“The Last Samurai, Panasonic continues”

Summary of Article

This article is about Japanese tech giant Panasonic’s decision to revamp and refocus its efforts after reports of a 1.5 trillion yen loss in the last two years ending in spring of 2013. As a result of the approximately $14.8 billion loss Chief Executive Officer Kazuhiro Tsuga has planned to trim any unprofitable divisions of the company by March of 2016. With an exponential rise in competition in Asian tech manufacturers especially in China and South Korea, Panasonic was forced to make some drastic changes in efforts to reposition itself ahead of its competitors.

 

The article goes ahead and explains in detail the change in strategy and direction taken by Panasonics management, as well as its recent success. With reallocation of innovative and operational resources Panasonic has taken a greater role in its automotive and industrial systems departments. Tsuga has decided to cut the companies losses by either suspending, trimming or completely shutting down operations in plasma TVs, circuit board manufacturing and smartphone production. As the article explains, Panasonic for a long time has been reliant on a highly competitive consumer electronic market, which is now crowded by companies such as Apple and Samsung. Therefore Tsuga is pointing Panasonic away from consumer electronics and into more stable, longer lasting relationships with other companies such as Tesla Motors. Aside a redirection, Tsuga is also dealing with high production costs in Japan which is causing losses in the semiconductor manufacturing sector or Panasonic as well.

 

Summary of Illustrated Concepts

This article resonates upon several of the concepts covered in class. Aforementioned, Panasonic has been forced to implement new strategy due to the increase in competitors and change in the landscape of the market. In doing so CEO Tsuga, is seeking to take advantage of new market opportunities, bar off future external threats, and remain profitable in the midst of an ever changing industry and economic changes. These changes have allowed for Panasonic to become a nimbler, leaner organization, bail out of unprofitable businesses and take a path to recovery. In order to properly demonstrate these changes I have chosen to highlight external opportunities and threats, as well as Panasonic’s ability recognize its position amongst its industry and competitors.

 

In regards to opportunities & threats; Panasonic, unlike Sony, was able implement a strategy to take advantage of changes in the industry as competition grew exponentially over the last ten years as well as the landscape of the consumer electronic market. These two threats as well as the unprofitable businesses Panasonic was able to recognize it was involved in led to what now Panasonic can consider a recovery from its heavy losses. Had Panasonic not recognized these shifts and made the appropriate changes to these changes early on, they could have ended up where Sony now stands. Instead, they executed two major movements in these areas, which converted threats to opportunities for Panasonic.

 

The changes Panasonic underwent in the past year have repositioned the company. These two changes were not only the slow exit from the consumer electronic market but also the shutdown of unprofitable businesses. Then to address its semiconductor production issue it merged its operations into joint ventures with Fujitsu and Tower Semiconductor Inc., as well as sell three plants to UTAC Manufacturing services. These changes have been the genius of Panasonic’s management and seem to be just the right ones as Panasonic’s numbers are all projected to be favorable in their coming quarters.

 

How the Article Contributes to my Concept Understanding

I found this article actually very interesting. I was not aware that Panasonic and Sony were impacted so much by the rise of Apple and Samsung among many other brands now on the consumer electronics market. However, as a fan of Panasonic it was also interesting and nice to see management recognizing external changes and reacting to them appropriately. I also liked and saw the value in partnerships with Tesla Motors and other industries as they are much better moves than trying to compete with the outrageously advancing speed of the consumer electronics world. With this article I saw not only real life applications and identities to problems that giant multinational companies have but also how to deal with them and find profitable solutions.

 

Additionally, as the sample also concluded, when looking at what elements discussed in class to apply to this case, it was probably the most difficult part due to their interconnectedness. Many of the concepts and elements are very related and tough to easily identify without simply going through all that may possibly apply. Even though I realized this during this assignment, I was not surprised that everything was so connected, simply because one aspect of business always has almost endless effects on the others.

 

 

Works Cited

 

Amano, Takashi. Einhorn, Bruce & Yasu, Mariko (2014, February 13). Panasonic Revives as Other Japansese Tech Giants Falter. Retrieved February 16, 2011, from Bloomberg Businessweek:
http://www.businessweek.com/articles/2014-02-13/panasonic-revives-as-nintendo-sony-falter

Let us Share – Banco Compartamos

Banco Compartamos was formed in 1990 as a private organization to aid the poor in rural areas of Chiapas and Oaxaca, Mexico, by providing microloans to the low income population of the region. In 2001, Carlos Danel and Carlos Labarthe, known as “the two Charlies,” took the organization private, and then in 2007 took Compartamos public in an IPO valued at $1.56 billion. Compartamos executives received $150 million of the $450 million in proceeds. Banco Compartamos became one of Mexico’s most successful banks, with an average return on equity of at least 40 percent.

However, after the IPO many criticized that Compartamos no longer benefitted the people but more so worked for its shareholders, a disservice to the world of microfinance. Many in this field saw such a successful and model microfinancing bank completely sell out to the world of big banks. There was also a worry in Compartamos’ social mission being lost.  With the 27.1 price to earnings ratio Compartamos had after the IPO, it was harder to reduce rates if need be in the future, and this indicated high profit expectations which meant tending to the needs of the shareholders was going to be high on the priority list. This new dimension to the company is exactly what made others believe Compartamos had lost their way and was taking the wrong path. This IPO also meant rapid growth in the front office, which meant spending more money to catch up the back office with management info systems, a huge fear in the world of microfinancing.

In weighing their options, the two Charlies considered a private sale of the company, but saw that a private sale had biggest threat to company because it would threaten the current mission and strategy if it were to be under new management. Another option was to continue looking for private investors, which is not only time consuming but demands higher returns and raises less capital than a public offering. Therefore a public offering seemed to be the only viable option under a couple conditions. Some of the conditions ran along the lines of no more than 30% of shares could be sold and no single investor could own more than 10%, to avoid one investor becoming too powerful. With enough leverage, the two Charlies could still run the company their way with their mission.

The IPO proved to be very successful, bringing in $1.56 billion in capital, selling at around $40 per share. Such a figure could have never been raised by non-commercial investors. However, this money had now made an almost impossible goal of 1 million clients, attainable now. A goal that they had set back “in the NGO days,” was a reason they saw themselves still on the right path. The capital now allowed them to expand to more clients and allowed them to offer different products other than their GDI. Among these two were many other opportunities of expansion. The cost of setting up a bank prior to the IPO was around $50,000, to build a new branch now that complied with banking standards cost around $200,000. So even though the new capital allowed expansion, it was almost relatively the same. The two Charlies also mention advice that made them consider what they had done from Luis Velazco saying, “Strategy drives finance and not the other way around.” Velazco’s words resonated in them as they wondered if their method of financing was really a medium to carry out their mission and strategy or not.

As the CEO of Compartamos I would have been against the IPO. I would have been against it because I believe it has distracted the company. It has brought another dimension that needs attention and thus removing administrative attention from their mission and purpose. The company had clearly been successful up until that point, with ridiculous returns on investment; I don’t see how hard it actually would have been to find more investors. The IPO simply juiced up all their operations but when their goal is to reach 1 million clients and the cost of a new branch is amplified four fold then they’re relatively in the same place. In addition to all the regulations, standards, quarterly reports and critizing by the financial world of Wall Street they must deal with now. If anything I believe if the company’s purpose is to provide low income financing, it should do that and grow at its own pace, especially if it has been so successful thus far. If the two Charlies had other ambitions, they should have made a separate company or entity to run alongside their private bank. Running the same programs but for profit and then going public would have been the more rational thing, as long as they kept one of the entities fully dedicated to its purpose of microfinancing.

The Achilles Heel

During the hectic month of December 2001, Argentina defaulted. Over that month, the economy was reduced to barter, mobs looted bank buildings, and the country went through five presidents in eleven days. After President Néstor Kirchner took office in 2003, Argentina began renegotiating it’s the debt in Dubai. The Argentines put a unique offer on the table with the conditions that the creditors would forgive past-due interest, and the old bonds would be swapped for new ones worth 35 cents on the dollar.  In exchange, the new bonds would include a GDP “kicker,” pronounced “keek-ker” by the Argentinians. This “kicker” promised the creditors additional payments equal to 1/20th of the dollar value of all GDP growth above an initial threshold of 4.2% per year.

The creditors rejected the offer, preferring a “haircut” of 40% on the face value of the debt, no interest-forgiveness, and none of this “kicker” business.  In response, Kirchner told them, the IMF, and the U.S. Treasury that the bondholders could take his “haircut” or nothing. On March 1st, 2005, the president finally repudiated their bonds. In 1998, Argentina’s debt burden came to 38% of GDP, interest payments on the foreign portion totaled 29% of exports, and the deficit came to 1.2% of GDP.  Yet investors pounded the poor country, taking out their money and rolling over the debt at higher interest rates, in addition to rising interest expenses, leading to bigger deficits and even higher interest expenses.

By pulling the plug on Argentina and rejecting the “haircut,” creditors fanned the flames of anti-market, anti-U.S. sentiment across Latin America, which brought Hugo Chavez to power in Venezuela and led to the failure of the Washington-backed Free Trade Area of the Americas. These long term results, a possible warning to Germany and the EU. However, Greece and Argentina are two different economies. Argentina is a food producer and, therefore, has an inflow of dollars to the country given the state of world affairs. That is not the case for Greece, at this point, which is primarily an import dependent economy.

Despite the differences, Argentina has some lessons for Greek policymakers. Unfortunately, none of them are easy and if Greece decides to exit the Eurozone, it could face some unpopular choices to prevent the collapse of the banking system. With the crisis picking up steam in Argentina, between March 2001 and July 2002, unpopular capital controls that only allowed withdrawals of $1200 to $1500 per month were imposed to keep the financial system solvent. The government went further. Wary of massive personal and corporate bankruptcies, it decided to devalue bank deposits at a rate of ARS 1.4 per dollar while keeping bank debt at 1 to 1 with the US dollar. This transition left banks in a fragile state and forced the government to step in and compensate them with some $8 billion in sovereign bonds.

In the end, long-term confidence in the financial system was lost. If Greece chose the same road, the move would obviously lead to social unrest similar to what was seen in Argentina. The economy would also take a dive, possibly contracting by 7% – 8% in the first few years. Greece is also more exposed to the negative effects of a rapid devaluation than Argentina was before the crisis. “The country is a net importer with more than 30% of its GDP worth of imports compared to only 12% in Argentina in 2001” (Financial Times). The move to devalue could outweigh the benefits of any domestic oriented growth in stark contrast to Argentina that managed to export its way out of its mess.

In addition to a heavy-handed policy to force foreign-owned “strategic” industries into local hands over the last 10 years, the contentious debt restructuring has negatively affected foreign direct investment. “FDI inflows to Argentina dropped to just USD 12bn from 2002 – 2010 from USD 76bn in 1992 – 2001”, according to the World Bank. If Greece decides to re-denominate claims into devalued drachmas, Greece may be able to avoid Argentina’s holdout drama. Most of the country’s debt has been issued under the Greek law. “In Argentina’s case, the bonds were mostly issued under New York, not Argentine, law – a move designed to give comfort to investors and reduce the interest rates demanded – which allowed creditors to sue in the US,” said former Secretary of Finance Marx. Additionally, like Argentina, Greece’s bonds do not have a collective action clause forcing creditors to participate in a restructuring if it is supported by a majority of creditors. However with most of its debt under local law, Athens could change the law forcing any untendered bonds to adhere to a deal supported by a majority.

One area where Greece trumps Argentina is the spillover impact of a crisis on its neighbors. When Argentina went through its crisis, the only countries affected were major trading partner Brazil and Uruguay. Rather than being chaotic for Greece alone, a default would affect the Eurozone, challenging the solvency of the regions banks. “Banks are not only exposed directly to the peripheral Eurozone countries such as Greece, but also indirectly via their lending to banks that hold significant peripheral claims,” said Richard McGuire, a senior fixed income strategist at Rabobank.

The quality of the crisis and supports the notion that for all the logical arguments in favor of a Greek exit, the repercussions of such a development will be felt throughout the system in ways likely to be as painful as they are hard to determine. Lastly, one can only hope Greece has leaders who look beyond short-term political costs and decide what is truly best for society.

 

 

 

 

Work Cited

Agustoni, Clara, and Christopher De Vrieze. “Latin Lessons: What Greece Can Learn from             Argentina.” Financial Times. Debtwire, 8 Dec. 2011. Web. 25 Mar. 2013.

Brazil: Leading the BRICs?

The longtime football powerhouse may soon be known for more than just its football. Brazil’s triumph in World Trade Organization has put it at the forefront of powerful developing economies. Between their victories using the World Trade Organization compulsory licensing to break patents, fighting agricultural subsidies in more developed countries, and its diplomatic negations with Iran, Brazil has proven itself to no longer be a country to be slept on. However the underlying question remains as to whether these developments will prove to be beneficial in their long term economy. Some of these developments however, have antagonized the United States and European Union along with potentially scaring away future businesses. That being said, although the success has put them on many countries radars, being on the bad side of the US and European Union can make things very difficult. In addition, using the WTO compulsory licensing due to a trivial price difference will have deterred companies from wanting to invest in Brazil with the fear that they may end up like Merck Pharmaceuticals.

Financially and from a business perspective, Merck was making a financially sound decision in asking a higher price from a country that was more financially capable. In addition, Brazil’s tariffs were much higher thus forcing Merck to offer a higher price. However, Merck was selling to other developing countries for less such as Thailand for 65 cents and to Brazil for $1.10, double. In 2007, Brazil offered that a single annual purchase as a compromise to save some of the company’s marketing expenses but Merck refused to retain higher profit margins. Therefore not only was Merck Pharmaceuticals offering deceptive pricing but also bringing a question of ethics to the table. This enraged Brazilian President Lula to the point where he announced that “From an ethical point of view the price difference is grotesque, and from a political point of view, it represents a lack of respect, as though a sick Brazilian is inferior.” This strong statement perfectly represented the Brazilian government’s point of view. It also showed that Brazil was not going to be pushed around by some foreign pharmaceutical company and that it held its people to a higher priority even though Merck had a large amount invested in Brazil. Therefore even though it may have hurt its reputation among potentially interested investors, many companies will overlook the quarrel with Merck because of what Brazil’s economy has to offer. Additionally, Brazil’s actions will be seen lesser because it was compulsory and an extreme case. Although the financial aspect and numbers being argued were in the bigger scheme, trivial, Brazil’s actions were more motivated more by principle and nationalism rather than simply breaking a patent for a drug they could afford. I believe Brazil made the right decision in the greater picture as Merck’s pricing was to a certain extent discriminatory towards Brazilians.

Brazil’s capitalism is a very controlled capitalism. The government holds a key role not only by owning many of the larger firms but serves as the primary source of capital, thus making it extremely influential in its economy’s direction. A key component of Brazil’s success has been its political and macroeconomic stability. Sizeable improvements in their public debt, reduction of poverty, rising standard of living, and industrial policies have brought it the success it holds today. These advancements have made Brazil an agricultural powerhouse and have been supplying commodities to China since 2003. Brazil’s weaknesses only lie in its infrastructure, as high interest rates bar entrepreneurial Brazilians from economic opportunity. Additionally Brazil has been labeled as on of the harder countries between the BRICs to work in due to all the red tape foreign and domestic companies need to cross to bring business to Brazil. These issues are issues found in any developing country and can be fixed with the right leadership.

With the World Cup coming in 2014 and the Olympics in 2016 Brazil’s future has only been looking brighter. With victories not only on the international economic podium but also politically, Brazil has put itself at the forefront of the BRICs. With the right leadership, and the right direction, Brazil has the opportunity to have the brightest future among the four biggest developing economies.

 

 

 

Work Cited

Daemmrich, Arthur A., and Aldo Musacchio. Brazil: Leading the BRICs? Boston: Harvard

Business School, 2011. Print.

 

 

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.