A Product Life Cycle

for International Trade?

LOUIS T. WELLS, JR.

Many products follow apredictable pattern in inter-national trade. Understand-ing the international prod-uct life cycle may lead toimproved policies resultingin increased exports and areduction in the effective-ness of import competition.

Journal of Marketing. VoL 32 (July,1968), pp. 1-6.

lowering of barriers to international trade has resultedin many opportunities for American companies to profit from

exports. Clearly, the businessman needs ways of analyzing thepotential exportability of his products and, equally important, toolsfor predicting which products are likely to be threatened by importcompetition.

Until recently, the manager was dependent on the explanationsof trade offered by the classical and neo-classical economists. Theirreasoning generally led to the conclusion that each country willconcentrate on exporting those products which make the most useof the country's abundant production factors. The economic theoryis elegant—it can be stated mathematically or geometrically and itcan be manipulated to yield, under certain assumptions, answersto questions such as what is the value of free trade to a country,or what are the costs and benefits of certain restrictions. So longas the problems posed are of a very broad nature, the theory pro-vides a useful way of analyzing them. However, when the theoryis applied to the detailed problems facing the businessman it be-comes of limited value.

The Trade Cycle Model

A new approach to international trade which appears most promis-ing in aiding the business executive is closely related to the productlife cycle concept in marketing. The model claims that many productsgo through a trade cycle,̂ during which the United States is ini-tially an exporter, then loses its export markets and may finallybecome an importer of the product. Empirical studies of trade insynthetic materials,- electronic products,^ office machinery,^ con-sumer durables,^ and motion pictures^ have demonstrated that these

1 For a more complete theoretical support of a similar model, seeRaymond Vernon, "International Investment and International Tradein the Product Cycle," Qiuirterly Journal of Economics, Vol. LXXX(May, 1966), pp. 190-207.

2 Gary C. Hufbauer, Synthetic Materials and the Theory of Inter-national Trade {Cambridge: Harvard University Press, 1966).

3 Seev Hirsch, Location of Industry and International Competitiveness(Oxford: Clarendon Press, 1967).

•* U. S. Senate, Interstate and Foreign Commerce Committee, Hearingson Foreign Commerce, 1960, pp. 130-139.

5 Louis T. Wells, Jr., Product Innovation and Directions of Inter-national Trade, unpublished doctoral thesis (Harvard Business School,1966).

6 Gorden K. Douglass, Product Variation and Trade in Motion Pic-tures, unpublished doctoral thesis (Department of Economics, Massa-chusetts Institute of Technology, 1963).

Jourrufl of Marketing, July, 1968

products follow a cycle of international trade similarto the one which the model describes.

According to the trade cycle concept, many prod-ucts follow a pattern which could be divided intofour stages:

Phase I: U.S. export strengthPhase II: Foreign production startsPhase III: Foreign production competitive in ex-

port marketsPhase IV: Import competition beginsA brief look at the reasoning underlying each of

these stages will give some clues which will helpthe businessman to identify the stage in which par-ticular products may be. The concept can then bean aid in predicting the product trade performanceto come and in understanding what actions the mana-ger can take to modify the pattern for certain prod-ucts and to profit from different stages of the cycle.

Phase I: US. export strength

What kinds of new products are likely to be intro-duced first in the United States? It can be assumedthat American entrepreneurs have no particularmonopoly on scientific know-how or on very basictechnical ability. What they do have, however, is agreat deal of knowledge about a very special market—one which is unique in having a large body ofvery high-income consumers. Products which satisfythe special demands of these customers are especiallylikely to be introduced in the United States. More-over, due to a monopoly position of the United Statesas a supplier of the new products which satisfy theseunique demands, they offer the best opportunitiesfor export.

Empirical studies have failed to show a verysimple relationship between demand and invention.However, there can be little doubt that certainproducts are simply more likely to be developed inAmerica. Automatic transmissions for automobilespromised to be pretty expensive additions to cars.If an inventor considers the chances of his brain-child's being purchased by -consumers, a U. S. in-ventor would be more likely to pursue an automatictransmission than a European. The European in-ventor would more probably concern himself withideas suitable to European demands. He might re-spond to high fuel taxes and taxes on engine dis-placement by developing engines which produce morehorsepower per cubic inch. He might develop betterhandling suspensions in response to the road condi-tions. An inventor usually comes up with productssuitable to his own market. It is even more likelythat the final product development leading to com-mercial production will be achieved by an entre-preneur responding to his own national demand.

Even if an American is most likely to be the firstto produce a high-income product, why does he notset up his first plant abroad where labor is cheaper?Certainly for many products the cost of materials

and of capital is not sufficiently higher in Europeto offset the advantages offered by cheaper labor.Moreover, the burden of tariffs and freight are lightenough now for many items. And the uncertaintiesof manufacture abroad are diminishing as moreAmerican companies gain experience. There are,though, very rational reasons why the Americanentrepreneur might prefer to start manufacture athome.

At the early stages of a product's life, design isoften in a constant state of flux. There is a realadvantage which accrues to a manufacturer who isclose to the market for his products so that he canrapidly translate demands for design changes intomore suitable products. Moreover, these changesoften require the availability of close communicationwith specialized suppliers. Hence, the instability ofproduct design for new products argues for a loca-tion in the United States—near to the market andclose to a wide range of specialized suppliers."• Theentrepreneur is less likely to be concerned with smallcost differences for very new products. The existenceof a monopoly or the significant product differentia-tion at the early stage of the product life cycle re-duces the importance of costs to the manufacturer.The multitude of designs and the lack of standardperformance specifications make it very difficult forthe consumer to compare prices. Also, in the earlystage of the product life cycle the consumer is fre-quently not very concerned with price. Success comesto the manufacturer who can quickly adjust bothhis product design and marketing strategy to con-sumers' needs which are just beginning to be wellidentified.

At this point, the American manufacturers havea virtual monopoly for the new product in the worldmarket. Foreigners who want the good must orderit from the United States. In fact, wealthy con-sumers abroad, foreigners with particular needs forthe product, and Americans living abroad seem tohear about it very quickly. Unsolicited orders beginto appear from overseas. U. S. exports start to grow—initially from the trickle created by these earlyorders—to a steady stream as active export programsare established in the American firms.

Same reference as footnote 3.

• ABOUT THE AUTHOR. Louis T. Wells.Jr., is an Assistant Professor at HarvardUniversity Graduate School of BusinessAdministration. He is currently teachingand conducting research in the Interna-tional Business Area. A graduate ofGeorgia institute of Technology, he re-ceived his Master's and Doctorate inBusiness Administration from HarvardUniversity.

The study on which this article isbased was made possible by a grant from the Ford Foundation.

A Product Life Cycle for International Trade?

Phase II: Foreign production startsIncomes and product familiarity abroad increase,

causing overseas markets eventually to become largeenough that the product which once appealed primar-ily to the U. S. consumer has a broad appeal in thewealthier foreign countries. Not only does a po-tential foreign producer now have a market close-at-hand, but some of his costs will be lower than thoseof the U. S. producer. Imports from America haveto bear duty and overseas freight charges—costswhich local products will not carry. Moreover, thepotential foreign producer may have to invest lessin product development—the U. S. manufacturer hasdone part of this for him. Some measure of thesize of his potential market has been demonstratedby the successful sale of imports. Favorable profitprojections based on a demonstrated market and anability to underprice imports will eventually inducean entrepreneur in a wealthy foreign market—usu-ally first in Western Europe—to take the plunge andstart serious manufacture. Of course, this manu-facturer will, in some cases, be an American sub-sidiaiy which starts production abroad, realizingthat if it does not, some other company will.

However, the calculations that yield favorablecosts projections for competition with imports fromthe United States in the foreign producer's homemarket do not necessarily lead to the conclusion thatthe foreign producer will be a successful competitorin third markets. For many modern manufacturedgoods he is likely to be at a serious disadvantagedue to the small size of his plant in a market wherehe also must bear the burdens of freight and tariffs.Scale-economies are so important for many productsthat the U. S. manufacturer, with his large plantssupplying the American market, can still producemore cheaply than the early foreign producers whomust manufacture on a significantly smaller scale.

During this second stage American exports stillsupply most of the world's markets. However, asforeign producers begin to manufacture, U. S. ex-ports to certain markets will decline. The patternwill probably be a slowdown in the rate of growthof U. S. exports. The slowdown in the rate of growthof exports of home dishwashers in the last few yearsas European manufacturers have begun productionprovides an example of a product in this phase ofthe cycle.

Phase III: Foreign production competitivein export markets

As tbe early foreign manufacturers become largerand more experienced their costs should fall. Theywill begin to reap the advantages of scale economiespreviously available only to U. S. manufacturers.But, in addition, they will often have lower laborbills. Hence, their costs may be such that foreignproducts become competitive with American goodsin third markets where goods from both countrieshave to carry similar freight and duty charges.

U. S. Eiporii

Infrodudion Start ofFweign Competftion

FIGURE 1. Export Cycle

During this stage, U. S. producers will be pro-tected from imports in their domestic market wherethey are not faced with duty and overseas transpor-tation costs. However, foreign g-oods will graduallytake over the markets abroad which were previouslyheld by American exports. The rate of growth ofU. S. exports will continue to decline. The successof European ranges and refrigerators in LatinAmerica points out that these products are in thisphase.

Phase IV: Import competition begins

As the foreign manufacturer reaches mass pro-duction based on his home and export markets, hislower labor rates and perhaps newer plant mayenable him to produce at lower costs than an Ameri-can manufacturer. His cost savings may be sufficientthat he can pay ocean freight and American dutyand still compete with the American in his ownmarket. This stage will be reached earlier if theforeign producer begins to think in terms of mar-ginal costs for export pricing. If he believes thathe can sell above full costs in his home market and"dump" abroad to use up his excess capacity, hemay very quickly undercut the U. S. producers pric-ing on full costs.

During this final stage, U. S. exports will bereduced to a trickle, supplying very special cus-tomers abroad, while import competition may becomesevere. The bicycle is a product which has been inthis phase for some time.

The CycleThus the cycle is complete—from the United

States as a strong exporter to the stage where im-ports may capture a significant share of the Ameri-can market. Figure 1 shows schematically the U. S.export performance for an hypothetical product.

The early foreign producers—usually WesternEuropeans—will face a cycle similar to that of theU. S. manufacturer. As still lower-income marketsbecome large enough, producers in these countrieswill eventually become competitive—displacing thedominance of the early foreign manufacturers. Themanufacture of products moves from country to

Journal of Marketing, July, 1968

RATIO OF

Necessity

RefrigeratorsRangesRadiosIronsTelevisions

Average

VALUE OF

0.470.871.421.661.04

1.07

TABLE 1

1962-1963 EXPORTS TO

Discretionary

AutomobilesElectric ClocksStill CamerasWashersVacuum CleanersMixersRecord Players

VALUE

0.991.044.661.351.781.251.81

1.84F =

OF 1952-1953 EXPORTS

LuxuryMovie CamerasFreezersAir ConditionersSlide ProjectorsDishwashersOutboard MotorsRecreational Boats

7.0 {Significant at 0.95

4.140.743.594.668.504.184.404.32

level)

Note: Adjustments for freezer exports to Canada and 1963 still camera exports raisesignificance to 0.99 level. Same reference as footnote 5.

Source: Classification of products from James Gately, Stephen Gudeman, and GeorgeMoseley, "Take-Off Phenomenon," unpublished paper submitted to Consumer BehaviorResearch Seminar (Harvard Business School, May 27, 1965). Export data from U. S.Department of Commerce, Bureau of the Census, FT 410 Reports.

country in what one author has called a "peckingorder."s

So far, there are only relatively few examples ofthe less-developed countries' becoming exporters ofmanufactured goods. The classic example is standard-ized textiles. Another interesting example is theexport of certain standardized computer componentsfrom Argentina. However, the current gi*owth rateof over 12% per year for exports of manufacturersfrom less-developed countries may indicate that theywill soon become an important factor for the Ameri-can businessman.

How Different Products Behave

Obviously, the export patterns are not identicalfor all products. Three variables were critical tothe argument supporting the trade cycle concept:the uniqueness of the appeal of the product to theU. S. mai-ket, the reduction in unit costs as thescale of production increases, and the costs of tariffsand freight. Differences in these variables will bevery important in determining' how a particularproduct behaves as an export or import—and thuswhat the profit opportunities or threats will be.

High-income ProductsThe advantage of the United States in export

markets in certain products was said to be dependenton the uniqueness of the appeal of the product tothe American consumer. The cycle would be more"stretched out" if this demand is particularlyunique. For such products, the U. S. manufacturerwill probably remain an exporter for a longer periodof time and can postpone his fears of import com-petition.

It is possible to categorize some products for whichthe U. S. demand is "unique":

Luxury Function: Certainly products which per-form functions people are willing to do withoutuntil they are comparatively wealthy have a par-

ticularly large demand in the United States.Movie cameras and room air-conditioners comeimmediately to mind. In fact, a classification ofconsumer durables into luxury, discretionary, andnecessity shows a remarkable correlation with theU. S. export performance of the products. Ex-ports increased 330% over a ten-year period forthe luxury products, compared to an almost 84%increase for the discretionary items and only a7% increase for the necessity products. (SeeTable 1.)Expensive to Buy: Products that cost signifi-cantly more than other products which performsimilar functions appeal primarily to a high-income market. Electric knife sharpeners are anexample of this type of product. A study by TimeMarketing Service^ showed that 21.5% of house-holds with incomes of over $10,000 (where theheads were white collar, college educated) ownedelectric knife sharpeners. In contrast, only 11.6%with incomes under $10,000 owned them.Expensive to Own: Similarly, products that areexpensive to maintain or to operate compared toalternative products which perform similar func-tions are uniquely suited to a high-income market.The American automobile provides an example.The disadvantage of its high fuel consumptionmore than offsets the advantages of more spaceand higher horsepower for most low-income for-eign consumers.

Labor Saving: Products which save labor bysubstituting a relatively large amount of capitalare particularly appealing to the American market.The high cost of labor, a function of high Ameri-can incomes, makes it very attractive to buy itemssuch as heavy road building equipment and com-puters which substitute capital for labor.

Of course, the businessman can infiuence the ap-

Same reference as footnote 2.

Time Marketing Services, Selective Mass Markets forProducts and Services, Time Marketing Information,Report No. 1305.

A Product Life Cycle for International Trade?

peal of his products through his product policy. Forexample, he can build larger or smaller cars, auto-matic record players or simple ones.

Scale EconomiesThe trade cycle is also influenced by the amount

of savings in cost, which can be achieved by in-creasing the scale of production. If a small plant isequally as efficient as a large one for a given product,a foreign producer will start to manufacture whilehis market is still relatively small. U. S. exportswill not be as successful, and import competition willprobably soon begin.

The effect of scale economies is well illustratedby the cases where a product goes through severalstages of manufacture. In refrigerator production,for example, low costs can be reached in assemblyoperations at a much lower volume than in the manu-facture of compressors. This difference shows upin the performance of U. S. exports for one periodwhere exports of completed refrigerators fell dras-tically, but exports of compressors for inclusion inrefrigerators assembled abroad held their own.

Tariffs and Freight

If tariffs or other trade barriers overseas are highfor a particular product, foreign production is en-couraged. Hence U. S. exports will receive earlycompetition from foreign production. Developingcountries have frequently raised tariffs to encouragelocal production while their markets are still small.However, if the American tariff is high, it followsthat the United States manufacturers need worryless about import competition.

High freight costs, usually for products which arehea\y or bulky compared to their value, tend to dis-courage trade. Not only will foreign productionoccur earlier, but foreign competition is unlikely tobecome a serious threat in the U. S. market. In theextreme cases of very high transportation costs,trade never occurs, or occurs ahnost entirely alongborders where a foreign source is closer than adomestic one. For example, trade in gravel hasnever been significant because of transportationcosts.

Exceptions to the Cycle

Not all products can be expected to follow thecyclical pattern described. The model says littleabout products which do not have a particularlystrong demand in the United States. In addition,for some products the location of manufacture istied to some particular natural resource—agricultural,to certain types of land; mining and initial process-ing, to areas containing the mineral. The manufac-turing processes for some products such as thetraditional handicraft goods have only slightly in-creasing returns to scale. Moreover, some productsappear to remain sufficiently differentiated so thatprice discrepancies play only a slight role. For

example, American cigarettes have continued tocommand a price-premium in Europe.

There are also manufactured goods for whicheven the U. S. market is not large enough to allowsignificant scale economies. Such products tend tobe produced in various locations close to marketclusters, and no one area achieves a large cost ad-vantage. Trade tends to be more on the basis ofproduct differentiation or specialization. However,as demand in the United States grows, a standardversion may be produced in quantity, bringing thecost down so that the product moves into the cycleunder discussion.

High-performance sports cars and sail boats maybe examples of this t>'pe product. Until recently,much of the production for such sports cars waslocated in various areas of Europe and was based onsmall production quantities. Recently both of theseproducts have seen some large-scale manufacture inthe U. S. and significant cost-reductions. GeneralMotors led the way with mass manufacture of theCorvette. More American manufacturers will prob-ably enter the high-performance sports car marketand compete with the virtually hand-produced, ex-pensive European sports cars.

The Trade Cycle and Business Planning

Obviously, no simple model can explain the be-havior of all products in international trade. How-ever, the trade cycle model does appear to be usefulfor understanding trade patterns in a wide rangeof manufactured goods. Although no such modelshould be used by the businessman without a carefulexamination of individual products, it does providesome very useful hints as to which products mightbe exportable and which might suffer import com-petition. The concept can give some clues as to thesuccess of various product policies.

Market SegmentationThe model provides some insights into the role

which market segmentation can play in increasingexports and protecting against imports. Designmodifications can be made for certain productswhich can change the appeal of the product todifferent kinds of customers and thus modify thetrade cycle. In fact, the manufacturer often makessuch changes for reasons unrelated to internationaltrade but rather as a response to changes in thenature of his home market. As the American con-sumer becomes wealthier and more sophisticated,and as domestic competition becomes more severe,the manufacturer often makes his products moreautomatic, more powerful, more luxurious. Themarketer may be trying to differentiate his productfrom those of his competitor, or he may simply beresponding to the demands of a wealthier consumer.These changes may make the product more suitedto the growing incomes of the American customer,but they will also affect its exportability. The item

Journal of Marketing, July, 1968

may become too expensive for the majority of foreignconsumers, hastening competition from foreign-pro-duced goods.

This gradual product sophistication may, however,provide some protection against imports in theUnited States. No doubt, the size and automaticfeatures of the American automobile have had aspecial appeal to the high-income American marketand have consequently held back the flovi' of imports.The product design has, however, had anothereffect: simpler, cheaper foreign cars have been ableto capture a part of the U. S. market more con-cerned with economy of operation and lack of styleobsolescence than with luxury, fashion, and auto-matic features—second cars, student cars, etc.

The American automobile industry did not respondto imports by trying to produce a real economy carin competition with the Volkswagen and Renault, butrather produced a middle-range product (the com-pacts) which competed with Volvo and Peugeot, forexample. The move was probably a wise one. Nodoubt, the producers of the economy cars abroadhad reached cost savings from scale economies equiv-alent to anything the U. S. producers could hopeto obtain. Moreover, they had lower labor costs.By choosing to attack the middle range, the Ameri-can manufacturers chose a market where they couldhave a scale advantage for a time, until the higher-income segment of the European market was so largethat middle-range cars would be more important.Perhaps the U. S. manufacturers simultaneouslycreated a more exportable product for the future.

For products where design sophistication consistsof adding special features to a basic model, exportversions can be produced simply by eliminatingsome of the extras. Thus, some producers can ex-tend the exportability of their products while simul-taneously satisfying the more sophisticated needs oftheir home market.

The existence of segmented markets leads to Amer-icans' exporting and importing the same product:exporting large automobiles to high-income consum-ers abroad while importing small, economy cars;exporting large refrigerators while importing smallones for campers and summer homes. The relative

competitiveness of the United States in 1965-66 inthe higher-quality versions of a product stands outwell in the case of home freezers. Prices were con-trasted for comparable home freezers of differentsizes in Germany and in the United States. For eachmodel the lowest-priced unit was chosen for compari-son. The larger models were cheaper in the UnitedStates and the smaller models in Germany. Ameri-can manufacturers did not yet need to worry aboutimports of large freezers, but they were alreadybeginning to experience competition from smallermodels.̂ "

Product Roll-over and Foreign InvestmentOf course, the point is finally reached for many

products where design changes can no longer makethe American product competitive abroad or safefrom imports. The U. S. firms may follow twostrategies for survival: a continual product roll-over, shifting resources to new products more suitedto the unique demands of the American market; andmanufacturing abroad to take advantage of lowerproduction costs and to save tariffs and transporta-tion charges. The strategies are not mutually ex-clusive, but both require advanced planning andconstant surveillance of the future of individualproducts and assessments of the company's capa-bilities.

Conclusion

Companies can no longer afford failure to ana-lyze opportunities for profit offered by exports andthe possible threats to their own market posed byimports. The trend of international events indicatesan increased importance of trade to businessmen.In response to this changing environment, the mana-ger must have a continuing program to analyze thefuture directions of international trade in his prod-ucts so that he may plan early enough for appropri-ate policies. The product cycle model provides auseful tool in this analysis.

Sears, Roebuck and Co. catalog (Fall and Winter,1965) and Neckermann Katalog, No. 169 (September1, 1965-March 1, 1966).