NAVISTAR: Entering Asian Markets

Team : GLIMSTARS

a
Entry Strategy
Strategizing the best way to enter each of these Markets. Doing what it takes, Mergers, Joint Ventures and getting it right Page 9

8th October, 2012

Countries
Analyzing the potential Markets in Major Emerging Asian economies. We aim to be at the right place before doing the right Page 2 thing.

Road Map
Scripting the actual plan of action for executing our business strategy that leads to business excellence, value creation and Page 12 profitability.

1. Introduction
This study aims at finding the right markets for Navistars products in South East Asia and building the right strategy to enter these Markets. The company is looking to enter with a specific range of products in the South-East Asian Markets. A total of 7 emerging economies have been listed as potential markets, these markets need to be studied and a plan of action needs to be laid down for entering these markets.

About
Navistar is a leading manufacturer of commercial trucks, buses, RVs, defense vehicles and engines. The current record shows headquarter located in Lisle, IL with employee size 3,500 - 4,500 and has annual revenue of $9.713 billion. The company's products, parts, and services are sold through a network of nearly 1,000 dealer outlets in the United States, Canada, Brazil, and Mexico and more than 60 dealers in 90 countries throughout the world.

Rating: 4.5

Philippines GDP: $216 Billion (3.7% Growth FY11) Economy Driving Industries: 1. Agriculture - 32% by Population, 13.8% by GDP Sugar Exports Coconut Oil Exports 2. Industries/ Manufacturing 13.8% by Population, 30% by GDP Food Electronics Consumer Durables 3. Services46.5% by Population, 56.2% by GDP Tourism IT Health and Wellness Transport Telecommunication 4. Infrastructure Energy Mining Oil & Gas Housing and Construction

Major Competitors: Caterpillar, JCB

Socio Political Stability: +ve | Democratic Stable Society, Low Cost Labour, Growing Infrastructure Target Areas for Navistar Infrastructure Exports Manufacturing Transport & Tourism Tandem Rollers, Motor Graders, Crawler Dozer, Vibratory Compactors, Crawler Cranes, Truck Mounted Cranes, Rough Terrain Crains, Compact Excavators, Crawler Excavators, Backhoe Loaders, Front End Loaders Reach Stackers Forklift Trucks, Diesel Powered Gensets, Pickup and Carry Cranes Reach Stackers, Motor Graders, Vibratory Compactors

Summary & Conclusion Philippines has been identified as one of the most promising emering asian economies, Goldman Sachs has estimated it to be the worlds 14th largest economy by 2050. The economy has recently moved from an Agro based economy to an industry based economy and thus high potential investment is anticipated in infrastucture. It is evident from the countries economy that most of the Navistar products would be required in some industry or the other, and therefore it is one of the major contenders to become Navistars new market. The country has a high Ginis coeficient, and is likely to provide labour at low cost. Also, therare reduced tariffs for all capital equipments and products.
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Rating: 3.5

Taiwan GDP: $466.83 Billion (10.9% Growth in FY10, 5.2% in FY11) Economy Driving Industries 1. Services 66.9 % of GDP, 5.2 IT Telecommunications 2. Industry 32 % of GDP, 35.9 Electronics/ Consumer Durables Oil Refining Chemicals and Textiles Iron and Steel Machinery 3. Agriculture 1.3 % of GDP, 58.8 Major Competitors: Socio Political Stability: -ve | Diplomatic Isolation, Low Birth Rate, Ageing Polpulation, Economic Dependence on China +ve | Large Trade Surplus, 4th Largest Foreign Reserve, Large Exports Target Areas for Navistar Transportation (Exports) Manufacturing Refinary Summary & Conclusion Taiwans economy is influnced by a lot of external factors, the economy is run by exports and is thus affected by global economic conditions. The countries infrastructure is in place and not much growth is anticipated in years to come. This is followed by ageing population, saturated markets. Most of the Navistar products expected to be sold in this region are support products for transportation, material handling and power generation. There is low scope for selling contruction equipments and earth movers. The country has high imports too which means that one doesnt need to be present there to sell a poduct.
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Pickup nad Carry Cranes, Reach Stackets Diesel Powered Gensets, Truck Mounted Crains, Forklift Crains Diesel Powered Gensets

Rating: 4

Thailand GDP: $ 377.6 Billion (0.1% Growth FY11) Economy Driving Industries: 1. Agriculture - 40.7% by labor force 13.3% by GDP Rice Exports Chicken meat exports Industriallly processed goods. 2. Industries 13.2% by labor force, 34% by GDP Automotive Electronics & Electrical Iron and Steel Major Competitors: Caterpillar Socio Political Stability: -ve | Constitutional Monarchy. +ve| 70% of population is in the age group of 15-64. Target Areas for Navistar Industries Exports Manufacturing Transport & Tourism Tandem Rollers, Motor Graders, Crawler Dozer, Vibratory Compactors, Crawler Cranes, Truck Mounted Cranes, Rough Terrain Crains, Compact Excavators, Crawler Excavators, Backhoe Loaders, Front End Loaders Reach Stackers Forklift Trucks, Diesel Powered Gensets, Pickup and Carry Cranes Reach Stackers, Motor Graders, Vibratory Compactors 3. Services46.1% by Population, 52.7% by GDP Tourism Construction Transport, storage and communication.

Summary & Conclusion Thai exports - mostly machinery and electronic components, agricultural commodities, and jewelry - continue to drive the economy, accounting for more than half of GDP. The industrial sector is poised to recover from the second quarter of 2012 onward, however, and the government anticipates the economy will probably grow between 5.5 and 6.5% for 2012, while private sector forecasts range between 3.8% and 5.7%.

Rating: 4.5

Indonesia GDP: $1.139 Trillion (6.2% in FY11) Economy Driving Industries 1. Services 38.1 % of GDP, 48.9 % by labor force. Textiles Apparel & footwear Tourism. 2. Industry 47.2 % of GDP, 12.8% by labor force. Electronics/ Consumer Durables Oil and Gas Mining Cement rubber 3. Agriculture 14.7 % of GDP, 38.3 % by labor force. Major Competitors: Caterpillar, Volvo (sporadic products) Socio Political Stability: -ve | +ve |Republic state Target Areas for Navistar Transportation (Exports) Pickup nad Carry Cranes, Reach Stackets Mining & Construction Front end loaders, Backhoe loaders, crawler/compact excavators, rough terrain cranes, truck mounted cranes, crawler/pick-and-carry cranes, reach stackers. Cement and Rubber Diesel Powered Gensets Summary & Conclusion Indonesia, grew an estimated 6.1% and 6.4% in 2010 and 2011, respectively. During the global financial crisis, Indonesia outperformed its regional neighbors and joined China and India as the only G20 members posting growth in 2009. The government has promoted fiscally conservative policies, resulting in a debt-to-GDP ratio of less than 25%, a small current account surplus, a fiscal deficit below 2%, and historically low rates of inflation. Fitch and Moody's upgraded Indonesia's credit rating to investment grade in December 2011. The government faces a challenge of improving indonesia's insufficient infrastructure to promote growth in the economy.
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Rating: 4

Vietnam GDP: $ 135.411 Billion (4.7% Growth FY11) Economy Driving Industries: 1. Electricity, gas, steam and AC supplies- $25258 mn worth of FDI sanctioned 2. Industries/ Manufacturing $7788 mn worth of FDI projects approved 4. Repair and manufacturing of motor vehicles: $ 500 mn worth of FDI projects sanctioned 5. Infrastructure Energy Mining Oil & Gas Housing and Construction- $2270 mn worth of FDI projects sanctioned

Major Competitors: Mining Machines (Ukraine), OMZ group (Russia), Samy (China), China National Heavy Machinery Corp (China), Nissan, John Deere Political Stability: Nominally marxist, single party (Meium stability) Target Areas for Navistar Infrastructure, mining, real estate and construction Repair and manufacturing of motor vehicles Manufacturing Summary & Conclusion
There are considerable pros and const of entering this country. The barriers to entry include Cultural differences, FDI regulations, corruption, red tape and IPR issues, complicated transaction systems and marked competition from Chinese manufacturers. Vietnam is one of the fastest growing Asian economies and the sudden surge in FDI can be directly attributed to the mining of coals and other minerals. This unprecedented mining activity has given the much-needed Fillip to other secondary sectors such as the automobile and real estate sectors, which might be of particular interest to Navistar. Moreover, the country is finding it hard to cope up with the sudden surge of vehicles and houses and the market for infrastructure development is also lucrative to Navistar from a strategic long-term perspective.

Tandem Rollers, Motor Graders, Crawler Dozer, Vibratory Compactors, Crawler Cranes, Truck Mounted Cranes, Rough Terrain Crains, Compact Excavators, Crawler Excavators, Backhoe Loaders, Front End Loaders Diesel engines Forklift Trucks, Diesel Powered Gensets, Pickup and Carry Cranes

Malaysia GDP: $ 472.942 Billion (5.1% Growth FY11) Economy Driving Industries: 1. Services: 49.2% of the GDP= $232 billion 2. Industries/ Manufacturing 24.4% of
the GDP= $115.168 Billion

3. Construction: 3.2% of the GDP= $15.1 Billion

4. Mining and quarrying: 10.4% of GDP= $49.088

Billion

Nissan, John Deere, Sumitomo, Volvo (sporadic products), Powertech (engines) Political Stability:Democratic and stable. Target Areas for Navistar Construction Rough terrain cranes, truck mounted cranes, crawler/pick-and-carry cranes, and reach stackers. Mining and Front end loaders, quarrying Backhoe loaders, crawler/compact excavators Manufacturing Forklift Trucks, reach stackers, Diesel Powered Gensets, Pickup and Carry Cranes Summary & Conclusion Malaysia is one of the most balanced economies of the APAC region. It is also an important strategic port and is trade friendly in most of its practices. The diverse cultures and the availability of labor at decent rates makes it a good location to venture into. There are ample opportunities of striking JV and M&A deals with smaller local players and the consumers are generally open to newer product offering in both the heavy equipment and the small engine segments. However, there are a few barriers to entry like High upfront capital expenditure, exclusive agreement requirements in most industries, red tape, restrictions by the MOT (min. of Transport), MOW (Ministry of Works) and MET (Ministry of entrepreneurial development) and a threat from Chinese competition.

Rating: 4

Singapore GDP: $ 318.9 Billion (4.9% Growth FY11) Economy Driving Industries: 1. Industries 19.6% by labor force, 26.6% by GDP Oil drilling Petroleum and Refinery Rubber processing Ship repair Offshore platform construction 2. Services80.3% by Population, 73.4% by GDP Tourism Financial services Lifesciences

Major Competitors: Caterpillar, Volvo (sporadic products) Socio Political Stability: -ve | inflow of foreign labour. +ve| Parlimentary republic, tax incentives Target Areas for Navistar Industries Tandem Rollers, Motor Graders, Crawler Dozer, Vibratory Compactors, Crawler Cranes, Truck Mounted Cranes, Rough Terrain Crains, Compact Excavators, Crawler Excavators, Backhoe Loaders, Front End Loaders

Summary & Conclusion

Singapore has a highly developed and successful free-market economy. It enjoys a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries. The economy depends heavily on exports, particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector. Real GDP growth averaged 8.6% between 2004 and 2007. The economy contracted 1.0% in 2009 as a result of the global financial crisis, but rebounded 14.8% in 2010 and 4.9% in 2011, on the strength of renewed exports. Singapore has attracted major investments in pharmaceuticals and medical technology production.

Based on various economic factors we have given rating to target countries, these ratings are based on their current economy plus the future growth potential. 1. Indonesia 2. Philippines 3. Malaysia Followed by Singapore, being the economic heart of the region.
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2. Entry Strategy: Business Honeymoon to South-East Asia

Entering new Markets is never an easy job, especially when youre moving to a culturally and politically different region. It is very essential to realize your motives and get your plans right in place before entering. We have thus devised a three-step procedure to evaluate the lucrativeness of a country for market entry, making sure that we look for what we need and not what looks the best. At the broader level, these steps are:

Evaluate the market attractiveness and potential to create strategic advantage. Will Navistar be able to create a profitable position? Will the activities in the country fit Navistars global business models?

2.1 Evaluating the market attractiveness and potential for creating strategic advantage:
Market attractiveness: At the broader level, macroeconomic factors like the GDP, IIP and Ginis coefficient can give brief snapshots into a countrys general business environment. We need to dig deeper into these numbers and see the percentage of the GDP that can be tapped into by Navistar using its product lines. This is precisely what we have done in the first part of this report while grading the countries. We have analyzed macroeconomic factors for each of the countries and translated the numbers into possible business opportunities for Navistar. This is just the preliminary research and we intend to look forward to factors like population, distribution of wealth, availability of man power, IPR risks and other potential barriers to entry and doing business in the future course of business.

Potential for creating strategic advantage: Can the country offer Navistar strategic advantages over other countries and can it help the company emerge as a cost leader or a differentiated leader in its category of products? Is the country satisfying the broader corporate and business strategy objectives of the company? Is the countrys economic environment and future potential at part with the companys long-term goals? Are there enough avenues for mergers and acquisitions in the country? These are just some of the questions that also need to be addressed and looked at to unearth insights that reach beyond preliminary numbers. In our opinion, this brainstorming is very important; as it will help the company sustains its operations in the country(s) of choice. Outcomes: The outcomes of this phase of planning should yield a prioritized list of countries and their specific opportunities and challenges. We should have a rough blueprint of how to enter the market, which vendors/suppliers/dealers to partner with and which firms to acquire (if required) to move ahead and take the leadership positions in the country of choice.

2.2 Will Navistar be able to create a profitable position?

This is a critical question, which, if answered correctly can reap benefits, if not, can impose heavy penalty on the investment. There are three ways, in which a Navistar can enter the target market, i. Going it alone ii. Finding a partner iii. Acquire a company. Going it alone requires a high degree of control over a number of factors namely brand presentation, quality, local practices and intellectual property. Although this can seem lucrative in terms of market share, however it has a downside in terms of the time required to establish the brand in the market as well as the lack of market knowledge can lead to expensive mistakes. Finding an established local player as a partner can create a 'win -win' situation enabling Navistar to capitalize on the current foothold of the local player in the market. A partnership is less capital intensive and provides Navistar with the needed dealer network, vital to penetrate the market. However the flip side of this partnership could be that at some point there might be difference of opinion among the partners and this may lead to dilution of brand image. Furthermore sharing the control increases the risk of brand damage. Acquiring a company in the emerging market will also give Navistar access to the dealer network that is already established, which can be integrated into the parent companies network over a period of time. In addition having a local asset can ease the way in case market exit is required. However it is important that the company being acquired be valued for the optimum price as emerging markets provide higher market potential, hence Navistar should be clear about what they are buying into and value should be locked in through retention payments or other means. Last but not the least all the three strategies mentioned above have a few common factors, but the one, which stands out, is, Government Policy. It is important that the government policies be thoroughly examined for the expansion plans of the company. It will also be important for Navistar to look at the global competitors which have operations established in the Asia Pacific region.

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For a diverse and mixed region it is always difficult to fit in with single strategy, thus a mix and match of the above three is highly recommended. It is like diversifying your risk and at the same time leveraging the diversification by having specialized marketing strategy. The moving in strategy can thus be summarized easily through the figure given below.

Low Risk

Acquisition

Medium Risk

Joint Venture

1. 2. 3. 4.

Low Investment Flexibility to move out Established Market Reduced Time to Market 5. Better Network

1. Acquisition cost to be paid. 2. Tax Benefits 3. Better Network 4. Tied up to Assets 5. Internal Conflicts

1. High Initial Investment 2. Time Consuming 3. Requires Local Expertise 4. No free Exit 5. No Interdependency

Recommendation: Asian markets are heavily perception driven and it is always recommended to have local expertise working on the marketing strategy. In addition the markets are growing, immature, and local players are looking forward to technological advancements by joining hands with global players. Recent years have shown large number of joint ventures & acquisitions in the region, in the urge for growth and sustainability. The countries are geographically smaller in area, relatively low in population but high in diversity, this means that coming up as a solo player in one of these markets doesnt ensure entry to neighboring markets whereas coming up in all the countries would need huge investments not justifying the market size. Thus, JVs and acquisitions are highly recommended in these regions.

2.3 Will the activities in the country fit Navistars global business models?
Navistars Global portfolio shows majority of its manufacturing facilities in South America (Argentina, Brazil), USA, Mexico, India, China & South Africa. This is primarily close to its homeland USA, large countries with huge infrastructures coming up and BRICS nations. These are nations with great growth potential, low labor cost. Also, Navistar has come up with JVs in India (Mahindra & Mahindra) & China (JAC). The south-east Asian market is no different except for the size. Thus, leaving Joint Ventures as the best option to move in, they are already manufacturing in India and China so coming up with a solo manufacturing facility in one of these South East Asian countries wont be the greatest of an idea.
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High Risk

Solo Player

2. Roadmap to Excellence : Creating Value & Making Profit

In pursuit of new revenue opportunities and lower-cost operations, manufacturers around the world are creating ever-more complex global networks of sourcing, manufacturing, marketing, sales, and service, and research and development activities. Over the last two years, we have monitored the development of such networks through our global benchmark studies of the global operations of nearly 800 manufacturers based in North America, Western Europe, Central and Eastern Europe, South Africa, and Asia-Pacic. As the world moves to a more specialized market with more aware customers than ever before, it is essential to understand the uniqueness of every customer and design an equally unique product and service. This is the key to success and to survival. Before entering any of such specialized markets we need to be a specialist, which doesnt happen overnight and thus we need to collaborate. Constant learning, innovation and adaptability to change is an essential.

Evaluate: Chose the right place to be from future growth perspective

Collaborate: Look for Joint Ventures, Local Talent Acquisition, Capture the essence of local market

Deliver Value, Build Brand and then look foreward to invest in manufacturing units and expansion plans.

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References:
http://robertoigarza.files.wordpress.com/2008/03/cap-globalizationemerging-markets-koudalengel-2007.pdf http://www.aseansec.org/14298.htm http://www.indexmundi.com/philippines/economy_profile.html http://philippinebritish.com/news/philippine-economy-and-2012outlook http://philippinebritish.com/news/philippine-economy-and-2012-outlook http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx http://www.gso.gov.vn/default_en.aspx?tabid=491 http://www.austrade.gov.au/Mining-to-Vietnam/default.aspx http://www.statistics.gov.my/portal/index.php?lang=en http://www.competition-regulation.org.uk/publications/working_papers/WP68.pdf http://www.google.co.in/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:MYS&dl=en&hl= en&q=gdp+growth+rate+of+malaysia http://www.asiamedia.net.my/barriers-entry http://www.tcim.com.my/

Prepared By: Gaurav Dalvi Student, Great Lakes Institute of Management Jeewant Gupta Student, Great Lakes Institute of Management Krishna Prakash Singh Student, Great Lakes Institute of Management