2-1 The Not-So-Wonderful World of EuroDisney—Things Are Better Now at Disneyland Resort Paris

2-2 Cultural Norms, Fair & Lovely, and Advertising

2-3 Starnes-Brenner Machine Tool Company: To Bribe or Not to Bribe?

2-4 Ethics and Airbus

2-5 Coping with Corruption in Trading with Vietnam

2-6 When International Buyers and Sellers Disagree

2-7 McDonald’s and Obesity

2-8 Ultrasound Machines, India, China, and a Skewed Sex Ratio

2-9 Coping with Piracy in China

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The Not-So-Wonderful World of EuroDisney*—Things Are Better Now at Disneyland Resort Paris

CASE 2-1

BONJOUR, MICKEY! In April 1992, EuroDisney SCA opened its doors to European visi- tors. Located by the river Marne some 20 miles east of Paris, it was designed to be the biggest and most lavish theme park that Walt Disney Company (Disney) had built to date—bigger than Disneyland in Anaheim, California; Disneyworld in Orlando, Florida; and Tokyo Disneyland in Japan. Much to Disney management’s surprise, Europeans failed to “go goofy” over Mickey, unlike their Japanese counterparts. Between 1990 and early 1992, some 14 million people had visited Tokyo Disneyland, with three-quarters being repeat visitors. A family of four staying overnight at a nearby hotel would easily spend $600 on a visit to the park. In contrast, at EuroDisney, families were reluc- tant to spend the $280 a day needed to enjoy the attractions of the park, including les hamburgers and les milkshakes. Staying over- night was out of the question for many because hotel rooms were so high priced. For example, prices ranged from $110 to $380 a night at the Newport Bay Club, the largest of EuroDisney’s six new hotels and one of the biggest in Europe. In comparison, a room in a top hotel in Paris cost between $340 and $380 a night. Financial losses became so massive at EuroDisney that the president had to structure a rescue package to put EuroDisney back on firm financial ground. Many French bankers questioned the initial financing, but the Disney response was that their views reflected the cautious, Old World thinking of Europeans who did not understand U.S.-style free market financing. After some acri- monious dealings with French banks, a two-year financial plan was negotiated. Disney management rapidly revised its marketing plan and introduced strategic and tactical changes in the hope of “doing it right” this time.

A Real Estate Dream Come True The Paris loca- tion was chosen over 200 other potential sites stretching from Portugal through Spain, France, Italy, and into Greece. Spain thought it had the strongest bid based on its yearlong, temperate, and sunny Mediterranean climate, but insufficient acreage of land was available for development around Barcelona. In the end, the French government’s generous incentives, together with impressive data on regional demographics, swayed Disney management to choose the Paris location. It was calculated that some 310 million people in Europe live within two hours’ air travel of EuroDisney, and 17 million could reach the park within two hours by car—better demographics than at any other Disney site. Pessimistic talk about the dismal winter weather of northern France was countered with references to the success of Tokyo Disneyland, where resolute visitors brave cold winds and snow to enjoy their piece of Americana. Furthermore, it was argued, Paris is Europe’s most-popular city destination among tourists of all nationalities.

Spills and Thrills Disney had projected that the new theme park would attract 11 million visitors and generate over $100 million in operating earnings during the first year of operation. By summer 1994, EuroDisney had lost more than $900 million since opening. Attendance reached only 9.2 million in 1992, and visitors spent 12 percent less on purchases than the estimated $33 per head. If tourists were not flocking to taste the thrills of the new Euro- Disney, where were they going for their summer vacations in 1992? Ironically enough, an unforeseen combination of transatlantic air- fare wars and currency movements resulted in a trip to Disneyworld in Orlando being cheaper than a trip to Paris, with guaranteed good weather and beautiful Florida beaches within easy reach. EuroDisney management took steps to rectify immediate prob- lems in 1992 by cutting rates at two hotels up to 25 percent, intro- ducing some cheaper meals at restaurants, and launching a Paris ad blitz that proclaimed “California is only 20 miles from Paris.”

An American Icon One of the most worrying aspects of EuroDisney’s first year was that French visitors stayed away; they had been expected to make up 50 percent of the attendance figures. A park services consulting firm framed the problem in these words: “The French see EuroDisney as American imperialism—plastics at its worst.” The well-known, sentimental Japanese attachment to Disney characters contrasted starkly with the unexpected and widespread French scorn for American fairy-tale characters. French culture has its own lovable cartoon characters such as Astérix, the helmeted, pint-sized Gallic warrior, who has a theme park located near EuroDisney. Hostility among the French people to the whole “Disney idea” had surfaced early in the planning of the new project. Paris theater director Ariane Mnouchkine became famous for her description of EuroDisney as “a cultural Chernobyl.” In fall 1989, during a visit to Paris, French Communists pelted Michael Eisner with eggs. The joke going around at the time was, “For EuroDisney to adapt prop- erly to France, all seven of Snow White’s dwarfs should be named Grumpy (Grincheux).” Early advertising by EuroDisney seemed to aggravate local French sentiment by emphasizing glitz and size rather than the variety of rides and attractions. Committed to maintaining Disney’s reputation for quality in everything, more detail was built into EuroDisney. For example, the centerpiece castle in the Magic Kingdom had to be bigger and fancier than in the other parks. Expensive trams were built along a lake to take guests from the hotels to the park, but visitors preferred walking. Total park construction costs were estimated at FFr 14 billion ($2.37 billion) in 1989 but rose by $340 million to FFr 16 billion as a result of all these add-ons. Hotel construction costs alone rose from an esti- mated FFr 3.4 billion to FFr 5.7 billion.

*The Official name has been changed from “EuroDisney” to “Disneyland Resort Paris.”

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Cases 2 The Cultural Environment of Global Marketing

EuroDisney and Disney managers unhappily succeeded in alienating many of their counterparts in the government, the banks, the ad agencies, and other concerned organizations. A barnstorming, kick-the-door-down attitude seemed to reign among the U.S. decision makers: “They had a formidable image and con- vinced everyone that if we let them do it their way, we would all have a marvelous adventure.” One former Disney executive voiced the opinion, “We were arrogant—it was like ‘We’re building the Taj Mahal and people will come—on our terms.’ ”

STORM CLOUDS AHEAD Disney and its advisors failed to see signs at the end of the 1980s of the approaching European recession. Other dramatic events included the Gulf War in 1991, which put a heavy brake on vacation travel for the rest of that year. Other external factors that Disney executives have cited were high interest rates and the devaluation of several currencies against the franc. EuroDisney also encoun- tered difficulties with regard to competition—the World’s Fair in Seville and the 1992 Olympics in Barcelona were huge attractions for European tourists. Disney management’s conviction that it knew best was dem- onstrated by its much-trumpeted ban on alcohol in the park. This rule proved insensitive to the local culture, because the French are the world’s biggest consumers of wine. To them a meal without un verre de rouge is unthinkable. Disney relented. It also had to relax its rules on personal grooming of the pro- jected 12,000 cast members, the park employees. Women were allowed to wear redder nail polish than in the United States, but the taboo on men’s facial hair was maintained. “We want the clean-shaven, neat and tidy look,” commented the director of Disney University’s Paris branch, which trains prospective employees in Disney values and culture. EuroDisney’s manage- ment did, however, compromise on the question of pets. Special kennels were built to house visitors’ animals. The thought of leaving a pet at home during vacation is considered irrational by many French people. Plans for further development of EuroDisney after 1992 were ambitious. The initial number of hotel rooms was planned to be 5,200, more than in the entire city of Cannes on the Côte d’Azur. Also planned were shopping malls, apartments, golf courses, and vacation homes. EuroDisney would design and build everything itself, with a view to selling at a profit. As a Disney executive commented, “Disney at various points could have had partners to share the risk, or buy the hotels outright. But it didn’t want to give up the upside.” “From the time they came on, Disney’s Chairman Eisner and President Wells had never made a single misstep, never a mistake, never a failure,” said a former Disney executive. “There was a ten- dency to believe that everything they touched would be perfect.” The incredible growth record fostered this belief. In the seven years before EuroDisney opened, they took the parent company from being a company with $1 billion in revenues to one with $8.5 billion, mainly through internal growth.

Telling and Selling Fairy Tales Mistaken assump- tions by the Disney management team affected construction design, marketing and pricing policies, and park management, as well as initial financing. Disney executives had been erroneously informed that Europeans don’t eat breakfast. Restaurant breakfast service was downsized accordingly, and guess what? “Everybody

showed up for breakfast. We were trying to serve 2,500 breakfasts in a 350-seat restaurant [at some of the hotels]. The lines were horrendous. And they didn’t just want croissants and coffee, they wanted bacon and eggs.” In contrast to Disney’s American parks, where visitors typically stay at least three days, EuroDisney is at most a two-day visit. Energetic visitors need even less time. One analyst claimed to have “done” every EuroDisney ride in just five hours. Typically many guests arrive early in the morning, rush to the park, come back to their hotel late at night, and then check out the next morning before heading back to the park. Vacation customs of Europeans were not taken into consider- ation. Disney executives had optimistically expected that the arrival of their new theme park would cause French parents to take their children out of school in mid-session for a short break. It did not happen unless a public holiday occurred over a weekend. Similarly, Disney expected that the American-style short but more frequent family trips would displace the European tradition of a one-month family vacation, usually taken in August. However, French office and factory schedules remained the same, with their emphasis on an August shutdown. In promoting the new park to visitors, Disney did not stress the entertainment value of a visit to the new theme park; the emphasis was on the size of the park, which “ruined the magic.” To counter this, ads were changed to feature Zorro, a French favorite, Mary Poppins, and Aladdin, star of the huge moneymaking movie success. A print ad campaign at that time featured Aladdin, Cinderella’s castle, and a little girl being invited to enjoy a “magic vacation” at the kingdom where “all dreams come true.” Six new attractions were added in 1994, including the Temple of Peril, Story book Land, and the Nautilus attraction. Donald Duck’s birthday was celebrated on June 9—all in hopes of positioning EuroDisney as the number 1 European destination of short duration, one to three days. Faced with falling share prices and crisis talk among share- holders, Disney was forced to step forward in late 1993 to rescue the new park. Disney announced that it would fund EuroDisney until a financial restructuring could be worked out with lenders. However, it was made clear by the parent company, Disney, that it “was not writing a blank check.” In June 1994, EuroDisney received a new lifeline when a mem- ber of the Saudi royal family agreed to invest up to $500 million for a 24 percent stake in the park. The prince has an established reputation in world markets as a “bottom-fisher,” buying into potentially viable operations during crises when share prices are low. The prince’s plans included a $100 million convention center at EuroDisney. One of the few pieces of good news about EuroDisney is that its convention business exceeded expectations from the beginning.

MANAGEMENT AND NAME CHANGES Frenchman Philippe Bourguignon took over at EuroDisney as CEO in 1993 and was able to navigate the theme park back to prof- itability. He was instrumental in the negotiations with the firm’s bankers, cutting a deal that he credits largely for bringing the park back into the black. Perhaps more important to the long-run success of the ven- ture were his changes in marketing. The pan-European approach to marketing was dumped, and national markets were targeted separately. This new localization took into account the differing

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tourists’ habits around the continent. Separate marketing offices were opened in London, Frankfurt, Milan, Brussels, Amsterdam, and Madrid, and each was charged with tailoring advertising and packages to its own market. Prices were cut by 20 percent for park admission and 30 percent for some hotel room rates. Special pro- motions were also run for the winter months. The central theme of the new marketing and operations approach is that people visit the park for an “authentic” Disney day out. They may not be completely sure what that means, except that it entails something American. This approach is reflected in the transformation of the park’s name. The “Euro” in EuroDisney was first shrunk in the logo, and the word “land” added. Then in October 1994 the “Euro” was eliminated completely; the park was next called Disneyland Paris; and now Disneyland Resort Paris. In 1996, Disneyland Paris became France’s most visited tourist attraction, ahead of both the Louvre Art Museum and the Eiffel Tower. In that year, 11.7 million visitors (a 9 percent increase from the previous year) allowed the park to report another profit.

THEME PARK EXPANSION IN THE TWENTY-FIRST CENTURY With the recovery of Disneyland Paris, Disney embarked on an ambitious growth plan. In 2001 the California Adventure Park was added to the Anaheim complex at a cost of $1.4 billion, and Walt Disney Studios Theme Park was added to Disneyland Paris. Through agreements with foreign partners, Disney opened Disney-Sea in Tokyo and Disneyland Hong Kong in 2006, and plans are underway for a theme park in Shanghai scheduled for 2016. A decade after being slammed for its alleged ignorance of European ways with EuroDisney, Disney is trying to prove its got- ten things right the second time around. The new movie-themed park, Walt Disney Studios adjacent to Disneyland Paris, is designed to be a tribute to moviemaking—but not just the Hollywood kind. The Walt Disney Studios blends Disney entertainment and attrac- tions with the history and culture of European film since French camera-makers helped invent the motion picture. The park’s gen- eral layout is modeled after an old Hollywood studio complex, and some of the rides and shows are near replicas of Disney’s first film park, Disney-MGM Studios. Rather than celebrating the history of U.S. Disney characters, the characters in the new theme park speak six different languages. A big stunt show features cars and motorcycles that race through a village modeled after the French resort town of St. Tropez. Small details reflect the cultural lessons learned. “We made sure that all our food venues have covered seating,” recalling that, when EuroDisney first opened, the open-air restaurants offered no protection from the rainy weather that assails the park for long stretches of the year. On the food front, EuroDisney offered only a French sausage, drawing complaints from the English, Germans, Italians, and everyone else about why their local sausages weren’t available. This time around, the park caters to the multiple indigenous cul- tures throughout Europe—which includes a wider selection of sausages. Unlike Disney’s attitude with their first park in France, “Now we realize that our guests need to be welcomed on the basis of their own culture and travel habits,” says Disneyland Paris Chief Executive. Disneyland Paris today is Europe’s biggest tourist attraction—even more popular than the Eiffel Tower—a turnaround that showed the park operators’ ability to learn from their mistakes.

The root of Disney’s problems in EuroDisney may be found in the tremendous success of Japan’s Disneyland. The Tokyo Park was a success from the first day, and it has been visited by millions of Japanese who wanted to capture what they perceived as the ulti- mate U.S entertainment experience. Disney took the entire U.S. theme park and transplanted it in Japan. It worked because of the Japanese attachment to Disney characters. Schools have field trips to meet Mickey and his friends to the point that the Disney experience has become ingrained in Japanese life. In the book Disneyland as Holy Land, University of Tokyo professor Masako Notoji wrote: “The opening of Tokyo Disneyland was, in retrospect, the greatest cultural event in Japan during the ‘80s.” With such success, is there any wonder that Disney thought they had the right model when they first went to France? The Tokyo Disney constitutes a very rare case in that the number of visitors has not decreased since the opening.

2005—Bankruptcy Pending In early 2005, Disneyland Paris was on the verge of bankruptcy. The newest park attraction at Disneyland Paris, Walt Disney Studies, featured Hollywood- themed attractions such as a ride called “Armageddon—Special Effects” based on a movie starring Bruce Willis, flopped. Guests said it lacked attractions to justify the entrance price, and oth- ers complained it focused too much on American, rather than European, filmmaking. Disney blames other factors: the post-9/11 tourism slump, strikes in France, and a summer heat wave in 2003. The French government came to the aid of Disneyland Paris with a state-owned bank contribution of around $500 million to save the company from bankruptcy. A new Disneyland Paris CEO, a former Burger King executive, introduced several changes in hopes of bringing the Paris park back from the edge of bankruptcy. To make Disneyland Paris a cheaper vacation destination, the CEO lobbied the government to open up Charles de Gaulle airport to more low-cost airlines. Under his direction, Disneyland Paris created its first original character tai- lored for a European audience: the Halloween-themed “L’Homme Citrouille,” or “Pumpkin Man.” He has also introduced a one-day pass giving visitors access to both parks in place of two separate tickets. He is planning new rides, including the Tower of Terror, and other new attractions. If these changes fail to bring in millions of new visitors, Disney and the French government might once again be forced to consider dramatic measures. Even though French President Jacques Chirac called the spread of American culture an “ecological disaster” and the French gov- ernment imposes quotas on non-French movies to offset the influ- ence of Hollywood and officially discourages the use of English words such as “e-mail,” Disneyland Paris was important to the French economy. In light of France’s 10 percent unemployment at the time, Disneyland Paris is seen as a job-creation success. The company accounted for an estimated 43,000 jobs and its parks attracted over 12 million visitors a year, more than the Louvre Museum and the Eiffel Tower combined. By 2008 Disneyland Paris was experiencing increases in park attendance, and the turn- around appeared to be working.

DISNEY’S GREAT LEAP INTO CHINA Disney’s record with overseas theme parks has been mixed. Tokyo Disneyland is a smash hit with 25 million visitors a year, and Disneyland Paris, opened in 1992, was a financial sinkhole that just now is showing promise of a turnaround. Disney was

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determined not to make the same cultural and management mis- takes in China that had plagued Disneyland Paris. Disney took special steps to make Hong Kong Disneyland cul- turally acceptable. “Disney has learned that they can’t impose the American will—or Disney’s version of it—on another continent.” “They’ve bent over backward to make Hong Kong Disneyland blend in with the surroundings.” “We’ve come at it with an American sensibility, but we still appeal to local tastes,” says one of Hong Kong Disneyland’s landscape architects. Desiring to bring Disneyland Hong Kong into harmony with local customs from the beginning, it was decided to observe feng shui in planning and construction. Feng shui is the practice of arranging objects (such as the internal placement of furniture) to achieve harmony with one’s environment. It is also used for choos- ing a place to live. Proponents claim that feng shui has effects on health, wealth, and personal relationships. The park’s designers brought in a feng shui master who rotated the front gate, repositioned cash registers, and ordered boulders set in key locations to ensure the park’s prosperity. He even chose the park’s “auspicious” opening date. New construction was often begun with a traditional good-luck ceremony featuring a carved suckling pig. Other feng shui influences include the park’s orienta- tion to face water with mountains behind. Feng shui experts also designated “no fire zones” in the kitchens to try to keep the five elements of metal, water, wood, fire, and earth in balance. Along with following feng shui principles, the park’s hotels have no floors that are designated as fourth floors, because 4 is consid- ered an unlucky number in Chinese culture. Furthermore, the open- ing date was set for September 12, 2006, because it was listed as an auspicious date for opening a business in the Chinese almanac. But the park’s success wasn’t a sure thing. The park received more than 5 million visitors in its first year but short of its targeted 5.6 million, and the second year was equally disappointing with attendance dropping nearly 30 percent below forecasts. Many of those who came complained that it was too small and had little to excite those unfamiliar with Disney’s cast of characters. Disneyland is supposed to be “The Happiest Place on Earth,” but Liang Ning isn’t too happy. The engineer brought his family to Disney’s new theme park in Hong Kong from the southern Chinese city of Guangzhou one Saturday in April with high hopes, but by day’s end, he was less than spellbound. “I wanted to forget the world and feel like I was in a fairytale,” he says. Instead, he complains, “it’s just not big enough” and “not very different from the amusement parks we have” in China. Hong Kong Disneyland has only 16 attractions and only one a classic Disney thrill ride, Space Mountain, compared with 52 rides at Disneyland Paris. After the first year’s lackluster beginning, Disney management introduced five new attractions and added “It’s a Small World,” the ride made famous at the flagship Disneyland in Anaheim, California. A variety of other new entertainment offerings were due in 2008. Guests’ lack of knowledge of Disney characters created a special hurdle in China. Until a few years ago, hardly anyone in mainland China knew Mickey Mouse and Donald Duck even existed. Disney characters were banned for nearly 40 years, so knowledge of Disney lore is limited. China was the first market where Disney opened a park in which there had been no long-term relationship with attendees. It was the Chinese consumer who was expected to understand Disney, or so it seemed. Chinese tourists unfamiliar with Disney’s traditional stories were sometimes left bewildered by the Hong Kong park’s attractions.

To compensate for the lack of awareness of Disney characters and create the mystique of a Disney experience, Disney launched numerous marketing initiatives designed to familiarize guests with Disneyland. One of the first buildings upon entering the park exhibits artwork and film footage of Disney history, from the cre- ation of Mickey Mouse through the construction of Hong Kong Disneyland. Tour groups are greeted by a Disney host who intro- duces them to Walt Disney, the park’s attractions, characters, and other background information. For example, the character Buzz Lightyear explains Toy Story and the Buzz Lightyear Astro Blaster attraction. Even though there were complaints about the park size and the unfamiliarity of Disney characters, there were unique features built with the Asian guest in mind that have proved to be very popular. Fantasy Gardens, one of the park’s original features, was designed to appeal to guests from Hong Kong and mainland China who love to take pictures. At five gazebos, photo-happy tourists can always find Mickey, Minnie, and other popular characters who will sign autographs and pose for photos and videos. Mulan has her own pavilion in the garden, designed like a Chinese temple. Mickey even has a new red-and-gold Chinese suit to wear. Restaurants boast local fare, such as Indian curries, Japanese sushi, and Chinese mango pudding, served in containers shaped like Mickey Mouse heads. All in all, Hong Kong Disney is Chinese throughout. It’s not so much an American theme park as Mickey Mouse coming to China. The atmosphere is uncomplicated and truly family oriented. It is possible to have a genuine family park experience where six-year- olds take precedence. However, early advertising that featured the family missed its mark somewhat by featuring a family consist- ing of two kids and two parents, which did not have the impact it was supposed to have, because China’s government limits most couples to just one child. The error was quickly corrected in a new TV commercial, which the company says was designed to “forge a stronger emotional connection with Mickey.” The revised ad featured one child, two parents, and two grandparents together sharing branded Disney activities, such as watching a movie and giving a plush version of the mouse as gifts. “Let’s visit Mickey together!” says the father in the commercial, before scenes at the park set to traditional Chinese music. Many other aspects of the park have been modified to better suit its Chinese visitors. The cast members are extremely diverse, understand various cultures, and, in many cases, speak three languages. Signs, audio-recorded messages, and attractions are also in several languages. For example, riders can choose from English, Mandarin, or Cantonese on the Jungle River Cruise. Disney runs promotions throughout the year. For example, the “Stay and Play for Two Days” promotion was created mainly to give mainland tourists a chance to experience the park for a longer period of time. Because many Chinese tourists cross into Hong Kong by bus, they arrive at Disneyland mid-day. With this promo- tion, if a guest stays at a Disneyland hotel and purchases a one-day ticket, the guest is given a second day at the park for free. Special Chinese holidays feature attractions and decorations unique to the holiday. For the February 7, 2008, New Year holiday (the Year of the Rat), Disney suited up its own house rodents, Mickey and Minnie, in special red Chinese New Year outfits for its self-proclaimed Year of the Mouse. The Disneyland Chinese New Year campaign, which lasts until February 24, features a logo with the kind of visual pun that only the Chinese might appreciate: the Chinese character for “luck” flipped upside-down (a New Year

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tradition), with mouse ears added on top. Inside the park, vendors hawk deep-fried dumplings and turnip cakes. The parade down Main Street, U.S.A., is joined by the “Rhythm of Life Procession,” featuring a dragon dance and puppets of birds, flowers, and fish, set to traditional Chinese music. And of course there’s the god of wealth, a relative newcomer to the regular Hong Kong Disneyland gang, joined by the gods of longevity and happiness, all major figures in Chinese New Year celebrations. The Hong Kong park has been reducing its losses since open- ing, from more than $170 million early on to $92.5 million in 2010 and only $30.5 million in 2011. However, plans to increase the capacity of the park 23 percent are going forward, with the new attractions to open in 2014. There are broader implications for Disney from the performance of the Hong Kong theme park than just its financial health. From the outset, executives at the business’s Burbank headquarters viewed Hong Kong Disneyland as a springboard to promote awareness of the Disney name among the mainland Chinese population and cement ties with Beijing. The next theme park is set for Shanghai, and the last thing they want is a “turkey” in Hong Kong that would undermine their whole China strategy. The new $4 billion park in Shanghai is scheduled for completion, also in 2016. Disney will hold a 47 percent stake there. The new park ultimately will be 50 percent larger than the Hong Kong park. Even though 330 million Chinese live within a three-hour drive of Shanghai, the company will have to work very hard to repeat the successes of the U.S. and Japanese parks’ atten- dance levels, at well over 20 million visitors per year. The most the Hong Kong park has attracted is some 6 million visitors.

QUESTIONS 1. What factors contributed to EuroDisney’s poor performance

during its first year of operation? What factors contributed to Hong Kong Disney’s poor performance during its first year?

2. To what degree do you consider that these factors were (a) foreseeable and (b) controllable by EuroDisney, Hong Kong Disney, or the parent company, Disney?

3. What role does ethnocentrism play in the story of EuroDisney’s launch?

4. How do you assess the cross-cultural marketing skills of Disney?

5. Why did success in Tokyo predispose Disney management to be too optimistic in their expectations of success in France? In China? Discuss.

6. Why do you think the experience in France didn’t help Disney avoid some of the problems in Hong Kong?

7. Now that Hong Kong Disney is up and running, will the Shanghai development benefit from the Hong Kong experience?

8. Now that Disney has opened Hong Kong Disney and begun work on the Shanghai location, where and when should it go next? Assume you are a consultant hired to give Disney advice on the issue of where and when to go next. Pick three locations and select the one you think will be the best new location for “Disneyland X.” Discuss.

9. Given your choice of locale X for the newest Disneyland, what are the operational implications of the history of EuroDisney and Disney Hong Kong for the new park?

10. Think forward to 2020 and presume the rough politics and violence of the MENA region settle down substantially. Where would be the best location for a Disney park in that region? Defend your choice.

This case was prepared by Lyn S. Amine, Ph.D., Professor of Marketing and Inter- national Business, Distinguished Fellow of the Academy of Marketing Science, and President, Women of the Academy of International Business, Saint Louis University, and graduate student Carolyn A. Tochtrop, Saint Louis University, as a basis for class discussion rather than to illustrate either effective or ineffective handling of a situ- ation. The original case appearing in prior editions has been edited and updated to reflect recent developments. Source: “An American in Paris,” BusinessWeek, March 12, 1990, pp. 60 – 61, 64; Asahi Shimbun, “ Tokyo Disney Prospers In Its Own Way,” Asahi Evening News, April 22, 2003; Chester Dawson, “Will Tokyo Embrace Another Mouse?” Business- Week, September 10, 2001; “Euro Disney Gets Its Rights Issue Thanks to Under- writing Banks but Success in Balance,” Euroweek, February 11, 2005; “EuroDisney’s Prince Charming?” BusinessWeek, June 13, 1994, p. 42; “Saudi to Buy as Much as 24% of EuroDisney,” The Wall Street Journal, June 2, 1994, p. A4; Bernard J. Wolf- son, “The Mouse That Roared Back,” Orange County Register, April 9, 2000, p. 1; “ Disney Applies Feng Shui to Hong Kong Park,” AP Online, June 27, 2005; Michael Schuman, “Disney’s Great Leap into China,” Time, July 11, 2005; Michael Schuman, “Disney’s Hong Kong Headache,” Time, May 8, 2006; “A Bumpy Ride for Disneyland in Hong Kong; Despite Fixes, Some Observers Say Troubles Could Follow company to Shanghai,” The Washington Post, November 20, 2006; Dikky Sinn, “Hong Kong Government Unhappy with Disneyland’s Performance,” AP Worldstream, December 4, 2007; Elaine Kurtenbach, “Reports: Shanghai Disneyland May be Built on Yangtze Island; City Officials Mum on Talks,” AP Worldstream, December 4, 2007; Lauren Booth, “The Wonderful World of Mandarin Mickey . . .” The Independent on Sunday, July 22, 2007; Mark Kleinman, “Magic Kingdom Fails to Cast Its Spell in the Middle Kingdom . . .” The Sunday Telegraph (London), February 25, 2007; Paula M. Miller, “Disneyland in Hong Kong,” China Business Review, January 1, 2007; Jeffrey Ng, “Hong Kong Disneyland Seeks New Magic,” The Wall Street Journal, December 19, 2007; Geoffrey A. Fowler, “Main Street, K.K.; Disney Localizes Mickey to Boost Its Hong Kong Theme Park,” The Wall Street Journal, January 23, 2008; “A Chinese Makeover for Mickey and Minnie,” The New York Times, January 22, 2008; “Mickey in Shanghai,” BusinessWeek, November 16, 2009, p. 6; Chester Yung, “Hong Kong Says Loss at Theme Park Shrank,” The Wall Street Journal, January 20, 2010, p. B4; Ronald Grover, Stephanie Wong, and Wendy Leung, “Disney Gets a Second Chance in China,” Bloomberg Businessweek, April 18, 2011, pp. 21–22.

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Cultural Norms, Fair & Lovely, and Advertising

CASE 2-2

Fair & Lovely, a branded product of Hindustan Unilever Ltd. (HUL), is touted as a cosmetic that lightens skin color. On its website (, the company calls its product “the miracle worker,” “proven to deliver one to three shades of change.” While tanning is the rage in Western countries, skin lightening treatments are popular in Asia. According to industry sources, the top-selling skin lightening cream in India is Fair & Lovely from Hindustan Unilever Ltd. (HUL), followed by CavinKare’s Fairever brand. HUL’s Fair & Lovely brand dominated the market with a 90 percent share until CavinKare Ltd. (CKL) launched Fairever. In just two years, the Fairever brand gained an impressive 15 percent market share. HUL’s share of market for the Fair & Lovely line generates about $60 million annually. The product sells for about 23 rupees ($0.29) for a 25-gram tube of cream. The rapid growth of CavinKare’s Fairever (www.cavinkare .com) brand prompted HUL to increase its advertising effort and to launch a series of ads depicting a “fairer girl gets the boy theme.” One advertisement featured a financially strapped father lamenting his fate, saying, “If only I had a son,” while his dark-skinned daugh- ter looks on, helpless and demoralized because she can’t bear the financial responsibility of her family. Fast-forward and plain Jane has been transformed into a gorgeous light-skinned woman through the use of a “fairness cream,” Fair & Lovely. Now clad in a miniskirt, the woman is a successful flight attendant and can take her father to dine at a five-star hotel. She’s happy and so is her father. In another ad, two attractive young women are sitting in a bedroom; one has a boyfriend and, consequently, is happy. The darker-skinned woman, lacking a boyfriend, is not happy. Her friend’s advice—Use a bar of soap to wash away the dark skin that’s keeping men from flocking to her. HUL’s series of ads provoked CavinKare Ltd. to counter with an ad that takes a dig at HUL’s Fair & Lovely ad. CavinKare’s ad has a father–daughter duo as the protagonists, with the father shown encouraging the daughter to be an achiever irrespective of her complexion. CavinKare maintained that the objective of its new commercial is not to take a dig at Fair & Lovely but to “reinforce Fairever’s positioning.” Skin color is a powerful theme in India, and much of Asia, where a lighter color represents a higher status. While Americans and Europeans flock to tanning salons, many across Asia seek ways to have “fair” complexions. Culturally, fair skin is associated with positive values that relate to class and beauty. One Indian lady commented that when she was growing up, her mother for- bade her to go outdoors. She was not trying to keep her daughter out of trouble but was trying to keep her skin from getting dark. Brahmins, the priestly caste at the top of the social hierarchy, are considered fair because they traditionally stayed inside, por- ing over books. The undercaste at the bottom of the ladder are regarded as the darkest people because they customarily worked in the searing sun. Ancient Hindu scriptures and modern poetry eulogize women endowed with skin made of white marble. Skin color is closely identified with caste and is laden with symbolism. Pursue any of the “grooms” and “brides wanted” ads

in newspapers or on the Web that are used by families to arrange suitable alliances, and you will see that most potential grooms and their families are looking for “fair” brides; some even are progressive enough to invite responses from women belonging to a different caste. These ads, hundreds of which appear in India’s daily newspapers, reflect attempts to solicit individuals with the appropriate religion, caste, regional ancestry, professional and educational qualifications, and, frequently, skin color. Even in the growing numbers of ads that announce “caste no bar,” the adjective “fair” regularly precedes professional qualifications. In everyday conversation, the ultimate compliment on someone’s looks is to say someone is gora (fair). “I have no problem with people wanting to be lighter,” said a Delhi beauty parlor owner, Saroj Nath. “It doesn’t make you racist, any more than trying to make yourself look younger makes you ageist.” Bollywood (India’s Hollywood) glorifies conventions on beauty by always casting a fair-skinned actress in the role of heroine, surrounded by the darkest extras. Women want to use whiteners because it is “aspirational, like losing weight.” Even the gods supposedly lament their dark complexion— Krishna sings plaintively, “Radha kyoon gori, main kyoon kala? (Why is Radha so fair when I’m dark?).” A skin deficient in melanin (the pigment that determines the skin’s brown color) is an ancient predilection. More than 3,500 years ago, Charaka, the famous sage, wrote about herbs that could help make the skin fair. Indian dermatologists maintain that fairness products cannot truly work as they reach only the upper layers of the skin and so do not affect melanin production. Nevertheless, for some, Fair & Lovely is a “miracle worker.” A user gushes that “The last time I went to my parents’ home, I got compliments on my fair skin from everyone.” For others, there is only disappointment. One 26-year-old working woman has been a regular user for the past eight years but to no avail. “I should have turned into Snow White by now but my skin is still the same wheatish color.” As an owner of a public relations firm commented, “My maid has been using Fair and Lovely for years and I still can’t see her in the dark .  .  .. But she goes on using it. Hope springs eternal, I suppose.” The number of Indians who think lighter skin is more beautiful may be shrinking. Sumit Isralni, a 22-year-old hair designer in his father’s salon, thinks things have changed in the last two years, at least in India’s most cosmopolitan cities, Delhi, Mumbai, and Bangalore. Women now “prefer their own complexion, their natu- ral way” Isralni says; he prefers a more “Indian beauty” himself: “I won’t judge my wife on how fair her complexion is.” Sunita Gupta, a beautician in the same salon, is more critical. “It’s just foolishness!” she exclaimed. The premise of the ads that women could not become airline attendants if they are dark-skinned was wrong, she said. “Nowadays people like black beauty.” It is a truism that women, especially in the tropics, desire to be a shade fairer, no matter what their skin color. Yet, unlike the approach used in India, advertisements elsewhere usually show how to use the product and how it works.

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Part 6 Supplementary Material

Commenting on the cultural bias toward fair skin, one critic states, “There are attractive people who go through life feeling inferior to their fairer sisters. And all because of charming grand- mothers and aunts who do not hesitate to make unflattering com- parisons. Kalee Kalooti is an oft-heard comment about women who happen to have darker skin. They get humiliated and morti- fied over the color of their skin, a fact over which they have no con- trol. Are societal values responsible? Or advertising campaigns? Advertising moguls claim they only reflect prevailing attitudes in India. This is possibly true but what about ethics in advertising? Is it correct to make advertisements that openly denigrate a majority of Indian people—the dark-skinned populace? The advertising is blatant in their strategy. Mock anyone who is not the right color and shoot down their self-image.” A dermatologist comments, “Fairness obtained with the help of creams is short-lived. The main reason being, most of these creams contain a certain amount of bleaching agent, which whitens facial hair, and not the skin, which leads people to believe that the cream worked.” Furthermore, “In India the popularity of a product depends totally on the success of its advertising.” HUL launched its television ad campaign to promote Fair & Lovely but withdrew it after four months amid severe criticism for its portrayal of women. Activists argued that one of the messages the company sends through its “air hostess” ads demonstrating the preference for a son who would be able to take on the financial responsibility for his parents is especially harmful in a country such as India where gender discrimination is rampant. Another offense is perpetuating a culture of discrimination in a society where “fair” is synonymous with “beautiful.” AIDWA (All India Women’s Democratic Association) lodged a complaint at the time with HUL about their offensive ads, but Hindustan Unilever failed to respond. The women’s association then appealed to the National Human Rights Commission alleging that the ad demeaned women. AIDWA objected to three things: (1) the ads were racist, (2) they were promoting son preference, and (3) they were insulting to working women. “The way they portrayed the young woman who, after using Fair & Lovely, became attractive and therefore lands a job suggested that the main qualification for a woman to get a job is the way she looks.” The Human Rights Commission passed AIDWA’s complaints on to the Ministry of Information and Broadcasting, which said the campaign violated the Cable and Television Network Act of 1995—provisions in the act state that no advertisement shall be permitted which “derides any race, caste, color, creed and nationality” and that “Women must not be portrayed in a manner that emphasized passive, submissive qualities and encourages them to play a subordinate secondary role in the family and society.” The government issued notices of the complaints to HUL. After a year-long campaign led by the AIDWA, Hindustan Unilever Limited discontinued two of its tele- vision advertisements for Fair & Lovely fairness cold cream. Shortly after pulling its ads off the air, HUL launched its Fair & Lovely Foundation, vowing to “encourage economic empower- ment of women across India” by providing resources in education and business to millions of women “who, though immensely tal- ented and capable, need a guiding hand to help them take the leap forward,” presumably into a fairer future. HUL sponsored career fairs in over 20 cities across the country offering counseling in as many as 110 careers. It supported 100 rural scholarships for women students passing their 10th grade, a professional course for aspiring beauticians, and a three-month

Home Healthcare Nursing Assistant course catering to young women between the ages of 18 and 30 years. According to HUL, the Fair & Lovely Academy for Home Care Nursing Assistants offers a unique training opportunity for young women who pos- sess no entry-level skills and therefore are not employable in the new economy job market. The Fair & Lovely Foundation plans to serve as a catalyst for the economic empowerment for women across India. The Fair & Lovely Foundation will showcase the achievements of these women not only to honor them but also to set an example for other women to follow. AIDWA’s campaign against ads that convey the message, “if she is not fair in color, she won’t get married or won’t get promoted,” also has resulted in some adjustment to fairness cream ads. In revised versions of the fairness cream ads, the “get fair to attract a groom” theme is being reworked with “enhance your self- confidence” so that a potential groom himself begs for attention. It is an attempt at typifying the modern Indian woman, who has more than just marriage on her mind. Advertising focus is now on the message that lighter skin enables women to obtain jobs conven- tionally held by men. She is career-oriented, has high aspirations, and, at the same time, wants to look good. AIDWA concedes that the current crop of television ads for fairness creams are “not as demeaning” as ones in the past. However, it remains against the product; as the president of AIDWA stated, “It is downright racist to denigrate dark skin.” Although AIWDA’s campaign against fairness creams seems to have had a modest impact on changing the advertising message, it has not slowed the demand for fairness creams. Sales of Fair & Lovely, for example, have been growing 15 to 20 percent year over year, and the $318 million market for skin care has grown by 42.7 percent in the last three years. Says Euromonitor International, a research firm: “Half of the skin care market in India is fairness creams and 60 to 65 percent of Indian women use these products daily.” Recently, several Indian companies were extending their market- ing of fairness creams beyond urban and rural markets. CavinKare’s launch of Fairever, a fairness cream in a small sachet pack priced at Rs 5, aimed at rural markets where some 320 million Indians reside. Most marketers have found rural markets impossible to penetrate profitably due to low income levels and inadequate distribution systems, among other problems. However, HUL is approaching the market through Project Shakti, a rural initiative that targets small villages with populations of 2,000 people or less. It empowers underprivileged rural women by providing income-generating opportunities to sell small, lower priced packets of its brands in villages. Special packaging for the rural market was designed to provide single-use sachet packets at 50 paise for a sachet of shampoo to Rs 5 for a fairness cream (for a week’s usage). The aim is to have 100,000 “Shakti Ammas,” as they are called, spread across 500,000 villages in India by year end. CavinKare is growing at 25 percent in rural areas compared with 15 percent in urban centers. In addition to expanding market effort into rural markets, an unexpected market arose when a research study revealed Indian men were applying girlie fairness potions in droves—but on the sly. It was estimated that 40 percent of boyfriends/husbands of girlfriends/wives were applying white magic solutions that came in little tubes. Indian companies spotted a business opportunity, and Fair & Handsome, Menz Active, Fair One Man, and a male bleach called Saka were introduced to the male market. The sector expanded dramatically when Shah Rukh Khan, a highly acclaimed Bollywood actor likened to an Indian Tom Cruise, decided to endorse Fair & Handsome. Euromonitor International forecasts

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Cases 2 The Cultural Environment of Global Marketing

that in the next five years, spending on men’s grooming products will rise 24 percent to 14.5 billion rupees, or US$320 million. A recent product review in, praises Fair & Lovely fairness cream: “[Fair & Lovely] contains fairness vitamins which penetrate deep down our skin to give us radiant fairness.” “I don’t know if it can change the skin color from dark to fair, but my personal experience is that it works very well, if you have a natu- rally fair color and want to preserve it without much headache.” “I think Riya Sen has the best skin right now in Bollywood. It appears to be really soft and tender. So, to have a soft and fair skin like her I recommend Fair & Lovely Fairness Lotion or Cream.” Yet “skin color isn’t a proof of greatness. Those with wheatish or dark skin are by no way inferior to those who have fair skin.” Here are a few facts from Hindustan Unilever Ltd.’s homepage:

Lever Limited is India’s largest Packaged Mass Consump- tion Goods Company. We are leaders in Home and Personal Care Products and Food and Beverages including such products as Ponds and Pepsodent. We seek to meet ev- eryday needs of people everywhere—to anticipate the as- pirations of our consumers and customers and to respond creatively and competitively with branded products and ser- vices which raise the quality of life. It is this purpose which inspires us to build brands. Over the past 70 years, we have introduced about 110 brands. Fair & Lovely has been specially designed and proven to deliver one to three shades of change in most people. Also its sunscreen system is specially optimized for Indian skin. Indian skin, unlike Caucasian skin, tends to “tan” rather than “burn” and, hence, requires a different combination of UVA and UVB sunscreens.

You may want to visit HUL’s homepage ( for addi- tional information about the company.

QUESTIONS 1. Is it ethical to sell a product that is, at best, only mildly effec-

tive? Discuss. 2. Is it ethical to exploit cultural norms and values to promote a

product? Discuss.

3. Is the advertising of Fair & Lovely demeaning to women, or is it promoting the fairness cream in a way not too dissimilar from how most cosmetics are promoted?

4. Will HUL’s Fair & Lovely Foundation be enough to counter charges made by AIDWA? Discuss.

5. In light of AIDWA’s charges, how would you suggest Fair & Lovely promote its product? Discuss. Would your response be different if Fairever continued to use “fairness” as a theme of its promotion? Discuss.

6. Propose a promotion/marketing program that will counter all the arguments and charges against Fair & Lovely and be an effective program.

7. Now that a male market for fairness cream exists, is the strength of AIDWA’s argument weakened?

8. Comment on using “Shakti Ammas” to introduce “fairness cream for the masses” in light of AIDWA’s charges.

9. Listen to “In India, Skin-Whitening Creams Reflect Old Biases,” NPR, November 12, 2009.

Sources: Nicole Leistikow, “Indian Women Criticize ‘Fair and Lovely’ Ideal,” Women’s eNews, April 28, 2003; Arundhati Parmar, “Objections to Indian Ad Not Taken Lightly,” Marketing News, June 9, 2003, p. 4; “Fair & Lovely Launches Foundation to Promote Economic Empowerment of Women,” press release, Fair & Lovely Foundation, (search for foundation), March 11, 2003; Rina Chan- dran, “All for Self-Control,” Business Line (The Hindu), April 24, 2003; Khozem Merchant and Edward Luce, “Not So Fair and Lovely,” Financial Times, March 19, 2003; “Fair & Lovely Redefines Fairness with Multivitamin Total Fairness Cream,” press release, Hindustan Unilever Ltd., May 3, 2005; “CavinKare Launches Small Sachet Packs,” Business India, December 7, 2006; “Analysis of Skin Care Advertis- ing on TV During January–August 2006,” Media, Advertising, Marketing Watch, October 17, 2006; “Women Power Gets Full Play in CavinKare’s Brand Strategy.” The Economic Times (New Delhi, India), December 8, 2006; Heather Timmons, “Telling India’s Modern Women They Have Power, Even Over Their Skin Tone,” The New York Times, May 30, 2007; “The Year We Almost Lost Tall (or Short or Medium-Height), Dark and Handsome,” The Hindustan Times, December 29, 2007; “India’s Hue and Cry Over Paler Skin,” The Sunday Telegraph (London), July 1, 2007; “Fair and Lovely?” University Wire, June 4, 2007; “The Race to Keep up with Modern India,” Media, June 29, 2007; Aneel Karnani, “Doing Well by Doing Good—Case Study: ‘Fair & Lovely’ Whitening Cream,” Strategic Management Journal 28, no. 13 (2007), pp. 1351–57; “In India, Skin-Whitening Creams Reflect Old Biases,” NPR, November 12, 2009.

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Starnes-Brenner Machine Tool Company: To Bribe or Not to Bribe?

CASE 2-3

The Starnes-Brenner Machine Tool Company of Iowa City, Iowa, has a small one-man sales office headed by Frank Rothe in Latino, a major Latin American country. Frank has been in Latino for about 10 years and is retiring this year; his replacement is Bill Hunsaker, one of Starnes-Brenner’s top salespeople. Both will be in Latino for about eight months, during which time Frank will show Bill the ropes, introduce him to their principal customers, and, in general, prepare him to take over. Frank has been very successful as a foreign representative in spite of his unique style and, at times, complete refusal to follow company policy when it doesn’t suit him. The company hasn’t really done much about his method of operation, though from time to time he has angered some top company people. As President Jack McCaughey, who retired a couple of years ago, once remarked to a vice president who was complaining about Frank, “If he’s making money—and he is (more than any of the other foreign offices)—then leave the guy alone.” When McCaughey retired, the new chief immediately instituted organizational changes that gave more emphasis to the over- seas operations, moving the company toward a truly worldwide operation into which a loner like Frank would probably not fit. In fact, one of the key reasons for selecting Bill as Frank’s replacement, besides Bill’s record as a top salesperson, is Bill’s capacity to be an organization man. He understands the need for coordination among operations and will cooperate with the home office so that the Latino office can be expanded and brought into the mainstream. The company knows there is much to be learned from Frank, and Bill’s job is to learn everything possible. The company cer- tainly doesn’t want to continue some of Frank’s practices, but much of his knowledge is vital for continued, smooth opera- tion. Today, Starnes-Brenner’s foreign sales account for about 25 percent of the company’s total profits, compared with about 5 percent only 10 years ago. The company is actually changing character, from being principally an exporter, without any real concern for continuous foreign market representation, to having worldwide operations, where the foreign divisions are part of the total effort rather than a stepchild operation. In fact, Latino is one of the last operational divisions to be assimilated into the new organization. Rather than try to change Frank, the company has been waiting for him to retire before making any significant adjustments in its Latino operations. Bill Hunsaker is 36 years old, with a wife and three children; he is a very good salesperson and administrator, though he has had no foreign experience. He has the reputation of being fair, honest, and a straight shooter. Some back at the home office see his assignment as part of a grooming job for a top position, per- haps eventually the presidency. The Hunsakers are now settled in their new home after having been in Latino for about two weeks. Today is Bill’s first day on the job. When Bill arrived at the office, Frank was on his way to a local factory to inspect some Starnes-Brenner machines that had to have some adjustments made before being acceptable to the Latino

government agency buying them. Bill joined Frank for the plant visit. Later, after the visit, we join the two at lunch. Bill, tasting some chili, remarks, “Boy! This certainly isn’t like the chili we have in America.” “No, it isn’t, and there’s another difference, too. The Latinos are Americans and nothing angers a Latino more than to have a ‘Gringo’ refer to the United States as America as if to say that Latino isn’t part of America also. The Latinos rightly consider their country as part of America (take a look at the map), and people from the United States are North Americans at best. So, for future reference, refer to home either as the United States, States, or North America, but, for gosh sakes, not just America. Not to change the subject, Bill, but could you see that any change had been made in those S-27s from the standard model?” “No, they looked like the standard. Was there something out of whack when they arrived?” “No, I couldn’t see any problem—I suspect this is the best piece of sophisticated bribe taking I’ve come across yet. Most of the time the Latinos are more ‘honest’ about their mordidas than this.” “What’s a mordida?” Bill asks. “You know, kumshaw, dash, bustarella, mordida; they are all the same: a little grease to expedite the action. Mordida is the local word for a slight offering or, if you prefer, bribe,” says Frank. Bill quizzically responds, “Do we pay bribes to get sales?” “Oh, it depends on the situation, but it’s certainly something you have to be prepared to deal with.” Boy, what a greenhorn, Frank thinks to himself, as he continues, “Here’s the story. When the S-27s arrived last January, we began uncrating them and right away the jefe engineer (a government official)—jefe, that’s the head man in charge—began extra-careful examination and declared there was a vital defect in the machines; he claimed the machinery would be dangerous and thus unacceptable if it wasn’t corrected. I looked it over but couldn’t see anything wrong, so I agreed to have our staff engineer check all the machines and correct any flaws that might exist. Well, the jefe said there wasn’t enough time to wait for an engineer to come from the States, that the machines could be adjusted locally, and we could pay him and he would make all the necessary arrangements. So, what do you do? No adjustment his way and there would be an order can- celed; and, maybe there was something out of line, those things have been known to happen. But for the life of me, I can’t see that anything had been done since the machines were supposedly fixed. So, let’s face it, we just paid a bribe, and a pretty darn big bribe at that—about $1,200 per machine. What makes it so aggravating is that that’s the second one I’ve had to pay on this shipment.” “The second?” asks Bill. “Yeah, at the border, when we were transferring the machines to Latino trucks, it was hot and they were moving slow as molasses. It took them over an hour to transfer one machine to a Latino truck and we had ten others to go. It seemed that every time I spoke to the dock boss about speeding things up, they just got slower. Finally, out of desperation, I slipped him a fistful of

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Cases 2 The Cultural Environment of Global Marketing

pesos and, sure enough, in the next three hours they had the whole thing loaded. Just one of the local customs of doing business. Generally, though, it comes at the lower level where wages don’t cover living expenses too well.” There is a pause, and Bill asks, “What does that do to our profits?” “Runs them down, of course, but I look at it as just one of the many costs of doing business—I do my best not to pay, but when I have to, I do.” Hesitantly, Bill replies, “I don’t like it, Frank. We’ve got good products, they’re priced right, we give good service, and keep plenty of spare parts in the country, so why should we have to pay bribes? It’s just no way to do business. You’ve already had to pay two bribes on one shipment; if you keep it up, the word’s going to get around and you’ll be paying at every level. Then all the profit goes out the window—you know, once you start, where do you stop? Besides that, where do we stand legally? The Foreign Bribery Act makes paying bribes like you’ve just paid illegal. I’d say the best policy is to never start: You might lose a few sales, but let it be known that there are no bribes; we sell the best, service the best at fair prices, and that’s all.” “You mean the Foreign Corrupt Practices Act, don’t you?” Frank asks, and continues, in an I’m-not-really-so-out-of-touch tone of voice, “Haven’t some of the provisions of the Foreign Corrupt Practices Act been softened somewhat?” “Yes, you’re right, the provisions on paying a mordida or grease have been softened, but paying the government official is still illegal, softening or not,” replies Bill. Oh boy! Frank thinks to himself as he replies, “Look, what I did was just peanuts as far as the Foreign Corrupt Practices Act goes. The people we pay off are small, and, granted we give good service, but we’ve only been doing it for the last year or so. Before that I never knew when I was going to have equipment to sell. In fact, we only had products when there were surpluses stateside. I had to pay the right people to get sales, and besides, you’re not back in the States any longer. Things are just done different here. You follow that policy and I guarantee that you’ll have fewer sales because our competitors from Germany, Italy, and Japan will pay. Look, Bill, everybody does it here; it’s a way of life, and the costs are generally reflected in the markup and overhead. There is even a code of behavior involved. We’re not actually encouraging it to spread, just perpetuating an accepted way of doing business.” Patiently and slightly condescendingly, Bill replies, “I know, Frank, but wrong is wrong and we want to operate differently now. We hope to set up an operation here on a continuous basis; we plan to operate in Latino just like we do in the United States. Really expand our operation and make a long-range market commitment, grow with the country! And one of the first things we must avoid is unethical . . .” Frank interrupts, “But really, is it unethical? Everybody does it, the Latinos even pay mordidas to other Latinos; it’s a fact of life— is it really unethical? I think that the circumstances that exist in a country justify and dictate the behavior. Remember, man, ‘When in Rome, do as the Romans do.’” Almost shouting, Bill blurts out, “I can’t buy that. We know that our management practices and relationships are our strongest point. Really, all we have to differentiate us from the rest of our competition, Latino and others, is that we are better managed and, as far as I’m concerned, graft and other unethical behavior have got to be cut out to create a healthy industry. In the long run, it

should strengthen our position. We can’t build our future on illegal and unethical practices.” Frank angrily replies, “Look, it’s done in the States all the time. What about the big dinners, drinks, and all the other hanky-panky that goes on? Not to mention PACs’ [Political Action Committee] payments to congresspeople, and all those high speaking fees certain congresspeople get from special interests. How many congresspeople have gone to jail or lost reelection on those kinds of things? What is that, if it isn’t mordida the North American way? The only difference is that instead of cash only, in the United States we pay in merchandise and cash.” “That’s really not the same and you know it. Besides, we certainly get a lot of business transacted during those dinners even if we are paying the bill.” “Bull. The only difference is that here bribes go on in the open; they don’t hide it or dress it in foolish ritual that fools no one. It goes on in the United States and everyone denies the existence of it. That’s all the difference—in the United States we’re just more hypocritical about it all.” “Look,” Frank continues, almost shouting, “we are getting off on the wrong foot and we’ve got eight months to work together. Just keep your eyes and mind open and let’s talk about it again in a couple of months when you’ve seen how the whole country operates; perhaps then you won’t be so quick to judge it absolutely wrong.” Frank, lowering his voice, says thoughtfully, “I know it’s hard to take; probably the most disturbing problem in underde- veloped countries is the matter of graft. And, frankly, we don’t do much advance preparation so we can deal firmly with it. It bothered me at first; but then I figured it makes its economic contribution, too, since the payoff is as much a part of the eco- nomic process as a payroll. What’s our real economic role, any- way, besides making a profit, of course? Are we developers of wealth, helping to push the country to greater economic growth, or are we missionaries? Or should we be both? I really don’t know, but I don’t think we can be both simultaneously, and my feeling is that, as the company prospers, as higher salaries are paid, and better standards of living are reached, we’ll see better ethics. Until then, we’ve got to operate or leave, and if you are going to win the opposition over, you’d better join them and change them from within, not fight them.” Before Bill could reply, a Latino friend of Frank’s joined them, and they changed the topic of conversation.

QUESTIONS 1. Is what Frank did ethical? By whose ethics—those of

Latino or the United States? 2. Are Frank’s two different payments legal under the Foreign

Corrupt Practices Act as amended by the Omnibus Trade and Competitiveness Act of 1988?

3. Identify the types of payments made in the case; that is, are they lubrication, extortion, or subornation?

4. Frank seemed to imply that there is a similarity between what he was doing and what happens in the United States. Is there any difference? Explain.

5. Are there any legal differences between the money paid to the dockworkers and the money paid the jefe (government official)? Any ethical differences?

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Part 6 Supplementary Material

6. Frank’s attitude seems to imply that a foreigner must comply with all local customs, but some would say that one of the contributions made by U.S. firms is to change local ways of doing business. Who is right?

7. Should Frank’s behavior have been any different had this not been a government contract?

8. If Frank shouldn’t have paid the bribe, what should he have done, and what might have been the consequences?

9. What are the company interests in this problem? 10. Explain how this may be a good example of the SRC

(self-reference criterion) at work. 11. Do you think Bill will make the grade in Latino? Why or

why not? What will it take? 12. How can an overseas manager be prepared to face this


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Ethics and AirbusCASE 2-4

One September, a fraud squad, led by Jean-Claude Van Espen, a Belgian magistrate, raided Airbus’s headquarters in Toulouse. “They wanted to check whether there was possible falsification of documents, bribery or other infractions as part of the sale of Airbus aircraft to Sabena,” says Van Espen’s spokesman. The team of 20 Belgian and French investigators interviewed several Airbus employees during its three-day stay in Toulouse and carted away boxes of documents. In November 1997, Sabena had approved an order for 17 Airbus A320s (narrow-bodied aircraft), which it did not need. Even more oddly, it had doubled the order at the last minute to 34, a move that helped trigger the airline’s collapse four years later. Although nominally controlled by the Belgian government, Sabena was run by the parent company of Swissair, SAirGroup, which had owned a stake of 49.5 percent since 1995 and which also went bust in 2001. A former Sabena manager, who arrived after the Airbus order was placed, says that the planes were not needed: “It was a fatal business decision.” A Belgian parliamentary commission’s recent report confirms that the Airbus order was a big cause of Sabena’s collapse. Van Espen’s separate criminal investigation is continuing. According to the report, it started in October 2001 after Philippe Doyen, then a Sabena employee, lodged a complaint. Among other things, he suggested to Van Espen that he interview Peter Gysel, a former Swissair employee now working at Airbus, who put together Sabena’s deal with Airbus. Gysel denies any impropriety. The former Sabena manager says: “I never got the slightest whiff that the decision was driven by kickbacks, side- payments, and so on. But I cannot rule anything out.” Neither does Van Espen. Today airlines are ordering about 400 aircraft a year. But in good times, 800 planes, worth around $60 billion, are sold a year. In the past ten years Airbus (originally a consortium, now owned 80 percent by EADS and 20 percent by BAE Systems) has caught up with Boeing, which had enjoyed two-thirds of the market since its 747 jumbo-jet entered commercial service in 1970. Many aircraft are no doubt bought and sold in entirely conven- tional ways. But many are not. After all, lots of airlines are still state-owned and not subject to normal business rules. Commission payments (licit or illicit) on multimillion-dollar aircraft deals increase the capital cost of aircraft, which are therefore subject to higher depreciation or operating-lease charges, or both. But these extra costs are barely discernible in the pool of red ink created by the carriers’ perennial losses. Aircraft purchases drag on for years, as airlines play Boeing and Airbus off against each other. Especially in a buyer’s mar- ket, deep discounts are common, performance guarantees are demanding, and manufacturers have to offer all sorts of sweeteners (e.g., aircraft trade-ins, unusual guarantees) to persuade an airline to switch to their aircraft. Unsurprisingly, given the regulated nature of international air travel, politics plays a part. For instance, no sooner had Air Mauritius bought Airbus A340s in 1994 than it obtained an upgrade

from Paris Orly to Charles de Gaulle airport, which is Air France’s main base with better onward connections. Aircraft purchases have long been associated with controversy. In the 1970s, when Lockheed was still making civil jets, it was caught bribing Japanese officials to buy its L1011 wide-bodied airliner. A Japanese prime minister was later charged and con- victed in 1983 for taking a bribe. Prince Bernhard of the Neth- erlands was also disgraced for his involvement with Lockheed. This scandal led in 1977 to Congress passing the Foreign Corrupt Practices Act (FCPA), which forbids American companies, their officers, or their representatives from bribing foreign officials. Critics have often pointed out that American firms can side- step the FCPA by using foreign subsidiaries and nationals to pay bribes. Boeing says that its policy is to adhere to the spirit and letter of the FCPA, that its systems of controls ensure employees comply with this policy, and that no Boeing employee has been charged under the FCPA. In 1982 Boeing pleaded guilty to false statements about commissions on the sale of commercial aircraft prior to 1977. Boeing also says that there have been public hear- ings in the Bahamas over allegations of bribery in the 1990 sale of deHavilland aircraft to Bahamas Air, during Boeing’s ownership of deHavilland. Airbus has not been subject to such constraints. France ratified an OECD convention to outlaw bribery of foreign public officials in 2000. Until then the government even permitted French compa- nies tax deductions for giving bribes. For years, as they steadily lost market share to the European challenger, the Americans have been outspokenly critical of Airbus. In the 1980s the beef was the huge subsidies that European governments poured into the industry. Now that Airbus repays such launch aid, that is less relevant, especially as Boeing receives indirect subsidies through America’s defense budget and space program. But the American government has also spoken out on the subject of bribery. Grant Aldonas, an undersecretary for inter- national trade, told a congressional committee: “Unfortunately this [aircraft manufacturing] is an industry where foreign cor- ruption has a real impact . . . this sector has been especially vul- nerable to trade distortions involving bribery of foreign public officials.” According to a European Parliament report, published in 2001, America’s National Security Agency (NSA) intercepted faxes and phone calls between Airbus, Saudi Arabian Airlines, and the Saudi government in early 1994. The NSA found that Airbus agents were offering bribes to a Saudi official to secure a lion’s share for Airbus in modernizing Saudi Arabian Airlines’ fleet. The planes were in a $6 billion deal that Edouard Balladur, France’s then prime minister, had hoped to clinch on a visit to see King Fahd in January 1994. He went home empty-handed. James Woolsey, then director of the Central Intelligence Agency, recounted in a newspaper article in 2000 how the American government typically reacted to intelligence of this sort. “When we have caught you [Europeans]  .  .  . we go to the government you’re bribing and tell its officials that we don’t take kindly to such

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corruption,” he wrote. Apparently this (and a direct sales pitch from Bill Clinton to King Fahd) swung the aircraft part of the deal Boeing’s and McDonnell Douglas’s way.

KUWAITI KICKBACKS? Not even the NSA, however, knows about everything in the aircraft-manufacturing industry as it actually happens. Con- sider the history of an Airbus order placed by Kuwait Airways Corporation (KAC), another state-owned airline. In November 1995, Reuters reported that Kuwaiti prosecutors had questioned Bader Mallalah, KAC’s then chief financial officer, over allegations of embezzlement made against him by KAC. The firm’s chairman, Ahmed al Mishari, had suspended Mallalah from his job the previous month. But KAC had trumped up the allega- tions against Mallalah to put the lid on a story of corruption in which its then chairman was himself involved. That story began exactly five years earlier in Cairo, where KAC had set up temporary headquarters after Iraq’s invasion of Kuwait in August 1990. Most of its planes would inevitably be lost or damaged, so al Mishari was planning a shiny new postwar fleet. Naturally, both Boeing and Airbus were asked to tender. Both firms expected politics to play a part in KAC’s choice, especially after an American-led coalition had liberated Kuwait. Shortly after the liberation of Kuwait, Boeing and KAC met in London. One person present says al Mishari gave the impression that the order would be Boeing’s. After all, until then, American companies had won most of the large reconstruction contracts from a grateful government. Airbus hoped otherwise. In 1991, shortly before the Paris Air Show, Jean Pierson, the then-boss of Airbus, met al Mishari at the Churchill Hotel in London. The two talked in private for part of the time, so what they discussed is not known. Two clear inferences can, however, be drawn from subsequent events: al Mishari prom- ised the order to Airbus, and Pierson pressed for an announcement at the imminent air show. As substantial public funds were involved, KAC was supposed to follow the formal process in Kuwait before placing the order. This process included approvals from the Ministry of Finance and the public-spending watchdog. None of these approvals was sought before the air show. In June 1991, at the show, al Mishari stunned Kuwaiti officials and Boeing when he announced a firm order for 15 Airbus aircraft, worth $1.1 billion, and options for nine more, worth up to $900 million. A delighted Pierson trum- peted the deal as Airbus’s first single order for all its aircraft types. Most unusually, Boeing was not asked for its “best and final” offer, according to a former KAC employee. Boeing’s response to the announcement was to offer generous discounts to KAC—so that its package was around $100 million cheaper than its rival’s— but it was too late. The upshot of a meeting in the summer of 1991 between the boss of Boeing Commercial, furious American officials, and the Crown Prince of Kuwait was a messy compro- mise. KAC would order the engines for the Airbuses from General Electric; Boeing would receive an order for two wide-bodied planes as a sop; and the firm order for 15 Airbus aircraft would go ahead provided that KAC bought from Boeing in future. This compromise left al Mishari in a rather awkward spot. KAC had an option to buy nine more aircraft from Airbus. An airline is usually able to walk away from an option deal if it forfeits the modest deposit paid. But this case was far from normal. The company that was to take up the option was not KAC itself but

a subsidiary, Aviation Lease and Finance Company (ALAFCO), which al Mishari had set up in Bermuda in September 1992. ALAFCO was to buy the aircraft and lease them to KAC. In late 1992 al Mishari confirmed to Pierson that ALAFCO would buy the nine planes and sent off a $2.5 million deposit. By buying the planes through ALAFCO, al Mishari intended to bypass formal governmental approval. There was more to the deal. Airbus chipped in a total of $450,000 between 1992 and 1994 to help with the costs of set- ting up and running ALAFCO. On December 15, 1992, ALAFCO appointed a part-time commercial adviser, Mohamed Habib El Fekih, a Tunisian national. His day job was then as head of sales in the Middle East—for Airbus. Under his ALAFCO contract of employment, a copy of which The Economist has and which was to run for three years from January 1993, El Fekih received $5,000 a month and $80,000 in back pay for “services” rendered to ALAFCO from February 1, 1990—31 months before ALAFCO’s incorporation—to December 31, 1992. The $5,000 was paid each month from ALAFCO’s account number 201-901-04 at the Commercial Bank of Kuwait in New York to El Fekih’s personal account at Crédit Lyonnais’s branch in Blagnac, France, where Airbus is based on the outskirts of Toulouse. By 1993 three of the nine aircraft under option, all cargo planes, were nearly ready for delivery. However, Mallalah, who was also ALAFCO’s chief executive, insisted that the transaction be subject to formal procedure in Kuwait. This meant competi- tive tenders from Airbus and Boeing. Unsurprisingly, Airbus, with inside knowledge from its two-hatted vice president, El Fekih, was able to match exactly offers from Boeing, after Boeing came in over $50 million cheaper. With nothing to choose between the offers, ALAFCO selected Airbus, on the grounds that KAC’s fleet now comprised predominantly Airbus aircraft. The deal sailed through KAC’s board and the Ministry of Finance. However, Mallalah provided Kuwait’s public spend- ing watchdog with full details of ALAFCO’s order for the cargo planes. It refused to sanction the deal. Consultants concluded in early 1995 that the purchase of the cargo aircraft was not justified. The Ministry of Finance told KAC not to proceed. After Mallalah submitted a report to KAC’s board on the affair, El Fekih resigned from ALAFCO in March 1995. El Fekih says that he acted in an honest way; Pierson approved his ALAFCO contract, as did the boards of KAC and ALAFCO; his ALAFCO contract had nothing to do with the sale of Airbus to KAC; KAC canceled its option; ALAFCO never bought any Airbus aircraft; he acted as a consultant to help set up ALAFCO as an aircraft-financing company; and he declared his earnings to the tax man. Airbus says that it offers this sort of support to custom- ers, when asked. The present owners of the ALAFCO business confirm that ALAFCO bought three Airbus aircraft. Of the other six aircraft under option, three were not converted into firm orders. Two Airbus A320s were leased to Shorouk Air in Egypt. This joint-venture between KAC and EgyptAir was specifi- cally set up to find a home for them but is being liquidated because of massive losses. Kuwait’s Ministry of Finance leased another. Al Mishari, sacked as the chairman of KAC in 1999 after spending almost his entire career with the airline, owns a shop- ping complex in the Salmiya district of Kuwait, which local wags have dubbed the “Airbus Centre.” Al Mishari, whose family is wealthy, suffered financial problems when the Kuwaiti stock mar- ket collapsed in the early 1980s. Al Mishari declines to comment, as does KAC.

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It is not irrelevant to ask if the price of the Airbus aircraft was inflated to allow for kickbacks. No evidence of graft has ever come to light. However, no policeman, in Kuwait (or elsewhere), has looked for any.

INDIA INK What about cases where police have carried out investigations? In March 1990 India’s Central Bureau of Investigation (CBI) filed a first information report (FIR). It was investigating allegations that Airbus had bribed highly placed public servants and others to induce Indian Airlines (IA) to order its aircraft. In March 1986 state-owned IA had ordered 19 Airbus A320s, worth $952 million, with an option for 12 more, later exercised. This order was despite the fact that, when IA set up a committee in 1983 to recommend replacement aircraft for its aging Boeing fleet, the A320 was not considered—it had not then been launched or flown. With approval from the Indian government, IA had in July 1984 paid Boeing a deposit for 12 Boeing 757s, large narrow- bodied aircraft. Several civil servants and IA officials were named in the FIR. One name not on the list was that of Rajiv Gandhi, India’s prime minister in 1984–89, who was killed in a bomb explosion in May 1991. How has the CBI’s investigation progressed in the intervening 13 years? Hardly at all, despite the hounding on public-interest grounds of the CBI in Delhi’s High Court since 1998 by B. L. Wadehra, an anti-corruption lawyer based in Delhi. The Economist has examined the publicly available court documents—the CBI’s status reports on its investigation are secret—from Wadehra’s litigation. These papers allege, first, that in October 1984, weeks before Gandhi, a former pilot, succeeded his mother, IA received an offer from Airbus for A320 aircraft, a smaller and less expensive plane than Boeing’s 757. It required urgent attention. Second, in November, the aviation ministry gave IA just three days to appraise the offer for Gandhi’s office. Much later, in 1990, Indian Express, an Indian newspaper, reported a leaked manuscript note which showed that Gandhi had decided at a meeting on August 2, 1985, that IA “should go in for Airbus A320 aircraft.” Gandhi’s correspondence file on the deal mysteriously vanished. The court papers show that civil servants reconstructed 29 pages of the missing file for the CBI by obtaining copy correspondence from government departments. Remarkably, this task took seven years—and even then the reconstruction was only partial. After the green light from Gandhi, approvals from IA and government bodies were a formality. For instance, the IA board approved the Airbus order at a meeting on August 30, 1985, which started at noon. The quality of the analysis presented to the board on the competing offers was pitiful. The board considered only one criterion—comparative fuel efficiency. Even for that, the data were incomplete. The A320 with the engine chosen by IA had yet to be tried and tested anywhere; provisional data only were included in the report for Boeing 737s “since no technical data were supplied by the company.” But Boeing had not been asked for any, because two hours before the board meeting, at 9:50 a.m. IA’s managing director, who is named in the FIR as an alleged recipient of kickbacks, received a letter from Richard Elliott, then Boeing’s regional sales director. Boeing offered to supply up to 35 of its 737 aircraft, its

narrow-bodied rival to the A320, with a discount of $5 million per plane. This offer would reduce IA’s investment in new planes by $140 million, stated Elliott. IA’s board brushed the offer aside on the grounds that “if Boeing was [sic] too serious . . . they [sic] could have made the offer earlier.” The Delhi court has a withering opinion of the help Airbus has given the CBI. It allowed Wadehra to add Airbus’s Indian subsid- iary to his action on the grounds that Airbus in France was not cooperating. Airbus told Wadehra that French law forbade it from answering his questions. “[Airbus] sells its aircraft on their mer- its,” the firm insisted. The court has castigated the CBI for its dilatory approach. It took the Indian authorities until 1995 to contact Airbus for infor- mation, only to be told that such requests should be routed through the French government. The CBI told Wadehra, despite trying Interpol and diplomatic channels, it was not getting any help from the French government. The French embassy in Delhi in effect told Wadehra to get lost when he wrote to ask why France was not cooperating. Wadehra’s case is now topical, because in March last year, IA’s board approved an order for 43 Airbus planes, worth around $2 billion. The order now needs government approval. However, in September 2000, the Delhi court ruled that the Indian govern- ment should not approve further purchases from Airbus until the CBI had obtained the information it wanted from the French. The upshot of the IA story is that no serious attempt has been made to establish whether or not Airbus paid kickbacks to Gandhi and associates. The CBI has not answered written questions.

MOUNTIES AND BANKS But there are police forces that have shown rather more resolve and initiative than the CBI. One important case establishes that Airbus has paid “commissions” to individuals hiding behind shell companies in jurisdictions where ownership of companies is not a matter of public record, and where strict bank secrecy applies. Airbus’s first big sale in North America was a $1.5 billion deal, signed in 1988, to sell 34 aircraft to the then state-owned Air Canada. The middleman was Karlheinz Schreiber, a German- Canadian with connections to politicians in Germany and Canada. Schreiber emerged as a figure in the financing scandal that engulfed Germany’s Christian Democrat party and its top politi- cian, Helmut Kohl, a former chancellor, in the late 1990s. In August 1999 the Royal Canadian Mounted Police, acting on a German arrest warrant, nabbed Schreiber. In 2000, Schreiber was charged in Germany with tax evasion on money he had received for the Airbus transaction and other deals. The Süddeutsche Zeitung, a German daily, supplied a copy of Schreiber’s indictment to The Economist. According to this document, Airbus signed a consultancy contract (amended four times) with International Aircraft Leasing (IAL) in March 1985. IAL, which was to help with the Air Canada deal, was a shell company based in Vaduz, Liechtenstein, and a subsidiary of another Liechtenstein-registered shell, Kensington Anstalt. According to the indictment, between September 30, 1988, and October 21, 1993 (i.e., as Air Canada took delivery of Airbus planes), Airbus paid a total of $22,540,000 in “commis- sions” to IAL. Then $10,867,000 was paid into IAL’s account at the Verwaltungs-und Privat-Bank in Vaduz and $11,673,000 into IAL’s account numberat Swiss Bank Corporation (SBC) in Zurich. During extradition proceedings against Schreiber in 1999, Airbus

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admitted to these payments. In October 2000, Schreiber won a suspension of execution of his case. The court ruled that IAL belonged to Schreiber, and also that, to the extent that Schreiber had paid out the Airbus “commissions” as Schmiergelder (“grease monies”), these payments could be tax deductible. Schreiber’s German tax lawyer later told the court: “Schmiergelder were not openly paid to the ‘greased’ person by [Airbus]. It was through third persons to make reception anony- mous and the Schmiergelder unrecognizable as such.” So who got the commissions? After years of police investiga- tions in at least five jurisdictions, it is still not clear. According to The Last Amigo, a well-researched book on the affair by Harvey Cashore and Stevie Cameron, both Canadian journalists, a lot was withdrawn in cash. Cashore, a producer on “The Fifth Estate,” the Canadian Broadcasting Corporation’s main investigative program, says that Schreiber’s bank records and diaries showed that he usu- ally followed a simple formula for dividing up the money: half for Canadians and half for Europeans. The book alleges that there may have been a smaller scam within the bigger scam: an Airbus employee may have got some of the money. Some of the money was transferred into subac- counts at SBC in Zurich. One of the subaccounts, code-named “Stewardess,” received as much as one-eighth of the commissions. The book suggests that this account was intended for Stuart Iddles, Airbus’s senior vice president from 1986 to 1994. Iddles’s wife bought Casa Las Estacas, a luxurious beachfront villa in Puerto Vallarta, Mexico, in September 1992. Documents in The Economist’s possession show the price was $1.5 million. According to a person involved in the deal, the money was wired from an account in the name of the Ciclon Foundation at the Zurich branch of Lloyds, a British bank. Mrs. Iddles confirms that she bought the villa in 1992 but says she has not the “foggiest idea” how much it cost, or which bank the money came from. Mr. Iddles has denied any impropriety. Airbus says it has not been indicted in any jurisdiction over the Air Canada deal, or over any other sales. It adds that no investigator has found unethical behavior on its part.

SYRIAN SCANDALS Only one case of Airbus’s colluding with a middleman apparently to bribe officials to buy its aircraft has led to convictions. Accord- ing to Syria’s state news agency, three people were sentenced in Syria in October 2001 to 22 years imprisonment each (later reduced to 10 years) for “serious irregularities” in connection with state-owned Syrianair’s order for six Airbus A320s in 1996. The court also imposed a fine on the three of $268 million. They were a former minister for economic affairs, a former transport minister, and Munir Abu Khaddur, the middleman. Khaddur was sentenced in absentia and is reportedly living in Spain. The court found that the men had forced the airline to buy the planes, worth $240 million, and as a result Syrianair had incurred “big financial losses.” The only inferences to be drawn are either that there was a mis- carriage of justice or that bribes were paid. If the latter, the news agency did not release details of how much the men embezzled. Quite why bribes would have been necessary is puzzling. Because America deems Syria to be a sponsor of terrorism, Boeing has long been prohibited from exporting there. The Syrian govern- ment declines to comment. The result of investigations into instances of corruption or alleged corruption by Airbus suggests that Van Espen will have

a very long haul as he tries to establish whether “commissions” influenced Sabena’s decision to buy Airbuses. The order for the 34 A320s could be viewed as incompetence. But nobody can predict the results of Van Espen’s inquiry. The parliamentary report says Sabena’s board received some lacunary information that was misleading. The choice of Airbus supposedly meant Sabena was confident of strong sales growth. Yet a month after the order was placed, SAirGroup’s chief execu- tive, who also sat on Sabena’s board, said: “We’re now in the last year or years of the boom in air travel.” (We do not mean to imply by inference that the chief executive was corrupt.) Most of what is recounted in this case happened before Airbus’s present top management team arrived, before it was established as a proper company, and before France adopted the OECD convention on bribery. No one doubts the company’s ability to compete across the whole product range with Boeing. By the time the Paris Air Show is over, Airbus will probably be well ahead of its rival in market share, thanks to an attractive range of planes. But if charges of corruption involving Airbus were to emerge from Van Espen’s investigation of Sabena, that would deal the company’s reputation a severe blow.

AIRBUS LOBBIES TO RELAX ANTI-BRIBERY RULES Newly released documents have revealed how companies used their lobbying power to loosen official rules designed to stop corruption. In behind-the-scenes maneuvers, Rolls-Royce, BAE Systems, and the aircraft giant Airbus persuaded trade secretary Patricia Hewitt to allow them to keep secret details of the middle- men used to secure international contracts. She brushed aside the advice of U.K. government officials who argued that these middlemen are often used to channel bribes to foreign politicians and officials to win contracts. The government’s Export Credits Guarantee Department (ECGD) had proposed that exporters had to disclose the identities of middlemen when they applied for financial support from the taxpayer. The government required the details as part of tougher measures to stop the payment of bribes overseas by  British companies. The documents were released by the ECGD following a freedom of information request from The Guardian (a British newspaper) and a recent court case. Minutes of a meeting on August 9, 2004, show that the three companies told the ECGD that information about these middlemen was “very commercially sensitive.” The minutes continued: “The network of agents/intermediaries was a valuable asset built up over a number of years and offered impor- tant commercial advantages such as being able to open doors . . .. The intermediaries themselves may have valid and justifiable rea- sons for wanting to remain anonymous.” The companies claimed that the names of the agents would leak from the ECGD, enabling competitors to poach them. Hewitt agreed that the companies did not have to give the names or addresses of these middlemen, provided the firms gave an explanation. At a meeting on October 7, the companies wanted “confirma- tion that commercial confidentiality would be accepted as a valid reason for not identifying its agents.” Hewitt has been forced to rethink the anti-bribery rules because of a legal victory by anti- corruption campaigners, the Corner House group. Susan Hawley,

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for the group, said: “Knowing who is the middleman is crucial to stopping corruption, otherwise the taxpayer will end up directly supporting bribery.” BAE is alleged to have made corrupt payments through middlemen in Saudi Arabia, Qatar, and India. Rolls-Royce is accused of paying £15 million to win a contract in India.

QUESTIONS 1. In each of the cases described, who benefits and who suf-

fers from the alleged ethical and legal lapses of Airbus? 2. How should the public relations staff at Airbus respond to

the articles appearing in The Economist, The Guardian, and Reuters News?

3. What steps might Boeing take to defend itself from this sort of competition?

4. Do you think that Boeing and Airbus behave differently in marketing their aircraft around the globe? How and why?

5. Had France adopted the OECD convention on bribery ahead of these transactions, would the firm’s behavior have differed? Why?

Sources: “Airbus’ Secret Past—Aircraft and Bribery,” The Economist, June 14, 2003, pp. 55–58; Rob Evans and David Leigh, “Firms Can Keep Secret Agents: Minister Persuaded to Ease Anti-bribery Rules,” The Guardian, January 25, 2005, p. 18; “EADS Says Airbus Audit Shows No Wrongdoing,” Reuters News, April 3, 2007.

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Coping with Corruption in Trading with Vietnam

CASE 2-5

Corruption is a fact of life in China. In fact, Transparency Interna- tional, a German organization that applies its Corruption Perception Index (CPI) globally,1 rates China with a CPI of 3.6 and is number 75 of the 183 countries rated. New Zealand is rated the least cor- rupt at number 1 with a CPI of 9.5, the United States at 1924 with a CPI of 7.51, and North Korea and Somalia the most corrupt at number 182 with a CPI of 1.0. The country’s press frequently has detailed cases of corruption and of campaigns to crack down on bribery and other forms of corruption. The articles primarily have focused on domestic economic crimes among Chinese citizens and on local officials who have been fired, sent to prison, or assessed other penalties. There is strong evidence that the Chinese government is taking notice and issuing regulations to fight corruption. Newly issued Communist Party of China (CPC) regulations on internal super- vision and disciplinary penalties have raised hopes that the new regulations will enhance efforts against corruption. The regula- tions established “10 Taboos” for acts of party members that violate political, personnel, and financial regulations and who are involved in bribery, malfeasance, and infringement of oth- ers’ rights. The taboos included lobbying officials of higher rank, handing out pamphlets or souvenirs without authorization, holding social activities to form cliques, and offering or taking bribes. Also on the list were making phone calls, giving gifts, holding banquets or conducting visits to win support, covering up illicit activities, spreading hearsay against others, using intimidation or deception, and arranging jobs for others. Some believe that the execution of three bankers, for “a run-of-the-mill fraud,” just before the Communist Party’s annual meeting, was an indication of how serious the government was about cracking down on corruption. Much of China’s early efforts to stem corruption were focused on activities among domestic Chinese companies and not on China’s foreign business community. Traders, trade consultants, and analysts have said that foreign firms are vulnerable to a vari- ety of corrupt practices. Although some of these firms said they had no experience with corruption in China, the majority said they increasingly were asked to make payments to improve business, engage in black-market trade of import and export licenses, and bribe officials to push goods through customs or the Commodity Inspection Bureau, or engage in collusion to beat the system. The Hong Kong Independent Commission Against Corruption reports that outright bribes, as well as gifts or payment to establish guanxi, or “connections,” average 3 to 5 percent of operating costs in the PRC, or $3 billion to $5 billion of the $100 billion of foreign invest- ments that have been made there. The most common corrupt prac- tices confronting foreign companies in China are examined here.

PAYING TO IMPROVE BUSINESS Foreign traders make several types of payments to facilitate sales in China. The most common method is a trip abroad. Chinese officials, who rarely have a chance to visit overseas, often prefer

foreign travel to cash or gifts. (This was especially true when few PRC officials had been abroad.) As a result, traders report that dangling foreign trips in front of their PRC clients has become a regular part of negotiating large trade deals that involve prod- ucts with a technological component. “Foreign travel is always the first inducement we offer,” said an executive involved in machinery trade. In most cases, traders build these costs into the product’s sale price. Some trips are “reasonable and bona fide expenditures directly related to the promotion, demonstration, or explanation of products and services, or the execution of a contract with a foreign government agency,” but it may be another matter when officials on foreign junkets are offered large per diems and aren’t invited specifically to gain technical knowledge. Foreign travel isn’t always an inducement—it also can be extorted. In one case, a PRC bank branch refused to issue a letter of credit for a machinery import deal. The Chinese customer sug- gested that the foreign trader invite the bank official on an overseas inspection tour. Once the invitation was extended, the bank issued the letter of credit.

ANGLING FOR CASH Some MNCs are asked to sponsor overseas education for the chil- dren of trading officials. One person told a Chinese source that an MNC paid for that individual’s U.S. $1,500-a-month apartment, as well as a car, university education, and expenses. Firms find direct requests for cash payments—undeniably illegal—the most difficult. One well-placed source said that a major trader, eager for buyers in the face of an international market glut, had fallen into regularly paying large kickbacks into the Honduran, U.S., and Swiss accounts of officials at a PRC foreign trade corporation. Refusing to make payments may not only hurt sales, it can also be terrifying. A U.S. firm was one of several bidders for a large sale; a Chinese official demanded the MNC pay a 3 percent kickback. When the com- pany representative refused, the official threatened: “You had better not say anything about this. You still have to do business in China, and stay in hotels here.” Not surprisingly, the U.S. company lost the deal. Traders of certain commodities may be tempted to resort to the black market for import and export licenses that are difficult to obtain legally. A fairly disorganized underground market, for instance, exists for licenses to export China-made garments to the United States. Some branches of the Commodity Inspection Bureau (CIB) also have posed problems for traders. Abuses have emerged in the CIB since it started inspecting imports in 1987. A Japanese company, for instance, informed CIB officials of its intention to bring heavy industrial items into China—items that had met Japanese and U.S. standards. The officials responded that they planned to dismantle the products on arrival for inspection pur- poses. The problem was resolved only after the firm invited the officials to visit Japan.1See for more details about its 2010 index.

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Some traders get around such problems by purchasing inspec- tion certificates on the black market. According to press accounts, these forms, complete with signatures and seals, can be bought for roughly U.S. $200. Some claim that, for the appropriate compensation, customs officials in a southern province are very willing to reduce the duti- able value of imports as much as 50 percent. Because the savings can far exceed transport costs, some imports that would logically enter China through a northern port are redirected through the southern province. The new Communist Party of China (CPC) regulations address some of these problems, but unfortunately, the new law raises more questions than answers. Two kinds of bribes are covered under the new law: The “Criminal Law of the PRC,” known as common bribery, applies to the bribery of state officials and employees of state-owned enterprises, which are most of China’s large compa- nies. Anyone who demands or accepts money or property in return for benefits is guilty of bribery. The other is the “Law Against Unfair Competition of the PRC,” known as commercial bribery. It prohibits businesses from giving money or property to customers to sell or purchase products. The law is confusing in that it says nothing about punishment for gifts and benefits costing less than $600 or even whether these transactions can amount to bribes. Thus, tickets to sports events, which can cost several hundred dollars, wining and dining execu- tives, or even pharmaceutical samples to physicians remain in a gray area. The only clue is that Communist Party guidelines prohibit members from accepting gifts exceeding $500 but that doesn’t necessarily mean that gifts under $500 won’t be consid- ered a violation of the law. The trouble with China’s bribery laws is that they can be interpreted to apply to any gift at all.

AN ILLUSTRATION Here are some excerpts from a trial concerning a Chinese bank, a Chinese consultant, and several U.S. companies in which charges of bribery, among other issues, are involved. The list of charges, countercharges, and alleged bribery will give you a sample of the types of behavior that can arise in a transaction where bribery is rampant. A Chinese company alleged that it got pushed out of a lucra- tive business deal because an American software company secretly funneled money to powerful Chinese government offi- cials to ensure a profitable banking contract. In court filings, lawyers for the Chinese company said they had obtained copies of detailed e-mails and other records that show that the American company paid over a million dollars in fees to a consultant for services in addition to reimbursing the consultant about $170,000 in expenses covering an array of gifts, hotels, shopping sprees, and entertainment costs. The suit also contends that the American company arranged through the Chinese consultant for two Chinese banking offi- cials and family members to travel on vacation to Hong Kong, Paris, Rome, Las Vegas, and the golfing resort of Pebble Beach, California. These trips were arranged by a consultant who was reimbursed for an array of gifts given to the Chinese bankers and their families. The gifts included expensive Sony cameras, luxury outfits from Versace and Burberry, and perhaps even a $330,000 apartment in Shanghai. The suit says an American company official e-mailed another company executive saying the chairman of China Construction

Bank was interested in playing golf at “Cobble Beach” (he thought he meant Pebble Beach). Soon after, the American company paid for the chairman’s hotel, car services, and green fees in Pebble Beach. After the chairman expressed an interest in seeing Florida, the lawsuit says the American company sent its corporate jet to fly him from San Francisco, where he had been visiting with another U.S. company, to its headquarters in Florida. The lawsuit also charges that the American company reim- bursed the consultant for tickets the chairman’s wife and son used to travel in China and the United States. The lawsuit claims it also paid for his son’s tennis club fees in Shanghai and golfing fees in Shenzhen and for the daughter of the bank’s chief information officer to travel to Europe. The American company contended that all payments made to the consultant and all the business trips by the Chinese officials the company paid for were legitimate costs of doing business in China. It is the price the company had to pay to help secure a huge software contract with China Construction Bank worth about $176 million. It is important to note that this is an illustration of a civil law- suit between two companies and does not involve charges by the U.S. government and possible violations of the FCPA. However, the report indicated that the Justice Department was looking into the charges.

TWO COMMENTS ON DEALING WITH CORRUPTION Comment of a Consultant As the head of one U.S. consulting firm asserts, “Corruption is a huge issue, it’s systemic. Whether it’s self-dealing, phantom suppliers, kickbacks, intellec- tual property theft or inappropriate dealings with governmental officials, crime and corruption are risks companies face when operating in China. There are many instances where, unbeknownst to the U.S. company, various payments are being made under the table. The company’s credo, the company’s standard operating procedures, the company’s code of conduct, corporate governance, best practices—all of that needs to be ingrained and it needs to be accepted. There has to be constant training and constant reminding” to the local Chinese staff. Chinese culture is “very different” from Western culture. As such, “a U.S. company cannot simply translate its compliance policies and procedures into Chinese and expect them to have the same effect as in the U.S. The entire approach must be tailored to the Chinese environment.”

Comment of Former U.S. Foreign Service Agent A retired agent of the U.S. Foreign Service raises questions about how strictly the Foreign Corrupt Practices Act is enforced. The economics officer of the U.S. Foreign Service says he intentionally subverted the intent of the Foreign Corrupt Practices Act so U.S. investors and exporters would not lose out unfairly to companies and agencies from other foreign countries. “I figured out how business was actually done in corrupt coun- tries, who was on the take, whether the going rate for host country cooperation in a particular type of transaction was 10 percent or 25 percent and who was good or bad as a go between.” “I would tell Americans trying to do business in the host country: ‘Don’t tell me about any corrupt practices you are engaged in, because I am obliged to write that up and report you to Washington, but do tell me in detail about corrupt activities by competing foreign companies. In return, if your information

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is interesting, I’ll give you my best guess on how corruption works here.’ By doing this I hope that I have helped level the playing field.”

QUESTIONS 1. List all the different types of bribes, payments, or favors

represented in this case under (a) FCPA, (b) Criminal Law of PRC, and (c) Law Against Unfair Competition of the PRC. Why is each either legal or illegal?

2. For those practices that you listed as illegal, classify each as lubrication, extortion, or subornation, and explain your reasoning.

3. Which of the payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA)?

4. Assuming that the FCPA did not exist, what is the ethi- cal response to each of the payments, favors, or bribes you have identified? Read the section titled Ethical and Socially

Responsible Decisions in Chapter 5 as a guide to assist you in your decision.

5. In your view, which of the expenses detailed in the lawsuit could be in violation of the FCPA, and which could be legiti- mate business expenses as the American Company contends? Discuss.

6. Discuss the legal/ethical issues raised by the comments by the retired Foreign Service agent and the consultant.

7. List alternatives to paying bribes in international markets and discuss the plusses and minuses of each.

Sources: Walter H. Drew, “Corrupt Thinking,” Foreign Policy, May/June 2005; David Barboza, “Charges of Bribery in a Chinese Bank Deal,” The New York Times, November 29, 2006; “India, China Ranked 72 out of 180 in Corruption Rankings,” The Hindustan Times, October 8, 2007; “Take Great Care in Choosing Partners: Corruption Rampant, but Lately Its Drawing Government Attention,” Business Insurance, March 26, 2007; “China’s Communist Party Issues List of ‘Taboos’ Ahead of Politician Reshuffle,” International Herald Tribune, January 4, 2008; “China Lists New Anti-Graft Rules,” BBC News, January 4, 2008; Transparency International, 2012.

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When International Buyers and Sellers Disagree

CASE 2-6

No matter what line of business you’re in, you can’t escape sex. That may have been one conclusion drawn by an American exporter of meat products after a dispute with a German customer over a ship- ment of pork livers. Here’s how the disagreement came about. The American exporter was contracted to ship “30,000 lbs. of freshly frozen U.S. pork livers, customary merchantable quality, first rate brands.” The shipment had been prepared to meet the exacting standards of the American market, so the exporter expected the transaction to be completed without any problem. But when the livers arrived in Germany, the purchaser raised an objection: “We ordered pork livers of customary merchantable quality—what you sent us consisted of 40 percent sow livers.” “Who cares about the sex of the pig the liver came from?” the exporter asked. “We do,” the German replied. “Here in Germany we don’t pass off spongy sow livers as the firmer livers of male pigs. This ship- ment wasn’t merchantable at the price we expected to charge. The only way we were able to dispose of the meat without a total loss was to reduce the price. You owe us a price allowance of $1,000.” The American refused to reduce the price. The determined resistance may have been partly in reaction to the implied insult

to the taste of the American consumer. “If pork livers, whatever the sex of the animal, are palatable to Americans, they ought to be good enough for anyone,” the American thought. It looked as if the buyer and seller could never agree on eating habits.

QUESTIONS 1. In this dispute, which country’s law would apply, that of the

United States or of Germany? 2. If the case were tried in U.S. courts, who do you think would

win? In German courts? Why? 3. Draw up a brief agreement that would have eliminated the

following problems before they could occur: a. Whose law applies. b. Whether the case should be tried in U.S. or German courts. c. The difference in opinion as to “customary merchantable

quality.” 4. Discuss how SRC may be at work in this case.

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McDonald’s and ObesityCASE 2-7

THE PROBLEM Governments and influential health advocates around the world, spooked that their nations’ kids will become as fat as American kids, are cracking down on the marketers they blame for the explo- sion in childhood obesity. Across the globe, efforts are under way to slow the march of obesity. In the United States, roughly 30 percent of American chil- dren are overweight or obese. According to the U.S. Centers for Disease Control and Prevention (CDC), an estimated 64.5 percent of Americans tip the scales as overweight or obese, the highest percentage of fat people of any country in the world. However, adults and kids in other countries are catching up.

THE WORLD The World Heart Federation reports that globally there are now more than 1 billion overweight adults and that at least 400 million of those are obese. An estimated 155 million children are over- weight worldwide including 30–45 million who are obese.1 In many countries, the worst increases in obesity have occurred in young people. About half a million children in Europe are suffering classic middle-aged health problems because they are too fat. Obesity among European children has been on the rise over the last 25 years. The number of over- weight children in Europe did not change much from 1974 to 1984; then the rate started to creep up during the next 10 years, and it exploded after 1995. In Britain, one in five children is overweight or obese; in Spain 30 percent; and in Italy, 36 percent. While less than 1 percent of the children in Africa suffer from malnutrition, 3 percent are over- weight or obese. Perhaps the most distressing data come from Asia, where the measure of being overweight used in Western countries may underestimate the seriousness of weight-related health prob- lems faced by Asians. In Japan, for example, obesity is defined as a body mass index (BMI) level of 25 or more, not 30 as it is in Western countries. But Japanese health officials report that a BMI of 25 or more is already causing high rates of diabetes. About 290 million children in China are thought to be overweight, and researchers expect that number to double in the next 10 years. The World Health Organization has warned of an escalating global epidemic of overweight and obesity.

GLOBAL REACTIONS TO OBESITY One of the perplexing questions is why there has been a relatively sudden increase of obesity worldwide. Some opine that fast-food portion sizes are partly to blame; the average size order of French fries has nearly tripled since 1955. Some people say advertis- ing is to blame, particularly ads aimed at children, such as those

that  use celebrities to market high-calorie foods. According to USA Today, one study found that the average American child sees 10,000 food ads a year, mostly for high-fat or sugary foods and drinks. Traditionally, in developing countries, the poorest people have been the thinnest, a consequence of hard physical labor and the consumption of small amounts of traditional foods. But when these people in poor countries migrate to cities, obe- sity rates rise fastest among those in the lowest socioeconomic group. Even as food companies’ battle U.S. lawsuits and legislators who blame them for inducing childhood obesity, they’re being attacked on another front—Europe—which is threatening, among other things, to ban advertising icons such Tony the Tiger and Ronald McDonald. “I would like to see the industry not advertis- ing directly to children,” said one European health commissioner. “If this doesn’t produce satisfactory results, we will proceed to legislation.” The European Health Commission has called for the food industry to set its own regulations to curb so-called junk-food advertising aimed at the European Union’s 450 million citizens— or face bans similar to the tobacco industry. The ominous comparison to cigarettes is increasingly being made in the United States as well. Commenting on a McDonald’s plan to send Ronald McDonald to schools to preach about nutrition, an aide to a U.S. senator said, “No matter what Ronald is doing, they are still using this cartoon character to sell fatty hamburgers to kids. Once upon a time, tobacco companies had Joe Camel and they didn’t get it either.” Also under fire is TV advertising of kids’ foods, as calls for curbs or bans rise around the world. “If the rise in [the] child obesity trend continues, within five years we’ll be in the same situation as America is today,” said a senior child nutritionist at the University of Copenhagen who sits on the board of Denmark’s National Board of Nutritional Science. “Banning TV ads that are targeting kids is an important strategy to adopt.” But there is an argument that those measures won’t help. “In Sweden, Norway and Quebec, where food ads are banned from kids’ TV, there’s no evidence that obesity rates have fallen.” A new law in France will force food marketers to choose between adding a health message to commercials or paying a 1.5 percent tax on their ad budgets to fund healthy-eating mes- sages. Other measures under consideration in Europe include banning celebrities and cartoon characters from food ads aimed at children and preventing food marketers from using cell phone jingles to reach kids. Ireland bans celebrities from food and beverage ads aimed at children and requires confectionery and soft-drink spots broadcast in programs where half the audience is younger than 18 years of age to carry a visual or voice-over warning that snacking on sugary foods and drinks can damage teeth. Ireland is a small mar- ket, but there are fears that these measures could spread to the United Kingdom and then to the rest of Europe, especially since many advertisers run the same campaigns in the United Kingdom and Ireland.1“Obesity,” World Heart Federation, May 2007,

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Cases 2 The Cultural Environment of Global Marketing

Unlike France and Ireland, the United Kingdom is trying a more carrot-and-stick approach, encouraging self-regulation with legislation as a last but threatened resort. The U.K. government published health recommendations giving the food and beverage industries until early 2007 to act more responsibly or face for- mal legislation. The document followed a high-profile U.K. government inquiry into child obesity. Marketing and agency executives called to give evidence were grilled publicly over the use of celebrities in ads, inciting kids’ “pester power” and high salt and sugar content in foods. The paper’s proposals include clamping down on using cartoon characters to appeal to kids in food and beverage ads, potentially dooming brand icons such as Kellogg’s Tony the Tiger. There have also been calls for a ban, like Ireland’s, on celebrity endorsement in “junk-food” advertising. In a country where the biggest grocery- store brand, PepsiCo’s Walker’s Crisps, relies on celebrities in its ad campaigns, that’s a big deal. The Nordic countries are the most militant about enacting laws to ban or restrict marketing of foods that they consider unhealthy to children and fighting to extend those restrictions to the rest of Europe. The toughest laws against advertising to children have long been in Scandinavia, where the health risks of obesity and diabetes from high sugar consumption are sometimes compared to tobacco. The legislatures in Sweden, Finland, and Denmark are all considering even tighter controls on marketing sugary foods. Denmark’s National Consumer Council has petitioned the government to ban marketing “unhealthy food products” to anyone under 16 years of age, and Finland’s legislature is hearing from health groups that want a total ban on TV ads for sugar-laden food. Commenting on such proposals, the CEO of the Finnish Food and Drink Industries Federation said, “Implementing stricter controls on advertising food and drinks will not be a quick-fix answer to all these problems.” “The European Union is on it, Washington is on it, the ball is rolling now and the food companies have to do something,” said one top advertising agency executive. But he added, “I hope food companies won’t be bullied into doing things that play to the politicians,” noting there are other contributing factors for obesity, such as low income. He said food marketers could truly contribute to a solution by putting money into programs like the USDA’s Nutrition Program for Women, Infants and Children, a subsidized food and education program that also happens to be very good at driving sales for the products approved for the list. The key is to translate the hype to real solutions like physical education in schools and parents—the most important role models according to substantiated research—reclaiming responsibility. “If a food has a right to exist, a marketer has the right to advertise it.” Marketers are struggling against a crackdown on food adver- tising amid growing concern over obesity throughout the world. Marketers are trying to avert a clampdown with greater self- regulation. But despite a slew of individual company efforts to shift new- product and marketing focus to healthier offerings, the industry has, until now, largely shied away from defending itself more broadly.

MCDONALD’S RESPONSE For the last few years, McDonald’s has reacted to the obesity issues in several ways in the United Kingdom and other countries. Concerned about consumer reaction to the film Super Size Me,2

McDonald’s Corp. broke a U.K. campaign called “Changes” with poster ads that omit the Golden Arches for the first time, replacing them with a question mark in the same typeface and the tagline “McDonald’s. But not as you know it.” Promoting ongoing menu changes, the posters feature items such as a salad, a pile of free- range eggshells, pieces of fruit, and cups of cappuccino. The effort preceded a direct-mail campaign to 17 million households touting healthier menu items and smaller portion sizes. McDonald’s aim was to cause people to think differently about McDonald’s and to make the public aware of new products. “There’s no intention to abandon the Arches” but only to focus attention on the “healthy” additions to the menu. Despite the new campaign, research showed the chain hadn’t received the hoped- for awareness for some of the newer items on its menu, includ- ing the all-white-meat Chicken Selects and the fruit bags. More worrisome, a research study revealed that frequent users didn’t like to admit to friends that they ate at McDonald’s. “We don’t want to have closet loyalists.” One researcher urged more time for McDonald’s “Changes” campaign to get traction. “The market position and market stature of McDonald’s in the U.K. is not nearly as strong as it is in the U.S. and accordingly, you have to stick with the program longer,” he said. But he warned that the “Changes” campaign could backfire. “Trying to suppress the logo is not likely to change the hearts and minds of many fast-food voters in Europe.” In anticipation of the release of the documentary Super Size Me in the United Kingdom, McDonald’s in London went on the defensive with full-page newspaper ads discussing the film. The ads, headlined “If you haven’t seen the film ‘Super Size Me,’ here’s what you’re missing,” have appeared in the film- review sections of six newspapers to coincide with filmmaker Morgan Spurlock’s appearance at the annual Edinburgh film festival. The copy describes it as “slick and well-made,” and says McDonald’s actually agrees with the “core argument” of the film—“If you eat too much and do too little, it’s bad for you.” However, it continues: “What we don’t agree with is the idea that eating at McDonald’s is bad for you.” The ad high- lights some of McDonald’s healthier menu items such as grilled chicken salad and fruit bags. A spokeswoman for McDonald’s said it ran the ads to ensure there was a “balanced debate” about the film. Super Size Me distributor Tartan Films has retaliated by running identical-looking ads in newspapers promoting the film. As a direct response to government calls for food marketers to promote a more active lifestyle, McDonald’s U.K. launched an ad campaign aimed at kids featuring Ronald McDonald and animated fruit and vegetable characters called Yums. In two-minute singing- and-dancing animated spots, the Yums urge, “It’s fun when you eat right and stay active.”

2Super Size Me is a documentary about the fast-food industry and the addictiveness of fast food, its allure to children, and so forth. Scenes in the film feature Morgan Spurlock (the director, producer, and star of the documentary), whose fast-food feat consists of eating some 5,000 calories a day, twice what his doctor says he needs to maintain his starting weight of 185 pounds. He also avoids exercise because, he says, that’s what most Americans do. Spurlock gains weight— nearly 25  pounds over 30 days. His cholesterol goes up, and so does his blood pressure. His doctor describes his liver function test results as “obscene.” Spurlock complains of sluggishness, depression, shortness of breath, impotence, chest pressure, and headaches.

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Even though McDonald’s plans to expand its healthier menu offerings, it does so cautiously, so people remember that the Golden Arches at its core still means burgers and fries. McDonald’s, throughout Europe and elsewhere, is testing ways to address the obesity issue. In Scandinavia, for example, popular healthy local foods have been added to the McMenu, like cod wrapped in rye bread in Finland. In Norway, some outlets sell a salmon burger wrapped in rye bread. In Sweden, no salt is added to the food served. In Australia, McDonald’s took a differ- ent approach—it reduced its budget for ads directed to kids by 50 percent. McDonald’s French operation raised the ire of the parent company when it ran a print ad in a women’s magazine quoting a nutritionist’s suggestion that kids shouldn’t eat at the restau- rant more than once a week. While the ad was meant to promote McDonald’s and seems reasonable since the French only visit quick-service restaurants every two weeks on average anyway, such a campaign would have been heresy in the United States. McDonald’s Corp. later issued a statement claiming that “the majority of nutritionists” believe McDonald’s can fit into a bal- anced diet. Later, the company recruited a pair of French nutrition- ists who declared the  Big Mac and cheeseburger healthier than traditional French fare such as quiche. Marketers in France have lobbied hard to be allowed to use pos- itive lifestyle messages in ads—like emphasizing the importance of physical exercise and a balanced diet—rather than grim health warnings. France’s Ministry of Health appears to be listening and is now expected to let marketers choose among three or four positive health messages. Industry experts say the government changed its mind out of fear that strong warnings might backfire, causing anxi- ety among consumers about eating. Moreover, France may hope its new law, if not too extreme, will become a blueprint for Europe. Although McDonald’s responded to the obesity issue with menu changes and reworking its advertising, McDonald’s didn’t stop advertising to children. The chief executive of McDonald’s pooh-poohed the idea that McDonald’s should “go dark on commu- nications” to kids—two-and-a-half million U.K. customers every day, a fair portion of them under 16 years. McDonald’s is keeping children firmly in its marketing sights. School’s out, ads for the kids’ big summer movie releases are slapped on burger boxes, and a trip to McDonald’s is on the holiday menu. McDonald’s defense is that McDonald’s Ronnie’s YumChum friends are positively bursting with healthy advice. There’s even a song: “Don’t let your Yum-Chums get glum, put healthy stuff in your tum.” One of the casualties of the obesity turmoil may have been the tie between McDonald’s and Disney’s line of cartoon characters, a marvel for attracting young children to the Golden Arches. Disney failed to renew its 10 year exclusive partnership with McDonald’s. Both parties insist it was a mutual decision that would allow each to seek more profitable promotions. However, the growing concern over the obesity epidemic may have proved critical for Disney, which has become increasingly worried that its links to McDonald’s would damage its family-friendly image. For its part, McDonald’s may have wanted to avoid being linked to box-office flops such as Treasure Planet.

THE MARKET’S REACTION Initially, McDonald’s sales worldwide, as well as in England, suf- fered. However European sales last year, from restaurants open all year, was 5.8 percent, outstripping even U.S. growth. Some

320,000 more people a day than the year before visited McDonald’s in Britain. Around 90 percent of them are buying traditional prod- ucts such as burgers, fries, and ice cream rather than the healthier sandwiches and salads the chain stocks. The estimates mark a big turnaround for McDonald’s, which bounced back after nega- tive publicity about fat content in its food. McDonald’s changed menu—with such items as porridge, smoothies, and chicken wraps—is one reason for the growing business. The government has spent large sums on promoting healthier diets and the message to eat five portions of fruit and vegetables a day as obesity levels continue to rise. There’s been enough pub- licity about the relentless rise and impact of obesity, but from the figures, it seems the public is choosing to ignore them. More than 88 million visits were made to McDonald’s worldwide restaurants in one month, up 10 million on the previous year.

THE PRINCE CHIMES IN Just as the focus on obesity was giving away to concerns about anorexia and the pressure being put on young girls by so-called size zero models at a British Fashion Week, Prince Charles, Prince of Wales and future King of England, tipped the scales back in the direction of obesity. On a royal visit to the Middle East, the Prince suggested that McDonald’s was to blame for an obesity epidemic among children. Charles asked: “Have you got anywhere with McDonald’s? Have you tried getting it banned? That’s the key.” His comments were reported internationally, with reactions that were more positive for McDonald’s than one would expect. Positive comments from several sources attested to the effec- tiveness of the work that McDonald’s had done to improve its image. Health advocates and nutritionists said a ban on McDonald’s was “certainly not the answer” to Britain’s obesity epidemic. Even the press ran articles favorable to McDonald’s. One referred to the Prince as a hypocrite, because his company, Duchy Originals (one of the United Kingdom’s leading brands of organic food and drink),3 offered fast foods whose fat and calorie content was no better, if not worse, than McDonald’s. The Duchy Originals’ Cornish pasty carries 264 calories per 100g, consider- ably more than the 229 per 100 g of the Big Mac, and the fat content is 13.6g per 100g, which is higher than the 11.12g in the Big Mac. A medium portion of fries from McDonald’s contains 298 calories per 100g; again this amount is considerably less than the 464 per 100g contained in the Duchy Original Organic Hand Cooked Vegetable Crisps. A 100g serving of Duchy Original’s Organic Lemon Tart has 337 calories (one-third more than the McDonald’s Apple Pie). The Prince’s comments were later downplayed, stressing that he was merely advocating a balanced diet, especially for children, and wanted to make the point that burgers and chips were not the only foods available to them. McDonald’s took a conciliatory tact stating, “The comment made by the Prince of Wales appears to be an off-the-cuff remark that, in our opinion, does not reflect either our menu or where we are at as a business. We know that other Royal Family members have visited and have probably got a more up-to-date picture of us.” Prince Harry certainly does not share his father’s distaste for

3 In 1990, the Prince created Duchy Originals because of his belief in the clear advantages of organic farming, the production of natural and healthy foods, and sound husbandry, which helps regenerate and protect the countryside. All of the profits from Duchy Originals are donated to the Prince of Wales’s Charitable Foundation.

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Cases 2 The Cultural Environment of Global Marketing

McDonald’s and often eats their burgers. He even took advantage of a “buy one get one free” offer, then wolfed down two chicken burgers outside a McDonald’s in Plymstock, Devon.

QUESTIONS 1. How should McDonald’s respond when ads promoting

healthy lifestyles featuring Ronald McDonald are equated with Joe Camel and cigarette ads? Should McDonald’s eliminate Ronald McDonald in its ads?

2. Discuss the merits of the law proposed by France that would require fast-food companies either to add a health message to commercials or pay a 1.5 percent tax on their ad budgets. Propose a strategy for McDonald’s to pay the tax or add health messages, and defend your recommendation.

3. If there is no evidence that obesity rates fall in those coun- tries that ban food advertising to children, why bother?

4. The broad issue facing McDonald’s U.K. is the current attitude toward rising obesity. The company seems to have tried many different approaches to deal with the problem, but the problem persists. List all the problems facing McDonald’s and critique its various approaches to solve the problems.

5. Based on your response to Question 4, recommend both a short-range and long-range plan for McDonald’s to implement.

Sources: Jardine and Laurel Wentz, “U.K. Not Feeling the Love; McD’s Puts Slogan on Ice,” Advertising Age, September 13, 2004; “Thinking Locally,” Advertising Age, March 7, 2005; Alexandra Jardine and Laurel Wentz, “It’s a Fat World After All,” Advertising Age, March 7, 2005; Steven Gray and Janet Adamy, “McDonald’s Gets Healthier—But Burgers Still Rule,” The Wall Street Journal, February 23, 2005; Stephanie Thompson, “Europe Slams Icons as Food Fights Back,” Advertising Age, January 3, 2005; Emma Ross, “Obesity Hurting Health of European Children,” Associated Press, June 3, 2005; J. E. Brody, “Globesity,” The New York Times, April 19, 2005; “Disney Drops $1 bn McDonald’s Deal Amid Health Fears,” Belfast Telegraph, May 10, 2006; “McDonald’s Defies Critics With an Even Bigger Big Mac,” The Independent (London), April 24, 2006; “McDonald’s Set to Fight Message in Movie: Chain Warns Franchisees About ‘Fast Food Nation,’ ” Crain’s Chicago Business, April 10, 2006; “McDonald’s . . . Now With Ethical Sauce. Fast-food Giant Takes on the Critics with Soft Lights, Comfy Sofas and the Promise of Great Career Prospects,” Mail on Sunday (London), April 23, 2006; “Prince Wants McDonald’s Off the Middle East Menu as Prince Charles Advises Health Workers in the Middle East to Ban McDonald’s,” The Aberdeen Press and Journal, February 28, 2007; “So Why Does Charles Think McDonald’s Is the Root of All Food Evil?” The Scotsman, February 28, 2007; “McDonald’s Health Wins Back Customers,” The Independent (London), January 18, 2007; “Sure, McDonald’s ‘Health Kick’ Is a Ruse—But It’s Better Than Nothing,” The Independent (London), July 23, 2007; “UK’s McDonald’s Outlets Selling More Burgers than Ever Before,” Hindustan Times, January 7, 2008; “McDonald’s Answer to Obesity Fears—A Boom In Burger Sales,” Evening Standard (London), January 7, 2008.

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Ultrasound Machines, India, China, and a Skewed Sex Ratio

CASE 2-8

General Electric Co. and other companies have sold so many ultrasound machines in India that tests are now available in small towns like Indergarh, where there is no drinking water, electricity is infrequent, and roads turn to mud after a March rain shower. A scan typically costs $8, or a week’s wages. GE has waded into India’s market as the country grapples with a difficult social issue: the abortion of female fetuses by families who want boys. Campaigners against the prac- tice and some government officials are linking the country’s widely reported skewed sex ratio with the spread of ultrasound machines. That’s putting GE, the market leader in India, under the spotlight. It faces legal hurdles, government scrutiny, and thorny business problems in one of the world’s fastest-growing economies. “Ultrasound is the main reason the sex ratio is coming down,” says Kalpana Bhavre, who is in charge of women and child welfare for the Datia district government, which includes Indergarh. Having a daughter is often viewed as incurring a lifetime of debt for parents because of the dowry payment at marriage. Compared with that, the cost of an ultrasound “is nothing,” she says. For more than a decade, the Indian government has tried to stop ultrasound technology from being used as a tool to deter- mine gender. The devices use sound waves to produce images of fetuses or internal organs for a range of diagnostic purposes. India has passed laws forbidding doctors from disclosing the sex of fetuses, required official registrations of clinics, and stiffened punishments for offenders. Nevertheless, some estimate that hundreds of thousands of girl fetuses are aborted each year. GE, by far the largest seller of ultrasound machines in India through a joint venture with the Indian outsourcing giant Wipro Ltd., introduced its own safeguards, even though that means for- saking sales. “We stress emphatically that the machines aren’t to be used for sex determination,” says V. Raja, chief executive of GE Healthcare South Asia. “This is not the root cause of female feticide in India.” But the efforts have failed to stop the problem, as a grow- ing economy has made the scans affordable to more people. The skewed sex ratio is an example of how India’s strong economy has, in unpredictable ways, exacerbated some nagging social prob- lems, such as the traditional preference for boys. Some activists are accusing GE of not doing enough to prevent unlawful use of its machines to boost sales. “There is a demand for a boy that’s been completely exploited by multinationals,” says Puneet Bedi, a New Delhi obstetrician. He says GE and others market the machines as an essential pregnancy tool, though the scans often aren’t necessary for mothers in low- risk groups. Prosecutors in the city of Hyderabad brought a criminal case against the GE venture with Wipro, as well as Erbis Engineer- ing Co., the medical-equipment distributor in India for Japan’s Toshiba Corp. In the suits, the district government alleged that the companies knowingly supplied ultrasound machines to clinics that were not registered with the government and were illegally

performing sex-selection tests. The penalty is up to three months in prison and a fine of 1,000 rupees. Both companies deny wrongdoing and say they comply with Indian laws. A GE spokesman said its legal team would be looking into the charges. Vivek Paul, who helped build the early ultrasound business in India, first as a senior executive at GE and then at Wipro, says blame should be pinned on unethical doctors, not the machine’s suppliers. “If someone drives a car through a crowded market and kills people, do you blame the car maker?” says Paul, who was Wipro’s chief executive before he left the company in 2005. Paul is now a managing director at private equity specialists TPG Inc., formerly known as Texas Pacific Group. India has been a critical market to GE. Its outsourcing opera- tions have helped the Fairfield, Connecticut, giant cut costs. The country also is a growing market for GE’s heavy equipment and other products. The company won’t disclose its ultrasound sales, but Wipro GE’s overall sales in India, which includes ultrasounds and other diagnostic equipment, reached about $250 million in 2006, up from $30 million in 1995. Annual ultrasound sales in India from all vendors also reached $77 million last year, up about 10 percent from the year before, according to an estimate from consulting firm Frost & Sullivan, which describes GE as the clear market leader. Other vendors include Siemens AG, Philips Electronics NV, and Mindray International Medical Ltd., a new Chinese entrant for India’s price- sensitive customers. India has long struggled with an inordinate number of male births, and female infanticide—the killing of newborn baby girls—remains a problem. The abortion of female fetuses is a more recent trend, but unless “urgent action is taken,” it’s poised to escalate as the use of ultrasound services expands, the United Nations Children’s Fund said in a report. India’s “alarming decline in the child sex ratio” is likely to exacerbate child mar- riage, trafficking of women for prostitution, and other problems, the report said. The latest official Indian census, in 2001, showed a steep decline in the relative number of girls aged 0 to 6 years compared with the decade earlier: 927 girls for every 1,000 boys compared with 945 in 1991. In much of northwest India, the number of girls has fallen below 900 for every 1,000 boys. In the northern state of Punjab, the figure is below 800. Only China today has a wider gender gap, with 832 girls born for every 1,000 boys among infants aged 0 to 4 years, according to UNICEF. GE sells about three times as many ultrasound machines in China as in India. In January, the Chinese government pledged to improve the gender balance, including tighter monitoring of ultrasounds. Some experts predict China will be more effective than India in enforcing its rules, given its success at other popula- tion-control measures. Boys in India are viewed as wealth earners during life and lighters of one’s funeral pyre at death. India’s National Family Health Survey, released in February, showed that 90 percent of parents with two sons didn’t want any more children. Of those

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Cases 2 The Cultural Environment of Global Marketing

with two daughters, 38 percent wanted to try again. Although there are restrictions on abortions in this Hindu-majority nation, the rules offer enough leeway for most women to get around them. GE took the lead in selling ultrasounds in the early 1990s soon after it began manufacturing the devices in India. It tapped Wipro’s extensive distribution and service network to deliver its products to about 80 percent of its customers. For more remote locations and lower-end machines, it used sales agents. The company also teamed with banks to help doctors finance the purchase of their machines. GE now sells about 15 differ- ent models, ranging from machines costing $100,000 that offer sophisticated color images to basic black-and-white scanners that retail for about $7,500. To boost sales, GE has targeted small-town doctors. The company has kept prices down by refurbishing old equipment and marketing laptop machines to doctors who travel frequently, including to rural areas. GE also offered discounts to buyers inclined to boast about their new gadgets, according to a former GE employee. “Strategically, we focused on those customers who had big mouths,” said Manish Vora, who then sold ultra- sounds in the western Indian state of Gujarat for the Wipro-GE joint venture. Without discussing specific sales tactics, Raja, of GE Health- care South Asia, acknowledges the company is “aggressive” in pursuing its goals. But he points out that ultrasound machines have broad benefits and make childbirth safer. As the machines become more available, women can avoid making long trips into cities where healthcare typically is more expensive, he says. Indian authorities have tried to regulate sales. In 1994, the gov- ernment outlawed sex selection and empowered Indian authorities to search clinics and seize anything that aided sex selection. Today any clinic that has an ultrasound machine must register with the local government and provide an affidavit that it will not conduct sex selection. To date, more than 30,000 ultrasound clinics have been registered in India. GE has taken a number of steps to ensure customers comply with the law. It has educated its sales force about the regulatory regime, demanded its own affidavits from customers that they will not use the machines for sex selection, and followed up with periodic audits, say executives. They note that in 2004, the first full year it began implementing these new measures, GE’s sales in India shrank by about 10 percent from the year before. The sales decline in the low-end segment, for black-and-white ultrasound machines, was especially sharp, executives say. Only in 2006 did GE return to the sales level it had reached before the regulations were implemented, according to Raja. Complying with Indian law is often tricky. GE cannot tell if doctors sell machines to others who fail to register them. Different states interpret registration rules differently. GE also is under close scrutiny by activists battling the illegal abortion of female fetuses. Sabu George, a 48-year-old activist who holds degrees from Johns Hopkins and Cornell universities, criss-crosses the country to spot illegal clinics. The criminal case in Hyderabad against Wipro-GE, a company representative, three doctors, and an ultrasound technician fol- lowed an inspection that found one clinic could not produce proper registration and had not kept complete records for two years. A team of inspectors seized an ultrasound supplied by Wipro-GE. The inspection team’s report said it suspected the clinic was using the machines for illegal sex determination.

The owner, Sarawathi Devi, acknowledged in an interview that her clinic, Rite Diagnostics, was not officially registered at the time of the inspection. She said the ultrasound machine was owned by a “freelance” radiologist who had obtained proper docu- mentation for the Wipro-GE machine but was not there when the inspectors had arrived. She denied the clinic has conducted sex determination tests. Later, Dr. Devi’s records show, she registered the clinic with the government and bought a Wipro-GE machine, a sale the company confirms. The court case was part of a wider dragnet spearheaded by Hyderabad’s top civil servant, District Magistrate Arvind Kumar. During an audit last year, Kumar demanded paper- work for 389 local scan centers. Only 16 percent could furnish complete address information for its patients, making it almost impossible to track women to check if they had abortions follow- ing their scans. Kumar ordered the seizure of almost one-third of the ultrasound machines in the district due to registration and paperwork problems. A suit also was lodged against Erbis, the Toshiba dealer. GE’s Raja says that, in general, if there’s any doubt about the customer’s intent to comply with India’s laws, it doesn’t make the sale. “There is no winking or blinking,” he says. A Wipro-GE representative is scheduled to appear at the Hyderabad court hearing. An Erbis spokesman said he was unaware of the case in Hyderabad. A court date for Erbis had not been set. A visit to the clinic in Indergarh, a town surrounded by fields of tawny wheat, shows the challenges GE faces keeping tabs on its machines. Inside the clinic, a dozen women wrapped in saris awaited tests on GE’s Logiq 100 ultrasound machine. The line snaked along wooden benches and down into a darkened base- ment. On the wall, scrawled in white paint, was the message: “We don’t do sex selection.” Manish Gupta, a 34-year-old doctor, said he drives two hours each way every week to Indergarh from much larger Jhansi City, where there are dozens of competing ultrasound clinics. He said even when offered bribes, he refuses to disclose the sex of the fetus. “I’m just against that,” Dr. Gupta said. But he is not complying with Indian law. Although the law requires that clinics display their registration certificate in a conspicuous place, Dr. Gupta’s was nowhere to be seen. When Dr. George, the social activist, asked for the registration, he was shown a different document, an application. But the application was for a different clinic: the Sakshi X-ray center. Dr. Gupta said the proper document wasn’t with him, adding: “I must have forgotten it at home.” Asked by The Wall Street Journal about the clinic, the local chief magistrate of Datia district called for Dr. Gupta’s dossier later in the day. When a local official arrived, “Sakshi X-Ray center” had been crossed out on the application. In blue pen was written the correct name, “Sheetal Nagar,” the part of Indergarh where the clinic is located. It’s not clear how Dr. Gupta procured the GE machine. Dr. Gupta said he bought it from a GE company representative, but he declined to show documents of ownership. GE says it does not comment on individual customers. Like the rest of India, the Datia district government has taken a number of steps to try to boost the number of girls in the district. For girls of poor families, the local government provides a place to live, free school uniforms, and books. When they enter ninth grade, the government buys bicycles for them. Yet the low ratio of girls born had not budged much over

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Part 6 Supplementary Material

the past decade, according to Bhavre, the district government official. Ultimately, says Raja, head of GE Healthcare in South Asia, it’s the job of the government, not companies, to change the pre- vailing preference for boys. “What’s really needed is a change in mind-sets. A lot of education has to happen and the government has to do it,” he says. India’s Ministry of Health, which is now pursuing 422 different cases against doctors accused of using ultrasounds for sex selec tion, agrees. “Mere legislation is not enough to deal with this problem,” the ministry said in a statement. “The situation could change only when the daughters are not treated as a burden and the sons as assets.”

Most recently, both Siemens and GE have introduced handheld ultrasound machines, only slightly larger than an iPhone. Initially they will sell for under $10,000.

QUESTION What should GE management do in India about this problem, if anything? In China?

Source: Peter Wonacott, “Medical Quandry: India’s Skewed Sex Ratio Puts GE Sales in Spotlight,” The Wall Street Journal, April 18, 2007, pp. A1, A8. Licensed from Dow Jones Reprint Services, Document J000000020070418e34i00032; Paul Glader, “GE Is Latest to Make Handheld Ultrasound,” The Wall Street Journal, February 12, 2010, online.

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Coping with Piracy in ChinaCASE 2-9

Read the following two stories about intellectual property theft in China carefully, then answer the questions at the end of the case.

Monday, two fake Apple stores in Kunming were ordered to close. But Steve Jobs may have wished otherwise, since the Apple wannabes would have benefited Apple Inc. Apple’s glorious success in the Chinese market has to do with the scarcity of its products and the difficulty to counter- feit them, adding to the premium consumers are willing to pay. The Cupertino-based technology giant has a total of four official stores in China—two in Beijing and two in Shanghai—which have become the most heavily trafficked Apple Stores in  the world. According to The New York Times, they also generate the most revenue, outselling even the Fifth Avenue Apple Store in Manhattan, which is open around the clock. Many of you may have not known the actual number of real Apple Stores in China until fake ones were reportedly spotted in Kunming, the capital of China’s mountainous southwestern Yunnan province. The fake Apple Stores in Kunming were outed after an American blogger discovered the store and posted her find- ings onto the Internet. “This was a total Apple store rip-off. A beautiful rip-off—a brilliant one—the best rip-off store we had ever seen,” the anonymous blogger posted . . . . Two days after the revelation, industrial and commercial authorities in Kunming launched a sweeping investigation not only on the alleged Apple Store, but also on all the city’s electronics stores, reports a Chinese news outlet Xinhua. Business licenses, authorized permits of brand use, and the purchasing channels of each store were inspected, said Xinhua. After inspecting 300 shops in the city, officials found five self-branded “Apple Stores” to be operating without authori- zation from Apple Inc, the Metropolitan Times report said.

Among the five, two fake Apple stores were told to shut down because they did not have an official business license. China is notorious for counterfeited products from watches, clothes, luxury items, electronics, and in this case Apple stores. The fake items generally are sold for a frac- tion of the actual cost in retail stores, but the products in the fake Apple Store were selling for the same price as the real iPads and iPhones in Apple-authorized stores. Interestingly, Apple Inc. declined to comment on the case that flooded the media and given the original whistle- blower one million page views within the first 72 hours. “Are you listening, Steve Jobs?” was the title of the original blog post . . . . For sure, Apple, famous for sensitive control on its supply chain, would have been aware of the five fake stores. “After all, how could one foreigner aimlessly strolling down the streets of Kunming with her husband find some- thing that an obsessively protective company with hundreds of investigators and lawyers could not?” said Gordon G. Chang of Forbes in a blog post . . . . “Moreover, Apple had received a complaint about the fakes filed by a major autho- rized Kunming distributor.” Chang speculated that more than Apple was taking its time to figure out the source of the products sold by unauthorized sellers, the tech giant had not decided how to handle the situation. Aside from protecting the company’s intellectual properties, Apple was benefiting from the renegade stores in Kunming that sell Apple goods at official prices. “To be honest, Apple is the biggest winner in the current situation,” a Yunnan-based intellectual property lawyer Zhang Honglei was quoted by Forbes as saying. “It has many Chinese companies willing to help it sell products and increase the popularity of its brand for free. Why would Apple sue them? Why would Apple punish them for helping it sell more?”

Fake Apple Store in Kunming, China Source: REUTERS

Exterior of the fake Apple Store in Kunming Source: REUTERS

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For Apple to build up China market share swiftly before counterfeiters enter the field, even the unauthorized retailers could help achieve that objective by gearing up the sales speed. Especially now that Apple’s presence seems to be out- grown by the development of the middle class in China, no wonder: “China has taken rip-offs to a new level, pirating Apple Stores themselves,” Charles Wolf, a securities analyst

who follows Apple for Needham & Company, said. “It speaks to the demand for Apple products throughout China.” What a happy worry for Steve Jobs. Finding a sweet spot to take over the Chinese market, Apple now faces a challenge of creating the best synergy with China’s state-owned companies while avoiding competition. Apple’s invasion into China seems to have no end.

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QUESTION Assume you are the CEO of a new firm that has perfected a package of software applications for medium- and large-sized companies to help manage intellectual property applications (patents, trademarks, copy- rights). Licenses for companies in the United States have sold briskly, at $2000 per company for more than a year. Now you have heard rumors that your software is being pirated in China. Ironic, isn’t it?

Write a briefing for your board of directors with a specific plan of action to address this leakage of your intellectual property into the Chinese market.

Source: “Why Fake Apple Stores in China Can Make Steve Jobs Happy,” IBTimes New York, July 25, 2011.

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