The Cartel

There is no doubt that the Mexican drug cartels are hurting the Mexican economy. Cartel violence and notoriety have hindered tourism, foreign direct investment and global reputation of Mexico.

With its manufacturing might and numbers, a GDP of 4% in 2011, low inflation (3%) and developing middle class Mexico seems to resemble the US in the 1950s. However, with so much potential, the drug problem has severely cast a shadow over Mexico’s economy. Mexico’s fourth biggest source of revenue and approximately 8% of its GDP, is tourism. The problem is, popular destinations for tourists such as Acapulco have been huge sources of cartel violence. Although not the most violent area, Acapulco has been the home of some very horrific violence. One instance was in August of 2011 where officials found two decapitated corpses, dismembered into 20 pieces in a parking lot of a Sam’s Club wholesale store. The two body’s scalps and facial skin were later found in a patron’s purse. Violent stories vary from mass kidnappings, shootouts with Mexican federal agents and extortion. This violence does not discriminate either. From the U.S. alone, 100 U.S. touring citizens were murdered in Mexico in 2010. (IBTimes) In April of 2011 the U.S. State Department actually issued a long-term travel warning to U.S. Citizens in regards to travels in Mexico. Similar warnings in the past by the U.S. State Department have put Mexico on a list with dangerous destinations such as North Korea, Yemen, The Democratic Republic of Congo and Afghanistan.

Factors like this severely influence tourism in Mexico and are detrimental to its progress as a developing economy. After having to deploy thousands of additional military police to patrol cartel hotbeds in the wake of heightened violence, Mexican Finance Minister Agustin Carstens said in a recent press release that, “The issue of security has effected economic growth in Mexico,” and later added that “If we could resolve this issue it could give the economy an extra shine of at least 1 percent.” Local businesses are also directly being financially burdened by the cartels because in addition to the loss in business they are forced to pay protection money to the gangs. To many small business owners, among the everyday fear of violence, paying the gangs is like paying taxes twice. Reuters estimated that at least “4,500 businesses closed down in Mexico’s Chihuahua state last year as a result of drug cartel extortions pushing them into bankruptcy” (Reuters) The businesses ranged from law firms to pharmaceutical chains. Aside from this, foreign investors are being almost literally scared away. Investors now fear the countries instability after anti criminal forces had to be reinforced by military personnel. To many investors, between the red tape, average infrastructure and normal risks in entering a new country, the fear of violence and gangs is just a risk they do not see worth taking. In cities closer to the U.S. – Mexico border, the tourism has been harshly impacted as hotel occupancies are below 50 percent (Reuters).

Are Mexican drug cartels hurting the Mexican economy? Absolutely; violence, extortion and high-risk, are all words that are used to explain what is going between Mexico and its drug problem. None of these words are words investors or tourists want to hear. Will that completely stop gambling investors or well-versed tourists? No, there are always exceptions but has it potentially hurt and hindered Mexico’s potential thus far as an emerging economy, there is no doubt.

 

 

 

 

Works Cited

Emmott, Robin. “Drug War Hits Mexican Economy in Crisis.” Reuters. Thomson Reuters, 03        Apr. 2009. Web. 11 Feb. 2013.

<http://www.reuters.com/article/2009/04/03/us-mexico-drugs-economy-analysis-idUSTRE5325PG20090403&gt;.

 

Forbes, Miguel. “For Mexican Economy, Drugs Not The Whole Story.” Forbes. Forbes     Magazine, 04 Oct. 2012. Web. 11 Feb. 2013.

<http://www.forbes.com/sites/miguelforbes/2012/10/04/for-mexican-economy-drugs-not-the-whole-story/&gt;.

 

Tovrov, Daniel. “Is Mexico’s Drug War Hurting Tourism?” International Business Times. The        International Business Times Inc., 20 Jan. 2012. Web. 11 Feb. 2013.

<http://www.ibtimes.com/mexicos-drug-war-hurting

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Wiley International

Wiley International is considering investing in Brazil for many reasons. Brazil is forecasted to be the sixth largest economy in the world by the end of 2015. In addition to being the second largest United States trading partner in the hemisphere. Brazil’s ability to control inflation over the past five years has renewed confidence in the Brazilian economy and financial markets, making it a large potential emerging market. Another reason Brazil is appealing to Wiley, is because of its workforce who are known to be very technically advanced and flexible, which would facilitate Wiley’s ambitions in the manufacturing industry. Currently, Brazil’s person per car ratio is 9 to 1, in comparison to developed countries 2 to 1 ratio this is not good for automobile manufacturers as they want more people in their cars. However, with such a growing economy and foreign auto import taxes circa 70%, domestic car manufacturing is most likely to boom in the next few years due to these factors.

Advantages to operating in Brazil vary. An advantage would be having a manufacturing foothold in one of the world biggest emerging markets. In addition to its skilled and flexible workforce, Wiley’s Brazilian branch sees a large need for fractional horsepower engines from Brazilian auto makers. The problems with this project however lie in the rates and finances of this project. The internal rate of return is being calculated using Brazilian Reals when applied to the cash flows. Additionally, the inflation rate being used was also the Brazilian inflation rate of 8%. All in all, the controls being used were all in terms of the Brazilian economy. Therefore any profits would be subject to tax and currency exchange once repatriated to the United States if Wiley decided to do so. A questionable move was that of using the 40% United States tax rate over the 20% Brazilian rate because Wiley would need to find out if its profits would be taxed twice, once by the Brazilian government and then again by the United States if the profits were to be repatriated to the US. The double taxation would leave them with a different figure than that of just picking the higher tax to play it safe.

The five year life span of this project for Wiley in my opinion does not look attractive. If there were better financial plans set into place the proposal would be much more appealing. But as Esposito has his concerns, so do I. There seems to be way too many potential implications and miscalculations. Internal rates of return can be misleading and should not be used to rate mutually exclusive projects. Additionally, without a clear indication of which discount rate should be used, this project may be a complete bust without management knowing. The internal rate of return assumes that there will be a reinvestment of short-term cash flows in projects with equal rates of return. Therefore without this reinvestment, the internal rate of return overstates the annual corresponding rate of return for a project whose temporary cash flows are reinvested at a rate lower than the calculated internal rate of return figure. This presents a huge issue, especially for projects with large rates of return, since there is frequently, like in this case, not another project available in the following term that can earn the same rate of return as the first project. In addition, the internal rate of return does not consider the cost of capital, unlike the Modified Internal Rate of Return. Therefore, without evidence of all these issues taken into consideration, I suspect there are huge holes in the calculation of this project which may lead Wiley down a bad road in Brazil. Lastly, this project is only projected to be profitable for 5 years. This is also not good because after five years all the equipment and facilities will be deemed obsolete. If this is the case Wiley may become obsolete during the automobile boom that firms are expecting and potentially miss out on their anticipated gold rush.

I would use the US 9%, discounted rate as there are less to no foreign exchange risks and political risks associated with that rate whereas the foreign-based rates may not include all non-quantifiable threatening factors. Even after taking this into account, I still feel it does not adequately capture the risk being taken by investing in this project in Brazil. The Japanese supplier I believe definitely makes the viability of the project much easier as they are offering a lower interest rate and thus a lower cost of capital.

As Esposito, I would not accept this project. I would push for further, clearer and more dependable calculations to be made. The internal rate of return calculation simply is not enough for the approval of a project like this where there are numerous variables unaccounted for. Although lucrative, with the data given, as Esposito I would not feel comfortable approving this project.

 

 

 

Works Cited

Higgins, Robert. Wiley International – Richard Ivey School of Business University of Western Ontario. Ed. Paul Bishop and Stephen Sapp. London Ontario: Ivey Management Services,     2005. Print.

Novartis

Try not to become a man of success. Rather become a man of value.

Albert Einstein

In the Novartis Consumer Health Businesses case, three CFOs are presented and assessed for what they’ve accomplished under what circumstances in an effort for Simeon Bolan, the finance head, to allocate and develop the finance talent within the company. Out of these assessments, certain managers have attributes that others don’t, but the question remains if one’s attributes outweigh all the others’. It is these attributes or strengths and weaknesses that have allowed these managers to be so successful.

The first is Remi Escurel, the regional CFO for their Asian Pacific region. Remi seems to have been successful because she has taken a very organized approach to solving problems. Her organization proves that she knows what she is doing and she is dedicated to thoroughly solving the problem.  Remi was also successful because she allows input from all areas of the company; this builds a good relationship in the company and makes sure that lines of communication are open. Moreover Remi was successful because she made sure that everything was planned. She seemed to always keep everything in perspective to plan her daily activities. Her challenges consisted of company-wide compliance issues, inaccurate forecasting and the lack of financial involvement in the company. When faced with such challenges, Remi executed her structured procedure approach until a solution was found.

Next is Tanya Ferretto. Tanya worked as both CFO and GM, spearheading the Animal Health in Japan. Tanya was successful because she knew what her group must do and how her group could help in the success of the company. Tanya seemed to have a clear understanding of their roles and how each individual member’s skills could contribute to the success of the company. Tanya was successful because she carefully used strategies so that Novartis AH in Japan would grow. These strategies helped in lessening Japan’s resistance to change. These strategies also helped Novartis AH establish itself in the Japan market. Tanya’s challenges consisted of implementing new growth strategies in a new market, and tapping into market information with no experience in the region such as sales trends.

Lastly is Jaime Maturana. Jaime “filled the BPA role” and ran the business, planned the business and analyzed the business. Jaime was successful because, like Remi, he made sure that the line of communication between him and his employees or managers were always open. Jaime often met with managers from other departments and tried to give them the assurance that the finance group was their partner in achieving Novartis’ goals. Jaime was also successful because he made sure that all processes were constantly reviewed and changed to meet the goals of efficiency. He changed processes so that they would perform better and prove their value to the firm. Jaime’s challenges included improving inefficient processes and constantly working with a volatile environment.

Out of these financial heads I would pick Jamie to work for me and to work for. I feel he handled his challenges to the best degree. I would also pick him because I really liked and agree with how he saw logistics and finance very closely related. He made himself readily available to the whole company and was completely involved in his work, unlike many stereotypical management offices. He emphasized team work and communication and with the environment he worked in probably dealt with every type of external issue.

A skill I found common between all three CFOs was their dedication; their dedication to their job and success of their group. This dedication entailed them to be prepared to do anything appropriate and logical for the company. Dedication also assures the firm that the CFO would not commit acts that will hinder the organization.

Out of all the skills exhibited by these workers, I believe dedication to not only the company but to its people, attention to detail, and efficaciousness are three essential qualities that are necessary to succeed and have led these three managers to their success. Dedication is important in every aspect. It assures the firm loyalty, that operations are done right and that they are done wholeheartedly. This means getting your hands dirty when you have to and standing behind your work. Attention to detail is also vital. A leader who pays attention to detail will stand out amongst the rest and be able to identify problems and advantages. Lastly is efficaciousness. If a leader is not an effective leader, then they are simply spinning their wheels. An effective leader communicates clearly and correctly, wastes no time and gets the job done. Being ineffective means nothing will get done and lots of company dollars down the train. As exhibited by Remi, Tanya and Jaime, these are skills that are necessary in leaders because they are what make leaders successful.

To buy or not to buy that is the question.

To provide Groupo Ariel proper consultation on the purchase of recycling equipment, a future cash flow projection calculation when inflation of two countries is different and identified. Therefore the project must be calculated using the net present value of the program both in euros and pesos based on the assumption that purchasing power parity and uncovered interest parity remain constant. In my analysis I further analyze net present value when purchasing power parity does not remain constant.

The first step in analyzing Groupo Ariel’s options is to check out their cash flows. To calculate the net present value of Groupo Ariel’s Mexican subsidiary’s recycling equipment to get the incremental cash flow of the replacement of equipment. For 2008, beginning with revenue from sale of the old machine, tax is added from the sale since the actual sale price is lower than the book value of it, then the initial investment is subtracted which includes the purchase and installment cost. For the incremental cash flows from 2009 to 2018, the cost saving due to the replacement should be adjusted by the tax savings on depreciation. The tax savings on depreciation are found by subtracting the tax benefits of the old equipment that is being sold, and adding the tax benefits of the new equipment that is being bought. The cost savings is influenced by inflation, therefore cash flow changes when inflation fluctuates as well. Secondly are the exchange rates. The single exchange rate that can be used is the spot rate 15.99 in 2008. However it can also be converted from Pesos into Euro-dollars each period using forward exchange rates. When purchasing power parity and uncovered interest parity remain constant, the

forward exchange rate is calculated normally. But when the purchasing power parity and uncovered interest parity change, the forward rate is assumes that the exchange between MXN and EUR will increase from 15.99 to 20.00 by the time 2011 comes and up to 25.00 by 2018. Next, is the hurdle rate. The hurdle rate is basically the minimum rate of return on the project in regards to the same project in France. The hurdle rate in France is 8% for the same project. This must also be taken into consideration when calculating the exchange rates with the power parity holding and with it changing. Lastly is tax and inflation. Initially the cash flows are all in pesos therefore Mexico’s tax rate of 35% must be used. However, in terms of inflation, in Mexico the inflation rate is 7% and only 3% in France. By using the second scenario with RPPP and UIP changing, both countries find themselves with equal rates at 3%.

After computing the NPV in the first scenario with power parity and uncovered interest parity holding, the net present value is 1,478,998.83 pesos which translates to 92,495.24 Euro at the spot rate of 15.99. In the second scenario with the exchange rate being calculated as 1.04(1+7%/1+3%), the net present value is the same at 92,495.24 Euro. Next are the inflation rates. Again, when the power parity and uncovered interest parity hold the rates are both 3%. After you repeat the net present value calculation the new number for the equipment project is 869,716 pesos or 54391.24 Euros.

In the second scenario, with changes in purchasing power parity and uncovered interest parity, the inflation rate is still 3% in both France and Mexico. Frances new hurdle rate however is adjusted by the future exchange rate. Therefore from 2008-2011 it is 17.03%, 2011-2013 it is 20.00% and from 2013-2018, 8% because the cash flows are discounted at different rates. This way, by repeating the NPV calculation under the first scenario totals to 314909.29 pesos or 19,694.14 Euros. However under the second scenario we assume the MXN to EUR exchange rate increases from 15.99 to 20.00 and again to 25.00. Therefore you convert the cash flows at those rates and discount the cash flows by France’s 8% hurdle rate. This leaves a net present value of 335,479.38 pesos or 20,980.57 Euros. After seeing all these calculations it is clear that the numbers are different.

Calculating these present values takes two different approaches. They both take the rate of change and risk in foreign currency into different considerations. The second scenario takes the forecasted rates directly from the differences in inflation rates; whereas the first scenario took into consideration, the cost of capital using the same inflation differences. But now in the second scenario the net present values change because the changes in inflation can’t be influenced by the changes in the currencies. Therefore if the project foresees huge changes in currency then it is better to translate the figures into the domestic currency rather than where the project is being proposed. However, if the cost of capital is valued rationally the company should discount the cash flows with the foreign cost of capital. I believe Groupo Ariel should purchase the equipment because if the forecasted rates are correct the purchase seems very profitable.