MGMT-7750 Global Business and CSRP&G: Financial Plans and CSR Issues In Costa Rica And AustraliaSaralise MingYanbin LiMadhura DeshpandeRaghuveer ReddyShankar KarJoseph Coyne 11/18/2010<br />Table of contents<br />Part 1: Costa Rica TOC o "1-3" h z u Financing Plan for Costa Rica: PAGEREF _Toc277797672 h 2The Potential CSR Issues and Solution-Costa Rica PAGEREF _Toc277797673 h 3Result Expected-Costa Rica PAGEREF _Toc277797674 h 5Part 2: AustraliaFinancing Plan for Australia: PAGEREF _Toc277797675 h 6The Potential CSR Issues and Solution-Australia PAGEREF _Toc277797676 h 7Result Expected-Australia PAGEREF _Toc277797677 h 9Exhibits and ReferenceExhibit 1 PAGEREF _Toc277797678 h 11Exhibit 2 PAGEREF _Toc277797679 h 12Exhibit 3 Costa Rica’s Investment Climate Indicators PAGEREF _Toc277797680 h 13Exhibit 4 Expected Financial Results For P&G’s Strategy In Costa Rica PAGEREF _Toc277797681 h 14Exhibit 5 Expected Financial Results For P&G’s Strategy In Australia PAGEREF _Toc277797682 h 15References: PAGEREF _Toc277797683 h 16<br />Costa Rica<br />Financing Plan for Costa Rica:<br />We have assumed that for setting up a plant in Cost Rica P&G has to spend about $150 Million. We arrived at that number by making certain assumptions. <br /><ul><li>Assumptions and Process:
Average spending per person on P&G products is $14 ( Data taken from Harvard case study)
Projected revenue structure is approximately $60 million (4,519,126*14)(Population*Avg. Spending).
Cost of Production of Goods is $30 million. ( Data obtained from income statement of P&G)
Average labor cost in Costa Rica is $1.4/hour ($2800 per year).
Assumed number of employees are 500 which implies $1.5 million as total labor costs per year.
Costa Rica tax structure 30% which implies $10 million. ( 30 % of the Revenue $60M-Costs of Goods Sold $30 M)
Cost of land in Costa Rica is $75 M (2700 acres for plant). ($27500/acre--data obtained from real estate statistics)
Estimated cost of equipment and other non foreseen costs are $25M.
Working capital $10million.</li></ul>Therefore the total costs add up to $111.5 million.<br /><ul><li>Lending Structure:</li></ul> Banking Intermediation dominates Costa Rica’s financial sector. Overall, through consolidation, the number of financial intermediaries has increased as shown in Table 2.1 (see Exhibit 1) and in addition, it has strengthened the onshore banking sector which accounts for 84% of the systems lending to the private sector (Figure 2.1, see Exhibit 1). Investment funds have grown rapidly and are therefore, becoming significant institutional investors. As in figure 2.4(see Exhibit 2), it can be seen that the credit line to the private sector has been steadily increasing and therefore, based on Procter and Gamble’s worldwide recognition, it will be able to successfully obtain funds from banks for setting up their plans in Costa Rica. (Data obtained from World Bank report on Costa Rica).<br /> Costa Rica lending rates are around 7.5% which is above the US rate of 5%. So we recommend raising capital from US. Costa Rica FDI rules are also very flexible and the country encourages FDI inflows generally.<br />The Potential CSR Issues and Solution-Costa Rica<br />P&G already has a significant presence in Costa Rica with sales marketing share of 0 and 60 US$ million investment in 2000 with 1700 employees. The services provided are back-office operations such as finance, human resources, payroll, employee benefits, purchasing and IT services. As of 2004, P&G had already been presented with an award for Corporate Responsibility by the Costa Rican Chamber of Commerce for its continuity in coordinating, implementing, and supporting activities that benefit either communities or society in general for several years in succession. As P&G expects to expand its operations into manufacturing, the company needs to continue its work in building the local communities and needs to start putting efforts into minimizing and ideally preventing any potential environmental issues. <br />Costa Rica has an open foreign investment system with some exceptions including: importation. When P&G entered Costa Rica initially for administrative purposes, the Government treated this foreign company in the same manner in which it would have treated any other company. There were no favors involved but the advantages of moving in were still exceptional. P&G was able to enjoy the usual 100 percent exemption on income tax for the first eight years and 100 percent exemption on import duties (Horvath, J. 2001). P&G can obtain an income tax exemption for the first 8 years and the exemption also on import duties <br />The World Bank indicates that even in a country as ‘peaceful’ as Costa Rica, bribery does exist but on a small scale relative to its neighboring countries at just less than 2% of sales (see Exhibit 3). Whilst this figure is considered low, P&G should still take note of it and resist being involved in questionable activities because it is a well respected company in Costa Rica and around the world. P&G needs to have all procedures completed within the legal limits regardless of the time required. P&G is a US based company and is subject to US laws and hence, it is crucial that it stays away from illegal activities in Costa Rica and Caribbean. <br />The next phase of P&G’s plan to export products which are manufactured in Costa Rica to the Caribbean islands isn’t likely to be met with difficulties since the Costa Rican Legislative Assembly approved a free trade (commercial) agreement between Costa Rica and twelve countries of the CARICOM in 2005. <br />P&G has already been active in the education industry of Costa Rica. It launched a program, in conjunction with Live, Learn and Thrive, which provides disabled children with equal opportunity to be educated. This program not only makes learning more possible but it makes education facilities more accessible; hence, eliminating the physical and psychological barriers. Teachers have been specially trained to deal with such circumstances and approximately 16,000 children have already benefited. P&G employees have also been encouraged to volunteer for this program in order to ensure its success. Since P&G will be expecting to further tap into Costa Rica’s work force, it should consider building more education oriented programs for the local communities, especially for the children. <br />Costa Rica takes great pride it its pristine environmental conditions and diverse flora and fauna. This country benefits greatly from this through its popular ecotourism industry and its worldwide recognition of environmental performance. In 2007, the government of Costa Rica set its target on making the country the first carbon neutral country in the world. Therefore, this is the biggest likely issue that P&G could encounter since a manufacturing plant generally produces by-products which may have negative impacts on the environment. However, P&G is already committed environmental sustainability for its products as well as manufacturing. For products, P&G expects to use 100 percent renewable/recyclable material, have no consumer waste in landfills and maximize on the conservation of nature resources. Its manufacturing plants will be powered by 100 percent renewable energy, will have no carbon dioxide or toxic emissions, preserving or improving water quality and eliminating manufacturing wastes. P&G must carefully convince Costa Rica’s officials that it is very capable of achieving its goals and is committed to the preservation of Costa Rica’s environmental conditions. <br /> Result Expected-Costa Rica<br />If P&G’s project is successful in Costa Rica, the results would be as follows:<br /><ul><li>Access to High Quality Employees </li></ul>Costa Ricans are highly educated and typically multi lingual. The country has a literacy rate of 95.8% and the overall secondary school attendance rate is around 70%, which shows that the skill sets available for manufacturing are plenty. They are eager to work for P&G since this company is highly respected in Costa Rica. Therefore, P&G is expected to have increased access to the local talent pool and would have the opportunity to relocate highly skilled employees. <br /><ul><li>Strategic Location</li></ul>Due to Costa Rica’s strategic location, P&G expects to use it to export products to the Caribbean islands. The islands of the Caribbean are in close proximity to Costa Rica and are in very close proximity to each other. This geographical advantage will work to P&G’s advantage to capture significant market share in the Caribbean. <br />We are actually proposing to start the site in Limon (port city) which is well connected to central valley of Costa-Rica, inhabited by the majority of the population, via road or air transportation and also it is the closest port available to cater to Caribbean islands. <br />Market Share<br />The overall market that P&G is looking into when entering Costa Rica is a population of 4.5 million and 21 million in Caribbean region. Assuming US$14 average spending per year per person on P&G products, the potential market share will be US$ 357 million (25.5 million * 14). <br />Increasing the availability of P&G’s products coupled with marketing, branding campaigns and an increase in environmentally friendly perception of the company are expected to result in an increase in P&G’s market share in Costa Rica and the Caribbean. <br />Establishing manufacturing operations in Costa Rica would allow P&G to increase their market share and also market share in the Caribbean islands would increase as P&G markets its products there after creating a logistics center in Costa Rica and warehouses in the various islands. <br /><ul><li>Financial Results (see Exhibit 4)</li></ul>Three case scenarios were considered and the underlying assumptions are as follows:<br />ScenariosNPVAssumptionsWorst case-1526221.472Cost of capital - 8.25%, Sales - 1% average growth rate, cost of goods sold - 52% of revenue, labor costs - 5%Average case11037238.86Cost of capital - 7.25%, Sales - 3% average growth rate, cost of goods sold - 50% of revenue, labor costs - 3%Best case27602627.03Cost of capital -6.25%, Sales - 5% average growth rate, cost of goods sold - 48% of revenue, labor costs - 1%<br />Financial projections were calculated with the following assumptions, an organic growth rate of 2% year on year including cost of goods sold, labor cost and revenue. The discount rate used is the current average lending rate of the Central Bank of Costa Rican, around 7.25%. The project life is projected to be at least 10 years with break-even occurring in 7 years. Taking these assumptions into account, the NPV for the project is expected to be approximately $40 million.<br />Australia<br />Financing Plan for Australia:<br />We have assumed that for setting up a plant in Australia P&G has to spend about $150 Million. We arrived at that number by making certain assumptions. <br /><ul><li>Assumptions and Process:
Cost of Production of goods is $267 million. ( Data obtained from income statement of P&G)
Avg. labor costs in Australia are $528 per week ($27500 per year).
Assumed number of employees are 500 which implies $14 million as total labor costs per year
Australia tax structure 30% which implies $75 million. ( 30 % of the Revenue $308M-Costs of goods Sold $150 M)
Cost of land in Australia is $621 M (2700 acres for plant). ($230000/acre--data obtained from real estate statistics)
Estimated cost of equipment and other non foreseen costs is $50M.
Working Capital $25 million</li></ul>Therefore the total cost add up to $710 million.<br /><ul><li>Lending Structure:</li></ul>Main types of financial institutions:<br /><ul><li>Authorized Deposit Taking Institutions
Insurers and Funds Managers</li></ul> In Authorized Deposit taking institutions (ADI), banks account for 81% of all financial institutions and the remainder 19% is catered by building societies (raise funds by providing mortgage loans) and credit unions (provide deposit, personal/housing loan and payment services to members). In Non-ADI, money market corporations (merchant banks, total assets of US$ 123Billlion), finance companies (general financiers and pastoral finance, total assets US$133Billion) and securitizes (total assets US$ 229 Billion) are the key players. Life and general insurance companies in addition to public trust units, cash management trusts and friendly societies are major components in the insurers and fund managers aspect of the financial system in Australia. <br /> Australia banks lend at 8.5% which is way above the US lending rate around 5%. So, we recommend raising capital from US for Australian plant. However, Australia has strict regulations regarding capital flows into and out of the country. So, we suggest that company should raise part of it from US and part from Australia.<br />The Potential CSR Issues and Solution-Australia<br /> Australia is one of the most attractive business locations in the world and is a strategic location for multinational companies targeting market opportunities in the Asia Pacific region. Australia welcomes foreign investment and is a relatively easy country in which to do business. Nevertheless, it is essential that prospective investors obtain advice concerning regulatory, legal and cultural issues arising from the conduct of business in Australia.<br /> English being the national language, P&G will not face language issues expanding into Australia. Australian political and legal systems are very stable. There is a system of courts at both the Commonwealth and State level. Australia has a relatively deregulated and open economy.<br /> Major industries in Australia include property and business services, manufacturing, wholesale and retail trade, finance and insurance, construction, health and community services, transport and storage, mining, education, distribution, and agriculture. These industries are favorable for establishing P&G’s product line in Australia. P&G can build a strong local network to support its business in Australia by cooperating with these industries. <br /> Probably the largest risk for the Australian economy is the level of credit growth. Rises in interest rates would impact on consumer spending and repayments. P&G’s expansion in Australia would create new jobs. This will help strengthen stability of Australian economy.<br /> The Foreign Investment Review Board (FIRB) approves most foreign investment in Australia unless the investment is judged to be contrary to the national interest. P&G needs to analyze the value it would bring to Australian business with its entry into the country. Generally speaking, the Government normally raises no objections to proposals above the notification thresholds where the relevant total assets/total investment is below $50 million. However, P&G’s investment in Australia is going to be much higher and hence to tackle this issue P&G will have to build credibility in Australia by leveraging its brand and global recognition and effectively communicating its value proposition to the Australian market and economy.<br /> There are controls against restrictive trade practices. For example, anti-competition, consumer protection, and resale price maintenance. Tariffs and anti-dumping measures exist, although Australia has recently entered into free trade agreements with, amongst others, Singapore, the United States of America and Thailand. P&G needs to be careful to abide by the Australian trade practices.<br /> All employees in Australia are protected by legislation. The intention of the legislation is to ensure that all employees are treated fairly. Around 22% of the fulltime workforce in Australia is unionized. Promoting employee welfare and fair employee treatment will help P&G hold firm ground in Australia.<br /> Australia maintains a thorough system of laws and regulations designed to counter corruption. In addition, the government procurement system generally is transparent and well regulated, thereby minimizing opportunities for corrupt dealings. Accordingly, corruption has not been a factor cited by U.S. businesses as a disincentive to investing in Australia, or to exporting goods and services here. The level of foreign investment in Australia increased by $66 billion (US$61 billion) in 2008 to reach $1.72 trillion (US$1.58 trillion). This is a favorable factor that to encourage P&G’s entry into the Australian market. Furthermore, Australia has not signed the GATT/WTO Agreement on Government Procurement, which means that it is not bound by conditions prohibiting specification of locally made product in tenders. However, the Australian Government procurement policy framework is non-discriminatory. That is, potential suppliers will not be discriminated against on the basis of their degree of foreign affiliation.<br />The Australia-United States FTA (AUSFTA) entered into force on January 1, 2005. AUSFTA is a comprehensive agreement that covers goods, services, investment, financial services, government procurement, standards and technical regulations, telecommunications, competition-related matters, electronic commerce, intellectual property rights, labor and the environment. The agreement has guaranteed U.S. access to the Australian market and the gradual expansion of this access. This will be very beneficial for P&G’s entry and development in Australia.<br />Result Expected-Australia<br /><ul><li>Market Share</li></ul>Establishing R&D and manufacturing operations in Australia would allow P&G to increase their market share in the country. Through targeted marketing campaigns and an increase in environmentally friendly perception of P&G, market share will be increased, which will boost total revenues from the Australian market. <br /><ul><li>Strategic Location</li></ul>Establishing a presence in Australia has strategic implications for P&G, providing a jumping-off point to export products to the rest of Oceania and southern Asia. Australia itself represents a large market opportunity for P&G, and also can serve as a central manufacturing and distribution point for P&G’s southern Asia operations.<br /><ul><li>Environmentally Friendly Image/Knowledge</li></ul>Due to the strict environmental regulations in place in Australia, knowledge and skills gained in Australia regarding environmentally friendly practices and manufacturing techniques could be applied to other global operations. Environmental concerns are rapidly growing throughout the world, providing P&G and opportunity to improve its corporate image by demonstrating environmental sympathy and taking measures to ensure compliance with environmental regulations. This is of particular importance to P&G, as there are NGOs which scrutinize P&G’s environmental track record and criticize their use of animal testing.<br /><ul><li>Specific Knowledge Development</li></ul>Australia has a high rate of skin cancer amongst the population, providing an opportunity to develop knowledge around this specific cosmetics area which could then be applied to other markets. Through cooperation with local cosmetics manufacturers and specific efforts to develop skin-care products for the Australian market, P&G can develop expertise in skin-cancer-related cosmetics which could be applied globally to other markets which also have a high skin-cancer risk.<br /><ul><li>Financial Results (see Exhibit 5)</li></ul>Financial projections were calculated with the following assumptions, an organic growth rate of 2% year on year including cost of goods sold, labor cost and revenue. The discount rate used is the current average lending rate in Australian banks, around 8.5%. The project life is projected to be at least 10 years with break-even occurring in 9 years. Taking these assumptions into account, the NPV for the project is approximately $560 million, indicating an attractive project to undertake.<br />Exhibit 1<br />Exhibit 2<br />Exhibit 3 Costa Rica’s Investment Climate Indicators<br />As a % of PercentagesGovernance and InsecurityCrime LossesSales0.7Judiciary DistrustFirms17.4Undeclared RevenuesSales31.6BribesSales1.8Inspections# per year5.3InfrastructureWater Interruptions# per year3.9Power Out LossesSales3.0Internet UseFirms32.1Email UseFirms61.5Access to FinanceAccess to Lines of CreditFirms43.2Banks – Working CapitalFirms36.7Banks – InvestmentFirms18.7Supplier CreditFirms34.7TechnologyComputer UseWorkers19.5Worker TrainingFirms46.4ISO CertificationFirms9.3R&D ActivitiesFirms30.9Computer Control MachFirms30.3<br />Source: World Bank<br />Exhibit 4 Expected Financial Results For P&G’s Strategy In Costa Rica (Unit: Dollar)<br /> Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Revenues 60,000,000 61,200,000 62,424,000 63,672,480 64,945,930 66,244,848 67,569,745 68,921,140 70,299,563 71,705,554 Cost of Goods Sold 30,000,000 30,600,000 31,212,000 31,836,240 32,472,965 33,122,424 33,784,873 34,460,570 35,149,781 35,852,777 Labor Costs 1,500,000 1,530,000 1,560,600 1,591,812 1,623,648 1,656,121 1,689,244 1,723,029 1,757,489 1,792,639 Taxes 8,550,000 8,721,000 8,895,420 9,073,328 9,254,795 9,439,891 9,628,689 9,821,262 10,017,688 10,218,041 Net Income 19,950,000 20,349,000 20,755,980 21,171,100 21,594,522 22,026,412 22,466,940 22,916,279 23,374,605 23,842,097 18,601,399 17,690,841 16,824,855 16,001,261 15,217,983 14,473,046 13,764,576 13,090,785 12,449,977 11,840,538 Capital Expenditure(Land & Equipment) 100,000,000 Working Capital 10,000,000 9,324,009 149,955,261 NPV 40,631,252 Discount Rate 0.07250 1.07250 <br />Exhibit 5: Expected Financial Results For P&G’s Strategy In Australia (Unit: Dollar) <br /> Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Revenues 533,000,000 543,660,000 554,533,200 565,623,864 576,936,341 588,475,068 600,244,569 612,249,461 624,494,450 636,984,339 Cost of Goods Sold 266,500,000 271,830,000 277,266,600 282,811,932 288,468,171 294,237,534 300,122,285 306,124,730 312,247,225 318,492,170 Labor Costs 14,000,000 14,280,000 14,565,600 14,856,912 15,154,050 15,457,131 15,766,274 16,081,599 16,403,231 16,731,296 Taxes 75,750,000 77,265,000 78,810,300 80,386,506 81,994,236 83,634,121 85,306,803 87,012,939 88,753,198 90,528,262 Net Income 176,750,000 180,285,000 183,890,700 187,568,514 191,319,884 195,146,282 199,049,208 203,030,192 207,090,796 211,232,612 162,903,226 153,144,046 143,969,518 135,344,616 127,236,413 119,613,955 112,448,142 105,711,618 99,378,664 93,425,103 Capital Expenditure(Land & Equipment) 671,000,000 Working Capital 25,000,000 23,041,475 1,253,175,303 NPV 559,133,828 Discount Rate 0.0850 1.0850 <br />References:<br />http://finance.yahoo.com/q/is?s=PG+Income+Statement&annual<br />http://www.zawya.com/story.cfm/sidZAWYA20090625035825/P%26G%20to%20set%20up%20$100m%20plant%20in%20Pakistan%20%20<br />http://ww-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/05/09/000020953_20070509092200/Rendered/PDF/354240CR.pdf<br />http://www.rba.gov.au/fin-stability/fin-inst/index.html<br />