The product to be manufactured is a prestigious executive car (10 years in exportation in these countries). After manufacturing in the selected country, it will be sold to this host country and neighboring countries in the region.
Suggested Contents
- Introduction
- Automobile industry
- Risk assessment in Brazil
- Risk assessment in Malaysia
- Conclusion and Recommendations
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Country Risks – Political and Financial
Publication Information: Article Title: Corruption and Foreign Direct Investment. Contributors: Mohsin Habib – author, Leon Zurawicki – author. Journal Title: Journal of International Business Studies. Volume: 33. Issue: 2. Publication Year: 2002. Page Number: 291+. COPYRIGHT 2002 Academy of International Business; COPYRIGHT 2002 Gale Group
Liberalization since 1986 gives countries at least 20% FDI annually. Corruption does not affect FDI in absolute terms as illustrated by high corrupt countries like China, Brazil, etc that also have large inflows of FDI. Corruption is seen to enhance efficient/ rent-seeking companies, increase transaction cost of bribing companies while its effect is largely attached to the goodwill of official to materialize the effects of bribe to social issues. Corruption halts competition and undermines quality and price in favor of firm’s ability to access officials who accepts bribe. This condition aggravates when the state has excessive administration power with little transparency.
The study found that corruption is avoided by foreign firms because it is morally wrong, costly and hard to manage. They may also hesitate to invest in a prospective host country when the level of corruption in their home country varies with it. The challenge is to combat a competitor who deals with corruption and try to outperform them by instilling values and morals in operations like McDonalds in Russia.
Publication Information: Article Title: Political Risk and the Benefits of International Portfolio Diversification. Contributors: Jean-Claude Cosset – author, Jean-Marc Suret – author. Journal Title: Journal of International Business Studies. Volume: 26. Issue: 2. Publication Year: 1995. Page Number: 301+. COPYRIGHT 1995 Academy of International Business; COPYRIGHT 2002 Gale Group
Political Risk exists when (1) discontinuities occur in the business environment, (2) when they are difficult to anticipate and (3) when they result from political change. It is of significance because it can change the prospects of the profitability of a given investment.
Ø Note: can be used in managing risk
The Automobile Industry: A Global Perspective
Publication Information: Article Title: Strategy, Scale or Policy? Exit in the Australian Car Industry. Contributors: Matthew P. Fleischmann – author, David Prentice – author. Journal Title: Economic Record. Volume: 77. Issue: 239. Publication Year: 2001. Page Number: 351+. COPYRIGHT 2001 Economic Society of Australia; COPYRIGHT 2002 Gale Group
In the closing years of Australian car manufacturing on 1950s, there were at least 24 car manufacturers. In the onset of the 21st century, however, they were only four as the previous decades illustrated declining trend. The findings showed that from 1920 to 2000, falling government policy increases the likelihood of exit where exemption applies to a large manufacturer while aggravation applies to a small firm with large production plant. The theme of Australian car industry of continuous decline in car plants is the ability of industry players to be efficient. Although the 1940s level of 14 plants (the government protects local assemblers) was increased 1960s to 16 plants (the government encourage manufacturing), this suggests that foreign players started to saturate the industry. Due to this, at the first quarter of 1980s, the effect of globalizing the industry and entrance of relatively technological and experienced players in the West or those from Japan had caused decline. This was flamed by the government’s minimal support and protection to domestic producers. This resulted to managerial decisions to merge and identify strategic links leading to cost-effectiveness, at the same time, small number of companies.
Publication Information: Article Title: Vertical Keiretsu and International Market Entry: The Case of the Japanese Automobile Ancillary Industry. Contributors: Kunal Banerji – author, Rakesh B. Sambharya – author. Journal Title: Journal of International Business Studies. Volume: 27. Issue: 1. Publication Year: 1996. Page Number: 89+. COPYRIGHT 1996 Academy of International Business; COPYRIGHT 2002 Gale Group
The Japanese automobile industry is using the vertical keiretsu that is said to give them competitive advantage in the international arena. Partly the cause of being the second largest FDI contributor to the United States, interdependence and coordination with competitors and strategic links that supplies activities in the value chain characterized association of such industry. This aspect provides Japanese manufacturers enhancement in there OLI (Ownership, Location and Internalization) paradigm. The automobile ancillaries of core Japanese manufacturers are able to overcome the risk (as it is founded that larger firms tend to invest abroad) of FDI due to their relatively small size because there is long-term relationship between the two. With security of demand and cash flow, there were 97 keiretsu affiliations out of 106 in the US. The restriction of US to use local components in manufacturing was resolved by including only a limited number of US suppliers while retaining the large number of keiretsu networks.
Hitt, M, Hoskisson, R & Ireland 2003, Strategic Management: Competitiveness and Globalization, 5th Edition, South Western; Thomson Learning, Singapore.
The automobile industry has continues to globalized. Daimler Benz merged with Chrysler Corporation and focused on integrating operations of individual subsidiaries scattered in the global landscape. In addition, Ford had acquired Volvo that extended the former global brands also six. The purpose of these global manufacturers and assemblers is to build economies of scale in performing activities in the value chain particularly in requisition of car components that make the 60% value of the finished product. Thirty percent of auto market in the US is owned by foreign players while rivalry is tough for luxury brands. Due to internationalization trend, auto companies are confronted with cultural issues especially the languages. A concrete example was Ford’s translation in branding its new released car in Japan called Ka which means mosquito. Apparently, the objective is to enjoy the advantages of scale and localization at the same time. As a result, cost-effectiveness and value-adding capabilities attributable to the firm are enhanced.
Political Risk Assessment in Brazil
Historical Record
http://www.ie.ufrj.br/publicacoes/discussao/automobile_demond_and_supply_in_brazil.pdf
The industry played a crucial role in alleviating the economy of Brazil as it shared 10% of GDP in 1998. This happened despite the government’s move to liberalize importation of automobiles to counter market power and promote innovation. The action showed that the government is sensitive not to lag behind global breakthrough, at least among developing nations, and undermine technological developments. It is willing to relax local protectionism if observed that local consumers are induced to choose and buy a line of auto products in affordable but inferior design and quality. However, when the incumbent president was replaced due to impeachment, the policy was changed that brought back support to local manufacturers of popular/ affordable cars. The revision is also impacted not only by lack of confidence of political parties (an indication that they prioritized consumers’ price vulnerability than product differentiation) and political instability but also high inflation rates. During 1990s, there are several efforts by the government to create harmonious local and imported automobile incentives. They provided loans for potential auto consumers (possibly to buy imported products), reverted this scheme by doubling import tariff rates, induce FDI from foreign automobile producers through Automotive Regime and major exporters are awarded the same tax benefits as multinational corporations in the country.
With this information, political risk is likely to be confronted by foreign firms due to the historical record of regulating the automobile industry. The Brazilian experience tells the subjectivity of government decisions with regards to dealing with industry problems. Important measurement of having a fair to strong lobbying ability of foreign firms is to locate their plants in the Northern region as the Southern region is already saturated. Another, products should be competitive against trading partners like US, Argentina, Germany, EU and Japan in order to slice market share out of the popular models.
Present Environment
www.trendwatching.com/trends/sachet_marketing.htm
This is the biggest South American country in terms of automobile demand with strong demand on low-cost popular cars (below). An indication that most Brazilian consumers are basically in the working class, detergents and washing machines have targeted the low-income bracket of the population. These products are advertised as effective at low cost (detergent) while others are customized in design to fit the fascination and stiff budget of the consumers (whirlpool). In the demand of automobile, such indication is also relevant as popular and compact models are attached to affordable cars. The industry under this classification received relaxed competition from imported products that are typically luxurious and expensive while tax rebates for affordable autos intensify the ability of firms to remain price leaders. As a result, profits from this specific industry are derived in high sales volume.
http://www.brazilianchamber.org.uk/trade_info/referenceinfo.htm
Brazil requires 30% corporate tax and 15% withholding taxes against profit and dividend remittances. It has double taxation treaty with the United Kingdom and other several countries providing additional incentive to foreign investors and managers which mean unnecessary decrease in their income resulting to higher motivation and lower turn-over in manpower. Tariff ranges from 17% to 23% depending on the industry. Automobile sector is highly dependent on the economy.
This is due to their They are friendly and happy people with initiative spirit. They spend most of their time outside due to the hot climate. It exports half of its produced motor vehicle parts to US and EU while the remaining goes to Latin countries and within the region. This is made possible due to the decreasing GDP share of agricultural industry and transfer of capital and labor to service and manufacturing industries
Common Forms of Political Risk
Attitude of consumers in the host country
Actions of host government:
_Taxes
_Labour regulations
_Capital controls
_Investment incentives
_Protectionism
Blockage of fund transfers
War
Bureaucracy
Corruption
Common Forms of Political Risk
Attitude of consumers in the host country
Attitude of consumers should include there consumption of automobiles both quantity and quality. Factors that affect their consumption (income, prices). Do they view having a car as commodity, status, etc. How they buy, what they buy, when they buy and why they buy.
The demand for high-end automobile in Brazil. According to Luxury Goods Survey 2000 in Brazil, approximately 1.1M million families (around 2% of the population) in the country are considered wealthy wherein their incomes are 14 times greater as the average family income in Brazil at 50 per year (2003 values). They are concentrated in the Southeast (73.5%) wherein Sao Paulo city has concentration rate of almost 40% followed by Rio de Janeiro and Brasilia. In a similar study of Brazilian consulting firm, local spending on luxury goods amounts to B annually. An assumption affecting the purchase of luxury commodities evolved in their features that can provide distinction of social status to the user. http://www.fas.usda.gov/gainfiles/200504/146119373.pdf
Selling a prestigious executive car would likely be aimed to this market segment to consider a rational venture. Even though the percentage of the segment with regards to whole population is very small, Vertex has several business models to choose with. It can serve this number exclusively fastening the prospect to export its produced to the neighboring countries with economies of scale. Another, it ca
ever, the sub-optimal demand can support the research that customers would stop buying a product when everybody uses it. In this view, making the proposed car inaccessible to the middle class seemingly can classify as a strategic move for Vertex because middle class tend to follow trends by high-end consumers and opinion leaders. Inaccessibility can be attained at a premium price of the proposed car, segregation of its manufacturing plant from wealth-saturated areas and use of direct marketing.
Actions of host government:
_Taxes
_Labour regulations
_Capital controls
_Investment incentives
_Protectionism
Blockage of fund transfers
War
Bureaucracy
Corruption
Credit:ivythesis.typepad.com
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