In September 2003, Art DeFehr, president of Canada’s second-largest furniture com pany, Palliser Furniture Ltd., of Winnipeg, Manitoba, was pondering whether to sig nificantly expand the company’s relationship with China. Ever since Palliser set up a plant in Mexico in 1998, the company had faced increasing competitive pressures from Asia, especially from China.
THE MEXICO INVESTMENT 1998
In 1998, Palliser set up a leather furniture manufacturing facility in Saltillo, Coahuila, Mexico, to serve the Midwest and southern North American market. Palliser continued to ship products from its Winnipeg plants to the northern United States and Canadian markets. The Mexican facility would expand Palliser’s leather manufacturing capac ity, which was also part of its strategic shift from producing wood furniture to more leather products. In 1997, DeFehr had considered the China option. Beginning in the mid-1990s, Taiwanese furniture manufacturers started to establish plants in Mainland China, and China’s household furniture exports to the U.S. market had increased quickly. How ever, in 1997, China was not making much leather furniture. This would have been a proactive move to respond to the emerging low-cost Asian furniture-manufacturing sector. DeFehr nonetheless chose Mexico over China for several reasons: 1. The Mexican location, which was close to the Texas border, would provide a lower distribution cost structure for Palliser. Prior to 1998, Palliser had difficul ties absorbing the higher freight cost when the company shipped products from Winnipeg, Manitoba, Canada, across the U.S.-Canada border to the south.
Jing’an Tang prepared this case under the supervision of Professor Paul W. Beamish solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling o f a managerial situation. The authors may have disguised certain names and other identifying informa tion to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail email@example.com. Copyright © 2004, Ivey Management Services Version: (A) 2009-10-08
Richard Ivey School of Business The U niversity of W estern O ntario
In te rn a tio n a l Strategy: C reating Value in G lob al M arkets
At the time, China’s leather furniture sector was small and inexperienced. Tanner ies in China were not suitable for making leather furniture and the leather had to be imported. Moreover, although there had been leather cutting and sewing workers in the garment business in China, they had little experience in producing leather furniture. In Mexico, there were more industry skills. One other major firm in the volume furniture business, Leather Trend, built products in Tijuana (a Mexican city near San Diego, California) and shipped across the continent to other cities in the United States. Other firms in Mexico were all very small businesses. At that stage, the foreign investments in China were mainly joint venture opera tions. DeFehr wanted to own a business; he did not want a joint venture (JV) and he did not want to contract the work and noted: I did not feel comfortable owning something in China. I still have certain discomfort. There are millions of examples of joint ventures in China. The JV partners were pushed out after some time. In contrast, in Mexico it was easy to wholly own a business. Palliser had manufactured its products mainly in Canada with only a small por...