INTERNATIONAL BUSINESS

TUTORIAL WEEK 7: MARKET ENTRY STRATEGIES

CASE ANALYSIS

Read the two cases below and answer the Case Discussion Questions at the end of each
case. In undertaking this analysis, you should try and take into account the concepts,
theories and frameworks that you have learned from Lecture 4 – Market Entry Strategies
and other lectures that you think are relevant.

Sources: Hill’s International Business Textbook (14E)

Tesco's International Growth Strategy

Tesco, founded in 1919 by Jack Cohen, is a British multinational grocery and merchandise
retailer. It is the largest grocery retailer in the United Kingdom, with a 28 percent share of
the local market, and the second-largest retailer in the world after Walmart measured by
revenue. Last year, Tesco had sales of more than $70 billion, employed more than 480,000
workers, and operated 6,553 stores in 13 countries.

In its home market of the United Kingdom (with a headquarters in Chestnut, Hertfordshire,
England), the company's strengths are reputed to come from strong competencies in
marketing and store site selection, logistics and inventory management, and its own label
product offerings. By the early 1990s, these competencies had already given the company a

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leading position in the United Kingdom. Tesco was generating strong free cash flows, and
senior managers had to decide how to use that cash. One strategy they settled on was
overseas expansion.

As managers looked at international markets, they soon concluded the best opportunities
were not in established markets, such as those in North America and western Europe,
where strong local competitors already existed, but in the emerging markets of eastern
Europe and Asia, where there were few capable competitors but strong underlying growth
trends. Tesco's first international foray was into Hungary in 1995, when it acquired an initial
51 percent stake in Global, a 43-store, state-owned grocery chain. By 2017, Tesco was the
market leader in Hungary, with more than 200 stores and additional openings planned,
accounting for 1 percent of the whole economy of Hungary!

A year after the Hungary expansion, Tesco acquired 31 stores in Poland from Stavia. The
following year, in 1996, Tesco added 13 stores that the company purchased from Kmart in
the Czech Republic and Slovakia; and the following year it entered the Republic of Ireland.
Tesco now has more than 450 stores in Poland, some 80 stores in the Czech Republic, more
than 120 stores in Slovakia, and more than 100 stores in Ireland.

Tesco's Asian expansion began in 1998 in Thailand when it purchased 75 percent of Lotus, a
local food retailer with 13 stores. Building on that base, Tesco had more than 380 stores in
Thailand by 2017. In 1999, the company entered South Korea when it partnered with
Samsung to develop a chain of hypermarkets. This was followed by entry into Taiwan in
2000, Malaysia in 2002, Japan in 2003, and China in 2004. The move into China came after
three years of careful research and discussions with potential partners. Like many other
Western companies, Tesco was attracted to the Chinese market by its large size and rapid
growth. In the end, Tesco settled on a 50-50 joint venture with Hymall, a hypermarket chain
that is controlled by Ting Hsin, a Taiwanese group, which had been operating in China for six
years. In 2014, Tesco combined its 131 stores in China in a joint venture with the state-run
China Resources Enterprise (CRE) and its nearly 3,000 stores. Tesco owns 20 percent of the
joint venture.

As a result of these moves, by 2019 Tesco generated sales of $25 billion outside of the
United Kingdom (its UK annual revenues were about $52 billion). The addition of
international stores has helped make Tesco the second-largest company in the global
grocery market behind only Walmart (Tesco is also behind Carrefour of France if profits are
used). Of the three, however, Tesco may be the most successful internationally. By 2019, all
its foreign ventures were making money.

In explaining the company's success, Tesco's managers have detailed a number of important
factors. First, the company devotes considerable attention to transferring its core
capabilities in retailing to its new ventures. At the same time, it does not send in an army of
expatriate managers to run local operations, preferring to hire local managers and support
them with a few operational experts from the United Kingdom. Second, the company
believes that its partnering strategy in Asia has been a great asset. Tesco has teamed up
with good companies that have a deep understanding of the markets in which they are
participating but that lack Tesco's financial strength and retailing capabilities. Consequently,

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both Tesco and its partners have brought useful assets to the venture, increasing the
probability of success. As the venture becomes established, Tesco has typically increased its
ownership stake in its partner. For example, Tesco owns 100 percent of Homeplus, its South
Korean hypermarket chain, but when the venture was established Tesco owned 51 percent.
Third, the company has focused on markets with good growth potential but that lack strong
indigenous competitors, which provides Tesco with ripe ground for expansion.

Case Discussion Questions

1. Why did Tesco’s initial international expansion strategy focus on developing nations?
2. How does Tesco create value in its international operations?
3. In Asia, Tesco has a history of entering into joint venture agreements with local partners.
What are the benefits of doing this for Tesco? What are the risks? How are those risks
mitigated?
4. Tesco’s entry into the United States represented a departure from its historic strategy of
focusing on developing nations. Why do you think Tesco made this decision? How is the U.S.
market different from other markets Tesco has entered?

Sources: A. Monaghan, "Tesco Boss's Bonus Cut Despite First Sales Growth in Seven Years," The Guardian, May
12, 2017; P. N. Child, "Taking Tesco Global," The McKenzie Quarterly 3 (2002); H. Keers, "Global Tesco Sets Out
Its Stall in China," The Daily Telegraph, July 15, 2004, p. 31, K. Burgess, "Tesco Spends Pounds £140m on
Chinese Partnership," Financial Times, July 15, 2004, p. 22; J. McTaggart, "Industry Awaits Tesco Invasion,"
Progressive Grocer, March 1, 2006, pp. 8-10; Tesco's annual reports, archived at www.tesco.com; "Tesco Set to
Push Ahead in the United States," The Wall Street Journal, October 6, 2010, p. 19.

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Sources: Hill’s International Business Textbook (14E)

Vanguard in China

Vanguard is one of the world's largest asset management companies. The firm has built a
$7.2 trillion asset management empire by selling low-cost index funds to individual
investors, primarily in North America. However, the company has struggled to grow its
business in Asia. Passive investing in Exchange Traded Index Funds (such as the S&P 500
index or the Russell 2000), a strategy that was pioneered by Vanguard in the United States,
remains relatively novel in Asia, where many individual investors prefer stock picking in the
hope of securing higher returns. For some years, Vanguard has had a presence in Hong Kong
and Japan, but it has found it tough to build business, and in 2020 the company announced
it would close its offices in both of those markets. However, its business in China seems to
be following a different trajectory.

Following a decision by Chinese regulators to start relaxing restrictions on foreign financial

service companies doing business in China, in 2017 Vanguard set up an onshore operation in
Shanghai. To grow its business there, in 2019 the company entered into a joint venture with
Ant Group, which is an affiliate of the Chinese tech company Alibaba started by Jack Ma. The
joint venture is 51 percent owned by Ant, and 49 percent by Vanguard. Ant owns Alipay,
which is China's largest digital payment platform. Alipay has over 1 billion users around the
world and 80 million merchants, with total payment volume reaching a staggering 118
trillion Chinese yuan in June of 2020. More than one third of China's population, or 588
million people, contribute cash to Ant's largest money market fund.

In April 2020, the joint venture rolled out a robo advisor that targeted the Chinese fintech
firm's one billion users. The venture started offering an automated service called "Bang Ni

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Tou" (Help You Invest), to capture people with at least 800 yuan ($113) to place in mutual
funds. Using models developed by Vanguard, the robo adviser recommends a portfolio
selected from 6,000 mutual funds, after assessing the user's risk appetite and investment
horizon. For a small fee, the transactions are done automatically and the robo adviser will
also help investors rebalance their portfolios if necessary. According to Vanguard, the
company worked with Ant to create a service that is as easy to use as possible. In the 100
days from its April 2020 launch, the service had 200,000 customers who had collectively
invested more than $300 million. By the end of 2020, 500,000 Chinese retail investors had
reportedly made investments using the service.

Vanguard and Ant are not alone in pursuing this strategy. China's robo-advisory market is
expected to reach 737 billion yuan by 2022, according to a report by Lufax and consultant
iResearch. Traditional financial institutions and a slew of fintech startups are also gearing up
to grab market share according to the report. They include state backed giants such as
Industrial & Commercial Bank of China Ltd. and China Merchants Bank Co.

By venturing into the retail market through its joint venture with Ant, Vanguard is breaking
away from the strategy pursued by other Western investment firms in China such as
BlackRock Inc. These firms have for years managed money for China's institutions, state
funds, and the wealthy to build their brand and political goodwill. They have settled for
being lesser partners with Chinese banks to reach individual investors. In 2020, this long-
held strategy appeared to bear fruit when Beijing began letting foreign firms apply for
mutual fund licenses of their own. Still, no foreign firms have yet started selling their own
mutual funds to Chinese individuals. One major problem is that they face distribution
challenges, because Chinese banks and brokerages control bricks-and-mortar branches, and
internet giants dominate digital channels.

Vanguard's strategy of partnering with Ant and selling directly to retail investors represents
a radically different approach to building business in China. Vanguard decided to chart a
new way after months of internal debate. Vanguard's U.S. executives wanted the firm to
focus on the Chinese retail market, rather than sinking resources into big clients that often
demanded white-glove service. The head of Vanguard's Asian operations, Charles Lin, and
other overseas executives argued Vanguard needed to build a name among Asian financial
institutions. In 2019, Charles Lin left Vanguard, and the firm shifted its strategy. The firm
exited its Chinese institutional business, informing China's sovereign-wealth fund China
Investment Corp. and the agency managing China's foreign-currency reserves that it would
return their money. Vanguard also decided to shut its Hong Kong office that mainly served
big clients, shifted its Asia headquarters to Shanghai, announced plans to cease Japan
operations, and pared back institutional offerings in Australia.

Vanguard is clearly going all in with Ant, focusing on retail investors in China. But Vanguard
must also deal with a complication. Ant was scheduled to undertake an Initial Public
Offering on the Shanghai Stock Exchange in late 2020 that was on track to raise at least
$34.4 billion, which would have made it the biggest IPO of all time! The IPO valued Ant at
more than $300 billion, making it worth more than most Chinese and American banks.
However, in November 2020 Chinese regulators stunned the global investment community
by stopping Ant from pursuing the IPO. The dramatic reversal for Ant brings to a head

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concerns that Chinese regulators have long had about the opacity of Ant's operations and
the oversize influence it has on the Chinese payments and financial landscapes. While the
precise reasons for pulling the IPO are not known, observers point to controversial
comments made by Jack Ma at a public forum in Shanghai in October 2020 that some top
Chinese regulators also spoke at. The comments were widely viewed as being critical of
China's financial system and the state's role in it. The norm in China is that companies are
supposed to operate within the country's regulatory constraints and the established political
system. Jack Ma may have erred by breaking that norm and directly criticizing the
established order. The implications of this turn of events for the Vanguard-Ant joint venture
remain to be seen.

Case Discussion Questions

1. What are the attractions of the Chinese market for Vanguard? Does it make sense for the
company to participate in this market in some form? What are the risks associated with
entering the market?
2. Prior to Ant's IPO being pulled by Chinese regulators, did Ant make a good joint venture
partner for Vanguard? What are the benefits of partnering with Ant, as opposed to (a)
partnering with one of China's large state-controlled banks, or (b) going it alone in China?
3. Vanguard's own Asian executives favored a strategy of partnering with established
financial institutions and focusing on large institutional clients (such as China's sovereign
wealth fund). They were apparently overruled by Vanguard's senior U.S. executives, who
decided to pull out of the institutional market and go after the retail market, which is
composed of hundreds of millions of small investors. This strategy has worked well for
Vanguard in the United States, but is it the correct strategy for China? What are the
potential benefits here? What are the risks?
4. What are the implications for Vanguard of Ant's IPO being pulled by Chinese regulators?
Are there political risks here? Could those risks have been mitigated by pursuing a different
strategy?
5. Given events unfolding in China, should Vanguard stay the course with Ant?

Sources: L. Y. Chen, "Ant, Vanguard Target 900 Million Users with Robo Advisor," Bloomberg, April 1, 2020; J.
Yang and S. Ng, "Ant's Record IPO Suspended in Shanghai and Hong Kong Stock Exchanges," The Wall Street
Journal, November 3, 2020; D. Lim and J. Yang, "Vanguard Chart's a Narrow Path in China, Staking Its Future on
a Fledgling Venture," The Wall Street Journal, February 25, 2021.
Design element: naqiewei/Digital Vision Vectors/Getty Images

1. Attractions of the Chinese Market for Vanguard:

- Enormous market size with a large population of potential investors.
- Growing middle class seeking investment opportunities.
- Emerging interest in passive investing, aligning with Vanguard's expertise.
- Regulatory changes allowing greater access for foreign financial firms.

Risks:
- Competition from local and global players.
- Regulatory uncertainty and potential policy changes.
- Cultural differences and market complexities.

2. Ant as a Joint Venture Partner:

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 - Ant offered access to a vast user base through Alipay.
- Leverage of Ant's fintech expertise and market knowledge.
- Potential synergy between Vanguard's investment products and Ant's platform.

Benefits Over Other Partners:

- Greater digital reach compared to traditional banks.
- More flexibility compared to state-controlled entities.

3. Vanguard's Retail Focus Strategy:

- Potential Benefits:
- Tapping into the growing retail investment market.
- Leveraging Vanguard's reputation for low-cost index funds.
- Alignment with Vanguard's successful U.S. strategy.

- Risks:
- Competition in the retail space.
- Shifting from institutional clients may have downsides.

4. Implications of Ant's IPO Being Pulled:

- Potential political risks due to regulatory changes.
- Mitigation through diversified strategies or partners might have been considered.

5. Vanguard's Future with Ant:

- Decision depends on Vanguard's assessment of risks and rewards.
- Adaptation to evolving regulatory landscape may be necessary.
- Continual evaluation of the partnership's viability is crucial.