MAV Corporation Business Expansion Plan from Directors

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MAV CorporationBusiness Expansion Plan from
Directors

• Group 7
• Ryan M Lucas
• Kyo Hyug Koo
• Rian A Maguire
• Anthony S Martinez
• Reshel Kurniadi

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Outline

• MAV Corp. General Facts
• MAV Corp. Business and Marketing Strategy
• Proposal to CEO
• Demographics and History of South Africa
• Economic Background of South Africa
• Key Advantages of Proposal
• Barriers to Entry and Negative Impacts
• Final Recommendation to CEO

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MAV Corporation General Facts

• Company founded in 1989
• Developed 7 large factories over the last 15
  years
• Has over 1,000 employees

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MAV Corporation - Products

• 100 of MAVs production is passenger cars
• Specializing in compact, fuel-efficient models
• Production consists of 5 different models of cars
  and 2 models of small SUVs

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MAV Business Strategy

• Low cost supplier
• Price range from 12,000 to 25,000
• Capitalize on cost savings from foreign
  production through exports to American markets
• To increase sales presence through exports to
  Japan, Europe and other Asian markets

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MAV Marketing Strategy

• Target markets
• Low to middle income families and singles
• First time buyers
• Environmentally concerned consumers
• Primarily marketed in urbanized environments

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Proposal to CEO

• Develop a market presence in Japan, Europe and
  the remainder of Asia
• Accomplish multi-national presence by building
  car manufacturing plant in South Africa near
  ports and rail spur
• South Africa offers central shipping location to
  all major markets of interest

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South Africa

• Located on the southern coast of Africa
• Total land 1,219,912 sq km and has 2,798 km of
  coastline
• Abundant natural resources
• Large portion of land unusable for irrigation

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Demographics of the People

• Population 42,718,530
• 65.3 between the ages of 15 and 65
• Median age 24.7 years
• Ethnic groups
• Black 75.2
• White 13.6
• Colored 8.6
• Indian 2.6
• Literacy rate 86.4
• Unemployment rate 31
• 11 official languages

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Social History of South Africa

• Racial conflict date from the Dutch arrival at
  the Cape of Good Hope in 1652
• European established a company to acquire goods
  to re-supply its ships
• Europeans took up arms and drove most of the
  local population into the interior
• Expanded the use of slave labor

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A Time of Change

• The discovery of minerals in the late nineteenth
  century--diamonds in 1867 and gold in
  1886--dramatically altered the economic and
  political structure of southern Africa
• Valuable resource that attracted foreign capital
  and large-scale immigration

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Government and Economic History

• In the early 1900s, laws were put in place to
  ensure that Africans would have to seek jobs from
  white employers
• Many Afrikaners pooled their funds to established
  banks, insurance companies, etc to wrest a
  portion of the economy out of the control of
  English businessman
• In 1948, the National Party won the election on
  its apartheid platform
• Blacks, led by Nelson Mandela, rose up in protest
  against apartheid in the 1950s
• Government banned all organizations opposed to
  apartheid Nelson Mandela was sentenced to
  imprisonment for life

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Growing Economy

• Despite growing international criticism for
  apartheid, the governments success in capturing
  its enemies fueled an economic boom
• Foreign investment more than double between 1963
  and 1973
• Beginning in 1973, people grew fearful of
  instability in South Africa, causing foreign
  investors to withdraw their money or move it into
  short-term rather than long-term investments

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Democracy Introduced

• Through the 1970s and 1980s, the world publicly
  denounced the apartheid, causing the value of the
  Rand to collapse
• On May 9, 1994, Nelson Mandela was unanimously
  elected president by the National Assembly
• The government has made substantial progress in
  expanding social services, health care, and
  education
• The continuing violence and political uncertainty
  contributed to a steady decline in the value of
  the Rand in late 1996 and early 1997

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Destination for Private Sector and Foreign
Investment

• The government is offering incentives to increase
  foreign participation in South Africa
• The Ministry of Finance outlined new economic
  strategies aimed at
• liberalizing foreign-exchange controls
• imposing stricter fiscal discipline
• lifting of import tariffs and exchange controls
  to expand foreign trade
• Pressing for fiscal responsibility,
  private-sector development is likely to receive
  even greater emphasis in the early twenty-first
  century

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Economic Background (I)

• The automotive sector is a fast growing industry
  in the South African economy
• This sectors contribution to the GDP in 2002 was
  6.3 up from 5.7 in 2001
• The close correlation between vehicle sales and
  GDP growth is a positive sign for the future
  since GDP is forecasted to grow by over 16 over
  the next 3 years
• All major multinational motor vehicle
  manufacturers are represented in SA, some of
  which share the same manufacturing facility

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Economic Background (II)

• There are 7 passenger car assemblers, 12 medium
  and heavy commercial assemblers and 8 independent
  importers currently operating in South Africa
• In the automobile component part sector, there
  are approximately 270 first tier suppliers and
  over 300 second and third tier suppliers
• Persons per passenger car in South Africa are
  10.2 to 1. The major proportion of vehicles are
  however 10 years and older

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Multinational Motor Vehicle Manufacturers

• The leaders in the passenger car sales segment in
  the domestic market during 2002 were
• Volkswagen South Africa with a 22 market share
• Toyota with a 19.5 market share
• Industry is mainly concentrated in Gauteng,
  Eastern Cape, and Kwazulu-Natal, all located near
  ports

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Multinational Investments

• Investment in the vehicle assembly industry has
  increased steadily since 1995
• From 2001 to 2002 investment increased by 14.6
  following the 31.2 increase from 2000 to 2001
• The German OEMs were first to reap the benefits
  of the Motor Industry Development Programme
  (MIDP), and as a result, have increased their
  investments in South Africa for solid financial
  reasons
• It is expected that General Motors recent buyout
  of all Delta shares will result in component
  suppliers expanding their presence in South
  Africa

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Other Key Industries in South Africa

• Agro processing
• Banking and Finance
• Chemicals
• Food and Beverages
• IT and Electronics
• Mining and Minerals
• Tourism
• Telecoms
• Textiles

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Industry Advantages

• Infrastructure
• Flexible production ability
• Raw material availability
• Labor and Productivity

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Key Advantages

• Location
• Access to Ports
• Large population in surrounding areas
• Stable Employment Rates Nationwide
• Ample supply of able-bodied laborers
• Low wage rate average
• Educated labor force

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Governmental Advantages

• Multiple Tax Breaks including
• Import and Export taxes
• Property taxes
• Corporate Income taxes
• Further Capitalization incentives for expenses
• Accommodating Monetary Policy

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Governmental/Economic Advantages

• Low interest rates
• Allow us to borrow at lower rates than we could
  worldwide
• Low inflation rates
• Encouraging statistic for long-term growth

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Economic Advantages (I)

• Price Stability for Raw Materials
• In real terms, domestic prices have actually
  decreased due to the increasing strength in the
  Rand
• Exchange Rate Benefit
• Thus far in 2004, the Rand is the strongest it
  has ever been

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Economic Advantages (II)

• Positive Business and Consumer Sentiment
• Strong Replacement Demand
• Enhanced New Vehicle affordability

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Manufacturing Advantages

• Ample Supply of Most Raw Materials
• Large rail network and port location will allow
  for lower transportation charges
• Capital expenditures have increased by 700 over
  the last 4 years

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Manufacturing Advantages

• Production capacity nationwide has increased 33
  Over the last 4 years

  Year 2000 Year 2001 Year 2002 Year 2003 Q1 2004 Q2 2004
Cars 66.1 72.2 73.2 77.2 72.3 81.4
Light Commercials 60.2 62.6 70.6 69.6 68.1 68.5
Medium Commercials 64.2 69.8 67.8 60.7 60.3 56.0
Heavy Commercials 74.8 78.1 85.7 85.6 85.0 84.9
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Manufacturing Advantages

• Domestic passenger car sales have increased 23.9
  over the last 12 months

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Manufacturing/Sales Advantages

• Per day selling rates have increased by almost
  62 over the last 10 years

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Barriers to Entry

• Language barrier
• Low availability of Steel and Rubber
• Supply problems due to vendors lack of logistics
  planning

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Negative Social Impact

• High crime rates
• Both organized crime and petty street thugs
• AIDS epidemic over 21 of population has
  HIV/AIDS
• Water shortage
• Lack of major arterial rivers

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Negative Economic Impact

• Decreased exports
• Due to increasing strength of Rand

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Final Recommendation

• MAV Corporation SHOULD go through with
  development of a factory in South Africa
• MAV Corporation needs to act fast as the MIDP
  will end in 2012

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Appendix
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Auto Industry overview
Appendix

• The auto industry is one of the key
  oligopolistic, dynamically complex and networked
  global industries.
• To produce car, which consists of some 20,000
  parts and components, a producer needs to
  orchestrate the logistics and assembly of various
  kinds of input factors such as steel, glass,
  rubber and plastic, semi-assembled components
  though many manufacturing technologies that are
  spatially distributed and located
  internationally.
• Therefore, this industry has specific impacts on
  other industries that arise from vertical
  integration functions across producing countries.

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Competitive Advantages
Appendix

• Infrastructure -SA has one of the best
  infrastructure and service industries among
  developing nations, particularly in roads,
  telecommunication, harbors, banking systems,
  insurance and shipping. With its 3000 kilometers
  of coastline and 7 commercial ports, SA has by
  far the largest and best-equipped network of
  ports in Africa. With the major upgrading of
  these ports underway, SA will be able to function
  as a hub for increasing commercial traffic
  emanating from and destined for Europe, Asia, the
  Americas as well as the east and west coasts of
  Africa.
• Flexible production ability -The SA automotive
  industry has retained its ability where single
  production facilities manufactured a range of
  quality products at competitive prices to satisfy
  the domestic market. Given this flexibility, SA
  has a unique competitive advantage when it comes
  to low volumes, such as the case with lower
  volume vehicles and niche markets or at model run
  out, compared to other countries where production
  is set up for long runs.
• Raw material availability- SA has an abundance of
  raw material availability including steel,
  stainless steel, aluminum, chrome, plastics,
  leather and precious metals.
• Labor and Productivity
• The African Growth and Opportunity Act (AGOA)

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South Africa Key Other Industries
Industry Description Major Companies
Agro processing SA is a food self-sufficient country and the bulk of the populations food needs are produced locally from raw materials. Unilever, Nestle, Coca-Cola, Danone, Kellogs etc.
Banking and finance 55 locally-controlled banks, 5 mutual banks, 12 foreign-controlled banks, 9 branches and 60 representative offices of foreign banks. ABSA, First National Bank, Standard Bank, Nedcor
Chemicals The largest manufacturing sector of the SA economy, accounting for 5 of the gross domestic product. 4 Oil refineries, Sasol, PetroSA
Food and Beverages Flour, beer and malt, slaughtering and preparing meat, canning and preserving of fruit and vegetable, wine
IT and Electronics SA has three cellular network operators, and a base 5 million mobile users. Siemens, Alcatel, SBC, Telecom Malaysia, Cell C, and Vodaphone
Mining and Minerals South Africa holds the worlds largest reserves of gold(35), platinum group metals(55.7), manganese ore(80) chrome ore (68.3) titanium metals (21) DIAMOND
Tourism South Africa tourism industry is valued 10billion a year
Telecoms South Africa is the telecommunication leader on the African continent. Nexus Connexion
Textiles A major boost to the industry has been approval of South Africa by the U.S.A. for benefits under the Africa Growth and Opportunity Act (AGOA)
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Labour and Productivity
Appendix

• Significant advantages in terms of raw materials
  and labor
• Union-employer partnership focus on results and
  quantum improvements in productivity and flexible
  skills direct labour cost in the vehicle
  assembly industry has been reduced by 30 over
  the past 5 years.
• Average labour costs/month for an operator
  amounts to approximately US1.05/hour, for a
  technician to approximately US 4.65/hour and for
  an engineer/professional person to approximately
  US 1 700/month. Cost excludes medical, pension
  and car allowance contributions by the employer
  ranging between 30 and 40. (2002 US R10.52)

Labor costs (SA Rand vs. US ) (1US R10, 52)
Activity Operator Technician Manager
Basic 1.05 p/hour 4.65 p/hour 1 700 p/month
Purchasing Parity Price Rate (PPP rate) 2.90 p/hour 12.87 p/hour 4 773 p/month
Pension 7.5 7.5 7.5
Medical 15 15 15
Car allowance N/a 10 17.5
Food allowance 7.5 7.5 N/a

• The PPP rate on 1/1/2002 was R3, 80 1US .
  This rate represents the rate of a comparable
  fixed basket of commodities purchased in SA and
  the USA.
• Source DeLoitte Touche

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The African Growth and Opportunity Act (AGOA)
Appendix

• The African Growth and Opportunity Act (AGOA)
  represents a non-reciprocal gesture by the USA
  aimed at assisting growth and development of
  sub-Saharan African countries by extending duty
  free and quota free access into the USA market in
  respect of a broad range of products for a period
  of 8 years. SA, together with 37 other African
  countries had been designated as an eligible
  country in terms of the Act.
• The effective commencement date of the duty free
  access provisions in terms of AGOA is 1 January
  2001 until 30 September 2008. Various automotive
  components and, importantly, motor cars as well
  as motor vehicles for the transportation of
  persons and of goods will, subject to rules of
  origin, qualify for a duty free and quota free
  access into the USA. In terms of the rules of
  origin SA products exported to the USA must
  represent at least 35 of the free on board (FOB)
  value of the product into the USA - up to a
  maximum of 15 of such USA inputs of the FOB
  customs value will qualify as SA local content.

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Appendix
Motor Industry Development Programme (MIDP)

• The strong growth in the automotive sector has
  been the result of well-designed and managed
  government policies and in particular the MIDP.
• The MIDP, implemented in September 1995, has now
  been in operation for nearly 9 years and is
  regarded as a prime example of public and private
  sector co-operation.
• The extension of industry support until the end
  of 2012 will ensure a ten year window as well as
  policy certainty for industrys long term
  strategy and planning and create the platform for
  sustained future development.
• Linkages with multi-national companies lead to
  participation in global sourcing from SA and will
  become all the more important in future.
• Total industry exports in total have grown by 38
  on an average annual basis since 1995 when the
  MIDP was introduced

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Exports
Appendix

• Total automotive related exports have grown by
  38 on an average annual basis and component
  exports by 31 since 1995 when the MIDP was
  introduced.
• The main destinations for passenger cars exported
  from SA during 2002 were the USA, Japan and the
  UK with the EU accounting for nearly 30 of total
  exports in Rand terms.
• SAs main destination for medium and heavy
  commercial vehicles during 2002 was SADC that
  accounted for 52 of exports. During 2002 SA
  produced 404,441 vehicles of which 125,306 units
  were exported.

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Market Size? Total Domestic Production Total
Aggregate Exports
Appendix
Source National Association of Automobile
Manufacturers of South Africa (NAAMSA)