International Business

– Coca Cola Entering The Indian Market Essay, Research Paper

Introduction

To give a short introduction to the circumstances affecting this case of Pepsi & Coca Cola it has to be said that in general it is not just simple for MNEs to invest and enter foreign markets as regulations and restrictions differ from coutry to country and hence ifluence international business negotiations to a great extend. Therefore MNEs investigating in foreign markets have to either adopt to those condition given by the host country government, which of course to a certain extend has to be negotiated as no one of those parties want to loose their maximum independence- or the MNE decides not to take further steps towards the foreign operation and leaves the feeld by assumingly in turn missing out a great opportunity, but this again depends on a complexity of economic and cultural reasons influencing international trade, which I will develop critically in the further case study of Pepsi & Coke in accordance to the following questions.

1.) Did PepsiCo make too many concessions in order to enter the Indian market?

Could the company have negotiated better?

In this case study PepsiCo for the second time intends to enter the Indian market, though already having experienced major problems which consequently led to their first departure (for non profitability). As well Coca Cola departured India after harsh disagreements with the government.

Why after all did Pepsi enter again, facing a country with such strongly adverse feelings towards foreign companies which is rooted in Indians history of colonialistic times when the British, French and Portuguese were extracting the country s recources its wealth without returning noticeable benefits to its economy.

Moreover they feared that national companies would not be able to compete with foreign investors and as a result of this high artificially prices and profit margins reduced incentives for national companies to enter. This almost irrepairable bad approach towards foreigner went even that far that journalist widely reported that PepsiCo had a CIA connection aimed at undermining India s independence.

However returning to the argument of PepsiCo having too many concessions or not, first as should have become clear now, the company was confronted with a govvernmental volatility and unwillingness to negotiate. It was rather a one-way game wherein PepsiCo had to agree with completely, or take its departure, as the company was not only faced with economic but also with moral issues (as mentioned above). Especially the confidence factor plays a great part in her which for the company turned out to be a rather costly factor as PepsiCo had to make various concession before they could enter the Indian market.

The company had to agree to the following provision given by the government;

? having to export five times the value of its imports over the first ten-year period;

? soft drink sales would not exceed 25 % of joint-venture sales;

* PepsiCo would limit ownership to 39.9%;

? Seventy five % of concentrate to export;

* Establish R & D centre in agriculture;

? joint-venture would set up fruit and vegetable plants

Having a look at the the above provision given by Indian government it seem rather unsupportable not to consider further extensions/changes by new governments, where I will come to further on.

Considering the economical factors facing the country, PepsiCo may well be suported by its decision to make all those concessions. The Indian market for soft-drink had been growing rapidly (by 1990 a whole of 3 billion bottles a year consumption expecting to quadrupple during the 1990s. Furthermore India s population was expected to grow even surpass China and researchers have even estimated India to become an economic giant in the future as the worlds most poplated country which of course enhanced foreign investments as major sales are expected in the long-run.

Now, PepsiCo entered the market with great potential for the future they did a great step by only investing $15 million, which was a rather small amount compared to other foreign investments. This low investment reduced the risk the company was already to taking to a large extend , while being able to expand after time and waiting for political changes towards FDI restrictions offering better conditions for further investments. In fact PepsiCo is planning an investment of $ 1 billion in the 1990s.

Moreover the company could gain from cheap labour costs leading to cheaper cost of production. Finally the company is gaining a major competitive advantage for being the first, which is an important factor in the highly competitive sof-drink market as to tighten up brand loyalty and gaining the best distributers.

This analysis of the situation above presents a rather convincing view towards PepsiCo negotiating but coming to answer the question, could the company have done better my answer is yes, the company could have done better in various points even if they did quite well already. For example PepsiCo did a reat fob on dreating joint-venture with the most powerful private firm and second a government owned company, whose involvement gave the appearance that the public interst would be served in the venture, but they could most probably have done better by agreeing into a joint-venture, which Coca Cola did later on, with an other soft drink producer like Parle Export and hence gaining benefits through already existing capacities like for example highly expanded distribution net-works, machinery etc. for lowering cost of production.

Secondly it could be assumed to PepsiCo could have gotten a better deal out of the provision; only allowing 25 % of joint-venture sales to be invested into soft-drinks, which in all respects, is for a main soft-drink producer a rather discouraging result of negotiations. But probably they could have negotiated stronger on the employment factor in Punjab 25,000 and 25,000 some where else and the opportunities of foreign soft-drink producers entry allowance by China and the Soviet Union. ????????

2.) In the light of later events, should Coca Cola have abandoned the Indian market in 1977?

I would assume that Coca Cola did the right choice to abandon the Indian market in 1977 which in later years even provided greater opportunities for the company with major competitive advantage which I will be explaining furtheron.

First of all Coca Cola, while operating in the Indian market within the Years 1950 until 1970, the company was underlying threats occurred mainly by the competitive national company Parle Exports. As in India it is stated in the above text there have been a common feeling among non-India companiew that India competitors can and do use a great deal of influence to prevent foreign competition meaning Indian business leader co-operating tightly with political leaders, which is the case of Parle Export. The head of Parle Export was an ally of Prime Minister Moraji Desal and Coca Cola executives were close to Indira Gandhi, the head of the opposition party. I assume this has thrown the company into a rather undelightful position as it meant troubles and negotiating would probably never end until governmental changes took place. Anyway the two main concessions the company would have had to make were unagreable as they would not agree to a dual trademark replaced by local logo, neither would they divulge their formular which was definitely not keept with regard under Indian government, most probably did Cola do the right thing as they were not expecting the situation to become better and especially in the light of later events did the company make the right choice. To start with the joint-venture with the giant company Parle Export as a leader with a market share of 70% of the soft-drink industry in India. Cola could not have returned better, they did not even have to go through all the political changes and harassments, which PepsiCo as a forerunner did manage through over the year until Coca Cola could finally enter again in 1993 with a better agreement of ownership – 51 % further their brand name was still well remembered even after the company s long absence as the text states bottles were eve smuggled in from Nepal representing a high level of brand loyalty to Coca Cola.

I want to point out one important aspect of the development of both companies.

During Colas period of absence Pepsi s negotiations with governmental level were not only of a rather ongoing nature but also very much of public interest, whereas Coca Cola had taken a descretionary position, which was obviously presented by the last issues where political opponents of FDI harrassed PepsiCo. Eventhough Coca Cola just re-invested into the Indian market and could have been a .., they stayed out of turbulences. It was only Pepsi to be mentioned publicly when FDI matters came up and it was Pepsi s bottles that were smashed and posters burned and Pepsi KFC restaurant that was threatened, though it was finally both having to suffer from recent sales suspension.

However, I think if in the light of later event or not, Coca Cola was doing the right choice even gaining major advantages in the light of later events.

Although there is now still the question of which one of the main soft-drink competitors – PepsiCo and Coca Cola – has evaluated a better position.

3.) From an Indian standpoint, evaluate the government s restrictions on FDI

First of all I will briefly explain the reasons for FDI in the overall macroeconomic terms as to further answer the above question more appropriate;

? Increasing the world trade and opening up new markets

? Development of new technologies that can be transplanted between countries

? Liberalisation of the economy of the nations throughout the globe

? Establishment of common markets and other regional trading blocks with common external tariffs.

All these reasons seem to encouraging factors for FDI whereas an individual firm having specific motives for investing directly n foreign countries will most probably involve communication difficulties, lack of commitment etc. and this is my starting point in this case. From an Indian standpoint, government restriction on FDI are quite easy to understand. As mentioned already in question 1) Indien s approach toward forein companies is deeply rooted in its wounds of history of colonialist times by British, French and Portuguese, which ruthlessly extracted the country s resources without returning anything to the benefits of Indians economy.

These past experiences consequently resulted in governments tight restrctions of FDI. At the same time when Pepsi strted negotiating, equity holdings for foreign investors wererr limited to 40 % maximum. Additionally foreign companies were committed to exports as to compensate for dividend payments of imported equipment and components.

To manifest the assumption of the nation s fear of foreign investment, this can be presented by Indian political sensitivity in election priods, when negotiation periods took even longer and little action was made towards these matters as politicians were afraid of advers reaction if thea supported entry of foreign companies. Gillette for ecqmple was negotianting seven years when finally agreed to a 24 % equity holding and not to have its name on its products.

From an Indian standpoint the above mentioned facts are easily understandable by knowing India and its hisstory, furthermore having to understan that India as a developping LDC still anging on to its traditions not being familiar with technology, of cours ths will cause difficulties fo convert peoples morality and their degree of confidence on a short-term basis/rather on a step-by-step basis developed over the years.