Background

In 1987, Extrusion Technology (later called XTech ) was acquired by Jim Sharpe. It manufactured a variety of customized extruded aluminium parts for industrial customers ranging from construction to consumer durables. By 2000, they focussed entirely on telecommunications & networking equipment. Their main customer was Lucent, later they started selling to all major telecommunication players like Nortel, Nokia, Alcatel, Cisco, IBM, Siemens, etc.

XTechs Products
In 2005,400 separate products were sold in small batches as per customer specifications. Examples : 1. Steel or aluminum front panel 2. Flow Pressed 3. Stamped sheet metal USP: minimization of electromagnetic interference In the year 2000, they specialized in custom-made Front panel and enclosure systems for Telecommunications, networking and Electronics market and became a niche player.

XTechs Order Processing

OEM sends a non-binding contract XTech develops and tests the components at their own expense Analysis of the manufacturing costs Gross Margin 25% - 50% based on order volume Price range USD 10-15 per piece First delivery after 25 days Full production in 12 months Product Life Cycle 4 - 5 years

The XTech Advantage

Very fast on delivery of prototypes 2. Tailor-made solutions 3. Short-term contracts
1.

XTechs Sales figures

37.1
40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 (predictive) (predictive)

32.2 22.1
14.5 24.2 23.5

10.1

13.8

International Expansion???
XTechs No.1 customer Lucent and their Contract Manufacturers (CMs) pressurised that XTech MUST establish their operations in China. Reason: The entire supply chain believed that producing in China will yield in lowest manufacturing costs which would increase the profit margin. This made the XTech senior management to consider options for international expansion.

Political & Legal Challenges

The communist party exercises absolute power over legislations and economic & cultural institutions. Rules and regulations are less tranparent China has a loosely defined legal system, giving rise to various loopholes in the law- The wordings of the Chinese laws are often vague and can be interpreted in many ways Local Lawyers can manipulate the law further against western businesses.

Cultural & Economic Challenges

There is a strict hierarchy in the Chinese business culture, which is very different from the business culture of some of the western countries. So making a Chinese employee look bad in front of others would have hidden consequences beyond what was intended The labor costs have steadily increased over the last 5 years owing to high economic growth and the government has increased the minimum wage level. This will impact the operating costs in China and a western company will have to factor in this risk as well

Why CHINA??
China is considered the factory of the world Accounts for 13.2% of the world Manufacturing Offers low cost raw material and cheap labour Outsourcing to china by western companies can be either through contract manufacturers or wholly owned subsidiaries of parent western firms

Research Question
Which variant for entry into the Chinese market should XTech choose?

US v/s China market

In USA, a) Diffused industry was a $ 250 million industry. b) Competition between existing competitors c) XTech was a $23 million enterprise in 2003. In China, diffused industry consisted of many small producers. a) 1 large Chinese producer - Low Price Strategy b) Strong product differentiation c) Very different product quality

XTechs Marketing Strategy

Challenges Encountered in Market Entry Threat of new competitors Threat of substitutes

Action Taken to gain entry 1. Concentration on niche 2. Competitive advantage through R & D 3. Shielding EMI 4. Improved material properties

Alternatives to enter market in China

1) Southco (Contract Manufacturing) 2) Nextron (Joint Venture) 3) Ideal Jacobs (Joint Venture) 4) WOFE (Wholly Owned Foreign Enterprise) 5) Push the decision for later (Not the right time to

venture out)

Southco Contract Manufacturing

Southco, 1200-person Philadelphia-based maker with 4 equipped plants in Shanghai and Shenzhen. XTech started negotiations for Rent free capacity in factory/facilities Personnel including Southcos salespeople covering Chinese market. Purchases of some services like light assembly & injection moulding

Nextron Minority Joint Venture

Nextron, $100 million producer of sheet metal and parts for injection molding from Taiwan with 1000 person facility near HongKong. XTech officials offered A Strategic Alliance called LeanTek will produce, sell & support XTechs products in Chinese market. LeanTek would make 10% margin on all sales. Nextron officials proposed (Minority JV) Joint Venture 70%(Nextron) and 30% (XTech) Total Investment = $ 2 million investment BUT!!! Nextrons sales technique very, very aggressive

Is XTechs brand image at stake, if this deal is finalized???

Ideal Jacobs Majority Joint Venture

IDJ was a leading, New Jersey-based printer of labels for electronic equipment. IDJs 50% revenues were accounted to XTech IDJs Proposal for Joint Venture (Majority JV) Joint Venture 20%(IDJ) and 80% (XTech) XTech to use 10,000 square feet of open space at $1.30 per foot per year. and staff of IDJ Minimum Investment = $ 200,000

WOFE (Wholly Owned Foreign Enterprise)

WOFE allowed complete control of operations for XTech Best but one of the riskiest propositions. Face Political & Bureaucratic challenges in order to set up new business in China. XTech in favor of a minority partner but Foreign Investor Board said NO. XTech to have its own subsidiary despite sales restrictions for Chinese market.

WOFE-Strengths
Largest control Displays permanent involvement Protection against Counterfeit

Weakness
Insufficient capital Lack of prior international experience

Opportunities
Low labor costs Customer focus - reducing Transport costs Economies of scale

Threats
Counterfeiting Cultural differences High level of bureaucracy

Should we defer this decision???

Recommendation
XTech should choose Low Mode of Entry - IDJ Majority Joint Venture. Take advantage of local knowledge initially so that we can gradually reduce psychic distance. Less risk, since stakes are high in high mode of entry. Also this is their first international move. Once Xtech acclimatizes to the Chinese business climate, it can make progress towards hierarchical mode of entry e.g. WOFE.