Northern Illinois University

Family Insulation and CushioningExpansion in Panama

Names: Matthew Benning, Daniel Fashoda, Ryan Gustafon, Jamaal Hamilton, Chase Renwick, April Zimmerman, and Michael Zubrickas.

Course: UBUS-310 Section 10

Professor: Ken Elliott

Paper Due: December 3rd, 2015

Date: December 3rd, 2015

To: Ken Elliott

From: Team A, Section 10 (Team Panama)

Subject: Executive Summary

Family Insulation and Cushioning does plan on expanding business into the country of Panama in the short-term and in the long-term. The benefits far outweigh the disadvantages of expanding into Panama. What we have decided is that the best initial course of action would be to simply market and sell in Panama for the time being. It would be our short term goal to take a large portion of the market share initially without manufacturing in the country. This way our only expenses would deal with marketing and shipping costs. If we were to create a plant in Panama immediately this project would have extremely high initial costs and it would be extremely difficult to make up for that in the short-run.

Since we have decided that we will only market in Panama for now this will keep our costs low which will help a lot for keeping our profitability up. With the growing housing market in Panama there is an exponentially growing market for insulation. This means that there is plenty of market to dive into and it should not be a problem for the Family Insulation and Cushioning to gain market share quickly. If we are gaining market share quickly and keeping our costs low by not creating a new plant in Panama, we will have a high initial net profit margin. We have chosen to focus on net profit margin because the net profit margin focuses on the actual dollar that we receive after taxes and expensed. We believe that the net profit margin would be the most accurate way of measuring our initial success.

Our plan to market in Panama initially for the short-term supports our corporate level and business level strategies. Our corporate level strategy is related diversification. We are accomplishing this through horizontal integration by marketing our original products in Panama. Our business level strategy we have an integrated narrow market involving both focused low cost strategies and differentiation strategies. Our plan supports our business level strategies by aiming at a specific buyer group in Panama where we are trying to maximize our market share and our profits while keeping our costs low.

In the long-term big picture of our expansion into Panama we have a few plans that differ from the short-term. One plan is to build a manufacturing facility in Panama so that we will no longer have the hefty shipping expenses and we will be closer to our customers. This will assure fast delivery and higher flexibility to the market and it should create less shrink. We would like to do this within the next three to five years because we expect to make enough profit by just selling in Panama to help support this manufacturing facility. Another plan we have is to also build a distribution warehouse in Panama. This warehouse would preferably be located right outside of Panama City. We would like to do this so that we could be more efficient with our deliveries and so we could have a more well-organized presence in Panama.

Through this plan to expand into Panama we will be acting as a foreign subsidiary. We will be marketing in Panama and then eventually manufacturing in the country as well.

INTRODUCTION

Family Insulation and Cushioning is a growing company that needs to consider expanding its operations to become an even more profitable company. Our company has a product line consisting of insulation and cushioning. Its NAICS code is 3216140, better known as polystyrene foam product manufacturing. As a company we have chosen to research Panama in our quest of expanding our current operations. A successful expansion would increase overall revenue and net income. Our investigation will help us decide if Panama has a large enough market and demand for insulation and cushioning. If the market is large enough we proceed with expanding and potentially manufacturing and producing our product there. If we can accomplish this then we can build a foreign subsidiary in Panama City, Panama.

We are the manufacturer of our polystyrene insulation and cushioning products. Our company relies on two suppliers in order to create our finished product. First off we obtain polystyrene beads from our long time supplier Americas Styrenics LLC, this is the main ingredient needed for all manufacturing. Then if desired by a customer we fireproof our product and in order to do this, we do business with Unibrom Corporation who is our supplier for fire proofing materials. Our customer base is mainly comprised of distribution warehouses with shipping needs, contractors, and retailers

Our company will follow three business activity recommendation options. First, we can pursue manufacturing to supply U.S. operations only, but have no marketing activity. Secondly, we can pursue marketing in Panama, but have no manufacturing activity. Lastly, we can pursue both manufacturing and marketing activities.

When it comes to marketing the overall question is, does Panama have an economy stable enough for us to establish a business? We need to decide if the people of Panama need insulation and cushioning. We need to decide if we are capable of getting our product there efficiently. We need to know if our insulation and cushioning will meet regulations in Panama, and what their foreign policy is.

When it comes to manufacturing is there opportunity for access to suppliers in Panama? Can we even manufacture within proximity of 50 miles from our customers so we can remain close? Is there available technology for us and materials available in Panama or will we need to do some sort of importing if we establish there? Will we be able to have a warehouse close to Panama City to make distribution easier?

If we chose to expand our company into Panama our corporate level strategy will be related diversification by horizontal integration. We’re expanding into the same industry and we will also be reaching out to new customers and new geographic regions. When it comes to our business level strategies we have chosen a narrow target market with a focused low cost and integrated focused differentiation. With this we are looking to aim at a specific buyer group and geographic market. We want to maximize profits and create a competitive advantage against other insulation and cushioning suppliers available in the market.

Our expansion strategy will be to have moderate risk tolerance. As a company we need to maintain a management control of greater than 60%. Ideally we would also like partners with cultural expertise in the future, so that we can better understand our market to increase our chances of entry and maximize profits. With further analysis you will understand how polystyrene is made and what it’s used for, how our end to end supply chain is organized/works, our corporate and business level strategies, and other general specifications for doing business in Panama.

ANALYSIS

(U.S. Business Activities)

Currently Family Insulation and Cushioning produces polystyrene foam. We specifically focus on making insulation and cushioning. By being the manufacturer of our product we have multiple steps that lead us to a finished product. First we obtain our polystyrene beads from our long time supplier Americas Styrenics LLC. These beads will then be put into a steam chamber that expands the beads to a much larger size. The easiest way to visualize this process is by thinking about how popcorn starts as a kernel, and then once heated turns into popcorn (How it Works.).

The then expanded polystyrene beads will be poured into a large scale block mold. The mold presses and heats the expanded polystyrene pellets to make one large foam block. Once cooled the polystyrene foam is then removed and put through a heated coil slicer to cut to size. In some circumstances our trained professionals may need to cut more intricate designs by hand based on individual customer needs. Lastly, if desired by a client the polystyrene foam is then fire proofed with hexabromocyclododecane which is supplied to us by Unibrom Corpoartion (How it Works.).

Polystyrene foam is a flammable agent that requires handling the product away from any type of heat source to prevent fire. Manufacturing of this product requires on the job training, and traits such as critical thinking. As a company we also prefer that an individual have a degree in science. Safety is our number one priority as a company and we want our staff to feel the same. If we chose to expand our operations to Panama we must consider hiring Panamanian individuals. By Panamanian law 90% of our employees will either need to be Panama citizens or have lived in Panama for at least 10 years due to their regulations. Bilingual employees will also be preferred in this case. This is something we must think thoroughly about as a company (“How to Start a Business in Panama.”).

When it comes to our cushioning aspect we mainly sell to distribution warehouses whom have shipping needs. On the other hand when it comes to insulation our customers consist of contractors and retailers. These customers then distribute our product to our end consumers such as homeowners, business owners, and individuals who purchase products online or at retail stores.

Our target market when it comes to Panama consists of multiple groups such as contractors, homeowners, retailers, and retail distribution centers. Each different type of insulation customer for example, has a similar need for keeping their residence or business cool during Panamas hottest seasons. Instead of paying insane amounts to keep their air conditioners running on a daily basis, with our insulation they can run it a fraction of the time and save money in the long run. Our target market in Panama would also need to have some expendable income in order to afford all the insulation they would need. Panama is growing into a more prosperous country every year since wealthy people realize how beautiful a country it is and how relatively cheap it is to live there (“Panama.”).

Currently our manufacturing center is located in Berkeley County, South Carolina. For initially transporting our product to Panama we would first truck our product in bulk from our manufacturing center to the Port of Charleston. From the Port of Charleston we will ship it to the Balboa Port in Panama. All of our products will be in large scale containers so that it makes it easier to truck once they reach Panama. From the Balboa Port we will truck to our newly established distribution center located right outside of Panama City. Finally, at this point we will truck our product from our distribution center to our customer (“Panama, Country, Central America.”).

Currently Panamas economy is doing substantially well and continues to grow when it comes to current events. One potential multinational competitor we may face is General Insulation Company Inc. They started up in April of 1982 and acquired their biggest competitor Clark Insulation in 2008. Their corporate office is located in Medford, Massachusetts. Currently they distribute to multiple big name

manufactures one being 3M. They could be a potential threat for us doing business in Panama if they chose to also do business internationally there (“General Insulation Company, Inc.”).

(Evaluation: External Environment)

When it comes to the external environment for foreign operations there is one big incentive in Panama. Law 41 is a special license that allows a business to obtain a license which in return would allow them to establish headquarters in Panama. As a company this is something we would definitely want to consider. The benefit from establishing a headquarters in Panama is that we would get to take advantage of a favorable tax agreement under Law 41 ("2011 Investment Climate Statement - Panama."). In our particular industry in Panama there are tax incentives available for local investors in this industry, but the government does not offer them protection. Panama itself also has a very slow judicial system ("Doing Business in Panama: Panama Trade and Export Guide.").

When it comes to environment and safety issues Panama and the United States act as regional trading zones. Panamanian law mandates that 90% of an employer’s staff must be Panamanian. This could represent a culture barrier because Panamas main language is Spanish, although many citizens do know English as well. Other than ensuring their own citizens work in a business, Panama has no laws to protect employees, which may result in poor performing employees ("2011 Investment Climate Statement - Panama.").

Phytosanitary permits are also required on all imported non-food agricultural products only. Initially if we establish a business in Panama we will need to have a commercial license as well. All goods arriving in Panama intended for re-exportation immediately must be marked “PANAMA IN TRANSIT” on each individual box or outside each large container, this is law. If we decide to establish headquarters there, then down the line we will need to have an industrial license. One other thing to keep in mind is that in the future our labeling may have to be in Spanish. Local regulations require certain labels to be in the Spanish language currently but our product is not one of them at the moment, this could potentially change in the future (“2012 Investment Climate Statement - Panama.”).

Compared to U.S. tax rates, corporate taxes in Panama currently are lower. Corporate Panama tax is 25% of net income and an additional 10% on after tax branch income ("Panama Highlights 2015."). Currently the economy is quite healthy. It’s has grown at an 8.75% average rate over the past 9 years with expected growth in the future. Their construction industry is also growing greatly into the double digits. There are also numerous people investing in residential and non-residential projects. The government is executing numerous public investments in infrastructure. Many of these construction projects will require insulation. Even though the economy is expanding, in general, Panama is struggling with a trade deficit, which means there may not be a huge demand for cushioning at this time. This could mean their economy could struggle in the future as well (Hassig, Susan M.).

Currently in Panama there’s a couple of political aspects that may affect our business. Within the past ten years there has been an extreme amount of economic growth in Panama, mainly due to big construction projects. Panamas last president, Ricardo Martinelli, whom began making goals for Panama to have huge economic growth, has been under recent speculation. Panamanian experts don’t believe this growth is sustainable. If this growth stops then a recession can occur. This will cause Panamanians ability to buy to decrease dramatically. Growth in the housing market will also decrease. Although most don’t see a recession in Panamas future, any of these factors could potentially threaten demand for insulation and cushioning in Panama ("Multiple Perspectives on Panama's Political Shift.").

Currency in Panama is referred to as the Panamanian Balboa. This translates to the U.S. dollar. There is no difference in currency value wise between the two countries. No conversion is needed and

therefore a spot price does not exist. Since 1904, the balboa replaced the Columbian peso and it has been tied to the U.S. dollar at a 1:1 exchange rate. The balboa has also not depreciated or appreciated since 1904 and it will most likely continue at the 1:1 ratio in the foreseeable future ("Panama - Climatescope 2015.").

A major event that’s going on in Panama that could potentially stop us from doing business there, is the expansion of the Panama Canal. It was set to be finish in 2014 but setbacks from strikes and budgeting has caused the date to be pushed back to 2016. Construction could slow us down and in some cases halt imports through one of our main channels ("Panama Canal Expansion Prompts Safety Concerns."). Culture seems to not be as big of a concern. There may be some language barriers, but English is very well known in Panama. Sometimes Panamanians may also be known as bargainers. This means if they want a better deal and we don’t go down in price then that customer could seek out another manufacturer that better suites their needs ("Doing Business In Panama :: International Business.").

The best location by far for manufacturing in Panama would be right on the outskirts of Panama City. This way the company would be right near the Panama Canal and transportation costs from our suppliers would be lessened. For marketing in Panama the best area would be in Panama City. Panama city is the power house of Panama’s population and if the company were to try and get thousands of people to see an add or billboard, Panama City would be the place ("Panama, Country, Central America.").

Our infrastructure needs can be met in Panama easily. We will have no problem having power and the right technology because there are many suppliers of both of those in America where our manufacturing facility is located. On the logistics side of things, we have laid out our supply chain clearly and transportation needs will be met through trucking and shipping from our manufacturing facility to the Port of Charleston and then to the Balboa Port ("Panama."). We do however need to take into consideration that Panama is the top energy consumer in Central America, and must import more than 80% of its energy to meet its needs. So we may face some issues when it comes to power and power could potentially be costly if we need to import. Power costs could potentially be higher than the U.S. at this point ("Panama Economy - GDP, Inflation, CPI and Interest Rate.").

(Business Activities Manufacturing)

See Attached Exhibit A

There are multiple decisions from a manufacturing aspect when it comes to Panama. One decision when it comes to manufacturing in Panama is if there is access to suppliers. If we can find suppliers then we would have lower transportation costs, and we would also have more time flexibility for demand fluctuations. However, if we obtain access to suppliers in Panama, then we could possibly lose relationships with our suppliers here in the U.S. Also, using a new supplier could potentially mean higher costs as well.

Can we manufacture within proximity of 50 miles from our customers so we can remain close? If we accomplish this, the results will be a quick response to demand and increased inventory turnover. However, the cost of property may be more expensive being located closer to customers. Railroads are also scarce in Panama leaving trucking to be our only option, which is expensive.

Will we have the available technology and materials available in Panama or will we need to do some sort of importing? If we have the available technology, then we will have a faster production process. Not only will we be faster, but we will still sustain strong relationships with our U.S. suppliers if

we need to import technology. Future cons to this scenario could be the need to do onsite training, and also importing materials can be more costly.

Our last decision when it comes to manufacturing is will we be able to have a warehouse close to Panama City so we can make distribution easier? This means faster distribution from our warehouse to the customer. At this point, we can hire employees who live directly in the city and know the area. On the other hand, this could cost more if we establish directly in Panama City versus other locations. We will more than likely also have higher initial start up costs when establishing our distribution warehouse.

(Business Activities Marketing)

See Attached Exhibit A

Along with manufacturing decisions there are also multiple decisions to make from a marketing perspective. First off, do the people of Panama even need insulation and cushioning? Currently, they have a growing construction industry which makes demand higher for our product. In general, our product will be affordable to the people who would have a need for our products such as the rich, contractors, government, etc. However, an economy growing upwards of 10% cannot sustain such growth forever. Alternate types of insulation besides polystyrene could take over the market as well.

Are we capable of getting our product to Panama efficiently? We currently have strong bonds with suppliers which lets us keep good supply chain management. Getting our product efficiently to Panama also means stronger customer bonds. If we can’t get our product there efficiently we may not be able to keep our customers. We may even be charged fees for late deliveries and may need to do rush orders at this point.

We must consider if our product is legal in Panama and what their foreign policy is. Currently our product is legal and abides by foreign policy. Also, we’re willing to put in the extra effort for our customers to make our product fireproof so it’s legal for their establishments if need be. Even though our product is legal it may need to undergo some type of regulation testing or inspection. At some point we may even need to modify our product to keep up to legal standards and building codes.

Lastly, is Panama’s economy stable enough, including the need for our product? Panama currently does have a growing economy with numerous construction projects. The Panama Canal growth has been giving aide to the economy as well. However, the economy will eventually slow its growth rate and will mature its economy. Panama also has a bad trade deficit.

(Expansion Strategies)

See Attached Exhibit A

There are two expansion techniques we are considering as a company. One would be establishing a foreign subsidiary in Panama. When it comes to us having moderate risk tolerance, it will only be a risky strategy because we are starting from square one. We are reestablishing ourselves as a company in a foreign country with new policies. We also as a company want management control of greater than 60%. With this strategy in mind it should be fairly easy to maintain 60% or even more management control. There are no other companies in this country who deal with insulation and cushioning like we do, so we would not have a joint venture. As a company, we would like future partners with cultural expertise. We can benefit from these partners because they understand how to maximize profits in our market. Establishing a foreign subsidiary makes it easy for us to maintain high management control, but being in a foreign environment will still be tough. It will be essential we maintain a strong bond with Panamanian

partners. Some of our control will need to go to other Panamanian management to insure we are doing everything properly.

Our second technique would be to simply export. Going along with our moderate risk tolerance, risk will be minimal with this decision. Regulations will be minimal for exporting as well. However, there needs to be a demand for us to export to begin with, which makes it somewhat less risky to do business in Panama. Without demand we would not export at all and we would not consider Panama for expansion. When it comes to management control we can also achieve management control above 60%. With this technique, we will have a large percentage of management control because we will be exporting our product from the United States and we won’t have many middlemen to deal with. Our strategy of having partners in the future with cultural expertise is limited however with this technique. We may have a few just as selling channels. Trucking will be doing most of the work in Panama for us while we stay in the U.S.

Establishing a foreign subsidiary would be the best option for us at this time. Establishing ourselves in Panama City makes our product readily available in an area where manufacturing does not exist currently for polystyrene. This makes risk more on the moderate side for us. Management control can easily be maintained in this market due to there being no other businesses to do business with currently. If we need someone with cultural expertise in the area, we can hire individuals who have worked for big corporations in Panama City, so they can help us understand Panama much better as a whole. Establishing a foreign subsidiary is the best option with multiple payoffs down the line for Family Insulation and Cushioning.

RECOMMENDATIONS

The short term plan for our company’s immediate entry into Panama is along the lines of a lower cost expansion project.  We want to start marketing in Panama and use the country's low amount of competition to our benefit.  For the time being we would simply market and sell to Panama using our existing manufacturing plants in the U.S. We have discussed manufacturing in Panama at this time as a company, but we believe that would create too many initial expenses that would be incredibly difficult to handle, while also trying to focus on gaining more market share in a completely new cultural environment.

As we would like to expand into these new markets within Panama, we would also like to keep as much revenue as we can in the process.  This means that we plan on staying a completely wholly owned company throughout this expansion project.  It may however create some higher costs and it may be difficult to adjust to the culture difference of a whole new country without the help of an already existing company in Panama. However, we strongly feel that with the lack of competition and the need for new profits we will continue as a wholly owned company creating a new entity in the country of Panama ("Panama Demographics Profile 2014.").

Within the next few years we expect to be turning a higher profit by marketing and selling in Panama.  First of all the growing amount of market share our company would be receiving in this expansion would generate a tremendous amount of revenue.  Also we would be using the existing plants we have in the U.S. which means our only added expenses would be through marketing and shipping and possible taxes that come along with our expanded supply chain.  The ratio we will be using to monitor this added cash flow will be the net profit margin because, it’s the most accurate way to record findings in respects to our net profit ("Panama Demographics Profile 2014.").

We can support this claim by looking at the facts.  First of all by only marketing in Panama for now we are gaining market share with the lowest possible costs in comparison to manufacturing in the

country.  Another great aspect to look at is the economy of Panama.  In Panama the housing market has been growing exponentially in the past ten years.  This huge increase in construction projects means a large growing demand for insulation.  With this low cost market, gaining strategy profits will very likely go up within the first year ("Panama Real Estate Market Growth.").

Whenever a company has the need to expand into a completely new country there will always be problems.  Culture for example will be a large road block.  As a wholly owned company we will need to learn how to embrace the already established culture of Panama to be successful which will of course be a challenge.  Another thing we must keep in mind is that the more we expand, the higher the costs of shipping and marketing, and we must be ready to create revenue that is higher than our expenses.

In the long term of this expansion project we plan on building manufacturing plants in Panama.  At some point the shipping costs will put too much weight on our profits. This is when we will have to take the next step forward and introduce a plant in the country and also possible distribution centers to keep everything running smoothly and efficiently.

SUPPORTING EXHIBITS

EXHIBIT 1: Supply Chain Management/ End to End Supply Chain:

EXHIBIT 2: Financial Considerations

EXHIBIT 3: Manufacturing Polystyrene Insulation and Cushioning

BIBLIOGRAPHY

"2011 Investment Climate Statement - Panama." U.S. Department of State. U.S. Department of State, 1 May 2011. Web. 2 Nov. 2015. <http://www.state.gov/e/eb/rls/othr/ics/2011/157340.htm>.

"2012 Investment Climate Statement - Panama." 2012 Investment Climate Statement - Panama. U.S. Department of State, 1 June 2012. Web. 1 Nov. 2015.

"Doing Business In Panama :: International Business." Doing Business In Panama. 123helpme.com. Web. 26 Nov. 2015. <http://www.123helpme.com/doing-business-in-panama-view.asp?id=164673>.

"Doing Business in Panama: Panama Trade and Export Guide." GOV.UK. 13 May 2015. Web. 26 Nov. 2015. <https://www.gov.uk/government/publications/exporting-to-panama/doing-business-in-panama-panama-trade-and-export-guide#challenges-doing-business-in-panama>.

"General Insulation Company, Inc.: Private Company Information." Bloomberg.com. Bloomberg. Web. 2 Nov. 2015. <http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=4281817>.

Hassig, Susan M., and Lynette Quek. Panama. 2nd ed. Tarrytown: Marshall Cavendish Benchmark, 2007. 36, 87. Print.

How it Works. “Expanded Polystyrene Products.” YouTube. YouTube, 2 July 3013. Web. 1 November 2015.

"How to Start a Business in Panama." Panamainfo.com. 23 Aug. 2007. Web. 1 Nov. 2015. <http://panamainfo.com/en/how-start-a-business-panama>.

"Multiple Perspectives on Panama's Political Shift." COHA. 16 May 2014. Web. 1 Nov. 2015. <http://www.coha.org/multiple-perspectives-on-panamas-political-shift/>.

"Panama." World Atlas. World Atlas, 29 Sept. 2015. Web. 8 Nov. 2015. <http://www.worldatlas.com/webimage/countrys/namerica/camerica/pa.htm>.

"Panama - Climatescope 2015." Climatescope 2015. Web. 7 Nov. 2015. <http://global-climatescope.org/en/country/panama/#/detail>.

"Panama Canal Expansion Prompts Safety Concerns." BBC News. BBC News Services, 24 Aug. 2015. Web. 3 Nov. 2015. <http://www.bbc.com/news/world-latin-america-33958280>.

"Panama, Country, Central America." Columbia Electronic Encyclopedia, 6Th Edition (2015): 1-2. Academic Search Complete. Web. 25 Nov. 2015.

"Panama Demographics Profile 2014." Panama Demographics Profile 2014. 30 July 2015. Web. 26 Nov. 2015. <http://www.indexmundi.com/panama/demographics_profile.html>.

"Panama Economy - GDP, Inflation, CPI and Interest Rate." FocusEconomics. FocusEconomics, 10 Nov. 2015. Web. 12 Nov. 2015. <http://www.focus-economics.com/countries/panama>.

"Panama Highlights 2015." Deloitte. Deloitte, 2015. Web. 26 Nov. 2015. <https://www2.deloitte.com/content/dam/Deloitte/pa/Documents/tax/2015_PA_Tax-panamahighlights.pdf>.

"Panama Real Estate Market Growth." Panama Real Estate Market Growth. Web. 11 Nov. 2015. <http://www.encuentra24.com/content/panama-en/real-estate/view/panama-real-estate-market-growth>.

"Trade Regulations and Standards in Panama." Export.gov. Export.gov, 1 Sept. 2015. Web. 2 Nov. 2015. <http://export.gov/Panama/doingbusinessinpanama/traderegulationsstandards/index.asp>.