Starbucks Coffee International Inc.
in South Korean and Japan
|
South Korea |
Japan |
|
Product/service
standards |
Product/service
standards |
|
Anti-competitive
practices |
Anti-competitive
practices |
The Global
Strategists are pleased to present our individual reports for Week 4. We
selected these two topics in order to investigate in depth the ability of
Starbucks Corporation to succeed in two cultures that are very different from
the United States.
South Korean product and service
standards impact on Starbucks Coffee Korea, Ltd.
Have you
had your jolt of Starbucks today? Starbucks’ notable line of tasty coffee beverages,
tantalizing pastries, stuffed sandwiches, and calming ambiance has caught the
attention of people around the world. Qualitatively, one only has to look
around or walk down a busy street to see just how many Starbucks stores are
strategically placed on a block and throughout a city. Quantitatively, the
coffeehouses net revenues were $3.2 million in 2002. Through their product and
service positioning, Starbucks has managed to create a coffee culture that is
centered on relaxing atmospheres, Internet connections, and a large selection
of beverages (hot and cold). The Global Strategists’ chose Starbucks as their
company of study because of this winning combination of attractive industry
drivers and effective strategic and operational alignments.
This report
discusses the expansion of Starbucks International Inc. into the South Korean
market. We were tasked with answering the following questions –
·
Are there any standards imposed on the product or service by
the target market?
·
What impact do these standards have on manufacturing or
marketing the product? What (in any) strategies would help to minimize the
effect of those standards?
Based on
research we found that Starbucks existing standards provide a solid framework
for all its operations (national and international). Its diligence in adhering
to the highest standards of health, safety, and environment leaves little room
for impact from standards imposed by South Korean government. We recommend that
Starbucks continues to partner and form strategic business alliances with South
Korean agents and representatives to assist in the awareness of adhering to
government and society imposed standards. We also found that Starbucks’ ability
to sustain local responsiveness to South Koreans regarding taste, preferences,
traditional customs, and government demand is an ongoing challenge for the
organization.
In 1999,
Starbucks Coffee International Inc. created Starbucks Coffee Korea Ltd. and
expanded its operations into Seoul, South Korea. This new business entity
extended the company’s reach in the Asian market. As noted in the Starbucks
business overview presented in Week 2’s assignment: International Trading
Systems, the company aggressively strives to build their brand into a global
commodity that transcends a global coffee culture. Starbucks has achieved this
successfully by partnering with appropriate and prosperous ventures and
markets. Its expansion in the Asian market with South Korea as one of the
targeted markets is an example of such initiatives. With the rise of South
Korea’s economy and expected growth of the specialty coffee market by 50-60% a
year since 2000, it seemed a foregone conclusion to expand operations there.
The South Korean market was expected to reach 0.1 trillion Korean won in 2000
(Jee-yeon).
Early
studies of Starbucks show that the company is using three distinct business
strategies when considering furthering their operations. The three approaches
are joint ventures, licenses, and company-owned operations. Starbucks South
Korean entry mode is a joint venture. It has successfully entered into a joint
venture with the Shinsegae Department Store Co. Ltd. Although a specific reason as to why the cooperative method was
chosen is not available, one can surmise that it provides the most advantageous
way of entry considering the uncertainties in the Korean market, political
interference, and local practices.
Partnering with the Shinsegae Department Store gives Starbucks a
competitive edge that reduces the above reservations, as well as the influence
of the chaebols on local businesses.
South Korea’s history shows that the Korean conglomerate chaebols still
highly influence Korean business, and encourage business operations on their
terms, which could make partnership agreements difficult. Therefore, partnering
with knowledgeable Korean representation helps engage in business relationships
that are both personal – an important aspect of doing business in Korea – and
well grounded in facts about government and business policies.
Research
shows that the codes established by the Korean government may change without
notice. For this reason, forging a sound relationship with a Korean agent
important in dealing with daily operations.
While stringent regulations and standards can serve to drive up costs
for the manufacturer thereby forcing them to charge higher prices for their
products in the host country, this is not the case for Starbucks Coffee Korea.
The Korean Food and Drug Administration (KFDA) provide the basic guidelines for
regulations and standards of imported products. The main regulation and
standard affecting Starbucks products is the labeling requirements set forth by
the KFDA. The basic requirements are: country of origin labeling is required for
commercial shipments entering Korea and imported food products should have
Korean language labels. Overall, there are not any specific standards and/or
regulations imposed on Starbucks products or services by the Korean government
that makes it difficult or costly to manufacture/market the product in the
country. Thus, having no tariffs or trade quotas allows Starbucks to enter and
do business in Korea rather easily. Starbucks conforms to regulations and
labeling requirements imposed by the Korean government by adopting the most
stringent food labeling regulations set forth by the Australia/New Zealand Food
Association.
There are
standards imposed that are regulated by the people of South Korea that
Starbucks must be cognizant of in order to successfully build and grow
operations in that region. For example,
South Korea has a large portion of its population who are instant coffee
drinkers. This existing coffee culture is possibly a reason why Starbucks chose
South Korea to expand into. This allowed for easy introduction and infiltration
into the coffeehouse market. Rising household disposable incomes of Koreans and
their high coffee consumption levels are two more factors influencing Starbucks
decision to expand there. To help facilitate the acquired taste of coffee
flavors, Starbucks presented a trendy image to the younger Koreans influenced
by Western culture. This was easily achieved since Koreans perceive United
States goods to be of both higher quality and value. One question that arose is
how Starbucks influenced the existing South Korean coffee culture. Whereas,
Koreans previously would gulp instant coffee dispensed from vending machines in
offices and indoor spots, Starbucks’ entry has brought with it a new atmosphere
and custom of coffee drinking. It is rapidly changing into a social activity
where people take the time to sit down and almost luxuriate over a cup of
coffee and are not averse to sitting outdoors either.
With the
urbanization of Korea, environmental issues are an increasing concern for and
pose another aspect that Starbucks must consider regarding their position in
helping or hindering environmental standards. Two of South Korea's
environmental concerns are air pollution and waste reduction. Starbucks Coffee
Korea is a willing participant in combating these issues. Starbucks is
addressing these without prodding from the Korean government by establishing
guidelines for raw material and supplies procurement from suppliers who share
their concern for the environment. These guidelines range from lead-free ink
for paper purchases to energy efficient systems and processes and minimal
packaging standards. Starbucks also pursues a philosophy of active waste
reduction that ranges from paperless administration systems to recycling coffee
grounds from the coffee roasting and extraction operations.
Although
instant coffee products comprise of about 80% of South Korea’s coffee market,
Starbucks has grown in popularity. One of Starbucks’ competitive advantages in
this market is their pricing strategy. A cup of Starbucks coffee retails for
3,000 won per cup as compared to an average of 3,000 to 8,000 won per cup from
other coffee shops (Jee-yeon). Introducing Koreans to freshly brewed coffee
with a variety of flavors as opposed to the canned and instant coffee found in
vending machines would be a much harder proposition without an appropriate
price point. Starbucks international operations are a leading source of revenue
generation for the organization, comprising 17% of its specialty revenues (by
operational segment) in 2002. This impressive figure indicates the potential
for further growth as operations have only reached 928 licensed international retail
stores. With South Korea representing 53 of the retail stores, this signals
positive interest in the region as the government continues to liberalize
foreign investment agreements and strengthen its economy. Based on research and analysis there are three drivers that
will ensure Starbucks growth in the future in South Korea. These are: a strong
economy, high consumption rate, and sophisticated consumers. Starbucks
anticipates growth in the Asian market with a target plan of 2005 with
additional entries into other metropolitan areas of South Korea, such as Pusan,
and Taegu where one branch of Starbucks exist as of early 2002.
Japanese product and service
standards impact on Starbucks Coffee Japan, Ltd.
The topic
of this report is the relationship between Japanese product and service
standards and the Starbucks Corporation’s ability to sell coffee products in
Japan. The Global Strategists’ team decided to choose this topic because the
customer expectations are a key factor in Starbucks’ success. Making a great
pot of coffee is only the first step in finding marketplace profitability.
There can be significant risks both financially and to the brand image when a
company tries to promote a food item internationally. Food product specifications
and customer service expectations may vary significantly from country to
country. Food invokes strong personal and cultural responses, and is
extensively regulated in most countries. This report addresses the following
questions –
·
Are there any standards imposed on Starbucks’ products and
services by the Japanese market?
·
What impact do these standards have on manufacturing or
marketing our product? What (if any) strategies would help minimize the effect
of those standards?
Japanese
consumers and Starbucks Corporation products would seem to be made for each
other. Starbucks Corporation’s core values are premium quality products,
exceptional customer service, and employees who deliver highly personalized
service (Starbucks mission statement, 2003). The company targets urban markets
with a concentration of people with high disposable incomes who consume upscale
convenience products. These requirements closely match Japan’s demographics.
The majority of Japan’s population lives in highly concentrated urban areas
(U.S. Department of State, 2002). Japanese consumers are extremely luxury and
service conscious, and comprise the largest food importing market in the world
(USDA, 2002). Japanese consumers also have a taste for coffee and coffee beans.
In 2002, Kirin Beverages sold $2.7 billion worth of coffee and teas, and Asahi
Soft Drinks sold $2.0 billion (USDA, 2002). 22% of Japanese food service sales
in 2002 were spent in bars and coffee shops (USDA, 2002). The market for coffee
beans and cocoa products is also significant. In 2000, Japan imported $1.762
billion worth of coffee and cocoa (Agro-Trade, 2001).
Starbucks’
entry strategy into Japan is to combine the Starbucks brand image with local
Japanese partners. This allows the company to leverage its reputation for
premium coffee beverages without appearing to be a foreign-based business.
Starbucks opened its first coffee house in Japan in 1996 (Starbucks Coffee
Japan, Ltd.). By January 2001, there were 200 Starbucks shops in Japan.
Starbucks anticipated adding the 500th store to the chain in March
of 2004 (Starbucks Coffee Japan, Ltd.). Japan represents an important market
for the company. As of March 2003, the total capitalization of Starbucks Coffee
Japan was 8,330,640,000 yen, or $68,610,113.66 in U.S. dollars (Xe.com, 2003).
Japanese
expectations and requirements for product and service standards are precise and
exacting. Starbucks must import the coffee and tea products it serves in the
coffee houses, as these products cannot be grown locally in Japan. This adds
additional expense to business operations for the chain. Japan controls food
imports through the Food Sanitation Law. The Ministry of Labor and Welfare
enforces the law and is similar to the U.S. Food and Drug Administration
(JETRO, 1999). Food regulations cover food items, food additives, food
preparation equipment, and food packaging containers (JETRO, 1999). These
regulations cover Starbucks coffee beans, espresso machines, beverage
containers, teas, and snack foods sold in the stores.
This level
of regulation is both a hindrance and a help to food importers. There is a
sophisticated level of paperwork and inspections that must be met to obtain
import licensing for raw materials. The locally produced items used by the
stores, including paper cups and snack foods, must also be certified under the
Food Safety Law (JETRO, 1999). The inspection and licensing requirements
increases the prices Starbucks must charge the consumer. Once the requirements
are met, however, Japanese consumers have confidence in their government and
readily accept imported foods as safe (USDA, 2002). Businesses also may be
confident that once they meet import requirements, they will be able to conduct
market activities without disruption. Japanese government is consistent and
relatively corruption free, and the Japanese court system effectively enforces
contracts and settles legal disputes (U.S. Department of State, 2002).
The
Japanese consumer places a high value on convenience, quality, image, and
customer service (USDA, 2002). Each of these attributes is a central strength
of Starbucks operations. Starbucks began its move into Japan in upscale
locations in Tokyo, and has continued to select store locations in high status
neighborhoods. As in Korea, Starbucks strives to make their store locations a
social experience, a place where people go to see each other, enjoy the
atmosphere, and also buy a cup of coffee. Japanese consumers can purchase
coffee at Seven-Eleven as well as Starbucks. To justify the price difference,
Starbucks uses staff training, store location, superior ingredients, and
focused marketing to create an ambiance of enjoyment, energy, and importance.
So far, Japanese consumers have been very receptive to Starbucks products.
Japan
has environmental concerns similar to those in South Korea regarding waste
disposal and recycling. Starbucks Coffee Japan’s corporate policy is harmoniously
aligned with both the regulatory environment and consumer expectations in this
area (Corporate policy, 2003). Meeting environmental requirements is built into
Starbucks’ business practices, so there are no new, unique adjustments required
for business operations. This is a benefit for Starbucks on several levels. The
company can claim the image-enhancing position of being environmentally
friendly as a core value, instead of having to develop (or rehabilitate) a
corporate position. Starbucks may also develop this position to its advantage
relative to Kirin Beverages and Asahi Soft Drinks, which engage in prepackaged
drink manufacturing and maintain bottling plants. The bottling plants consume
more energy and generate greater amounts of waste than coffee shops.
Another
aspect of environmental friendliness that is not as great an issue in South
Korea is the concern over genetically modified organisms (GMO). GMO foods are
readily accepted in the U.S., and the U.S. FDA does not require explicit packaging
information identifying the presence of GMO products in human food (USDA,
2002). Japan takes a stringent position on food labeling and allergic reaction
testing (JMHLW, 2003). This is an area of potential risk and reward for
Starbucks. Coffee beans are not presently the target of biotechnology research,
so Starbucks can gain positive public perception from taking the effort to
certify coffee beans as GMO free. The bottled coffee beverages present a
potential risk. If the drinks are produced in the U.S. and shipped to Japan,
significant added expense and effort would be required to verify that the corn
syrup, milk, cream, and other additives that are blended into the drinks are
GMO free. If Starbucks were unable to certify that the drinks are GMO free, they
would have to be labeled as potentially containing GMOs. Consumer acceptance of
bottled drinks and by extension the Starbucks brand may be negatively affected.
Starbucks Coffee
Japan, Ltd. faces competition from both multinational and Japanese-based coffee
businesses. Starbucks’ primary competitors in the U.S. are Diedrich Coffee, AFC
Enterprises, and New World (Hoover Online). In Japan, competition comes from
both beverage manufacturers and coffee shops organized under the All Japan
Coffee Association (USDA, 2002). Both multinational corporations and Japanese
companies operate under the same regulations as Starbucks, so no competitive
advantage or disadvantage exists in the area of product standards and
regulations. Starbucks holds a strong advantage in consumer perception over all
competing businesses due to its strong global brand image. This is important in
meeting the status and luxury expectations of Japanese consumers (USDA, 2002).
Kirin Beverages and Asahi Soft Drinks approach or match Starbucks in brand
recognition, but these two companies are positioned for bulk sales of
pre-packaged drinks and have not moved into distributing products through
stand-alone company stores.
A greater potential
challenge to Starbucks may be the continued stagnation of the Japanese economy,
attended by a rising unemployment rate (U.S. State Department, 2002). This has
not noticeably affected the Japanese appetite for food imports of all kinds
from the U.S. to date (USDA, 2002). However, the stagnant economy remains a
concern for the long-term potential of the market. The Starbucks corporate
policy of ‘flooding’ an area with many store locations located close to one
another may amplify the effects of a reduction in customer demand for Starbucks
products. One way to reduce this vulnerability would be to increase the
cross-marketing efforts of beans, pre-packaged drinks carried in other stores,
and coffee-related equipment. The company recently opened a whole coffee bean
store in the Odakyu Department Store in Tokyo (Company information, 2003). This
store only sells coffee beans and is the first of its kind for Starbucks
worldwide. Overall, Starbucks continues to enjoy success in the Japanese market
and will continue to do so if it maintains its focus on customer service and
satisfaction.
South Korean anti-competitive
practices
After its economic
crash that occurred in 1997, the IMF imposed stringent economic changes on South
Korea’s trade and economic policy. The changes were imposed by the IMF as a
condition to receive debt relief funding. One of the many changes that were imposed
on South Korea was the requirement to open their trade policies with other GATT
members and allow foreign businesses to own a much greater percentage of Korean
firms. Starbucks signed a joint venture agreement for its first store in 1997
(Starbucks, 2001). By that time, the South Korean economic recovery was well on
its way and it was apparent that the country was complying with IMF imposed
rules. This was evidenced by a GNP growth rate that was a whopping 10.2% in
1999 and was estimated at 8% in 2000 (USDS, 2000). Starbucks saw that the
population was well educated overall and were becoming wealthy once again. Thus
they could afford the cost of Starbucks products. It made a lot of sense to
begin operations there at that time and ride the economic recovery wave in the
country. Starbucks has 53 stores in South Korea today.
One of the
countries selected by the global strategists for this course is South Korea. As
mentioned in the Global Strategists’ Week Two introductory paper on Korea and
Japan, “The two countries also represent a different political, cultural, social,
and financial environment from the America-centered perspective each team
member presently lives in.” (2003, p.1). Politically, South Korea (a.k.a. the
Republic of Korea) and the United States function very similarly as
representative democracies (republics). The people elect local provincial and
federal government representatives. Because of the similarities in government,
risks to Starbucks’ operations due to political differences are minimized.
Economically,
South Korea operates as a state directed economy. This means that the
government guides the direction of economic activity by providing additional
aid to those companies that produce goods or services that match the plans and
goals envisioned by the government for economic growth (Hill, 2003). When
making the decision to begin operations in South Korea, Starbucks had to assess
the level of risk associated with an economy whose overall industrial and
service economy is driven by government intervention. In the U.S., the
government intervenes in the international operations of companies through
legislative, tariff and non-tariff methods, but generally leaves domestic
operations alone. Starbucks had to assess which ownership vehicle they should
use to open stores in South Korea. The precise reasoning used to make their
decision is unknown, but it can be postulated that the government could have
forced Starbucks to share profits with a local company in some pre-determined
percentage to ensure a sufficient amount of profits were realized by a Korean firm
and ultimately the Korean economy.
For
international markets Starbucks uses business agreements based on licensing,
company-owned, or joint ventures to open their stores (Stein). In South Korea a
joint-venture was probably because Starbucks would not agree to outright
licensing of their products. A licensing agreement would not allow Starbucks to
exercise sufficient control over operations to assure the Starbucks experience
was consistent and not compromised in any way. The joint venture would also assuage
any concerns by the Korean government that a sufficient percentage of profits
were not realized by a Korean business entity. Having a large successful local
company participate in the joint venture would minimize business risk to
Starbucks. Ostensibly, the local partner would know how the business climate
works there and smooth any governmental concerns over the venture. Starbucks
entered a 50-50 joint partnership with Shinsegae Department Store Co. in South
Korea. Business risk should have been
further reduced because of the economic policies forced upon South Korea
by the IMF in exchange for the economic aid they received from the IMF in 1997.
Another
significant risk for Starbucks is currency conversion risk. Prior to 1997, the
Korean won traded at under 10 KRW for 1 US dollar, but by January 1, 1998 the
exchange rate was more than 1600 KRW for 1 US dollar. Today the exchange rate
is approximately 1250 KRW for 1 US dollar (Xe.com). Starbucks must keep a
watchful eye on the economy and currency stability in order to form a currency
policy that will minimize profit risk due to currency conversion. They wisely
waited to see positive progress towards economic recovery in South Korea before
opening any stores there.
Anti-competitive
behavior as viewed by Americans can take many forms. Common methods are price
fixing, boycotts, government intervention, or monopoly control over an
industry, etc. Although there has been monopoly control and oligopoly control
in many industries, there has been no evidence of anti-competitive behavior on
the part of Korean businesses or the Korean government regarding the coffee
industry in general or Starbucks in specific. Starbucks now holds over 40% of
the coffee house business in Korea. In South Korea, the presence of
anti-competitive practices and overt oligopolies has been widely known in the
areas of steel production, industrial manufacturing (of automobiles, general
consumer electronics, heavy equipment machinery, etc), and semiconductors. This
is the area where the chaebol have total control (Megastories). The chaebol are
companies that are controlled by the Korean government (Megastories). The
government provides them preferential financing, export laws, guidance, and
protection from default. One of the major contributors to the economic crash in
1997 was the government’s attempted bailout of failed or defaulted investments
made by the chaebol when investor confidence in Asia’s tigers collapsed.
Chaebols are
characterized by a central holding company that controls many other companies.
There are four major chaebol entities: Daewoo, Lucky Goldstar, Samsung, and
Hyundai. Together they are responsible for approximately 45% of South Korea’s
Gross National product. The chaebol
were created based on the Japanese Keiretsu concept of interlocking companies
although they have distinct differences in the functioning of the central
controlling company (banks in Japan, private families in Korea). The chaebol
are still family owned and controlled super conglomerates that keep top
leadership and ownership closely held (Megastories). They have a wide breadth
of business coverage rather than great depth (horizontally rather than
vertically integrated).
The fact that Starbucks has not experienced
any significant Korean resistance stems from the fact that the leisure food
industry has not yet attracted the attention of the chaebols, nor do they pose
any threat to their businesses. Had Intel, AMD, IBM or Ford tried to open operations
in South Korea they would have met with terrible resistance from the chaebols
and the Korean government both directly (through tariff and non-tariff means)
and indirectly via the chaebols. Starbucks has a first-mover advantage in South
Korea for lower cost, high quality, gourmet drip coffee houses and now faces
significant competition from many other coffee companies. Ironically, in future
years, we may see Starbucks themselves acting in a non-competitive manner in
Korea in the form of acquisitions of or mergers with smaller coffee
establishments in order to gain further market share.
Recent
information has suggested that the Starbucks-like coffee house market is
starting to plateau (Kim, 2002). This means that Starbucks must begin to use
more innovative methods to further win over South Korea 50 million residents.
The company already has at least 53 stores operating in the country and must
pay close attention to the changing demographics of the patrons of its coffee
houses. Anecdotal evidence suggests that more middle-aged Koreans are paying
Starbucks a visit (Kim, 2002). This is a change from the initial crowd, who
were mostly young generation-X in their low twenties and teens (Kim, 2002). The
global strategists suggest that Starbucks consider opening more satellite
stores or kiosks to allow easier access for corporate workers and business
people on the go who want to avoid long lines and waiting. This would include
agreements for small Starbucks kiosks in business cafeterias, on corporate
campuses, in universities, and in the lobbies of big buildings so employees can
easily access the product without leaving their office, campus, or corporate
grounds. This approach has enjoyed great success in the United States.
Japan Anti-Competitive Practices
Starbucks’
remarkable growth success in every market that it has entered reiterates their
commitment to become a great, enduring company with the most recognized and
respected brand in the world, known primarily for ‘new lifestyle concepts’
while inspiring and nurturing the human spirit. Continuing to transcend daily into new markets all over the
world, and build their brand through the delivery of the Starbucks Experience,
Starbucks Coffee Japan, Ltd. was established October 1995, as a joint venture
between Starbucks Coffee International and Japanese retailer and restaurateur,
SAZABY Inc., and as since taken the Japanese market by storm. With the opening of it’s 200th store in
January 2001 in Tokyo’s Tachikawa area, Starbucks Coffee Japan is estimating a
500 store count by March 2004. “Beset
with structural rigidity, excessive regulation, and market access barriers, the
Japanese economy continues to under perform…Over-regulation in Japan continues
to hamper economic growth, raise the cost of doing business, restrain
efficiency, restrict competition, and impede imports and investments” (OUSTR,
2002). Already struggling with a depression, the global economic slowdown in
2001 caused even more decreases in Japanese exports. The U.S. trade deficit
with Japan declined 15% in 2001 from $81.6 billion in 2000. It’s not that the
U.S. increased their exports to Japan, in fact, the opposite is true: exports
decreased, it’s just that Japan’s exports to the States declined by even more.
Whereby, this report provides an analysis of anti-competitive practices most
relevant to Starbucks expansion success in Japan, with an emphasis on the
U.S.-Japanese trade disputes, focusing on the government’s ability to impose
limitations relating to restrictive private practices, which could be
potentially damaging to Starbucks astonishing growth rate.
According to
the Office of the United States Trade Representative, “an essential
prerequisite for a vibrant Japanese economy is a transparent, fair,
predictable, and accountable regulatory system,” and in order to participate in
the regulatory process, it is critical that firms, both foreign and domestic,
have access to information and opportunities. In the Regulatory Reform
Initiative, the U.S. is pushing for an additional reform to “ensure universal
access by all interested parties to government information and the policymaking
process.” It has long been said that
the U.S. and Japan should manage their trade and competition friction wisely so
not to embitter the overall relationship between the two countries. With regard
to competition, the globalization of business activities and markets has made
the policy closely associated with cross border issues. However, there are no established
international rules - either substantive or procedural - regarding competition
policy or regulation or anti-competitive practices affecting trade.
Since the
80’s, many disputes have arisen, due in part to U.S. allegations that Japanese
markets are closed to imports because of restrictive practices such as
exclusive dealings between domestic manufacturers and distributors. However, as the laws for importation change,
there is still a residual discriminatory bias in the use of bureaucratic
discretion. Foreign Direct Investment
(FDI) is a prime example of such, and there are still several ministries that
require prior notification of investment to these ministries. “More than
government-related obstacles, however, Japan’s low level of inward FDI flows
reflects the impact of exclusionary business practices and high market entry
costs” (OUSTR, 2002). With the
establishment of Starbucks Japan, executives realized that a pure licensing
agreement (franchising strategy) would not give Starbucks the control necessary
to ensure that their ‘success formula’ per se was followed by Japanese
licensees. Hence, Starbucks’ first $10 million FDI via a joint venture
(basically a controlled growth strategy), which allowed Sazaby, Inc. to
take-over the responsibility for growing Starbucks’ presence in Japan, and by
October 2000, Starbucks had invested some $52 million in foreign joint
ventures. (Hill, 2003).
The U.S.
is working with Japan’s Ministry of Economy, Trade and Industry to help reduce
anti-competitive practices. The Regulatory Reform and Competition Policy
Initiative is just one program that will promote economic growth for the U.S.,
Japan, and the global economy. In 2001, Japan’s government having recognized
the importance of change in this area began a three-year program to institute
reforms. Specifically, improving the areas of “the strict enforcement and
promotion of the 1994 Administrative Procedure La; increased transparency of
administrative guidance; full and effective implementation of the Law
Concerning the Disclosure of Information Retained by Administrative Agencies;
wide and effective use of the Public Comment Procedures for Formulating,
Amending and Repealing Regulations; introduction of the ‘No Action Letter’
system; comprehensive and objective evaluation of the need effects and costs of
new proposed regulations” (OUSTR, 2002).
Japan has advanced
with extraordinary rapidity to the rank of second most technologically powerful
economy in the world following the U.S., and ranks as the third largest economy
in the world after the U.S. and China. While retaining its time-honored
culture, Japan rapidly absorbed Western technology during the late 19th and
early 20th centuries. Japan recovered after a devastating defeat in World War
II, to become the second most powerful economy in the world and a staunch ally
of the US. While the emperor retains his throne as a symbol of national unity,
actual power rests in networks of powerful politicians, bureaucrats, and
business executives. Both Japan and the
U.S. are members of the Asian-Pacific Economic Cooperation (APEC) and are
regulated by a constitutional monarchy with a parliamentary government. According to the ODCI-CIA fact book (2002),
internal conflict over the proper means to reform the ailing banking system
will continue to be a economic issue, however a notable characteristic of
Japan’s economy is the collaboration of manufacturers, suppliers, and
distributors in closely-knit groups called “Keiretsu,” (a derivation of the
family version called Zaibatsu) which have become part of the Japanese culture.
The second economic feature has been the guarantee of lifetime employment for a
substantial portion of the urban labor force, however, both features are now
eroding. Industry, the most important
sector of the economy, is heavily dependent on imported raw materials and
fuels. The much smaller agricultural sector is highly subsidized and protected,
with crop yields among the highest in the world. Usually self-sufficient in
rice, Japan must import about 50% of its requirements of other grain and fodder
crops. Japan maintains one of the world's largest fishing fleets and accounts
for nearly 15% of the global catch.
Exclusionary
business practices abound Japanese markets, which inhibit or actually block
potential business opportunities for the U.S.
These practices strain the Japanese economy, which has been in the midst
of a recession for approximately 10 years, with their interest rates at
basically zero (0.001%), limiting economic stimulation. “By constraining market
mechanisms, exclusionary business practices reduce the choices available to
business and consumers, and raise the cost of goods and services.” Japan’s
economy is the result of over-regulation and as is often the case with
over-regulated societies, “the Japanese economy also suffers from a
misallocation of resources and a lack of entrepreneurial innovation” (OUSTR,
2002). Potential foreign investors are also affected by this phenomenon unable
to bring innovation, which would stimulate the economy and over-regulation
causes the price-of-goods to increase.
A surprising
number of violators of Japan’s Anti-Monopoly Act (AMA), which was passed in
1947, remain unchecked and is seen as a major exclusionary practice, because
the U.S. realizes the importance of a strong Japanese economy for its own
interests as well. In June of 2001, the U.S. started an initiative with Japan
on the Regulatory Reform and Competition Policy Initiative (the Regulatory
Reform Initiative) to help improve the Japanese economy. The Japanese Ministry
of Economy, Trade and Industry (METI) published a report in August 2000 that
“structural reform would put Japan on a 3% annual growth track from 2006-2010”
(OUSTR, 2002). The Regulatory Reform
Initiative actually is a continuation of efforts to improve on the issues of
trade barriers and the Enhanced Initiative on Deregulation and Competition
Policy (the Enhanced Initiative), made great progress during 1997 to 2001 in
several areas. Japan’s viewpoint is
focused on its government proceeds with deregulation. The way of handling
disputes on restrictive practices will considerably impact the future
development of the Japanese competition policy.
Another
exclusionary business practice in Japan are the keiretsus, where “prior to
World War II, much of Japanese industry was organized into six huge zaibatsus, or
family-owned companies, each of which consisted of approximately 300 companies
and their suppliers. Each zaibatsu combined the activities of many
subcontractors with whom it had long-term contracts, a manufacturing
organization, a major financial institution, and an export-import organization”
(Gannon, 2001). Zaibatsu type organizations are forbidden in the U.S. and in
the post World War II Japanese structure. However, as a variation on a theme,
the keiretsu emerged as a non-family version of the zaibatsu and remains legal
in Japan to this day. “American and European managers frequently complain
bitterly about the operations of the keiretsus, because they have a great
amount of power over many activities in the marketplace, and they can persuade
Japanese distributors not to carry the products of the foreign companies”
(Gannon, 2001). Although the U.S. and
Japan are working to make improvements on anti competitive practices and trade
regulations to reduce trade barriers for the benefit of the Japanese economy,
there are still several cultural practices that remain (e.g., keiretsu and
their monopolies).
Foreign
direct investment (FDI) and the foreign acquisition of Japanese firms are other
examples of exclusionary business practices that can be found in the areas of
“non-transparent accounting and financial disclosure, high levels of
cross-shareholding among keiretsu member firms, a low percentage of publicly
traded common stock relative to total capital in many companies, and the
general absence of external directors.”
The good news is there have been improvements in this area, as “U.S.
foreign direct investments in Japan…have seen steady increases in recent years.
Specifically, the stock of U.S. FDI to Japan was $55.6 billion in 2000. This
amount was an increase of 12.5 percent from 1999 levels” (OUSTR, 2002).
Although
the U.S. economy has weathered the economic impact of the tragic events of
September 11 reasonably well with the gross domestic product (GDP) falling by
only 0.6%, as compared with an average decline of over 2% during the post-war
era recessions, the global outlook still remains uncertain. The latest GDP
revisions in the U.S. confirm that the situation two years ago was actually
worse than thought, rather than slowing, we now know that the largest economy
in the world was ‘already in recession’ when the terrorist attacks occurred,
with out put having shrunk for the first nine months of 2001, and beginning
2002 with a mean score of 4.8 (Cornelius 2002). Japan’s is expected to increase gradually, with output remaining
below production potential and into the foreseeable future, with more
optimistic executives with respect to their recession expectations since the
mean response has increased from 3.6 in early 2001 to 4.1 in 2002. However, executives in both countries still
maintain a high degree of caution, due to the possibility that terrorism could
seriously affect the global economy and business.
Officials
from the U.S. and Japanese entered into an Antitrust Cooperation Agreement on
October 7, 1999, marking an important milestone in the development of the
already close relationship that exists between the world’s two largest national
economies and the two antitrust enforcement agencies. Attorney General Janet
Reno and Japan’s Charge d’ Affaires, Hideaki Kobayashi, note that the pact “was
signed to foster greater cooperation in preventing price-fixing and other
anti-competitive practices between the two nations” (CNN Money, 1999). The Bureau of Competition of the Federal
Trade Commission (FTC) along with the Antitrust Division of the U.S. Department
of Justice along with Japan’s Fair Trade Commission, jointly share
responsibility for enforcing laws that promote competition in the marketplace,
protecting consumer sovereignty (the freedom to choose goods and services in an
open marketplace at a price and quality that fits the consumer’s needs, and
fosters opportunity for businesses by ensuring a level playing field among
competitors).
There is a
need for trust building of the Japanese Competition Policy, the U.S. government
and U.S. industry; both appear to have distrusted the policy for a long time
albeit under questionable grounds. Japan has to recognize this deep-rooted
distrust and enforce the competition policy for which it is accountable - both
domestically and internationally. A sound competition policy is also an
important element of the economic structural reform that Japan is currently
tackling. In economic terms, the recent
Asian economic crisis reemphasized that collaborative Japan - U.S. economic
relations are indispensable for the stable growth of the world economy. The cooperative leadership by the two
countries is also mandatory in the promotion of further global trade
liberalization in the next century (Masabumi, 1999). In terms of future growth for Starbucks Coffee Japan, there is
very low risk of encountering anti-competitive business restrictions, which
will limit its ability to continue to compete in the Japanese market.
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