Discussion Of Comparative Advantage, Role Of Economies Of Scale, Government Intervention, Economic Integration Etc.
Description Of Client’s (International) Business Operations Model - Overview Of Current Largest Markets For The Sector -
Brief Analysis Of Global Competition In The Sector/Industry (Local And International)
Analysis Of European International Competitiveness In This Sector/Industry
Tarkett SA was incorporated in October 1997 with the merger of two companies, one French and the other German named Sommer-Allibert and Tarkett AG respectively. It is based in France and deals in the production of walls coverings and flooring. It thus belongs to the Building and Surface covering Industry (Tarkett 2016). Currently Tarkett is bearing in mind expansion scopes through acquisition of a number of markets in nations like Germany, Italy and France. The company produces under the Brand names of Tarkett, Pegulan, Febolit, Sommer, etc.
Currently, the company has a saturated domestic market and is now considering expansion scopes, the capital investment requirements would be high (Trade Commissioner 2019). However, it would lead to increase in the overall growth of the company and expansion of operations.
This report deals with analysis of economic factors which impact the company’s operations in the countries of Brazil, Indonesia and South Africa. To get a better understanding, the presence of Tarkett SA in these countries is discussed.
In Brazil, Tarkett aimed at its growth by acquiring the Brazilian floor making company Fademac. This was done in 2009 when an agreement was signed between Tarkett and Brussels based Etex Group. The then sales of Fademac was around $ 35 million (Wilson 2018). This led to the growth of commercial presence of Tarkett in South America. This led to the presence of a manufacturing and distribution unit in the region. The acquisition included an Industrial base around Sao Paulo and an entire distribution network in the region. In Indonesia and South Africa too, Tarkett Floorings have been a choice of architects in designing high quality interiors. Trakett Floorings come with high definition features like sound reduction, shock absorption, stable construction, improved impact resistance and low TVOC which make it a preferred brand in floorings and wall furnishings (Tarkett 2016). The main product brands of the company are Tarkett, Johnsonite, Tarkett Sports, Beynon Atlas, Fieldturf Poligras, Nafco, Azrock, Rhinofloor, sintelon, Easyturf and Polystyl. Tarkett SA is a global leader for vinyl products and artificial turf (Walker 2019).
Tarkett SA has a balanced business model wherein everybody sees different faces of the company. This model leverages its global presence. In addition, the local strength of each region creates a competitive environment for the company. The company targets expansion strategies by using Dunning’s OLI Framework and through FDI’s. The operations model and growth strategy of Tarkett in each of the countries under review is discussed:
Overview of Business Operations Model
Brazil: Tarkett is currently operating in many cities of Brazil. It bolstered its operations in the Brazil by unveiling a brand new expansive facility through acquisition of Fademac. However, there is a further expansion scope in the cities of Brazil through which it can expand further into South America. The country hosts a number of companies with home to a large number of technical and construction professionals. This makes the availability of resources cheaper and easier. With more investment, Tarkett shall be able to open more production sites in Latin America (Brown 2019).
Indonesia: Tarkett SA currently has no production units in Indonesia. However its floorings are sold in Indonesian markets through its distribution networks. Indonesia is one of the fastest growing internet economy in the Southeast part of Asia. To dive into Indonesian markets, Tarkett needs to streamline the business prospects across consumer verticals. Although Indonesia is not in the list of countries currently where Tarkett would like to expand its presence, it can target to enter into business in the country because of the available growth prospects. The company can eye on various SME partners to grow in the country. It has been continuously launching new products to increase its product listings (weforum.org 2018).
South Africa: Tarkett has been listed amongst the most iconic companies of recent times. It does not have a manufacturing unit in the country but is looking forward to expansion in such new countries. It can enlarge its presence to accommodate more African employees and generate employment in the country. This will enable South Africans to access the company’s remarkable set of tools and address many of the complex challenges faced by the country. It can build a new workspace here for growth. Tarkett has adopted similar mechanisms in France and many other nations and can now think of expanding its operations in South Africa. As per World Bank estimates, a country can grow by 1.4% in their GDP by increasing the broadband penetration by 10%. There are over 10 million young people in South Africa looking forward to job opportunities which can fill them with innovation and technological knowledge. Overall, it shall lead to the country’s economic growth. The investments by the US has been doubling in South Africa. The South African Government has been supporting the growth through the African Growth and Opportunity Act (AGOA) by funding for the development of next generation leaders (Williams 2017). All this shall help South Africans to develop their own solutions in empowerment, growth and building a better tomorrow.
Overview of Sectors and Competitiveness Data
Tarkett SA belongs to the Flooring sector which relates to production of high quality flooring and wall furnishings. The company provides interior furnishing solutions for all kinds of spaces which includes schools, homes, offices, corridors, staircases etc. The company produces a wide range of wall coverings. Recently, the company has been facing challenges from the CIS nations. The top competitors of Tarkett are Shaw Floors, Armstrong flooring, Mannington, HALEX, Traxx, Louis Carpet supplies, Milliken, Lumber Liquidators, T&L Distributing etc. (Tarkett 2015). Tarkett is an old company ruling the markets for over 130 years. It is amongst the global leaders in cutting edge flooring solutions and port surfaces. The company’s highest presence is in the North American and European regions. Tarkett’s Net sales for 2016 was 2.7 billion Euros because of geographies and sector bifurcations. The topmost competitor in the list is Armstrong flooring which generates a lesser revenue of $ 2.5 billion.
In the construction supplies and fittings business, the top market leaders are Armstrong flooring, Shaw floors, Mannington etc. (weforum.org 2016). These companies along with Tarkett own over 50% of the market share in the industry. Shaw Floors is the highest revenue generating competitor of Tarkett SA. Among the list of top companies in this sector, Tarkett ranks second.
In terms of employee count, Shaw floors leads the league with 25,000 employees. Tarkett has around 12,900 employees and ranks second in the list. Tarkett has acquired Lexmark Carpet Mills Inc. in August 2018 which is its most recent acquisition. There are news that Tarkett has also closed the deal with Aquafil by announcing partnership (Tarkett 2019).
In terms of Comparative advantage, Tarkett SA being an MNC has a global presence and leads among its local competitors. It has a very high market share in flooring solutions. In other business segments too, Tarkett occupies a major position in the market share. Talking about competitive advantage, Tarkett provides high quality product solutions. Because of its global presence, the company is able to bring down its cost of operations drastically. This also leads to a scenario of “natural monopoly”.
The top three comparative advantage held by Tarkett include its huge sustainability infrastructure, innovative designs and market share (Mathur 2016). With a large market share, the economies of scale too are large for the company. The Heckscher – Ohlin theory applies to South Africa, Indonesia and Brazil because based on two factors of production, labour is abundant in the developing nations (Salvatore 2019). However, to produce goods like vinyl flooring and spaces, these countries can export goods to its manufacturing areas of France and Germany with cost reduction in mind.
In Brazil, the Economic Freedom Act diminishes the extent of Government intervention. It follows the principles of freedom as a guarantee, good faith, exceptional intervention procedure and recognition of vulnerability to stimulate the economic activity in Brazil. For this to happen, the reduction of Government interference is a must. Apart from this the Declaration of Economic Freedom Rights (DEFR) also regulates and restricts government intervention as per the provisions of Brazilian Federal Constitution. The EFA has also amended the Brazilian Civil code to accommodate the impact of lesser Government intervention (Alston et al. 2016).
In Indonesia, on the other hand, there is a higher government intervention to stabilize the prices and govern the pricing mechanisms of various goods and services. With fundraisers like GoJek and Tokopedia and entry of tech giants like Jack Ma, Indonesia is getting ready to compete with bigger nations like US, China and India (Chandra 2018). In 2005, the Minister of Communications and Information Technology also made announcements to raise funds to invest in startups in Indonesia. The government in Indonesia has launched HUB.ID where entrepreneurs and investors connect with each other.
In South Africa, the government intervention is comparatively less in the product market sector. In recent times, however, the government is taking steps to increase its interference in this sector and other businesses (Rahman 2018).
Porter’s model is said to be one of the strategic economic models which assists in explaining why a country is more successful than the other country for a particular industry or line of business (Bruneel and De Cock 2016). This model states that for an industry to embrace competitive advantage it is persistent to understand these four factors which are Firm strategy and rivalry, factor condition, demand condition and supporting industries. These factors of the Porter’s diamond model shall be elaborated in the context of the floors and wall coverings business in the Brazil, South Africa and Indonesia.
The Brazilian productive chain is evaluating the systemic costs and federal government is promoting a creative environment that not only promotes development but even enhances the competitiveness (Cunha 2013). These productive chains can increase the country’s share in the economic market whether its textiles, flooring or construction.
On the contrary, South Africa has gained its momentum towards its manufacturing trend, partnerships have developed. The customer’s different demand in terms of flooring and furniture have made the suppliers flexible. Flooring spaces, new types of carpeting has been developed and customisation for specific use is the way to future (Bizcommunity.com 2017). Indonesia’s supply of material resources is weaker and lacks chains and distribution channels across the world.
Talking about the impact of International events in businesses, the BREXIT or EU referendum has been discussed with reference to Tarketts line of business.
The US – China Trade war too has impacted the Company’s sales in China. Sales have reduced due to the bans imposed by the Chinese Government. Such events lead to a downfall in the economies of scale (Brown 2019). This was a major event which impacted the markets of various nations. Currently, both the governments have relaxed some of the impositions. A few still remains. The United Nations too supports free flow of trade across nations to enhance global relationships.
From an environmental point of view, the company aims towards sustainable use of resources and recycling products wherever possible. The company is working on eco-innovation in its products. Recently, an agreement was signed with the German Environmental Protection Encouragement Agency (EPEA) to apply the ‘Cradle to Cradle’ method to upcycle products (Charles Jr, Schmidheiny and Watts 2017). Tarkett is the first French company to adopt such measures. With reference to this, when analysed for Brazil, greenhouse gas emission is of the areas where the economy has substantiated its breakthrough especially for health purposes. The Jacarei production in Brazil has sourced its mineral filler to a distance of 700 kilometres for flooring, reducing the transport related greenhouse gases (Tarkett 2015).
Gravity Model in International Trade predicts the bilateral flow of business on the basis of economic sizes and distance between business units (Ghani et al. 2019). Having been introduced by Walter Isard, this model analyses determinants of trade flow which includes common borders, legal systems, languages, currencies, legacies and many more. In case of the Business Model of Tarkett, this model is quite relevant. Tarkett has its headquarters set up in Paris, France. It has various units managing its different business segments in various nations across the world. It is thus governed by the gravity model of international trade. As per the theory, bilateral business across nations is directly proportional to the size of the nation and measured by GDP and is inversely proportional to the distance between the nations.
In Brazil, in the beginning of 2014, LVT production was developed in Tarkett to extend its capacities in Brazil; though, the product line’s origin started from being manufactured in Europe (Tarkett 2019). The bilateral trade flows seems to be strong in South Africa due to the FISA (Floors International South Africa) in 2003 (Sindhi 2015). The professional approach has led to basket full of ranges and by bringing trade visions to eco-friendly environment of Tarkett.
Brazil: Brazil is the fifth largest country in America with a population orientation of mostly middle class people based in urban environments. It is one of the most challenging places in the world to do business. But once a company takes the leap, it is no big deal to acquire a customer base in this tech savvy country. There are various chances for entrepreneurs to generate returns of Silicon Valley style if the investors are willing to take risks and slog through the ecosystem of Brazil (Hellmann and Thiele 2019). Initially, due to government mismanagement a lot of people lived below the poverty line in Brazil (Serbin 2019). But in the 20thcentury, the country flourished with its exports of gold, coffee, rubber and soybean. After the introduction of the Real Plan in 1990, there was further boom in the trade of cotton, iron, sugarcane, ethanol, coffee, corn, woodpulp etc. which drive the economy even now. Although there are ongoing corruption issues in the country, there are institutions fighting against it.
Indonesia: Indonesia is the fourth most populated country in the entire world. It is the largest market in Southeast Asia and therefore the business opportunities are growing in the country. Statistics reveal that there have been more than $20 billion USD investment through FDI’s in 2018. Looking at the emerging business opportunities in Indonesia, there is a lot of scope of both Domestic and foreign investments (Na 2016). There have been over 58 thousand business registrations in a year in Indonesia in the past 3-4 years. Because of this, there is a high chance of Business Support Services to succeed in Indonesia. However, most startups are valued at less than USD 10 million which means that they still need a lot of support to build the startups. Till now, many companies have founded or co-founded incubator and accelerator programs in Indonesia. When it comes to regulations, there are extra obstacles a company has to go through in Indonesia.
South Africa: It is very easy for investors to invest in South Africa. The regulations are comparatively lenient. Most of the investment in South Africa currently comes from the United States (Hasan et al. 2016). Even then, South Africa lags behind all other global peers in terms of attracting foreign direct investments. It is not that the country lacks opportunities. It is just that the investors are not sure about the political and social conditions in South Africa. South Africa needs to make the world aware that they are open for Business and that they’ll facilitate investments. BRICS economies are doing just that. As per a recent report by the United Nations, FDI’s in South Africa was $ 7 billion in 2018 compared to $59 million in Brazil (Ghemawat and Altman 2016). Despite having similar complex domestic environments, other countries are attracting far more investments than South Africa. Investments are required in South Africa to cater to challenges of unemployment and poverty (Igwe and Kanyembo 2019). This will create jobs, new companies and wealth in the country.
The CAGE Framework monitors Cultural, Administrative, Geographical and Economic differences and variances amongst nations that the firms should address when creating their international strategies.
The cultural differences covers determinants like difference in languages, ethnicities, religions, values, norms, dispositions and social networking. In case of multilateral business models, cultural differences covers insularity and traditionalism (Engsig, Chiambaretto and Le Roy 2018). Cultures includes the traditions and the business mind set of the investor for international market which can vary from languages to celebrations (Deresky 2017). Bahasa Indonesia is the commonly spoken language and being the fourth most populous state in the world. South Africa’s first language is Zulu with English as the fourth most common language mainly understood in urban areas. Brazil has many minority languages and Portuguese is the official language and makes it difficult for expansion as English is not spoken widely even though the environment is favourable for international market.
The issues include lack of colonial ties, currency differences, political hostility and absence of shared trading blocs. For multilateral countries, the factors are closed economy, lack of memberships in international organizations and corruptions (Gil-Pareja, Llorca-Vivero and Martínez-Serrano 2019). Brazil’s current government has introduced investor-friendly initiatives which includes various e-commerce opportunities. The Federal Government performs the three tier system at the federal district. Secondly, South Africa a parliamentary republic also with three-tier system. There are issues related to Property Rights which makes the investors questions the efficiency and the growth of their investments (Arent and Zinaman 2017). The economy often faces risks which reduces the flow of FDI’s and adversarial business environment can be detrimental for expansion prospects on a country level (Beugelsdijk, Ambos and Nell 2018). The Indonesian government is of multi-party system of democratic republic with executive power exercised.
Physical distance, no land border, time zone differences, climatic differences are the geographical issues faced by bilateral country pairs. Weak communication links, size, remoteness, navigability etc. are the risk factors concerning multilateral country pairs (Stone 2018). These can be addressed by adopting standard time zones and communication methodologies. The geographical distance between France and Brazil is the shortest that is 5349 miles, followed by South Africa which is 5441 miles. Lastly, the distance between France and Indonesia is 7287 miles that is highest among the three target countries. Although, Brazil and South Africa distance is almost the same from France. However, South Africa and Brazil both have better international markets for products of Tarkett.
In 2018, GDP for Indonesia is 1.042 trillion US dollars whereas that of South Africa is 368.289 billion US dollars. For the last eight years, South African GDP has been falling on an average of 0.18% every year. Brazil’s GDP is highest amongst all as it is 1.869 trillion US dollars (Data.worldbank.org 2020). Based on economic distance, Brazil is a better choice for expansion in international market followed by Indonesia.
Recommendation and Conclusion
From an analysis of all the markets, it can be observed that a further expansion in Brazil is the most suitable for Tarkett since it already has existing operations there. If the company plans to expand its operations globally and enter Asian and African markets, it can do so by venturing into markets of Indonesia and South Africa. Tarkett should first expand its domestic presence further in France and Germany and then look forward to international markets. This will enable it to procure capital from existing markets and invest in newer markets of developing nations like the target countries. A proper risk analysis should be performed before making any investments. A detailed study of the socio-economic factors of the country of investment is a must to identify the long term growth potentials.
In the report, an analysis of the current scenario in Europe has been done to identify risks in the domestic presence of Tarkett Inc. A detailed study of the three emerging markets i.e. Brazil, South Africa and Indonesia has also been done to evaluate investment strategies in these markets (Engsig, Chiambaretto and Le Roy 2018). A comparative and relative study of these markets has helped in identifying the best potential market for investments. Factors such as slowdown of Germany economy, US China Trade war etc. has helped in a better understanding of the market scenarios.
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