Cmi Brazil 2012.04.25. Student Post

Jens Lage Hansen

SOUTH AMERICA
BRAZIL
GRUNDFOS
CMI: FDI IN DEVELOPING COUNTRIES
CBS 26.04.2012

30-04-2012 JensLageHansen@mail.dk 1

My background
Jens Lage Hansen

• Danish and Brazilian citizenship
• Lived in Brazil, Argentina, Spain, U.S. Virgin Islands and
Denmark
• MSc in Electrical Engeneering (DTU) and Bcom (CBS)
• International career with marketing, general management
and board responsibilities in Novo Nordisk, Novozymes, Foss,
Danisco and Grundfos
• Board member in two biotech startups: Aquaporin A/S (from
1995) and Intomics A/S (from 2009)
• Adjunct associate professor at CBS


Agenda
Jens Lage Hansen

• The situation
– BRIC
– South America
– Brasil
– Grundfos
• The decisions
– Question 1: Should Grundfos enter Brazil?
– Question 2: How should Grundfos enter?
• Building and managing Grundfos do Brasil
– Question 3: How would you manage the company?


BRIC countries. What crisis?
World GDP growth the last 5 years Jens Lage Hansen


Where are they right now?
BRIC countries economy and population Jens Lage Hansen

2011 POPULATION GNP at PPP GNP per capita Political Risk *
CIA factbook (MIO) (billion US$) (US$)
Brazil 205 2,282 11,600 Low

Russia 138 2,380 16,700 Medium -
Significant
India 1,205 4,463 3,700 Moderate -
Medium
China 1,343 11,290 8,400 Low -
Moderate
USA 314 15,040 48,100 Low -
Moderate
* Lasserre 2nd ed. pg. 179
BRIC countries all have Medium economical risk (Lasserre)


The giant and the rest
Map of South America Jens Lage Hansen


Don’t they like their nabours?
Intraregional exports in Latin America
Jens Lage Hansen

The Economist


Biggest economies of South America
Brazil, Argentina, Venezuela, Colombia and Peru Jens Lage Hansen

2011 POPULATION GNP at PPP GNP per capita Political Risk *
CIA factbook (MIO) (billion US$) (US$)
Brazil 205 2,282 11,600 Low
Argentina 42 710 17,400 Significant
Columbia 45 471 10,100 Medium
Venezuela 28 374 12,400 Significant
Peru 30 300 10,000 Medium

* Lecturers subjective assesment


Brazilian regions
Jens Lage Hansen


The Academic
President Fernando Henriques Cardoso 1995 – 2002 Jens Lage Hansen

• Tamed inflation in 1994 as
fincance minister
• Sound economical policies
• Limiting and reducing states
and governments deficits
and huge loans
• Opening of economy
• Beginning of social progams


The Union Man
President Luiz Lula da Silva 2003 – 2010 Jens Lage Hansen

• Won for the first time in 4
elections by moving to the
center
• Continuity
• Boosting social programs
• Pursuing south – south ties
• Increasing state
intervention in economy


The Efficient Bureaucrat
President Dilma Rouseff 2011 – Jens Lage Hansen

• Lula’s choice, and that was
enough
• Continuity and in control
• Fighting corruption
– 7 ministers out in one year
• Promoting meritocracy
• Boosting education
• Incrasing state control and
protectionism
• Personal approval rating
march 2012: 77%


A picture says more than a 1,000 words
Former president Lula and president Dilma Jens Lage Hansen


Brazil’s extraordinary energy mix
Domestic energy supply in Brazil Jens Lage Hansen

SOURCE BRAZIL OECD
(% in 2007) (% in 2005)

Oil 37.4 40.6

Gas 9.3 21.8

Coal 6.0 20.4

Uranium 1.4 11.0

Hydro 14.9 2.0

Biomass 30.9 4.2

Total 100.0 100.0

Renewable 45.8 6.2


Just start digging
Reserves of natural ressources. World ranking Jens Lage Hansen

• Bauxite no. 3
• Iron ore no. 5
• Nickel no. 3
• Tin no. 3
• Uranium no. 6
• Oil no. 10
• Forests no. 2


Feeding the world
Agrobusiness production. World ranking Jens Lage Hansen

• World class Brazilian institute for agroresearch
• Orange juice no. 1
• Sugar no. 1
• Fuel-ethanol no. 2
• Soyabeans no. 2
• Chickens no. 3
• Coffee no. 1
• Beef no. 2
• Pork no. 4
• Maize no. 4
• Cotton no. 5


What markets are interesting?
Business opportunities as seen from Denmark Jens Lage Hansen

• Environmental technologies
– Supply of potable water
– Effluent treatment. Industrial and domestic
– Reducing air polution
– Energy saving
• Oil and gas exploration
• Food processing technology
• Bioethanol production
• Fashion, design and clothes
• Pharmaceutical equipment
• Medicotechnical products
• Information and communication technology in health care

The Brazil cost
Jens Lage Hansen

• High interest rates
– SELIC 9.00 %
• High taxes
– Brazil 34.4 % of GDP
– Russia 36.9, India 17.7 %, China 17.0 %, Denmark 48.2 %
• Complicated tax system
• Bureaucracy
• Poor physical infrastructure
• Inflexible labour market with untouchable employees
– Cost of employees double up because of taxes, social contributions and
mandatory benefits (transport, meals, vacation bonus, extra salary)
– HSBC doorhandler
– Grundfos time clock


Jens Lage Hansen

GRUNDFOS AND BRAZIL 1998


Do you want to move water?
Some examples from Grundfos product range Jens Lage Hansen


How do you make that work?
Grundfos matrix organization around 2000 Jens Lage Hansen

Corporate Management (CEO, CFO, CPO)
Businesses Ground water Industry Building services
Regions
Europe
North America
South America (JLH)
Asia

Group Executive council:
Corporate management, business managers, regional managers


Where were we heading and how?
Grundfos strategy Jens Lage Hansen

• Purpose
– Grundfos is a global leader in advanced pump solutions and a
trendsetter in water technology. We contribute to global sustainability
by pioneering technologies that improve quality of life for people and
care for the planet.
• Values
– Sustainable
– Open and trustworthy
– Focused on people
– Independent
– Parthership
– Relentlessly ambitious


Grundfos strategy (cont.)
Jens Lage Hansen

• Scope in 1998
– Pump systems for water supply, water movement and water treatment
– In house R&D, Production and sales
– Sales and service companies in most important global markets
– Traditionally only production in Denmark, Germany and USA with
Denmark being the dominant supplier
– Recently established sales and service companies in Russia, China and
India
• Value proposition
– The most sustainable, advanced and effective pumps and pumping
systems in the world


What were we looking at?
Brazilian market Jens Lage Hansen

• Huge geographical teritory
• Big billion dollar pump market
• Vast variety of products to cover every application
• Products low to medium end
• Intense rivalry with focus on price
• Low to no profitability amongst suppliers


Who were the customers?
Customer needs and segments Jens Lage Hansen

• Customer needs
– Low prices
– Short delivery times
– Technical advice in choosing product
– Reliable technical after sales service
• Groundwater segment
– Public and corrupt
• Industry segment
– Technical oriented buyers
• Building segment
– Fragmented with many competitors


How about competition?
Competitors in Brazilian market Jens Lage Hansen

• Leao
– Brazilian competitor with plant in Sao Paulo state
– Dominated groundwater segment
• KSB
– German multinational
– Plant in Sao Paulo city
– Strong in industry segment
• Smaller local outfits


High value of Reais gave favourable COG
Average price and cost of goods Jens Lage Hansen

Thousand Reais excl. all taxes
2.5

2

1.5
Average COG
1 Average selling price

0.5

0
1994 1995 1996 1997


Case question 1
Jens Lage Hansen

• Should Grundfos enter Brazil?
• Why?


Case 1 wrap-up
Jens Lage Hansen


What should we look at?
Country attractiveness Jens Lage Hansen

• Market and competitive opportunities
• Country risk


Is it going to be easy?
Market and competitive opportunities for Grundfos Jens Lage Hansen

• Market
– Big market
– Growing
– Customer quality
• Price
• Some quality segments (BOT groundwater, industry high enery users)
• Competition
– High intensity of rivalry
– High entry barriers
• Established relationsships and trust
• Government protection of local production and jobs
– Bargaining power
• Suppliers: Low
• Customers: High
– Industry profitability low
• Incentives
– Taxes, subsidies and global competitiveness Lasserre 2nd ed. pg. 165
• Critical ressources
– None

What is the country like?
Country risk Jens Lage Hansen

• Political risks were low
– Shareholder exposure
– Employees exposure
– Operational exposure
• Economic risks were significant – a fact we underestimated
– Economic growth but high variability
– Inflation under control
– Cost of inputs risky
– Exchange rates
• The Devil is in the detail Lasserre 2nd ed. pg. 165
• More later


Country risk (cont.)
Jens Lage Hansen

• Competitive risk
– Public contracts influenced by some corruption
– Cartels were not in evidence
– Networks did not influence
• Operational risk
– Infrastructure
• Power, telecommunicaion, transport low risk
• Suppliers secure
– Regulations
• Nationalistic preferences very much in evidence. High risk
• Constraints on local capital, local content, local employement a factor
• Taxes on imports to protect local production


Case question 2
Jens Lage Hansen

• What should Grundfos objectives for entry be?
• What phase is the Brazilian pump market in?
• What entry mode would you recomend?
• Why?


Case question 2 wrap-up
Jens Lage Hansen


Why do we want to do it?
Strategic objectives for entering a country Jens Lage Hansen

• Market development
• Resources access
• Learning
• Co-ordination


Factors influencing entry modes
Jens Lage Hansen

• Corporate global strategy
• Country risks
• Market opportunities
• Companies internal capabilities
• Time pressure
• Government requirements


Entry modes
Jens Lage Hansen

Limited control Full control

• JV without control (50% or • Wholly owned subsidiary by
below) greenfield investment
• Full aquisition
High investment • JV with absolute control (above
66%)

Arms lenght agreements • Marketing subsidiary
• Distributor • Regional headquarters
• Agent • Pocurement office
Low investment • Representative • Representative office
• Franchisee • Technial observatory
• Licensing


Lets do it ourselves
Building an managing own company Jens Lage Hansen

• Status end 1998
– Sales orgnization in place
– From Sao Paulo to Curitiba
• Organization
• Two page action plan
• Surfing the edge of chaos (Pascale 1999)
• Fighting battles in different worlds
– Mandatory member of Group Executive Management (topmanager)
– Sorting out Argentina (local chairman)
– Building Brazil (entrepreneur)


Now lets get this up and running
Building operations in 3 months Jens Lage Hansen

• Warehouse and offices
• Assembly, test and service facilities
• Energy and water
• Furnishing offices and warehouse
• Recruiting and training people
• IT
• Accounting
• Approvals


Where are the results?
Building sales Jens Lage Hansen

• The exchange rate
– Russian , Asian and South American crisis in 1998
• Customers
• Territories and segments
• Pricing
• Availability and delivery times
• Staying power
• Company sales policies
– Wining, dining and ?
– Consignment stocks
– Payment terms


Who said economical risk?
Average price and cost of goods Jens Lage Hansen

Thousand Reais excl. all taxes

3.5

3

2.5

2
Average COG
1.5
Average selling price
1

0.5

0
1994 1995 1996 1997 1998 1999 2000 2001


Building sales (cont.)
Jens Lage Hansen

• Competitors
– Relationships
• Logistics
– Forecasting sales per product
– Airfreight
– Wladimirs small big orders
• The technical support people
• Promoting Grundfos
– Exhibitions
– Traning courses


Why do they react like that?
Managing in Brazil Jens Lage Hansen

• The boss
– Avis in Gongonhas
– Manuel and Manolo
– Staff meetings for all
• Hierarchy vs. effectiveness
– Nelson and Fernanda
• Relations vs. tasks
– New customers
– Brazilian meetings
– Saying hallo and goodbye
– Argemiro’s sightseeing


Managing in Brazil (cont.)
Jens Lage Hansen

• High context language
– verbal communication vs. emails
• Perception of Time
• Work ethics
• Planning
• O jeitinho


Case question 3
Jens Lage Hansen

• How would you manage Grundfos do Brasil S.A.?
– What would your priorities be?
– How would you interact with the staff?


What am I missing?
Open session Jens Lage Hansen

• Questions?
• Comments?


Jens Lage Hansen

Thanks for listening!


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