Wednesday, April 23, 2014

Practical Alliances: When Two Rivals Ally to Counter a Third

The news came out a few days ago that Samsung and Globalfoundries had initiated a collaboration that would make Globalfoundries users of Samsung developed production technology for the latest generation of 14 nanometer chips. This is interesting news because such production technologies are important sources of competitive advantage in chip production, and there is little indication that Globalfoundries were failing in their efforts to generate their own 14 nanometer technology. They still decided to abandon it and use Samsung's technology.

The motivation is actually different. With both companies using the same technology, they can make identical chips. That can be convenient for customers who want multiple sources of their chips and who order many enough chips that they have some ability to negotiate. Apple would an example. So, the alliance is helping their customers by giving better service. But, the service improvement in this case is actually that Samsung and Globalfoundries are giving away power by making it easier for the customer to set up competition between them. What exactly would be the benefit of that? Well, the answer is simple. Neither Samsung nor Globalfoundries is the largest chip producer (foundry) in the world – Taiwan Semiconductor Manufacturing Co (TSMC) is bigger. Apple is known to have increased interest in TSMC because they see the irony of fighting Samsung in the smartphone market and courtrooms while depending on their chips. And, the competition does not stop there. Intel also can make 14 nanometer chips, and is known as a pretty competitive firm.

So, to understand this alliance it is necessary to see the entire market, and to see how it is a way for two firms to gain some advantage over the competition. In many ways Samsung and Globalfoundries are not ideal alliance partners – if you follow the analytical methods of our Network Advantage book you would find problems with the match between them especially related to whether they really will have shared interests and goals in the long term. But, in the short term TSMC, and Apple, is a big enough problem for them that they are willing to collaborate. This will be an interesting alliance to watch, especially in the long term.

Clark, Don. 2014. Samsung, Globalfoundries Agree to Adopt Same Production Process. Wall Street Journal, April 17 2014.

Tuesday, April 1, 2014

Where will China’s firms establish subsidiaries? Where there are Chinese

Europe and China are currently negotiating a raft of trade issues, with wishes to increase exports and investments from abroad. It is not necessary to distinguish who wants what; both want to export more and receive more investments. Basically the governments would like to receive more money from the other party, as governments often do. But one part of this story is new and interesting: Europe is still suffering from an economic crisis and many Chinese firms have reached considerable size, so European nations are very eager to become targets of Chinese investment. While EU negotiates on behalf of all, each nation competes with the others.

So where will China’s large firms place their subsidiaries? Well, they might behave like other multinational firms, which would be interesting news for Europe. In research published in Administrative Science Quarterly, Exequiel Hernandez found that foreign firms entering followed a very clear pattern: they preferred locations in which immigrants from their nation were numerous. It is easy to think of an example. Honda became famous for their early and successful entry into the US, which started in Los Angeles – a city with a large Japanese-American contingent. But this research is more than a set of examples, it is a clear pattern that can be shown by studying many firm entries.

The pattern makes sense too, because immigrants from the same country are ideal for firms that establish a subsidiary. They are in between. They understand the origin country, and they understand the new one. They can be employees, contractors, trading partners, teachers: in all roles they benefit the company more.So, the choice of locations with many immigrants is not a simple reaction to liking, it makes sense for the firms. In fact, the research also showed that the new establishments survived better in locations with more immigrants from the same country.

So what does that mean for Europe? Well, one thing that is obvious from looking around is how few Chinese immigrants there are, many fewer than in the US or Canada. And a bit of knowledge of politics is enough to learn that many European nations have political groupings that see immigration as problematic and are trying to seal themselves off. There is variation in how much of this happens, of course. And probably the people campaigning for fewer immigrants are unaware that they may be campaigning against companies and jobs too, not just people who look different from themselves.