Motivation To International Business - Part 2
Domestic market: VOSCO will still be the biggest shipping company especially in bulk and dry bulk cargo transportation while continuing to develop oil and container shipping International market: VOSCO tend to be more active and concentrate on seaborne trade within Asian Region (such as Korea, China, Indonesia…) as well as furthering other freight routes all over the world (Africa, Europe and America). Motivation why VOSCO want to expand their market to foreign market because Currently the demand of shipping in Vietnam is limited and just holds a minor part.
So VOSCO certainly will need to enter foreign markets to get more profit and customers (sources of cargo-supply in long term) and utilize the fleet capacity (bulk, tanker and container ships) as well as reduce the inventory cost and promote economies of scale. In the near future demand for import-export from regional countries and the amount of cargo in international shipping expects to rise tremendously in the near future.
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According to UNDESA 2012, worldwide commercial good transported by sea will increase by 36% in 2020 and double the gross tonnage by 2033, especially bulk cargo still remain as the major – which is also the strength of VOSCO fleet. The barriers to entrance foreign market are reduced or eliminated when Vietnam joined ASEAN and WTO recently: VN has been a member of WTO since 2007, commercial relations with over 220 countries and territories, sign 88 bilateral trade agreements, establish 7 FTA with 15 countries.
So removes significantly trade barriers and is good condition for Vietnamese companies, specifically VOSCO to enter foreign markets. VOSCO has a lot of good competitive advantages to develop further like: low-cost and skilled crew (seafarers), good related and supporting system such as shipbuilding industry, ports… (VOSCO is a member of VINALINE)… Moreover the company can manage and exploit their own fleets therefore positively seek to customers and participate in international market without dependence on other partners.
In addition, VOSCO officially takes part in foreign market also means the company have to deal with a lot of threat. The biggest one is the competition from much bigger rivals around us such as COSCO, Hanjin… in both price and quality wars, then other threats emerging from the host country like culture, policy and currency. Now move to factors this company should consider in shaping their strategies to compete in foreign market.
We did mention that China and Indonesia can be potential foreign market so let’s take a look at some external environmental analysis of them: Political Factor: both Indonesia and China are considered as stable political environment, unlikely the high political risk in Africa. Tariffs are high but on decreasing slope. The recent dispute on The East Sea between China and some countries including Vietnam may not affect too much on trade between countries. Economic Factor: both countries are in trillion dollar GDP club. Currently China’s economy is the second biggest economy in the world and Indonesia ranks 15th.
Especially FDI plays a vital role in China and Indonesia growth rate. Trade between these two countries with other all over the world continues to rise significantly regardless of the bad impact of public debt in Europe economy. Socio-cultural Factor: Population in Indonesia and China is extremely high not only in Asia but in the world. However there’s a big difference between these culture, especially in religion(major religion in China is Buddhism but Indonesia is Muslim) Technological Factor: Transport system and Communication System in these countries are effective and highly developed compared with other in region.
From this analysis we can see that the company should choose a proper method to access the market. We think the way of merger and acquisition or integration with a local freight forwarder would be efficient because setting up a new affiliate is risky (postponement). Nevertheless setting up subsidiary or using will help the firm take the initiative in linking with local customers. Beside that VOSCO should focus on its own strength in shaping other strategies.
Generic competitive strategies: Focus on market niche will be a good choice because VOSCO now take advantage in dry and bulk cargo transportation. It also means mineral, grain and other agricultural product will be the major commodity. In shaping the production strategy, there are two main factors: fleet and logistics service. Like we said before, VOSCO should renew and upgrade regularly their quality and functionality fleet to meet the international transport demand. For example:
Firstly, technical improvement in ship sizes and draft is required (international coal shipping require 30,000 – 70,000 DWT vessels; demand for regional rice shipping currently concentrate on under 10,000 DWT vessels but in the near future it will increase to 20,000 – 30,000 DWT) Secondly, standardization factor (the problem of registry – Vietnamese registered vessel may satisfy the operation standard but in fact it is unfavorable in international transport because standards by VR may not strict enough). The factor of logistics activities in both home and host country is very important.
Investing in logistics infrastructure such as warehouse, inland transportation… in China or Indonesia should be a long-term objective. Initially it should be integration with local providers. Expanding business in foreign market certainly need to consider factors in human resources. Integration can be seen as the first step before M&A process. Initially local shipping agent and logistics provider will run totally by local employees (inpatriate) then gradually replaced by our expatriates especially the top position. Therefore selection, training and development those expatriates will play an important role (Ex: Culture: China – Indonesia).
Secondly VOSCO must set up a competitive compensation package to motivate them and finally a proper relocation policy. Move to financial issues, initially the company should not consider the financial objective as the most important. Instead, the outcome better focus on (which is reflected by customer satisfaction). Another factor is the source of fund for the subsidiary. Depend on the (high) IR and exchange rate in both China and Indonesia, it’ll be better if the fund depends on both parent company and local borrowing and they uses the most common method: dividend remittance to pay back the parent firm.
Finally regular financial report to the VOSCO headquarter is necessary in order to hedge the risk and develop their own financial strategy. The last but not least is containerization. Expand the business focusing on dry and bulk cargo market doesn’t mean we skip the container market. Like I said, this is a long-term objective because the current inefficiency of VOSCO container vessels. Therefore, profit from bulk cargo shipping can be reinvested in developing container lines services in the future.