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Beauty and personal care transnationalization: main changes in its spatial structure

https://doi.org/10.24057/2071-9388-2019-94

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Abstract

At the turn of 21st century global beauty and personal care industry underwent dramatic changes in its territorial structure. The main factors of that changes were world economics institutional changes, primarily – the international trade liberalization, as well as the R&D progress. During abolition of tariffs or tariff cut the competition in beauty and personal care ratcheted up sharply. That was accompanied by sea changes in its macrogeography, particularly, by the manufacturing transnationalization (mainly, in the form of its «drift» to developing countries) and the general expansion of the range of countries specializing in the beauty and personal care production. The main drive-forces of beauty and personal care transnationalization and the resulting territorial changes in the industry are discussed.

For citation:


Gladenkova T. Beauty and personal care transnationalization: main changes in its spatial structure. GEOGRAPHY, ENVIRONMENT, SUSTAINABILITY. 2020;13(1):244-250. https://doi.org/10.24057/2071-9388-2019-94

INTRODUCTION

For the end of the 20th - the beginning of the 21st cen­turies the growth of open economic borders of countries as well as the growth of international capital movements, the liberalization of national trade regimes, the formation of a global financial market and a global information net­work were main characteristic occurrences (Gorbanev 2014; Rodionova 2010, 2016). As a result, it is becoming increasingly difficult to define a clear boundary between the activities of national economies and transnational cor­porations.

The process of transnationalization of industrial pro­duction, which in a general sense implies the movement of capital across the borders of the country of origin and the organization of production abroad, has an objective basis. The key factors for the development of this process are the overcoming of customs barriers, reduction of production costs, among which the cost of transport, labor and raw materials compose a significant share, and others (Sokolsky 2010).

The beauty and personal care industry stands out sig­nificantly against the background of the main consumer sectors. The specifics of this industry are consumer char­acter of its products, its transportability, as well as high involvement in world trade, helped by the reduction of WTO customs tariffs. Thus, since 2014, the average tariff for chemicals for the European Union member countries was 4.54%, for the USA - 2.76%, for Russia - 5.74%, for China - 6.5%, for Latin American countries - 5-10% (Wto.org 2014).

Until the end of the 20th century the main producers and consumers of beauty and personal care products were developed countries. However, by the end of the 20th cen­tury in connection with the active investment of TNCs in the beauty and personal care of developing countries, the latter loudly declared themselves as suppliers of beauty and personal care products: in 2000, almost half of beau­ty and personal care products net exporters belonged to developing countries (Comtrade.un.org 2015); and also demonstrated an active growth in demand for goods of the industry (in 2015, the share of the Asia-Pacific region countries accounted for about 35% of world consumption of perfumes and cosmetics (against 20% in 2000)).

The development of the beauty and personal care in­dustry in developing countries took place mainly «from the outside», with the participation of the top TNCs. The excep­tions are India, Brazil and the Republic of Korea, where the industry has mainly developed on the basis of local manu­facturing competencies and resources.

In comparison with the other industries, the beauty and personal care does not have a high potential for its transnationalization (the products of the industry are char­acterized by high transportability, while the reduction and abolition of customs tariffs contributed to an increase in the volume of trade in its goods). Nevertheless, the ten­dency to its involvement in this process is becoming more and more obvious. From this perspective, it seems relevant to consider two key issues: 1) what is the manifestation of the beauty and personal care transnationalization and 2) what are its main causes, forms and consequences.

MATERIALS AND METHODS

The paper includes an analysis of changes in the vol­ume of global beauty and personal care products output from 1990 to 2015, as well as an analysis of the top beauty and personal care companies turnovers from 1977 to 2015 and their setting up manufacturing strategies for the pe­riod from 1920 to 2016. Selected data were collected for each country and TNCs, subsequently consolidated into a common base.

The main sources of statistical and analytical informa­tion of the presented paper were databases, reports and analytical notes of international organizations (UN Com- trade, UNCTAD, WTO), annual reports of the studied com­panies and data of annual ratings of the top corporations. During our research the general scientific system approach and various methods of scientific knowledge were widely used: analysis, synthesis, historical modeling.

RESULTS AND DISCUSSION

TNCs as the core of modern beauty and personal care industry

The intensification of the process of the global beauty and personal care industry transnationalization can be indirectly judged by the growth in the number of TNCs that are the main initiators of international capital transfers. Since the end of the 20th century, the number of foreign affiliates of multinational corporations has increased significantly, and their turnovers, incomes and assets are also growing (McCann and Iammarino 2013).

The level of beauty and personal care transnationalization is largely manifested in the growth of the number of countries where TNCs operate. The main centers of the corporate power of the beauty and personal care industry remain North Ameri­ca, Western Europe and Japan, where the vast majority of head units of the top TNCs are concentrated. The main production fa­cilities are also located mostly in developed countries. However, since the end of the 20th century, there has been a tendency to place beauty and personal care manufacturing sites in develop­ing countries, the main reason for which was the motivation of beauty and personal care companies to enter new unsaturated markets (Weber et al. 2002). The consumer nature of the indus­try's products predetermined the dominance of factors such as the conquest of new markets (to expand the geography of sales and compensate for the slowdown in the growth rate of demand for beauty and personal care products in developed countries), as well as to overcome institutional barriers. Against the background of active investment by TNCs in the beauty and personal care industry of developing countries, local national manufacturers significantly strengthened their positions. As a result of these two parallel processes, the output of the beauty and personal care products from 1990 to 2015 in Asia increased 20 times (in China - 114 times, in India - 40 times), Latin Ameri­ca - 11 times (in Brazil - 9 times, in Mexico - 6 times) (Fig. 1).

 

Fig. 1. World beauty and personal care products output 1990/2015 ($ bln) and the global beauty market1 growth forecast 2015-2020 (%). Production volumes are given by countries

 

Currently, developing countries are beginning to make an increasing contribution to the development of the beauty and personal care industry with their dynamically growing markets, among which stand out (in order of market size) the BRICS countries, Mexico, Argentina, Saudi Arabia, Thailand, Indonesia, Poland, Turkey, Iran, Colombia, Nigeria, UAE, Malaysia. As the vol­umes of these markets increase, their value will also increase. Developing beauty and personal care markets are significant­ly faster than developed ones in terms of growth rates - more than twice; which provides a significant share of the growth of the global industry market. Against the backdrop of the stag­nation of developed markets, key developing markets already occupy leading positions in top ratings in terms of growth rates and absolute sizes: since 2010, China has held a strong sec­ond place after the United States, overtaking Japan, and Brazil since 2008 has held forth place by taken over UK, Germany and France. It is expected that by 2025, Brazil will take third place in this ranking. As a result, the regional structure of the global beauty and personal care market is changing significantly. In 2015, emerging markets together accounted for about 47% of the global consumption of beauty and personal care products, versus 24% in 2000.

It is worth paying attention to the fact that with the increase in the share of the middle class in developing countries, there is an active growth in demand not only for products for mass con­sumption, but also for premium products produced by major TNCs. Thus, the markets of developing countries are acquiring a qualitatively new role in the modern world beauty and personal care market and in the activities of TNCs in particular.

In recent years, companies originating from developing countries are becoming more confident in the global beauty and personal care market and are successfully competing with the beauty and personal care industry's veterans (in the 1970s, among the leading international firms there was not one orig­inating from developing countries) (see Table 1) (Matusow et al. 2016). The products from East and South-East Asia and Latin America have become particularly popular in both European and North American markets (Kcia.or.kr 2018; Premiumbeautynews.com 2018).

 

Table 1. Top beauty and personal care transnational corporations, 1977, 2018

Company

Turnover, 1977 ($ bln)

Home

country

Company

Turnover, 2018 ($ bln)

Home country

1

Colgate-Palmolive

2.5

USA

1

Procter & Gamble

44.6

USA

2

Avon

1.4

USA

2

L'Oreal

32.4

France

3

Shiseido

0.9

Japan

3

Unilever

24.3

UK/

Netherlands

4

Revlon

0.9

USA

4

Kimberly-Clark

18.5

USA

5

LOreal

0.8

France

5

SCA

15.8

Sweden

6

Bristol-Myers

0.7

USA

6

Estee Lauder

13.7

USA

7

Unilever

0.7

UK/

Netherlands

7

Colgate-Palmolive

11.2

USA

8

Procter & Gamble

0.6

USA

8

Johnson & Johnson

8.6

USA

9

Chesebrough-Pond's

0.5

USA

9

Kao

10.8

Japan

10

Wella

0.4

Germany

10

Shiseido

10.3

Japan

11

Johnson & Johnson

0.4

USA

11

Coty Inc.

9.4

USA

12

Gillette

0.4

USA

12

Beiersdorf

7.4

Germany

13

Schwarzkopf

0.4

Germany

13

AmorePacific

6.2

South Korea

14

Norton Simon (Max Factor)

0.4

USA

14

LVMH

6.1

France

15

American Cynamid

0.3

USA

15

Avon

5.7

USA

16

Beiersdorf

0.3

Germany

16

Unicharm

5.5

Japan

17

Kanebo

0.3

Japan

17

LG H&H

5.3

South Korea

18

Beecham

0.2

UK

18

L Brands

4.8

USA

19

Faberge

0.2

USA

19

Henkel

4.5

Germany

20

Estee Lauder

0.2

USA

20

Mary Kay

3.5

USA

World turnover

15

 

World turnover

545.5

 

Thus, one of the important geographical consequences of the transnationalization of the beauty and personal care industry is a significant increase in the number of countries where TNCs have their own manufacturing facilities.

The share of TNCs in the beauty and personal care indus­try of foreign countries is also steadily growing. This can be illustrated by China, where in 2016, 80% of the beauty and personal care goods were produced by foreign companies or joint ventures (Trade.gov 2016). In many ways, an increase in FDI flows to China has been facilitated by «open door» pol­icies and reforms that began in the 1980s. At the same time, SEZs and various industrial clusters organized under the new policy became important drivers of China's economic growth. In organized SEZs and clusters, TNCs not only orga­nized their production, thereby providing new jobs to the local population, but were also able to create ties with local firms. Thanks to a favorable business environment, knowl­edge flows: TNCs exchange their knowledge, experience and technologies with national producers. As a result, the level of development of local production has grown significantly. The largest transnational corporations, such as P&G, Unilever, L' Oreal, took advantage of the «first move»: they were the first to enter the unsaturated Chinese market, subsequent­ly becoming its permanent leaders. At the same time, for TNCs, China serves as a production site serving the markets of the Asia-Pacific region. For example, more than half of the products manufactured at the L' Oreal plant in Yichang are exported abroad to the countries of Southeast Asia, Japan, South Korea and New Zealand. In 2016, in Indonesia, Uni­lever Indonesia, P&G Home Products Indonesia and L' Oreal Indonesia produced 50% of the total beauty and personal care products of the country (Trade.gov 2016). A number of international brands are also produced in Indonesia under license from Unilever, L' Oreal and Revlon (Trade.gov 2015).

Despite the fact that over the past forty years, the share of the top TNCs in world turnover of beauty and personal care products has declined significantly (from 1977 to 2018 the share of the top-20 TNCs decreased from 83% to 45.6%), they continue playing an important role in the modern glob­al beauty and personal care (see Table 1). Thus, the trans­nationalization index for such major manufacturers as P&G (in 2016 the share of beauty and personal care products ac­counted for 23.4% of total sales (Pg.com 2017)) and Unilever (in 2016 the share of beauty and personal care products ac­counted for 38.3% of total sales (Unilever.com 2017)), from 1998 to 2012 for the first company increased from 40.3% to 61%, and for the second decreased from 89.3% to 87.1% (which may be due to faster growth in demand for the com­pany's products in the parent country) (Unctad.org 1998, 2012, 2015).

The main types of setting up manufacturing strategies of TNCs in developing countries

By the nature of the industrial management the strategies used by beauty and personal care TNCs in developing coun­tries can be divided into two main types. The first type of strate­gy is based on the orientation of companies towards cheap raw materials and labor. Corporations produce products for mass consumption, which are subsequently exported (from 70% to 100%) to industrialized countries and partially sold within the region of the producing country. Prerequisites for this type of industry development strategy have been the accumulation of knowledge and the intensive growth of the economy. The transportation costs of companies are largely compensated by reducing the costs of labor and raw materials.

In addition to these factors, the active development of this type of TNC strategy has largely contributed to the provision by developing countries of the benefits of multinational com­panies (various grants, tax incentives and subsidies, as well as privileges from countries participating in various international regional trade blocs).

Type of strategy with a focus on raw materials and labor, mainly implemented in the countries of South-East and South Asia. As part of transnational vertical integration, regional states specialize in different stages of the value-added chain. Each plant located in a particular country performs one of the successive stages of raw material processing. Or each produc­tion site specializes in a specific commodity unit within the framework of the node-based division of labor.

An example is the P&G's production development mod­el, whose diversified activities cover all stages of the produc­tion chain (Fig. 2). The P&G production chain is structured as follows. At the first stage, raw materials from Indonesia and Malaysia are processed at the oleochemical plant in Malaysia (Kuantan). The resulting chemicals in the form of intermediates are transported to other company facilities in ASEAN coun­tries and around the world. At the next stage, from Indonesia, where the largest TNC's Southeast Asian plants are located (Ja­karta and Karavang), raw materials and intermediate products are delivered throughout the region. From Singapore, where the company's only Asian perfume production center is locat­ed, fragrances and flavors are delivered to other TNC's factories throughout the Asian region. The final stage of the production chain is carried out in Thailand, which has the world's largest export-oriented P&G factory for the production of hair prod­ucts, and in the Philippines (Kabuyao), where the largest entire Asian region multifunctional factory of the company is located.

 

Fig. 2. Procter & Gamble production chain in ASEAN countries

 

Another example - L' Offal's strategy, which began devel­oping the region twenty years ago by launching plants in In­dia (Pune) in 1994, and in China (Pudong), in 1997 (Loreal.com 2017). Production is carried out mainly using local raw materi­als, that significantly reduces the cost of final products.

The second type of the setting up manufacturing strategy of the TNCs in developing countries is characterized by a focus on the local market. Companies place their production facili­ties in foreign countries for use them as a platforms, providing regional market with the produced products. The main prereq­uisites for the development of this type of strategy were high rates of economic development and, as a result, an increase in the purchasing power of the local population, as well as a facil­itated process of penetration into the local market for TNCs.

This type of strategy was developed at the beginning of the 20th century in Latin America and only at the beginning of the 21st century began to be applied in South, East and South­East Asia (in combination with the strategy of the first type). This can be explained, firstly, by the fact that Latin America was originally a more developed region. Secondly, at the begin­ning of the 20th century, when the beauty and personal care industry was just beginning to acquire its present character, the location of enterprises in South and Central America al­lowed European and American companies to save significantly on value added taxes (Jones 2006).

A pioneer in the application of this model was Colgate-Pal­molive, which in the 1920s organized the production of toi­let soap «Palmolive», firstly in Mexico, and later in Brazil and Argentina (Jones 2006). In 1948, Revlon opened a factory in Mexico. In 1954, Avon located its factories in Puerto Rico and Venezuela, and in 1958 - in Cuba, Mexico and Brazil. L' Oreal opened the first two plants in South America in 1959 in Rio de Janeiro and Sao Paulo. In the 1960s Helena Rubenstein opened seven plants in Latin America (Jones et al. 2005).

At the beginning of the 21st century many TNCs have be­gun to apply a similar strategy for the countries of South, East and South-East Asia. In 2012, L' Oreal opened its largest plant in Indonesia (in Jababeka), serving the markets of South-East Asia: 75% of its products are exported to countries in the re­gion, 25% are sent to the domestic market. In 2013, Unilever announced the opening of a new plant in India (Hamgaon) to provide markets in South and Southeast Asia.

Such a form of expansion as mergers and acquisitions for a long time was mainly used by TNCs only in developed coun­tries. The purpose of M&A transactions, in addition to territorial expansion and assortment expansion of the product portfolio, is to acquire the accumulated knowledge of other companies, as well as faster access to new markets due to the high recog­nition of local brands. Recently, in view of strengthening the position of national producers of developing countries, the largest transnational corporations not only actively interact with local firms in the format of contract manufacturing, but also acquire local companies.

Expansion of the beauty and personal care production ge­ography

Depending on the time of siting of beauty and person­al care manufacturing facilities in developing countries, these countries can be divided into several main groups. The «First wave» of beauty and personal care manufacturers - the countries of Latin America (Argentina, Brazil and Mexico), in which TNCs began to locate their production facilities in the 1920s-1950s.

Later, in the 1990s - 2000s TNCs began to locate their pro­duction sites in the countries of the Middle East, as well as East, Southeast and South Asia (India, China, Malaysia, Thai­land, Indonesia, Vietnam, the Philippines) - the «Second wave» of beauty and personal care manufacturers.

However, starting from the 2010s, due to the loss of com­petitive advantages in these countries due to higher costs, TNCs have to look for new «launching grounds» to accommo­date their production facilities. Thus, the beauty and personal care manufacturers of the «Third wave» become the poorest countries of South-East and South Asia: Bangladesh, Nepal, Myanmar, Laos, Cambodia, Sri Lanka, Pakistan; as well as Africa (excl. South Africa), Colombia, Bolivia and Peru.

Localization of the beauty and personal care production facilities depends largely on innovation and the R&D in gen­eral. In view of this, nowadays, an important trend in the de­velopment of the beauty and personal care industry is the lo­cation of R&D centers of the top TNCs in the first and second wave countries. One of the main reasons of this trend is that in order to compete in the new market it's necessary to adapt global brands to local conditions (the needs and expectations of customers, differences in phenotypes and etc.). Employees of organized R&D centers actively interact with local scientists and research institutes of the host countries, that also ensures the flow of knowledge.

A telling illustration of the «drift» of the beauty and per­sonal care industry is China. Foreign beauty and personal care companies, which began to locate their production sites here in the 1990s, were attracted by the presence of rich natural re­sources, cheap and fairly skilled labor, as well as high intensity of labor exploitation.

However, over the past decade, China has acquired the status of a state with a high growth rate of purchases of prod­ucts from developed countries. In view of the rising living standards in China, the country has become very attractive for many foreign firms. Starting from the end of the 20th century, top TNCs actively conquered the local market (Cosmeticsbusiness.com 2017). Their success is largely due to the «fashion» factor: due to the low level of Chinese consumer confidence in local products, the population is increasingly choosing im­port brands (Euromonitor.com 2015; Ey.com 2016). A specific feature of the transnational business is the ability of TNCs to take into account the needs of the world market and to form a significant demand for their products before the start of their production.

In general, over the past ten years, the growth rate of Chi­nese exports decreased from 31% to 8% per year, which was partly due to the rise in labor costs by 14% over the past fifteen years (Hktdc.com 2017). While the average Chinese worker earns $ 650-700/month, the average wage of a Vietnamese worker is $ 250/month, and the Cambodian worker earns $ 130/month (Tradingeconomics.com 2016) (see Table 2).

 

Table 2. Average annual wages in industry 1980, 1990, 2016 ($ thousand)

Country

1980

1990

2016

South Korea

9.0

19.6

36.0

Turkey

0.5

5.1

18.3

Malaysia

6.8

7.5

9.0

China

0.8

2.3

8.4

Brazil

3.3

4.2

8.1

Mexico

3.3

3.9

5.8

Argentina

4.4

5.6

9.6

Thailand

0.3

2.1

4.7

India

0.7

0.9

2.7

Vietnam

0.1

0.5

2.5

Indonesia

0.4

0.6

2.2

Philippines

1.0

1.1

1.8

Cambodia

0.08

0.3

1.6

Laos

0.07

0.1

1.3

Myanmar

0.07

0.09

1.2

Among the South-East Asian countries, Vietnam is of particular interest to companies originating from developed countries. The country's high level of literacy, which is about 94% of the total adult population, and a large proportion of young people are very attractive for the top TNCs.

Thus, one of the possible scenarios for the further devel­opment of beauty and personal care TNCs, by analogy with low-tech industries (textile and footwear), can be the almost complete transfer of industry to countries with even lower production costs (the principle of «cascades»).

At the moment, Africa is characterized by the advantag­es that were previously characteristic of Latin America and South and South-East Asia. Among the main factors that make the region attractive for the top TNCs, we can highlight the rapid population growth of the continent, 60% of which is younger than 25 years, the rapid growth of the middle class, increasing urbanization (Un.org 2017), as well as the improvement of the business regulation system (Euromonitor.com 2015).

In addition to the leading economies - Egypt, Nigeria and South Africa; Kenya, Ethiopia, Tanzania and Uganda have the greatest potential for the development of the beau­ty and personal care industry in the African region. For the three top TNCs, L' Oreal, Unilever and P&G, these countries are strategically important because the industrial siting with­in their territories provides access to the Middle East markets, where currently one of the highest growth rates of demand for perfumery and cosmetic products are observed (Wordpress.com 2016; McDougall 2015).

In 2016, the group of world beauty and personal care products net exporters included 8 African countries - Gha­na, Togo, Senegal, Chte d'Ivoire, Egypt, Madagascar, Comoros and Swaziland. The participation of these countries in the group of net exporters may indirectly indicate their potential for placing TNCs production facilities within their territories in order to use them as «launching grounds» with an export orientation.

Assessing the future prospects for the transnationaliza­tion of the beauty and personal care, it can be stated that the development strategies of TNCs will increasingly be a refer­ence point for developing countries that are becoming more attractive to Western companies not only because of low production costs, but also the growth of consumer potential in them, and the active participation of the public sector in these countries in attracting foreign investment.

As for the general forecast regarding the transnation­alization of the global beauty and personal care industry, it can be assumed that this process will continue to increase, but will manifest itself not in the growth of the number of TNCs subsidiaries, but in the increase in the number of merg­ers and acquisitions of other companies. The organizational form of TNCs will also change significantly: recently along with the holding system, joint ventures with companies in host countries, contract agreements, including licensing, strategic alliances and outsourcing, have been developing rapidly. The increase in the value of industrial cooperation is typical not only for the beauty and personal care industry, but also for the global industry as a whole, which is due to the optimizing the production process.

CONCLUSIONS

  1. At the beginning of the 20th century in the conditions of the unliberated world market, the process of manufac­turing transnationalization in the beauty and personal care industry was driven by the motivation of TNCs to overcome customs barriers for the disposal of their goods in deep mar­kets of the industrialized countries. As a result, during that period there was an increase in the concentration of the beauty and personal care in developed countries, which pre­determined their absolute dominance in the industry.
  2. In the last quarter of the 20th century due to the lib­eralization of foreign trade and increased competition be­tween firms in the industry, the main incentive for beauty and personal care companies became the maximum pro­duction cost-effectiveness. In this regard, there is a power­ful «drift» of the industry to developing countries with their cheap raw materials and labor. Today the balance of power between developed and developing countries in the global beauty and personal care industry is almost equivalent. This suggests a steady destruction of the core-periphery para­digm.
  3. In the course of the beauty and personal care trans­nationalization, TNCs evolved: if in the early stages of devel­opment multinational companies were focused on the raw materials of less developed countries, then recently they have been actively interacting with the local authorities of the countries where the «drift» of production occurs to adapt their production systems to local conditions, involving home firms. In parallel, there is a process of moving the R&D activity to developing regions in centers with high scientific poten­tial.
  4. As the technological and human resources of the most industrialized developing countries increase, as well as in the process of increasing production costs in them, one of the possible strategies for developing the activities of TNCs is to move beauty and personal care manufacturing to countries with a lower level of technical and economic development, including the poorest countries of South-East Asia, South America, and also the countries of Africa. 

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About the Author

Tatiana Gladenkova
M.V. Lomonosov Moscow State University
Russian Federation

Faculty of Geography, 

Moscow



For citation:


Gladenkova T. Beauty and personal care transnationalization: main changes in its spatial structure. GEOGRAPHY, ENVIRONMENT, SUSTAINABILITY. 2020;13(1):244-250. https://doi.org/10.24057/2071-9388-2019-94

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