Strategy

Offshore expansion: how to create international success

[email protected] School of Business /

According to conventional wisdom, Malaysian company Ta Ann Holdings Berhad should never have succeeded in its expansion to Tasmania, where it established two veneer mills.

Existing models of “internationalising success” – when companies establish profitable overseas ventures – say internal resources and capabilities are vital to offshore success. When Ta Ann expanded to Tasmania, it had neither: it was the company’s first offshore move so it lacked international experience, and it didn’t have massive resources. So why did a company such as Ta Ann make it in Tasmania against the odds, and against conventional business thinking?

The question has been closely examined by Australian School of Business honours student Victoria Jordan-Jones and lecturer Ricardo Flores in a recent research study that has implications for how managers handle overseas expansion and models of internationalising success.

“Without any international experience and without a disproportionate set of resources dedicated to this project, Ta Ann has been able to succeed,” Flores says. “If you had been reading the literature, this success story would have been unexpected, or at least, highly unlikely. So we thought there was something here, and we decided to explore not just what’s inside the company but also what’s outside.”

Their research found that external factors, contributed by local organisations such as the Tasmanian Government, were crucial to Ta Ann’s success. It shows that existing models of internationalising success, and their focus on internal company factors, may be too limited. The research also highlights that managers looking offshore, particularly those running smaller companies, can significantly increase their odds of success by tapping into the skills, knowledge and resources of local governments, businesses and consultants, and by an exhaustive preparation before actually moving overseas.

“Managers should consider looking outside the company to source whatever is missing internally, or what might need to be improved,” Jordan-Jones says. “Whether this is from local consultants or the local government, Ta Ann certainly benefited from these knowledge sources and I think it is possible for other companies to use this case as an exemplar.”

Reviewing success factors

Ta Ann Holdings Berhad was founded in 1989 as a small trading company operating in the Malaysian forestry industry. It expanded significantly and became a listed public company in 2007. It now has a workforce of 6000 across operations in Malaysia, Australia and China. But back in the mid 2000s it was yet to expand offshore. Tasmania was to become its first international market. Ta Ann spent $70 million building two mills in Tasmania’s south and north that produce veneer for export to Malaysia. Construction was timely, and there have been minimal interruptions. The mills began operation in 2007 and now employ 140 workers.

By any standards, the venture has been successful. Revenue surged from RM8.3 million (AUD 2.5 million) in 2007 to RM110.9 million (AUD 33.8 million) in 2010 as production increased to close to 140 million cubic metres of veneer. Its achievements were recognised when Ta Ann Tasmania won Australia’s Emerging Exporter Award in 2008.

However, that success was unlikely when viewed through the prism of existing academic literature, which basically says there are two ways for a company to succeed in foreign locations: first, by having enough resources to ride out a loss-making period and effectively buy enough time to learn how to succeed in the market; and, second, by having enough international experience. “Companies that have international business experience have developed, over time, knowledge and capabilities that allow them to cope with the idiosyncratic business practices and challenges they can find in countries where they haven’t operated before,” notes Flores.

Ta Ann clearly did not fit the existing models of internationalising success. The company had only ever operated in Malaysia and its Australian expansion was the first time it had moved abroad; also, in general terms, Ta Ann didn’t pour huge resources into the Tasmanian venture – it never had to prop up a loss-making operation for long periods.

“This case shows that even when you don’t know a lot about how work is done in another country, and when you don’t have a wealth of experience going abroad, you can still succeed if the right conditions and the right partners are there,” Flores says.

Another factor piqued Jordan-Jones’s interest in Ta Ann’s success: the growing number of smaller firms succeeding in offshore expansions. “Until recently it has been much more difficult to operate internationally; it was only an option for big companies that have those internal resources and capabilities,” she says. “With recent technological advancements, the possibility of internationalisation is available to a wider variety of companies, including much smaller ones. It seems that we don’t know enough about how these companies succeed.”

Given the challenge of Ta Ann’s success to existing internationalising literature, as well as the need to explore and explain the growing success of smaller companies in offshore markets, Jordan-Jones decided to investigate how Ta Ann was able to succeed. “This was a host environment vastly different from the company’s home, whether you consider cultural aspects or general levels of economic development,” she explains. “The company didn’t appear to have the experience necessary to successfully manage their international operations – but it did!”

Relying on others

Perhaps the most important part of Ta Ann’s success in Tasmania is the role of external players, most notably Forestry Tasmania, which has a mandate to manage the state’s timber supply and encourage the development of a long-term sustainable industry specialising in high value-added niche products. “This case shows how critical those government agencies might be, especially for smaller, less-experienced firms,” suggests Flores.

Forestry Tasmania has been described as the “chief enabler” of Ta Ann’s success, while Tasmania’s Department of Economic Development, Tourism and the Arts (DEDTA) also facilitated the investment, providing a point of contact to organise specialist services for Ta Ann.

Forestry Tasmania paved the way for Tan Ann’s expansion. It had invested a considerable amount of time and other resources in developing a eucalypt veneer product and a glue that enables the fabrication of plywood products using Tasmanian eucalypt veneer. It then generated interest from international plywood producers.

Forestry Tasmania was focused on getting investment in the state’s forestry industry and it sought to find a partner to develop a veneer site in Tasmania. Ta Ann was identified as a potential investor and it started testing eucalypt peeler logs in Malaysia. Peeler logs produce different grades of veneer for construction plywood and other engineered products. Their quality means they are long-lasting and have high stiffness and strength.

Forestry Tasmania also created an investment-ready site for Ta Ann, complete with utilities already onsite and planning and environmental approvals ready to go. The government business enterprise also invested directly.

In 2006 Ta Ann Tasmania was set up. Ta Ann Holdings Berhad held 90% and Forestry Tasmania invested A$2.4 million for a 10% stake.

Jordan-Jones says a primary lesson from the Ta Ann experience is that when a host government organisation is financially invested, they are interested in seeing a venture succeed. Ta Ann Tasmania developed two rotary peeled veneer mills, one in the Huon region of southern Tasmania, the other in Smithton in the state’s north, for which Forestry Tasmania later provided A$7.9 million of funding. The mills produce thin veneer slices that are exported to Malaysia where they are used to make a durable plywood product for a number of markets, including flooring for Japan.

The state government was interested in ensuring Ta Ann had all the information it needed to operate in the Tasmanian environment and was as prepared as possible, observes Jordan-Jones. “The investment was an important one for a number of reasons and local people were quite keen to see the investment succeed,” she says. “So they didn’t mind contributing resources and capabilities that Ta Ann wouldn’t have had at that time, such as knowing about specific labour regulations in Tasmania.”

Support for Ta Ann extended to public relations in the controversial Tasmanian timber industry environment. Tasmanian government agencies, rather than Ta Ann itself, used their network and capabilities to foster a favourable public impression of the company.

In addition to government support, Ta Ann’s use of local consultants was crucial in areas such as project management, industrial relations, human resource management and workforce training. DEDTA and Forestry Tasmania often introduced consultants to Ta Ann. In one case, the company brought in a consultant engineer after it was left with a half-constructed boiler at the Huon plant when the boilermaker went bankrupt during development. The consultant managed the issue, helping Ta Ann establish relationships with the boilermaker’s suppliers and arranging for the boiler to be finished with minimal delays. Consultants were also effective in helping the company manage the Australian industrial and human resources environment, which is significantly different to Malaysia.

“The firm hired individuals with unique knowledge or skills that met the needs of the company,” Flores says. “I think an important part of this, as a company, is recognising that you might not have all the answers in-house. It is okay to find the best people to meet the needs of the company and hire them in.”

Why was Forestry Tasmania so focused and prepared? It was, in part, because it had learnt lessons from a previous failure. Japanese company Hokushin had failed in its attempts to establish a profitable subsidiary, Starwood Australia, in Tasmania. Starwood started in 1995 but in five years of operation it failed to make a profit and it was liquidated in 2004-05. A key factor in its failure was lack of eucalypt veneer production technology at the time, a key motivation for Forestry Tasmania to get it right for Ta Ann.

Interestingly, like Ta Ann, Hokushin’s Starwood Australia investment was also its first international expansion move. So why did Ta Ann succeed where Hokushin failed? “I think Ta Ann was better prepared; that is, they had better preparations for the investment, and they have a close relationship with local professionals who have an intimate knowledge of the Tasmanian business environment,”Jordan-Jones said.

There was a lot of preparation for Ta Ann’s investment before anything really happened. “There was product testing, the site was prepared, etc, so there really was as much as possible done before construction began,”Jordan-Jones says. “I think this preparation ensured that when problems or issues did arise, the company was really prepared or better equipped to meet them. It is interesting that preparation for an investment doesn’t really receive much attention in the literature; then again, Ta Ann is rather a unique case.”

Planning for action

Indeed, a key take-out of the research for managers is importance of preparation. “What you end up doing there (international markets) is important, no doubt about it, but what you do before might be as important,” Flores believes. What the Ta Ann story tells us, and a key consequence of this research, is how important planning is before a company even starts operating in an offshore market, he says. That includes creating relationships with local officials and partners and “making sure your success is their success”.

The research also highlights how small companies can succeed offshore – as they are increasingly doing – with limited resources, and how detailed and exhaustive pre-investment planning is crucial to that success.

But the major point and implications of the research, particularly for managers, is simple: contrary to what existing literature tells us, success offshore depends not just on what your company has and does, but also how you engage with external players in your new market. “It is an example of a company that was able to use all available resources to become successful in a very challenging and foreign environment,” Jordan-Jones adds. “I think the overall message is one where we can learn from companies that are out of the ordinary, that don’t conform to academic expectations, yet are very successful in their chosen field.”

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