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PROJECT REPORT

IMPACT OF FREE TRADE

AGREEMENTS ON MARKETING

STRATEGIES OF INDIAN

COMPANIES

HIMANSHU VERMA

22B

MBA (IB)

2011-13

IIFT (DELHI)

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INDEX

Topic Page No.

1) Background of the Project

3

2) International Marketing 3

3) Indias Free Trade Agreements (FTA)

5

4) Nature of Competitive Advantages 7

5) Impact on Pricing & Distribution Channels

10

6) Effects on some Industries

11

7) References 15

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Impact of Free Trade Agreements on

Marketing Strategies of Indian Companies

Background

Introduction to Free Trade Agreement

A Free Trade Agreement (FTA) is a pact between generally twocountries or areas in which they eliminate tariffs, import

quotas, taxes and other barriers on most of the products to

trade between the entities.

The purpose is to create a more stable transparent trading and

investment environment to allow faster and more business

between the entities so that it benefits both.

The underlying economic theory of free trade agreements isthat of comparative advantage, which stipulates that in a free

marketplace, each country/area will ultimately specialize in that

activity where it has comparative advantage (i.e. natural

resources, skilled workers etc.)

International Marketing

International marketingoccurs when a business directs its

products and services toward consumers in more than onecountry. Even though the basic premise behind marketing

remains the same worldwide, the environment within which the

marketing plan is implemented can vary drastically with

different countries.

Common marketing concernssuch as input costs, price,

advertising, and distributionare likely to differ dramatically in

the countries in which a firm elects to market. Furthermore,many elements outside the control of managers, both at home

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and abroad, are likely to have a large impact on business

decisions. The key to successful international marketing is the

ability to adapt, manage, and coordinate a marketing plan in an

unfamiliar and often unstable foreign environment.

There are numerous reasons why businesses choose to explore

foreign markets. Commonly, firms initially explore foreign

markets in response to unsolicited orders from consumers in

those markets. In the absence of these orders, companies often

begin to export to: establish a business that will absorboverhead costs at home; seek new markets when the domestic

market is saturated; and to make quick profits. Marketing

abroad can also spread corporate risk and minimize the impact

of undesirable domestic situations, such as recessions.

While companies choosing to market internationally do not

share an overall profile, they seem to have two specific

characteristics in common. First, the products that they marketabroad, usually patented, have high earnings potential in

foreign markets; in other words, the international sale of these

products should eventually generate a substantial percentage

of the products' total revenue.

Also, these products usually have a price or cost advantage

over similar products or have some other attribute making

them novel and more desirable to end users abroad. Second,

the management of companies marketing internationally mustbe ready to make a commitment to these markets. They must

be willing to educate themselves thoroughly on the particular

countries they choose to enter and must understand the

potential benefits and risks of a decision to market abroad.

Asia, as a group, the number of concluded FTAs in Asia

increased from only three to 61 during that time. Of these, 47

are still in effect. The proliferation of FTAs in Asia is here to

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stay: another 79 are under negotiation. Asia is ahead of

Americas in number of FTA per country:

3.8 FTA per country in Asia

2.9 FTA per country in America

Indias Free Trade Agreements

India enjoys Free Trade Agreement with the following two

countries:

Sri Lanka

Thailand

Malaysia

Japan

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Most of the Free Trade Agreements are under negotiations with

different countries.

Indo-Japan FTA

A country would do well to play the game of free trade with

another country that is more advanced than it. The gains will

come eventually through competition with more efficient

producers, on the one hand, and in demanding markets, on the

other. The India-Japan CEPA, through its free trade provisions,

holds such possibilities for India.

The core of Indo-Japan FTA agreement is an eight-foldclassification of goods for tariff reductions, ranging from

category X, comprising goods which are excluded from the

process altogether because of their sensitivity vis--

vis domestic agriculture or industry, to category A for

immediate elimination of customs duties. Between these two

are a range of groups of products on which duties will be

eliminated in varying instalments.

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From an Indian point of view, however, the nub is how far the

CEPA would help Indian exports, particularly those that have

the best potential in the Japanese market. Obviously, the

inclusion in category A of whole clusters of textiles, garments,

leather products, pharmaceuticals, chemicals and a wide range

of manufactured and engineering goods speaks for itself.

As the world's second largest market for pharmaceutical

products, Japan holds exceptional interest for the Indian

pharmaceutical industry, all the more because of the Japanese

government's policy disposition to encourage prescription of

generic medicines so as to bring down the costs of healthcare

for an aging population.

But seizing the opportunities for generic and other medicines in

the Japanese market would call for a long-haul strategy for

Indian pharmaceutical industry. It would need to overcome the

challenge posed by the Japanese consumers' wariness about

the quality of medical products from developing countries and

the restrictive nature of the Japanese distribution system.

Joint ventures with Japanese companies, as already beingattempted by some Indian companies, would seem to be the

best course. The CEPA provides enabling conditions for such

ventures.

India-Thailand FTA

Thailand can be used as source of cheap labour and

Thailand can be used as a spring board to expand into

ASEAN and East Asian Markets

Impacts:

a) Indian companies to outsource from China

b) Third country will be routed through Thailand

c) Shifting of manufacturing bases of Indian companies

to Thailand

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d) Foreign companies with manufacturing bases in India

will shift to

Thailand

Effect in sectors of Auto Components, Electrical &

Electronic appliances, Alloy steel and stainless steel

products

Negative and Restricted list items on India- Singapore and

India-Thailand FTA granted zero duty access into the

Indian market

US imports $300 billion in services and ASEAN members in$150bn in services

Indian big business wants to capitalize on this segment in

services

India-ASEAN FTA

Improved market access to eastern markets

Negative impact of duty reduction on imports from ASEANcountries

India-ASEAN FTA came into effect on January 1, 2010 with

regard to Malaysia, Thailand and Singapore

Indias exports to ASEAN increased substantially with

largest access gained in Thailand, Cambodia, Vietnam,

Malaysia, Philippines

Main sources of Imports are Vietnam, Philippines,

Malaysia, Singapore, Thailand

India experiences a welfare loss due to both allocative

inefficiency and negative terms of trade effect

Nature of Competitive Advantages

The elimination of trade barriers may lead to shift in strategyby the firms, as internationalization theory, predicts the

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changes in government regulations may alter the competitive

advantages derived from operating in particular markets.

The strategic adjustments by companies depend on the nature

of the firms specific advantages (FSAs), country specificadvantages (CSAs) and on their existing competitive

strategies.

A firms potential competitiveness depends upon the firms

specific advantages (FSAs). These FSAs refer to the core skills

and know how of a company i.e. its distinct competencies. The

use of these FSAs refers to the marketing strategies of

company i.e. its price, differentiation of its products and its

promotion campaign.

The potential competitive advantages can be achieved depends

upon country-specific advantages facing the firm. The CSA

represents country characteristics that may give the firm an

edge or a disadvantage vis--vis foreign rivals. Thus, tariff and

non-tariff barriers to trade may constitute a CSA for protected

firms in the domestic market.

A strong FSA means that the company has the potential to

erect sustainable entry barriers against foreign rivals so as to

secure its product market domain. A strong CSA reflects the

potential to be competitive against international rivals but its

source lies outside the firm (e.g. cheap and abundant labour,

efficiency of the capital market, high quality human capital,

abundant natural resources, government shelter)

First, there is global segmentation whereby the firm pursuescost leadership or differentiation in many global markets.

With free trade, changes in Country specific advantages occur.

With free trade there are changes in entry barriers associated

with the firm. These entry barriers can be:

Economies of scale

Capital Requirements

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Switching costs

Access to distribution channels

Cost disadvantages

Government policy

Firms Specific Advantages

Strong

Weak

Country

Specific

Advantages

Strong

Weak

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1Global cost LeadershipGlobal differentiationGlobal Segmentation

(Focus A)

3National Responsiveness

(Focus B)Protected Market

Strategy

(Focus C)2

Global Segmentation(Focus A)

National Responsiveness(Focus B)

4Restructuring or Exit


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With national responsiveness or protected market strategy,

firms domain is primarily based in one country and competitive

advantage is gained against global rivals as a result of

government shelter i.e. imposing costs on foreign rivals by

imposing tariff and non-tariff barriers.

Firms in Cell 2 have weak country specific advantages but

strong firm specific advantages. An alternative is to shift to

countries having high CSAs. But, there are chances that there

are high exit barriers due to foreign governments

discriminatory policies in favour of their domestic firms.

Firms in Cell 3 have strong CSA but weak FSA. This is where the

firms producing largely generic products fit in. They need to

expand in different geographic locations and different countries

as here the FSA becomes unimportant. Thus, they supplement

their weak FSAs with strong CSAs in order to compete in world

markets.

Cell 4 represents inefficient foundering companies lacking any

strong CSA or FSA. These firms should be looking to restructure

or exit from the markets. Hence, if the firm is a subsidiary,effective restructuring by parent company is required. One

such step can be transferring new FSAs of the parent company

to the subsidiary.

Impact on Pricing & Distribution Channels

The key to the integration of Europe, as well as of the growth in

economies in both Europe & South America has been the

integration of their transport and communication networks.

Pharmaceutical Industry

Pharmaceutical Sector of India is hitherto known for providing

cheap life saving drugs to many countries of the developing

world. This sector is being targeted by many multinational drug

conglomerates.

Although India currently represents just US $6 billion of the$550 billion global pharmaceutical industry, its share is

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increasing at 10 % a year. The organised sector of Indias

pharmaceutical industry consists of 250 to 300 companies,

which accounts for 70 % of the market, with the top ten

companies representing 30%.

Liberalisation facilitated the ability of Indian firms to exploit this

opportunity to market generics drugs to the US and other

Western economies. Indian firms are preparing themselves to

take a share of this increasing global market. Indian drug

manufacturers currently export their products to more than 65

countries worldwide; the US being the largest customer.

However Indian firms face some difficult challenges such as non

tariff barriers, decreasing profits in the generics market,competitive threats from big pharma MNCs and reputation in

western markets. For example, US regulation disqualifies Indian

firms from bidding for government contracts and Indian firms

have to submit separate applications for each state even when

firms have FDA approved products and facilities.

Furthermore, stronger patent protection under the new patent

law of 1999 has shut down the avenues for exploitation of

generics opportunity in domestic market, but promised large

rewards to Indian firms that could leverage their reverse

engineering capabilities in advanced markets. The stronger

patent law restrict reverse engineering of newly patented

molecule, thus affecting an important source of growth for

Indian firms.

Also MNC pharmaceutical firms have entered India after 2005

and using the same resource base as Indian firms to competein the Indian domestic market further increasing pressure on

profit margins of Indian firms.

According to Frost and Sullivan (2005), the global outsourcing

market is worth $37 billion and growing at almost 11%; 50% of

the contract manufacturing market is in North America, 40% in

Europe and just 10% in Asia and the rest of the world. Indian

firms possess requisite capabilities to cater for therequirements of outsourcing markets, still India accounts for

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barely 1.5% of the global CRAM industry. Due to untested

patent protection law and lack of data protection MNC firms are

reluctant to outsource early stage R&D work to Indian firms.

Therefore Indian firms are trying to increase their share in theoutsourcing market by moving closer to the market.

Geographically the overseas acquisition by Indian

pharmaceutical firms continues to be directed at developed

countries specifically the US and Europe.

Indian companies have already established manufacturing

plants in the US, Europe, Brazil, Russia and China.

The major Indian companies such as Ranbaxy, Dr. Reddys

Laboratories, Wockhardt and others have established their own

brand image in the international market and are taking steps to

consolidate their activities. Indian firms are compensating for

the spiralling cost of selling and marketing in advance countries

by setting wholly owned subsidiaries or acquiring local firm.

Thus reinforcing the argument that Indian firms

internationalization through acquisition is directed towardsacquiring new knowledge in different areas such as R&D

capabilities, regulatory skills and distribution networks.

EU is pushing for Intellectual property provisions in FTA by

requesting for data exclusivity clause. Data exclusivity refers to

a period during which drug producers can maintain a monopoly

on production. Drug companies claim that the period is

necessary to recoup the high cost of producing new drugs.

More than 80% of the AIDS drugs doctors use to treat 1,75,000

people in developing countries are affordable generics from

India.

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Protest against India-EU Free Trade Agreement

India did not grant patents on medicines until 2005, when

World Trade Organization rules required it to do so. Despite this

Indian patent law prioritised public health, limiting patents to

drugs that are new, not just routine improvements of older

medicines. Even so this has already caused problems in gaining

access to newer medications, which are now patented in India.

The impact of Indian government agreeing to the demands of

European pharmaceutical cartels would be devastating not only

for the people of this country but would have a catastrophic

effect on large majority of the worlds poor.

Indian Auto components industry

The Indian auto components industry is currently facing

formidable pricing challenge from China and South East Asiancountries as they compete not only in the international markets

but also on the domestic turf.

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At present, the cost competitiveness of Indian players is

constrained on account of

Infrastructure inefficiencies;

Higher cost of power;

Upward pressure on wages and

Inflexible labour laws.

The lowering or elimination of customs duty on several auto

components under India-ASEAN and India South Korea Free

Trade Agreement (FTA) and forthcoming India-EU and India-

Japan FTAs would further diminish the cost competitiveness ofIndian suppliers.

India continues to be a net importer of auto components with

its trade deficit for automotive components having expanded to

USD 4.4 billion in 2009-10 from USD 210 million in 2004-05.

This has been contributed both by depletion in demand in

developed markets (especially over the last two years) as well

as phased lowering of import duties by India.

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In fact, imports of auto parts (such as tyres, batteries, wheels,

chassis components, engine valves etc) from China have

ballooned at a brisk rate over the last several years with their

increasing pervasiveness in the domestic replacement market

as well as domestic OEMs in the Commercial Vehicles and 2-

Wheeler segments.

The large scale participation by auto component manufacturers

from China in the Auto Expo held in India in January 2010

reflects the growing interest amongst Chinese firms to

strengthen their presence in the booming Indian auto market.

Chinas large domestic market provides the suppliers in the

country with large economies of scale. Going forward, anypotential shock to the Chinese automobile demand could result

in surplus capacity, which in turn might find its way into the

Indian market and exert pressure on the growth of the Indian

component industry.

Further, the FTAs entered into by India with many countries

have catalysed the import of auto components into India as

many components have become more cost effective to import

following reduction of import duty. Even FTAs between other

nations (where India is not a party) could have significant

implications for the growth of the Indian components industry.

For instance, the proposed FTA between Korea and the

European Union (EU) has prompted Hyundai Motor India

Limited to suggest that the company may look to shift part of

its production meant for export to the EU from India to Korea

implying significant loss of volumes for suppliers based in India.

Overall, while FTAs may bring down the cost of certain raw

materials and intermediate inputs for the Indian auto

components industry, their exposure to the risks related to

possible loss of business from OEMs and lower incremental

capital assets creation is likely to remain.

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References

1) FTA-Watch India Intercultural Resources

2) RIETI Discussion Paper on The Impact of Free Trade

Agreements in Asia

3) India-Asean FTA A critique by Dr. Amita Batra

4) Indian council for research on international economic

relations paper on

Determinants of Competitiveness of Indian Auto Industry

5) Economic Times

6) www.india-briefing.com

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