SDC Swiss-AIT-Vietnam Management Development Programme c/o HCMC University of Te chnology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: [email protected]/[email protected]COURSE : SM 3.01 INTERNATIONAL BUSINESS MANAGEMENT TERM : 3/2000 (January 2000) LECTURER : Dr Godwin Nair TUTORIAL ACTIVITY - 2 Week: 3 Date: Wednesday, 26 January 2000 Topic: Globalisation Activity: Case Study An alysis and Presentation – Group 6 THE GLOBALISATION OF BHP 1 S A V
Prepared by Shannon Mooney and Tony PelosoBased on the paper "The Globalisation of BHP", by Dr B.R. Stewardson, Chief Economist, BHP
Limited. In Carroll, P(ed) (1998) Marketing and International Business, Sydney: Prentice Hall.
Background
First incorporated in Melbourne back in 1885, BHP (The Broken Hill Proprietary Company Limited)has a long history as one of Australia's great companies. It began as a base metals miningcompany. BHP diversified into steel making in the early 1900's and petroleum in the 1960's. Today,it is one of the world's largest diversified resources companies, with operations, plants and offices in59 countriesi. Although BHP had been a major exporter from Australia for many decades, the past 15years have seen BHP making the transformation into a global company.
The scope of BHP's operations include steel manufacturing, mining (iron ore, black coal, manganeseore, copper), crude oil and condensate, natural gas-and shipping. As well, BHP conducts significantlevels of mineral, oil and gas exploration.
Historically, the primary industries, including mining, have been a major source of Australia's wealth.While there has been a dramatic rise in the contribution of the service sector to Australia's GNP,industries in which BHP operates continue to have a considerable impact on the national economy.
Approximately 80% of Australia's mining production is exported.
Traditionally there have been high levels of foreign investment in the Australian gas and petroleumindustries. In June 1993, this stood at $A32.8 billion, in the form of both direct investment (45%) andportfolio investment (55%)ii The resource sector in Australia is a major export eamer, and itsperformance has close links with the nation's balance of payments situation. Over time, successive
Australian governments protected many Australian industries from foreign competition, which did little
to create competitive Australian companies. Since 1985, these policies have been changing, andthe economy has been rapidly deregulated. Many steps have been taken to improve Australia'scompetitive position and to encourage exports.
Mining and steel making are capital-intensive industries, with much investment in highrisk ventures,often over significant periods of time. They are also dependent on world supply and demand,fluctuating prices and global economic conditions. The demand for energy and steel is high in manyrapidly growing economies in Asia, where industries such as ship building, car manufacturing andconstruction are continuing to develop.
Prices of minerals, steel and energy commodities are set on world markets. Prices generally havebeen trending down, largely as the result of world supply exceeding demand, as many sites in many
countries have been discovered and developed, new technologies have been introduced, andproduction has begun in low cost countries.
In Australia, inflation has grown faster than commodity prices since the mid-1980's, and commodityprices have fallen in real terms. This has increased pressure for on-going improvements at eachstage of the production and distribution processes.
BHP has an long history of exporting its steel and other products. However, changes in the politicaland economic landscape leading up to and following World War II greatly changed the way BHPconducted its business, and it largely stopped its exporting programs. In the early 1960's BHP beganto re-build its overseas activities by resuming exports of steel. Into the 1980's it exported varying
quantities. These exports tended to be excess production which could not be sold in the localmarket, particularly during slow economic cycles.
By the 1990's BHP Steel's approach was to "establish a permanent and continuous presence in theexport market for steel with only marginal quantities fluctuating inversely with Australian domesticdemand. BHP Steel's attitude to capital investment also nowreflected a 'long term exporter'philosophy.” iii BHP aims to "create a unique world steel business that operates from raw material tofinished product'. iv
The Road to Globalisation
In 1970, BHP began a program of acquisitions. (Chart 1) These commenced with 50% of John
Lysaght Australia; the balance was acquired in 1979. This purchase included major cold rolling andcoating operations in Australia, and a number of small roll forming mills in Asia, which producedcoated and painted steel sheet shapes such as corrugated profiles for roofing. These small plants,plus a tin mine in Indonesia and a small stake in a steel rope manufacturing plant in Malaysia, formedthe beginnings of a major expansion in global operations. BHP has continued to build many moreroll fomiing mills in various countries.
In Australia, BHP developed or acquired a number of major mines, from the mid 1960's to the mid1980's, largely for export. These included the Groote Eylandt manganese mine in the NorthernTerritory in 1966, a large iron ore mine in the Pilbara, (Mt. Newman), 58% of the Moura and Kiangaexport coal mines in Queensland, and the Gregory and Riverside coal mines (also in Queensland) inthe early 1980's.
1984 saw the size and nature of BHP's global push change, with the acquisition of Utah; a large UScorporation; and the commissioning of gold mining at Ok Tedi in PNG; a joint venture in which BHPhad a 30% share. The Utah purchase included export oriented coal mines in Queensland, largedomestic steaming coal mines in the US, a copper mine in Canada, a 49% share in a large iron oremine in Brazil, and various exploration properties, including the Escondida copper deposit in Chile.In 1985 BHP acquired 2 US companies with petroleum reserves and production; Energy ReservesGroup and Monsanto Oil Company. An oil refinery, gas utility and petrol retailing business; PacificResources Inc., in Hawaii; was added in 1989.
CHART 1: BHP's Overseas Expansion
Year Steel Minerals Petroleum Copper 1960 Overseas sales offices
1985 Energy ReservesGroup and MonsantoOil Co. acquired
1987 51 % Hamilton Oilacquired
1989 Pacific ResourcesInc. acquired
1990 Escondida Copper production begun
1991 Remaining 49%
Hamilton Oilacquired1992 100% New Zealand
Steel acquired
1995 Acquisition of Magma Copper
Escondida was a big new mineral development for BHP, which began production in 1990. In 1991BHP completed its purchase of Hamilton Oil, (with production and significant reserves in the NorthSea) which allowed it to become a world leader in oil drilling and production techniques. Other purchases and developments included 100% ownership of New Zealand Steel, acquisition of US-based Magna Copper, and continued exploration in oil (in the Irish Sea and the Dai Hung oil field off Vietnam), liquid natural gas and minerals. In the 1996/97 financial year, BHP budgeted to spend over $A400 million on oil exploration alone.
With the purchase of Magma Copper in December 1995 BHP became the world's largest non-govenunent copper producer. Magna Copper holds mines in the US and Peru, and copper smelting
and processing competencies. Despite Magma's first quarter loss in 1995/96, Largely due to risingproduction costs and falling copper prices, analysts were confident BHP could turn the performancearound. Bruce Foskey, of Shares, argued that the diversity of BHP's overall operations placed it in abetter position than its competitors for withstanding a difficult market. v
Many changes illustrate the development and globalisation of BHP over the past 15 years. In 1981,less than 1% of BHP's employees worked overseas. Overseas employment now accounts for almostone third of BHP's total employment. vi (Table 1)
Table 1: BHP Employment by Location (percent)
1981/82 1984/85 1995/96 Australia >99 N/A 72Overseas <1 N/A 28
100 100
BHP's total sales from 1984/85 to 1995/96 more than doubled, to $AI9.8 billion. In 1984/85 88% of
BHP's sales were provided from Australian sources and 12% from overseas sources. By 1996 37%of sales were sourced off-shore.vii (Table 2)
Table 2: BHP Sales by Source (percent)
1981/82 1984/85 1995/96 Australia 99 88 63Overseas 1 12 37
100 100 100
Since 1984/85, overseas assets have grown from 22% to 41% of total assets in 1995/96.viii (Table 3)
Table 3: BHP Total Assets (percent)1981/82 1984/85 1995/96 Australia N/.A 78 59Overseas N/A 22 41
100 100
Similarly BHP's markets have become more international. By 1995/96 66% of sales were inoverseas markets, up from 47% in 1984/85 ix (Table 4; Table 5 shows a more detailed split of BHP'soverseas sales).
Table 4: BHP Sales by Market (percent)
1981/82 1984/85 1995/96 Australia 77 53 34Overseas 23 47 66
Table 5: BHP Sales by Market - Detailed; to 1993/94 (percent)
1984/85 1993/94 Australia 53 35New Zealand 1 2
US 12 18Japan 17 14South East Asia 4 5Other Asia 4 10Europe 4 8Middle East 1 1Other 4 7
100 100
Sales in the US increased significantly due to the petroleum sales of the Hawaiian refinery. Thesales share to Japan fell as other markets increased faster than BHP's Japanese market. However,Japan remained the largest market for BHP minerals. Sales of steel and minerals to South East Asia
increased. This reflected the increasing importance of South Korea, Taiwan and China as marketsfor BHP. The share of sales to Europe more than doubled, reflecting growth in mineral andpetroleum sales.
BHP's share register also changed, with a trend to global financing. 21% of shares were foreignowned in 1995/96, almost a 50% increase since 1990. BHP's shares have been fully listed Londonand New Zealand for many years. BHP listed in New York, Frankfurt and the Swiss Exchanges in1987 and in Tokyo in 1988.
Why has BHP Globalised?
Several issues hold to the key to why BHP has globalised. BHP outgrew the Australian market in
many of its business activities. To continue to achieve growth to increase shareholder value, BHPhad to increasingly sell internationally.
To be competitive, firms must often produce internationally because many finished goods are costlyto transport, can be easily damaged, or are best produced close to the market. This allows the firmto respond quickly and flexibly to changes in demand. Basic commodity products, such as rawmaterials, are most competitively supplied from lowest cost ore deposits, regardless of location.
As they grow, many companies need to spread risk by diversifying their markets and products. Themining industry has become a global one: companies look for the best resources to developwherever in the world they can be found.
To compete effectively in the international market BHP focused on producing as efficiently aspossible, largely by operating low cost mines, with high grade ore and low extraction costs. Australiahad many excellent mineral deposits. Increasingly however, mining companies were lookingworldwide for the best deposits to develop.
Dr Stewardson, BHP's Chief Economist, has pondered the question of why BHP didn't start operatingmines overseas earlier. He suggested there may be a minimum size at which a mining company cansupport overseas operations and exploration. Perhaps BHP passed that size long before itundertook significant overseas operations. The acquisition of Utah, with its worldwide operation andexploration areas, established a platform for -further activity overseas.
At this time, the Australian economy began to become more focused on the world economy. As well,BHP became aware that some of its Australian deposits were beginning to be exhausted. However,some events, such as the reforms to the taxation of petroleum production in Australia, motivatedBHP to re-focus a portion of its exploration efforts in Australia. As well, liquid natural gas explorationin and around Australia continued at significant levels.
Increasingly, sophisticated steel production technology and methods are allowing a wide range of qteel products to be produced on a small scale basis. It is becoming technically and economicallymore possible to operate small scale production operations in developing countries. Italian steelcompanies have developed 'mini' steel plants, and countries such as Mexico and Brazil produce steelin highly advanced and efficient plants. The developing Asian countries are also quickly focusing on
steel production as a means of increasing their wealth and efficiency.
As well, tariffs in many Asian countries increase as the level of value-adding to the productincreases. This encourages steel producers to consider finishing the processes in the host nation.The ASEAN countries also are providing incentives through lower tariffs to member nations.
BHP has also considering moving further back up the production chain with small production plantslocated in overseas markets. The company began developing small scale production plants, to allowflat steel products to be produced in an electric furnace, in conjunction with scrap-based mini-mills.BHP realised it must continue to take advantage of its leading position as a technological andproduction innovator in steel.
The pressures for BHP to globalise remain: the Australian market is small, there are economies to berealised by supplying competitively to an international market, diversification of products and marketsspreads risks, and downstream development allows access to more markets internationally.Because of its size, BHP must operate globally to continue to grow.
An examination of BHP's management provides an interesting contrast. BHP has not fully globalisedits management. While changes are taking place, most senior managers are Australian. Dr Stewardson notes, "So though our heads may require us to go global, our liearts are still Australianand many of us still call Australia home, as well as head office". x BHP is focusing on developingglobal management talent and providing access for all managers to the knowledge and resourceslocated at the most established sites. The importance of formal and informal networks and other mechanisms is acknowledged, to enable the rapid learning necessary to enhance BHP's globalstrategies.
1. Identify the motives for the globalisation of BHP. Which, if any, was the most dominant motive:market-based, cost-based, or political?
2. How could the degree of globalisation by a firm be measured?3. What were the markets entered by BHP? How has BHP entered these markets? Why was the
particular method of entry chosen?
4. What role did technological developments play in the globalisation process?5. Evaluate the possible impacts on the Australian economy of the globalisation of BHP.
check. And the Polish currency, the zloty, was devalued as the first step toward making it compatible
with western currencies.
To eliminate long lines and shortages, the new plan allowed prices to rise so that producers wouldproduce more. Prices went up for almost everything including gasoline. With gas prices and
insurance so high, thousands of Poles stopped driving. Bread prices went up, electric bills
quadrupled. Meanwhile, salaries only went up slightly, held in check to fight inflation. As a result of
these events, the country was forced into recession. Fortunately, many enterprising Poles figured
out ways to beat the old system. People sold goods from their cars and trucks, circumventing the
state distribution system to lower prices on their products.
In the new free markets, farmers sell directly to customers. And industrious entrepreneurs have gone
into business to bring products to market. One woman buys wheat from farmers, brings it to a mill to
be ground, and sells the flour in Warsaw. Even students have gone into business for themselves.
According to a Warsaw student, "It's great! We have a lot of customers, the business is growing.
This is how it should be. This is a different market. And I'm sure, you know, in the United States it's
the same. The market should be for the customer. If there is a demand, then we provide
everything.”
The profit motive is also one of the new laws at large state-run enterprises throughout Poland.
Under the old communist system, factories sold as many products as the Central Committee told it
to. Managers didn't actually know how much each product cost, and they didn't have control of
costs. At the end of each fiscal year, managers would determine the loss, send it to the government,
and the government would print the money to pay for it.
Under that system, line workers and managers had little or no incentive to be efficient in their work.
There was little motivation for them to work harder because they were all paid the same wage.
Employees who worked less got the same money as those who worked hard. Qualifications weren't
important. It was more important to have a communist party card. Many party members were given
jobs as directors at the factories. The general rule was that managers were "mediocre, but
Factories have been learning to operate under new rules. According to Jan Buczkowski, a
production director, "now we have more problems than we had in the past. There are different
troubles. We have to think about costs of our production. We have to think about the costs of spareparts. And we must think about our customers. It is a new market."
In the old days, workers didn't care if a line shut down for lack of parts, their jobs were guaranteed.
Now if the factory doesn't turn a profit, it will be allowed to lay off workers, or worse, go bankrupt. In
spite of personal hardship, many Poles seem to support the government's program.
According to Konstanty Gebert, a political analyst, the Polish people 'reason in terms of a national
emergency and are willing to accept sacrifices as long as they think that these sacrifices serve a
general national cause. As long as they have trust and confidence in their leaders, who for the first
time since the war they could democratically elect.'
Privatization has been an important step on the road to reform. Laws for selling state enterprises to
private investors were enacted. One of the first privatized firms was Omig, a maker of electronic
components. As a private company, Omig operates more efficiently than it did before. According to
Omig's Marek Ogradzki, "I think that the only way for Poland is privatization. In the future I think it will
be 80 percent private sector and 20 percent state or government sector. Right now, it's the opposite
way." Privatization also includes ways of allowing workers and the public to buy shares in these
companies, such as a stock exchange.
However, not all Poles are eager to buy into the reforms. Zbigniew Holdys is one of Poland's most
famous rock stars. In the early 1980s his band, Perfect, filled stadiums until it was banned by the
government. In spite of his position as a progressive artist, he is uneasy about life in the new
Poland. Holdys stated that, "In my generation-I am 38 years old right now-even people who are a
little bit younger than me, I mean, about 30 years old feel that we are a loss for this country. I don't
think anyone from our generation is ready to stand this situation. You have to learn to work in a
lines are gone now, and so are the secret police and some of the communist apparatus. But it takes
time to change the habits and the thinking of a people.
Poland's national anthem begins, "Poland has not yet perished." After surviving more than 50 yearsof oppression by Hitler, Stalin, and the Soviet Communist party, the Polish people clearly have the
courage and commitment to rebuild and prosper. It may, however, take a generation to change the
collective consciousness of the people. Do Polish people still have the patience to survive? Will the
This case was prepared by Prem N. Shamdasani, Department of Marketing, National University of Singapore as a basis for class discussion rather than to illustrate either effective or ineffectivehandling of an administrative or business situation. The case is based on public and published information.
'Joining an airline alliance will not cure a sick carrier', said SIA chairman, S. Dhanabalan whenquestioned about the wisdom of forming strategic alliances in an interview with The Straits Times onOctober 19, 1997. 'Basically, each airline must be viable, competitive and efficient. Putting twoweak airlines into an alliance is not going to help. 1
Soon after this interview, aviation circles were rife with talk that SIA may abandon its alliance withSwissair and Delta Airlines. Swissair group chief executive Philippe Bruggisser was reported telling a
Geneva newspaper that, “I don't want to rule out that it could come to a new Lufthansa-Singapore Airlines alliance'. In a report published by Bloomberg, Lufthansa chief executive Juergen Weber saidhe hoped to add two Asian carriers by year-end to the Star Alliance. He declined to name thepotential alliance partners but many airline sources believed that SIA was a strong prospect. TheStar Alliance, which was established in May 1997, was made up of Lufthansa, Thai Airways, United
Airlines, Air Canada, Scandinavia's SAS and Varig of Brazil.2
Bruggisser acknowledged that the partnership with SIA was not working because ties were not deepenough. In late October 1997, SIA chairman Mr. S. Dhanabalan had also echoed similar sentimentswhere he noted that although SIA was one of the first airlines to enter a tie-up with Swissair andDelta in 1989, it had become more realistic about the potential benefits of an alliance. He pointedout that airlines still preferred to retain their distinct 'branding' and that a 'cautious approach' should
be taken in forming alliances despite recent trends which showed this was gaining momentum.
BACKGROUNDTHE LOGIC OF AIRLINE ALLIANCES
As of May 1996, there was a total of 389 airline alliances worldwide. Equity was involved in 62, or 16% of these alliances.3 The nature of these alliance relationships ranged from code sharing
arrangements to full-fledged cooperation and complete mergers of ground services and frequentflyer programs. The motivation to form alliances depended on the advantages partners wished toobtain from their cooperation both from an airline service provider and passenger points of view.
Advantages to passengers included the ability to travel to a greater number and variety of destinations in a 'seamless' manner on one ticket with convenient connecting flights through
harmonization of partner airlines' schedules. Additionally, the integration of frequent flier programsand benefits enabled passengers to redeem awards on any of the partners' flights. Benefits for partner airlines included the cost savings realized primarily from the capital-intensive services suchas the sharing of ground services including baggage handling, check-in, and business lounges.Other operational cost savings could be realized with partner airlines spacing providing each other
maintenance, catering services and exchange of personnel in times of need. Additionally, through joint purchasing agreements, the alliance's bargaining power vis-a-vis suppliers would be increased.Generally, proponents of airline alliances believed that the passengers stood to benefit from better service, convenience and improved perks.However, to get the most benefit from alliances, partners needed to make a variety of changes intheir organization, strategies and operations. For example, to benefit from joint purchasingagreements, the equipment bought by the partners (e.g., airplane type, cockpit design, inflightsystems, etc.) had to be similar. Additionally, to extend their reach effectively, partners had to better coordinate their flight schedules. However, there was no guarantee of commercial success for airlines that entered into these alliances. For example, Air France, the airline with the most strategicalliances, 31 according to the Airline Business Survey, was struggling financially
SIA'S ALLIANCES STRATEGY
SIAs alliance strategy continued to evolve in response to changes in the competitive environment inthe aviation industry. In 1989, SIA entered into a trilateral alliance called the Global Excellence
Alliance with Delta Airlines and Swissair to form a global network spanning 300 hundred cities inmore than 80 countries. From SIA's point of view, the alliance enabled it to effectively service agreater number of destinations both in the US and Europe. By the end of 1990, the three airlineshad created a marketing campaign that highlighted the alliance, the carriers' excellent customer service and specific products such as Swiss skiing packages and vacation packages in both Europeand the US. In June 1995, SIA, Delta Airlines and Swissair set up DSS World Sourcing, a jointpurchasing agency equally owned by all three airlines.
However, after the formation of the Global Excellence Alliance, all three partners also tied up withother airlines, including competitors. For example, in 1996, Delta had a trans-Atlantic alliance with
Air France, a neighbor and strong competitor of its primary alliance partner, Swissair. On the other hand, Swissair had an alliance with Sabena and Austrian Airline, and SIA had code-sharingagreements with American Airlines (e.g., Singapore-Chicago route) and Austrian Airlines (e.g.,Singapore-Vienna route). Additionally, SIA also operated joint cargo services with British Airways,KLM and Lufthansa, among others. SIA had entered a partnership with SAS that allowed jointmarketing of an all-cargo service between Copenhagen and Singapore. SIA also formed an alliancewith Aerolineas Argentinas to offer one of the cheapest round-the-world economy fares for a trip viathe South Pacific.
On 20 June 1997, Singapore Airlines, Air New Zealand, Ansett Australia and Ansett Internationalannounced plans for the formation of the Asia Pacific region's biggest international alliance. With acombined fleet of 223 aircraft, the enlarged network of the airline partners would cover 200 cities in47 countries. The South-Pacific alliance also planned to introduce new 'around the world', 'aroundthe Pacific' and around Asia' travel packages.
Besides air and cargo cooperative arrangements, SIA was one of the pioneering members of thegroup that created Abacus, the Asian Computerized Reservation System. Realizing that, by itself, itdid not have the critical mass, SIA enlisted eight partners including Cathay Pacific, China Airlines,
DragonAir, Malaysian Airlines, Philippine Airlines, Royal Brunei Airlines, SIA's SilkAir and WorldSpan
Global Travel Information Services to form Abacus. Additionally, in line with the growing importanceof frequent flier programs in retaining and rewarding loyal customers, SIA together with Malaysian
Airlines and Cathay Pacific set up Passages, a frequent flier reward program jointly administered bythe three alliance partners. In doing so, SIA was able to share the high costs and administrativeoverheads incurred in running a viable frequent flier program.
THE STAR ALLIANCE ATTRACTION
Despite market talk of the impending break-up of the Global Excellence Alliance in October 1997,Swissair reported that it was discussing with SIA how to broaden their code-sharing arrangement.The code-sharing agreement would allow SIA and Swissair to share flight codes and sell each
other's tickets. Swissair's Chief Executive Mr. Bruggisser commented that while losing Singapore Airlines as a partner would not affect its corporate results, it preferred to stay with SIA.2
Lufthansa announced on November 21, 1997 that it was setting up its regional office in Singapore tooversee its entire operations in the Asia Pacific. The Singapore office would coordinate itsoperations, including marketing and sales and services currently being performed by its regionaloffices in Tokyo, New Delhi, Hong Kong and Bangkok. Lufthansa already had a cargo andmaintenance division in Singapore, and the setting up of a regional office in Singapore would help toconsolidate its operations and give it the flexibility to expand cargo operations in the future. 4
Soon after, on November 25, 1997, SIA announced that it had dissolved its eight-year, three-wayalliance with Swissair and Delta Airlines and teamed up with Lufthansa in a bilateral alliance to boost
its international competitiveness. Dr. Cheong Choon Koong, SIA's deputy chairman and chief executive officer admitted that the Global Excellence Alliance with Swissair and Delta had notprovided the benefits it wanted and the three partners were parting ways amicably He emphasizedthat the newly formed alliance between IA and Lufthansa was purely a bilateral cooperation and nota decision to join Lufthansa's SIA-airline Star Alliance. The primary objective was to strengthen theSingapore-Frankfurt route as the premier trunk route between Europe and Southeast Asia. Other benefits of the bilateral alliance included code sharing on flights on the Singapore-Frankfurt routeand on services beyond both hubs; joint frequent flyer programs and benefits; access to bothcarriers' airport lounges for qualified members; ticketing and service assistance worldwide at officesof both airlines; and improved siting of airport facilities in both Frankfurt and Singapore to reducetransit times.
SlAs alliance with Lufthansa came hot on the heels of the trilateral alliance with Air New Zealand and Ansett earlier in 1997 and raised the question of whether SIA would eventually join Lufthansa's SIA-airline Star Alliance with Thai Airways, Lufthansa, United Airlines, Air Canada, SAS and Varig.Joining the Star Alliance would not only extend SIA's global market reach and help it to cut costs bypooling resources with partner airlines but also provide it with a competitive safety net against other large alliances that may be formed in the future Additionally, SlAs customers would also benefit by
being part of the Star Alliance network in the form of reciprocal lounge privileges, better scheduling,convenient ticket purchase, check-in and boarding, improved access to affordable shares andimproved customer service. Despite these benefits of being part of a global alliance, SIA needed tobe concerned about the transaction costs in negotiating and maintaining multiple alliances, schedulecoordination and operational problems, and the cannibalization of business on certain sectors, for
example those served by SIA and Thai Airways in Asia. Additionally, the lack of consistency inservice delivery of any of the Star Alliance members could have a negative effect on SIA's strongbrand positioning.
As of December 1997, there was already talk in aviation circles of the likelihood of at least two largealliances being formed by the end of this decade. One such global alliance would be led by British
Airways and American Airlines and the other would be led by Northwest and KLM. Global alliancenetworks such as the Star Alliance made strategic and operational sense since they offered major benefits to both partner airlines and their customers. However, despite the changes in the airlinealliance landscape that favored the formation of large global alliances, when asked to comment, SlAsdeputy chairman and chief executive officer,
Dr. Cheong refused to be drawn on the issue of joining the Star Alliance.5
ENDNOTES1. The Straits Times 1997. Tie-ups won't help sick carriers. October 19.2. The Straits Times 1997. SIA mum on whether it will dump Swissair for Lufthansa. October 27.3. National Aviation Press Club of Australia 1996. Global Aviation Trends. Speech by Dr.Cheong Choong Kong, Deputy Chairman & CEO of SlA. December 3. Http://wwwsingaporeaircom/corpinfo/press/augO498.htm
4. The Straits Times 1997. Lufthansa will open new regional office here by year-end.November 21.5. The Straits Times 1997. SlA opts for Lufthansa, ending 8-year pact with Swissair, Delta.November 25.
Jim Hoffmann, President of Seneca Cold-Drawn Steel, Inc., is considering possible ways to
overcome the severe difficulty that his company has encountered in its domestic market. Seneca is
a small cold-drawn precision-steel factory located in western New York. The company was founded
in 1974 when a nearby large steel mill closed down its production line as part of a strategic
contraction plan resulting from the oil crisis. Hoffmann seized the opportunity and set up Seneca
three miles away from the larger mill.
In its first five years, Seneca's business involved buying hot-rolled steel bars from the large steel mill
and "cold-drawing" them according to customers' required specifications, such as round, square, flat,
or hexagonal bars. The cold-drawing process begins with the receipt of the "hot-rolled steel" in theform of bars or coils. The material is then shot-blasted to remove dirt, scale, and rust. Next, it is
coated with a lime solution to prevent rust and improve lubrication when it is drawn through the dies
used for cutting and shaping. The steel is then drawn through the dies, which size it to customer
specifications. The steel bar is then straightened and cut to desired length. Whereas hot-rolled steel
is usually dirty, rusty, and inconsistent in size, cold-drawn steel is sized within precise tolerances,
stronger, and finished to a clean, semipolished surface. Finished cold-drawn products are then
supplied to industrial users, mainly in the automobile and machinery industries.
Seneca operated profitably in its first five years, primarily because of its ability to meet customers'
fluctuating delivery and specification requirements. And because of its small scale, local market
demand was sufficient to keep Seneca operating at full capacity. After 1980, however, increasing
competition from Japanese automobiles and machinery-products manufacturers in Pacific Rim
countries (principally Japan, Korea, and Taiwan) drove many of Seneca's customers out of business.
Moreover, the supplier providing Seneca with raw steel was forced to reduce its production. In turn,
this development forced Seneca to buy most of its raw steel from mills located more than 500 miles
away, greatly increasing raw-material costs and reducing Seneca's ability to meet its customers'
rapidly fluctuating requirements. Given these changing customer and supplier markets, Seneca
However, at the same time that Seneca encountered severe difficulties in its domestic market, many
opportunities were developing in international markets. For example, China, a vast market and a
land of great resources was opening its long-closed doors and attempting to. play a role in the global
economy. Recently, China had greatly increased its international trade. Since 1979 - the year Chinaimplemented a new Open Door policy that allowed Western companies to establish joint ventures
with Chinese investors-the Chinese government has encouraged direct foreign participation in order
to develop its economy. Since then, the Chinese gross national product has grown at least 10
percent annually, and international trade has grown at an annual rate of 17 percent. By 1987, about
140 wholly foreign-owned enterprises were operating in China. There were also numerous other
cooperative undertakings, including nearly 8,000 Joint-venture compan'es-300 of them American.
Today, American-owned enterprises or Chinese-American joint ventures include both large, well-
known companies (Xerox, Union Carbide, IBM, and Occidental Chemical) and smaller, lesser-known
companies (such as Mundi Westport Corp., Rochester Instruments, Pretolite Electric, and Kamsky
Associates).
The Chinese government encourages such enterprises in order to secure the technology, financial
resources, and management systems needed in such strategically important industries as
communication and transportation, machinery, iron and steel, biochemicals, food production and
processing. As a member of an industry being courted by the Chinese government, Seneca may
face a great new opportunity. With a population of more than one billion people and a geographic
territory exceeding that of the United States, China is a potential market that few companies can
ignore. To tap this market, however, Seneca must be willing and able to transfer its production
technology to China in a way that will enhance the Chinese steel industry.
In July 1988, Jim Hoffman had received a letter from an international management consulting firm
asking that Seneca host a delegation of Chinese steel entrepreneurs. The Chinese delegation,
known as the "China Entrepreneurs of Medium-Small Steel Plants Training and Studying Mission to
U.S.A.," consisted of plant managers or directors of 45 medium to small steel plants located in 26
-major Chinese steel-industry cities. Hoffman had decided to participate in the program.
companies doing business in China insist on payment in a major international currency. The
Chinese government, however, tightly controls the availability of foreign currency, ensuring
that what little international currency it does possess is channeled to the payment of important
strategic products. Such policies can result in great inefficiencies and hamper the growth of important enterprises. Thus, foreign companies must often develop counter-trade
arrangements and negotiate guarantees for payment in their own currencies. These
arrangements can be very complicated-the issue of foreign exchange should therefore be
addressed early in contract negotiations.
2. Labor practices: Although China has abundant labor resources, the government is still wary
of the foreign use of domestic labor, mainly because of memories of colonial exploitation.
Foreign firms doing business in China do not pay workers directly: The money is paid to local
governments that, in turn, pay the members of a particular "work unit." Thus, the Chinese labor
force is neither cheap nor efficient. Although there have been recent signs of change toward
more flexibility in hiring and firing practices, firms like Seneca must negotiate contracts that
-provide as much control over labor issues as possible.
3. Legal considerations: China has no history of an international-style legal system. Its laws
are vague and arbitrary, and there is always the concept of neibu-bureaucrats are not sure if
they should give information about laws to foreigners and so will no openly discuss many rules
and regulations. Foreign firms must thus negotiate patiently and adhere to their own basic
principles and goals. The Chinese political system also continues to be highly “personalistic”
in nature - there is often no commonly agreed-upon legal system, and government officials
seldom interpret rules consistently. Therefore, it would be important for Seneca to develop key
contacts and become active on the Chinese banquet circuit.
However, with recent refinements in business law and the popularization of legal study among
some of China's top leaders, the legal situation is slowly changing. Chinese leadership has
traditionally been determined to maintain control over the political system, but this attitude has
softened because of the remarkable recent turnover of leadership at all levels. Many younger,
better-educated, professionally qualified leaders have reduced the bureaucracy that has for
years been a major obstacle to foreign investment.
4. Relationship with the Chinese Counter-Party : The contractual relationship formed with a
company's Chinese counter-party can be summarized as follows: Everything is negotiable. In
TURNING THE TABLESThe 29-year-old customer wheels his old Toyota onto the lot at the Ford dealership and parks
near the showroom. A polite salesman greets him and accepts the Toyota's keys. After somebrief paperwork, the salesman and customer walk to another area outside the showroom. There,the salesman goes through the delivery checklist and then hands the customer the keys to a new,dark-green Ford Mustang coupe that sports a 3.8 liter V6 engine.
What's so unusual about this story? Well this scene occurred in Tokyo, Japan and both thesalesman and customer were Japanese. For much of the 1960s, '70s and '80s, Japanese car companies like Toyota and Honda pretty much had their way in the U.S. market. Meanwhile, American companies either had little interest in exporting to Japan or found the process verydifficult.
Ford has decided to change all that. The new Mustang that Seilchi Tsuzuki bought representsFord's flagship model in a new line of cars it introduced in Japan in mid 1994. AlthoughJapanese cars have their steering wheels on the right-hand side of the car, Ford's Mustang is aleft-hand-drive model that targets a high-profile niche market. Ford is positioning the Mustangsquarely against Nissan's Z cars and Toyota's Supra, cars that have dominated the "muscle car"niche in Japan. Along with the Mustang, however, Ford is introducing three right-hand-drivemodels - Probe, Laser, and Mondeo - that will target the compact-sedan market long ruled byHonda's Accord. This segment accounts for one-third of the Japanese market. Ford producedthese new "world cars" as part of a $6-billion development effort. They represent the first timeany American car company has offered right-hand-drive cars in Japan.
Mr. Tsuzuki, a manager at a life-insurance company, believes that the Mustang is "sexy," and heappreciates the "roughness" of its mystique. The car's running-horse emblem, he notes, "is asymbol of the United States," and he finds the car's design very impressive. He also appreciatesthe fact that the Mustang offers safety features, like air bags and anti-lock brakes, that cost muchmore on Japanese cars. Another recent customer, 72-year-old Tadashi Okabe, points out that"People say bad things about foreign cars - that the service is bad and that they don't runefficiently. But the Mustang is not like that. It is big, cool, and durable, and it also has air bags."
Although the Mustang offers image and accessories, its real advantage may be price. In recentyears, the yen has gained strength relative to the U.S. dollar, falling from about 130 yen to thedollar to about 100. This means that Japanese consumers find American goods about 23
percent cheaper than they had been. For example, Mr. Tsuzuki's Mustang cost about 2.3 millionYen or about $22,000. That is at least $7,000 lower than a comparable Japanese sports car'sprice. Ford is pricing its world cars at $2,000 to $3,000 below comparable versions of the Nissan Altima or the Honda Accord.
For years American car companies have complained about their market shares in Japan andasked the Japanese government for concessions. Now, Ford may finally have found the rightformula - offer an American icon at a discount price and back it up with other models adapted for the Japanese market.
2 Adapted from PhiIip Kotler and Gary Armstrong Principles of Marketing, 7th Edition (Englewood Cliff's, NJ: Prentice Hall, 1996).
This is not Ford's first attempt to crack the Japanese market. Until 1939, before World War II,the company sold about 10,000 Model A Fords annually in Japan. When Ford reentered themarket after the war, in 1953, it imported only a limited number of cars each year. In 1979, Fordbought a 25-percent stake in Mazda Motor Corporation. This affiliation allowed Mazda to producethe Ford vehicles sold in Japan and gave Ford access to Mazda's 286 dealerships. Todistinguish the relationship Ford and Mazda called the dealerships "Autorama." Despite the jointventure, however, Ford imported only 2,959 vehicles into Japan in 1991 and only 5,407 in 1993.
Ford's interest in Japan and other international markets is just part of the American autoindustry's growing interest in exporting. The weaker dollar and improved products are helping thecompany reverse U.S.-made vehicles' historically weak export sales. In 1994, analysts estimatedthat American and Japanese companies would have exported 529,000 cars and trucks from theUnited States, a 48.5 percent jump from 1993. The "Big Three," Ford, Chrysler, and General
Motors, would account for 382,000 of those vehicles, up from 254,766 in 1993. Japanesecompanies operating in the United States would also increase their exports in 1994 by over 30percent, but most of these exports would go to Taiwan. The stronger yen is also forcingJapanese companies to continue their investments in U.S.-based manufacturing. Toyota recentlydoubled its Kentucky plant's capacity to 400,000 vehicles per year.
Like Ford, General Motors is also targeting Japan, although it has been less aggressive. In1993, GM sold 17,400 vehicles in Japan, about one-half of them made in Germany by GM"s OpelUnit. By the mid- 1990s, GM plans to sell right-hand-drive Saturns and a right-hand-drive vanthat it manufactures in Georgia. Also, by 1996, it will offer Chevrolet Cavallers with a Toyotanameplate. GM owns 37 percent of the Japanese company Isuzu.
DRIVING FORD
Just introducing reasonably priced new cars to the Japanese market is not enough by itself Fordrealizes it will need a full marketing mix. Ford is depending on Konen Suzuki, president of Japanese operations, to mange its marketing strategy in Japan. Suzuki stunned his superiors atToyota when he jumped to Ford in 1991.
Suzuki's first goal was to make Ford more sensitive to the needs of Japanese motorists. Heknew that Ford offered roomier cars which the Japanese preferred for family outings andrecreation. Improved fuel economy made the cars more attractive in a country, with very highgasoline prices. Suzuki also realized that Ford would have to back up its cars with better service
than many local rivals provided. He issued Ford's first recall in Japan to replace broken steeringhoses and malfunctioning fuel pumps on Tauruses. Japan's narrow, twisting roads and constantstopping and starting were too much for these parts, so Ford replaced them with more reliablesubstitutes. Keeping replacement parts in stock has been one of Ford's challenges.
The typical Japanese consumer is also less interested in how a car drives than in how it looks.Because Japan has such a well-developed public transportation system, many Japanese use thatsystem for day-to-day travel. The Japanese treat their car as an ornament to be polished andcared for but used only occasionally.
Suzuki is also focusing on distribution. He wants to sign up an additional 1,000 dealers by theyear 2000 to supplement the 286 Autorama dealers. He has even enticed one Nissan dealer tooffer Fords at many of its dealerships. One problem, however, is that in Japan door-to-door salepeople sell about one-half of the cars sold each year, Because real estate is so expensive inJapan, most auto dealerships do not resemble American dealerships with their large buildingsand massive car lots. They serve instead as bases of operation for the salesforce. Toyota alonehas a 100,000 person salesforce - equal to about one-half of the entire U.S. auto salesforce - for a country the size of California. Toyota's roving salespeople help it capture two of every five car customers in Japan. The salespeople establish personal relationships with each of the 3,000 or so households in a typical sales area and make their sales pitches in their customers' livingrooms. The salespeople primarily target homemakers who don't work outside the home.Because of the door-to-door salesforces. most Japanese never go to an auto dealership, andmost are strongly brand loyal. Many Ford dealers don't like the time and expense involved in thetraditional sales approach, but they yet to develop any better ideas.
To entice consumers to visit the dealerships, Suzuki ordered a multimillion-dollar ad campaign
that positions Ford's offerings as fun family cars. Two trends may help Suzuki's efforts. First.more Japanese women are working and are, therefore, not at home for traditional sales calls.Second, more consumers are willing to go to showrooms, to see the latest new cars.
By 2000, Ford and Suzuki want to capture 5 percent of the Japanese market, roughly 200,000cars. Ford would import about one-half of these, with its Mazda affiliate making the balance.Suzuki knows, however, that Nissan, Toyota, Honda, and the other Japanese car makers will notsit idly by. He knows that Chrysler and GM will want their shares of the Japanese market. Howcan he carve Ford a larger place in one of the world's most competitive markets?
Sources: Valerie Reitnam, "Mustang Leads Ford's Charge on Japan," Wall Street Journal, June9, 1994, p. B I. Used with permission of the Wall Street Journal. Also see William Spindle andJames B. Treece, "Have You Driven a Ford Lately - In Japan?" Business Week, February 21,1994; Krystal Miller, "Exports of U.S.-Made Vehicles Surge as Big Three Offer Better Cars,Prices," Wall Street Journal, June 27, 1994, p. A3; Valerie Reitman, "GM is Planning to MakeInroads in Japan Market," Wall Street Journal, July 18, 1994, p. Ag; Oscar Suris, "Ford Lists NewLine of Compacts Below Japan's Top Sellers," Wall Street Journal, July 21, 1994, p. B6; ValerieReitman, "In Japan's Car Market, Big Three Rivals Face Rivals Who Go Door-to-Door," WallStreet Journal, September 28,. 1994, p. A1.
Professor Kathleen Slaughter prepared this case solely to provide material for class discussion.The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality Ivey Management Services prohibits any form of reproduction, storage or transmittal without itswritten permission. This material is not covered under authorization from CanCopy or anyreproduction rights organization.
In July of 1993, John Campbell vice-president of finance and administration at Midstream GasProcessing Ltd. (Midstream) in Calgary, and Clint Markson, manager of finance for ExtensivePipe Lines (EPL) in Calgary, were reviewing the expenses of the joint venture with PetroVietnam.They began to doubt whether the joint venture was even possible. What could they do toincrease the probability of success? Should they be considering an additional partner or even amerger with other competitors?
DESCRIPTION OF THE PROJECT
In late 199 1, Midstream was invited to participate in making a proposal to the national oil and gas
company of Vietnam, PetroVietnam, to construct a natural gas processing plant. The invitationcame through Tom Higgins, president of Higgins Engineering, a small engineering firm that had joined an Alberta Government trade mission to the Socialist Republic of Vietnam early in 1991.The trade mission's objective was to identify business opportunities in Vietnam for Albertacompanies.
On this first visit, Higgins became aware of a fledgling oil and gas business, PetroVietnam. WithRussian partners, the company had placed on production just three years earlier a huge oil fieldcalled the )White Tiger lying 120 kilometres off the southern coast. The unique feature of thisreservoir was the co-existence of gas reserves; as a result, gas also rose to the surface duringthe extraction of oil. At the time of Higgins' initial visit, the gas was being flared at the offshoreplatform at a significant financial and environmental cost. Every day, 100 million cubic feet of
natural gas extremely rich in liquids (propane, butane and condensates) was sent into theatmosphere. The resulting loss to the Vietnamese economy was estimated at US$500,000 per day or US$180 million per annum.
A business opportunity existed to add a natural gas processing plant to the offshore oil facilities.This plant would use compression and refrigeration to extract the liquids which would then bestored under pressure at the platform until they could be shipped into the Asian market. Theresidual gas would be sent by pipeline to shore for use by PetroVietnam in various projects suchas power production, fertilizer manufacture and other petrochemical applications. The plant itself and the process were similar to the Sherwood plant in western Canada which Midstream partiallyowned and fully operated. In Alberta, most of the liquids were stripped from the gas at a
processing facility, which was usually located in close proximity to the wells. Although theoffshore location presented some complications not faced by the Alberta gas processing industry,an alternative was also being proposed to build the plant onshore. The more economical choice,however, was to build the plant offshore, because it would be more technically complicated andexpensive to transport rich gas (i.e., laden with liquids) through a pipeline for a distance of 120kilometres.
The Vietnamese were very aware of the economic potential which lay in the offshore gas. Theproject offered many benefits: the generation of hard currency foreign exchange revenues fromthe start-up date; training and employment for Vietnamese operational staff; an ownershipinterest in the project at no cost; access to the very best gas processing technology in the world;and a solution to the environmental problems associated with the flaring of the raw gas.When Higgins returned to Canada, he approached Midstream to develop the project.
DEVELOPMENT OF THE PROJECT
Initially, Higgins assumed leadership of the project. In January, 1992, two representatives fromMidstream accompanied him to Hanoi for the purpose of outlining the project details toPetroVietnam, a company which they understood reported to the Ministry of Heavy Industry andwas responsible for awarding the project to the appropriate foreign company or joint venture. TheMinistry of Heavy Industry and PetroVietnam were supported by the State Committee for Co-Operation and Investment.
To facilitate the basic requirements of operating in a foreign country, Higgins hired the services of a South Vietnamese woman, Minh Chau, who had reasonably good English language skills andwhose business was similar to that of a travel guide. She arranged meetings, dealt with thecustomers and passport officials, provided transportation, etc. Although Minh Chau was
competent and arranged many meetings, these meetings mightaccomplish absolutely nothing. Sometimes, the Canadian's trips to Vietnam consisted of remaining in the hotel and waiting for her to schedule a meeting
The January 1992 visit to Hanoi lasted four days, during which Midstream and Higgins, with MinhChau acting as interpreter, sprinted from one dilapidated building to another to outline their proposal to the Ministry of Heavy Industry and PetroVietnam. The Vietnamese had not receivedan advance copy of the proposal, which was written entirely in English; therefore, they listenedattentively and requested some time to review the document. At a second meeting two dayslater, PetroVietnam requested classification and changes. At this point Higgins and theMidstream representatives returned to Canada to consider the next move.
In February of 1992, Midstream and Higgins returned to Hanoi to continue discussions withPetroVietnarn. They made one-week trips in subsequent months, until in July they were informedthat the project had been awarded to another company.
ANOTHER OPPORTUNITY
Just when it appeared that the project was finished, PetroVietnam contacted Midstream andHiggins in late 1992. Because the company it had selected for the joint venture had experienced
difficulty in meeting PetroVietnam's terms and conditions, the project was again thrown open tobid.
With greater knowledge of the project and some detailed cost estimates, Midstream haddetermined by now that several specialized skills were required and that the costs could be ashigh as $300 million. Therefore, Higgins and Midstream invited other companies from Calgary toform a consortium in order to spread the financial risk and to contribute skills to the joint venture.
Higgins did not define what his role would be in bringing this consortium together but he attendedmeetings and invited EPL and Willet Engineering to take part in the consortium. He did notspecify whether he expected a finder's fee or a percentage of profit. However, he was veryfamiliar with Midstream and he had read 'in the newspaper that EPL had made an unsuccessfulbid in Argentina. He knew, therefore, that EPL was interested in expanding internationally andhad some experienced personnel. What emerged was a group of four Canadian companies,each of which brought a unique skill to the project:
Higgins, an engineering company specializing in EPC work (engineering, procurementand construction) in relation to gas plants;
Midstream, specializing in the operation of gas plants on an ongoing basis, after completion of the construction of the plant;
Extensive Pipelines Limited, specializing in the construction and operation of pipelines
(i.e. in moving the gas); and
Willet Engineering, specializing in reservoir engineering and evaluation.
These companies, which all had good reputations and were well known to one another,proceeded after a meeting to discuss interests. Higgins, an engaging man, used hisfacilitation abilities to lead this loose consortium. The project was estimated to bring in $70 millionto $80 million and figures went as high as $300 million; the life of the project was estimated at 15years. The consortium proposed giving the Vietnamese 20 per cent of the revenues beforepayout, although in Canada the usual procedure was to retrieve out-of-pocket expenses beforecommencing payout.
THE CONSORTIUM SOLIDIFIES
Midstrearn and EPL travelled to Ottawa in January, February and March of 1993 to meet with theVietnamese embassy officials who influenced Vietnam's Ministry of Heavy Industry. At this stage,the joint venture parties decided not to formalize or define the roles, but to proceed on aninformal basis and to decide upon these details later. For now, the immediate concern was to winthe contract with PetroVietnam; until then, each company would pay its own travel costs andcontribute its own time and effort. The underlying assumption was that each company wouldparticipate in the project financially as well as lend its own expertise. Midstrearn assumed the per them and travel expenses for Higgins for six months and agreed to continue with only his travelexpenses for the duration.
In April and May of 1993, the new Canadian joint venture travelled to Hanoi to meet with theMinistry of Heavy Industry and PetroVietnam and its various departments. As always, Higginsassumed the leadership role and was accompanied by three or four other representatives fromthe joint venture companies. Gradually, however, Clint Markson from EPL emerged as theCanadian spokesperson. He was an energetic man in his early 30s whose boyish good looksmade him an easy person to talk to and a natural peace keeper in the consortium. He andvarious consortium members met with officials from departments within PetroVietnam, includingthe Economic and Planning Department, the Production Department and the Gas Department.Officials at the Ministry of Heavy Industry were also consulted with and informed of the project.The consortium continued to assure the Vietnamese that Alberta was the world leader in naturalgas processing technology, and that the joint venture participants had considerable expertise inthis technology. This combination provided the essential credentials to make the project asuccess.
VIETNAMESE HISTORY After the French were defeated by Ho Chi Minh in 1954, Vietnam was a divided country with thenorthern provinces controlled by communist and the southern provinces heavily influenced by theUnited States until the latter's military withdrawal in 1973. As a result, the south continued to becharacterized by a more entrepreneurial approach which still survived after 20 years of communist influence. Recognizing this, the communist party leaders in the northern city of Hanoiappointed a southerner, Vo Van Kiet, as prime minister to lead the country to a market-basedeconomySince the communist takeover in 1975, there had been little or no contact between the West andVietnam. By 1990, the Vietnamese realized that their past policies had left them seriously behindin ten-ns of productivity and competitiveness in relation to their neighbors. As a result of thedecision to model their previously government-controlled economy after the free-marketeconomies of their Southeast Asian neighbors, the Vietnamese opened their doors and invited
Western businesses to Invest in their country. In return, the Vietnamese hoped to benefit fromWestern business practices and technology, which would lead to increased productivity andemployment. A growing concern was how to feed and care for a young population of 70 millionpeople. In 1991, there was a window of opportunity for Canadian business as the trade embargoimposed by the United States was still in effect.
UNDERSTANDING THE VIETNAMESE
Because of cultural differences, the Canadians had to learn about Vietnamese attitudestowards business decisions. Time was not money and deadlines were irrelevant. Longtermcontrol was very important and worth fighting for. One person made all decisions and rm'd-leveltechnocrats had no decision-making power. Many Vietnamese thought that there were already
enough foreigners in their country. Although the burning off of the gas was costing theVietnamese as much as $500,000 US per day in lost revenue, they were not moved by a senseof urgency; because the large influx of foreign currency that they desperately sought was comingfrom the oil, the potential gas revenues were not urgent.
PetroVietnam, was a puzzle. It seemed to be a state secret who was on various committees andwhen decisions would be made. Vietnam was still working with a war mentality. Which aspects of behavior were cultural and which were war mentality was not clear. The deference to authorityand seniority were clear and they were committed to an ideal in the face of hardships. Becausethe Vietnamese were also learning English, they focused on numbers; therefore, the group usedas many numbers as possible. The reports were a challenge for them to read. All the
negotiations were time consuming. Although the consortium had previously considered settingup an office in Hanoi, they changed their decision in order to control costs.
In order to advance the project, the Canadians were required to deal with the Vietnamesestakeholders at both the business and the political levels. The business level included continuingthe ongoing negotiations with PetroVietnam as well as investigating and understanding dierecently established legal, taxation and banking systems. The political level included persuadingthe Ministry of Heavy Industry about the merits of doing business with Alberta's oil and gasindustry. Contacts needed to be developed and maintained. The Canadian group had to cramall of this work into the four or five day visits which they made every month or six weeks.
THE DECISION APPROACHES
In early 1993, PetroVietnam informed all interested groups competing for the project that thesuccessful bidder could be announced as early as July, 1993. As the deadline for projectselection drew near and as the Canadian joint venture learned more about the project itself, it
became apparent that one or two of the members wanted more influence. For example,Midstream thought that its area of expertise, gas plant operations, was now being coveted by oneof the other members of the consortium. Nevertheless, the Canadian joint venture continued withits hectic trips to Hanoi. These culminated in a meeting in the first week of June, 1993, whichthey dubbed the "butterfly" meeting as the attendees were mesmerized by a huge butterfly thatfluttered around the room throughout the meeting without drawing the attention of a singleVietnamese. At this meeting, PetroVietnam, through its consultant, Morgan Grenfell, grilled theCanadian joint venture on numerous aspects of its proposal. In late June, the consortium wasinformed that it had been selected as number one to proceed with the project.
The joint venture in its present form had proceeded for almost six months without setting out eachmember's role in a formal agreement. The group had worked thus far as a Calgary "old boys"
network. However, the obligation now surfaced to do feasibility studies. Midstream had done afinancial feasibility study and the Canadian government had funded a technical feasibility study,but the project lacked a business principle approach; therefore, the group agreed to redo allstudies because the financial feasibility had been based on the technical feasibility study, whichwas weak at best. Then, In July of 1993, Willet Engineering pulled out of the project after its newCEO proposed a change in direction and decided that the project was not consistent with thecompany's new vision.
The loss of Willet Engineering, plus the shaky validity of the early feasibility studies left Campbellof Midstream and Markson of EPL with many concerns after many trips to Vietnam, and expensesof over $80,000 per company. How could they increase the probability the consortium's beingselected as the partner? If it was selected, could they finance the project without Willet
Engineering? Perhaps it was not too late to consider other options.
