WHY NOT ALTERNATIVE ENTRY MODES? [Exporting, Licensing, Turnkey Projects, Franchising]

[Janice Lim]

Exporting is the direct selling and shipping of goods from one country
to a foreign country. While this measure may potentially give JCB a
cost advantage in terms of eliminating the need to establish costly
manufacturing facilities overseas, and allowing JCB to achieve
economies of scale by producing from its existing centralized location
in UK instead of spreading its manufacturing to India; with the
existence of a lower-cost manufacturing location like India, this
downplays the cost advantages that exporting can bring to JCB, as
compared to if JCB were to invest directly in India. Moreover,
exporting of bulky construction equipment like backhoes will likely
take up a substantial portion of JCB’s capital in terms of
transportation costs, which can instead be put to better use. Lastly,
high tariff barriers implemented by the Indian government also made
exporting of construction equipment to India uneconomical by reducing
JCB’s profits.


Licensing is an agreement whereby a licensor grants the rights to
intangible property to the licensee for a specified period of time and
receive a royalty fee from the licensee in return. Firstly, licensing
is less appropriate to JCB because, although JCB owns rights in
technological know-how, it will continue to be a manufacturer of its
own construction equipment such as backhoes and excavators. Hence, JCB
is unlikely to expect to reap any manufacturing benefits derived from
licensing its technology to Escorts. Secondly, with technological know-
how as one of JCB’s competitive advantages, licensing will make JCB
vulnerable to losing this valuable technology to Escorts, who might be
its potential competitor in future due to the similarity in their
product lines. This will endanger JCB’s competitive position. Thirdly,
licensing does not allow JCB to have tight control over its
manufacturing operations since licensees are given autonomy to set up
and run their own production operations. This limits JCB’s ability to
realize benefits derived from experience curve and location economies,
and defeats the purpose of JCB’s entry into the Indian market, since
India is known for its populous demographic and high growth potential
to be tapped on. Also, licensing its technology will not allow JCB to
coordinate its strategy by using profits earned in India to support
its other factories’ operations in China or United States, which
engaging in an alternative mode of entry can offer. This is because
Escorts is unlikely to allow JCB to use its profits to support another
licensee, more so especially knowing that this move will serve to
benefit JCB, its potential competitor in construction equipment
manufacturing. While licensing may favorably allow JCB to receive
royalty, the amount JCB potentially receives from licensing its
valuable technology is minimal as compared to greater profits it can
reap if it were to engage in alternative mode of entry, like Joint
Venture.


Turnkey projects essentially involve exporting process technology.
Like licensing, turnkey projects are less appropriate for JCB because
it is likely to result in the loss of valuable technology to Escorts.
In the long run, selling this technology might enhance Escort’s
position as JCB’s competitor and erode JCB’s competitive advantage.
Moreover, because of their one-off nature, turnkey projects also limit
JCB’s interests to expand its future market share in India, should
India subsequently prove to be a profitable market for its
construction equipment; and this is a likely case, since India is
noted for its huge population and its profitable growth potential.


Franchising is a form of licensing in which a franchisor sells
intangible property to a franchisee, and requires the franchisee to
abide by strict rules as to how it does business. Firstly, similar to
licensing, franchising encompasses the problem of limiting JCB’s
ability to coordinate its strategies by ‘spreading’ its profits across
its global operations to optimally manage its business, as mentioned
earlier. Secondly, there are difficulties in controlling the quality
of the products due to the geographical distance between JCB’s home
company in UK and its market of interest, India. This makes the
products susceptible to poor quality, potentially affecting JCB’s
brand image.