International Economics for Business and Finance: Tarkett SA Report

This report analyzes the impact of the current economic environment on Tarkett SA, a multinational company in the flooring and wall coverings industry, focusing on its expansion prospects in Brazil, Indonesia, and South Africa. The report begins with an overview of Tarkett SA, its business operations, and the competitive landscape, including discussions on comparative advantage, economies of scale, and government intervention. It then delves into a comparative analysis of the three target countries, applying the CAGE framework to assess cultural, administrative, geographical, and economic distances. The analysis incorporates Porter's Diamond Theory and the gravity model to evaluate market attractiveness and potential risks. The report also considers the impact of socio-economic factors like Brexit and the US-China trade war. The report aims to provide recommendations for Tarkett SA's strategic decisions. The report also includes an abstract, company profile, overview of business operations model, sector competitiveness data, discussion of comparative advantage, role of economies of scale, government intervention, economic integration, Porter’s Diamond Theory, impact of Socio-Economic factors, discussion of gravity model within the current business model, comparative analysis of prospects in Brazil, Indonesia and South Africa, recommendation and conclusion, and references.

International Economics for Business and Finance
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TABLE OF CONTENTS
1. Abstract..................................................................................................................................3
2. Company Profile....................................................................................................................3
3. Overview of Business Operations Model..............................................................................4
3.1 Overview of Sectors and Competitiveness data...............................................................5
3.2 Discussion of comparative advantage, role of economies of scale, government
intervention, economic integration etc...................................................................................6
3.3 Porter’s Diamond Theory.................................................................................................7
3.4. Impact of Socio-Economic factors..................................................................................7
3.5 Discussion of gravity model within the current business model......................................8
4. Comparative analysis of prospects in Brazil, Indonesia and South Africa:...........................8
4.1 Application of CAGE Framework...................................................................................9
4.1.1 Cultural Distance.....................................................................................................10
4.1.2 Administrative Distance..........................................................................................10
4.1.3 Geographical Distance............................................................................................10
4.1.4 Economic Distances................................................................................................11
5. Recommendation and Conclusion........................................................................................11
6. References............................................................................................................................12
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1. Abstract
The assignment reports the impact of current economic environment in Brazil, Indonesia and
South Africa. For the same, Tarkett SA has been chosen for the report since it is one of the
top MNC’s with its sales in more than 100 countries worldwide. The company owns 36
industrial venues from where it manages its operations. This report analyses the economic
conditions in the given countries along with recent risk factors to ascertain the growth
prospects of MNC’s in such economic environment.
2. Company Profile
Tarkett SA was incorporated in October 1997 with the merger of two companies, one French
and the other German named Sommer-Allibert and Tarkett AG respectively. It is based in
France and deals in the production of walls coverings and flooring. It thus belongs to the
Building and Surface covering Industry (Tarkett 2016). Currently Tarkett is bearing in mind
expansion scopes through acquisition of a number of markets in nations like Germany, Italy
and France. The company produces under the Brand names of Tarkett, Pegulan, Febolit,
Sommer, etc.
Currently, the company has a saturated domestic market and is now considering expansion
scopes, the capital investment requirements would be high (Trade Commissioner 2019).
However, it would lead to increase in the overall growth of the company and expansion of
operations.
This report deals with analysis of economic factors which impact the company’s operations
in the countries of Brazil, Indonesia and South Africa. To get a better understanding, the
presence of Tarkett SA in these countries is discussed.
In Brazil, Tarkett aimed at its growth by acquiring the Brazilian floor making company
Fademac. This was done in 2009 when an agreement was signed between Tarkett and
Brussels based Etex Group. The then sales of Fademac was around $ 35 million (Wilson
2018). This led to the growth of commercial presence of Tarkett in South America. This led
to the presence of a manufacturing and distribution unit in the region. The acquisition
included an Industrial base around Sao Paulo and an entire distribution network in the region.
In Indonesia and South Africa too, Tarkett Floorings have been a choice of architects in
designing high quality interiors. Trakett Floorings come with high definition features like
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sound reduction, shock absorption, stable construction, improved impact resistance and low
TVOC which make it a preferred brand in floorings and wall furnishings (Tarkett 2016). The
main product brands of the company are Tarkett, Johnsonite, Tarkett Sports, Beynon Atlas,
Fieldturf Poligras, Nafco, Azrock, Rhinofloor, sintelon, Easyturf and Polystyl. Tarkett SA is a
global leader for vinyl products and artificial turf (Walker 2019).
3. Overview of Business Operations Model
Tarkett SA has a balanced business model wherein everybody sees different faces of the
company. This model leverages its global presence. In addition, the local strength of each
region creates a competitive environment for the company. The company targets expansion
strategies by using Dunning’s OLI Framework and through FDI’s. The operations model and
growth strategy of Tarkett in each of the countries under review is discussed:
 Brazil: Tarkett is currently operating in many cities of Brazil. It bolstered its
operations in the Brazil by unveiling a brand new expansive facility through
acquisition of Fademac. However, there is a further expansion scope in the cities of
Brazil through which it can expand further into South America. The country hosts a
number of companies with home to a large number of technical and construction
professionals. This makes the availability of resources cheaper and easier. With more
investment, Tarkett shall be able to open more production sites in Latin America
(Brown 2019).
 Indonesia: Tarkett SA currently has no production units in Indonesia. However its
floorings are sold in Indonesian markets through its distribution networks. Indonesia
is one of the fastest growing internet economy in the Southeast part of Asia. To dive
into Indonesian markets, Tarkett needs to streamline the business prospects across
consumer verticals. Although Indonesia is not in the list of countries currently where
Tarkett would like to expand its presence, it can target to enter into business in the
country because of the available growth prospects. The company can eye on various
SME partners to grow in the country. It has been continuously launching new
products to increase its product listings (weforum.org 2018).
 South Africa: Tarkett has been listed amongst the most iconic companies of recent
times. It does not have a manufacturing unit in the country but is looking forward to
expansion in such new countries. It can enlarge its presence to accommodate more
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African employees and generate employment in the country. This will enable South
Africans to access the company’s remarkable set of tools and address many of the
complex challenges faced by the country. It can build a new workspace here for
growth. Tarkett has adopted similar mechanisms in France and many other nations
and can now think of expanding its operations in South Africa. As per World Bank
estimates, a country can grow by 1.4% in their GDP by increasing the broadband
penetration by 10%. There are over 10 million young people in South Africa looking
forward to job opportunities which can fill them with innovation and technological
knowledge. Overall, it shall lead to the country’s economic growth. The investments
by the US has been doubling in South Africa. The South African Government has
been supporting the growth through the African Growth and Opportunity Act
(AGOA) by funding for the development of next generation leaders (Williams 2017).
All this shall help South Africans to develop their own solutions in empowerment,
growth and building a better tomorrow.
3.1 Overview of Sectors and Competitiveness data
Tarkett SA belongs to the Flooring sector which relates to production of high quality flooring
and wall furnishings. The company provides interior furnishing solutions for all kinds of
spaces which includes schools, homes, offices, corridors, staircases etc. The company
produces a wide range of wall coverings. Recently, the company has been facing challenges
from the CIS nations. The top competitors of Tarkett are Shaw Floors, Armstrong flooring,
Mannington, HALEX, Traxx, Louis Carpet supplies, Milliken, Lumber Liquidators, T&L
Distributing etc. (Tarkett 2015). Tarkett is an old company ruling the markets for over 130
years. It is amongst the global leaders in cutting edge flooring solutions and port surfaces.
The company’s highest presence is in the North American and European regions. Tarkett’s
Net sales for 2016 was 2.7 billion Euros because of geographies and sector bifurcations. The
topmost competitor in the list is Armstrong flooring which generates a lesser revenue of $ 2.5
billion.
In the construction supplies and fittings business, the top market leaders are Armstrong
flooring, Shaw floors, Mannington etc. (weforum.org 2016). These companies along with
Tarkett own over 50% of the market share in the industry. Shaw Floors is the highest revenue
generating competitor of Tarkett SA. Among the list of top companies in this sector, Tarkett
ranks second.
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In terms of employee count, Shaw floors leads the league with 25,000 employees. Tarkett has
around 12,900 employees and ranks second in the list. Tarkett has acquired Lexmark Carpet
Mills Inc. in August 2018 which is its most recent acquisition. There are news that Tarkett
has also closed the deal with Aquafil by announcing partnership (Tarkett 2019).
3.2 Discussion of comparative advantage, role of economies of scale, government
intervention, economic integration etc.
In terms of Comparative advantage, Tarkett SA being an MNC has a global presence and
leads among its local competitors. It has a very high market share in flooring solutions. In
other business segments too, Tarkett occupies a major position in the market share. Talking
about competitive advantage, Tarkett provides high quality product solutions. Because of its
global presence, the company is able to bring down its cost of operations drastically. This
also leads to a scenario of “natural monopoly”.
The top three comparative advantage held by Tarkett include its huge sustainability
infrastructure, innovative designs and market share (Mathur 2016). With a large market
share, the economies of scale too are large for the company. The Heckscher – Ohlin theory
applies to South Africa, Indonesia and Brazil because based on two factors of production,
labour is abundant in the developing nations (Salvatore 2019). However, to produce goods
like vinyl flooring and spaces, these countries can export goods to its manufacturing areas of
France and Germany with cost reduction in mind.
In Brazil, the Economic Freedom Act diminishes the extent of Government intervention. It
follows the principles of freedom as a guarantee, good faith, exceptional intervention
procedure and recognition of vulnerability to stimulate the economic activity in Brazil. For
this to happen, the reduction of Government interference is a must. Apart from this the
Declaration of Economic Freedom Rights (DEFR) also regulates and restricts government
intervention as per the provisions of Brazilian Federal Constitution. The EFA has also
amended the Brazilian Civil code to accommodate the impact of lesser Government
intervention (Alston et al. 2016).
In Indonesia, on the other hand, there is a higher government intervention to stabilize the
prices and govern the pricing mechanisms of various goods and services. With fundraisers
like GoJek and Tokopedia and entry of tech giants like Jack Ma, Indonesia is getting ready to
compete with bigger nations like US, China and India (Chandra 2018). In 2005, the Minister
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of Communications and Information Technology also made announcements to raise funds to
invest in startups in Indonesia. The government in Indonesia has launched HUB.ID where
entrepreneurs and investors connect with each other.
In South Africa, the government intervention is comparatively less in the product market
sector. In recent times, however, the government is taking steps to increase its interference in
this sector and other businesses (Rahman 2018).
3.3 Porter’s Diamond Theory
Porter’s model is said to be one of the strategic economic models which assists in explaining
why a country is more successful than the other country for a particular industry or line of
business (Bruneel and De Cock 2016). This model states that for an industry to embrace
competitive advantage it is persistent to understand these four factors which are Firm strategy
and rivalry, factor condition, demand condition and supporting industries. These factors of
the Porter’s diamond model shall be elaborated in the context of the floors and wall coverings
business in the Brazil, South Africa and Indonesia.
The Brazilian productive chain is evaluating the systemic costs and federal government is
promoting a creative environment that not only promotes development but even enhances the
competitiveness (Cunha 2013). These productive chains can increase the country’s share in
the economic market whether its textiles, flooring or construction.
On the contrary, South Africa has gained its momentum towards its manufacturing trend,
partnerships have developed. The customer’s different demand in terms of flooring and
furniture have made the suppliers flexible. Flooring spaces, new types of carpeting has been
developed and customisation for specific use is the way to future (Bizcommunity.com 2017).
Indonesia’s supply of material resources is weaker and lacks chains and distribution channels
across the world.
3.4. Impact of Socio-Economic factors
Talking about the impact of International events in businesses, the BREXIT or EU
referendum has been discussed with reference to Tarketts line of business.
The US – China Trade war too has impacted the Company’s sales in China. Sales have
reduced due to the bans imposed by the Chinese Government. Such events lead to a downfall
in the economies of scale (Brown 2019). This was a major event which impacted the markets
of various nations. Currently, both the governments have relaxed some of the impositions. A
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few still remains. The United Nations too supports free flow of trade across nations to
enhance global relationships.
From an environmental point of view, the company aims towards sustainable use of resources
and recycling products wherever possible. The company is working on eco-innovation in its
products. Recently, an agreement was signed with the German Environmental Protection
Encouragement Agency (EPEA) to apply the ‘Cradle to Cradle’ method to upcycle products
(Charles Jr, Schmidheiny and Watts 2017). Tarkett is the first French company to adopt such
measures. With reference to this, when analysed for Brazil, greenhouse gas emission is of the
areas where the economy has substantiated its breakthrough especially for health purposes.
The Jacarei production in Brazil has sourced its mineral filler to a distance of 700 kilometres
for flooring, reducing the transport related greenhouse gases (Tarkett 2015).
3.5 Discussion of gravity model within the current business model
Gravity Model in International Trade predicts the bilateral flow of business on the basis of
economic sizes and distance between business units (Ghani et al. 2019). Having been
introduced by Walter Isard, this model analyses determinants of trade flow which includes
common borders, legal systems, languages, currencies, legacies and many more. In case of
the Business Model of Tarkett, this model is quite relevant. Tarkett has its headquarters set up
in Paris, France. It has various units managing its different business segments in various
nations across the world. It is thus governed by the gravity model of international trade. As
per the theory, bilateral business across nations is directly proportional to the size of the
nation and measured by GDP and is inversely proportional to the distance between the
nations.
In Brazil, in the beginning of 2014, LVT production was developed in Tarkett to extend its
capacities in Brazil; though, the product line’s origin started from being manufactured in
Europe (Tarkett 2019). The bilateral trade flows seems to be strong in South Africa due to the
FISA (Floors International South Africa) in 2003 (Sindhi 2015). The professional approach
has led to basket full of ranges and by bringing trade visions to eco-friendly environment of
Tarkett.
4. Comparative analysis of prospects in Brazil, Indonesia and South Africa:
 Brazil: Brazil is the fifth largest country in America with a population orientation of
mostly middle class people based in urban environments. It is one of the most
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challenging places in the world to do business. But once a company takes the leap, it
is no big deal to acquire a customer base in this tech savvy country. There are various
chances for entrepreneurs to generate returns of Silicon Valley style if the investors
are willing to take risks and slog through the ecosystem of Brazil (Hellmann and
Thiele 2019). Initially, due to government mismanagement a lot of people lived below
the poverty line in Brazil (Serbin 2019). But in the 20th century, the country flourished
with its exports of gold, coffee, rubber and soybean. After the introduction of the Real
Plan in 1990, there was further boom in the trade of cotton, iron, sugarcane, ethanol,
coffee, corn, woodpulp etc. which drive the economy even now. Although there are
ongoing corruption issues in the country, there are institutions fighting against it.
 Indonesia: Indonesia is the fourth most populated country in the entire world. It is the
largest market in Southeast Asia and therefore the business opportunities are growing
in the country. Statistics reveal that there have been more than $20 billion USD
investment through FDI’s in 2018. Looking at the emerging business opportunities in
Indonesia, there is a lot of scope of both Domestic and foreign investments (Na 2016).
There have been over 58 thousand business registrations in a year in Indonesia in the
past 3-4 years. Because of this, there is a high chance of Business Support Services to
succeed in Indonesia. However, most startups are valued at less than USD 10 million
which means that they still need a lot of support to build the startups. Till now, many
companies have founded or co-founded incubator and accelerator programs in
Indonesia. When it comes to regulations, there are extra obstacles a company has to
go through in Indonesia.
 South Africa: It is very easy for investors to invest in South Africa. The regulations
are comparatively lenient. Most of the investment in South Africa currently comes
from the United States (Hasan et al. 2016). Even then, South Africa lags behind all
other global peers in terms of attracting foreign direct investments. It is not that the
country lacks opportunities. It is just that the investors are not sure about the political
and social conditions in South Africa. South Africa needs to make the world aware
that they are open for Business and that they’ll facilitate investments. BRICS
economies are doing just that. As per a recent report by the United Nations, FDI’s in
South Africa was $ 7 billion in 2018 compared to $59 million in Brazil (Ghemawat
and Altman 2016). Despite having similar complex domestic environments, other
countries are attracting far more investments than South Africa. Investments are
required in South Africa to cater to challenges of unemployment and poverty (Igwe
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and Kanyembo 2019). This will create jobs, new companies and wealth in the
country.
4.1 Application of CAGE Framework
The CAGE Framework monitors Cultural, Administrative, Geographical and Economic
differences and variances amongst nations that the firms should address when creating their
international strategies.
4.1.1 Cultural Distance
The cultural differences covers determinants like difference in languages, ethnicities,
religions, values, norms, dispositions and social networking. In case of multilateral business
models, cultural differences covers insularity and traditionalism (Engsig, Chiambaretto and
Le Roy 2018). Cultures includes the traditions and the business mind set of the investor for
international market which can vary from languages to celebrations (Deresky 2017). Bahasa
Indonesia is the commonly spoken language and being the fourth most populous state in the
world. South Africa’s first language is Zulu with English as the fourth most common
language mainly understood in urban areas. Brazil has many minority languages and
Portuguese is the official language and makes it difficult for expansion as English is not
spoken widely even though the environment is favourable for international market.
4.1.2 Administrative Distance
The issues include lack of colonial ties, currency differences, political hostility and absence
of shared trading blocs. For multilateral countries, the factors are closed economy, lack of
memberships in international organizations and corruptions (Gil-Pareja, Llorca-Vivero and
Martínez-Serrano 2019). Brazil’s current government has introduced investor-friendly
initiatives which includes various e-commerce opportunities. The Federal Government
performs the three tier system at the federal district. Secondly, South Africa a parliamentary
republic also with three-tier system. There are issues related to Property Rights which makes
the investors questions the efficiency and the growth of their investments (Arent and
Zinaman 2017). The economy often faces risks which reduces the flow of FDI’s and
adversarial business environment can be detrimental for expansion prospects on a country
level (Beugelsdijk, Ambos and Nell 2018). The Indonesian government is of multi-party
system of democratic republic with executive power exercised.
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4.1.3 Geographical Distance
Physical distance, no land border, time zone differences, climatic differences are the
geographical issues faced by bilateral country pairs. Weak communication links, size,
remoteness, navigability etc. are the risk factors concerning multilateral country pairs (Stone
2018). These can be addressed by adopting standard time zones and communication
methodologies. The geographical distance between France and Brazil is the shortest that is
5349 miles, followed by South Africa which is 5441 miles. Lastly, the distance between
France and Indonesia is 7287 miles that is highest among the three target countries. Although,
Brazil and South Africa distance is almost the same from France. However, South Africa and
Brazil both have better international markets for products of Tarkett.
4.1.4 Economic Distances
In 2018, GDP for Indonesia is 1.042 trillion US dollars whereas that of South Africa is
368.289 billion US dollars. For the last eight years, South African GDP has been falling on
an average of 0.18% every year. Brazil’s GDP is highest amongst all as it is 1.869 trillion US
dollars (Data.worldbank.org 2020). Based on economic distance, Brazil is a better choice for
expansion in international market followed by Indonesia.
5. Recommendation and Conclusion
From an analysis of all the markets, it can be observed that a further expansion in Brazil is
the most suitable for Tarkett since it already has existing operations there. If the company
plans to expand its operations globally and enter Asian and African markets, it can do so by
venturing into markets of Indonesia and South Africa. Tarkett should first expand its
domestic presence further in France and Germany and then look forward to international
markets. This will enable it to procure capital from existing markets and invest in newer
markets of developing nations like the target countries. A proper risk analysis should be
performed before making any investments. A detailed study of the socio-economic factors of
the country of investment is a must to identify the long term growth potentials.
In the report, an analysis of the current scenario in Europe has been done to identify risks in
the domestic presence of Tarkett Inc. A detailed study of the three emerging markets i.e.
Brazil, South Africa and Indonesia has also been done to evaluate investment strategies in
these markets (Engsig, Chiambaretto and Le Roy 2018). A comparative and relative study of
these markets has helped in identifying the best potential market for investments. Factors
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such as slowdown of Germany economy, US China Trade war etc. has helped in a better
understanding of the market scenarios.
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