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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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