Degusa
Overview
Degussa is one of the top ten chemical companies in the world (#1 in specialty chemicals) with large production facilities in over 50 countries and sales and marketing offices worldwide. In March 2005 the company committed to increase their EBIT by 2008 through four priorities: solutions to customers, site excellence, human and corporate excellence and make China happen (Source: Degussa 2008 Program). The strategic plan for China was to triple the sales from $300 to $900 million by 2008 and capture a major share of the Chinese market for specialty chemicals. One of the high growth potential areas would be the segment of stabilizers (growing at least 7-9% per year in China and Degussa owned only 10% market share of it). The company suffered from cost and lead time disadvantages due to production in Germany. It was clear that in order to increase their market share Degussa would need to either start sourcing their stabilizers locally from competitors or start their own production in China. In case of second option (FDI) the managers would also face the choice of mode of entry: greenfield, joint venture or acquisition.
FDI or non-FDI?
We can find multiple reasons within OLI framework (Dunning, 2000) for Degussa to go with FDI in China. In terms of ownership (O) of valuable competitive advantages we should mention advanced product technology (high standard products including proprietary products and over 300 patent families), process technology (“Perfect Plant” concept introduced in all its plants for improved cost efficiency) and product reliability (ISO certification, quality perceived by customers as premium). These advantages are sustainable as long as Degussa stays committed to R&D, training and quality control and all of them can be utilized in China. Speaking of location (L) China is interesting in terms of market (will become the largest chemical market by 2015), labor (cheap compared to Europe) and resources (raw materials, utilities).
Degussa is one of the top ten chemical companies in the world (#1 in specialty chemicals) with large production facilities in over 50 countries and sales and marketing offices worldwide. In March 2005 the company committed to increase their EBIT by 2008 through four priorities: solutions to customers, site excellence, human and corporate excellence and make China happen (Source: Degussa 2008 Program). The strategic plan for China was to triple the sales from $300 to $900 million by 2008 and capture a major share of the Chinese market for specialty chemicals. One of the high growth potential areas would be the segment of stabilizers (growing at least 7-9% per year in China and Degussa owned only 10% market share of it). The company suffered from cost and lead time disadvantages due to production in Germany. It was clear that in order to increase their market share Degussa would need to either start sourcing their stabilizers locally from competitors or start their own production in China. In case of second option (FDI) the managers would also face the choice of mode of entry: greenfield, joint venture or acquisition.
FDI or non-FDI?
We can find multiple reasons within OLI framework (Dunning, 2000) for Degussa to go with FDI in China. In terms of ownership (O) of valuable competitive advantages we should mention advanced product technology (high standard products including proprietary products and over 300 patent families), process technology (“Perfect Plant” concept introduced in all its plants for improved cost efficiency) and product reliability (ISO certification, quality perceived by customers as premium). These advantages are sustainable as long as Degussa stays committed to R&D, training and quality control and all of them can be utilized in China. Speaking of location (L) China is interesting in terms of market (will become the largest chemical market by 2015), labor (cheap compared to Europe) and resources (raw materials, utilities).
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