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Chapter 4: The Global Economic Environment

Sony seeks to revive profitability
Few brands in electronics have the (LCD) panels. Hon Hai should thus be a
enduring brand reputation that Sony strong competitive position in TV
enjoys. Yet the Japanese company has assembly, as it can benefit from
found it difficult to maintain profits in transaction costs savings. Still,
an increasingly competitive competition from Samsung is stiff, and
environment. Its history of innovative Samsung has an in-house supply of LCD
products goes back to the Walkman in panels.
1979. It invested heavily in flat-screen
televisions, but competitors such as Sony’s loss-making Barcelona factory
Samsung and LG have challenged it in poses another challenge. The Barcelona
quality and price. Sony has not been an operation is small in comparison to
inward-looking company. It was among Nitra, and therefore a natural
the first Japanese companies to have candidate for closure, but it will be
foreign board members, and its costly. The factory is unionized, and
Chairman and CEO, Sir Howard Stringer, Spain has strong employment
is British. It has globalized production protection laws. Who would buy the
and sought to locate manufacturing Barcelona factory? An outsourcing
facilities near markets. However, manufacturer would be deterred by the
competitive pressures and global small scale and high costs. Of the other
economic downturn have taken their TV plants, Sony is intent on keeping the
toll. Sony’s CEO has embarked on a ‘mother factory’ in Japan, which is
widespread restructuring programme, important in design and feedback. Its
targeting its television factories in factories in Brazil and China, both
particular. growing markets, will also be kept:
these are large markets and both
Sony started manufacturing televisions countries have high import duties on
at its factory in Slovakia since 2006, and TVs.
built up production capacity, but it has
now decided to slim down to save Small LCD panels for use in mobile
costs. Overall, Sony’s electronics phones and digital cameras are still
business, which includes audio, video manufactured at Sony factories in
and televisions, is being reduced from Japan, even though they are not
57 factories to 42. It is shedding four of profitable. It sold one of these factories
its eight TV factories. The Nitra plant in to Kyocera, but has kept two. Its
Slovakia was sold to Hon Hai of Taiwan, reasoning is that it wishes to develop
an outsource manufacturer making TVs display technologies for the future, as
under licence. Hon Hai also bought these help to differentiate its products.
Sony’s TV factory in Mexico. Hon Hai’s Sony has faced criticism that it has lost
attractiveness as an outsourcer stems its leadership role in innovation as
partly from its acquisition of an affiliate other companies, such as Apple, with
specializing in liquid crystal display its iPad, have taken the limelight. Sony
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is considering a rival to the iPad, and it brand, even though someone else has
has been somewhat cheered by made the product? Sony executives are
increased sales of its Vaio PCs. hoping the answer is ‘yes’.
However, quality problems with the
new PS3 PlayStation were Sources: Harding, R. and Soble, J.
disappointing, especially coming at a (2010) ‘Japanese fret over quality of
time when Toyota was also manufacturing’, Financial Times, 3
experiencing quality problems. March; Harding, R (2010) ‘Stringer’s
Production of the PS3 is outsourced to Sony restructuring has unfinished
China. Sony has traditionally justified its business’, Financial Times, 1 April;
premium prices on its reputation for Harding, R. and Gelles, D. (2010) ‘Sony
quality. With its TV manufacturing plans to compete against Apple iPad’,
increasingly outsourced, will consumers Financial Times, 5 February; Sony
still be willing to pay for the Sony Annual Report 2009, at [Link]

Questions for discussion:

 What trends are apparent in the global electronics industry, which are having
adverse effects on Sony?
 What are Sony’s core competencies?
 What are the risks of outsourcing from Sony’s perspective?

2016 update:
Sony continued to struggle to maintain appointed in 2013, and a new CEO,
competitiveness in global markets. In appointed in 2015, have built a strategy
smartphones, Apple and Samsung have for regaining competitiveness that
taken leadership of the premium focuses on the company’s innovative
market, while Chinese manufacturers, strengths, rather than attempting to
Huawei and Xiaomi have led in the compete in volatile markets for
lower-price products. Sony embarked consumer goods. Imaging products,
on cost-cutting in its smartphone video games and entertainment are
business, in order to improve areas in which the company has
profitability in targeted markets, rather strengths which can lead it back to
than chasing market share in the profitability. The business areas
competitive markets of China and India. targeted by the new strategy are game
Sony had already outsourced its TV and network services, pictures and
business, and it has sold its PC business music. It has invested in its PlayStation
due to competitive pressures. It has platform, and it has hoped to increase
struggled to cope with losses in its its market in music, especially in
smartphone business, and the company streaming services.
was clearly in need of a turnaround
strategy. A new chief strategy officer,
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The turnaround strategy seems to have strength. The camera businesses also
worked so far. In 2016, the company showed good financial results. On a
reported a 600% rise in profits due to bleak note, however, an earthquake in
the success of the PlayStation 4. And Japan in 2016 caused the temporary
the smartphone business, in which closure of its factories for image
losses had been a serious concern, also sensors and digital cameras. The CEO
showed a dramatic improvement. Its had cause to be upbeat, but the
Xperia phone, while not selling in large company still faced challenges in
volumes, was showing renewed market maintaining its competitiveness.

Alibaba aiming to shape the world

Online sales amounting to the world’s media. Those reservations

equivalent of $8 billion in 10 hours on remain, despite the euphoria of 11
11 November 2015 gave Alibaba, November.
China’s ecommerce champion, a world Ma’s Alibaba IPO on the NYSE in 2014
record for a single day’s trading. The was indeed a success. The first day’s
news of the record made global trading valued the company at $235
headlines for its charismatic founder, billion, and the share price saw a ‘pop’
Jack Ma, who received a congratulatory of a 35% rise in value on the listing
phone call from the office of China’s price on the first day. US investors were
president. For a private-sector Chinese keen to own shares in Alibaba, and the
company, global admiration combined backing of large banks, such as JP
with praise from the communist Morgan, Goldman Sachs and Citi Group,
political establishment could be reinforced their confidence. It seemed
interpreted as the pinnacle of success. not to be misplaced: the shares soared
Certainly, achieving sales that exceeded 77% in the first two months after the
the ‘black Friday’ record for equivalent IPO. But since then, the price has
sales in the US (falling the day after halved. Weakening economic data from
Thanksgiving) was an achievement that China’s economy have been a factor,
its billionaire founder could be proud and share prices on China’s stock
of. But celebrations on the day should exchanges have tumbled. As a Chinese
be tempered by consideration of where company, Alibaba would not be
the company is going – and how. Only immune from these movements. Ma
two months previously, when Alibaba has grown the ecommerce giant in a
was celebrating the first anniversary of business environment that has seen
its listing on the New York Stock growing demand from Chinese
Exchange (NYSE), doubts about its consumers. Alibaba has had a dominant
business, its governance, and the position in the Chinese market, with its
impacts of country factors associated Tmall business (similar to Amazon) and
with China were scattered across the Taobao business (similar to eBay). Their
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popularity has risen among the middle- one of shares directly in the company,
class consumers who have benefited but in a number of offshore-registered
from China’s growing prosperity. Ma intermediary entities that ‘simulate’
aims for global markets, but so far ownership. These are all private
these have been limited, accounting for companies controlled by Ma. Critically,
9% of overall sales. He has also been Ma also owns Aliplay, the payment
astute in catering to consumers who company (similar to PayPal) that is the
use smartphones for shopping, by lifeblood of Alibaba. It, too, is a private
increasing mobile sales and acquiring company under his control. He justifies
companies with expertise in mobile this arrangement on the grounds that
apps. By 2014, the time was ripe for Chinese law requires that non-bank
listing Alibaba. But the method was payment systems must not be foreign
unconventional, and Alibaba had had a owned. But there are clearly big risks
previous listing that had misfired. for ordinary investors in these
Alibaba was listed on the Hong Kong arrangements, as their ownership is
Stock Exchange in 2007, but the indirect. Ma assures investors and
financial crisis soon followed, along consumers that he has their interests to
with a corruption scandal that engulfed the fore, but these promises have no
Ma. It was delisted five years later. In force in terms of legal obligation.
the meantime, Ma searched for Shares listed in New York are
another way to go public. He looked to purchased by institutional investors
Silicon Valley where, in companies such such as pension funds. Although
as Google and Facebook, the founders Alibaba shares were eagerly bought by
have relatively small shareholdings but investors and backed by prestigious
retain control of the company. The institutions, there were risks. As an
Hong Kong Stock Exchange rejects such online company, Alibaba is particularly
structures as a departure from one- affected by internet controls and
share-one-vote. He turned to New regulations imposed by government.
York, which proved amenable to close Alibaba has encountered criticism for
control. The company, Alibaba Group, tolerating the sale of counterfeit goods
is registered in the Cayman Islands, an and other goods of marginal legality.
offshore Caribbean jurisdiction with Although there are international
light disclosure requirements. The agreements to control the trade in
ownership structure was to raise nuclear-sensitive materials that could
eyebrows. be used to make bombs, active trading
Ma and 30 individuals have a has appeared to be relatively
partnership among them that gives unhampered on Alibaba’s websites
them the right to name the people on (Clover, 2014). Ma’s warm relations
the board of directors. These insiders, with top political leaders are valuable.
some of whom do not work for the But when the leadership changes, new
company, own altogether only 13% of leaders might pose threats, especially if
the shares. The investors who buy he has been associated with leaders
shares in the company have no say, that have fallen out of favour. China’s
and, what is more, their holding is not market reforms have allowed talented
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entrepreneurs like Jack Ma to build (2015) ‘On its first birthday, Alibaba’s
empires and accumulate fortunes, but stock is a battleground’, 17 September,
the ultimate control of the economic Forbes, at [Link].
levers by authoritarian political rulers
remains intact. Questions for discussion:
 What are the risks for private-
Sources: Clover, C. (2014) ‘Weapons of sector companies in China’s
mass ecommerce’, Financial Times, 27 economic environment?
September, at [Link]; Pratley, N.  What aspects of Alibaba’s IPO in
(2014) ‘Alibaba’s stock market listing a New York could be criticized,
risky prospect as insiders hold all the and why?
cards’, The Guardian, 18 September, at  Is Alibaba a good model for a
[Link]; BBC (2015) modern Chinese company?
‘China’s Alibaba breaks singles day  Would you invest in Alibaba
record as sales surge’, BBC News, 11 shares?
November, at [Link]; Financial
Times (2014) ‘How Alibaba turned itself
into a different type of company’, 19
September, at [Link]; Schaefer, S.

Ethiopia’s economic growth comes at a price

Ethiopia is now experiencing economic away from its primarily agricultural
growth, but until just over two decades base. Flower growing has become an
ago, it was grappling with recurring important industry. The availability of
drought and famine, combined with low-cost labour has attracted
violent ethnic tensions. The famine of manufacturers, including textile and
the 1980s precipitated the fall of the leather companies. H&M, the world’s
communist dictatorship that had ruled second-largest fashion retailer, is now
since the 1970s; 1991 saw the manufacturing in Ethiopia. The
overthrow of the communist dictator government is spending public money
and the ushering in of a new era of on health, education, agriculture and
hope for the economy and new roadbuilding. One of the biggest
constitutional democracy. Under the projects is a huge hydropower project,
political leadership of the dominant the Grand Ethiopian Renaissance Dam,
party, the Ethiopian People’s which is government funded and will be
Revolutionary Democratic Front the continent’s largest such project.
(EPRDF), which is still in control, the The government is both guiding
country’s economic accomplishments development and becoming the largest
have attracted praise from all parts of investor in Ethiopia’s future. The risks
the world. Economic growth has been of drought remain, but it is hoped that
in region of 10%, an unusually high rate there is now less risk of widespread
for an economy without large energy famine. Ethnic tensions remain, and
resources. The economy has diversified
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human rights issues are raising million people have been forcibly
concerns. moved to new ‘model’ villages in this
With its strong state leadership driving process, which is effectively land
economic growth, Ethiopia is an clearance. The displaced groups
example of the development state, a complain that they have been moved to
model of development that has been areas that are infertile and that have
successful among the emerging Asian inadequate social services, schools and
countries, such as China. But China’s healthcare. They are left without their
development is guided by an traditional agricultural livelihoods.
authoritarian political system. Ethiopia These groups have little political voice
has democratic political institutions, and, although the constitution
making its development policies guarantees them the right to choose a
potentially more accountable to a livelihood, this seems to have been
democratic electorate, while ‘building overridden in the interests of
capitalism from above’ (KushKush, development at the national level. One
2015). However, the formal democratic displaced Ethiopian says of the new
institutions are dominated by one foreign investors, ‘This is not the way
party, the EPRDF; there is only one seat for development. They do not cultivate
in the legislature held by an opposition the land for the people. They grow
member. The NGO, Human Rights sorghum, maize, sesame, but all is
Watch, has reported that political exported, leaving none for the people’
dissidents, such as bloggers, protesters (Smith, 2015).
and opposition parties, suffer from Despite its impressive economic
repressive tactics by the government growth, Ethiopia still has a lowly
(HRW, 2015). Moreover, the EPRDF is ranking of 173rd in the UN’s Human
dominated by the Tigre ethnic group. Development Index (UNDP, 2015).
The many other minority ethnic groups Poverty remains an overriding issue.
in the country are concerned about the Although the percentage of people
authoritarian tendencies of the below the poverty line has fallen from
government. 37% to 26% in the decade to 2014, the
Ethiopia remains predominantly a rural absolute number (25 million out of a
society. Four out of five Ethiopians live total of 86 million people) is roughly
in rural areas, and agriculture accounts the same, due to population growth.
for half of the country’s GDP. Despite People hovering around the poverty
the government’s policies for improving line remain vulnerable to food
well-being, its plans for regenerating insecurity. The UN has pressed for
agriculture have given rise to concerns ‘inclusive growth’, but it finds that in
of social justice. In southern regions of Ethiopia, the benefits of growth have
the country, where minority ethnic not been widely distributed throughout
groups are prevalent, people have been society. There are high rates of
moved away from their homes so that unemployment and under-employment
the land can be leased to foreign in both urban and rural areas. Hence,
investors engaged in commercialized poverty and international migration
agricultural production. Some 1.5 remain worryingly high. It urges policies
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that will promote private-sector October, at [Link];

economic activity, to create productive KushKush, I. (2015) ‘Ethiopia, long
and sustainable jobs. mired in poverty, rides an economic
Ethiopia’s GDP per capita is just $550. boom’, New York Times, 3 March, at
The government was aiming to raise [Link]; Smith, D. (2015)
Ethiopia to the level of a middle- ‘Ethiopians talk of violent intimidation
income country by 2015. However, as their land is earmarked for foreign
economic growth will not automatically investors’, The Guardian, 14 April at
resolve the inequalities: the people [Link]; HRW (2015)
who are growing richer are mainly the ‘World Report 2015: Ethiopia’, at
business élites. The number of [Link].
millionaires in Ethiopia grew 108%
between 2007 and 2013 – the fastest Questions for discussion:
growth in the number of millionaires of  Summarize the main drivers of
any African country. They are a tiny economic growth in Ethiopia’s
proportion of the population, only economic development model.
2,700 people. For development to be  What gains in social well-being
sustainable, focus would need to shift are occurring in Ethiopia?
to goals of raising levels of human  In what respects are social goals
development and inclusive growth. being set back by government
policies?
Sources: UNDP (2015) ‘National Human  Is Ethiopia’s development
Development Report 2014: Ethiopia’, at model a good one for other
[Link] ; Dori, D. (2014) emerging economies to follow,
‘Ethiopia’s “African tiger” leaps towards and why?
middle income’, The Guardian, 22

Sweden: an economic model for others to follow?

Sweden, along with its Scandinavian all the Scandinavian countries. To
neighbours, has become identified with critics, there are inherent
an economic model that combines a contradictions in these twin ideals.
market economy with social welfare. They maintain that high levels of social
The thinking behind this combination welfare inevitably entail high taxes,
acknowledges the benefits of the which discourage enterprises, while, at
market, but recognizes that policies can the same time, generous welfare
be put in place to temper its benefits discourage people from
inequalities and promote social well- seeking productive employment. The
being. The political underpinning of this result can be increased public spending
thinking is most evident in the policies that spirals out of control, leading to
of the social democratic parties that possible economic crisis. The critics
have been at the forefront of politics in would note that this is roughly what
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happened to Sweden’s economy in the reining in the high levels of debt and
1980s. A financial crisis in 1991 saw the strictly controlling public spending.
ruin of two banks that had to be Sweden was also alert to the changes
nationalized. Economic recession and taking place in a globalized economic
high unemployment led to growing environment. For businesses, Sweden
pressure on public expenditure. The has been a good deal more competitive
virtues of the so-called ‘Nordic’ model as a location than might be imagined.
were looking more like myth than Whereas corporation tax in the 1980s
reality. It looked as if the critics had was 35%, it is now 22%, which is
been right. considerably less than in the US.
However, Sweden’s government took a Moreover, there are numerous tax
firm hand and guided the country out exemptions. The company enjoys
of its economic woes. Did this mean the exemption from capital gains tax and
old model would be abandoned? In from tax on dividends from shares held
fact, much of what the government did for business purposes, whether in a
certainly seemed inconsistent with the listed or non-listed company. These
old model (Stenfors, 2015). For policies are favourable to the holding
example, privatization was introduced company structure, which is common
in many services, such as healthcare among Swedish businesses. Sweden’s
and education. And taxes were economy is dominated by the large
lowered. This did not seem to fit the holding companies that are run as
picture of social-democratic orthodoxy, family dynasties, the most notable one
as markets appeared to be supplanting of which is the Wallenbergs.
the state. However, in the Swedish The Wallenberg family, now in its fifth
context, the strength of the nation’s generation, controls a huge array of
cultural commitment to equality, full businesses. Their holding company,
employment and individual freedoms Investor, controls a business empire
remained the foundation for the worth in the vicinity of $250 billion.
reforms. Market forces and financial They are famous for their long-term
innovations were seen as means of perspective and for their active
restoring economic growth, not as ends management of the many companies
in themselves. Hence, for example, under their control. These include
privatization of services was introduced Electrolux, the white goods
where efficiencies could be made, manufacturer; Saab, the aerospace
without sacrificing quality and without company; and Ericsson, the telecoms
undermining the overall system. equipment maker. Family members sit
Welfare spending was reduced after on multiple boards, and control board
the crisis, but not drastically. Sweden appointments. There are weighted
remains essentially committed to social voting rights held by family members,
welfare. Government spending still so that they can effectively control
accounts for half its economy. board appointments. It is sometimes
Government efficiencies were an said that this system creates too cosy
essential element of the newer version an atmosphere between managers and
of the Swedish economic model, the dominant shareholders (Milne,
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2015). It could be argued that the Sources: Stenfors, A. (2015) ‘The

system works in Sweden, where there Swedish model in 2015: A “safe haven”
is a high level of trust and those in or a “Nordic Noir”?’, Global Labour
charge feel a strong sense of personal Column, No. 201, May, University of
responsibility. The family dynasty as it the Witwatersrand, at
operates in Sweden is seen as a source [Link]-labour-
of stability and long-term business [Link]; Bergston, C.F. (2013)
strategy. ‘Obama should take lessons from
Sweden’s economy suffered from the Sweden to the G-20’, The Washington
financial crisis of 2008, as did other Post, 29 August, at
European countries, which are the main [Link]; Sanandaji,
destinations of its exports. However, it N. (2015) ‘The end of Nordic illusions’,
has been able to recover rather more Wall Street Journal, 24 June, at
strongly than its European neighbours, [Link]; Milne, R. (2015) ‘Meet
partly because its banks had been the Wallenbergs’, Financial Times, 6
recapitalized after the earlier crisis, and June, at [Link].
its government had in place prudent
policies to keep public spending under Questions for discussion:
control. Is Sweden still enjoying the  What are the strengths of
social stability that reflects its Sweden’s economic model?
egalitarian values? Inequality is  How has Sweden’s economic
growing, and the rise of the anti- model changed since the 1980s?
immigration political party, the Swedish  What criticisms could be made
Democrats, suggests that the against the dominant family-run
consensus on the social aspects of the holding companies in Sweden?
Swedish model could be coming under  To what extent is Sweden’s
strain. economic model a good one for
other countries to follow?
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