Google’s Nest Expansion into Germany and Uruguay using a cross comparison between New Zealand and South Korea
A concept paper based on 2015 November global conditions
As the brainchild of former Apple employees, Tony Fadell and Matt Rogers, Nest is a producer of Wi-Fi-enabled smart home technology that is focused on reinventing common household appliances. The company’s goal is to reimagine the customer experience by leveraging complete feedback systems, from users to energy companies, and to develop thoughtful and simple homes. In order to realize this goal, the company offers a thermostat, security camera and smoke/CO2 alarm. Given the nature of this product, Nest has certain needs to be met before it enters any given foreign market. Some key areas of interest are disposable income, IP rights, environmental/energy focus and internet penetration. When looking at a possible expansion into a foreign market, Nest needs to be sure that it can meet local market needs. As such, Nest is focusing on countries that have high levels of English proficiency and a Western focus. Through an analysis of Germany, New Zealand, Uruguay and South Korea, it was decided that Nest should enter the German market first then possible expand into Uruguay.
Unlike many of its competitors, such as Samsung’s SmartThings and German-based tado®, Nest’s impetus for international market expansion are not solely driven by monetary gain but rather a mission for environmental sustainability and human safety leveraged upon technological solutions. Furthermore, while Google bought Nest is more interested in forming partnerships with existing firms, such as Mimo, a baby camera and monitoring system, or Lutron, an application that allows homeowners to control their lights, shades and thermostat, just to name a few.
While Nest’s current international expansion is driven by sustainable & responsible practices, several factors must be taken into consideration for continued market expansion. In September 2014, Nest expanded its mainly North American and U.K. market to include: Belgium, France, Ireland and the Netherlands. While customer support and software interfacing is available in local languages, Nest has no plans of changing the existing Open Source Compliance to account for the new language markets. Hence, Nest has an established platform of investing in Anglo-based markets with a high to medium proficiency in the English Language.
Nest’s most popular product, the Learning Thermostat, retails for 249 USD not including shipping and installation charges, whereas in the United States the average cost of a simple thermostat are 20.5 USD. Leaving a margin of the population with a means, a disposable income, willing to spend more than twelve times the average amount on a high tech device that exceeds minimal expectations.
This desire can be attributed to several key factors. The first is consumer by in to the innovation and gadget culture. Additional incentives from energy companies, insurance firms, and internet service providers assisted Nest in capturing further consumers. Consumers also believe in the brand/product identity; in a vision of a safer, more environmentally friendly home that is easily controlled via Wi-Fi. Popular media has also swayed consumers into integrating smart technology into their home, and Nest through its product line and its partnerships provides an adequate space for that.
As Nest relies on a protocol called Weave to (inter)connect devices. In 2016, Nest plans to open up its thermostat software to communicate with non-nest platforms and devices. While this shift will allow third party applications and products to interact with the Nest interface, the requirement for a stable information and communications technologies (ICT) and Wi-Fi infrastructure are ever more prominent. Until 2016, Nest consumers have been using a Google serviced, cloud-based application program interface (API). This API allows Nest devices to communicate with one another without the presence of a wireless, internet network.
Leading the charge with Nest into 2016 are General Electric Co. (GE) and Procter & Gamble. Currently, GE has established markets in South Korea, Germany, and New Zealand; Whereas GE’s only presence in Latin America is Brazil. Procter & Gamble also has a base of operations for its market distributions in Germany and New Zealand, it does not have corporate sites in Uruguay and South Korea. As Nest looks to international markets for expansion, existing partnerships in new countries and available corporate sites from partnership firms can provide valuable scaffolding.
Since Nest’s thermostat inception into the U.S. market the company has been fighting off a series of lawsuits and allegations of patent stealing. For example, in 2012, Honeywell, a leading competitor in the home environment management market, filed for a series of patent infringements against Nest. Then a year later Allure Energy sues Nest over the learning capability of the thermostat product line. Furthermore, a series of class action suits has been brought against multiple Nest products. On many occasions Nest has successfully defended its intellectual property (IP), and continued market expansion via big box venues and online platforms.
The annual Corruption Perceptions Index reports can provide insight into the comparative rankings between Germany (Score 79/Rank 12), New Zealand (Score 91/Rank 2), Uruguay (Score 73/Rank 21) and South Korea (Score 55/Rank 43). Regardless of the faults or claims, Nest’s next market for expansion must provide a manageable space for the company to continue to fight legal actions presented on an international scale. To assist Nest in the barrage of legations, nations that have a firm support system of international IP rights and low corruption levels.
To this end the selected nation for market expansion should have low levels of corruption and a strong support for Nest’s intellectual property. Additional support systems in the form of existing partnerships in potential host nations can offer valuable support. Additionally, the nation selected for market expansion must have a stable ICT infrastructure that can accommodate Nest’s product lines. It was under these considerations, and from the selection available, that Germany was selected as the most viable option.
Germany is often viewed as one of the most important and most difficult markets to enter in the European Union. If businesses enter the German market without establishing brand equity in other European markets first, it can be difficult to gain the required exposure. On the other hand, it is difficult to gain a foothold in a saturated market. This situation puts Nest in a unique position to be successful in Germany. While there are a number of reasons why Germany is an ideal market for Nest, the four areas that should be highlighted are social, economic, environmental and manufacturing. The social aspects show that 41.7% of the population is within the target age range and focused on modernization, which is in line with the segmentation study. Germany is the largest economy in the EU and the fifth largest economy in the world. Germany is focused on reducing its reliance on non-renewable sources of energy in an effort to reduce its footprint on the global environment. The core philosophy of Nest is to reinvent home appliances through technology in order to help the individual consumer and their family to reduce their energy footprint. When entering the German market, Nest could utilize its current capital resources in Ireland, which has an established relationship with U.S. tech companies, to manufacture its products. Through this analysis it becomes clear that Nest should continue with its European expansion by entering the German Market.
We compared all the four countries we researched based on five critical factors: the English Proficiency Index, total disposable income, IP rights index, the Climate and Energy Index and Internet Penetration.
English Proficiency Index is a report which attempts to rank countries by the average level of English skills amongst adults. It draws conclusions from data collected via English tests available for free over the internet. The rating is out of 100. No surprises as New Zealand had the highest index followed by Germany and then South Korea. English is the native language for New Zealand while in the other countries it’s a second language.
The next criteria we compared was total disposable income. Disposable income is total personal income minus personal current taxes. We equated disposable income to be the correct measure to buy nest products. Germany had the highest total disposable income standing at $ 2500 Billion while South Korea came in second at $775 Billion. We were aware that these numbers were influenced by population but even when we performed the analysis as disposable income per person the results were the same.
We also looked into the IP rights index. This economic index has continuously proven to be the most inclusive and far reaching study on the correlation between economic success and property rights worldwide. Developing economies tend to struggle as weak protectionist policies over intellectual and physical property rights tend to be more prevalent. Germany is known for its engineering and hence was no surprise that it was one of the top countries in IP rights protection. It had a rating of 9.3 (3rd globally) while the rest of the countries behind with South Korea closest at 8.5.
One of other criteria we thought was important to our analysis was Climate and Energy Index. Climate and Energy assesses mitigation actions and access to energy relative to a country’s level of economic development. Instead, this indicator is measure of countries’ ability to reduce the intensity of carbon emissions over time. Our products are targeted at saving energy (Thermostats), so we equated countries with better Climate Index as potential markets. New Zealand just edges Germany on this indicator. All though both New Zealand and Germany are not world leader in this index, they are, however, head and shoulder above South Korea and Uruguay.
Lastly, one of the most important criteria we analyzed was Internet Penetration (% of population). Our devices are connected to the Wi-Fi all the time and without internet they will not be effective. Hence, this criteria had a lot of weight in our decision to choose the right country. Three of the countries Germany, New Zealand and South Korea were all close. New Zealand (94.6%) edged Germany (88.6%). Although the percentages are similar but the population of Germany is 10X that of New Zealand. The number of people with internet is higher in Germany.
In conclusion, we had a consensus that Germany was the right country to enter. We also considered New Zealand as a close alternative but population/ Market size was a hindrance to scale operations. Germany was also closer to some of the European countries we were already present in. We hypothesized that we could use some of existing infrastructure and distribution channels within Europe.
As we mentioned earlier, Germany has appropriate feature of business expansion, but Germany also has growing opportunity of new market. For example, Germany has many highly skilled workers due to the high level of education system. This means if NEST establish local manufacturing facilities, they can easily employ highly skilled workers who also has knowledge about high-tech products and software, and they can keep creating high quality and innovative products. Also, since Germany has already many local companies that have such high skill and knowledge, partnership with such local companies might be an effective way of business expansion. Furthermore, from the impression toward recent immigration issue, the number of people who would concern about security issue might increase, which would increase the opportunity to buy security products of NEST.
On the other hand, there would be some risks to expand business in Germany. One of the risks is that there is an already existing market of smart home devices in Europe, so the market might be already saturated. Also, funding in Germany to establish new branch or factory would be a risk. In addition, since there are some competitors like SAMSUNG that has similar smart home devices already expanded business in Germany, NEST might not be able to make enough profit if they face excessive competition.
Thus, although Germany is an appropriate market to expand business in the short run, it would be necessary to develop new market in the long run to mitigate the risk. As we consider in long-term perspective, Uruguay is one of the suitable market among the countries we researched. Uruguay has one of the highest level of living quality, so the people would have enough disposable income to buy smart home appliances. This means Uruguay is the one of the first countries that we should consider about business expansion. Also, because Uruguay is one of the countries of MERCOSUR and is adjacent to big market Brazil, it has huge economic advantage. Moreover, reliable intellectual property protection would be another advantage because NEST can make long-term relationship with local companies.
One of the possible risks would be that the economic growth opportunity and increase in disposable income is not clear. Another risk factor would be that consciousness for environment and security might not be necessarily as high as North American and European countries. Besides, the number of highly skilled workers who have knowledge on high-tech product and software would be possible risk factor.
While Germany represents the ideal current market for Nest to launch its products, competitor presence and Nest’s over saturation in European spaces are growing concerns. For example, Samsung’s SmartThings are already spreading across the U.K. and Ireland, and Nest has entered both these markets as well as Belgium, the Netherlands, and France. Hence, the team suggests Nest explore a Latin American market after Germany, via Uruguay.
Uruguay has a strong history of protecting investor’s IP rights, and great partnerships with U.S. based partnership firms, especially in the areas of science, innovation, and environmental stewardship. Uruguay has a stable democratic society and social benefits that sustains a highly trained, urbanized work force. Additionally, Uruguay has a history of supporting environmental, security, and energy conversational investors as a host nation. Furthermore, Uruguay’s proximity to Brazil could prove to be fruitful in future endeavors.
German Environment – Contributing author Rose Mason
Germany presents the widest range of opportunities for Nest as it seeks to continue its market expansion in Europe. The powerhouse of Europe, Germany is one of the main European markets that needs to be entered in order for Nest to have a sustainable presence in Europe. According to a study conducted by the European Commission, Germany, the UK and France hold the top positions as European ICT (information and communications technology) Poles of Excellence. Nest has already entered the UK and France. It would be remiss of them to miss out of the opportunities presented in Germany, Europe’s largest economy. By delving into the opportunities and risks of this market expansion, the reason why Nest should enter the German market will become even more apparent.
While there are a variety of opportunities when looking at the German market, five main topics take precedence: environmental/energy focus, economic focus, disposable income, technological focus and international IP rights. Nest’s core philosophy is to reduce waste, use energy wisely and lead social responsibility efforts. Nest and Germany are aligned in this philosophy. Germany is focused on phasing out nuclear power by 2021, creating buildings that consume zero energy from 2020 and establishing carbon free energy in all sectors. While Germany has had some setbacks, it has made some progress. According to the graphic on slide 13, Germany gained 28% of its energy from renewable sources, a 3% increase, 16% from nuclear energy, 51% from fossil fuels, a 7% decrease, and 5% from other. These initiatives show that Germany has a very real interest in energy conservation. Nest can only succeed in countries like Germany because of the strong focus on preserving energy.
The economic opportunities presented by Europe’s largest economy cannot be ignored. GDP and market size are typically one of the most interesting and important aspects to many business leaders when they look to enter a new market. Even the mention of Germany as the world’s fifth largest economy is bound to get the interest of many companies. With a population of over 80 million of which 41.7% are aged 25-54, Germany is a prime country for Nest to target. This target age range tends to have higher paying jobs, disposable income and families. Ignoring a country with a strong history of economic growth and an ideal target population would be a clear mistake.
Even though the Eurozone is in a minor slump, Germany still has positive GDP growth of 0.4%. Known for its thorough and strict cultural aspects, it is highly unlikely that Germany will go through a downturn anytime soon. Even with the costs of providing for the many Syrian refugees that it has promised to take in there shouldn’t be any long-term negative impacts on such a strong OECD economy.
When looking at the product line for Nest, it becomes very apparent that Nest produces premium products that require customers to have high levels of disposable income. According to the OECD Better Life Index, the average household in Germany has a net-adjusted disposable income per capita of USD 31,252. This amount is above the OECD average of USD 25,908 and on par with the disposable incomes of the other European countries in which Nest is currently operating. German employees are used to higher than average levels of compensation and wealth, to a certain degree, is seen as a source of power. Not only do Germans on average have enough disposable income to purchase Nest products, their culture has a preference for such premium products. Given the fact that the German government is going to enforce some fairly strict environmental and energy goals for the country, which could cause additional expenses for the average German, there is an unmet need for products that could help consumers reduce their long-term energy expenses.
All of Nest’s products focus on using technology to reinvent common household appliances and solve common energy problems in the home. The caveat to the product’s performance is that they only perform well in countries that have strong ICT positions. Without access to strong, connected wireless networks, the products are severely limited in their abilities. As stated above, Germany holds thirteen regions throughout the tier 1, tier 2 and tier 3 EIPE (European ICT Poles of Excellence) Composite Indicator, which is the most of all of the European countries included. Germany is the only country with a region that has a perfect score in the EIPE Composite Indicator. This strong connection with technology makes Germany a more than ideal country for Nest to operate. Given the fact that the German market is hard to enter, it makes sense that Nest entered other European countries first. Sometimes it is better to establish a presence in surrounding countries to build demand in the preferred country instead of going into the preferred country and starting out with a blank slate.
Due to the technological nature of Nest products, a country with high international intellectual property (IP) rights is a necessity in order to protect the product and the country from imitations. According to the International Property Rights Index, Germany ranks 8/19 regionally and 11/97 globally. These rankings are on par with those of the other countries in which Nest operates. Germany’s strong IP rights will ensure that Nest’s product is protected.
Even though any market expansion includes numerous risks, there are three main risks in the areas of manufacturing, culture and competition. In regards to manufacturing, it is often stated that Germans prefer products that are manufactured in Germany. For this reason, there could be some resistance to Nest. While the extent of Nest’s manufacturing locations is unknown, the assumption is that Nest is following the practice of other major technology firms in Europe by manufacturing in Ireland. It is unlikely that Germans would have a distinct aversion to this practice, but they may prefer the product to be manufactured domestically. Culturally, Germans tend to be more direct and thorough than Americans. If there were a manufacturing issue, Nest would be sure to know about it. According to past market expansions, Nest should be able to mold itself to the needs of the German market. The idea that Germans tend to aggregate towards the norm is very useful for Nest. Combining the government’s energy and environmental policies with this cultural aspect could cause Germans to have a particular interest in the product in order to be more aligned with the government and each other. This could be very beneficial for any smart home technology company looking to enter the German market. Currently, only Samsung SmartThings is in the German market, but their product line isn’t as advanced as Nest’s. Furthermore, the German market is very attractive and often becomes saturated very easily. By using the brand equity that Nest has already built in Europe, now would be the ideal time to enter this market.
Germany is the powerhouse of Europe. Poised on the forefront of innovations and progress in renewable energy, technology, international IP rights and more, it is a more than ideal country for Nest to enter. There are a few stumbling blocks that could get in the way, such as the desire for domestic manufacturing and more of a direct culture, but these risks can be mitigated once a thorough understanding of Germany is done. By meeting German consumer’s needs, Nest can provide the German market with products that it needs to meet its energy goals. Success for Germany and Nest are intertwined.
Uruguay in Comparison– Author Najia Sabir
Within Latin America, Uruguay is unique for its success as an “equitable society and its high per capita income, low poverty rate and absence of extreme poverty,” as declared by the World Bank, the Human Development Index, the Human Opportunity Index and even the Economic Freedom Index. Overall, Uruguay represents a market with a stable economy, decent communication and IP infrastructure, and growing consumer base which in turn represents a viable market for Nest. Additionally according to the CIA World Factbook, Uruguay has achieved very high levels of access to government services such as free education, clean water, sanitation and electricity. These opportunities have allowed citizens high levels of governmental trust.
Both Uruguay’s domestic and international relationships are favorable for Nest to move into this market. Uruguay has a stable constitutional republic with an independent judiciary and a fully integrated civil law system based on the Spanish Civil Code. It also has a westernized cultural attitudes mixed with regional environmental concerns means that the country is actively promoting a growth in environmentally friendly technologies and related businesses. As mentioned before, one of Uruguay’s largest imports is technologies and one of its existing import partners is the United States, where Nest is based.
Entering into a new content can prove to be a challenge and in-country management will prove to be the most difficult. As a Spanish speaking nation in a new regional market, infrastructure and human resources will need to be developed from the ground up. Montevideo, the capital, can serve as the ideal location for establishing shipping, administration, and marketing all in one space. The city and neighboring regions have abundant airports and six large trading ports will simplify shipping. During start-up, Spanish speaking management may be pulled from existing, multilingual staff or from Nest’s existing European partners. Additionally, Montevideo has several established legal firms that can assist U.S. Nest in setting up regional hubs.
Uruguay’s economic strategies make it well suited for smaller technology companies like Nest. Uruguay maintains a low level of institutional corruption, focus on consistently high levels of employment, and broad social policies have created an environment that is relatively insulated from severe economic fluctuations. According to the World Bank, Uruguay was one of the most successful Latin American countries in weathering the ongoing world fiscal crisis. Uruguay’s continued focus on sustainable growth coupled with the support of the World Bank and other financial institutions creates a positive forecast for economic growth. Furthermore, Uruguay’s strong policy focus on environmental sustainability means that NEST’s corporate policies will be well received. Here are just two examples: (1) Uruguay is the first Latin American country to implement the UNDP Poverty-Environment Initiative (PEI); and TIFA includes Memorandums of Understanding on renewable Energy and Energy Efficiency and Small and Medium Enterprises.
Uruguay has strong trade ties with the United States through Bilateral Investment Treaties (BITs), and is also actively participates in international fora including the International Court of Justice (ICJ), and World Trade Organization (WTO). Uruguay’s positive relationship with Latin American countries both in and outside of Mercosur render it a good starting point for future expansion in the region. While there might be some challenges related to linguistics and the need to translate customer service centers to Spanish and currency issues. Any additional issues are fully supported by the US-Uruguay trade & Investment Framework Agreements (TIFA). Historically, business ventures between Uruguay and U.S. firms have been very welcoming.
With the current whirlwind of litigations and lawsuits follow Nest intellectual property protection becomes a critical issue. And, Nest should not invest in a nation that cannot support this company’s technology and products. Uruguay has a strong and growing IP regime due to its western oriented trade agreements. Additionally, with such a growing economy locally and globally, Uruguay has made strides in terms of protecting its IP rights and trades; in 2014 it grossed nearly 37 million in charges for the use of intellectual property. In Uruguay, IP protection has improved greatly in the last 10 years and the receipt of patents on Nest technology will limit ease of entry for other U.S. competitions, such as Honeywell and Samsung. Once the patent expires, the Nest’s trademark and marketing strategies should help maintain a strong market share for NEST products in the related technology space.
In 2014, Uruguay was ranked as a high-income nation with an estimated $20,600 GDP, with an average annual (estimated) growth rate of 5.2 % between 2006 and 2014. In 2014, 25.5% of Uruguay’s GDP comes from imported goods and the top imports consist of: “refined oil, crude oil, passenger and other transportation vehicles, vehicle parts, cellular phones” coming from the following nations respectively: “Brazil 20.3%, China 16.9%, Argentina 13.1%, US 10.2%, Venezuela 4.6%.” With such a strong history of economic performance Uruguay has been able to withstand external disturbances.
Furthermore, Uruguay’s proximity to Brazil’s large consumer base can offer additional and future incentives for Nest’s sales. For example, Brazil is located only 1,050km from the nation’s capital which is also a trading post. Additionally, Uruguay has 660 km of coastline, and six international shipping ports which Nest can readily access to distribute products within the host nation.
The CIA World Factbook found that the 6.5% of the population was unemployed (in 2014), and 18.6% of the population fell below the national poverty line (in 2010). More specifically, moderate poverty dropped from 32.5% (in 2006) to 9.7% (in 2014), while extreme levels of poverty has nearly vanished: 2.5% to 0.3% during the years. Not only are poverty levels low but most citizens live in highly urbanized areas (95.5%), and with the median age of 34.3 years old Uruguayan citizens are the prime demographic consumers of Nest’s products. These are the individuals are the most likely to install Smart technologies in their homes.
Uruguayans represent the right consumer market demographics for the Nest product line with a lower median age and highly urbanized population; the physical and IP infrastructure is able to support initial market penetration; as a nation, Uruguay supports Nest’s company mission to support environmental causes and ensure consumer security; and product distribution and protection would be easily managed with a regional hub in Montevideo.
New Zealand’s Proximity – Contributing author Mitsuhiro Ito
From our analysis, New Zealand could be one option but not necessarily the best county to expand business. The reason we considered this is as follows. From Ghemawat Cage Analysis, we found New Zealand has a lot of similar cultural background with US. They have same official language, English, and their majority of religion is Christianity. Also, they are both colonization experience by England, and now have highly developed and have less corruption and highly political stability. However, they have different time zones because New Zealand is quite far from US, which means New Zealand has closer relationship with Asia and Oceania countries, especially Australia. Economic situation is a little different from US. New Zealand is not as highly developed as US. GDP per capita is lower than US, but internet penetration is as high as US.
From the Country Framework Analysis, we found different aspect of New Zealand as a whole. Historically, New Zealand got independence from England, so New Zealand had strong relationship with England, but opened the market for acquiring new business opportunities. New Zealand has strength on agricultural and dairy product, and has strong trade relationship with Australia, China, US, and Japan. They import oil and minerals from mostly from Australia, so Australia has especially strong relationship on trade. Also, tourism is one of the best resources to attract foreigners to New Zealand.
The strategic goals of New Zealand are very clear. They expect foreign investors to invest more on their economy and they want to be more competitive. Earthquake in Christchurch was serious disaster, so the government invests a lot of budget on rebuilding Christchurch. On the political standpoint, they are very positive toward renewable energy. Because nature tourism is one of the biggest industries, preserving nature and eco-friendliness are important for them. Although they have ethnic minority, their political condition is stable and the right of such minority is protected.
On performance, New Zealand is very characteristic. Because they want to attract foreign investors, their market is highly open and this openness to foreign investors ranked 1st on starting business. To attract foreign investors, administrative procedure and cost are considerably reduced. However, GDP growth is not as high as other developing countries, and private consumption is lower than OECD average because of less disposable income and high level of household debt. Their IP protection is reliable and higher than average. On social point, their population will be expected to grow stably, and unemployment rate is considerably low.
Thus, New Zealand has some cultural similarity to western countries, and strong trade relationship with Asia and Oceania countries. They have great natural tourism resources, so they have mind of energy efficiency and environment consciousness. Also, they have very open market and it is highly ranked in starting business. Economically, New Zealand has stable growth and population also will grow stably. In addition, New Zealand has somewhat higher protection policy for IP.
These are the general country analysis of New Zealand. We also analyzed the fitness of business expansion to New Zealand of NEST. New Zealand has cultural similarity to western countries, which means communication between headquarter and local branch would be easier. In terms of economic aspect, New Zealand has stable growth and low private consumption, so it might be difficult to sell new product to the people. IP protection ranking is higher than average, but not the highest. Environment consciousness is important for selling smart home devices, but it not clear that they are interested in high-tech devices. They are mostly interested in renewable energy to protect the environment, due to having rich geothermal energy, which means they do not necessarily have interest on high-tech energy management system. Moreover, there are no competitor is existing in New Zealand, but it may also mean that New Zealand is not so attractive, or it is not necessary to build branch there because they can import any products from US or Australia with readable instructions. Internet penetration is also important and growing number of tablet is positive trend for mobile device market.
Based on these analysis, New Zealand is good place to start business, but not for business expansion of NEST. Because the high ranking in starting business is due to the low cost and short procedure, the ranking does not necessarily mean New Zealand is suitable place to expand business. Most critical point would be economic market. Economic size of New Zealand is not as high as other developed countries and is not expected to grow in the future, and the price would be not competitive because export would have some cost, even though they have proximity to Australia and Asia.
Therefore we conclude that New Zealand is not the best place for expand business. Because they might have potential needs for smart home devices, it would be possible to consider New Zealand to export our product, not to expand business.
Ideally not South Korea – Contributing author Vasudeva Bandi
After evaluating South Korea on CAGE, country analysis and on the 5 factors that I thought were critical, I recommend not to enter South Korea. South Korea is one of the developing countries we are looking at for expanding Nest. South Korea is a country with 50 Million population and had strong GDP. The FDI funds inflow is also increasing at a fast pace.
Evaluating South Korea using CAGE framework, there were interesting observations on the cultural as well economic aspects. On cultural front, Nepotism is prevalent. Decisions are made on personal preferences and family relations. Trying to enter such a market may have some ethical challenges and difficulty. Secondly, English is not widely spoken. Since all our products are in English, it would be hard to market our products there. Lastly, South Korea is an early adopter of technologies. Smart homes technology has already been in the market for a while. In fact, Samsung operates SmartThings, smart devices manufacturer, for over a couple of years. Samsung has a great leverage in the South Korean market and competing against a giant like Samsung in an already mature market may not be a profitable idea.
On the administrative side, South Korea free trade agreement with South Korea means countless new opportunities for U.S. exporters to sell more American goods, services to Korean customers. South Korea ranked 8th out of 183 economies in terms of ease of doing business. South Korean government is keen on pulling in more FDI $ 19 billion in 2014. The future outlook also looks good for investment as new government regime is looking to increase FDI.
Geographically, South Korea is small country. Its location- Proximity to China is a major concern for IP related issues. It is also an opportunity to gain a foothold in small market before launch in larger market like China. Also one important factor to look into is transportation of products to South Korea. Transportation costs are higher because of the physical distance between US and South Korea.
The economic side of analysis is encouraging. GDP is strong & stable. It is predicted to grow 3% year over year till 2020. The taxes are also low as compared to many other countries around. However, the average household net-adjusted disposable income per capita is USD 19, 510 a year (Lower than US). Nest products are expensively priced and the disposable income is relatively low as compared to average of comparable countries.
South Korea is interesting politically as monetary stability has been well maintained, but the government subsidizes certain industries. It is also an export driven an innovation driven culture. Business freedom is one of the highest comparable to united states. Also, government playing a major part by keeping imports low and encouraging FDI. Exchange rates depreciated favoring import of raw materials as well as export of finished products.
Competition from local and big firms such as Samsung is intense in the South Korean market. All the major electronics and smart home forms have a relative presence in the market. Looking on the whole there are opportunities such as ease of doing business, tough Penalties for Piracy and Counterfeiting. The challenges outweigh the opportunities. Imports are not as high as exports. While the disposable income levels are also not high. There is a high degree of corruption and nepotism. Also, competition is intense.
This hypothesis that South Korea is not the right place to expand was validated by analyzing 5 critical factors we had identified. English Proficiency Index, total disposable income, IP rights index, Climate and Energy Index and internet penetration.
English Proficiency Index is moderate with a value of 53.6. While, total disposable income was comparatively on the lower side of averages across similar/comparable countries. Since our products are all technologically advanced, IP rights protection was an important aspect of consideration. Not surprisingly, South Korea is an innovation fostering country hence IP protect is strong. Also, our products are more connected to saving energy. So, Climate and Energy Index was the right measure to evaluate how importance of energy conservation in the country. South Korea was not keen on energy conservation. Hence the market will be not as huge. Since all our devices operate using Wi-Fi, the last of the factors was internet penetration. South Korea has very high internet penetration and has highest average speed of connectivity.
Considering all the factors, even though there are some opportunities, South Korea represents a difficult market to expand and capture. Resources may better utilized to target other markets on the Asian continent.
Najia's Reflexivity Archive (Status: Hiatus) 