Tuesday, October 20, 2009

The case for and against Mega Multinationals such as Unilever

This blog is devoted to the thinking mind, and I am trying to encourage thought on the pros and cons of the operations of large companies like Unilever that have both positive and negative contributions to the economy and the long-term prosperity of the people of this resplendent land, today and for the future.

This company, as an example with its sheer size and extent of brands it owns and markets is just mind boggling. Most consumers are unaware that some competing brands of soap powder are part of the same organization, and different brand managers compete to improve their brand share within this organization.

Their ability to raise capital at lower costs by borrowing from the parent, and their ability to use human resources from a worldwide pool, as well as its ability to recruit people of high caliber due to both prestige, as well as proven career development paths for them is the envy of struggling local FMCG companies. They are also able to use adverts across national boundaries sometimes at lower cost as one can see on Sri Lanka TV where Indian ads are dubbed into to the local languages. Additionally whole factories that are mothballed in other countries can be shipped to SL to set up new manufacturing plants producing low cost products that can seriously undermine the local manufacturers that do not have the same access.

Deep pockets allow them to cut their losses and move on as was the case with the Walls Ice Cream plant in Sri Lanka which failed despite an investment of Rs 3Billion, which was sold to Cargills at a huge loss. This was be a gain to the buyer who is now able to profitably produce Ice Cream, with a low cost base of manufacturing plant which they otherwise would have not been able to achieve.

We have also seen the recent marketing efforts by them for Fair & Lovely and Vaseline creams, with ads aimed at persuading the viewer that both these products are essentials for ones future happiness and well being. I shall not go into the individual necessary attributes of either of these products except to say that all this time our people have maintained healthy skin without them, and I have no reason to believe their skin will be more healthy by their use. I would like comments from the users of either of these products to comment on their particular use, but from my limited knowledge, an employee of mine who began using Fair & Lovely, now has no choice but to use it. If he stops it, his face is a sea of pimples which he never had before he began using it. Granted that each individual’s skin is unique and anecdotal evidence should not damn the product, but I hope I make the point.
There is no question that some of the working conditions at these organizations are far superior to the locally owned businesses, as they have to conform to stricter practices set by the parent company as well as adhere to standards across the globe that they try to meet. Then there are a series of Corporate Social Responsibility Projects they get into to enhance their goodwill with the local community.

They generally have a highly developed and sophisticated marketing system to ensure their customers, mainly the retailers of their products, that their shelves are always full of their products. This is something the local competitors struggle to emulate, and seem to fail, possibly for lack of the economies of scale.

There is the ability to cross subsidize products, so that some products can be loss leaders, and those loss leaders then drown out local competition, as a smaller local company not having this ability is not able to sustain a period of losses that Unilever can on selected products for this exercise which is sometimes a predatory pricing system aimed at dominating the market, especially when a threat from a competitor is seen. Even if the threat of a new competitor is on the horizon, this method can prevent them entering the market for obvious reasons.

On the taxation front, these companies have sophisticated pricing and accounting systems that even some of the local professionals within the organization do not understand but merely follow. It is possible to shift a large amount of profits out by such methods of pricing of products purchased from overseas. It is very easy to do, and anyone who has handled international transactions knows of its frequent use to avoid the tax burden. Often the ignorance of the host country to such actions makes it easy for such practices to be overlooked as there are no local plants(as in humans) to bring this matter to the authorities for investigation. Local politicians are easily bought in very subtle ways by these organizations, usually with relatives of highly placed government personnel or bureaucrats also working for the multinational, a way of diffusing a potential powder keg or even an investigation.

One case in point, unrelated to Unilever, was the recent melamine scare where fingers were pointed at a local company, quite frivolously, and hence hurting its future and prospects, and the finger pointer happened to be a multinational with an agenda.

I have lived most of life overseas and I am not trying to ban these companies, it is just that I believe a level playing field is essential to protect local industry, not tariffs to bar these companies and it is the duty of the Government to level it!!


N B said...

Some of their brands didn't do well in SL and Levers went on a brand rationalization that would leave them with few core flagship brands that would give them the edge. Sunlight is a case in point where they bought / acquired Wonderlight only to kill the brand. Typical multinational arrogance i must say. They also exploited the Ceylon Tea brand image, virtually piggy bagged on it and built Lipton, the so called Pure ceylon Tea that's apparently a kenyan, ceylon, viatnamese blend. Lipton factory had troubles and got sold to Akbar Brothers, a local company that's doing extremely well. Then you also have Clogard, the brand that became Signals' biggest headache. As for fairness creams, they don't make you any fairer. Not one bit. Dermatologically proven many times despite Unilever's claims, lab studies and clinical reports from their own (if not related) labs.
As you've very correctly pointed out its a volume game where EOS (Economies of Scale) makes all the difference. They produce in one central location (often the cheapest location for production & logistics) and ship them abroad, but here's the trick, they adopt internal transfer pricing making their proucts competitive in the import country. My uncle's firm (packwell lanka) were and are still supplier's of packing material to Levers and i'm not at the liberty of discussing their credit terms. I wish i could. They just penalise suppliers and Yes its funny they seem to care about environment and have this massive water / waste recycling plant at their grandpass location while wasting tons of litres at their Lifebuoy mobile showers ! Hypocrisy at its best !

I guess their vision is "Adding Vitality to life" ? WTF is that ? I am kind of Anti-Multinational... I'm no nationalist either, but this is just sick they exploit and our ass kissing idiots just don't see this plain writing on the wall.

On a related note, you would appreciate Shell Gas is another evil hypo that managed to kill others like Mundo gas.. Only Laugfs survived.

If FMCG, then there are great examples of Sri Lankan success from hemas, munchee to raigam.. Irony is these brands don't have the financial muscle to invest in their brands like multinationals do. In marketing terms, out of sight, out of business.. you need to be seen all the time, and its dificult to be seen all the time unless you have year long campaigns year after year.. Thats where these multinationals score, product is the same technically.

In conclusion, I am all AGAINST multional hypocrisy !


Anonymous said...

Oh come off it NB, you're just sore because you got sacked from one of these MNC's

N B said...

Thanks for the news. Shows how much you really know about me? Did you forget your medicine today? Get well soon OK.

Harsha said...
This comment has been removed by the author.
Harsha said...

Does Sri Lanka not have an anti trust and competitive law framework to prevent market domination by a single player?