42O Part lll Market entry strategies Chapter 13 lnternational sourcing decisions and the role of the subsupplier

Chapter 13 lnternational sourcing decisions and the role of the subsupplier 421

The nraľketing oŕ projects is different from tlre marketil"lg of pľoc1ucts in tlrc following Table 13.2 Advantages and disadvantages of buyer-seller relationships for contractor and subcontractor
respects:
. Decisiĺln of purchase, apart fľonr iocal busirress intefests' often involves decision pro- Advantages Disadvantages
cesses in national ancl inteľĺrational clevelopment organizatiĺlns. This irrrplies the partic-
Contractor (buyer) The contractor is flexible by not investing in The availability of suitable manufacturers
ipation of a large number of people ancl a heavily bureaucľatic system. manufacturing facilities. The subcontractor (subcontractors) cannot be assumed.
. The product is designecl ancl created during the negotiation process, where the require- can source the products more cheaply Outsourcing tends to be relatively less stable
ments aľe pllt forwarĹl. (because of e.g. cheaper labour costs) than than in-house operations
. It often takes years from the disclosuľe of ncecls to the purchase decision being taken. by own production The contractor has less control over the
Therefore total marketing costs are very large. The contractor can concentrate on in-house activities of the subcontractor
. When tlre project is takerr over by the pľoject buyer, the buyer-selleľ relations cease. core competences Subcontractors can develop into
However, by ctrltivating these ľelations before, during and after the project' a 'sleepil-lg' Complement of the contractoťs product competitors
relationship can be woken up again ir.l connection with a new project (Hadjikhani, range Quality problems of outsourced products can
1.996). New ideas for product innovation can be harm the business of the contractor
carried over from the subcontractor Assistance to the subcontractor may increase
Financing a project is a key problern for the seller as well as the buyer. The pľoject's size the costs of the whole operation
and the time used for planniĺ-lg and implementation result in finarrcial demands that make
it necessary to rlse external sources of finance. In this connection, the following main seg- Subcontractor (seller) Access to new export markets because of Risk of becoming dependent on the
the internationalization of the contractor contractor because of expanding production
menrs can be distinguishecl. The segments arise from differences in the source of financing
(especially relevant for the so-called late capacity and concurrent overseas expansion
for the pľojects: starters) of sales and marketing activities in order to
r Pl:ojects whete ĺnĺiltilcłterdlorłdniz(łtiolts, suclr as the'!íorld Bank or ľegional develop- Exploits scale economies (lower cost per
meet the demands of the contractor

ment banks' aľe a primary soLlľce of finance . unit) through better capacity utilization
o Proiects where bilĺłteralorgĺłnizatiorrs eÍe a prinrary or essential source of finance. Learns product technology of the contractor
. Projects where a gotlerĺullcĺĺtiłlstittltion acts as buyer. Tlris was normal in the comnrarrd LeaÍns marketing practices of the contractor
economies, wheľe governmel1t cotnpxllics acted as btrycrs. However, it can also be found
in liberal economies, e.g. in connection with the development of social infrastructure or
the building of a bľic1ge.
o Projects where a pritlate persoil or firĺĺl'acts as buyer' such as when Unilever builcls a
factory in Vietnam for the pľoduction of ice'cream.
Case Study 13.1
For łarge'scale projects' suclr as a new airport, tlreľe may be many partners ŕoľming a con-
ARM: challenging lntel in the world market of computer chips
sortiunl' involving the concept of a 'leacler firm', but with each paf tner uncleľtaking firranc-
il-lg, organization, supervision anĺl/or constructioll, etc. of a part of the project on the basis
c'f ľheir speciŕic cxpcrtisc.
ARM Limited ([Link]) is the leading pro- South-east Asia and lndia. lt is headquartered in
Organizing export projects involves establishing an interaction between different firms
from the '\X/esr, on rhe one sicle , and firms and authorities typically from [Link] coun- vider of embedded microprocessor architecture Cambridge, in the UK.
tries, on the other. Creating or [Link] an organization that is able to function under these with commanding market share in everything from
conclitions is a precondition of project marketing. mobile devices to sensors. ARM provides leading
microprocessor intellectual property (lP) and sup-
porting technology including physical lP, system
lP, graphic processors, design tools and software
13.9 Summary to a massive ecosystem of partners that in turn
develop and support a broad range of industrial
and consumer products. ARM licenses and sells its
This chapter has analysecl the buyer-seller relationship from different angles in the interna- technology and products to international electron-
tionalized environment. The advantages and disadvarrtages ŕoľ the contractor and subcolr- ics companies, which in turn manufacture, market
tractoľ of entering into a ĺelati<lnslrip are sttmmarized in Table 13.2. and sell microprocessors, application-specific inte-
The project export situation differs from the 'normal' buyeľ-seller relationship in the grated circuits (ASlCs) and application-specific
following ways: standard processors (ASSPs) based on ARM's
soUŕce: Kristoffer TrippIaarlAlamy Stock Photo.
. The buying decision process often [Link] national and international development orga- technology to systems companies for incorpora-
nizations. This often ľesults in very buľeaucratic selection of subcontractors. tion into a wide variety of end products. The com- ARM was established in 1990 as a result of col-
o Financing of the project is a key pľoblem. pany primarily operates in the UK, the US, Europe, laboration between Acorn and Apple Computer, to
 422 Part lll Market entry strategies
chapter 13 rnternationar sourcing decisions and the
rore of the subsupprier 423
develop a commercial reduced instruction
set comput_ Low-power processors are idealfor Figure 1 The business models of ARM and lntel
ĺn9 (RlsC) processor. VLSl Technology soon became an
small, battery-operated products
investor in ARM. ln 1gg.l, the company introduced its
first embeddable RISC core, the ARM6 solution. For products such as desktop computers, which
are
Cirrus Logic and Texas lnstruments licensed ARM physically large and mains-operated, the power The ARM business model
con_
technology and Nippon lnvestment and Finance sumption of processors is not a very important design
Semiconductor
became ARM's fourth investor and introduced the consideration. Thus ClSC processors remain domĺnant Access to a OEMs
companies/
ARMT core in 1993. in the desktop pC market, even though their very partners
fast Licensing out
- Examples:
ln 1994, the company experienced international clock speeds and very high transistor counts lead
to Examples: -Samsung
expansion, when Samsung and AKM (Asahi Kasei high power consumption and the need for large heat ARM - Nvidia Sell their ARM- -UMC
Microsystems) licensed its technology. ln the same sinks to ensure that excess heat is safely dissipated. -Broadcom based chĺps to -TSMC
year, it opened offĺces in the US (Los Gatos, Cal- For products which must be physically small and Uj-front licencefee -Cisco Systems OEMS which - ST Erĺcsson
-Texas lnstruments manufacture
ifornia) and Japan (Tokyo), also introducing the battery-operated, processor power consumption is consumer -sMrc
-Qualcomm -HTC
ARM7500'system chip' for multimedia applications a critically important design factor. A key factor in electronics, e.g.
-Samsung smartphones
ln 2017 ARM had 30 offices around the world, ARM's success was the recognition by the company
including design centres in Chĺna, Taiwan, France, and its customers that its RISC processor designs Boyalty fees
The lntel business model
lndia, Sweden and the US. offered significant computational capabilĺties with
low electrĺcal power consumption. OEMs
What is a mlcroprocessor (,chip,)? The key to ARM's business model is that it ofters its Exatnples:
manufacturing customers access to its designs, rather (PC manufacturers)
Microprocessors are found at the heart of many
than making silicon chips itself, which is lntel,s busi_ - Hewlett-Packard
electronic systems. They are semiconductor devices lntel
ness model. When producing a processor chip, (accounted for
capable of interacting with other components of the the 19% oÍ lntel's net
design phase can be separated from the physical fab_
system, such as memory, disk drĺves, keyboards, revenue in 201 1)
rication phase. Design can be completed largely with
and so on, either directly or via intermediate devices - Dell (accounted
('chip sets'). The processor coordinates the software, and therefore needs little capital áxpenoĺ- Íor 15Yo of lntel's
function_ ture compared with establishing a fabrication facility. revenue in 20'ĺ 1)
ing of these devices and manipulates digital data.
A company like lntel would invest approximately
Typically, the processor performs various proce_ US$
1 billion in setting up a new production
dures on data stored in the memory or received from facility.
peripheral devices, and transfers the results The high up-front outlay and running costs
to the associated with advanced semĺconductor manu-
appropriate locations. For example, a processor can For the last 30 years or so, the processor industry products, and the number of processors per product
compress a file by copying data from RAM, carrying
facturing translate into high entry barriers to this has been dominated by the race to create even has also increased.
industry. This means that it is difficult to challenge more powerful chips for servers and pCs. lntel is
out a compression algorithm and then copying The difference between the two companies regard_
the lntel, which is vertically integrated from initial the undisputed leader in this market, having inno_
resulting data to a disk drive. con_ ing size, turnover and profits is shown in Table.l.
cept, through design, to production (see Figure 1). vated aggressively over the years while simulta_
ln order to provide this level of ,intelligence,, a ln the world of computer chips, there are essen_
processor executes programs ultimately Therefore, ARM uses a different model. lt confĺnes neously bringing down the prices. processors can
written by tially two competing architectures: lntel xg6 chips
itself to designing RISC processor cores. lt then now be found in a massive array of applications and
a human programmer. A processor of a given
design offers and their compatibles, which dominate the pC mar_
this intellectual propeĄ to its chip manufacturer
has a specific instruction set. This is a set of the cus- ketplace; and ARM RISC chips and their compatibles,
very tomers. Revenues are generated from (see Figure
logical, arithmetical and other operations that the 1): which dominate the smaller but fast-growing mobile
devĺce can perform in a single step. o Ĺlcence ŕees. The fee is charged ĺn exchange for giving Table 1 Comparison of ARM and lntel,s key
ln order to execute the program, the processor the customer access to ARM's design. Lĺcence fees financial figures, 2017
steps through the sequence of instructions at a rate are set at a level desĺgned to recover ARM's devel-
determined by its clock. This is a device that provides opment costs. Having paid the fee, each customer
Key indicators ARM lntel
a steady stream of timing pulses at a rate of any_ then integrates ARM's ĺP into its own chip design, (2o'.t7)
a (million US$) (million US$)
where between one millĺon and several billion per process that typically takes three to four years.
second. . Royalties. For each chip incorporating ARM,s lp Net revenue 1,806 62,BOO
The power consumptĺon of a processor depends that is shipped, the manufacturer pays a small
Net profit after 191 9,600
on its clock speed, its power supply voltage and royalty. The size of the royalty is scaled to the taxes
the number of transistors it contains. Becauie RISC price of the physical processor chip. lt is
typically
architectures (whĺch ARM uses)can be implemented less than $1 per chip, but the high volume at Number of 6,250 106,000
in silicon with far fewer transistors than CISC employees
archi_ which chips are manufactured and the possĺbility
tectures (which lntel uses), they tend to consume that a design can be in production foi 20 years
far Source: based on financial reports 2017 from Arm ([Link].
less power in operation. mean that this is a significant revenue stream. com) and tntel ([Link]).
r
424 Part lll Market entry strategies chapter 13 lnternational sourcing decisions and the role of the subsupplier 425

devices sector. What makes this interesting is that ARM designs technology that ensures energy-ef- base of licences. ln 2014 ARM signed a record 163 ARM's market positlon in2017
lntel and ARM do not simply compete on price and ficient, high-performance chips and system designs. processor licences, taking the licence base to nearly
technical specifications; they also compete on busi- A processor design can take two to three years to 1,198 licences with 389 semiconductor companies.
ln 2017 the production of chips based on ARM's
ness model, application models and perception and develop. ln most years, ARM introduces two to three technology was 21 billion, which results in a 'market
relationships with the industry. new processors with a range of capabilities making ARM's development in the smartphone share' for ARM's technology platform of about 39
per cent, up from 35 per cent in 2013. ARM has a spe-
ln addition to both companies serving different them suitable for different end-markets. industry
types of products and needs, they also operate vastly The companies that choose ARM's technology cial strong position (80-90 per cent market share) in
pay an up-front licence fee to gain access to a ARM's first mobile phone design win was in a Nokia the small electronic devices, such as smartphones,
different business models. lntel designs, manufactures
handset in the mid-1990s. This was one of the smartwatches, and tablets. ln the other industries
and sells chips directly to the marketer of the product, design. They incorporate the ARM technology into
world's first 2G mobile phones. The software run- like home (e.9. PCs and digital TVs) and enterprise
one step before the final consumer. The benefit of this their chip - a process that often takes three to four
ning on the ARM processor in this phone managed systems (desktop PCs, laptops and network sys-
is that, should there be a problem with a processor, the years. When the chip starts to ship, ARM receives a
both the protocol-stack and the user interface. This tems) the ARM has a much weaker position. ln these
company can quickly respond and fix its supply chaĺn, royalty on every chip that uses the design. Typically
user interface gradually became more sophisticated industries lntel is more dominating. ARM experi-
from design to production. lntel is famously known the royalty is based on the price of the chip. ARM
and engaging for the phone's users, changing the ences increasing revenues in new technologies like
to be incredibly good at doing this, with a quick turn- expects to recoup a chip's development costs from
around of its designed chips to the end user. How- the sale of the first 10 licences.
configuration of the phone, running games and in automotives, robotics, drones, loT, home surveil-
managing contact lists. lance, virtual reality, and shipping and logistics.
ever the problem wĺth this structure is that the original Each ARM processor and physical lP design is suit-
ln low-cost mobile phones there is one chip per
equipment manufacturers (OEMs) cannot customize able for a wide range of end applications and so can
phone. ln the new smartphones there are often many
the chips for their own purposes, unlike ARM chips. be reused in different chip families addressing mul- Questions
more. The average number of ARM-based chips in a
ARM simply designs its chips and then sells the tiple markets. Each new chip family generates a new 1. Explain the role of ARM as a supplier in the 'chip'
phone went up from 1.5 in 2006, to 2.6 in 2011 and to
design to the manufacturer for licence and royalty stream of royalties. An ARM design may be used in value chain.
nearly 5 in 2017. A smartphone can, in the best case,
fees. This means that ARM can generate large rev- many different chips and may ship for over 20 years.
bring the company nine times more royalties as a 2. What are the strengths and the weaknesses of
enues without having to make huge capital invest- The majority of ARM's revenues are earned from
basic phone, a tablet computer 13 times more. ARM's business model compared with lntel?
ments, and enables manufacturers to customize semiconductor companies based all over the world.
The price of the chip varies a great deal, but if we 3. ln which end-user application market should ARM
their chips to certain specifications. These companies sell their ARM-based chips to OEMs
take an average price of US$5, the typical royalty per strengthen its relationships to potential partners,
ARM processor-based chips are extremely building consumer electronics, which are also based in
:
power-efficient. lntel chlps, on the other hand, are chip will be 2 per cent 10 cents. and how?
all major economies. The OEMs sell their products to
powerful but consume more power. Both companies consumers and enterprises in every country. ARM's roy-
Sources: based on [Link]; [Link]; and other publicly available data
are slowly creeping into each other's territory. lntel alĘ revenues are derived from the chips in these oEM
is now putting serious effort into creating energy- products, and ARM therefore benefits from the growth
efficient chips for mobile devices, and ARM is making in all economies and countries around the world.
inroads into lntel's core business territory by making Demand for consumer products has been grow-
ARM processors for servers. The reasoning behind ing rapidly, especially in emerging markets such as
this is that servers that are meant for the internet lndia and China.
only require simple functions and therefore do not
need the heavy processing power of lntel's x86 infra-
structure. This means that they use less energy and
Why do semi(onductor companies buy Case Study 13.2
do not require as much cooling, which means that
ARM technology instead of developing Bosch lndego: how to build B2B and B2C relationships in a new global
it themselves? product market - robotic lawnmowers
the servers can be made smaller.
Both companies have their own very complex It is simply too expensive for the semiconductor
relationships with manufacturers and OEMs. More- companies' R&D teams to develop the technology
over this is the biggest strength and the biggest themselves. Each company would need to spend Before the traditional lawnmower, people used Types of lawnmowers
downfall of the non-commoditized portion of the over $100 million every year to reproduce what ARM scythes to cut the grass. ln 1827, the English engi-
technology industry. Although building strong does. This represents more than $20 billion of annual There are hundreds of lawnmower models on the
neer Edwin Beard Budding invented the first lawn-
relationships with manufacturers and end users is costs for the industry. By designing once and licens- market. To get an overview they can be categorized
mower. Colonel Edwin George manufactured the
important, it also creates a brand image that is ing many times, ARM spreads the R&D costs over the into five general groups (see Figure 1):
first gasoline-powered mower in 1919. The Austra-
difficult to change. For lnteĺ, this benefit/curse is whole industry, making digital electronics cheaper. lian company Victa started production of the first 1. Reel(cylinder/: normally pushed by hand or drawn
having the reputation of creating the most pow- Every licence represents the opportunity for a rotary mowers in 1952. After that several models by a small tractor on large lawns.
erful processors but at the cost of high-energy future royalty stream. ln recent years ARM has added were made. The latest, the robotic lawnmower, 2. Electrical: normally based on the rotary principle.
usage. over 100 processor licences per year to its exĺsting entered the market in the year 1995 (by Husqvarna).