Gerber company joint venture in poland
... to establishing a market economy. This harsh regime leaves many opportunities for Foreign Direct Investment. The decentralization of state owned monopolies allows businesses to enter the crucial, growing markets of Eastern Europe. 5) Due to the current economic difficulties and strict monetary and fiscal policies, the government are highly committed to a successful privatisation process. Accordingly, Gerber can negotiate extremely favourable terms and conditions for the acquisition. These incentives include substantial tax breaks and financial grants for further educating workers. 6) The Poles are exposed to foreign trade and goods; they seek and enjoy the benefits that the western neighbours had been enjoying for years. The government and the society at large are embracing the western market economic process. 7) Poland’s economy will become more and more stable. There has been remarkable growth in GDP from Z 29 billion to Z 42 billion in 3 years to 1991. There will be high unemployment as the ‘market economy’ prevails, but combined with the strong national pride and their newly obtained freedom, the Poles are likely to forgive early hardships. With Poland’s well-educated, dedicated and cheap labour force, Foreign Direct Investors should benefit greatly. 8) Poland is striving to join the queue for EU membership. Once Poland joins the EU foreign direct investors will benefit from the fall of trade barriers. 9) The Geographic location of Poland is important; it is located in the emerging Eastern Europe market and offers a crucial link between Western Europe and Russia; offering exporting opportunities to these important markets. 10) There will be a definite ‘first mover’ advantage into the key emerging Eastern European market, as this is one of very few developing places which is not dominated by multinational enterprises; those who do not move first will undoubtedly suffer to their competitors and may have to undertake a ‘follow the leader’ approach. Porter’s ‘Country Diamond’ The Key Concerns In A Foreign Investment The key concerns for Gerber as in any foreign investment decision, is how to increase sales via a new market whilst keeping costs and risks to a minimum. 1. The market and competitive opportunities in Poland must offer Gerber the opportunity to generate a return equal to or higher than the cost of capital. 2. The risks of operating in Poland must be acceptable for the shareholders and employees. Gerber’s Risk / Return Trade-off High Risk High High Return Attractiveness x Low Low Risk Attractiveness Low Return High Market and Competitive Opportunities Low High Risks Low x = Poland in 1991 There is opportunity for a high rate of return. Gerber would be able “to make its food competitive on price… gain valuable economies of scale, and avoid the duties that fell heaviest on goods imported from the United States.” The Polish government have lowered entry barriers and influenced profitability and competitiveness through price control and taxation. The degree of bargaining power amongst suppliers and buyers also needs to be taken into account. When entering emerging markets or exercising in international trade, there is additional risk, which is not present in domestic market operations. These country risks are used to measure the downside risk, or the potential loss that the firm could face. Economic Risk affects long- term investments so Gerber’s long run growth factors should be looked at. Although annual inflation rates in excess of 75% are high by western standards, the zloty has come under similar pressure thus offering Gerber a unique opportunity at this time. The government is determined to stabilise the economy and reduce inflation and take further measures to spark employment. Exchange Risk is an adverse movement in the exchange rate, such as an unexpected change in currency regime. As the Polish government has liberalised its economy they have also allowed the zloty to become freely convertable. This creates an enormous risk for investors either importing raw materials or selling abroad. Costs of goods can become expensive. Companies may hedge foreign exchange for the next day or up to two years forward. By doing so, Gerber will be able to budget with accuracy the cost of goods and sale prices. Hedging, while expensive is an important form of insurance. Political risk stems from changes in government control. Political risk of the host country is one of the most important determinants in investment decision-making. Poland, relative to a US or western European investment is much riskier. The government’s willingness to change rules and regulations can expose the investment to three kinds of risk. Schmidt (1986) subdivides political risk into three main categories: 1) Transfer Risk: decisions to restrict capital movements, making it difficult to repatriate profits, dividends, or capital for Gerber. This risk is very difficult to mitigate, although insurance and diversification will reduce overall exposure to such risks. 2) Operational Risk: applies to the operation and profitability of an investment in the host country. The major operational requirements for Gerber to be competitive include; having access to quality fruit and vegetables; the right varieties and the volume required to meet demand. Issues to be considered are whether the Polish farmers are unionised, supported by government aid or prone to strike and civil action. If workers are accustomed to being provided with uncompetitive rewards, Gerber may need to reverse such policies. The Polish road and rail infrastructure is superior to many of the competing eastern block countries and therefore this mitigates much distribution risk. 3) Ownership- Control Risk: Gerber could create a ‘build, operate and transfer’ structure whereby they provide the necessary improvements, operate dor a number of years and then hand over to local management with a long-term supply contract. Alternatively, they could offer various equity structures that greater involve management and employees. All these help to lessen the potential risk of government imposed ownership risks. Most of these issues are favourable. Modest changes will be required to improve standards, but nothing too excessive. Gerber In Poland Several issues are currently unresolved with regards to Gerber’s potential investment in the Alima plant. Certain measures can be taken to alleviate these concerns in conjunction with the Polish government. Property Issues Many expropriation and property issues are still unanswered. Proceeding with the deal may mean the Catholic Church or farmers will try claiming land from Gerber at a later stage, resulting in Gerber being legally bound to buy the Alima plant but not having property rights. Perhaps compensation measures could be agreed between the government and Gerber. Taxation Gerber want to secure a favourable tax break, to include a dollar for dollar exemption for all capital invested in Poland, as well as additional tax relief. Final profit figures cannot be realistically estimated until taxation issues are clarified, as current forecasts have not taken tax into account. The Borek Stary Facility Gerber’s shareholders may be disinclined to support the company if it were to move away from its baby-oriented roots into alcohol. Gerber can either take responsibility for the environmental problems or renegotiate with the government what action is to be taken. It is important that Gerber continues good relations with the Polish government, particularly with the local authority, the Wojwewoda. Exchange Rates Gerber has already experienced exchange rate problems with regard to exports. Gerber is trying to establish a local plant in Poland as a result of this so that the effects of exchange rate swings are minimised. If inflation rises then Gerber will be faced with a problem as they have not accounted for inflation in their current forecasting model. Competitors Gerber cannot afford to let their main competitors gain a foothold in Europe first, making them the follower rather than the leader. Allowing Heinz to gain more exposure and market share in Europe. Equipment There is some old equipment at the Alima plant, which will take up space that could be used more efficiently and cost-effectively. Gerber may be liable to pay a large expense of $3m to repair the solid waste disposal system at the plant. Environmental Issues It is suspected that too many pesticides are being used on the crops to be accepted as ‘pure and natural’, perhaps giving more ammunition to the Polish press who are not supporting foreign investment. Mass Privatisation The economic reform program carried out by the previous government is now open to more change. The mass privatisation of Poland’s state owned economy is now fully dependant on the actions of the new Polish government. This is likely to have an effect on Gerber’s bottom line figures. Staff risks The Poles that are against foreign investment see it as a form of foreign control over Poland’s economy. Polish labourers often strike so this may be disastrous for Gerber if they are not won over. Alima has 1200 employees, most of whom are not required for Gerber’s future needs. However, employment is very high on the government’s agenda and Gerber will need to make concessions in this area. For Gerber, a random employment strategy will not be acceptable to a labour force that has been accustomed to a centralist economy. The reductions in staffing levels or retraining will be possible but may have to be carried out over a 3-5 year period. Suppliers Local fruit and vegetable crops do not satisfy Gerber’s needs, alternative suppliers may need to be found which may increase costs. The glass plant that will be used to manufacture jars may be sold in the future, thus only satisfying Gerber’s short-term needs. Legal Polish firms are unfamiliar with western styles of management and US lawyers are inexperienced with Polish investment laws. A number of Poland’s management practices violate EU and US laws. Working with a Polish lawyer would aid negotiations and assist in gaining assurances from the government. ...