Tobacco and Gray Market Activity

The price of smoking is going up. As the federal government increases taxes on tobacco products and tobacco companies raise prices to pay for state-initiated settlements, consumers will see the price of their favorite brands rise. In January 2000 federal taxes on tobacco were raised by 10 cents to 34 cents a pack, and various states have increased their taxes on tobacco as well.

 

 

A settlement in 1998 in which the tobacco companies agreed to pay over $200 billion to state governments was designed in theory to compensate state governments for increased health costs, reduce consumption of tobacco, and penalize the tobacco companies for their actions.

Because the foreign markets in which the American tobacco companies sell their products are competitive, domestic consumers will mainly pay the additional costs of higher taxes, litigation, and settlement expenses. Such consumers have seen prices rise by about 70 cents a pack, and higher prices are expected. The price charged for exported tobacco has remained basically unchanged because the American tobacco companies face stiff competition from foreign producers that were not affected by the court settlement or federal U.S. taxes.

When international companies sell in multiple markets and charge different prices, there is the potential that some of the cheaper products will find their way back into the exporting country. This market is referred to as the "gray market" and is more likely to develop when the price differentials are large and the product can be easily transported. Small price differences and products that are hard to ship do not lend themselves as well to gray market activity.

With the price differential increasing between American markets and foreign markets, more cigarettes exported from the United States are finding their way back into the United States. It is estimated that 5 percent of the U.S. tobacco market is now gray, and that proportion may rise even further as the effect of new taxes raises domestic prices even further, According to a spokesman for the Brown & Williamson Tobacco Company, "When you raise taxes, you don't change smoking patterns, just buying patterns." Increasing taxation has created a financial incentive for middlemen to redirect the channel of distribution and sell products intended for export back into the United States.

 

1. Find the English equivalents for the following words and expressions:

рынок конкурирующих продавцов, различия в ценах, “серый” рынок,

цены внутреннего рынка, материальный стимул, посредник, производитель, налогообложение, отечественные потребители, дополнительные расходы, канал распределения;

повысить налоги, сталкиваться с жесткой конкуренцией, сократить потребление, назначать цену, повышать цены, компенсировать что-либо.

2. Translate into Russian:

to increase taxes, to raise prices, to compensate for something, to reduce consumption, to charge a price, to face stiff competition;

competitive market, domestic consumers, price differentials, gray market,

domestic prices, taxation, financial incentive, middleman, distribution channel, additional costs, producer;

 

3. Match the following:

1. additional a. incentive

2. competitive b. taxes

3. domestic c. differentials

4. financial d. consumers

5. increased e. market

6. price f. costs

 

4. Say whether these statements are true or false:

1. The price of smoking is going up because of the need to increase health costs.

2. The gray market will exist as long as there are large price differentials in multiple markets.

3. Middlemen are the ones who benefit most from increasing taxation.

 

5. Discuss the following questions:

1. Which parties in this situation benefit and which parties are harmed by this gray market activity?

2. What can be done to reduce or eliminate this problem?

 

Think of some more questions to the text

 

 

Case 6

 

TONIA MOTORBIKES:

A CASE OF CHINESE PIRACY

Tonia Motorbikes is the third largest manufacturer of motorized scooters in Japan. The company sells its product, a 125cc vehicle in Japan, Taiwan, Korea, Vietnam, and other Asian markets.

In an effort to reduce labor costs and to penetrate the Chinese market, Kenichi Hoskia, CEO of Tonia, decided to establish a manufacturing operation on the Chinese mainland. Tonia invested $17 million in a state-of-the-art production facility. The Chinese government had insisted on Tonia making a major commitment in order to enter China, including the establishment of a facility equipped with Tonia's most advanced manufacturing technology.

Tonia formed a joint venture with China's Happy Motors, a large, state-owned motorbike manufacturer. Tonia was required to share its technology secrets with Happy as a condition of the joint venture agreement. At first Kenichi resisted; however, the Chinese government assured him that it was in the best interests of both partners to keep the information secret. The Chinese government guaranteed that no one outside the partnership would be allowed access to any of Tonia's trade secrets. Since this guarantee came from high levels of the Chinese government, Kenichi felt more comfortable letting Happy Motors gain insight into the recent advances Tonia had made in small engine design. The thought of a market with 1.25 billion consumers was also a factor in his decision to share critical trade information.

After only five months of producing motorbikes in China, a Tonia employee noticed the Tonia 125 model being sold over the Internet for $1200. Since the machine sold for $2,400 in Japan and $1,600 in China, the employee questioned how a new bike could be sold so cheaply. Further investigation led Tonia to Yiwu, China, where the seller was located, ft was learned that Yiwu is the counterfeit capital of China—a place where counterfeiters from all over the country come to distribute their goods. Upon investigation, Tonia employees learned that the motorbikes being sold under the Tonia brand name were indeed counterfeit products.

With the help of an investigator in China, Tonia learned that not only were counterfeit bikes being sold in China, but that they were being exported to other Asian countries and some were even being exported to the United States and Europe. It was obvious to Kenichi that someone at Happy Motors had sold Tonia's technology. Not only was Tonia losing sales due to the counterfeit goods, but Kenichi also worried that if the quality of the product were inferior, consumers in important markets would be lost for future sales. Kenichi feared that if this situation were left unchecked, the potential existed to ruin the strong brand name Tonia had established.

Kenichi continued to investigate the source of the counterfeited goods but

was unable to determine where the products were being manufactured.

Rumor had it that a former Taiwanese counterfeiter, who was expelled from Taiwan when the government cracked down on product piracy, had moved to the Guangdong province of China and was manufacturing Tonia brand scooters there. It was also rumored that this individual had connections with Chinese government officials; however, there was no proof that these rumors were true.

After six months of investigation, Kenichi still could not determine the source of the counterfeit bikes and it was becoming clear that further investigation would probably not reveal the source. Kenichi did learn that, regardless of official government policy, product piracy was rampant in China. Weak laws, poor enforcement, and light penalties made counterfeiting a very lucrative and attractive business in China. Kenichi sat in his office and pondered his next move.

 

1. Find the English equivalents for the following words and expressions:

сокращать затраты на рабочую силу, создать совместное предприятие, “терять” сбыт, проникать на рынок, создать производственное предприятие, делиться секретами технологий;

производственные мощности, худшего качества, доходный бизнес, контрафактный товар, работник, последние достижения, передовая технология, производитель, потребитель, продавец;

2. Translate into Russian:

manufacturer, production facility, advanced technology, recent advances, employee, seller, counterfeit(ed) goods, inferior quality, lucrative business, consumer;

to reduce labor costs, to penetrate a market, to establish a manufacturing operation, to form a joint venture, to share technology secrets, to lose sales;

 

3. Match the following:

1. labor a. business

2. strong b. quality

3. production c. brand name

4. joint d. advances

5. manufacturing e. costs

6. inferior f. facility

7. lucrative g. operation

8. recent h. venture

 

 

4. Say whether these statements are true or false:

1. CEO of Tonia thought it wrong to loose a market with 1.25 bln. consumers and that is why he agreed to the condition of the joint venture agreement.

2. It’s quite common for state-owned enterprises in China to engage in product piracy.

3. Chinese Government made every effort not to allow anyone access to any of Tonia’s trade secrets.

4. Kenichi’s next step was to end the partnership and pull out of China.

 

5. Discuss the following questions:

1. Do you find it conceivable that state-owned enterprises in China are engaging in product piracy?

2. What should Kenichi do about this problem?

 

Case 7

 

PEGASUS FOOTWEAR:

TRAMPLING ON RELIGION

Pegasus Footwear was an international manufacturer, well known throughout the world for its product design and marketing savvy. Products were designed at company headquarters in the United States, and Pegasus used an extensive system of contract manufacturing to produce a variety of mostly athletic shoes sold throughout the world.

Charles Clark, or C.C., was the regional manager in charge of Pegasus operations in Southeast Asia. Clark, a British citizen, was responsible for manufacturing and marketing in the entire region. C.C. had been with Pegasus for 10 years and was recently promoted to his present position. The position was seen as a very important one, since most of the contract manufacturing for Pegasus occurred in this region of the world. C.C. was a graduate of Oxford University and began work at corporate headquarters in Los Angeles shortly after receiving his M.B.A. from Stanford. His management style was often described as visionary; however, some of the local managers felt that C.C. possessed a somewhat condescending attitude toward employees from less-developed countries.

C.C. and his team in Southeast Asia were considered very successful by top management back at corporate headquarters. As a result, C.C. earned an unusual degree of autonomy for his group. C.C. oversaw the manufacturing

operations in the region (which employed over 1,000 people) and was primarily responsible for the marketing of products that were manufactured in the region.

Most of the products, however, were sold in the United States and Europe, and responsibility for marketing in these regions was held by the respective regional managers. All product design was created in the Los Angeles office.

When C.C. arrived in his office on Tuesday morning, he received word of a problem. Storeowners in Indonesia were reporting problems with a particular shoe that had recently been designed by Pegasus.

 

Figure 1

Pegasus Shoe Design

 

The shoe called AirBurner was upsetting Muslim consumers who objected to the design found on the outer heel of the shoe. The design (Figure 1), which spelled "air," was written to resemble fire, but some consumers felt that the design spelled "Allah" in Arabic (Figure 2).

 

Figure 2

 

Since the shoe is considered by many to be the dirtiest part of clothing, it was considered a major insult to find the word for

Allah, or God written there. Storeowners tried to explain that the word was not "Allah" but rather "air," written in flaming letters. Most consumers were not satisfied with the explanation.

C.C. asked for an accounting of the number of shoes produced with the design and was told that 100,000 pairs had already been produced, and that more were being made. One-fourth were to be sold in his region and the rest were on sale in other parts of the world. Although each shoe had a direct cost of production to Pegasus of $6.75 and a recall of all 25,000 pairs in his region would not significantly affect profitability, CC decided not to recall the controversial shoes. He stated: "Pegasus is proud of the fact that we have never had a product recall and we don't intend to start one with this silly design issue. The design clearly spells the word air and it should not be an insult to anyone." C.C. felt that the whole issue would "blow over" in a few days and that a recall would just tarnish the image of Pegasus Footwear.

The problem did not go away, and on Thursday C.C. received an urgent call from an employee in Indonesia who informed him that angry crowds were damaging stores that carried the shoe. Newspapers in the country had reported the story and implied that the product was part of an America plot to discredit and insult Muslims. An international Muslim organization was now calling for a worldwide boycott of all Pegasus products and there was fear that the problem would spread to other countries with significant Muslim populations. C.C. had just been told that the CEO of Pegasus Footwear was waiting on the telephone to speak with him and that she was quite upset about the whole affair.

 

1. Find the English equivalents for the following words and expressions:

прибыльность, стиль руководства, производственные операции, высшее звено управления, потребитель, стоимость производства, должность, изъятие товара из продажи, производство, работник, прямые затраты;

нанимать на работу, производить, работать в компании, призвать к

бойкоту, быть в продаже, получить повышение (в должности), управлять производственной деятельностью, влиять на рентабельность, отвечать за что-либо.

 

2. Translate into Russian:

manufacturing, position, employee, top management, consumer, cost of production, direct costs, profitability, management style, manufacturing operations, product recall, top management;

to be in charge of (to be responsible for), to be promoted, to employ, to manufacture (to produce), to be on sale, to call for a boycott, to be with a company, to oversee manufacturing operations, to affect profitability.

 

3. Match the following:

1. contract a. costs

2. management b. manufacturing

3. manufacturing c. operations

4. direct d. style

 

 

4. Say whether these statements are true or false:

1. C.C. had no special training in business, but was appointed the regional manager due to his management style being visionary.

2. Storeowners succeeded in persuading consumers that the design clearly spelled “air”.

3. The whole affair sparked mass protests across the country and the event got full coverage in the local newspapers.

4. The problem did not go away and so C.C. took a decision to recall the product.

 

5. Discuss the following questions:

 

1. What went wrong in this situation?

2. Do you think that an early recall of the product would have headed
off the problem?

3. What would you recommend to C.C. and Pegasus?