Global expansion plan for Ford

Cars In Algeria

Project beneficiary:

Ford Motors, Corporate

FOR COURSE EVALUATION

Date: 25/11/2009

Prepared by

SECTON D GROUP 6

Name Roll No Role Email Ph

Shamin S PGP/12/ Operations

Vishwas D S PGP/12/244 Marketing &

Finance

Claire Juillet de

St Lager

FX/12/008 Strategist

1

Table of Contents

1. EXECUTIVE SUMMARY.....................................................................................4

2. OVERVIEW & OBJECTIVES..............................................................................5

Introduction...........................................................................................................5Background.........................................................................................................5Vision...................................................................................................................5

Justification..........................................................................................................6Importance...........................................................................................................6Benefits................................................................................................................6

Objectives.............................................................................................................6General objectives...............................................................................................6Specific objectives...............................................................................................6

3. PROJECT METHODOLOGY..............................................................................7

The project framework.........................................................................................7

Market Analysis..................................................................................................10

Car market in the People’s Democratic Republic of Algeria..........................10

Investment Types...............................................................................................13Analysis of Alternatives.....................................................................................13Exporting...........................................................................................................14Wholly Owned subsidiaries...............................................................................14Partially owned with remainder widely held.......................................................15Joint Ventures....................................................................................................15Licensing...........................................................................................................15Franchising........................................................................................................15Recommendation..............................................................................................16

Cash Flow............................................................................................................16Ford Algeria Cash Flow.....................................................................................16

Risks 18Operational Risk................................................................................................18Price risk............................................................................................................18Pure risk............................................................................................................19Credit risk..........................................................................................................19

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Marketing Plan....................................................................................................20

4. CONCLUSIONS................................................................................................21

5. ANNEXURES....................................................................................................22

MEMBER CONTRIBUTION.................................................................................22

6. REFERENCES..................................................................................................23

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1. EXECUTIVE SUMMARY

Ford is the 3rd largest producers of cars in the world. It is a global company with

presence across six continents in the world and has about 90 plants worldwide. Now

it looks to expand into the remaining big car markets where their presence directly

does not exist as of now.

We found that Algeria is one market which is suitable for Ford to make its entry. It is

the second largest market in Africa. Here in our project we have identified the pros

and cons of Fords entry into the Algerian Market and how Ford can establish itself in

it.

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2. OVERVIEW & OBJECTIVES

Introduction

The Ford Motor Company is an American multinational corporation. The automaker

was founded by Henry Ford and incorporated on June 16, 1903. In addition to

the Ford, Lincoln, and Mercury brands, Ford also owns Volvo Cars of Sweden, and a

small stake in Mazda of Japan and Aston Martin of England. Ford's former UK

subsidiaries Jaguar and Land Rover were sold to Tata Motors of India in March

2008.

Ford is currently the fourth-largest automaker in the world based on number of

vehicles sold annually. As of 2008, Ford is also the second largest automaker

in Europe, only behind Volkswagen. Ford is the seventh-ranked overall American-

based company in the 2008 Fortune 500 list, based on global revenues in 2008 of

$146.3 billion. In 2008, Ford produced 5.532 million automobiles and employed

about 213,000 employees at around 90 plants and facilities worldwide.

BackgroundFord currently has it spread across 6 continents and most countries in the world.

They now look to expand in to the remaining countries to further increase their global

presence. To this objective we identified Algeria as a potential country where Ford

has not yet been established but which had good presence of Ford through used

cars till recently, until used cars import was banned in 2005. So people here are

aware of the company and so it would be a right market for Ford to establish itself.

VisionThe vision of this project is to analyze the suitability of Algerian Car Market for Ford

and come up with a Marketing Plan for Ford to establish itself in that market. We

also see this project as a learning opportunity to understand the way businesses

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operate globally and the various factor that are to be considered before any

company goes global.

Justification

ImportanceThis project helps in identifying various factors that need to be taken into account

when a company goes global. The various strategies that the company can use to

enter a foreign market had to be analyzed and a proper decision taken. This analysis

gives a complete brief of international business.

BenefitsThe project will give Ford a complete overview of the Algerian market and a

business plan on how to enter the market.

Apart from the company, the team gets to learn international business concepts and

a complete know how of how to analyze a market that it can enter. Also the team

learns to build a business plan that it can use later when the individuals have an

entrepreneurial assignment and have an expansion plan.

Objectives

General objectivesThe general objectives of the project are to analyze African markets and decide

upon one country that Ford Motors can enter other than Egypt and South Africa

where they are present. And as a next stage come up with a strategy and plan as in

how they can enter the African market.

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Specific objectivesThe global business plan includes various reports which analyze each module of the

project. They are listed below

Targets Deliverables

Selection of Market Market Analysis Report

Understanding the target market and

positioning

Marketing Plan

Identifying Entry modes Risk Analysis Report

Investment Analysis Report

Projections Cash Flow projection

PROJECT METHODOLOGY

The project framework

Description Objective Targets Sources & Verification Remarks/

assumption

Overall

goal

Ford, one of the

market leaders in

automotive industry

has its presence in all

the continents in the

world. Its presence is

least in Africa. In Africa

the largest market lies

in South Africa and

Egypt. Ford has its

presence only in the

truck sector in rest of

Africa. The goal is to

identify a suitable

market for Ford in

Finding a suitable

market for Ford in North

Africa with which it can

enter that part of the

continent and use it to

tap the other markets

close by.

Africa which has

been in a lot of

trouble in recent

years has been an

untapped market.

Various companies

have tried earlier but

failed. With the

current situation, the

first mover will

benefit more.

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Africa.

Objective Try to penetrate and

attract new market and

develop a product

portfolio to cater to the

target market.

Selected Market:

Algeria

Algeria is a rapidly

growing market with 3.5

million vehicles

registered of which a

majority are used cars.

In 2006 Algeria has

banned imports of used

cars and the industry is

open now.

Identifying and

converting the potential

consumers to buy Ford

vehicles.

Analyze the

technology feasibility.

Understand the

market, growth rate etc

for finding the cost-

benefit analysis.

Several assumptions

will have to be made

based on the amount

and reliability of

market information

regarding

requirements of

customers.

Output

results and

deliverable

s

To come up with an

ideal plan to develop

and introduce smaller

cars and there by cater

to the needs of that

segment. Ford also

needs to pay attention

to high end segment in

this market.

Identify the demand in

smaller cars category in

Algeria and later to other

countries in Africa. To

provide them with an

objective reason for

moving to these

markets.

Analyse the impact

and image ford has in

the minds of potential

consumers.

Verification based on

market data and

techniques we used

for cost-benefit

analysis.

Availability of

accurate consumer

and market data is

essential. Data on

the actual market

segment and value

has to be obtained

Input

Resources

and

Planning

Market potential needs

to be assessed

properly. Special skills

required to analyse

and predict the market

properly. Proper usage

of historical data is

necessary

Assessing the potential

customers who would

be target the cars. We

can use the data from

existing market and

forecast future sales and

growth of market.

Information from

authentic sources on

the market and its

value. Data has to be

fool proof.

We use the data from

existing market of

sales and past growth

of market for

somewhat common

technology.

Involves corrective

action as reviewed

on a constant basis.

The global expansion

should be thoroughly

studied and

implementation

should be scrutinised

properly so as to

achieve desirable

results.

3.8

4. MARKET ANALYSIS

Car market in the People’s Democratic Republic of Algeria

The Algerian vehicle fleet has more than 3 millions of cars and it is the largest car

market among the Maghreb Countries (Morocco, Algeria and Tunisia); though an

average age of operated vehicle fleet is quite old: 55% of the cars are older than 20

years and more than 80% of them are older than 10 years.

Tab.1.The structure of the Algerian vehicle fleet by the end of 2005., units

Total: 3 165 539

Motors cars 1 891 920

Commercial cars 633 727

Lorries 312 211

Buses 51 373

Trailers 99 396

Prime movers 50 324

Special cars 2 948

Farm tractors 12 3640

Source: “OSN” (National Statistical Department)

Lately the vehicle fleet of the country started to renovate aggressively due to the

three following legislative innovations.

In September 2005, used cars were banned for import. The permission for duty-

free importation has been granted to former participants of the national liberation

struggle. From 2006 they have had an opportunity to buy cars on domestic market

after deduction of import duty. The permission for duty-free entry of motors cars

were also granted to the Algerians who have been resided permanently abroad for

more than three years, have been registered constantly in consular sections and

could prove the facts by documents. In both pointed things imported cars cannot be

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sold or passed to other persons for 5 years otherwise it must be paid all sum owing

taxes and fees.

Secondly, obligatory tech inspection of cars has been made compulsory, that

is carried out by the national organization for Technical Control “ENACTA”.

Thirdly, from 2001 auto credits were put into practice. Primarily these credits

were allotted by savings-banks of “CNTP Banque – Algerie”, which has been

reoriented to finance dwelling’s acquisition, and other banks are engaged in auto

credits including “Societe Generale”, the Algerian – Saudi Arabian “El Baraka”, the

Jordanian “Housing Bank”, Algerian banks “Credit Populaire Algerien” (“CPA”) and

“Cetelem”. Filial branches of auto manufacturers such as “Renault” and “Peugeot”

and exclusive importers “Citroen”, “Ford” are engaged in auto sales.

From February 2007 more than 20 concessionaires have merged into association

“L’Association des Concessionaires Automobiles d’Algerie” (“ACAA”). The largest

increase of the vehicle fleet (up to 40% against last year) was marked in 2004 when

sales of new automobiles reached 120 thousand units. Year 2005 was defined by

reallocation of places between seller firms. In 2006 at the Algerian car market

dominated the South Korean manufacturers like “Hyundai”, “KIA” and “GM-Daewoo”

(trade mark “Chevrolet”), occupying overall 30.4% of the market. French trademarks

“Renault-Dacia”, “Peugeot” and “Citroen” which hold 60% of sales before 2006,

gained only 26%, but the share of Japanese companies accounts for 22%. By

estimate, the share of German companies “BMW” and “Mercedes” hardly exceeded

6%. Other trademarks, including the Italian “Fiat” and the Indian “Tata” occupied the

rest of 28%. Year 2007 is defined by expansion of operations of the Iranian company

“Iran Khodro” that increases cars “Samand” deliveries with gas-engines that is very

important for the large gas producer in the world as Algeria.

Under consumer pressure and on the growing competitive market sales, cars’

maintenance sector is gradually getting professional in Algeria. In order to stand out

against the Chinese manufacturers’ expansion, counted on low prices, other

producers focused on improvement of service quality and for this purpose there are

a lot of possibilities.

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Firstly, the local auto service sector suffers from absence of professionalism;

secondly, the better part of service stations or garages are ill-equipped; thirdly, in the

country there are only 124 operating centers for technical control and car’s

diagnostics, 40 of them are in the capital district; the fourth, specialized transporters

(recovery vehicles) barely entered the Algerian market.

Liberalization of trade, including automotive parts, started to realize only 15 years

ago. Some acting suppliers of automotive parts mainly provide service to such

national companies as “L’Enterprise Nationale de Materiel de Travaux Publiques”

(“ENMTP”, manufacture of road – building engineering), “Complexe Moteur

Tracteur” (“CMT”, manufacture of engines) and “Societe Nationale de Vehicules

Industrielles” (“SNVI”, manufacture of trucks and buses). 

As for auto parts, the best part of them is imported. According to the National Centre

of Informatics and Statistics, in 2005 the volume of import deliveries of this

production grew up to $160 mln (up to 22.65% against 2004). The number of regular

importers made 122 enterprises.

Tab.2.The volume of auto parts’ deliveries to Algeria in 2005, thousand $

Supplying country Volume of deliveries ($,

thousands)

Increase by 2005 (%)

Totally: 165 870 - 2,41

France 41 120 15,85

Germany 23 620 27,24

Italy 12 500 - 39,32

Turkey 12 220 - 0,19

China 11 290 - 1,14

Spain 10 870 4,80

Japan 8 860 10,16

Republic of Korea 7 260 43,82

USA 5 530 13,73

Ukraine 5 510 79,22

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Source: the facts of  the National Centre of Informatics and Statistics (“Le Centre

Nationale de l’Informatique et des Statistiques” – “CNIS”).

By estimate, more than 50% of realized auto parts are the counterfeit production

mainly from China and in a less degree – from the Eastern Europe. According to

statistics of the National Traffic Safety Centre, accidents related to unfit auto parts

made 6% of the registered road traffic accidents in 2005, chiefly due to bad quality of

tires and unsatisfactory quality of brakes.

The imports of luxurious cars in Algeria increased by over 400% in 2008 marking a

staggering hike compared with the previous year. These imports concern notably

4x4 drive vehicles, "Mercedes Benz" and "BMW" whose unitary price is estimated at

around 10 million dinars in Algeria. 2756 "Mercedes" cars were imported in Algeria

in 2008 by very wealthy people for a financial package of around 3.441 million

dinars. According to recent statistics collected by "Echorouk Al Yaoumi" from the

Algerian customs services, these vehicle imports skyrocketed in the year 2008 to

reach 447.91%. The imports of another high brand car, namely "BMW", increased by

199% in 2008 with 720 cars imported to the Algerian market. Renault, Hyundai,

Diamal firm for the import of Chevrolet and Opel and many other brands has all

recorded a very high increase in imports. According to customs' figures, Algeria

imported a total of 352315 vehicles, all types taken together, in 2008 for 286.9 billion

dinars. In 2007, the overall number of imported vehicles reached 217742 for a

financial package estimated at 172 billion dinars. So we can see that the market for

high end vehicles is also huge in Algeria along with the common model cars.

Investment Types

Analysis of Alternatives

The different types of investment are illustrated below than listed as pictures say

more than words

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An analysis of the appropriate investment types for Ford

ExportingBy a special agreement with the European Union (EU), Algerian industrial products

are granted duty-free entry into the EU market and agricultural products get

seasonal tariff reductions, while Algeria gives reciprocal treatment to EU imports.

Tariffs on imports ranged from 3-40% in 1998, in addition to a value-added tax (VAT)

of 7%, 14%, or 21%. Some imports are also eligible for the Taxe Spécifique

Additionnelle, ranging from 20-110% and generally applied to luxury goods. As part

of its application to join the World Trade Organization, Algeria lowered its rates to

bring them within acceptable WTO levels.

This makes importing cars manufactured in other countries other than Europe a

problem.

Wholly Owned subsidiariesSetting up wholly owned subsidiaries involves a huge upfront investment. And

Algerian government does not allow a completely owned subsidiary by a foreign

investor to enter the market. The government wants the development of the country

and its industrial sector.

If the parent company exercises excessive control for example has the same board

of directors, use of common letterhead, in such case the parent company and the

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subsidiary are treated as one and the parent company is responsible for the

subsidiaries debts etc.

Partially owned with remainder widely heldControl also becomes an issue when a subsidiary is partially owned by another

outside organization.

Joint VenturesIn a growing number of countries, joint ventures with host governments have

become increasingly important. These may be formed directly with State-owned

enterprises or directed toward national champions. This is the case in Algeria as

well. Joint ventures can be used to reduce political friction and improve local/national

acceptability of the company.

LicensingLicensing makes the local company in Algeria own the technology, trademark etc of

Ford. Ford only gets royalties and not a share of the profits. A licensee can become

the licensor’s competitor. The licensee may ‘cannibalize’ sales of the licensor,

causing the latter to gain less from royalties than it loses from sales that go to its

new competitor. The licensee may be more effective or get to the market faster than

the licensor because it may have fewer development costs or may be more efficient.

The licensor depends on the skills, abilities and resources of the licensee as a

source of revenue. This dependence is even greater in an exclusive licence where

an ineffective licensee can mean no royalty revenue for the licensor. Contractual

provisions for minimum royalties and other terms can guard against this, but it is still

a concern.

FranchisingFranchising gives the fastest means to set up business in Algeria. This person that

Ford allows to franchise out from you is also taking Ford’s name. Therefore, if they

mess up it may reflect on the company as well as their own. This may cause Ford to

lose business even though you may not have done anything wrong. Those are the

main disadvantages to allowing Ford to be franchised out.

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RecommendationJoint Venture seems to be the un-debatable option for Ford. For Ford the joint

venture can prove an effective method of obtaining the necessary resources to enter

a new market. This can be especially true in Algeria, where local contacts, access to

distribution, and political requirements may make a joint venture the preferred or

even legally required solution. Joint ventures may provide specialist knowledge of

local markets, entry to required channels of distribution, and access to supplies of

raw materials, government contracts and local production facilities.

Cash Flow

Ford Algeria Cash Flow

From the above the projections are that Ford will be able to sell another 10,000 cars

in Algeria in its initial years after which it will increase.

From the above illustration we find the production costs to be 129,200/5.532 = $

23,355 approximately. This figure takes all segments into picture. So speaking the

production costs would be as low as $ 10,000 for the small cars.

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The market share of the Algerian Market will be in the same number as other African

countries. It is shown that in 2008 Ford had a market share of 2.4 % and so

projecting it to Algeria as well, we already saw that the current new car registration is

close to 200,000.

The functional currency is taken as USD as is the case of all subsidiaries of Ford.

Of this the 2.4% will be close to 5000. This is just the initial projections.

From the market we can see that the price that Ford can charge will be at an

average of $ 40,000. The production cost of the small car that Ford uses to enter the

Algerian market has been projected at $ 15000

Costs

Car Sales (units) 5,000

Cost of production (in $) 10,000

Total Production Costs 50,000,000

Sales & Revenue

Car Sales (units) 5,000

Price 15,000

Total Sales ($) 75,000,000

Profits before taxes ($) 25,000,000

Corporate Tax @ 30% + 3% ($) 8,250,000

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Profit after Taxes ($) 16,750,000

Risks

Operational RiskOperational risk is the risk of loss resulting from inadequate or failed internal

processes, people, and systems, or from external events. There is no expected

reward or return on investment, like one would expect from taking market or credit

risk. The only “reward” from successfully managing or mitigating an operational risk

is the reduction of a potential loss. Operational risk is the risk of loss from

something’s unexpectedly going wrong.

The risk is reduced as Ford enters the market with a joint venture. The operational

risk is mitigated or shared with the local partner, who will take care of the people.

Ford will have to take charge of the systems and process. The external events risk

cannot be mitigated as no one can predict what is going to happen.

Price riska. Product price risk

Product price risk depends on both input and output. This can further be classified

as input price risk and output price risk. If the price of a Ford car is fixed and the

price of raw materials increases, there is a chance that Ford might have to increase

prices and also lose sales. Else it might happen that the government puts in ceiling

prices for the cars that may cost more. These are part of the risks Ford has to

encounter with the government or with the suppliers.

b. Interest rate Risk

Interest-rate risk refers to the uncertainty of future market values and of the size of

future income, caused by fluctuations in the general level of interest rates. In other

words, as the cost of money changes for nearly risk-free securities (USGs), the cost

of money to more risk-prone issuers (Private sector) will also change. The

projections of Ford are all dependent on the future market values, which play a

major role in the risk.

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Pure riskPure risk is a risk in which there is only a possibility of loss or no loss. There is no

possibility of gain. Pure risk can be categorized as personal, property, or legal risk.

a. Loss of profit

The market is new and the entire world knows of the African crisis. Algeria has had

its share of political problems. The political scenario and the economic scenario play

important factors in the sales of Ford Cars. There is always a risk of loss of profit for

Ford.

b. Damage to assets

Damage to assets happen either by natural forces or by manual forces; the damage

by natural forces cannot be escaped though can be insured as in any other country.

c. Cost of paying and defending liability claims

Legal risk (aka liability risk) is a particular type of personal risk that you will be sued

because of neglect, malpractice, or causing wilful injury either to another person or

to someone else's property. Legal risk is the possibility of financial loss if you are

found liable, or the financial loss incurred just defending yourself, even if you are not

found liable.

Legal risks are insurable in Algeria as in other nations across the world.

d. Employee turnover

Employee turnover is one problem that Ford cannot try to solve directly. But it can be

done indirectly, by have programs for training, motivation and keeping them content.

Credit riskCompanies carry credit risk when, for example, they do not demand up-front cash

payment for products or services. By delivering the product or service first and billing

the customer later.

The credit risk occurs if Ford plans to sell its cars under a loan or an instalment

basis. Ford can use banks and collection agencies by which the risk is mitigated to

them.

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Marketing Plan

For Ford to establish in Algeria various factors have to be taken into consideration.

We have already seen that the market in Algeria is advancing fast with brands like

Toyota, Hyundai, Daewoo etc making huge inroads along the premium segment

ones like BMW and Mercedes. We have also seen that Ford is familiar to the people

of Algeria through the used cars market and already has a Brand name. SO it is the

right market for Ford to go ahead and Tap.

Ford should initially set up dealerships across Algeria. These dealerships can be

linked with the already existing dealerships in Morocco. So supply of Ford cars to

Algeria can be done form Morocco. This can be followed till we access the actual

amount of inroads Ford can make into the Market. Once this is identified, Ford can

start importing directly to Algeria. Considering the fact that Algeria is a leader in

making of spare parts in Africa, this can be tapped and Algeria can be used as the

base of spare parts manufacturing for Ford cars for the entire region of Northern

Africa which is currently nonexistent. These are currently manufactured and

imported from South Africa.

Once it establishes itself in Algeria it opens up other options of Ford as well. Tunisia

and Libya, the other two neighbours of Algeria other that Morocco, does not have

good presence of Ford. In Tunisia its nonexistent while in Libya, Ford is present but

not a leader. Once Ford forms a root in Algeria to will be able to cater to these

markets and be able to establish well in these markets as well. For this they need to

come up with a mode that will suit well to the people of Algeria or in general

Northern Africa. For this they need to design a model that suits well for the desert

conditions here. A fuel efficient model similar to that of Ford Fiesta may also do well

in African countries where common people are more money constrained. Ford can

also learn from the fact that high end models are imported to Algeria in large

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numbers as we saw above. So it should focus in bringing high end models also to

Algeria.

Once it is able to establish well in Algeria the next focus should be to leverage on

the low cost labour available in Algeria by setting up a plant in Algeria that can cater

to needs of Northern Africa. This will help Ford cut its costs as well.

5. CONCLUSIONS

Analysing these situations we found that Algeria is a country to which Ford should

not delay its expansion. Algeria is a market which already has a good presence of

Ford cars through used cars market and the market imports large number of high

end cars too. Algerian car market is also the second largest car market in Africa and

therefore one where Ford should not hesitate more.

Moving initially with dealerships linked with already existing dealers in Morocco and

then focussing on establishing direct dealers in Algeria would be the right strategy.

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6. ANNEXURES

MEMBER CONTRIBUTION

NAME MEMBER

ROLES

DESCRIPTION OF

INDIVDUAL TARGETS &

TASKS

Project

(HRS)

OUTCOMES

Shamin S COO

(Operation

s and

Marketing

lead)

Country Analysis

Market Plan

24 Marketing Plan

Vishwas D

S

CMD &

CFO

(Marketing

and

Finance

lead)

Country Analysis

Market Analysis

Risk Plan

Cash Flow projections

20 Risk Analysis

Report

Investment

Analysis Report

Financial

Projection

Document

Claire

Juillet

CEO

(Strategist)

Country Analysis

Investment Types

Analysis

Strategy

18 Market Analysis

Report

Strategy

Development

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7. REFERENCES

http://www.nationsencyclopedia.com/Africa/Algeria-CUSTOMS-AND-

DUTIES.html#ixzz0XKb8L2VG

http://ec.europa.eu/agriculture/markets/export_refunds/forms/dz.pdf

http://www.ford.com/doc/2008_annual_report.pdf

http://cars4fast.blogspot.com/2009/04/ford-cars.pdf

http://www.export.by/en/?act=s_docs&mode=view&id=1648&doc=64

http://www.ford.com/about-ford/company-information/ford-international-websites

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