International Expansion in China & Germany: TripAdvisor

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Introduction

In the last few decades, the world has witnessed increased integration of the global economy, which has resulted in new opportunities for economic, and income growth. One of the significant driving forces is globalization as characterized by the production of goods and services, linked, and synchronized on a global scale thus opening significant opportunities in all regions.

Therefore, as a company that aspires to internationalize its business operations, TripAdvisor has been motivated to expand into foreign markets such as China and Germany due to the looming market opportunities. Furthermore, there are various factors including the size of the company, its leverage, market saturation, and the overall market conditions that have made TripAdvisor to globalize its business and operations to such foreign markets.

In that respect, the purpose of this paper is to focus on the international expansion of TripAdvisor in countries like China and Germany. The paper analyzes the motivations for international expansion based three theories namely the product cycle theory, imperfect market theory and theory of comparative advantage.

A risk analysis of the countries where TripAdvisor wants to expand its business operations is also carried out. Besides, an analysis of the possible financing sources for TripAdvisor expansion is performed and an estimate of the cost of capital for TripAdvisor expansion project to China offered in the report.

International Expansion Analysis for the TripAdvisor

In February 2000, Palka Tom, Shanny Nick, Steinert Langley, and Kaufer founded TripAdvisor Company. After the company started to generate some profits in the fiscal 2002, the management began to expand its business operations to the United States and other parts of the European markets. hese markets attracted the company due to several reasons: (1) the regions had very large customer base, (2) the local residents who had travelled considered themselves risk-takers, (3) the market was fragmented and (4) the potential customers could be identified with regions.

Theory of comparative advantage

In international trade, the comparative advantage theory appears to be amongst the most imperative concepts that can be used to analyze global business operations for a company like TripAdvisor. Given that TripAdvisor yearns to increase its profits, expanding its global operations to a country like China will help the company to minimize the cost of operations.

First, China offers cheap labor or inexpensive raw materials that TripAdvisor can use to help it minimize the incurred expenses. Second, unlike other companies such as eBay and Yahoo that failed to prosper in these new markets, TripAdvisor is financially leveraged and can successfully set its presence in Chinese and Germany.

Besides, the overall market condition in Italy, Spain, and France where TripAdvisor operates is saturated and the two countries offer ready markets for this company to take advantage of and dominate the world largest travel sites (Tallman, 2010).

Given that Germany and China are tourism destinations, TripAdvisor core businesses including displaying restaurants, inns, breakfast and beds, as well as attractions founded on reviews generated from the users can possibly surpass those offered by rival corporations (Luo, 1999).

Thus, since the market conditions in Europe are currently saturated and unfavorable while the market conditions in China and German are favorable, TripAdvisor has been motivated to seek international expansion into the later countries.

Imperfect market theory

Spain, France, and Italy are some of the markets where business operations information is hardly divulged to all market participants due to the level of market competitions. However, despite the fact that online travel booking consumers in China are few, the general market conditions are favorable and market information is accessible to all market participants.

In fact, acquiring information on market operations in Germany and China is inexpensive and this is an addition international expansion advantage for TripAdvisor Corporation (TripAdvisor, 2009). The online travel markets found in China and German are managed and regulated by responsible authorities hence the prices for the travel market services and goods are not controlled by a single or many sellers. The Chinese and German markets are leveraged and companies such as Monster, About.com, eBay, Yahoo, and Google could not thrive under the prevailing situations.

Product cycle theory

Most literature on international expansion strategies assert that corporations that aspire to go global must first establish themselves domestically prior to going international (Wald, 1999). This implies that, TripAdvisor Corporation has been serving the local markets for more than ten years.

In fact, TripAdvisor Corporation has offered the online travel market services and goods to the locals since its introduction through to the growth stage, maturity stage, and the declining phase. Having been famous at the domestic level, TripAdvisor is obliged to expand its business and market operations to the overseas countries like China and Germany in order to accomplish its service provision demands in foreign markets (Harrison & John, 2009).

Thus, the need to start from service introduction through to the declining stage is amongst the motivations that drive TripAdvisor Company to seek for international business and market expansion in these foreign lands. That is, TripAdvisor aspires to introduce its online travelling market services in areas where it presence has not been felt.

TripAdvisor possible expansion in Germany and China

Before expanding its business operations into countries such as Germany and China, TripAdvisor must put into consideration numerous risks factors prior to deciding the region that offers lucrative business opportunities. However, both countries present different business and market environments in terms of fluctuations in global currencies, political and economic instabilities, as well as cultural and religious influences (Kirsner, 2010).

The overall fluctuation of German and Chinese currencies is a major factor that might affect the development of TripAdvisor into these market economies. Equated to other nations such as Japan, France, and Italy this situation might cause strain in revenues and operating incomes in both Germany and China.

Moreover, there is political polarization in some Chinese market regions where TripAdvisor intends operate. In China, policies regarding minimum wages are observed strictly unlike in German environs and this is intended to shun infringing labor rights. Monetization is a general challenge in China in that only limited success is evident in all businesses listed in the recent stock exchange.

However, policies relating to foreign business are accommodative in both Germany and China such that it is easy for TripAdvisor to operate smoothly with minimum risks (Harteveldt, 2009). Generally, German consumers get encouraged to consume TripAdvisor products as currencies are stronger and the rates of interest are low in Germany than in China.

The political parties in both Germany and China are in the forefront to make sure that the business environment is stable. Even during the economic slump periods, TripAdvisor intends to charge reasonable prices on its products to its customers in both countries. Given that its services are locally as well as globally oriented, it is advantageous for TripAdvisor to work in all areas across China and Germany (Gupta & Herman, 2011).

In contrary, its services can best be expanded to Germany than in China given that inflation in Germany is lower than in China whilst income rates for both countries are high. Germany and China uphold societal status and strong cultural practices hence TripAdvisor in its bid to expand its operations in these regions is likely to encounter cultural challenges (Madura, 2011).

In fact, to suit the general population standards of living TripAdvisor will have to upgrade its services to suit the cultural needs of the Chinese and Germans. Unlike China, Germany offers odd and flexible working hours thus making clienteles to access TripAdvisor online travel market services anytime.

Recommendation

TripAdvisor Corp has been conducting its online travel business operations in different foreign markets. However, the market entry modes depend on the type and nature of the market environment where the company wants to initiate its online business operations (Hill & Jones, 2007).

Since there are entrenched firms offering almost similar online travel products and services such as text links, business listings, and display advertising in China, the Chinese market is very competitive. Thus, to avoid encountering market entry barriers, competition and business challenges, it is prudent that TripAdvisor Corporation should seek a strategic alliance or merge with one of the leading domestic online travel and service-offering firms based in China (TripAdvisor, 2010).

The strategy will help TripAdvisor to avoid incidences of price competitions, tariff and market entry barriers, as well as have access to the locally available cheap raw materials and labour. TripAdvisor Company should employ some competent Chinese managers to help it run the corporation in the Chinese environment.

This follows the fact that Chinese managers are well conversant with the demands of the Chinese products consumers and the level of market competition. Besides, the managers will assist the company to abide by the culturally sensitive issues as well as the business operation regulations in China (Rappaport, 1986). Finally, TripAdvisor should minimize its costs of operations through hiring the cheap locally available labor and offer online travel market services at reduced prices to capture a larger market segment.

Analysis of the financing sources for TripAdvisor expansion

In order to go global, some of the possible financing sources for TripAdvisor include debt, and equity financing. However, one major challenge companies like TripAdvisor face is the choice made regarding the capital structure (Hutchinson, 1995). However, TripAdvisor is set free by its financial management to choose amongst the many alternative capital structures.

For instance, as a globally recognized company, TripAdvisor can either opt to issue large amounts of debts or even very little debt. Moreover, the company has the option of arranging for the lease financing, issue convertible bonds, sign forward contracts, trade in bond swaps or use warrants. It can as well issue dozens of discrete securities in myriad combinations (Pinkowitz, Rohan & Rene, 2007).

Based on capital structure theory that was developed by Modigliani and Miller, it is evident that the capital structure adopted by TripAdvisor will greatly influence its mutual profitability. Hence, it is essential to find the imperative factors, which influence this company’s choice of leverage.

In most cases, TripAdvisor capital structure constitutes collateralized assets, which include assets, equity such as the hybrid capital, minority interest, subscribed capital, and reserves. Finally, the last groups within TripAdvisor capital structure are the financial liabilities (Graham & Harvey, 2001). The global expansion funding for TripAdvisor venture will accrue from the owner’s equity investments available in form of loan (Titman & Wessels, 1988).

Capital for TripAdvisor expansion project to China

WACC for TripAdvisor is the average cost that the company incurs derived from the investors’ capital and it incorporates a given combination of equity or debt (Fama & French, 1998). Founded on the WACC principle, the capital costs always depict pre-tax costs for instance, costs incurred before investing and corporate taxes.

To ensure that it operates efficiently, TripAdvisor should apply CAPM to monitor and further reduce its costs in its international expansion operations (Grossman & Hart, 1982). TripAdvisor CAPM is given by

r_j=r_f+ β_j(r_m-r_f) where r_j = required return on a security;

r_f = risk-free rate of return;

ß_j= beta coefficient for the security and r_m = required return on the market portfolio.

Taking β_j=1.93;

r_m=10% and r_f=4%, r_j= 0.04 + 1.93 (0.10-0.04) =0.16.

The required return on market portfolio for TripAdvisor in the first fiscal year will be 16%.

Conclusion

The cost of capital determined using WACC principle corresponds to a similar tax level equivalent to the earnings underlying that are normally included in the returns on the invested capital (Gaver & Gaver, 1993). From the computed WACC in the appendices, it is expected that the cost of capital for an international project will be higher than that of a domestic venture.

This follows the fact that there are risks associated with international operations including volatility or high gearing which results into high earnings volatility (Gleason, Lynnette. & Mathur, 2000). Thus, shareholders demand that the company achieve higher return targets for purposes of financial risks. Nevertheless, TripAdvisor Corporation gearing should utilize cheaper debt finance as well as trade-offs between riskier capital structure and cheaper finance.

The cost of equity integrated into WACC reproduces the returns expected by the investors from TripAdvisor shares. Moreover, the costs of outside capital depend on the average borrowing cost of TripAdvisor (Booth et al., 2001).

References

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