Developments in International Business

Team 5: Angelique Lettich, Devansh, Keith Krause, Gerardo Zanartu Jacob

UvA MBA; Full-Time

Case 2: Market Expansion at CMS electronics

Evaluate the decision faced by CMS electronics. What should Michael Velmeden do? What
are the key critical factors that influence your strategy?

The strategic dilemma faced by Michael Velmeden regarding CMS entry into China is borne
out of the pressure by its significant customer in the Automotive sector and inhibition by the
risk associated in starting its own production facility in an alien market by a mid-size firm. We
believe Michael Velmeden should move ahead with his expansion in China in Automotive
market segment.

Automotive Market Segment commands 72% of the total revenues for CMS electronics.
European market has already saturated and the entire industry is moving towards Asia.
Hence, even if Michael might have his reservation for entering into an unknown country by
Following The Customer, he needs to do it by Following The Industry. While emerging from
the economic meltdown, regional European market is expecting a negative growth rate, yet
automotive industry has been forecasted to grow at the rate of 4 percent annually for global
car production in 2013-2018. In such an environment, it isn’t strategic for CMS electronics to
disassociate from its major customer in the automotive sector. Also, deliveries from Europe
has been slower and more expensive therefore extending into Chinese market is the only
available alternative.

In terms of addressing the ‘Liability of Foreignness’, CMS electronics already has a foot in
Shanghai in the form of its trading office. Not only does it act as a cultural window to the
China mainland but also enable the company to benefit from the price advantage compared
to the price advantage in other markets such as US, Europe. So, CMS electronics presence
doesn’t entire fit the description of ‘Foreigner’s Liability’. The Hong Kong presence along with
an extension into the mainland China will help in fostering trust and faith between CMS and
its customers which is an important factor for a mid-size firm such as CMS.

Certain factors that spark the problems of ‘Foreigner’s Liability’ for CMS such as red tape
bureaucracy and lack of transparencies in policy making but opening of trading office in Hong
Kong and engineering and sales office in Shenzhen, China would provide an inroad into
comfortable assimilation with the local environment.

Chunk of suppliers moving to Asia has tightened its noose on the mid-size firms such as CMS
and rising growth forecast in automotive segment has increased the expectations from the
customers. Thus the added value provided by EMS companies has been taken for granted by
customers as their willingness to pay for additional services is low. Thus moving to Asian
market for its significant customer will allow CMS to survive in the narrowing market for
automotive segment. Maintaining the ties with its long standing customer will not only
strengthen the ties but will also provide a cushion to CMS electronics in order to survive in
the industries which is marred with Mergers & Acquisition and the survival of a mid-size firm
is in jeopardy. Low labor cost of Asian EMS providers is significantly below 10 percent of sales
unlike its European counterparts where 20 percent or more of sales as HR costs to account
was the normalcy. Thus entrance into the China market will (at least) ensure short term
survival in the cut-throat market of automotive segment. Moreover, China’s coastal region
supports low logistics cost due to high concentrations of suppliers, thereby positions itself a
lucrative alternative for CMS.

Establishment of a local subsidiary in China could be challenging especially in terms of

formulating cohesive operational and cash management structures. Therefore the most
suitable option for CMS electronics would be to establish a Wholly Foreign Owned Enterprise
in China. Owning 100 percent control, CMS can exercise complete control over operations
with no dependency on a Chinese partner company in line with the expectations of CMS’s
significant customers. This also allows CMS to deliver more customized services. WFOEs
enable flexibility in the transaction through payments for expenses and acceptance of profit
in local currency. An undesired effect of WFOEs would be lack of interaction with local
partners and lack of depth in local regulations. Presence of the trading hub in Hong Kong will
be suitable to bridge such gaps by bringing various stakeholders onto the same page.

Apart from the cultural barrier, another major pain points for companies to expand to China
is the lack of transparency and absence of a legal structure prohibiting technological and
intellectual thefts. WFOEs ensures the security of such properties. Such guarantee would
provide conducive environment for mid-size firms such CMS to expand its operation in China.
One of the primary benefit of CMS establishing a WFOE in China would be the ability to
repatriate funds to the holding company. This also ensures a gradual shift towards attaining
vertical integration for CMS.

WFOEs, especially in the case of CMS, would be highly beneficial keeping the present dilemma
in front of Michael Velmeden in mind. As CMS is still contemplating the cost-benefit analysis
of starting its own manufacturing unit in China, manufacturing WFOEs ensures that no special
requirement will be necessary for Import/Export license for CMS’s own products. This would
provide a much needed boost for CMS to flourish.

Therefore, we believe that Michael Velmeden should expand the CMS manufacturing for its
customer in Automotive segment to China by opening a Wholly Foreign Owned Enterprise
aiming to establish strong ties with the local stakeholders in the longer run. This will not only
ensure CMS electronics survival in the volatile EMS market but also provide a cushion for the
growth stagnancy being experienced by CMS in the European market. In due course, CMS
should evolve from mid-size firm mentality into a bigger stature to optimize the full benefits
of the ecosystem in China. In order to accomplish this, CMS’s WFOE establishment in China
would be the most pragmatic way forward.