There are 4 major Phases in International Trade Life Cycle which are being discussed briefly in the later section of this writing. Before that we want to shed some light how companies maximizes profit extending product life cycles through operating abroad : Some firms prefer domestic operations providing performance there is satisfactory. Then, when domestic performance declines, they try to close the gap by exporting to foreign countries. This is possible only if there are different product life cycle patterns in different countries as shown in the diagrams below.
International business must consider many markets simultaneously, with a view to implementing a global
introduction and manufacture. The financial returns to an investment may depend on the roll-out of this
International Trade Life Cycle
The International Trade Life Cycle is used in developing long-term product strategy. It postulates that many products pass through a cycle during which high income, mass-consumption countries are initially exporters but subsequently lose their export markets and ultimately become importers of the product from lower cost economies.
From the perspective of the initiator high income country, the pattern of development is as follows.
Phase 1. The product is developed in the high income country (e.g. the USA). There are two main reason for this.
– High income countries provide the greatest demand potential
– It is expedient to locate production close to the market during the early period so that the firm can react quickly in modifying the product according to customer preferences
Phase 2. Overseas production starts. Firms in the innovator’s export markets (such as the UK)
start to produce the product domestically. Thus, for example, the UK market is then shared by the
innovative US firm and the UK firms.
Phase 3. Overseas producers compete in export markets. The costs of the UK producers
begin to fall as they gain economies of scale and experience. They may also enjoy lower costs of
labour, materials etc than the US firms. The UK firms now start to compete with the US producers in
third-party export markets such as, say, Greece or Brazil.
Phase 4. Overseas producers compete in the firm’s domestic market. The UK firms become
so competitive, due to their lower production costs that they start to compete with the US firms in
the US domestic market. The cycle is now complete.
The electric guitar industry is dominated by two main US brands, Fender and Gibson, both trading on their heritages of having developed the earliest commercial electric guitars in the 1950s and having been the guitars of choice for many influential players.
From the 1950s until the late 1970s both guitar brands were sold predominantly in the USA and were expensive as imports into Europe. In the early 1980s a copycat range to Fender was developed by a rival in Japan under the brand name Tokai and sold there. The Tokai was widely held to be superior in build quality and tone to the products being made in the USA and so Tokai guitars began to appear in Europe and USA.
In 1983 Fender commenced production in Japan of identical guitars to its USA made models and sold these in Japan and Europe. A further wave of copycat products from South Korea and Thailand in the 1990s led Fender to establish a third factory in Mexico producing a parallel line of products for sale in USA and Europe, still under the Fender name. It also developed a flanker brand ‘Squier by Fender’ which was initially made in Japan before being put out to contract manufacture across Indo-China later.
Gibson took a different route, acquiring a minor rival, Epiphone, in the 1970s and continuing to make Gibson guitars exclusively in the USA whilst also selling copies, made in Japan and later under contract elsewhere, under the ‘Epiphone by Gibson’ brand.