select an appropriate entry-mode in paragraph 9.2. Then price-, promotion- and product tools are discussed (see paragraph 9.3) and combined in a generic strategy of Porter (1980) in paragraph 9.4. Finally internal recommendations are given (see paragraph 9.5) to make the internal organization fitted with the new export marketing strategy for a suitable approach of new export target markets.
Finally, Chapter 10 Conclusions will give an answer to the research problem and the research
questions in paragraph 10.2 by concluding results of all research steps. The research is
divided into two sections, entering the right markets (Chapter 5 Country selection) and
entering them right ( an export marketing strategy in Chapter 9). The chapter ends with a short
evaluation of the research and possible future implications (see paragraph 10.3).
4
Chapter 2 Organisation, Market and Export 2.1 Introduction
This second chapter is devoted to a description of the company, its markets, export activities and the changed European car distribution legislation. In order to put the company and the research background into a general perspective, the organisation Sietsma B.V. and Ford in general are described first. Then, current export (-markets), and the method of exporting cars (parallel trade) are explained. The chapter ends with a summary of the most influential legislative developments in the European car market that created a parallel trade opportunity for Dutch car dealers like Sietsma B.V.
2.2 Organisation
Ford Company
As the second largest car manufacturer in the world Ford company is a powerful brand. Its vehicles are sold in two-hundred geographic markets in six continents. Ford's business is divided in four primary operating segments: Automotive (car/truck design, production, sales and maintenance), Visteon automotive systems, Ford Motor Credit (financing and leasing) and the Hertz (mainly car/truck rental) corporation. Henry Ford introduced automobiles to the middle class by offering a good price-quality relation, which is why its products are mass- consumption goods. The introduction of Ford Focus (the world's most sold car in 2000 and 2001) significantly increased its European market share (http://media.ford.com) and Ford's other car types (Mondeo, Fiesta and the Fusion) have interesting sales numbers too. Ford- Europe pursues a vigorous policy for its country-divisions (importers) and dealers, implying i.e. strict rules on the field of business activities, distribution, environmental prescriptions.
Sietsma B.V.
Sietsma B.V. was founded in 1920 as a bike repair shop and a hoof-smithy in Zwolle. The company developed itself quickly in the car-business and became within a few decades an official Ford-dealer, with a large diversity of services. In 1983 the company became a B.V.
and the number of employees had already grown from twenty to over fifty. In 1998 Sietsma B.V. expanded and became a "hub and spoke/satellite organisation" including four independent, service dealers in its direct sales area, so economies of scale could be reached.
Organisational Structure
Sietsma B.V. is part of L.P. van der Molen Beheer. In the organisational structure three B.V.’s can be separated. Auto Lease Zwolle B.V. is the first B.V. and used to be a department of Sietsma Zwolle B.V. until a few years ago. The second B.V. is the unit of analysis in this research: Sietsma B.V. Zwolle. A subdivision of this is Sietsma Kampen B.V. This service dealer provides extra service capacity for quick repair services. A few more changes have taken place in the last years. The Storehouse department has been rebuild a few years ago to increase capacity up to 14000 parts for stock. The F.E.S. qualification, that Sietsma B.V.
received, as the first of all official Dutch Ford dealers, made this company an official repair company. Further an export sales department was included last year to enable new car sales across the Dutch borders which is the subject of this research project.
Within the organisational structure of Sietsma B.V. Zwolle the departments: Repair,
Storehouse, Sales, Workshop and Export are divided in separate units and organised
centrally. Apart from the rest of the company, export activities take place under direct
supervision of the managing director. The employees in the Administration (office) and the
5
Assistant Managing Director are staff-members. From my observations I could describe this company's structure as mature and quite stable in its business environment. The number of people working in the company is over fifty of which eight people work in the Sales
department, three in the Export department, five employees in the Storehouse, five at the Administration, over twenty people in the Workshop and about eight people in the Repair department.
Most departments operate independently and have standardized procedures, except the export department. This department needs to react flexibly and quick to changes in the European car-market, whereas Sietsma B.V.'s other business activities focus on the local market which has less dynamicness. Export is Sietsma’s newest service. This officially exists for two and a half years now and is Sietsma B.V.'s most risk-bearing venture. Sietsma B.V. is one of the main exporting (official) dealers of new personal Ford cars in the Netherlands. The main types of Ford cars for export are Ford Focus, Ford Fiesta, Ford Mondeo and the newest model Ford Fusion. These cars ranging from small to middle- class segments are well promoted by the importer and traded in Europe which makes them quite easy products for export.
Organogram: L.P. van der Molen Beheer
Organogram: Sietsma B.V. Zwolle
L.P. van der Molen Beheer
Auto Lease Zwolle B.V.
Sietsma Zwolle B.V.
Sietsma Kampen B.V.
Managing Director: L.P.
van der Molen
Export Sales Workshop Storehouse Repair
Administrati on Assistant Managing
Director
6
2.3 Markets, export and parallel trade
After introducing the company of research, this paragraph describes the European car market in which Sietsma B.V. has export activities by means of parallel trade with new passenger cars. These three aspects are discussed and explained in this paragraph to create an understanding for the reader of the main aspects in this research.
Markets
The European passenger car market is quite dynamic in the last two decades. New regulations on car distribution shaped a new competitive area for all car industry players. Where car manufacturers used to keep a sharp control on their carefully selected distributors, now they lost their formal power. The new car legislation liberated this formerly protected market and so changed the car market composition for more competition to "put the customers back into the driver's seat" as M. Monti, EU Competition Commissioner said last year (2002).
Separating service from sales in the new regulation diminished the existing number of service dealers and caused a shift from a many sales dealers to service dealers. Because of this, the number of official dealers had decreased to 108.000 in 2002 (CECRA, 2002). Though registrations of new passenger cars in Europe are increasing in a straight line till 2006, when 16 million vehicles are expected to be sold
1. Even though analysts point to a stable situation for the world automotive industry at large, Western Europe clearly experienced recessive trends in its motor vehicle market over the year 2002. This reflects the rather weak performance of the European economy over the last twelve months.
The most popular car segments in Europe are small and lower-medium cars, which each account for about 30 % of the market (EC report, 2002. Market analysts conclude that the current demand for smaller and compact cars (downsizing) proceeds in Europe. The share of so-called mini's and super mini's like Ford Ka and Ford Fiesta, was in 2001 34,5 percent of the European sales, which means more than five million cars. Mini-mpvs also get attention by consumers. A quarter of all models in the C-segment (VW Golf, Opel Astra and Ford Focus) comprising 4.8 million cars in 2001, belong to this. The upper-medium section is the third largest, accounting for about one-fifth of the market, and executive vehicles account for less than 10%. Further the constant run on diesel cars isn't going to diminish according to J.D.
Power
2. He expects a rise in the share of diesel cars from 35 to 45 percent. These figures suggest, diesel cars remain the key area of structural change in the European automotive industry (ACEA, 2002).
Export
Exports at Sietsma B.V. started more then two years ago with a sales share of twenty percent of the complete business turnover in the year 2001. After one year a separate export
department was found to create more capacity for a quickly growing number of orders. In the second year export sales grew with five hundred, doubling the share of export turnover of the complete business turnover. The market that was served at the start of export activities
1
Source: www.raivereniging.nl
2
UK researcher J.D. Power-LCM, report: "Global Car & Truck Forecast", 2001.
Company Cars
Occasions Passenger
cars
7
(England) is now almost satisfied after a rush of supply from the Netherlands. Trader Robert Story says about to England exporting car dealers: "They have made much money but now they are punished" (Automotive, 2, 2003). According to the European Commission, there are many European countries left that are interesting for car exports with parallel trade). This last term is explained in the next part.
Parallel Trade
Parallel trade is one of the most enigmatic phenomena of international trade. On the one hand, namely, parallel traders strictly follow the laws of the market; yet on the other hand, the laws of the market are not the only ones that apply to this kind of activity. Even if a car is covered by a number of patents, once the carmaker has put that car on the market, he cannot prevent that car from being re-sold. From an Internet article with the DMA (2001)
3, N. Schouten explains parallel trade as: “Bringing products (mostly brand products because of their high margin) to a foreign market in a way that is next to (parallel) distribution via official distribution channels. Once an official license owner brings a product to an EER
4market, it can be traded freely in the EU." Sir H.C. Cohen Jehoram
5explains the difference between legal and illegal parallel trade: "parallel trade is when real -so not imitated- products are imported cheaply by an intermediary, without permission of the producer self that owns an IP right on these goods, with as goal to compete with the producer in his own, somewhere in a market cheaper introduced, products." As long as the product is brought to the market meeting all European standards by the manufacturer, and then re-sold via distribution networks 'parallel' to the official networks it is legal. A form of parallel trade that can be illegal is 'grey' trade. In this case, vehicles are not normally routinely sold in a EU country and they have come from outside the EU and therefore fall outside the EU specifications" (Mc Gowan, Retail Motor Industry Federation, 2001). 'Grey' trading mostly carries an implicit reference to the 'black' market, which is definitely illegal since in this case the brand-owner gets non of its rights and other investments paid back.
Parallel trade in cars is legal since the products are brought to the market meeting all European standards before Sietsma B.V. re-sells them to money-saving customers elsewhere in Europe. This will be interesting as long as car prices across Europe significantly differ. The fact that Sietsma B.V. distributes cars parallel to the existing official local car dealer networks makes it parallel trade. The price-differences are not only interesting for the dealer but also, and more important for the European Commission, for the customer. The EC namely wants consumers to gain from a global market. When allowing parallel trade: a greater choice of goods and outlets and lower barriers to trade enhance price and distribution channel competition which will effectively keep prices down for consumers. The Customer Association (1998) says that a condition for parallel trade to work is when there is an exclusive distributor of a particular product in a country and the product is expensive while in a different country, the same product is sold cheaper. People will then try to import that product into their own country. A part of the savings for parallel importers can so be passed to the customers. The table* below shows an indication of how much savings a consumer may expect with the relaxation of the rules for parallel imports of cars in Singapore:
Type of car Authorized Dealer Parallel Importer Savings
3
Interview on the Internetsite of the Dutch Merchants Association (DMA) with Sr. N. Schouten:
www. http://www.bmb-bbm.org, 2001.
4
EER= European Economic Area; this is a multilateral agreement for the stimulation of i.e. free trade of goods.
5
Lecture on Parallel trade written down by Prof., Mr. H.C. Cohen Jehoram (Teacher International Law in the
Netherlands, 2001).
8
Honda Odyssey $152,388 $144,800 $7,588
Mercedes E200 $228,000 $209,800 $18,200
BMW 520 $205,000 $188,800 $16,200
(* Extracted from an article in The Straits Times "Continental Car price dip likely", Karamjit Kaur, 25/5/2000)
The European Commission has always insisted on the "Freedom for intermediaries to respond to EU price-differences and engage in parallel trade as central to its policy of ensuring that distribution arrangements have a market integration and not a market partitioning effect".
Brand-owners have traditionally sought to restrict parallel trading by invoking national intellectual property rights, but this has increasingly led to a conflict with EU competition law. Typifying is the legitimacy of this kind of cross-border trade in goods even though it falls outside the brand-owner's 'official' distribution channels. There are cases of companies being fined by the European Commission for the resulting anti-competitive behaviour (See paragraph 2.4). The fines were given because the manufacturer's attempts to prevent parallel trade between EU states are contrary to the principles of the Treaty of Rome (1974). A core objective of this Treaty was the creation of a common market through which goods and people can freely pass, and with this treaty, parallel trade was made possible.
-Article 28 of this Treaty provides that:
"Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States
-Article 30 of the Treaty of Rome sets out the derogation from the free movement of goods in relation to industrial property. It states that:
"The provisions of [Article 28] shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on the grounds of ... the protection of industrial and commercial property. Such prohibitions or restrictions shall not however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States."
The EC Treaty article 81 also gives a legal framework for a free movement of goods within the EU.
2.4 Distribution legislation on the car market
The Single Europe Act (1986) was quite clear; from 31 December 1992 the EC would be “an area without internal frontiers, in which free movement of goods, persons, services and capital was ensured”. This enabled parallel trade for car dealers in Europe too. But in order to gain insight into their new "play field" this paragraph summarises the main effects of legislative change on car distribution in this area. With this information Sietsma B.V.
can find their chances in the new situation. The following items are discussed: the new car distribution regulation, indirect restrictions on sales, tax matters, and car price-differences across Europe.
The new distribution regulation (EC NO 1400/2002)
Until recently, based on the so-called Block Exemption Regulation (BER), car manufacturers
had exclusivity of control over their own distribution networks. In reality, this meant that new
cars were only distributed through authorized dealers with a restricted contract territory and
for pre-determined prices. Moreover, dealers were obliged to provide after-sales services. In
this way, the car industry was the only business sector in the EU not facing traditional anti-
trust regulations. The new regulation (No 1400/2002) "frees" dealers from the manufacturer's
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"shackles"; not only by liberalizing the method of selling cars, but also by opening the way to greater use of new distribution techniques, such as Internet sales and multi-brand dealerships too. By liberalizing car distribution with the new regulation, the European Commission hopes for more competition and a price harmonization. In the former regulations (see Appendix 2 for an outline of these) a large extent of price differences and a low degree of parallel imports some years ago showed some obstacles to cross-border trade (see paragraph 7.2 for these obstacles). A large unexploited arbitrage opportunity was there only if dealers got more freedom for the benefit of consumers too (F. Verboven, 2000). The new regulation facilitates car dealers to supply cars to local, national and from other Member states with parallel trade.
The main points of the new regulation are:
-Banning the combination of selective and exclusive distribution permitted by Regulation 1475/95. Manufacturers are obliged to choose either one on these. Dealers in a selective distribution system may sell actively and passively to any end consumer and after 1st October 2005 may open additional sales or delivery outlets for distributing new cars. Dealers within an exclusive distribution system are entirely free to sell actively within their territory and in territories, which are not subject to exclusive distribution and passively into other distributors' exclusive territories. (Sietsma B.V. can now sell to any end consumer in the EU).
-Reinforcing competition between dealers in different Member states, for intra-brand competition and improving market integration in particular. Forbidden are now distribution agreements that restrict passive (like Internet sales) and active sales (for selective distribution) and location clauses (selective distribution) that prohibit dealers to establish additional outlets elsewhere in the EU. (Sietsma B.V. can use an Internet site and from 2005 also establish itself across the EU).
-Removing the obligation for after-sales but allows dealers to subcontract the servicing and repair. (Sietsma B.V. can't any longer be obliged to offer servicing and repair services).
-Facilitating multi-branding, though suppliers may permit to exhibit the brands in different showroom areas. (Sietsma B.V. is allowed to sell other brand cars than Ford).
-Maintaining the "availability clause" by enabling dealers to sell cars with every possible car specification even if that's not used in the country self. UK consumers can i.e. buy a right- hand drive car (only used in the UK) in any given EU country. (Sietsma B.V. can offer any type of Ford unless the reluctance of importer Ford-Nederland).
-Supporting the use of intermediaries or agents by consumers. With this "tool" consumers easier decide to buy across the border. (Sietsma B.V. is allowed to contact intermediairies or agents for selling its cars abroad).
-Strengthening dealer's independence from manufacturers, by strengthening contractual protection (see EC NO 1475/95) and allowing multi-brand sales. Dealers can also sell their businesses to other dealers authorised to sell the same brand. (Sietsma B.V. has much more freedom in doing business and its dealership can't be taken off with the new contractual protection).
Indirect restrictions on sales
As is stated in the new Regulation, a manufacturer, importer, or area distributor may never
restrict a dealer from selling to any consumer who contacts him directly, through an
intermediary (or agent), or via the Internet. Dealers may not be penalized financially or with a
quota imposed for this. The new Regulation knows no direct restrictions on sales, active or
passive. All categories of EU-consumers are therefore officially allowed to purchase cars
across Europe. Article 16 of the new regulation (see Appendix 2 for the article and
explanation) shows forbidden forms of restrictions on car sales. In recent years, the EC has
detected several infringements of EC competition rules, which involved restrictions on sales
10
to foreign consumers. Many studies prove these violations (i.e. BEUC 1992, with prove of larger delivery lags for foreign consumers). The EC has fined the undertakings involved highly under which Volkswagen (1998 and 2001), Daimler Chrysler (2001) and Opel (2000).
The highest fine ever was for Volkswagen in 2001: 90.000.000 euros (Export en Ondernemen, April/May 2000,p. 4).
Taxes
It is virtually impossible for manufacturers to harmonize car prices, even under a single currency, when taxation across Europe varies from 7.5% to over 200%. One of the keys to the price harmonization issue is not in the hands of the manufacturers, but arranged by the EC and national governments regulating taxes. The car is one of the few goods where tax is payable where it is used as opposed to where it is purchased. Many car price reports of the EC demonstrate that EU car prices are heavily distorted by the existence of high taxes in countries like Denmark and the Netherlands. There, car taxes are 3 to 10 times higher than in most other Member States. This leads to significant parallel-market streams from high tax rate countries (like the Netherlands) to low tax rate countries (ACEA, 2000). Even though taxation varies by engine size/prize, average car taxation imposed in each country as in the table below, shows in general per country large differences in car taxes. The highest level of taxation is in Denmark. On some luxury models Denmark has taxation of over 200 percent. Switzerland has the lowest car taxation in Europe at 7.6%.
Source: ACEA, 2002
These different taxation levels explain more than 20% of European car price differences. The current lack of tax harmonization distorts competition and constitutes the single most important cause of the price differences for motor vehicles in the EU. If no significant progress in this area is made, true price convergence remains an illusion although it's for certain that Dutch car prices will at least rise with ten percent next year (www.rai.nl). The ACEA's Tax Guide (2002) tells that tax revenues in the EU amount around 3.8 percent of the GDP, making motor
vehicles the number one
tax contributor in the
EU. If Dutch taxes stay
unchanged, new cars
rise too much in the
11
future, says Th. Hooning of the RAI
6. Low car taxes make buying a new car in the Netherlands interesting for other European buyers. The price-harmonization aimed for benefits all EU clients. Although European car tax rates need much change. This figure shows tax rates in West Europe of retail car prices in Feb. 2003.
Source: www.europrice.comCar price differences
Manufacturers used to be successful in the case of selective distribution when they connected their strategy of international price discrimination with a strategy that limits parallel import, or international arbitrage, but legislative liberalization of car distribution ended this, further car price differences exist as long as tax harmonization and exchange rate stabilization for all currencies takes place (Goldberg, Verboven, 2001). Car prices in Europe are characterized by large and persistent differences across countries for over two decades (Goldberg, 1995).
Empirical analysis (Verboven, 1996), (Goldberg and Verboven, 1998), shows a significant international price discrimination in the European car market. This international price discrimination is the result of a failure in the competition policy according to M van der Heijden (see Appendix 3: Interviews). Consumer organizations
7state that these evolve from the imperfect European integration, which enables anti-competitive price discrimination.
When academic researchers started comparing European car prices almost ten years ago, differences of more then fifty percent were no exception (Verboven, 1995). Production costs and (double) profit margins were the main causes of price differences for 96 models in the five largest European car markets (Verboven, 1995). International price discrimination could eventually disappear without economic integration when competition in the markets increased. This is not likely to happen since the car market is characterized by large economies of scale, for R&D and Marketing. Concentration and market power then become essential to guarantee a normal profitability.
When comparing net car prices across Europe, Dutch prices always used to be relatively low.
The reason for this was the adjustment from car manufacturers of the net car prices to the high taxes that are imposed on new cars in this country. In countries with low taxes the net car price was raised to keep profit margins equal across Europe. Since the new regulation and therefore with the consumer freedom to buy a car everywhere in the EU, keeping differences in prices is no longer interesting for manufacturers. Price differences become for consumers more dependent of taxes (M. v.d. Heijden, Appendix 3: Interviews). In its latest publication on EU car prices (EC, February, 2003), the EC found that car price differences on new cars are still substantial, despite the introduction of the Euro. With the new regulation, Mr. Monti hopes to create a competitive business environment that leads to lower car prices and European integration. In the next two years, car prices are expected to converge to some harmonized level. More about these expectations from car experts from different "players" in the market can be read in "Appendix 2: Changing European legislation on car distribution".
6
RAI is the Dutch Automotive Cooperation of car Importers.
7
I.e. BEUC, 1992; Association of European Consumers (AEC), 2001 and more.
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Chapter 3 Research Framework 3.1 Introduction
After introducing the organisation and its involvement in export, the framework of the research itself is discussed now. Paragraph 3.2 starts with the background to the problem from the organisation. Then the problem objective is explained in paragraph 3.3. The following two paragraphs form the research boundary with restrictions and definitions. At last the method of performing the research is given at the end of the chapter.
3.2 Background to the problem
In the last few years, a parallel market for new vehicles has developed within the European Union. As is explained in paragraph 2.3 and 2.4, a new playing field for car dealers has been created with a new European distribution regulation that liberates the EU car market. Car dealers can exploit existing price-differences across Europe (parallel trade) and offer cars at attractive prices for consumers too
8. Sietsma B.V. started with exports two years ago when they received foreign demand. A quick increase of export orders made Sietsma B.V.'s export turnover grow in one year with a few hundred percent. Capacity was then too short and (external) export intelligence for investigating more markets to serve was needed.
To find out which markets are most interesting to serve in this short period and to find the most suitable approach for these markets, Sietsma needed export intelligence. Goal of this report is to provide strategic recommendations on which new markets and which export marketing strategy for these markets are most suitable for Sietsma B.V. There is no intention to make a complete business plan with exact cost calculations, since that would go beyond the scope of the research, as is explained in the research limitations.
3.3 Research Objective
According to Verschuren en Doorewaard (1999), a research framework contains a research objective, research question, sub-research questions, type of research perspective (see for these aspects paragraph 3.4), and a visualisation of the ingredients in the form of a conceptual model, for an overview of the relevant factors and inter-relations that enable to reach the research objective (see paragraph 4.1). The research objective that is discussed below is the first aspect of the research framework. Sietsma B.V. wants to know how to exploit the temporary parallel trade potential for cars in Europe. In order to make this possible Sietsma B.V. wants to know the countries with the best potential (chapter five) and the most suitable approach for these markets (chapter 9).
Therefore the Research objective for this research is:
“To recommend Sietsma B.V. how to exploit the temporary parallel trade in the European car market.”
The Research question is:
“Which markets within Europe have the best export potential for Sietsma B.V, and which
export marketing strategy is most suitable for Sietsma B.V.?”
8
