KUBOTA in Brazil

Aaron Bair Josh Burns Hailey Duff Erin Franklin Kelsey Youngblut December 2, 2013

Table of Contents

Introduction ................................................................................................................................................. 1 Executive Summary ..................................................................................................................................... 2 Feasibility Analysis ..................................................................................................................................... 4 Economic Analysis ...................................................................................................................................... 6 Political and Legal Environment Analysis .................................................................................................. 7 Cultural and Ethical Analysis ...................................................................................................................... 8 Resource Analysis ....................................................................................................................................... 9 SWOT Analysis ......................................................................................................................................... 10 Entry Strategy Analysis ............................................................................................................................. 11 International Generic Strategy ................................................................................................................... 12 Potential Problem Analysis ........................................................................................................................ 12 References ................................................................................................................................................. 14 Exhibits ........................................................................................................................................................ A Table 1: GNI Per Capita, PPP ................................................................................................................ A Table 2: Interest and Tax Rates for Japan, Brazil, and the United States ............................................ A Table 3: Big Mac Index ......................................................................................................................... A Table 4: Kubota in Georgia .................................................................................................................. A Table 5: Labor Cost Predictors ............................................................................................................. A Table 6: Feasibility Analysis Calculation Explanations ......................................................................... B Table 7: Financial Feasibility of Kubota in Brazil .................................................................................. C Table 8: Past 5 Years Economic Variables ............................................................................................ C Table 9: Cost of Living Comparison ...................................................................................................... D Table 10: Projected Revenue from World Cup and Summer Olympics ............................................... D Table 11: Starting a Business ............................................................................................................... D Table 12: SWOT Analysis ...................................................................................................................... D Table 13: Explanation of SWOT ............................................................................................................ E Table 14: Combinations of SWOT Characteristics ................................................................................ F Table 15: Potential Problems with Feasibility Anaylsis ......................................................................... F Table 16: Kepner-­‐Tregoe Table ............................................................................................................ G Table 17: Approaches to Staffing ......................................................................................................... H Table 18: Masatoshi Kimata Information .............................................................................................. I Table 19: Wholly-­‐Owned Subsidiaries ................................................................................................... I i

Introduction Kubota is a Japanese manufacturer that sells farm equipment, construction equipment, pipes and other related products. They operate mainly in Japan but are beginning to expand globally. Currently, Kubota has subsidiaries and partners in more than 130 countries that manufacture and market their different products (Kubota, 2013). The company operates through four business segments, but we decided we wanted to expand into Brazil in the agriculture segment so that we can take advantage of their recent growth in farm machinery. Kubota chose Brazil as the country of entry because of their recent boom in agriculture machinery spending provides an opportunity for their growing agriculture segment. The credit level in Brazil is rising as the 2014 World Cup and 2016 Summer Olympics are approaching and are both drastically improving the economy. Brazil was the last country to enter the recession as well as the first to leave the recession, which demonstrates the power of their strengthening economy. Upon entrance Kubota will be opening a wholly owned subsidiary manufacturing plant and will be producing mainly mid-sized tractors. Kubota is planning on expanding their sizes of tractors and Brazil will be a perfect test market for these bigger sizes. Compared to their competitors, John Deere and Caterpillar, who manufacture both construction and farm equipment, Kubota in Brazil will focus their attention on the agriculture segment to maximize efficiency while targeting a quickly growing market. After analyzing Kubota-Tractor’s financials in Japan for the last 3 years we decided that they will become profitable in Brazil in the second year of operations and stay profitable in the following three years as they gain customers and increase efficiency. Kubota will have an opportunity to produce at capacity within five years, which will greatly improve our efficiency and satisfy the growing demand from farmers in Brazil.

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Executive Summary

Feasibility Analysis In Kubota’s first year, sales were $501,365,920 due to our inability to produce at capacity and at full efficiency. Kubota was unable to produce a net income until the second year of operations because of the high costs of bringing in Parent Country Nationals as executives as well as the high competition from Deere and Company and Caterpillar, who have a first mover advantage. Although in the first year Kubota produced a net loss of $37,772,085, likely caused by the costs of our initial investment, they were able to generate a positive net income each of the four years following their entry into Brazil. Kubota generated a profit of $9,698,870 in year 2, $11,583,884 in year 3, $13,754,280 in year 4, and $16,250,203 in year 5. Economic Analysis The Brazilian economy continues to grow with a GDP of $2,252,664,120,777 after a slowdown caused by the European debt crisis. The poverty level in Brazil has fallen from 30.8% in 2005 to 21.4%. Brazil has a very high reserve level of $380 billion to offset any macroeconomic threat that may come. In order to increase profitability, Kubota needs to position themselves in the production, sale, and export of the M Series of tractors. By utilizing the exportation of Kubota tractors, the company has a strong economic outlook. Political and Legal Analysis The main political hurdle for Kubota is encountering corruption. The Brazilian government has not faced major corruption, but local governments face more corruption. Kubota needs to keep in good terms with the local governments and promote the wellbeing of the their employees along with how committed they are to Brazil. The legal environment in Brazil hinders the entrepreneurship and startup of new businesses. Starting a business takes 119 days, so Kubota will need to remain in constant control of the steps and paperwork required to open the manufacturing business is Curitiba. Cultural and Ethical Analysis Brazil is said to be a melting pot of cultures. Brazil is principally made up of three ethnic groups, native Brazilian Indians, Europeans and African immigrants. Brazilians are said to be “laid back” compared to European cultures. Deadlines and commitments are not as well kept and being on time is relative. Brazil places a high priority on both religion and family. Ethically, Brazilians are prone to corruption especially at the local level despite recent anti-corruption movements. Resource Analysis We will be adding value to the Brazilian market by bringing a product to Brazil that has a high resale value utilizing price management. Kubota offers rarity by introducing environmentally compatible equipment to Brazil, which is something our competitors haven’t successfully done yet. Our innovative and strategic team develops products and technology utilizing tacit knowledge by creating complex transmissions and products. Kubota has relationships around the world that add to our organization by building brand equity and awareness through our international experience.

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SWOT Analysis We will be adding value to the Brazilian market by bringing a product to Brazil that has a high resale value utilizing price management. Kubota offers rarity by introducing environmentally compatible equipment to Brazil, which is something our competitors haven’t successfully done yet. Our innovative and strategic team develops products and technology utilizing tacit knowledge by creating complex transmissions and products. Kubota has relationships around the world that add to our organization by building brand equity and awareness through our international experience. Entry Strategy Analysis Curitiba Brazil is a prime location where Kubota can set up a wholly owned subsidiary and manufacture tractors. Curitiba offers a well-connected transportation system with an extensive railroad hub and a close seaport as well as cluster advantages that will enable Kubota to find, attract, and keep talented professionals. Recent successes of other MNEs (such as Volvo) successfully setting up shop in Curitiba offer a pattern for Kubota. Kubota will hire both a Host Country National as well as a Parent Country National to head the new operation. A Green Field Venture strategy will be used so that a wholly owned subsidiary manufacturing facility in Curitiba will be a platform to enter other South American markets. International Generic Strategy Kubota uses a global standardization strategy. Kubota sets up wholly owned manufacturing facilities in few strategic international locations then exports these products to other markets. For Example in the 1960’s Kubota built a manufacturing facility in Georgia as a platform for its North American Tractor market. Since then they have had enormous success selling to the United States, Canada, and other North American countries including Brazil. Setting up shop in Brazil will be an excellent extension of their existing international strategy allowing Kubota to more fully exploit South American tractor markets. Potential Problem Analysis It has been determined that in order for the feasibility to hold it is necessary that current trends alluded to in the feasibility analysis, with regards to growth and sales forecast must hold true in order not to impede the likes of profitability and productivity. Potential problems that could arise have been identified via the Kepner-Tregoe method. Which of course highlights issues along the lines of seriousness and likely triggers; problems include such as language barriers, and unforeseen issues such as public unrest. This section has also identified the employee that is deemed most appropriate to lead this project, his name is Masatoshi Kimata, he has been chosen based on Japanese culture of ethnocentrism when selecting heads to manage foreign based subsidiaries; but also on his experience in running plants, and his familiarity with the agriculture product range. The final part of this section is the analysis, more accurately the drawbacks associated with the use of Greenfield Wholly-Owned Subsidiary method entry. Drawbacks include, being a slow method of entry in comparison with acquisitions and the likes of increased competition due to entry. This section also identifies some remedies to remove these and other identified drawbacks.

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Feasibility Analysis Kubota will invest in Brazil by building a single manufacturing plant that will cost around $70 million. Table 7 depicts the forecasted sales, costs, and profits for Kubota’s first five years in Brazil. According to the estimated forecasts, although Kubota generated a net loss of $37,772,085 in the first year, it will be feasible for Kubota to expand operations into Brazil and generate a profit of $9,698,870 by the second year (Table 7). The feasibility analysis was started with a prediction of sales that includes an estimation of units sold and the average price of a Kubota tractor in the United States (Table 1, Table 4). Since Kubota manufacturing costs are about the same in Brazil as they are in the United States, we used the average price in the United States for the predictions. In the fifth year it is estimated that Kubota would finally be producing 22,000 units, which is the new factory’s capacity as found in Table 4. Kubota will not produce and sell at capacity within the first four years after opening due to competition and lack of efficiency in the beginning. Once we reached the fifth year sales number, it was reduced each year by the average growth of agricultural spending in Brazil, which was 12%, to find the total revenue numbers for the first four years (Murphy, 2011). Estimations for the initial investment are based on information from a recently opened Kubota-Tractor manufacturing plant in Atlanta, Georgia, which cost $73 million and has the capacity for production of 22,000 units per year (Table 4). Since Kubota will be recreating this exact plant in Brazil, the only adjustment that was made was to decrease the investment cost to $70,865,700 after accounting for a difference in construction salaries, which was the only information that was found to use for this prediction (Table 5). Kubota reduced the initial investment by $2,134,300 after taking the difference between the average salaries for a construction

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worker in the United States and Brazil, then multiplying by an estimated 100 total construction workers (Table 5, Table 6). Next we found that Selling, General, and Administrative expenses were on average 18% of sales in Japan (Bloomberg, 2013). Kubota assume that SG&A costs will stay proportionate to sales because we will be using a Parent Country Nationals (PCNs) for the top administrative positions in Brazil. This implies that although the marketing, rental, and electric costs will be cheaper in Brazil, the executive salaries will be more than typical Brazilian salaries due to providing extra incentive for PCNs to relocate. We believe that these costs will essentially balance each other out and that keeping SG&A costs at 18% of sales will be appropriate in Brazil as it is in Japan. Property, plant, and equipment expenses were estimated after deciding in the first five years our revenues will be 14% of Kubota’s Japanese revenues. PP&E expenses for Kubota Japan were 37% of total revenue on average and we adjusted this number to 5% so it was proportionately the same as PP&E expenses to total revenue on Japan’s income statement (Bloomberg, 2013). Using the average salary of a manufacturing worker in Brazil, which is $47,964, and multiplying it by the 200 employees that will work in the Brazil plant, not including the executives, we were able to estimate labor costs (Table 5). Interest expense was estimated from data in Table 2, which compares Japan’s nearly 0% interest rates to Brazil’s 9.5% interest rates. We doubled Kubota in Japan’s interest rate to 2% of total revenues to make up for this difference in interest rates. KPMG data shows that income tax expense has stayed at a constant 34% in Brazil, so we believe that this will hold constant in the first five years of operating (Table 2). As Table 7 illustrates, we reached a net loss of $37,772,085 in the first year of operations due to the costs of the initial investment of the project. During the next four years of operation we

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became profitable with a net income of $9,698,870 in Year 2, $11,583,884 in Year 3, $13,754280 in Year 4, and $16,250,203 in Year 5. Economic Analysis The economy of Brazil was impacted by the European debt crisis of 2011 and 2012. However, the strong macroeconomic policies and practices allowed Europe to make a strong comeback in 2013, along with hosting the World Cup in 2014 and the Summer Olympics in 2016. Through continued development of the infrastructure and economic policies the Brazilian economy will continue to grow through GDP, lowering of unemployment and poverty rates, and raising the PPP of the Brazilian Citizens. With a GDP of $2,252,664,120,777 in 2012, Brazil is the seventh wealthiest economy (World Bank). As shown in Table 8, the Brazilian economy continues to grow. The Brazilian economy slowed significantly over 2011 and 2012, driven mainly by the uncertainty caused by the European debt crisis. Brazil’s overall macroeconomic framework is solid and sustainable in the medium term. The main risks to Brazil economy outlook relate to the external environment, however the high foreign reserve levels ($380 billion) offset the risks. The poverty level in Brazil has fallen from 30.8% in 2005 to 21.4%. The poverty level will continue to decrease in the future due to the World Cup and Summer Olympics creating hundreds of thousands of new jobs. The new jobs created will also give skills to workers that currently are unable to fulfill the requirements Kubota would demand. Moving forward, Kubota has a bright outlook in the Brazilian economy. The high foreign reserve levels of Brazil allow for an offset of the external risks to the economic environment. South America, with Brazil leading, stands poised for progress in the future. Emerging from the global recession with relative ease, Brazil certainly has a few speed bumps again, but the economic and hiring will only increase with time. With the strong agriculture and economic sectors of Brazil,
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Kubota will be positioned for great success through the production, sale, and export of the M Series of tractors. Political and Legal Environment Analysis The political and legal environment of Brazil has a few hurdles that Kubota must overcome to be successful, but are not unreasonable. Kubota will prove successful in Brazil by following procedures required and keeping in constant contact with the local political and legal figures. The political landscape is promising with the government working to increase minimum wage and gain a permanent seat on the UN Security Council. The legal landscape is more difficult and has some red tape Kubota will have to overcome. The main political hurdle Kubota may encounter is corruption. However, although the current government has not faced major corruption, the more regional and local governments face much more corruption of the political figures. This may create problems if the local government does not approve of Kubota and the employee relations. Kubota will need to keep in good terms with the local government of Curitiba through the maintaining the wellbeing of employees and showing how Kubota is committed to Brazil and keeping the Brazilian economy improving. The legal environment in Brazil can be burdensome on businesses, especially start-ups and entrepreneurs as shown in Table 11. Starting a business in Brazil takes 119 days, the number of procedures to register a property is 13, and the number of years to close down a business in Brazil is 4. All of these numbers are much higher than the Latin America and Caribbean average as shown in Table 11. In order for Kubota to be successful in Brazil, executives will need to remain in good terms with local officials of Curitiba and uphold high employee relations. In terms of the legal environment, Kubota will need to keep constant track of where they are in steps to complete the

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startup and registration of the business. Since the numbers given are an average, Kubota should be able to complete the steps in less than the 119 days. Cultural and Ethical Analysis Brazil is said to be a melting pot of cultures. Due to the large amounts of intermingling of cultures and ideas, Brazilians are very open and accepting of other beliefs and new ideas. For MNEs looking to enter Brazil, this cultural acceptance helps smooth over corporate and local cultural differences. Approximately one fifth of all Brazilians are illiterate. Those who finish a higher-level education earn as much as five times the amount of those who do not and those who receive a university education earn twice as much as those with a higher education (Brazil, 2013). Those who have access to higher education are those who are well connected, or have the means to pay for a higher education. As a result, most Brazilians do not have access to higher education. This poses a huge obstacle for companies seeking professional level Brazilians with a college education. Even though Brazilians are more religiously centered than Americans, they do not necessarily act more ethically when it comes to business. Especially at the local level, businesses are prone to give and accept bribes and behave unethically in order to “stay afloat.” Due to the enormous amounts of regulatory “red tape,” that is required to do business in Brazil, many companies face the temptation of bribery in order to compete or receive special favors. In recent years, the Brazilian government has taken anti-corruption measures with some success. Despite these efforts, corruption remains an obstacle for firms entering the Brazilian market. In conclusion, the culture of Brazil will prove to be both an asset and a challenge. There will be challenges with regards to the lack of college graduate workers, the general lack of

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punctuality and accountability as well as corruption, but there will be advantages with regard to cultural acceptance and tolerances for change. Resource Analysis Kubota has a higher resale value than competitors helping add value to their products. Kubota’s products offer environmental friendly equipment adding rarity to Brazil because it hasn’t been introduced to the Brazilian market yet. Kubota’s engineers have tacit knowledge in diversifying their transmissions from competitors while also having international experience. Value: The equipment will be more affordable through price management because Kubota has a reputation of having a good resale value. This helps Kubota have the capability to move into new areas of the agricultural business while meeting the demand for equipment that provides higher financial value at the end of its use. Rarity: Kubota focuses on producing environmentally compatible equipment designed to improve quality of farming. Manufacturing environmentally friendly equipment will add rarity to Brazil due to their environmental issues. Brazil has a competitive advantage in agriculture because of their soil and this new environmental equipment will advance farming because many competitors have not introduced environmentally friendly equipment to Brazil yet. Imitability: Kubota engineers have tacit knowledge by utilizing various types of transmissions in their products. The knowledge Kubota has in making their motors makes it difficult for competitors to emulate their specific products because of the complexity of the motors and transmissions. Organization: Kubota has international experience and strategically integrates and builds relationships around the world to help them in the global market. These resources include brand equity and awareness, which adds value to Kubota because it is known around the world and trusted by many. If Kubota does not add enough value to the products sold in Brazil, the products will be unreliable and may not be worth the cost to customers. This means that as long as Kubota continues
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to add more value to their products they will continue to be successful in Brazil. Kubota must continue to add more than the financial obligation required to own the products. SWOT Analysis Kubota offers a diverse product portfolio giving them the opportunity to meet different consumer’s demands. Brazil has high tax rates compared to other countries; therefore, Kubota plans to learn from others by utilizing late mover advantages. Brazil lacks engineers and scientists therefore we will be facing intense competition for employees as well as product lines. Kubota offers a diverse product line, which gives them the opportunity to market to a wide

range of farmers in Brazil (Table 13). Brazil has a high demand for farming equipment due to being the number one exporter of five products (4 Property). Having a diverse line of products gives Kubota the chance to meet all different customer demands. Brazil is known for their high tax rate at 67.1% compared the South American average at 52.9% (Latin Business Chronicle, Table 12). Having such a high tax rate in Brazil causes prices to increase and could potentially lead to loss of business, however, with Brazil being such an agricultural demanding country—the farming equipment is still in demand. Kubota will be a late mover to Brazil giving them the advantage to learn from others in the industry. The intense competition in Brazil will lead to the threat of being new in a location where others are comfortable and competitors who are already very successful. According to Ag Web Journal, Kubota is becoming a bigger threat to John Deere due to specialization in mid-size tractors, which are important in Brazil’s market. Brazil is known for their lack of engineers and scientists according to the Global Competitiveness Report 2012-2013, Brazil is ranked 113th out of 144 for having qualified engineers and scientists (Table 13). We have chosen to go into the Brazilian market in Curitiba Paraná Brazil giving us the chance to work with new graduates from the University in Curitiba.

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Kubota has products that are in high demand due to the growth of the agricultural sector,

which means Kubota can be successful in Brazil as long as they continue to provide diverse products that are suitable for all types of farmers while also meeting the demands of the environment. Entry Strategy Analysis In order to successfully enter the Brazilian market, Kubota will engage in a green field venture where it will build a manufacturing facility in Brazil and export to surrounding countries. As discussed earlier, Kubota faces a late mover situation where John Deere and Caterpillar are already set up shop and are manufacturing in Brazil. In order to successfully enter the Brazilian market, a strategic location to set up shop will be needed. This location will need to have adequate logistical capacities to import needed materials as well as move finished product throughout Brazil. As mentioned earlier, finding educated engineers and professionals will be an obstacle due to Brazil’s shortage of high-skilled college educated workers. An ideal location will have an educational institution close by and other advanced manufacturing MNE’s in the area so that Kubota can capitalize on tacit knowledge and skill spillover along with cluster advantages. Curitiba state of Parana fits all of the discussed requirements. Curitiba has a strong economy with the gross domestic product of $7,827 per head in 1997, which is one of the highest in South America. Curitiba has ample qualified workers due to the Universidade de Panana and the presence of Volvo, which attracts qualified workers throughout Brazil (Curitiba.pr.gov). Curitiba also has an extensive rail system and close seaport, which would be logistically beneficial. In Curitiba, Kubota would then set up a wholly owned subsidiary (WOS). In conclusion, this green field venture would provide numerous benefits along with challenges. By building a manufacturing plant from scratch, Kubota management will have the most

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control, maximum protection of proprietary technology, and platform from which to launch into new international markets in South America. International Generic Strategy Kubota pursues a global standardization strategy. Kubota was a wide presence in the international market despite its conservative international expansion. Since Kubota has many different business units besides tractors, the tractor division is relatively new. There are only two countries that actually manufacture Kubota tractors. The first is the United States, and the other is China. Kubota entered these markets with the intent to set up shop as a wholly owned subsidiary and then export to surrounding markets. Despite the fact that Kubota markets its products all around the world, it only has several specialized manufacturing facilities that supply the entire Kubota market. Kubota’s facilities in China and in the United States act as international centers of excellence where Kubota makes standardized products and exports them to the rest of the world. Since the 1960’s Kubota has had great success in the United States and has progressively expanded into other North American Markets. In conclusion, Brazil being one of the four main emerging world economies (Brazil, Russia, India, China), it is a prime location to continue its international strategy of setting up manufacturing centers of excellence, making a value-added product and exporting to surrounding markets. Brazil offers both relatively lower wages than first world economies, and the potential for explosive growth inside and outside the country making it a prime candidate for Kubota’s global standardization strategy. Potential Problem Analysis
KUBOTA will face many problems upon entering the market in Brazil. These can arise via problems in the feasibility analysis (growth trends don’t hold), general problems (language barriers etc), who

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will lead the expansion in the market (Mr Masatoshi Kimata) and what challenges are caused by the entry method selected (Greenfield Wholly-Owned Subsidiary). The forecast for the feasibility analysis has already been alluded to in the corresponding section and in Table 15. With that in mind the potential problems are quite clear. Should the trends currently in place fail to hold, trends including growth of market and sales, then the forecast will need to be adjusted accordingly, meaning projected profits may suffer. By using the Kepner-tregoe model seen in Table 16, several potential problems have been identified, along with causes and preventative actions to ease the identified problems. Problems such as language barriers, the cause: lack of common language, preventive actions: intensive language barrier for expatriate, contingent actions: translator. The probability and seriousness of this particular example are high on both accounts. As in highlighted in ’Peng Global pg.177’ upon entering global markets, Japanese companies adopt an ethnocentric approach, given the benefits this is understandable (Table 17). Mr Masatoshi Kimata’s experiences with regards to agriculture and running a plant make him the standout candidate (Table 18). By adopting the Greenfield Wholly-Owned Subsidiary approach to expanding, Kubota will face advantages and disadvantages (see Table 19). Advantages including controlling all of the equity and disadvantages such as slow-entry to market in comparison to acquisitions. In conclusion the success of this expansion will be determined by how well each problem as it arises is dealt with. Strong preventive and contingent actions are paramount in dealing with said problems, ensuring the success of this expansion. Japans and Brazils collectivist similarities may prove useful in the long-term when dealing with issues such as pay reductions as opposed to redundancies.

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References "Brazil Inflation Rate." Trading Economics. N.p., n.d. Web. 18 Nov. 2013. . "Corporate Tax Rates Table ." Corporate Tax Rates Table. N.p., n.d. Web. 18 Nov. 2013. . "Financial Statements for Kubota Corp (KUBTF)." Businessweek.com. N.p., n.d. Web. 19 Nov. 2013.. "GNI per Capita, PPP (current International $)." Data. N.p., n.d. Web. 19 Nov. 2013. . "Japan Interest Rate." Trading Economics. N.p., n.d. Web. 19 Nov. 2013. . "Kubota Tractor Reviews, Prices and Specs." Tractor.com. N.p., n.d. Web. 19 Nov. 2013. . "The Big Mac Index." The Economist. The Economist Newspaper, n.d. Web. 18 Nov. 2013. . “Brazil’s Main Agriculture Products and Exports.” 4 Property. 2013. Web. 2 November 2013. “Kubota Aims to Become ‘Real Threat’ to John Deere.” Ag Web. 14 March 2013. Web. 10 October 2013. . “Latin Tax Heavens and Tax Hells.” Latin Business Chronicle. 9 October 2012. Web. 2 November 2013.

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“Why is Brazil So Expensive?” The Economist. 30 September 2013. Web. 16 October 2013. Murphy, Peter. "Analysis: Brazil Farms Poised for Record Investment Boom." Reuters. Thomson Reuters, 19 May 2011. Web. 19 Nov. 2013. . Schwab, Klaus. “The Global Competitiveness Report 2012-2013.” World Economic Forum. Print. 14 November 2013. Williams, Trevor. "Japan's Kubota Opens $73 Million Plant." Global Atlanta. N.p., 8 Apr. 2013. Web. 19 Nov. 2013. Brazil Overview. Rep. The World Bank Group, n.d. Web. 01 Dec. 2013.. Gupta, Girish. "Brazil’s Protests: Social Inequality and World Cup Spending Fuel Mass Unrest." Brazil. Time Magazine, 18 June 2013. Web. 02 Dec. 2013. . Peng, Mike W. GLOBAL. Mason, OH: South-Western, Cengage Learning, 2013. Print. "Brazil." The World Bank. The World Bank Group, n.d. Web. 02 Dec. 2013. . Instituto de Pesquisa e Planejamento Urbano de Curitiba For Earth For Life: Kubota World Wide. http://www.kubota-global.net/cdata/affiliates.html#n_america

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Exhibits Table 1: GNI Per Capita, PPP

Location
Brazil United States Japan
Data from World Bank GNI Per Capita, PPP Table

GNI Per Capita, PPP
$11,720 $50,610 $36,290

Table 2: Interest and Tax Rates for Japan, Brazil, and the United States

Interest and Tax Rates
Location Japan Brazil United States
Table
3: Big Mac Index

Interest Rate 0% 9.5% 0.25%

Tax Rate 40% 34% 38%

Data from KPMG Tax Rate Tables and Trading Economics Interest Rates

Big Mac Data
Price Overvalued/(Undervalued) Actual Exchange Rate
Data from the Big Mac Index Table 4: Kubota in Georgia

Brazil
$5.28 16% 2.27

Japan
$3.20 (29.8%) 100.11

Kubota Opens Tractor Plant in Georgia - 2012
Factory Costs Size Employees Production Potential
Data from Global Atlanta Table 5: Labor Cost Predictors

$73 million 522,000 square foot 200 22,000 units

Labor Cost Predictors
Manufacturing Workers in Brazil Kubota Workers in USA Construction Workers in Brazil Construction Workers in USA
Data from Salary Explorer

$47,964/year $41,400/year $46,817/year $68,160/year

A

Table 6: Feasibility Analysis Calculation Explanations

Explanations for Feasibility Table
Section
Sales

Prediction
Increase production by 12% each year

Reasoning
In the fifth year we reach full capacity at 22,000 units/year. We then decreased this number by 12% (estimated from recent growth of agricultural spending in Brazil) each year to account for the annual growth from the beginning while being conservative in our entry years. Took average percentage of total revenue in previous years from Income Statement. Estimated from similar plant opening in the Georgia. Found that the difference between the average construction salary of US worker and a Brazilian worker was $21,343 then multiplied that by 100 construction workers to build the plant. Took average percentage of total revenue and found that it was 18% in Japan. Higher incentives for PCNs as executives will balance out the cheaper marketing, rent, and electric costs that are associated with SG&A expenses. Average manufacturing position salary in Brazil multiplied by 200 employees. Expecting a salary increase of 5% each year since Brazil's inflation rate increases around 5% each year. We looked at averages from Japanese plants and found that PP&E expenses are normally around 37% of sales. We reduced this number to 5% after finding that our Brazil plant will generate sales totaling 14% of Japans revenue. (.37*.14=.05) Took average percentage of total revenue in previous year of the Income Statement. Interest rates around 12% in Brazil and similar to Japan so interest expense should stay constant. Found that income tax in Brazil has been a constant 34% according to KPMG.

Cost of revenue Initial Investment

72.6% of Total Revenues $70,865,700 million

Selling, General, Admin Expenses 18% of Total Revenues

Labor Costs

$47,964*200 employees

Property, Plant, Equipment

5% of Sales

Interest Expense

1% of Total Revenues

Income Tax Expense

34% of income before taxes

B

Table 7: Financial Feasibility of Kubota in Brazil

Table 8: Past 5 Years Economic Variables 2008 GDP (in US $) GDP growth (%) Unemployment Rate (% of labor force) GNI per capita, PPP
$1,653,538,618,145 5.2%

2009
$1,620,165,226,994 -0.3%

2010
$2,143,035,333,258 7.5%

2011
$2,476,652,189,880 2.7%

2012
$2,252,664,120,777 0.9%

7.8%

8.1%

6.7%

6.0%

5.5%

$10,150

$10,150

$10,980

$11,410

$11,720

Poverty Headcount Ratio At (2005) National 30.8% Poverty Line (% of Population) Data from The World Bank Group

(2006) 26.8%

(2007) 24.2%

(2008) 22.6%

(2009) 21.4%

C

Table 9: Cost of Living Comparison Cost of Living Comparison Between Brazil and United States Consumer Prices 26.81% higher in United States than Brazil Rent Prices 65.48% higher in United States than Brazil Restaurant Prices 46.14% higher in United States than Brazil Grocery Prices 61.69% higher in United States than Brazil Local Purchasing Power 223.81% higher in United States than Brazil Data from The World Bank Group Table 10: Projected Revenue from World Cup and Summer Olympics

Projected Revenue from 2014 World Cup and 2016 Summer Olympics 2014 World Cup $3.5 billion 2016 Summer Olympics $5 billion
Data from The Council of the Americas Table 11: Starting a Business

Starting a Business in Brazil vs. Latin American/Caribbean Average Brazil Latin American/Caribbean Average Starting a business 119 days 53 days Number of Procedures Required 13 procedures 9 procedures to Register a Property Time to Close Down a Business 4 years 3.1 years
Data from Marketline Table 12: SWOT Analysis

Strengths S1—Diverse Product Portfolio: M Series Tractors S2—Late Move Advantages S3—Cluster Advantages S4—Credit is Rising in Brazil

Weaknesses W1—Lack of Engineers and Scientists W2—High Tax Burden

Opportunities O1—Brazil’s Absolute Advantage is Agriculture O2—Brazil Imports a Large Amount of Machinery

Threats T1—Intense Competition T2—Changes to the Forest Code T3—Weak Rule of Law

W3—KUBOTAs O3—Brazil Boarders 10 Unfortunate History in Countries in Latin America Legal Situations W4—Higher Wages O4—Brazil has Many Efforts for Increasing Economic Integration

D

Table 13: Explanation of SWOT Explanation of SWOT Analysis S1 Kubota has a diverse product line of M Series tractors. The M Series has a reputation of being a light tractors made for all-purpose task, which will fit the Brazilian market. Having a diverse product line will reduce uncertainties by providing cross-selling opportunities. S2 Kubota is a late mover to Brazil because two of our largest competitors are already there—Caterpillar and John Deere Corporation. Kubota has the opportunity to learn from our competitors’ mistakes in order to be successful which is allow us to be able to adapt to the market easier. S3 Our plant is in Curitiba, Paraná, Brazil, which gives us the advantage of business clusters. This gives us knowledge spillovers to hear from other organizations, which makes us effective collaborators with others. S4 Brazilians have the opportunity to purchase new equipment to be more efficient due to the credit being on the rise over the last five years. Since credit is raising this gives them the chance to borrow more money to ensure their careers success. W1 Brazil is ranked 113th out of 144 in availability of having engineer and scientists (2012-2013 Global Competitiveness Report) which decreases our chances of finding ambitious engineers to be innovative with expanding Kubota’s brand because scientist and engineers are a scarce resource in Brazil. W2 Brazil’s total tax rate is 67.1%, which is much higher, then the average of 52.9% in South America (Latin Business Chronicle). These high tax rates cause problems for businesses to grow and flourish economically due to the high amount of taxes they must pay. W3 Kubota has a large number of lawsuits of dismissed, settled or resolved cases in their home country, Japan that may be subject to criminal prosecution and substantial fines through the corporate office. These lawsuits may have a negative impact on Kubota’s brand image, which could impact our results in Brazil. W4 Kubota will need to pay higher labor wages because successful industry clusters push wages up. Pushing wages up will cause Kubota to spend more money on budgeting while remaining desirable to prospective employees. O1 Brazil has an absolute advantage in agriculture because they are the number one exporter in beef, coffee, oranges, poultry, soybeans, and sugar (4 Property). This leads them to have a high demand of farming equipment to maintain the demand of agriculture products. O2 Building a manufacturing facility for agricultural machinery will allow Brazilians to buy machinery for a lower price due to currency differences, taxes on imported goods, and shipping cost. This will increase Kubota’s demand for the product since it is manufactured locally because it lowers the cost for buyers. O3 Brazil boarders ten Latin American countries, which will allow Kubota to efficiently export to other surrounding countries to help their shipping cost remain low due to geographic proximity. O4 Brazil has many efforts for moving toward economic integration including working with organizations that bring companies from different countries in South America together. Brazil has influenced the importance of integration of economies by intermixing people to work together to better understand the benefits of integrating teamwork. T1 Two of our largest competitors are in Brazil now making our competition extremely intense. Kubota plans to diversify our products to match the demand of Brazilians slightly by making minor changes to the products to fit the needs of Brazilians better. T2 Brazil recently changed the Forest Code resulting in allowing large areas of forest to be cleared around streams and rivers, which could lead to increased number of natural disasters such as floods. T3 The rule of law is the extent to which business people have confidence in the society and abide by the rules, Brazil was ranked 55.4 percentile in rule of law and was ranked 46.2 percentile on absence of violence due to a concern in crime in larger cities of Brazil. E

Table 14: Combinations of SWOT Characteristics

Combinations of SWOT Characteristics SO: Having a diverse product line gives us the opportunity to market and serve a wide range of consumers by being able to market different products to different types of customers because all customers (farmers) have different demands based on their agricultural needs. ST: Kubota will be a late mover to Brazil, which gives us the advantage to learn from our competitors. The threat that comes along with coming to Brazil in the later stages is the intense competition for engineers. Since we are late movers we will be competing against some of our best competitors for their remarkable engineers,

WS: Brazil is known for their lack of engineers therefore we choose to be located in Curitiba Paraná Brazil where we have the chance to recruit new graduates from the Universidade de Panana. This gives us the opportunity to access qualified engineers effectively. WO: Brazil has a much higher tax rate than a low of other companies which causes us to be required to sell our products at a higher rate due to the high tax rate; however, Brazil has an absolute advantage in agriculture meaning the Brazilian farmers are in high demand for farming equipment to keep up with the increased demand in the plants they are harvesting, which means they will be more willing to pay higher prices if it leads them to be more efficient farmers and produce more.

Table 15: Potential Problems with Feasibility Anaylsis

Potential Problems with Feasibility Analysis Basis of Meaning Should trends Feasibility hold Growth of I.e. demand for Then Market agriculture predictions for equipment growth will remain accurate

Should it fail Feasibility based on figures achieved by rival organisations, entering market and different stage of growth, for example John Deere entering at growth stage. KUBOTA could be entering at maturity stage KUBOTAs entry into market via greenfield operation adds another

Preventive/contingent actions Should growth of market stall, then it becomes necessary to obtain largest possible market share, implementing VRIO framework should provide basis for overall competitiveness.

Predicted Sales

What demand will bring in terms of sales revenue

Sales forecasts will be met or exceeded.

Re-­‐evaluate forecasted goals, limit factory production. Wage reduction across workforce.

F

capacity to market i.e. smaller market share compared to what John Deere dealt with, Also greenfield has slow entry speed success determined by how quickly market demands KUBOTA products

Table 16: Kepner-­‐Tregoe Table Action: Setting up Wholly-­‐Owned Subsidiary in Brazil

(Lay-­‐offs unlikely due to shared collectivist cultures between Japan and Brazil.

Potential Probability/ problems Seriousness Adverse Low/Medium effects of foreign owned subsidiary. E.g. contempt from communities and governments, Cultural High/High Barriers – between management and subordinates E,g, language difference

Preventive actions Local population Corporate displeased by lack social of opportunities responsibility for local firms. initiatives. – community schemes etc.

Likely causes

An example could be language differences. Japanese to Portuguese

Insure foreign manager takes steps to learn language before assignment begins

Contingent actions Alter approach from reactive to proactive. Instead of waiting for unrest from community, look to go beyond what is expected, to curry favour Have manager take intensive language lessons, for short-­‐term, hire translator.

Triggers Local industries closing as result of increased competition from foreign organisations. Resulting in unhappy communities and governments Subordinate confusion occurring due to lack of clarity in communication

G

Unforeseen Problems Workers Medium/high strike/civil unrest –i.e. over excessive government spending. PR Disaster – Low/High faulty products, e.g. fault developed to

Government/ Brazilian football association/ Olympic committee decisions

Organisation empathy, attitudes etc. Difficult as Kubota not directly responsible.

Fault in Continuous manufacturing review of process of tractor design, manufacturing process etc.

Contingent workforce. Maintain good relationships with customers etc. Recall strategy in place, PR campaign to minimise impact prepared

Mass unrest over government spending on FIFA World Cup 2014 and Olympics 2016 view Link 1 Negligence on part of designers, manufacturers, distributors. Widespread coverage of fault

Table 17: Approaches to Staffing

APPROACHES TO STAFFING Type What is it? ETHNOCENTRIC An ethnocentric approach to staffing emphasises the norms and practices of the parent country (in this case Japan) POLYCENTRIC

GEOCENTRIC

Advantages • Stronger control for headquarters. • Parent country national gains international experience • PCN may be most suitable candidate A polycentric approach • Eliminates language and to staffing emphasises cultural barriers. the practice of • Cheaper than following norms of the ethnocentric host country (Brazil) • Promotes continuity in positions. • Motivates HCN

A geocentric approach • May bridge gap emphasises the need between headquarters to find best suitable and subsidiary. candidate, regardless of origin.

Disadvantages • Limits opportunities for host country nationals • Adaption of PCN takes time • Very expensive

• •

Lack of control from headquarters Limits international experiences for PCNs

• •

Host governments may dislike TCNs. Adaption duration.

.

. – highlights approach adopted within report.

H

Table 18: Masatoshi Kimata Information

Table 19: Wholly-­‐Owned Subsidiaries

Wholly-­‐Owned Subsidiaries Types Type What is it? Advantages Greenfield operation Starting from • Complete equity scratch, building new control factory and offices • Better protection of on proverbial ‘green proprietary fields’ technology Acquisition Buying existing • Fast entry speed to factories outright market • Adds no new capacity

Disadvantages • Slow entry speed into market • Political resentment to foreign entry. • Post-­‐acquisition integration problems, i.e. remaining staff resistant to change, from operating in a certain way to a sudden shift in practices, may breed contempt.

.

. – highlights approach adopted within report.

I