62 International Business Strategy
REGIONAL CARRIERS. Regionalairlines (or "region-
als") operated short- and medium-haul scheduled
airline service connecting smaller communities with
larger cities and with the hubs of the major airlines.
Although most were independently owned, several of
the largest regional carriers were actually subsidiaries
of the major airlines, including Atlantic Southwest,
Comair (Delta), and AMR Eagle (American Airlines).
Many regionals benefited from arrangements with
the majors, including code-sharing arrangements,
scheduling assistance to ensure flight connections in
majors' hubs, and the branding of a major airline.
With low-cost structure and improved service levels,
regionals as a whole became the most profitable seg-
ment in the air carrier business. Regionals continued to
replace turboprops on low-density routes and developed
new routes that extended airline networks, enabling
those carriers to serve unserved or underserved mar-
kets more cost-efficiently. Regionals were able to do
that because newer,smallerjets were significantlyfaster
than existing fleets of turboprop planes, had greater range,
and burned less fuel (a major per-flight fixed cost). The
regionalswere the fastest-growingsegment of commer-
cial aviation and continued to serve a valuable segment
of travelers unaddressedby low-cost and major carriers,
Fabiano lopes, Alexandre Zimath, Andrea Maat,
and Cel. Nivaldo Silva
W
HILE TRAVELING TO an investor
conference in Montreal, Canada,
on Embraer's Legacy business jet,
Mauricio Botelho, CEO of Embraer,
reflected on his company's dramatic
ascent to its position as the world's leading regional
aircraft manufacturer. Since becoming a private com-
pany, Embraer had successfully introduced seven
commercial aircraft models to the market, including its
latest, the llB-seat EMBRAER 195. As the jet began its
runway approach just a few miles from the headquar-
ters of rival company Bombardier, Botelho pondered
the potential competitive response to his company's
recent attacks on the commercial aircraft market.
The U.S, Airline Industry
With the passing of the Airline Deregulation Act of 1978
by the U.S, Congress, government control of routes
and fare pricing were eliminated, resulting in growth,
increased competition, and the emergence of three new
business models: major, regional, and low-costcarriers.
lOW-COST CARRIERS. Low-cost carriers (LCCs)
offered airfares at a lower price than major and
regional carriers. The largest LCCs included JetElue,
AirTran, Southwest Airlines, and America West, as
well as new upstarts Song and Ted, which were owned
by Delta and United, respectively.
Many of the LLCs started off as regionals, offering
short-haul serviceconnecting business and leisure trav-
elers between high-volume destinations. By operating
MAJOR CARRIERS. The distinguishing feature in the
business model of amajor carrier (ora "major") was the
hub-and-spoke system.This systemwasbasedoncentral
hubs to w.
62 International Business StrategyREGIONAL CARRIERS. Regio.docx
1. 62 International Business Strategy
REGIONAL CARRIERS. Regionalairlines (or "region-
als") operated short- and medium-haul scheduled
airline service connecting smaller communities with
larger cities and with the hubs of the major airlines.
Although most were independently owned, several of
the largest regional carriers were actually subsidiaries
of the major airlines, including Atlantic Southwest,
Comair (Delta), and AMR Eagle (American Airlines).
Many regionals benefited from arrangements with
the majors, including code-sharing arrangements,
scheduling assistance to ensure flight connections in
majors' hubs, and the branding of a major airline.
With low-cost structure and improved service levels,
regionals as a whole became the most profitable seg-
ment in the air carrier business. Regionals continued to
replace turboprops on low-density routes and developed
new routes that extended airline networks, enabling
those carriers to serve unserved or underserved mar-
kets more cost-efficiently. Regionals were able to do
that because newer,smallerjets were significantlyfaster
than existing fleets of turboprop planes, had greater range,
and burned less fuel (a major per-flight fixed cost). The
regionalswere the fastest-growingsegment of commer-
cial aviation and continued to serve a valuable segment
of travelers unaddressedby low-cost and major carriers,
Fabiano lopes, Alexandre Zimath, Andrea Maat,
and Cel. Nivaldo Silva
2. W
HILE TRAVELING TO an investor
conference in Montreal, Canada,
on Embraer's Legacy business jet,
Mauricio Botelho, CEO of Embraer,
reflected on his company's dramatic
ascent to its position as the world's leading regional
aircraft manufacturer. Since becoming a private com-
pany, Embraer had successfully introduced seven
commercial aircraft models to the market, including its
latest, the llB-seat EMBRAER 195. As the jet began its
runway approach just a few miles from the headquar-
ters of rival company Bombardier, Botelho pondered
the potential competitive response to his company's
recent attacks on the commercial aircraft market.
The U.S, Airline Industry
With the passing of the Airline Deregulation Act of 1978
by the U.S, Congress, government control of routes
and fare pricing were eliminated, resulting in growth,
increased competition, and the emergence of three new
business models: major, regional, and low-costcarriers.
lOW-COST CARRIERS. Low-cost carriers (LCCs)
offered airfares at a lower price than major and
regional carriers. The largest LCCs included JetElue,
AirTran, Southwest Airlines, and America West, as
well as new upstarts Song and Ted, which were owned
by Delta and United, respectively.
Many of the LLCs started off as regionals, offering
short-haul serviceconnecting business and leisure trav-
elers between high-volume destinations. By operating
3. MAJOR CARRIERS. The distinguishing feature in the
business model of amajor carrier (ora "major") was the
hub-and-spoke system.This systemwasbasedoncentral
hubs to which feeder nights were directed. Passengers
from the feeder flights transferred to numerous other
flights provided at the hub to their finaldestinations.'
The enormous capital required to expand geo-
graphically was a substantial barrier to entry for new
airlines. As low-cost and regional carriers primarily
competed on price and local market convenience, the
rationale for the majors' costly model lay largely on
the improved customer loyalty generated by the con-
venience and reach of these airlines.
To further enhance breadth of service and increase
the number of customers while limiting capital out-
lays, most majors turned lO code-sharing and global
alliances with other major and regional airlines. The
major global alliances included Star Alliance, Sky
Team, and One World.
This case was prepared by Fabiano Lopes.
Alexandre Zlmath, Andrea Maar. and revised
by Cel. Niva1do Silva, EADS Representative
to Embraer, under the supervision of Ming-
Jer Chen, Leslie E. Grayson Professor of
. Business Administration. It was written as
8 bas~s for class discussion rather than to illustrate effective or
ineffective
handl.m~~f an administrative situation. Copyright C 2007 by
the University
of Vlrgml~ Darden S~hool Foundation, Chanonesville, VA. All
rights
reserved. 10. order. cUfles. semi an e-mail 10 [email protected]
4. "!u part oflll/s publ,CMOII //lay be f/;!produced,stored in a
retrieval ~'SIt'1Il used
III a spr;udsheel, or transmitted in uny jorm or by an)' l11e(J/ls-
dect'ro~ic
1~:cl''"Dlllcal.photocopying. recording. or OIhenvise-withollt
the perl/lissio~
oJ me arden School Foundation.
DARDEN.
BUSINESS PU~LlSHINC;
JNM"""''''''''''INlA
C382
Embraer: Shaking Up the Aircraft Manufacturing Market 63
CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing
Market C383
I out of underuti Iized airports in those markets, the LLCswere
able to keep a low profile. The largest LCCs werealready
operating nonstop transcontinental flights.Contrary to the major
airlines' hub-and-spoke sys-
tem, LCCs generally operated a point-to-point route
system. This feature was credited in the air carrier
industry with providing higher levels in the quality of
passenger service in terms of on-time departures and
arrivals, limited lost luggage, etc. In order to effectively
utilize the point-la-point system, Lees offered service
to the same general destinations as majors and region-
als but used satellite airports, which were typically less
congested than hub airports and charged lower fees.
5. LCCs limited their fleet of planes to one or two
midsize, more fuel-efficient models, thus reducing
training and maintenance costs. Moreover, by avoid-
ing congested airports, LCCs were able to achieve
faster turnaround times. The net effect was that planes
were kept in the air longer, increasing the asset utiliza-
tion. Additionally, LCCs tended to have lower labor
costs because of the nonunion work force.
U,S. Market Conditions
The airline industry experienced uninterrupted growth
in revenues throughout the 1990s. A weakening global
economy, however, coupled with the September II,
2001, terrorist attacks, had drastically reduced air-
line traffic by the end of 2001. As a result, the indus-
try posted unprecedented losses of $7.7 billion for
the year, as revenues dropped 13.5% from a record
high of $93.6 billion in 2000. The slowdown contin-
ued into 2002 and 2003 as major airlines, faced with
reduced sales, continued to reduce capacity and trim
ranks. United Airlines, the second-largest airline in the
world, filed for bankruptcy at the end of 20022 The
U.S. domestic available seat miles (ASM)' evolution
(Exhibit I) demonstrates the shift in capacity from
majors to regionals and LCCs.
LCes, whose cost structures were already tailored
to the current fare environment, had not been affected
as greatly as the majors. In fact, they continually
reported profits even in the difficult post-September
II environment."
Market Conditions in Europe
In Europe, major airlines were faced with many of
the same competitive issues as majors in the United
6. States. Successful low-fare carriers exerted downward
pressure on fares, and fall-off in passenger demand
made it more difficult to maintain presence in existing
EXHIBIT 1
Embraer: Shaking up the Aircraft Manufacturing Market
Shifting Capacity among Business Models
200 ..
U.S. Domestic ASM Evolution Iindex 100)'
180
160..·
140···......···
120
60 --,------,--:-:---,-:---;---;--;-;-::-:-=--;::-;~;;:::---;:-:-:-
;:::_;::;__;;::__;:::_
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Dct- Jan-
Apr- Jul· Oct- Jan-
00 00 00 00 01 m m 01 ~ ~ ~ ~ ro ro ro ro N
1_ Majors - low Cost _ Regional I
1 "tommercfat Jets Market Assessment:
http://www.llmbraer.com.br(accessed 10 November 2006).
IIIIIIilT _
100· ... -·
80 ..........·....
7. 64 International Business~St:::r.:'t:eg~y:....... _
C384 CASE 25 I Embraer: Shaking Up the Aircraft
Manufacturing Market
structures and subassemblies, such as wings and fuse-
lages, to manufacturers of finished aircraft. Those sub-
contractors, in tum, were supplied by up to 4,000 firms
that manufactured components or raw materialS. Parts
that differentiated a product, or those strongly identi-
fied with a company, were usually produced in-house
given their strategic and competitive importance.
A strong customer base and careful order-book man-
agement were needed to recoup the cost of developing
new commercial or business jets. Standards for safety,
quality, and value were crucial. Because of the capital-
intensive nature of the industry, manufacturers needed
to sell hundreds of units globally in order to break even
on the design and manufacture of new aircraft.
The 1990s were years of consolidation in the air-
craft industry. In 1997, two of the industry's largest
producers, Boeing Company and McDonnell Douglas
Corporation, merged. Other well-known companies,
markets, much less expand to new ones. Regional
operators had softened the blow of the downturn. With
their lower cost struclUres and greater flexibility, they
had proven less vulnerable to outside market forces
and capable of growth under adverse conditions.
The milestones in the airline industry ror both the
United States and Europe are presented in Exhibits 2
8. and 3.
It is important to highlight that these trends in the
global airline industry were a key driver of the recent
developments in the commercial aircraft industry.
The Commercial Aircraft Industry
OVERVIEW. Since most modern aircraft were incred-
ibly complex (the Boeing 747, for example, had six
million pans), a worldwide network of approximately
400 subcontractors was required to supply major
EXHIBIT 2
Embraer: Shaking up the Aircraft Manufacturing Market
Milestones in the Airline Industry-United statas'
HUB·ANO-SPOKE
» U.S. Congress passes the Airline Deregulation Act of 1978,
initiating a period of intense competition and paving the
way for a new operational model, the hub-and-spoke system.
» Deregulation makes room for low-fare. point-ta-point service
expansion.
» By 1984, code-sharing alliances between major carriers and
regional operators begin to be formed.
» Majors begin to rely more on low-cost regionals. Number of
short-haul turboprop routes increase.
MARKET OUTSOURCING
» Regional jets are introduced in 1992.
» In2002. U.S.orders for regional jets near 400.Turboprop
orders collapse.
» ~egional jet networks grow dramatically as majors shift routes
9. to the lower-cost aircrafts and deploy them to d
Into new markets. expan
» Regional jets become a crucial part of airline strategy to
remain profitable in pre-September 11 downturn.
REGIONAL JETS
» Terrorist an~CkSinth~ United States on September
11,2001,deliver a crippling blow to the airline industry.
» FAA enacts Its Operational Evolution Plan.
» Airlines respond to plunging demand by cutting frequencies
and trim i ., . . .
profitably witl1low load factors offset losses from mainlines
operatin~ ;~hn~:~~~~'a~~~,onallets abilityto operate
» Regional jets used to complement or replace narrow-body
aircraft on unprofitable short-haul routes.
'''2004-2023 Embraer Market Outlook."
..----------~ 7
Embraer: Shaking Up the Aircraft Manufacturing Market 65,
CASE 25 I Embreer: Shaking Up the Aircraft Manufacturing
Market C385
EXHIBIT 3
Embraer: Shaking up the Aircraft Manufacturing Market
Milestones in the Airline Industry-Europe'
10. LIBERALIZATION IN EUROPE
» European airlines evolved a hub-and-spoke system
independently, primarily operating from each nation's capital
city.
» Europe takes a four-step approach to liberalization. The first
phase is implemented in 1988.
» Airlines begin to be restructured and privatized.
» High labor costs in a competitive, deregulated environment
force airlines to take drastic measures.
MARKET EXPANSION
» Regional jets are introduced in 1992.
» European airlines successfully deploy regional jets in the
current established air transport system.
» Regional jets replace many turboprops, but turboprops with
40·plus seats remain in service.
» tow-tare carriers such as Ryanair and EasyJet see dramatic
growth in RPKfrom 1995to 2001.
REGIONAL JETS
» The regional airline market in Europe averages 12% growth
during the period from 1995to 2002,
» Terrorist attacks in the United States on September 11,2001,
deliver a crippling blow to the airline industry.
» As in the United States, the regional jets' ability to adapt to
different demand environments helps sustain allied
majors through crisis.
1 "2004-2023 Embraer Market Outlook."
such as Piper Aircraft Corporation and Fairchild
Aircraft in the United States, as well as Fokker N.Y. of
11. the Netherlands, filed for bankruptcy during that period.
The market for commercial aircraft was typically
divided into two product categories: narrow-body and
wide-body aircraft. Narrow-body aircraft were single-
aisle, short-range aircraft (up to 6,000 km or roughly
3,700 miles) that typically carried up to 200 passen-
gers. Leading aircraft in that category were the Boeing
737, the Boeing 757, and theAirbusA-320. Wide-body
aircraft were double-aisle, medium- to long-range air-
craft (up to 14,000 km or roughly 8,700 miles) that
could carry from 200 to 450 passengers. Leading air-
craft in that category were the Boeing 747, the Boeing
777, and the Airbus A-300. Boeing and Airbus were
the industry leaders in these segments.
REGIONAL JETS. The regional jets segment, which
was included within the narrow-body category, was
traditionally composed of aircraft that carried between
20 and 70 passengers. Bombardier and Embraer
were the market leaders in this segment, which had
consistently expanded since 1992, when Bombardier
introduced the first regional jet as a replacement for
turboprop planes.
Even before regional jets became widely available,
growth among regional airlines was consistently robust.
Between 1971 and 1993, regional carriers outgrew the
majors virtually every year. The expansion could be
traced to two contributing factors. First, in the years
leading up to J 978, many cities previously unserved
had been introduced to air service, mainly on turboprop
aircraft. Second, regional carriers in the years after the
Deregulation Act of 1978 began to fill gaps in the ever-
expanding hub-and-spoke networks of the majors.
12. By 1989, the majors changed their airline operations
to increase the number of passengers flowing into
the networks by adding capacity on its feeder routes,
offering more destinations, and increasing frequency.
It was a strategy that played against the strengths of
regional turboprops, whose shorter range made them
ineffective in reaching new markets.
The net effect was a surge in regional jet adoption
and deployment, largely because of the replacement
I
International Business Strategy66
C386 CASE 25 Embraer: Shaking Up the Aircraft
Manufacturing Market
of iurcoprope on low-density routes and the develop-
ment of new routes that extended airline networks. As
the regional jets segment expanded, the capability of
the jets themselves expanded to comprise roomy and
cost-effective modem aircraft that flew up to 4,000
krn (3,700 miles), enough to operate within most
continents.
Based on expected growth of LCCs and regional
carriers, as well as tile aging of aircraft currently in use,
the market for regional planes appeared to be poised
for significant growth. Embraer had projected deliver-
ies of 30- to 120-seat planes to total nearly 8,500 units
13. over the next 20 years, representing a US$175 billion
business. The United States was expected to gener-
ate 56% of this demand, while 19% of demand would
come from Europe (Exhibit 4).
EMBRAER. In 2004. Embraer was the fourth-largest
commercial airplane manufacturer in the world in terms
of volume, behind Boeing, Airbus, and Bombardier.
Airbus and Boeing led the market with deliveries of
320 and 285 commercial airplanes, respectively. In
the regional market, Bombardier and Embraer demon-
strated a close rivalry by achieving 158 and 148 deliver-
ies, respectively (see Exhibit 5 for Embraer market share
evolution).
Embraer, founded in 1969, was the product of
an aeronautical technology center (CTA) that had
been established in 1945 by Brazil's Ministry of
Aeronautics. Together with Embraer, the eTA also
generated one of the world's leading aeronautical
engineering schools, the Aeronautical Technological
Institute (ITA). Most of Embraer's aeronautical engi-
neers had been hired out of ITA.
Moreover, Embraer's first great commercial suc-
cess was Lhe Bandeirantc, a 15-seat plane with a
design based on an eight-seat prototype assembled
inside the CTA. Overall, 500 Bandeirantes were sold
over a 10-year period. The first 80 were sold to the
Brazilian military, as an indirect government support
to the new enterprise.
From 1972 to 1983, Embraer introduced sev-
eral small turboprop planes. Ernbraer's first inter-
national success, introduced in 1983, was the EMB
120 Brasilia, a 30-seat pressurized twin turboprop. In
14. 2006, the Brasilia was still in production, with more
than 350 planes operating worldwide. Embraer's jet
era began in 1985 with the introduction oftheAMX, a
military jet developed in partnership with Aermacchi,
an Italian aircraft manufacturer.
Embraer was privatized in December 1994 as part
of President Fernando Henrique Cardoso's privati-
zation program. Cia. Bozano, Simonsen (CBS), the
leader of the consortium that took Embraer private,
was a conglomerate with diversified investments in
financial services, agriculture, real estate, and indus-
trial products (see Exhibit 6 for Embraer's ownership
structure).
In 1995, Embraer entered the commercial jet mar-
ket with the introduction of its ERJ family. The ERJ
145 (introduced in 1995), ERJ 135 (introduced in
1998) and ERJ 140 (introduced in 2000) had a seating
capacity of 50, 37, and 44 seats, respectively. Those
planes were developed in accordance with Embraer's
strategy of entering the 30- to 50-seat market to com-
pete against Bombardier's Q-Series turboprop planes
as well as its CRJ family of regional jets.
In 1999, while still celebrating the successful intro-
duction of the ERJ family, Embraer began develop-
ing a new aircraft family that would serve the 70- to
120-seat market. In February 2002, the 70- to 78-seat
EMBRAER 170 completed its first flight, taking off
from Sao Jose dos Campos. In the following two
years, Embraer completed the maiden flights of its
78- to 86-seat EMBRAER 175 as well as the 98- to
106-seat EMBRAER 190. To complete the family, in
December 2004, the 108- to 118-seat EMBRAER 195
15. accomplished its first successful flight (see Exhibit 7
for a list of Embraer's products as of 2006).
THE 70- TO 120·SEAT MARKET. Several reasons moti-
vated Embraer to manufacture 70- to 120-seat planes.
First, Embraer identified a gap between capacity and
demand for this range of planes. The absence of a true
70- to I20-seat jet family had forced airlines to deploy
planes that were either too large or too small to operate
efficiently in the inteImediate-demand market. In 2002,
61 % of flights in the United States departed the airport
with loads appropriate for 70- to 11O-seat aircraft.
Several trends in the airline industry also contrib-
uted to Ernbraer's interest in this segment. First, the
continued growth of LCCs had created a shift in air-
craft demand toward smaller, more efficient planes.
In addition, the downturn in the airline industry
that began with September 11,2001, along with the
resulting price wars, had highlighted the fact that the
~ajors required a high-load factor to compete effec-
tively agamst the LCCs. Furthermore the increased
volatility of passenger demand created' a greater need
for fleXIbilIty among airlines. As a result, the majors
7
Embraer: Shaking Up the Aircraft Manufacturing Market 1t.7
CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing
Market C387
30-60
20. 53%52% 49%
32% 30% 27%28%
19%
2001 2002
I_ EMBRAER _ BOMBARDIER
33%
Embraer: Shaking Up the Aircraft Manufacturing Market 69
CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing
Market C389
EXHIBIT 5 (Continued!
91- to 120-seatPlanes
Dare source; http://www.embraer.com.br1accessed 10November
20(6),
100%
100% 100% 100% 100%
BO%
73%
67% 66%60% 61% 59%
55%
21. 40%
20%
0%
199B 1999 2000 2001
I_ EMBRAER - BOEING _ AIRBUS I
199719961995
1969, yet has remained under the majority control of t
the Bombardier family throughout the company's his-
tory. In the 1970s, Bombardier began to diversify into
other transportation industries through acquisitions
of various train, plane, bus, and boat manufacturers.
Notable aerospace acquisitions included the purchases
of Canadian aircraft manufacturer Canadair in L986,
business jet manufacturer Learjet Corporation in 1990,
and de Havilland, manufacturer of the Dash-8 turbo-
prop, in 1992.
In 1992, Bombardier entered the regional jet mar-
ket with the launch of its 50-seat CRJl00I200. After
Embraer's entry into that market in 1995, Bombardier
began to face a significant erosion of its competitive
position. Financial problems compounded the chal-
lenges posed by Embraer; they prevented Bombardier
from launching major development projects outside of
the CRJ family of jets. Instead, Bombardier raced to
beat Embraer to the emerging 70- to 90-seat regional
jet market by announcing in 1997 its plans to intro-
duce the 64- to 75-seat CRJ700/705, a stretched
version of the CRJ1001200. The CRJ700/705, first
delivered in 2001, was followed by the 86- to 90-seat
CRJ900, another stretched CRJ 100/200, which was
22. announced in 1999 and in service by 2003. In 2000,
Bombardier's plans to develop a new generation jet
that could have beaten Embraer to the 100-plus-seat
were becoming increasingly receptive to the notion of
using smaller planes for short- to intermediate-range
flights. As well, the financial problems experienced by
the majors during this period had prompted their U.S.-
based unions to relax clauses that limited the scope of
their regional airlines to 50-seat jets, As a result, sev-
eral airlines were beginning to expand regional opera-
tions to include planes with more than 70 seats.
Another key reason was related to aging fleets.
More than one-third of the planes serving the 61- to
120-seat market were more than 20 years old. Those
planes amounted to approximately 690 units, which
would be gradually replaced within the next five to
10 years (see Exhibit 8 for details).
Embraer already delivered nine EMBRAER 170s
to customers, including US Airways, which had
broken in its new 170s with flights from Pittsburgh,
Pennsylvania to Albany, New York on April 4, 2004.
JetSlue Airways had 100 EMBRAER 190s on firm
order-at a total cost of $3 billion-having chosen
that model over the 107-seat Airbus A318. The total
number of firm orders for the 1701190 family, as of
December 2004, was 343.
BOMBARDIER. Founded in 1942 by Armand Bombar-
dier as a snowmobile manufacturer, Bombardier has
been publicly listedon theToronto Stock Exchange since
23. 70 lnternation~.I~B.":us~in'.':e~ss~5:':tr.~t':.!eg~y ---------------
C390 CASE 25 I Embraer Shaking Up the Aircraft
Manufacturing Market
EXHIBIT 6
Embraer: Shaking up the Aircraft Manufacturing Market
Embraer Capital Structure
Data source:
httPJ/WWW.llmbraer.com.br{aCCeSSed10November20(6).
Common Shares (242,544,448 Sharesl-33% of shares
BOVESPA Free F'oat'l Cia. Bazano,
19.20%
Europeanrl
Group,
20%
PREVI,
20%
Brazilian
Government,
SISTEL, 0.80%
20%
The European group includes: Thales 15.67%1,Dassault
15.67%1,
Snecma (2.99%1, and EADS (5.67%1
24. Preferred Shares (476,720,786 Sharesl- 66% of Shares
BOVESPA,
34.40%NYSE'l56%
-.:_ ........... BNDES,
9.60%
Total (719,265,234 Sharesl
European --~
Group,
Controlling
Shareholders,
32.60%7.70% 1
NYSE, ---l
37.10%
BNOES,~
6.90%
Boves pa,
15.40%
0.30%
CASE 25 I Ernbraer: Shaking Up the Aircraft Manufactunng
Market C391
25. EXHIBIT 7
Embraer: Shaking up the Aircraft Manufacturing Market
Embraer's 2006 Product Mix
Commercial Aviation Military Aviation Corporate Aviation
Embraer: Shaking Up the Aircraft Manufacturing Market 71
EMB 120
ERJ 135
ERJ 140
ERJ 145
Embraer 170
Embraer 175
Embraer 190
Embraer 195
Super Tucano
AMX
EMB 145 AEW&C
EMB 145 RS/AGS
P 99
Legacy
26. Legacy
Data source: htlp:/lwww.embraer.com.br(accessed 10 November
2006).
EXHIBIT 8
Embraer: Shaking up the Aircraft Manufacturing Market
The 70- to un-seat Capacity Gap
Data source: http://www.embraer.com.br(accessed 10 November
2lJ06).
North American Region
South American Region
European Region
Asian Region
150 170110 13090Seating Capacity 30 50 70
(continued)
72 International Business Strategy
C392 CASE 25 1 Embraer Snakmg Up the Aircraft
Manufacturing Market
EXHIBIT 8 (Continued)
How Overcapacity or Undercapacity Hurts the Bottom Line .' r
loads better suited for70- to un-seataircraft.
27. Note: More thsn half 0ls1l U.S. domestic airlines operallng
narrow-body malnlme aucran have passenue
27% 34%
appropriate for 70- appropriate for 90-
to 90-seat aircraft to 110-seat aircraft
~ ,-----'-----
17% 17%
~
€
m...~
Q
]I
~
'a
i
! 2%
0% tn. 0- L-- '- '- L-
<50 50 60 70 80 90 100 110 120
Passengers per Departure
14% 13%
9% 8%
7%
market were abandoned owing to financial constraints,
and Bombardier was forced to continue relying on its
existing platform.
28. After several years of escalating financial and busi-
ness challenges, in 2003, Bombardier appointed for-
mer CN Railway CEO Paul Tellier as the company's
president and CEO. Tellier quickly implemented a
recapitalization program, featuring an equity issue
and asset divestitures, to strengthen Bombardier's
balance sheet and refocus on its aerospace and rail-
car businesses, The aerospace business continued to
struggle, however, with 2005 production estimates
4%
130 140 >150
Seating Gap
Aircraft in Service (as of 2002
Note: More than one-third of the world's let fleet serving the
51-to 120-saat seement is more thal120years old and should be
retired in the coming veers.
001<1sourcll: http://WwW.embraer.com.br(accessed 10
November 2006).
500 689 aircraft older than 20years
(34% of total fleet in service)
r~---.A----,
453
400 372
330 304
208
100
29. o L-J1::-0_~5-~6:-_~10'---!1~'-~15'---!16::-_"!:20'-----;21-
2526-30
Aircraft AgeIVe.,s)
+30
Embreen Shaking Up the Aircraft Manufacturing Market 73
CASE 25 I Ernbraer Shaking Up the Aircraft Manufacturing
Market C393
for the 50-seat CRJ200 reduced from 98 to 54, as the
market continued to migrate toward larger regional
planes. Furthermore, the financial strength of airlines
still interested in 50-seat jets, such as US Airways and
Delta Airlines, continued to decline. In November
2004, Standard & Poor's and Moody's Investor
Service downgraded Bombardier's credit rating to
junk status. One month later, after less than two years
on the job, Tellier was removed from his position as
president and CEO of Bombardier. Replacing Tellier
was Laurent Beaudoin, a member of Bombardier's
founding family, chairman of Bombardier since 1979,
and previously CEO of the company from 1979-1999.
Beaudoin had reportedly pushed Tellier aside after dis-
agreeing with his long-term vision for Bombardier.
The CSeries: The entrepreneurial Beaudoin was
believed to be an enthusiastic supporter of the CSeries
development project that began feasibility studies at
Bombardier in 2004. The CScries, a new family of
thuee jets ranging from I I 0 to 135 seats, would serve
as Bombardier's entry vehicle into the commercial jet
30. market. Bombardier's board of directors was expected
to decide in early 2005 whether to proceed with devel-
opment efforts, with the objective oflaunching the proj-
ect in spring of 2006 and delivering the first jet in 20.10.
The Canadian government, attracted to the opportunity
to replace the thousands of jobs that had been lost
because of the scaled-back production of Bombardier's
CRJ200, had reportedly agreed to finance one-third of
the expected $2 billion of capital costs associated with
the prototype development. In exchange, Bombardier
would commit to locating the CSeries manufacturing
and development facilities in Canada.
The CSeries jets were expected to compete directly
with Embraer's EMBRAER 190, Airbus's A318, and
Boeing's 737-600. Bombardier claimed the CSe.ries
would be the only jet specifically designed for the
110- to 135-seat market, as Embraer's 190 was
an upward stretch from the 170, and Airbus's and
Boeing's jets were downsized versions of their larger
narrowbody jets. As a result, Bombardier claimed the
CSeries would outperform each competing jet with
respect to weight, size, or range. Bombardier expected
the CSeries to achieve unmatched operating efficiency,
reducing costs to 15% to 20% below the cost of oper-
ating competing planes.
Bombardier's recent hiring of former Boeing
executive Gary Scott, who had previously worked on
Boeing's development of the 737, to direct the CSeries
program sparked conjecture in the Canadian press of a
Bombardier plan to create ajoint venture with Boeing.
Bombardier called the reports "pure speculation," but
Boeing Commercial Airplanes President Alan Mulally
confirmed that his company had served as a "consul-
31. tant" to Bombardier. A relationship with Boeing could
add significant value to the CSeries, particularly if it
allowed Bombardier to create cockpit commonality
with Boeing's 737.
BOEING. Boeing was the world's second-largest
manufacturer of large commercial jets behind Airbus,
as well as the world's largest aerospace company,
focusing on military aircraft, satellites, missile de-
fense, human space flight, and launch systems and
services. Since 2001, Boeing's commercial airplane
sales had plummeted from 60% to 40% of Boeing
sales. Boeing responded to that downturn by cutting
costs, curtailing product development, and placing
more emphasis on its military and space operations.
In 2005, Boeing's commercial development efforts
were primarily focused on the 787 Dreamliner, a super-
efficient, long-range (9,500 km to 11,000 krn, or 7,000
to 8,000 miles), 200- to 250-,eat aircraft that was t
expected to be in service by 2008.
The smallest Boeing airplane in full-scale produc-
tion as of 2005 was the 162- to 189-seat 737. Boeing
announced in January 2005 that the 106- to 114-seat
717, which was inherited in Boeing's 1997 acquisition
of McDonnell Douglas, would be taken out of produc-
tion as soon as its existing orders were filled. Boeing
cited insufficient demand as the reason for the deci-
sion, adding that the 717's market niche was simply
too small for Boeing to continue serving. The 717
was considered by market analysts to be too big and
heavy to operate efficiently relative to smaller regional
jets such as Bombardier's CRJ900 and Embraer's
EMBRAER 190. Furthermore, the 717 was an orphan
product, with no cockpit or engine commonality with
other Boeing jets, and had not received a great deal of
32. marketing and development support from Boeing dur-
ing its six years of production.
AIRBUS S.A.S. The world's largest commercial
aircraft maker, Airbus, was 80% owned by the
European Aeronautic Defense and Space Company
(EADS), with U.K.-based BAE Systems controlling
the remaining 20%. Airbus was founded in 1970 to
address several European governments' wishes to
have a Eu.ropean competitor in the aerospace industry.
In 2005, Airbus was the manufacturer of the world's
74 International Business Strategy
The Decision
C394 CASE 25 Embraer: Shaking Up the Aircraft
Manufacturing Market
largest, lowest-cost, and longest-range aircraft. The
company had recently been focused on the super-
jumbo market, with the development of the SSO-seat
A380. In December 2004, however, Airbus announced
plans to develop a midsized piane, the A3S0, to com-
pete directly against Boeing's 787, sealing 24S to 28S
passengers.
Airbus's product line comprised four families: the
single-aisle A320 family, the widebody A300/310
family, the iong-range A330/340 family, and the new
super-jumbo A380 Family. Airbus's smallest airplane,
the 318, was a 107- to I32-seat short-haul jet launched
in 1999 to compete with Boeing's 717. TheA318 ben-
efited from a high degree of commonality with the
33. entire A320 family in terms of airframes, on-board
systems, cockpits, and handling characteristiCS, which
meant that the entire family could be flown by the same
pilots and maintained by the same engineers. Still, as
a downsized version of the ISO-seat A320, detractors
considered the A318 to be larger and heavier than is
desirable for jets in the IaD-seat market.
Competitive History (1989-2005)
i 989 Embraer began development of the ERJ 14S.
1992 Bombardier entered the regional jet market
with the SO-seat CRJI00I200, developed from
the CL-60 1 Challenger business jet.
1993 Airbus launched development of the 120-seat
A319.
1996 Embraerbegan delivering the ERJ i4S.
1997 Embraer launched the 37-seat ERJ 13S.
Bombardier announced pians to develop the
64- to 7S-seat CRJ700170S.
1998 Embraer began delivering the ERJ 13S.
1999 Bombardier began development of the 86- to
90-seat CRJ900.
Embraer launched development of the 44-seat
ERJ 140 and launched its EMBRAER 1701190
family beginning with the deveiopment of the
70-seat EMBRAER 170.
Airbus launched development of the 107- to
I32-seat A318.
After two years of discussion about government
subsidies, Canada challenged the Brazilian
34. subsidy program PROEX before the WTO.
The WTO decided that the Brazilian PROEX
was a prohibitive export program that had to be
withdrawn. The value of the PROEX subsidy
to Embraer was worth $1.4 billion. Following
that, Canada chose to retaliate by imposing tar-
iffs on the Brazilian exports including a tempo-
rary ban on Brazilian beef.
2000 Bombardier abandoned plans for development
of a new I OO-seatjet, the BRJ-X.
2001 Bombardier's CRJ700170S began service.
2003 Bombardier's CRJ900 began service.
Embraer's EMBRAER 170 began service.
2004 Bombardier announced that it was studying
the feasibility of a new jet family, the CSeries,
which would serve the 11O-to I35-seat market.
Embraer began delivery of the EMBRAER
175 and EMBRAER 190.
200S Boeing announced plans to stop production of
the 717 because of insufficient market demand.
As he made final preparations for his upcoming inves-
tor presentation, Mauricio Botelho was concerned
that Embraer still did not know what to expect from
Bombardier, Boeing, and Airbus. How would they
respond to Embraer's successful launch of its recent
family of jets? Would Bombardier really follow through
with its launch of the CSerles? Would Airbus and
Boeing perceive the latest attacks by Embraer and
Bombardier as attacks on their own families of jets?
35. Most importantly, given Botelho's expectations of
rivals' future competitive moves, what should Embraer
do next to protect its position and influence its com-
petitors' actions?
Endnotes
1. "Air Transportation," Encyclopedia of Globul Industries
online edition, Thomson Gale, 2005. Reproduced in Busin~ss
and Company Resource Center (Michigan: Gale Group. 2005),
hup:!lgalenet.galegroup.comlservletlBCRC.
2. "AirTmnsportatlcn," Encyclopedia afGloba/lndustries,
Gale Research International Ltd., Pub ID: GE66 (I December
2(02).
3. AV,ailable seat miles (ASM) measure available passenger
capacity.
4. "Airli~e.lndusn-y: A Business in Transition," Optimizing Air
Travel Mini-Conference Presentation. Boston Massachusets
24 March 2004. "
UPSin lndia-A Package Deal? 7S
It's challenging. But UPS is all about global trade. Global trade
is going to
pull us out of this recession.
-UPS CEO SCOTT DAVIS IN A 2009 CNBC INTERVIEW
Marne l.Arthaud-Day
Kansas State University
Shreyasi Banerjee
Intel Corporation
Frank T. Rothaermel
36. Georgia Institute of Technoloqv
I
THAD BEEN six months since Robin Page first
walked into the Sandy Springs headquarters of
United Parcel Service (UPS) and assumed her
role as Chief Strategy Officer. Th9ugh she had
been doing strategic analysis and planning for
years, she felt an unusual amount of pressure to prove
herself in this new position. Chief Executive Officer
ICEOI Scott Davis had made it clear when he offered
her the job that he had high expectations of what she
could do for the company, and that he wanted to see
concrete results by the end of the first year.
Ms. Page glanced at the pile of reports sitting on
her desk, many of them describing recent international
acquisitions and alliances. She knew that one of the rea-
sons she had been Mr. Davis's top choice for the posi-
tion was her extensive international experience. UPS
already had a presence in more than 200 countries,
but they wanted to penetrate those markets more
deeply, especially the rapidly growing economies of
Southeast Asia. Ms. Page had traveled extensively
around the region both for work and for pleasure, and
Mr. Davis was counting on her insights to help the
company with its Asian expansion.
First and foremost on her mind was India. She
remembered fondly a vacation she had taken there
just a year or so ago, and how the city marketplaces
had stnuck her as a unique mix of the modern and the
ancient. People milled around everywhere, pushing
their way through crowded streets, families piled on
37. motor bikes weaving inand out of lanes of standstill traf-
fic. Yet everywhere she looked, someone was talking
on a cell phone, and modern buildings lined the horizon
with names of multinational corporations from allover
the world. An entrepreneurial spirit seemed to fill the
air,with new businesses coming to life on a daily basis;
for every venture that failed, two more sprouted up
to claim its space. The country was awash with busi-
ness opportunities amidst the clamor, congestion, and
complexity that typified modern life in India's major cit-
ies like Mumbai, Delhi, and Bangalore. The sheer vol-
ume of people promised seemingly unlimited market
potential.
Although UPS had established a footprint in India,
it had yet to penetrate the market on the scale that
Ms. Page and other UPS managers hoped for. They
formed an alliance with Jet Air in 2005, which led
to the opening of the first" UPS Store" in Mumbai
and several other major cities. In 2008, UPS estab-
lished a second alliance with AFL Private Ltd, gain·
ing access to the logistics company's field stocking
locations and significantly increasing its access points
for international delivery. Since then, however, UPS's
attention had shifted to other Asian markets like China
and Malaysia, leaving India wide open to invading
competitors. Sure enough, in UPS's absence, DHL
acquired the Indian delivery company Blue Dart and
had become the clear market leader in both the inter-
national and domestic segments. Today, DHI:Blue
Dart had a combined market share three times higher
than the next largest company.' Clearly, it was to time
to reformulate UPS's India strategy.
In many ways, the India situation reminded Ms.
38. Page of when UPS first began to offer overnight
delivery back in the 1980s. A major competitor (the
U.S. Postal Service) dominated the marketplace, and
Professor Marne L. Arthaud-Day, Research Associate Shreyasi
Banerjee
(lndustrial Engineer and Systems Analyst. Inte1), lind Professor
Frank T.
Rorhaermel prepared this case from public sources. This case is
developed for
the purpose of class discussion. It is nor intended to be used ror
any kind of
endorsement, source of data. or depiction of efficient or
inefficient manage-
ment. CAnhaud-Day, Banerjee. and Rothaennel, 2013.
('l! ,'''''
,
... _~7.:6:.._~_~ln:.:t:.r:.:n::atiOnalBusiness S~t~ra~t.~9':Y _
C396 CASE 26 I UPS In India-A Package Deal?
while UPS had strongholdS in all of the major loca-
tions, the challenge was to figure out how to con-
nect rural America to its major transportation hubs.
UPS had promised overnight delivery between any
two addresses in the United States, and they weren't
joking. If a package needed to get to the base of the
Grand Canyon, the plan was to drive the package on
a dirt road for 50 miles from Valentine, Arizona, to
the rim of the Canyon. A mule train operator would
then take the letter over to the rocky final leg for a
$35 charge to UPS. UPS would deliver the letter at a
39. loss in order to maintain its commitment to overnight
delivery. Ms. Page knew that vast regions of rural India
still lacked adequate roadways, and she chuckled think-
ing that mule trains might not be such a far-fetched
idea after all. Delivery at the local level was still very
much a small business, especially in developing coun-
tries. It's like Kent Nelson, UPS's senior vice president
for finance and customer service, said in a 1985 inter-
view, "When you are in the package-delivery business,
you are really in the pennies business. The trick is to
have the pennies build up to be profitable:"
If UPS was to be a major player in the current "India
Mania:' the company would have to figure out the
answers to several difficult questions. How unique
was the Indian situation compared to other develop-
ing countries? UPS had been in business for over 100
years and had experience in over 200 worldwide mar-
ketplaces. Surely some of the lessons learned would
transfer to India, but how could they determine which
ones? Competitors already had a head start, so UPS
could not afford to experiment based simply on trial
and error. How should they go about tapping the exten-
sive potential of one of the world's largest economies?
How difficult would it be to streamline their supply and
distribution chain given the lack of infrastructure devel-
opment? With the size of India's population and the
economy's rapid growth, the rewards for successfully
addressing these issues were sizeable to say the least.
Ms. Page sat down and started reviewing the pile of
documents sitting on her desk, hoping the deals of the
past would help her figure out the right path for UPS's
future in India.
EARLY HISTORY. Claude Ryan and Jim Casey had a
big idea and a small amount of debt capital. Working
40. from a Seattle basement, they began running errands
and carrying notes on foot, as well as making horne
deliveries for drugstore customers. As the arrival of new
technologies such as the telephone and automobile led
to a decrease in demand for messaging services, the
company shifted its emphasis to delivering packages
for retail stores. "Merchants Parcel Delivery" quickly
built a strong reputation based on its personalized cus-
tomer service and the care with which it handled every
package.' The young enterprise changed its name to
United Parcel Service in 1919 as it entered a golden
period of domestic expansion. The word "United" was
chosen to reflect that even as the company expanded
into other cities like Oakland and Los Angeles, they
still belonged to the same organization.
Throughout its early history, UPS functioned pri-
marily as an intra-city delivery service, innovating in
response to consumers' changing [jfestyles and shop-
ping pattems.Lln the I920s, UPS added several unique
service features such as daily pick-ups, acceptance
of C.O.D. payments, and multiple delivery attempts.
It also developed a new conveyor belt system for
handling packages.' When fuel shortages leading up
to World War Tl caused retai lers to curtail their deliv-
ery activities and encourage customers to carry their
parcels home, UPS stepped up and expanded its retail
store service." After the war, as people migrated to the
suburbs and bought cars that could hold their goods,
UPS shifted its focus to the business-lO~business
segment.i
COMMON CARRIER RIGHTS, In the next phase of
its expansion, UPS decided to pursue common carrier
rights, meaning that it could deliver packages between
both private and commercial customers. This was tra-
41. ditionally the domain of the U.S. Postal Service, as
stipulated by the Interstate Commerce Commission
and multiple state regulatory bodies. A series of legal
battles ensued as UPS fought to expand its operat-
ing authority to all 48 states, a goal which it finally
achieved in 1975. By 1978, UPS also provided nation-
wide air transport services, flying packages in the
cargo bays of commercial airlines.!
The UPS Story
The UPS saga has all the elements of a remarkable
success story. Two teenage entrepreneurs in 1907
started what would one day become the world's larg-
est package delivery company.
UPS AIRLINES. In response to the deregulation of
the airline industry, many established carriers trimmed
flights during the 1980s, leading to reduced air freight
capacity. UPS saw this as an opportunity to enter the
• ~7
UPSin India-A Package Deal? 77
CASE 26 I UPS In lndta-c-A Package Deal? C397
air delivery business and began to acquire cargo jets.
It offered next-day air service to 48 states by 1985,
and in 1988, UPS Airlines was formally recognized
by the Federal Aviation Administration. It was the
fastest airline startup in FAA history, taking just over
one year to get all systems into place.' Building on
the success of its airline service, the company shifted
from a national delivery company to a global foot-
42. print throughout the 1990s. UPS now provides deliv-
ery services to more than four billion people in over
200 countrtes.'?
GOING PUBLIC. The latter half of the 1990s brought
both major challenges and new business opportuni-
ties. In August 1997, the Teamsters Union led about
185,000 UPS workers on a strike. They wanted more
union control of employee pension funds and objected
to UPS's increasing use of part-lime workers. UPS
controlled about 80 percent of all package deliver-
ies in the United States, so the repercussions of the
IS-day strike for both the company and its customers
were severe. UPS lost $650 million in business over a
disagreement that then CEO James Kelly commented
could have been worked out "without a strike,"! I UPS
recovered quickly, however, and went public in 1999,
almost 100 years after its conception. A report in The
New York Times said, "Investors have greeted the new
stock with an enthusiasm usually reserved for dot-com
ventures whose founders' parents had not even been
born by 1907,',12In fact, the UPS !PO was the largest
public offering to date. (See Exhibits I and 2 for UPS
financial data.)
SYNCHRONIZED COMMERCE. In the meantime,
UPS continued to redefine itselfin response to changes
in its external environment. No longer restricting its
activities to delivery services, UPS sought to become
a "solutions company" that offered services tailored to
its customers' business process value chain.P It formed
the UPS Logistics Group in 1995to streamline service
operations over its customer base, and UPS Capital in
1998 to provide financial products and services to help
small businesses grow." The company made about
30 acquisitions in total, including freight forwarders,
43. customer clearers, and a bank for the efficient move-
ment of goods, information, and financing along their
supply and distribution network.P When a study by
FutureBrand concluded that UPS had no terminology
to explain their expanded business model to custom-
ers, they coined the term "Synchronized Commerce," 16
By modifying its supply chain to streamline the flow
between buyers and sellers, UPS was able to "synchro-
nize" goods, information, and funds to deliver more
products and services to its customers.
By the star! of the new millennium, UPS was well
on its way to becoming a full-service business.'? In
2001, UPS acquired Mail Boxes Etc., then the world's
largest franchisor of retail shipping, postal, and busi-
ness service centers. 18 This strategic move enabled the
company to target smaller businesses and increased
its accessibility to residential and home-office cus-
tomers. Over 3,000 Mail Boxes Etc. locations were
re-branded as "The UPS Store," in the largest re-
branding campaign in history. Mail Boxes Etc.'s
CEO said that the initiative helped set lower maxi-
mum retail prices for UPS shipping. He added, "By
pooling MBE's expertise in retail business services
with UPS's expertise in shipping and other expanded
capabilities. The UPS Store offers an extensive port-
folio of products to our franchisees and their custom-
ers." Currently, ''The UPS Store" and "Mail Boxes
Etc," have over 4,800 locations in the United States,
Canada, and India alone. 19 .
Today, UPS maintains its focus on services as its
core business while continually looking to grow new
revenue sources. To ensure that the company keeps its
strategic focus, former CEO Mike Eschew introduced
44. the "Four Quadrant" growth strategy that "focuses on
innovating existing business operations internally
and externally, and, likewise, focuses innovation
on new entrepreneurial ventures both internally and
externally,',20 This strategy has helped to land UPS
among the top 15 most respected companies and in
the top 10 of all logistics companies worldwide (see
Exhibits 3 and 4).
HUB AND SPOKE MODEL. UPS's delivery network
is based on the hub and spoke model," a centralized
and integrated approach to logistics managemem.f It
consists of a hub (the center), where packages are sent
for consolidation, and spokes that link the hub to all
other points in the system. UPS's rival, FedEx, pio-
neered the huh and spoke system in the U.S. domes-
tic express delivery sector, and then extended it to its
international operations. FedEx's first Asian hub was
at Hangzhou Xiaoshan International Airport, located
in east China's Zhejiang Province.23 UPS transitioned
from direct shipping to the hub and spoke system
somewhat later than its major competitor, but has stiLI
benefitted from significant cost savings by doing so.
78 International Business Strategy
C398 CASE 26 I UPS in lndia-A Package Deal?
EXHIBIT 1
UPS Income Statement (U.S. $ in millions)
Years Ended December 31,
2010 2009
46. 1,027 958
Other expenses
3,873 4,305 5,322
4,633
Total Operating Expenses
43,671 41,496 46,104
49,114
Operating Profit
5,874 3,801 5,382
578
Other Income and (Expense):
Investment income
3 10 75
99
t
Interest expense ~)
~I ~I ~I
Total Other Income and IExpense) ~) ~I
~I ~I
Income Before Income Taxes 5,523
3,366 5,015 431
Income Tax Expense
2,035 ~ 2,012
47. __ 49
Net Income
3,488 2,152 3,003
382
~ ~
Basic Earnings Per Share $3.51 ...!ill ...E!
$0.36- -
Diluted Earnings Per Share $3.48
$2.14 ~ ~- -
source: SEC,gov,
EXHIBIT 2
UPS Consolidated Balance Sheets IU.S. $ in millionsl
December 31,
2010 2009 200S 2007
ASSETS
Current Assets:
Cash and cash equivalents $ 3,370 $ 1.542 $ 507
s 2,027
Marketable securities 711 558 542 577
Accounts receivable, net 5,627 5,369
Finance receivables, net
5,547 6,084
48. 203 287 480 468
Deferred income tax assets 659 585 494 606
.. ~7
UPSin India A Package Deal? 79
CASE 26 I UPS in India-A Package Deal? C399
EXHIBIT 2 (Continued)
December 31.
2010 2009 2008 2007
Income taxes receivable 287 266 167 1,256
Other current assets 712 668 ~ 742
Total Current Assets 11,569 9,275 8,845 11,760
Property, Plant and Equipment, Net 17,387 17,979 18,265
17,663
Goodwill 2,081 2,089 1,986 2,577
Intangible Assets, Net 599 596 511 628
Non·Current Finance Receivables, Net 288 337 476 431
Other Non-Current Assets 1,673 1,607 1,796 5,983
Total Assets $33,597 ~ $31,879 ~
LIABILITIES AND SHAREDWNERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper s
355 s 853 $ 2,074 s 3,512
49. Accounts payable 1,974 1,766 1,855 1,819
Accrued wages and withholdings 1,505 1,416 1,436 1,414
tSelf-insurance reserves 725 757 732 704Other current
liabilities 1,343 1,447 1,720 2,391Total Current Liabilities
5,902 6,239 7,817 9,840
Long-Term Debt 10,491 8,668 7,797 7,506
Pension and Postretirement Benefit Obligations 4,663 5,457
6,323 4,438
Deferred Income Tax Liabilities 1,870 1,293 588 2,620
Self-Insurance Reserves 1,809 1,732 1,710 1,651
Other Non-Current Liabilities 815 798 864 804
Shareowners' Equity:
Class A common stock 1285and 314 shares issued in 2009 and
2008) 3 3 3 3
Class B common stock 1711and 684 shares issued in 2009 and
2008) 7 7 7 7
Additional paid-in capital 2
Retained earnings 14,164 12,745 12,412 14,186
Accumulated other comprehensive loss 16,195) (5,127) (5,6421
12,013)
Deferred compensation obligations 103 108 121 137
Less: Treasury stock (2 shares in 2009 and 20081 ~ ~ ----.i.11!l
~
50. Total Equity for Controlling Interests 7,979 7,630 6,780 12,183
Noncontrolling Interests 68 66
Total Shareowners' Equity 8,047 7,696 6,780 12,183
Total Liabilities and Shareowners' Equity ~ $31,883 ~ $39,042
Source: SEC.gov.
II
II
80 International Business Strategy
C400 CASE 26 I UPS In India-A Package Deal?
EXHIBIT 3
The World's Most Respected Companies
Company
Mean
Rank
4.15
3.98
392
3.76
3.75
52. 11.
12.
13.
14.
15.
Johnson and Johnson
Berkshire Hathaway
Procter & Gamble
Apple
Walmart Stores
Exxon Mobil
McDonald's
Toyota Motors (Japan)
Coca-Cola
Cisco Systems
United Parcel Service
PepsiCo
3M
53. IBM
Abbott laboratories
Source: Barron's Magazine, 2009,
EXHIBIT 4
The Top 15 Global Logistics Companies
2008 Revenues
Rank Company (million USSI Base Country
Coverage
1 DHL Logistics $39,900 Germany
Globai
2 Kuehne + Nagel $20,220 Switzerland
Global
3 DB Schenker Logistics $12,503 Germany Global
4 Geodis $ 9,700 France Global
5 CEVA Logistics $ 9,523 Netherlands Global
6 Panalpina $ 8,394 Switzerland Globel
7 Altadis/Logista $ 8,190 United Kingdom Europe
8 C.H, Robinson Worldwide $ 7,130 USA Global
9 Agilitv Logistics $ 6,316 Kuwait Global
10 UPS Supply Chain
54. Solution
s $ 6,293 USA Global
Source: Traffic World, 2009.
-.------------------- =
____ -----------------------------------U::.p.:.s:.:i:.:n:.:ln:::d:::ia_-
.:.A:.:P.:.a:::c:.=:kage Deal? 81
CASE26 I UPSIn Indla-APackageDeal?C401
UPS BRAND AND CULTURE. Claude Ryan and Jim
Casey started UPS with the goal of providing the best
service at the lowest rates. Jim's commitment to reli-
ability, courtesy, neatness, and high ethical standards
helped establish the values that continue to guide UPS
today." "They trust UPS, our technology and visibil-
ity tools. It's good to get there on time," said CEO
Scott Davis, when asked what loyal customers think
55. of the brand.'5
Since its inception, UPS has stressed employee
ownership as a way to get its people to feel responsible
and involved. "We are all owners, that is a big part of
enhancing culture. At some point, all of our employees
have had a moment when they realize what it means
to be a partner," said former UPS CEO Mike Eskew.
The company cultivates further loyalty by following
a "promote from within" principle. Over the years,
many delivery workers and mail sortershave risen to
management levels, including Eskew himself. Before
serving as CEO from 2002 to 2007, Michael Eskew
started as an industrial engineering manager in 1972
and worked his way up the ranks for 30 years.
India Mania
In a 2006 address, Dr. Manmohan Singh, the Prime
Minister of India, declared, "We believe that India
is now on a sustained path of high growth. We have
developed anew model for service-led and technology-
driven integration with the global economy,,,26 As ifon
cue, India's GDP topped the $1 triLlionmark in early
April 2007, making it the 12th wealthiest nation in
the world according to Swiss investment finn Credit
56. Suisse.27 India's GDP now stands at $1.16 trillion,
with an annual growth rate of 7.9 percent even dur-
ing the global financial crisis." When asked about
the biggest benefit of doing business in India, Steve
Hochradel, Assistant VP of distribution for PBD
Worldwide said, "India offers great growth opportuni-
ties, and it is easier to do business there than in many
other international markets. India has a high popula-
tion of English speakers, which makes it easy to enter
the market, negotiate with vendors and partners, and
set up operations."Z9
ECONOMIC REFORM. However, prosperity did not
follow immediately after India's emergence from
British control and establishment as an independent
nation in 1947. For the first 40 years or so, the new
socialist government took an extreme protectionist
stance, structuring society on the basis of collective
action as opposed to capitalist acquisitiveness, The
License Raj represented the state's efforts to con-
trol all aspects of the economy. Elaborate permits
and regulations were required to set up or run busi-
nesses, severely limiting their growth. Though there
was economic discipline at the macro level and infla-
57. tion was low compared to other developing countries,
the Indian economy dragged along at a subsistence
level with a low GDP per capita. Basic industries
such as steel and textiles were conspicuous by their
absence.3o
The UPA (United Progressive Alliance), a coalition
of political parties that constitutes the Government
of India still today, is credited with opening up the
economy. An economic crisis during the 1991 general
election triggered the beginning of micro-economic
liberalization. To rectify the situation, then-finance
minister Dr. Manmohan Singh proposed changes such
as repealing the "License Raj" and lifting a ban on for-
eign direct investment. The economy grew by 9 percent
the foLlowing year as a result of these changes. The
Manmohan Singh government showed further sup- ~
port for international trade through the achievement
of two key foreign trade policy objectives in 2004:
(I) to double India's percentage share of global mer-
chandize trade in a five-year period; and (2) to use
trade expansion for both employment generation and
economic growth." To expand upon these objectives,
the government established several Special Economic
Zones (SEZ Act, 2005) in 2006 to attract foreign and
58. domestic investment. Companies operating in these
zones receive significant tax benefits and face much
simpler clearance and compliance procedures. India's
worldwide trade is linked to the world economy. For
example, with the recession hitting most of India's
major trading partners like the United States, United
Arab Emirates, and Singapore, export demand from
India declined by 16percent in January 2009."
KEY INDUSTRIES. India boasts a technical work
force of 4 million and trains 60,000 software engineers
every year.33 Combined with lower wages, these fac-
tors make India a prime source for information tech-
nology (IT) services and a choice business process
outsourcing (EPO) destination. In turn, large-scale
employment in the IT and BPO sectors has helped
to create an upwardly mobile working class, driv-
ing increased purchasing/spending power for India's
younger generations.
82 International Business strategy:- _
C402 CASE 26 1 UPS in India-A Package Deal?
59. Extentof Fall in
Manufacturing
Sector Growth1%)
Extent of
Fall in GDP
Growth (%1
Source Study on oil price Impact, Federation of Indian
Chambers of Commerce and lnd tus ry.
zation of resources from the private sector to comple-
ment government efforts.
India has 2.1 million miles of roadways that carry
80 percent of its total passengers and 65 percent of
India's freight (see Exhibit 6). As of 2000, roughly
74 percent of India's rura! population lacked adequate
road access, while 40 percent of the existi.ng roads
lacked all-weather capability. As a result, the govern-
ment plans to invest $70 billion in India's road infra-
structure over the next few years;" $33 million has
60. been dedicated to providing rural connectivity" De-
velopmental projects such as the Golden Quadrilateral
Project are helping link India's four major metropo-
lises (Delhi, Mumbai, Kolkata, and Chennai), while the
Prime Minister's Rural Roads Program (pMGSY) aims
to provide increased access to agricultural communities.
India's civil aviation industry was born in 1912
with the first air flight between Karachi and Delhi (see
Exhibit 7). The government monopolized the industry
for most of the 20th century through the state-owned
Air India and Indian Airlines Corporation, until the
passage of the "open sky" policy in April 1990 (effec-
tive as of 1994). Under "open sky," airlines could
receive foreign direct investment of up to 49 percent,
opening the market to a host of new players like Jet
Airways and Sahara. Deccan Airlines was started by
Captain Gopinath in August 2003 as a no-frills bud-
get air service, becoming the first in the industry to fly
to second-tier cities from major metropolitan areas.
38
However, after an initial period of rapid growth, the
Indian airline industry fizzled around 2007. Today,
61. the industry operates at fares below its costs and is
weighed down by huge debt. When oil prices hit $75
a barrel in early 2009, the industry as a whole was
expected to post a $9 billion loss. Major carriers like
Extent of
Increase in
WPI(%)
2.1
9.7
16.9
24.5
0.4
19
3.4
4.9
1.5
3.6
5.7
7.9
India's economic climate is highly dependent
62. on the oil industry, which until recently has been
closely regulated by the national government. An
RCCI (Federation of Indian Chambers of Commerce
and Industry) report found a strong positive correla-
lion between the price of oil and commodity prices
across different sectors of the Indian economy (with
the exception of manufacturing, see Exhibit 5). This
was largely due to the fact that political pressures
ensured that the government absorbed a large part of
the increase in oil prices, Public sector oil companies
reported losses of approximately US$ 28 million per
day on the sale of petroleum products at government-
mandated prices. The government offset these losses
by selling oil bonds, providing crude oil to state-owned
oil retailers at discounted rates, and making periodic
adjustments in retail oil prices." In June 2010, the
Indian government made a surprising announcement
that it plans to deregulate the oil industry. This move
is expected to drastically reduce India's fiscal deficit
by shifting increased oil costs to the end consumer,
and level the playing field between public and private
sector oil companies,
a,.;.-"------------
63. TRANSPORTATION SECTOR. Transportation in
India has undergone rapid development only in the last
two decades. The onus of covering 1,269,210 square
miles of land area and supporting a population of
more than one billion (1,028,737,436) people makes
the sustainable development of India's transportation
sector dimcult." The Eleventh Five-Year plan, which
detailed the latest plans for the Indian economy, pro-
jected that $500 billion was needed to achieve com-
prehensive growth in aviation, roads, railways, and
waterways combined. The plan also proposed mobili-
EXHIBIT 5
The Impact of Oil Prices on Various Factors
International
OilPrices
Per BarrollS)
Increase in
International
Dil Pricos (%)
50
64. 60
70
80
38.9
66.7
94.2
122.2
c
UPSin India A Package Deal? 83
t - ... t- ...
National Highway
Network of India
CASE 26 I UPS in india-A Package Deal? C403
EXHIBIT 6
The Road Network in India, Showing Major Warehouse Hubs
Source: Cygnus Research and Consulting.
65. North and East
/- I-
South and West
..
...... 101.
tlh _
Indian, Jet, and Sahara have been forced to turn their
full-service businesses into budget fleets by cutting
down on frills, due to the government's refusal to pro-
vide bailouts.
While passenger airlines are suffering, the gov-
ernment has increased the maximum level of foreign
direct investment in cargo carriers from 49 percent to
74 percent in order to attract overseas players to
increase their network in India.39 Research for Air
Cargo India 20 I0 indicates that air cargo now com-
prises 19 percent of the total freight in India-the
same amount as ocean and rail freight combined.
Overall, aviation is expected to grow at a rate close to
66. 25 percent in the next decade. Air cargo is expected
to post a CAGR of 11.2 percent, expanding to more
than three times its present size by 2025. Currently,
India has 126 functional airports, 12 of which are
international and are managed by theAirport Authority
of India (5 of these have been privatized for develop-
ment). Pricing in the industry is directly dependent on
high sales taxes on aviation turbine fuel (ATF) and high
airport charges. Players in the industry also face major
challenges in acquiring land, developing infrastruc-
ture, and other issues such as environmental clearance.
India's first rail line was set up as an experimental
line during the Madras Presidency in 1836. Later, the
British government encouraged development of a rail-
way system to haul construction materials around the
country, securing 9 million pounds from British com-
panies in guarantees. In 1951, the Indian Railway was
nationalized and integrated into one unit to form one
of the largest rail networks ill the world. Today, it has
..
67. 84 International Business Strategy
C404 CASE 26 I UPS In Indla-A Package Deal?
N
t
EXHIBIT 7
The AirNetwork in India
Source: PrsQ8t1lnlosoft Pvt tid, indlaeduc8tion.net
Pakistan China(Tibet)
Mumbai
IBombavl
Arabian
Saa
0,
LAKSHAOWEEP
•••
Pert Blair
68. a
ANDAMAN & NICOBAR ISLANDS
- Air Routes·lndian a
Other Alrlinu
- AlrRoutu-Alrlndla
• Airports
• International AirportS
B
more than 7,500 railway stations connected by tracks
spanning 39,233 miles that, most importantly, reach
both metropolitan cities and rural villages," Railroads
in India carry over a million tons of freight every day
(see Exhibit 8),
India has 12 major seaports, which account for
about 90 percent. of India's trade in terms of vol-
ume." Inland, the presence of canals, rivers, back-
waters, and creeks has facilitated the development of
an extensive waterway network, maintained by the
69. Inland Waterways Authority of India, Ten of these
inland waterways have potential significance at the
national level. Although close to 5,700 miles can be
used by mechanized crafts, freight transportation is
limited to only 0, I percent of the total inland traf-
fic in India. The volume of cargo carried by Inland
Waterways Transport has been declining consistently
in recent years in favor of alternative modes of trans-
portation," Nevertheless, future development of the
inland waterway system could bring economic as well
•
UPSin India A Package Deal? 8§
Railway Network Map
of India - Schematic
CASE 26 I UPS in India-A Package Deal? C405
EXHIBIT 8
The Rail Network of India
Source: Imp:l/www.nationmaster.com/encyclopedia/Rail-
70. transport-in-India
as environmental advantages. and under some condi-
tions, may be the only feasible mode of carrying cargo.
Logistics Industry in India
A World Bank research paper sums up the Indian eco-
nomic climate as having "a highly fragmented service
industry. Outdated regulations, heavy government con-
trol, aconstrained private sector. and largely inadequate
infrastructure have curtailed efforts to improve trade
"".1 ~""'.1flo<,,]f].d)
-1"'.1 ......
-Ol""~"".'
--.-- 1/1 ......... 11I. ( ", ••
"'''''·'1101 ij, ",1IO,..."..-_'",~."I"....,.",""
o ...Io'T 1 J.. ,.t ••I•• 1,_ ....t" .
0) .,1~.... '11.. .,.•••'"
II 'IIo'Dr'I>I"""II ••~•• "",,
-e..
71. ................,.~,
logistics."" Despite these obstacles, the World Bank
projects that the Indian logistics industry will grow at
an annual rate of 1.5percent to 20 percent, achieving
revenues of $385 billion by 2015.44 By 2013, approxi-
mately 110 logistics parks and 45,000,000 square feel
of warehousing space are expected to be developed
across the country by various logistics companies
(see Exhibit 9). Tier-2 and tier-S cities have become
favorable destinations due to the availability of large
pieces of land at lower prices. connectivity to multiple
86 International BusinessStrategy
C406 CASE 26 I UPS In India-A Package Deal?
EXHIBIT 9
Warehouse Capacity Plans of3PLPlayers in Indie (inmillionsof
square teetl
Expected byYearPlanned CapacityCurrent CapacityCompany
2010
73. 1.0
0.5
TCI
Safexpress
ORSLogistics
IndoArya
BlueOart
Gati
TNT
Prologistics
TranSmart
Total 16.5
Source: Industry, tantrum Research.
part of the industry, and they are typically character-
ized by low capacity and poor technology. Meanwhile,
the power supply is erratic and subject to prolonged
outages in many parts of [he country. All of these
inefficiencies lead to increased costs, Compared to
European countries, rail transportation in India costs
about three times more and the average transit time
74. by road is about three times longer. Airport charges
and related operating expenses are the major contribu-
tors to the cost structure in the aviation segment, while
shipping is plagued by high operating expenses, staff
markets, and the proximity to industrial clusters, Such
improvements in logistics capabilities could poten-
tially spur national GDP growth [0 I I to 12 percent
(see Exhibit 10).
Impediments to the dcvelopment of the Indian
logistics industry include government bureaucracy,
a fragmented market structure, and inadequate infra-
structure. Indian bureaucracy remains a quagmire; it
takes about 20 days to clear import and export cargo at
India's ports, while the same process lakes only 4 days
on average inSingapore, Smaller players form amajor
EXHIBIT 10
Contribution of logistics to India's GOP Growth
Source: Cygnus Research and Consulting.
2006-072001-02
4%
75. 17%
• Storage I• Sea _ Air _ Services
.. .:.-s
CASE 26 I UPS In India-A Package Deall C407
cost and depreciation.P In the Indian context, operat-
ing expenses generally exceed the costs of raw materi-
als (see Exhibit 11).
A study by Cygnus Business Consulting and
Research listed three main growth drivers for the
Indian logistics industry in the near future. Since
transportation accounts for over 40 percent of the
total cost of production in India, growth in quality
physical infrastructure is essential for improving the
efficiency of the industry." Secondly, the introduction
of a Value Added Tax (VAT), a consumption tax lev-
ied on any value that is added to a product, has led to
76. increased demand for integrated logistics solutions."?
Manufacturers arc seeking to reduce the number of
independent warehouses spread over various regions
to minimize unnecessary handling and processing
(and thus their VAT burden). Lastly, globalization in
the manufacturing sector has highlighted the need to
UPSin India-A Package Deall 87
EXHIBIT 11
Cost Structure Analysis for Supply Chain Management
(SCMICompanies
Source: SSE India; Cygnus Research.
Cost Structure Analysis of SCM companies
SCM Industry Cost Structure for OU Ended JFM 09 vs JFM 08
50
~ 40
3j 30
l; 20z
"S 10
.,.ol--~-
-10
77. 01 "" ~·5 el .... a
~~ ~~
g~ 0 ~
,lj
I. JFM200S • JFM20081
Shipping Industry Cost Structure for
QtrEndedJFM09vs JFM 08
35
~ 30
~ 25
'" 20
~ 15
"S 10
.,. 5
a
I. JFM2008. JFM200S]
Aviation Industry Cost Structure for Otr Ended JFM09 vs JFM
08
78. 40
35
:tl 30
"ii 25
'" 20
l; 15
z 10
"S 5
#- a
-5
-10
I.JFM200S • JFM20081
88 International BusinessStrateg,c.y ~ _
C40B CASE 26 I UPS In Ind,,-A Package Deal?
UPS in the Asia-Pacific Regionimegrate fragmented and
independently operated func-
tions (for example, transportation, warehousing, freight
79. forwarding, and so on) in order to achieve greater
efficiency (see Exhibit 12)." Despite strong poten-
tial, the Indian logistics sector currently comprises
only about 2 percent of the estimated $5,000 billion
global logistics industry.
Another potential growth driver is e-commerce
and the associated increase in demand for shipping
larger volumes of small packages direct to consumers.
Online retailing has been somewhat slow to develop
in India due LO the lack of infrastrucLUre. Many of the
country's rural population of 700 million still lack
lnternet access, though Cornat Technologies is actively
working to establish Internet centers in villages with
populations of more than 5,000. Other project col-
laborators include rCICl Bank, India's second-largest
private bank, and Wyse Technologies, a manufacturer
of computer terminal equipment.49 Another barrier
is that Indians value a personalized shopping experi-
ence and are not as discount-driven as the American
consumer. Credit card transactions in India are not as
secure as they are in other countries. Nevertheless,
many analysts expect that India will warm up to the
idea oflntemet shopping as the technology infrastruc-
ture improves.
80. UPS entered the Asia-Pacific market in 1986, by set-
ting up a regional headquarters in Singapore. Today, the
company's presence in the Asia-Pacific region spans
more than 40 countries and territories, and employs
more than 13,300 people. Additional air hubs are
located in Hong Kong, Shenzhen, and Shanghai, China.
UPS's initial foray into India was its 2005 partner-
ship with Jet Air. This agreement led to the opening of
the first "UPS Store" in Mumbai, which also marked
the brand's first expansion outside North America. The
UPS Store was India's first full-service retail outlet
to offer shipping, packaging, and other business ser-
vices under one roof. Speaking at the official opening
of a UPS Store in New Delhi in 2007, David Abney,
then President of UPS International said, "India's
role in the global economy continues to grow impres-
sively ... 'The UPS Store' will provide businesses
as well as consumers a convenient channel to markets
throughout the world."so
To better consolidate business processes and gain
faster, more cost-effective outputs in India, UPS
established a second alliance with AFL Private Ltd in
81. 2008. AFL is a logistics service provider with a sig-
nificant footprint in India. The alliance was mutually
beneficial: UPS gained access to 130 of AFL's field
stocking locations and increased its number of
access points for international delivery custom-
ers from 26 to 200, while AFL gained access to
UPS's export capabilities. UPS's penetration into
the Asian markets deepened further with the incor-
poration of 101 additional field stocking loca-
tions in China into UPS's service parts logistics
network.i!' 5' Globally, UPS maintains 1,000 such
distribution centers to provide customer inventory
and order management services in addition to core
packaging services. Some of those facilities also
house specialized contract services such as techni-
cal diagnostics and repair.
UPS continues to form alliances and collabo-
r~lions with other local Asian companies to target
different segments. For example, in May 2010,
UPS formed an alliance with AliExpress, a subsid-
iary of the China-based Alibaba group. AliExpress
IS the world leader in e-commerce for small busi-
nesses and hosts the world's largest base of sup-
82. pliers in the segment." Jordan Colletta, VP of
E-commerce and Marketing at UPS, explained the
purpose of the agreement as follows: "Through our
~ ..... ~r
EXHIBIT 12
Trend Shilt Toward "Integrated Supply Chain Models"
Source: Cygnus Research and Consultmg.
Enhanced value proposition
---• •
Overall supply chain visibility and optimizationforthe customer
Traditional3PLvalue proposition
---• • .....-.Cost
reduction
Cost
reduction
83. UPS in India-A Package Deal? 80
CASE 26 I UPS in lndta-e-A Package Deal? C409
alliance with Alibaba, we hope to partner with more
small and mid-sized Chinese businesses to simplify
their logistics processes and connect them with new
buyers and sellers worldwide.v'" Less than one month
later, UPS formed another alliance with PosLaju, the
leader in the Malaysian domestic courier business with
a 27 percent market share. Together, the companies
created PosLaju International Premium, which boasts
money-back guaranteed overnight international deliv-
ery service to 215 Asian locations.P
Competition in India
India was proving to be one of the more difficult
Asian markets to penetrate due to the sheer number
of competitors. Currently, the subcontinent boasts
more than 2,500 parcel carriers and courier services,
all competing to differentiate themselves based on
cost, speed, and territorial coverage. Larger players
have a clear advantage with respect to infrastructure,
business-consumer interface, and speed of delivery.
Smaller or more local firms tend to have better access
84. to local information and ease of penetration at the
domestic level (see Exhibit 13 for market share data,
Exhibit 14 for performance metrics, and Exhibit J 5
for key success factors, respectively). These different
EXHIBIT 13
Non-documentCargoandRoadFreight,
Comprising40Percent 01 the ExpressDeliveryMarket
Source: Author's interview with logistics sector expert.
MarketShare-India
approaches are reflected in their respective invest-
ments in information systems: larger firms devote
close to 20 percent of their development funds to in-
formation technology, compared to just over 7 percent
for smaller firms.
Blue Dart-DHL Express is the clear market leader
in both the international and domestic segments, with
a combined market share three times higher than
that of the nearest cornpeutor/" Prior to its acquisi-
tion by DHL, Blue Dart had an 8 percent share in
the non-document cargo and road freight sector. The
next largest competitor in the international segment
85. is TNT, which has double the market share of FedEx
and UPS.57 AFL, GATI, and First Flight are Blue Dart-
DHL's main challengers in the domestic sector. See
Exhibit 16 for a comparison of the stock performance
of some of these key competitors.
Started in 1989, GAT! has become a leader in
express cargo delivery. With operations touching 603
out of 6I I districts in India, GAT! is one of the most
sought-after freight carriers in the country.58 The com-
pany covers 200,000 miles every day and claims to
have brought India and the world closer by virtue of
their "deeply entrenched network and domain knowl-
edge." In recent years, GAT! has diversified both its
services and its geographic reach. GAT! now offers
distribution and supply chain management
solutions as well as delivery services, and
has spread across the Asian subcontinent.
While expanding its international pres-
ence through the establishment of offices
in Singapore, Hong Kong, China, and
Sri Lanka, GATI continues to develop
highly focused expertise in India-centric
operations.
86. Of course, all of these private companies
also compete against the Indian Department
of Posts, the government-run postal ser-
vice. The Department of Posts has the larg-
est network of post boxes in the world, and
close to 90 percent of this network spans
rural India. The Department also offers
express delivery through its Emergency
Mail Service (EMS), which comprises
13 percent of the express market share in
India." The Post Office (Amendment) Bill
of 2006 gives the Department a monopoly
in the debvery of small letters and pack-
ages (weighing less than 0.66 Ibs), limits
foreign direct investment in the industry
_ Safex(270Crl _ XPS(150Crl _ Speedage (70erl - AFL(130erl
Bluedart1100erl _ Gatil350Crl _ OM,TVSetc 1130erl
:"
90 International Business Strategy
87. C410 CASE 26 I UPS in India-A Package Deal?
EXHIBIT 14
Significant Dependency Relationships among Performance
Metrics and Key Success Factors
Micro & Small Companies 178 responses)
All Companies 1133 responses)
Independent Type of p-value
Independent Typa of p-value
variable relationship
variable relationship
Revenue growth Pricing of services
0.013 Coverage + 0.007
Breadth of services + 0.028
Client relations + 0.034
Integration of + 0.005
88. services
Profit growth Experience
0.012 On-time delivery
0.029
Coverage + 0.029
Breadth of services + 0.027
Integration of + 0.008 Integration of
+ 0.000
services services
Shipment volume noor-to-door + 0.039
Breadth of services + 0.001
growth service
t
Integration of 0.019 Investment in + 0.002
services information systems
89. Shipment value Door-to-door 0.007
Breadth of services + 0.024
growth service
Breadth of 0.006 Client relations
+ 0.001
services
Human resources + 0003
Return on Door-to-door
investments (ROI) service
+ 0.010 Coverage + 0.000
Coverage + 0.025
Breadth of 0.045
Integration of
services services
+ 0.001
Return on assets On-time delivery + 0.048 Coverage +
90. 0.001
(ROA)
Integration of + 0.002
services
Customer Client relations + 0.006 Reputation + 0.015
satisfaction Credit facilities + 0.021
Client relations + 0.039
Investment in Investment in
assets
0.030
information systems
0.046
Human resources + 0.023
Business Industry focus 0015 Industry focus
relationship
0.Ql9
Client relations + 0.002 Client relations + 0.000
91. Human resources + 0.005 Human resources + 0.000
.. ~r
UPSin India A Package Deal? g,
CASE 26 I UPS in India-A Package Deal? C411
EXHIBIT 14 (Continued)
Micro & Small Companies (78 responses) All Companies
1133responses)
Independenl Type of p-value Independent Type of p-velue
variable relationship variable relationship
Breadth of
0.009services + Coverage + 0.000
Industry focus 0.015 Experience + 0.000
Experience + 0.015 Human resources + 0.003
Coverage + 0.005 Coverage + 0.001
Industry focus + 0.004 Industry focus 0.003
92. Reputation + 0.038 Investment in + 0.001
assets
Client relations 0.006 Integration of + 0.000
services
Customer
acquisition
Grographic reach
Source: A Survey of IndianExpress Delivery Providers, liMe,
EXHIBIT 15
Comparative Study of Key Success Factors
Cluster
Micro & Small Medium Large
No. of Observations 78 15 7
Key Success Factor Rank % Rank % Rank %
93. Door-to-door service 97.44 100 8 85.71
On-time delivery & reliablity 97.44 2 93.33 I 100
Coverage (national/international) 6 55.13 7 80 I 100
Breadth of service offerings 11 15.38 9 60 1 100
Focus on specific industries 12 11.54 14 6.67 13 57.14
Experience of service provider 5 88.46 2 93.33 11 71.43
Reputation of service provider 3 9359 2 93.33 I 100
Competitive pricing of services 4 92.31 8 73.33 8 85.71
Extension of credit facilities 6 55.13 12 40 14 28.57
Relationship with customers 8 53.85 5 86.67 8 85.71
Investment in assets 12 11.54 11 46.67 I 100
Investment in information systems 9 3846 5 86.67 I 100
Quality of human resources 9 38.46 10 53.33 11 7143
94. Integration of services 14 513 13 26.67 1 100
Source; A Survey of IndianExpress Delivery Providers, liMe.
92 International Business Strategy
C412 CASE 26 I UPS in India-A Package Deal~
EXHIBIT 16
Comparative Studv; Domestic vs. Global Market
Major Indian Domestic Players vs. the Sensex (Bombay Stock
Exchange)
Source: Cygnus Consulting
150················..·.. ................................. " .
Relative Market Cap Performance, 2009
1_ Sensex ... Blue Dart ~ Gsti I
130 .
110·················· .
95. UPS vs. S&P 500 and Dow Jones Transportation Index
Source: UPS lonn 10K.Annual Report filed February 2.1,2.009.
Comparison of Five Year Cumulative Total Return
$220.00·· .
$200.00········
$190.00 . .
$160.00····· ~.... .. : ~ .
$140.00·······.. . ~. .. ..
$120.00 ....···......... ~ ., ..~, ..
$100.00············.. ~ ~ .
$80.00········ .. . .... . ..
$60.00 "" "
$40.00
2003 2004 2005 2006 2007
I ... S&P 500 _ UPS ... OJ Transport I
2008
to 49 percent, and requires all private carriers to par-
96. ticipate in an expensive and cumbersome registra-
tion system. Every registered service provider with a
turnover of $50,000 or more is required to deposit 10
percent of its annual turnover to a Universal Service
Obligation Fund (USO Fund).60Despite its legal man-
date, a survey of users of delivery services carried out
by the Indian Institute of Management revealed that
60 percent of consumers did not use India Post. The
40 percent that did use it sent only letters or documents
(but not packages). For all other shipments, customers
preferred express delivery service providers for their
reliability and accountability.
What Lies Ahead?
At the end of the day, Ms. Pagegathered up the remain-
ing reports, shut down her computer, and headed out
to her car. She figured she'd catch up on some more
"liqht" reading once she got home. At least she was
starting to feel like she had a better sense of what UPS
had done thus far, as well as some of the obstacles the
company faced if they were to penetrate the Indian
market more deeply. How could they take advantage
of India's growth potential? Did UPS's strategy of
promising delivery to "every address" in their area of
reach make business sense in the Indian context 7 Was