Introduction

PRPG was a state-owned enterprise and was developed form an old piano factory in

Guangzhou of China. The piano factory is located Pearl River, so that the brand of

piano is called Pearl River. Since the adoption of an open-door policy, China

exploited a range of new opportunities provided by a market-oriented economy for

expanding production, employments, and profits through free trade markets.

As a result, PRPG face a chance due to import technology and export products, and

then they were expended to become Pearl River piano Industrial Corporation. Their

business become more successful，after they merger with several small company. In

2000, PRPG had more than 130 strategic alliance through-outs the country, in addition

to 208 sales units.

Question1

Drawing on industry- resource- and institution-based views, explain how PRPG,

from its humble roots, managed to become China’s largest and the world’s

second largest piano producer.

1.1 Industry-based view

Rivalry among established firms may prompt certain moves. PRPG face some

challenges, since piano is traditional European musical instrument, European pianos

has a long history, and they always target upper market, such as Steinway. PRPG will

face a strong challenge when they target upper market. For example, although

YAMAHA is the largest piano producers, they focus on medium and low-end market;

however, Tong would like their PRPG become best brand, next only to Steinway. In

addition, PRPG not only import technology of piano making, but also learn and

introduce western culture to them.

Higher the entry barriers, PRPG face the difficult entre in US market; the US people

do not believe PRPG can make low price high quality products. PRPG cannot easily

target foreign people. US people stay loyal to their local product.

The bargaining power of buyers may lead to certain foreign market entries. In US

market, there are many competitors, such as Steinway. Steinway product always target

upper market. Buyers may buy Steinway product, rather than PRPG.

1.2 Resource-based view

According to case 8, in 1960-1980, the factory had very low productivities, low

competitive ability, even less than 100 labors and produce only 13 pianos per year.

The industry introduced total quality of management in 1988, and they also promote

ISO 9000 in 1998. Moreover, they built business partnership with YAMAHA via joint
venture. As a result, PRPG learned higher technology skill via business activities.

PRPG not only import technology of piano making, but also learn and introduce

western culture to them.

Tong pay attention to communicate with their employees in order to build good

“GUANXI”. Tong also established close relationship with some famous world well-

know piano players, and recommended they play their Pearl River piano in their

concerts. This is ‘celebrity's appeal’ strategy in order to target people.

Innovation included the importation of new technology in production and quality

measurement and production innovation. Production innovation can be concluded

developing a wide range of pianos to meet the upper-, medium- and low-end market

in order to target different consumers’ group.

1.3 Institution-based view

Regulatory risks

These risks are associated with unfavorable government policies. Since the adoption

of an open-door policy, PRPG is allowed import high technology and export their

products. As a WTO member, the government’s has been encouraging local industries

to learn from their foreign partners.

Currency risk

China is becoming an export powerhouse, which caused the friction with other

countries, United States in particular. The U.S. senators urging the Whitehouse to

exert pressure to China for RMB revaluation most recently and President Obama gave

an official statement to point out RMB should be appreciated. China’s direct response

to RMB rate issue can be found in Premier Wen JiaBao’s answer in the press

conference just after the NPC&CPCC* this month in Beijing. Premier Wen claimed

RMB is not raise in value by presenting China’s increased figure of imp/expo absolute

value in 2009.

Question 2

Why did Tong believe that PRPG must engage in significant internationalization

(instead of the current direct export strategy) at this point?

China is a country with a huge exporting activities, recently it is changing its

exporting mode which from low-wage and low-labor-cost advantage towards high-

tech, high-value-added exports. Pearl River Piano Group, a state-owned company in

China, had been stimulated from a slow-moving Chinese firm founded in the 1956 to

a booming global company with growing sales in domestic market and international

market. While it has a good performance in the low-end product segment in the
international market, there was an issue about whether Pearl River Piano could be a

well-known global brand by ascending to the mid-high product segment, and whether

it could achieve sustained growth by building a reputable and high-quality brand

name in the world.

2.1 Direct exports

Direct exports represent the most basic mode of entry, which capitalizes on

economized of scale in production concentrated in the home country and affords

better control over distribution. However, if the products involved are bulky.

This strategy essentially treats foreign demand as an extension of domestic demand,

and the firm is geared toward designing and producing for the domestic market first

and foremost. While direct exports may work if the export volume is small, it is not

optimal when the firm has a large number of foreign buyers.

2.2 Dissatisfied of the Pearl River piano progress

The company established a joint venture with Yamaha in 1995. Through this

partnership, PRPG learned how to make a world-class and high quality product. By

the end of 2000, PRPG was the largest piano builder in china, the second largest in the

world, with an annual production capacity of over 100,000 pianos. The company had

more than 4,000 employees with a total asset value of approximately $130 million.
Also it diversified into other musical instrument, and contains more than 50% of

piano market in China. However, Tong did not satisfy this progress; he thought the

Pearl River piano could be a world class brand.

2.3 Competition in domestic market

Hundreds of private companies began entering the market and competing with their

low quality and low price products. Such as the old well-known brand Star Sea and Ni

Er, and numbers of emerging piano builder company with a low price products.

2.4 Future prospects of PRPG

According to the case, Tong believed that the company could survive by themselves

in domestic market; however it is impossible for an entrepreneur to stay in the same

position permanently. And he thought that the company had made some successes, but

it is not enough for a company to stay in the good position. The company is still

developing and it needs to extend business in the global market in order to satisfy

company’s strategy.

2.5 Challenges in international market

When compared with other Chinese piano builders, PRPG had gained some

experience in exporting. Tong believed that although the piano market in the US was
mature, PRPG could still take advantage in the market. Because US have a high level

of labor cost, PRPG could take advantage of cheap labor cost in China with high level

of product quality to gain market position in US market. On the other hand, it is

difficult to enter into the US market. If company want to extend business in US

market, firstly PRPG need to introduce the US partner to the Chinese market, as an

exchange for its entry to the US market. Finally, PRPG established a sales subsidiary

in the US market for further expands.

2.6 Building world class brand

Direct exporting could be an efficient way for company to make sales, but it only

suitable for a short term development. For long term, PRPG must build its world class

brand and provide high quality product to target upper level markets in order to

maximize profit for sustainable development.

Question 3

If you were one of the professors who visited Tong in March of 2000, how would

you have briefed him about the pros and cons of various foreign market entry

options?

3.1 Non-equity modes (exports and contractual agreements)

Tends to reflect relatively smaller commitments to overseas markets, which do not

call require independent organizations.

3.11 Exports

1) Direct exports: treats foreign demand as an extension of domestic demand, and the

firm is geared toward designing and producing for the domestic market first and

foremost.

2) Indirect exports: exporting through domestically based export intermediaries.

1 Non–equity Pros Cons

modes: Exports

 Economics of scale in  High transportation costs for

Direct exports production concentrated bulky products

in home country  Marketing distance from

 Better control over customers

distribution (relative to  Trade barriers

indirect export)
  Concentration of  Less control over

Indirect exports resources on production distribution (relative to

 No need to directly direct exports)

handle export processes  Inability to learn how to

operate overseas

3.12 Contractual agreements

1) Licensing/franchising: the licensor/franchiser sells the rights to intellectual

property such as patents and know-how to the licensee/franchisee for a royalty fee.

2) Turnkey projects: projects in which clients pay contractors to design and construct

new facilities and train personnel.

3) R&D contracts: outsourcing agreements in R&D between firms (that is, firm A

agrees to perform certain R&D work for firm B).

4) Co-marketing: agreements among a number of firms to jointly market their

products and services.

2 Non–equity modes: Pros Cons

Contractual agreements

 Low development  Little control over

Licensing/Franchising costs technology and marketing

 Low risk in overseas  May create competitors

expansion  Inability to engage in

global coordination

 Ability to earn  May create efficient

Turnkey projects returns from process competitors

technology in  Lack of long-term presence

countries where FDI

is restricted
  Ability to tap into  Difficult to negotiate and

R&D contracts the best locations for enforce contracts

certain innovations  May nurture innovative

at low costs competitors

 May lose core innovation

capabilities

Co-marketing  Ability to reach  Limited coordination

more customers

3.2 Equity modes (joint ventures and wholly owned subsidiaries)

Indicate relatively larger, harder to reverse commitments, and equity modes call for

establishing independent organizations overseas.

3.21 Joint ventures: a new entity given birth and jointly owned by two or more parent

companies.
 Pros Cons

3 Equity modes:

Joint ventures  Sharing costs and risks  Divergent goals and

 Access to partners’ interests of partners

knowledge and assets  Limited equity and

 Politically acceptable operational control

 Difficult to coordinate

globally

3.22 Wholly owned subsidiaries

1) Green-field operations: building factories and offices from scratch.

2) Acquisition: A corporate action in which a company buys most, if not all, of the

target company's ownership stakes in order to assume control of the target firm.
 4 Equity modes: Pros Cons

Wholly owned

subsidiaries

 Complete equity and  Potential political problems

Green-field projects operational control and risks

 Protection of technology  High development costs

and know-how  Slow entry speed (relative

to acquisitions)

 Same as green-field  Same as green-field

Acquisitions (above) (above), except slow speed

 Fast entry speed  Post-acquisition integration

problems

Question 4
Again, if you were one of those professors, what method would you have to

suggest as a way to tackle the US market?

Method has been talked before: Joint ventures

Nowadays, joint ventures have been the main form of foreign direct investment (FDI).

4.1 Problems to tackle the US market:

4.11 How to get a partnership with local company?

US don't believe Chinese company can make good quality and cheap price products.

They don't trust overseas company. They consider Chinese company as a competitor

more than a partner.

4.12 Administrative requirements:

US government wants their own people to benefit from industrialization. So they push

foreign investors to ally with local firms before graniting access to market.

4.2 Suggestions:

4.21Share ownership with US companies: Increase the trust each other

Goal: encourage some ethnic citizens to participate in industrial development.

To achieve this goal: Introduce local culture and piano history to the cooperation.

Invite top leaders of US co-optations to visit PRPG factory in order to let them know

the higher handcraft skills and local culture we have. Also organize some local piano

leaner to have a music concert to let US cooperators to listen to the sound of the

piano. If they got interested in the partnership, tell them when they join us, in return,

they can get a part of profit for being participant in the industrial development.

4.22 Staffing joint ventures: Joint ventures require managers with political and

cultural skills as well as technical competencies. Foreign managers usually bring

cultural complexity to the company.

Goal: For Chinese managers to get knowledge form the local environment, to

synthesize and spread learning experiences to each relevant department in their

partner company.

To achieve this goal: when they got the partnership, invite some foreign managers and

employees from the partnership to build a mixed cultural in the company. This will

help a company to learn and integrate into the local business environment quickly.

And also to well organize the corporation itself which helps to get much more easy to

get access to compete with the US market.

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