P&G Report

MGMT-7750 Global Business and CSRP&G: Financial Plans and CSR Issues In Costa Rica And AustraliaSaralise MingYanbin LiMadhura DeshpandeRaghuveer ReddyShankar KarJoseph Coyne 11/18/2010 Table of contents Part 1: Costa Rica TOC quot;
1-3quot;
Financing Plan for Costa Rica: PAGEREF _Toc277797672 2The Potential CSR Issues and Solution-Costa Rica PAGEREF _Toc277797673 3Result Expected-Costa Rica PAGEREF _Toc277797674 5Part 2: AustraliaFinancing Plan for Australia: PAGEREF _Toc277797675 6The Potential CSR Issues and Solution-Australia PAGEREF _Toc277797676 7Result Expected-Australia PAGEREF _Toc277797677 9Exhibits and ReferenceExhibit 1 PAGEREF _Toc277797678 11Exhibit 2 PAGEREF _Toc277797679 12Exhibit 3 Costa Rica’s Investment Climate Indicators PAGEREF _Toc277797680 13Exhibit 4 Expected Financial Results For P&G’s Strategy In Costa Rica PAGEREF _Toc277797681 14Exhibit 5 Expected Financial Results For P&G’s Strategy In Australia PAGEREF _Toc277797682 15References: PAGEREF _Toc277797683 16 Costa Rica Financing Plan for Costa Rica: We have assumed that for setting up a plant in Cost Rica P&G has to spend about $150 Million. We arrived at that number by making certain assumptions. ,[object Object]

Population of Costa Rica is 4,519,126

Average spending per person on P&G products is $14 ( Data taken from Harvard case study)

Projected revenue structure is approximately $60 million (4,519,126*14)(Population*Avg. Spending).

Cost of Production of Goods is $30 million. ( Data obtained from income statement of P&G)

Average labor cost in Costa Rica is $1.4/hour ($2800 per year).

Assumed number of employees are 500 which implies $1.5 million as total labor costs per year.

Costa Rica tax structure 30% which implies $10 million. ( 30 % of the Revenue $60M-Costs of Goods Sold $30 M)

Cost of land in Costa Rica is $75 M (2700 acres for plant). ($27500/acre--data obtained from real estate statistics)

Estimated cost of equipment and other non foreseen costs are $25M.

Working capital $10million.Therefore the total costs add up to $111.5 million. ,[object Object], Banking Intermediation dominates Costa Rica’s financial sector. Overall, through consolidation, the number of financial intermediaries has increased as shown in Table 2.1 (see Exhibit 1) and in addition, it has strengthened the onshore banking sector which accounts for 84% of the systems lending to the private sector (Figure 2.1, see Exhibit 1). Investment funds have grown rapidly and are therefore, becoming significant institutional investors. As in figure 2.4(see Exhibit 2), it can be seen that the credit line to the private sector has been steadily increasing and therefore, based on Procter and Gamble’s worldwide recognition, it will be able to successfully obtain funds from banks for setting up their plans in Costa Rica. (Data obtained from World Bank report on Costa Rica). Costa Rica lending rates are around 7.5% which is above the US rate of 5%. So we recommend raising capital from US. Costa Rica FDI rules are also very flexible and the country encourages FDI inflows generally. The Potential CSR Issues and Solution-Costa Rica P&G already has a significant presence in Costa Rica with sales marketing share of 0 and 60 US$ million investment in 2000 with 1700 employees. The services provided are back-office operations such as finance, human resources, payroll, employee benefits, purchasing and IT services. As of 2004, P&G had already been presented with an award for Corporate Responsibility by the Costa Rican Chamber of Commerce for its continuity in coordinating, implementing, and supporting activities that benefit either communities or society in general for several years in succession. As P&G expects to expand its operations into manufacturing, the company needs to continue its work in building the local communities and needs to start putting efforts into minimizing and ideally preventing any potential environmental issues. Costa Rica has an open foreign investment system with some exceptions including: importation. When P&G entered Costa Rica initially for administrative purposes, the Government treated this foreign company in the same manner in which it would have treated any other company. There were no favors involved but the advantages of moving in were still exceptional. P&G was able to enjoy the usual 100 percent exemption on income tax for the first eight years and 100 percent exemption on import duties (Horvath, J. 2001). P&G can obtain an income tax exemption for the first 8 years and the exemption also on import duties The World Bank indicates that even in a country as ‘peaceful’ as Costa Rica, bribery does exist but on a small scale relative to its neighboring countries at just less than 2% of sales (see Exhibit 3). Whilst this figure is considered low, P&G should still take note of it and resist being involved in questionable activities because it is a well respected company in Costa Rica and around the world. P&G needs to have all procedures completed within the legal limits regardless of the time required. P&G is a US based company and is subject to US laws and hence, it is crucial that it stays away from illegal activities in Costa Rica and Caribbean. The next phase of P&G’s plan to export products which are manufactured in Costa Rica to the Caribbean islands isn’t likely to be met with difficulties since the Costa Rican Legislative Assembly approved a free trade (commercial) agreement between Costa Rica and twelve countries of the CARICOM in 2005. P&G has already been active in the education industry of Costa Rica. It launched a program, in conjunction with Live, Learn and Thrive, which provides disabled children with equal opportunity to be educated. This program not only makes learning more possible but it makes education facilities more accessible; hence, eliminating the physical and psychological barriers. Teachers have been specially trained to deal with such circumstances and approximately 16,000 children have already benefited. P&G employees have also been encouraged to volunteer for this program in order to ensure its success. Since P&G will be expecting to further tap into Costa Rica’s work force, it should consider building more education oriented programs for the local communities, especially for the children. Costa Rica takes great pride it its pristine environmental conditions and diverse flora and fauna. This country benefits greatly from this through its popular ecotourism industry and its worldwide recognition of environmental performance. In 2007, the government of Costa Rica set its target on making the country the first carbon neutral country in the world. Therefore, this is the biggest likely issue that P&G could encounter since a manufacturing plant generally produces by-products which may have negative impacts on the environment. However, P&G is already committed environmental sustainability for its products as well as manufacturing. For products, P&G expects to use 100 percent renewable/recyclable material, have no consumer waste in landfills and maximize on the conservation of nature resources. Its manufacturing plants will be powered by 100 percent renewable energy, will have no carbon dioxide or toxic emissions, preserving or improving water quality and eliminating manufacturing wastes. P&G must carefully convince Costa Rica’s officials that it is very capable of achieving its goals and is committed to the preservation of Costa Rica’s environmental conditions. Result Expected-Costa Rica If P&G’s project is successful in Costa Rica, the results would be as follows: ,[object Object],Costa Ricans are highly educated and typically multi lingual. The country has a literacy rate of 95.8% and the overall secondary school attendance rate is around 70%, which shows that the skill sets available for manufacturing are plenty. They are eager to work for P&G since this company is highly respected in Costa Rica. Therefore, P&G is expected to have increased access to the local talent pool and would have the opportunity to relocate highly skilled employees. ,[object Object],Due to Costa Rica’s strategic location, P&G expects to use it to export products to the Caribbean islands. The islands of the Caribbean are in close proximity to Costa Rica and are in very close proximity to each other. This geographical advantage will work to P&G’s advantage to capture significant market share in the Caribbean. We are actually proposing to start the site in Limon (port city) which is well connected to central valley of Costa-Rica, inhabited by the majority of the population, via road or air transportation and also it is the closest port available to cater to Caribbean islands. Market Share The overall market that P&G is looking into when entering Costa Rica is a population of 4.5 million and 21 million in Caribbean region. Assuming US$14 average spending per year per person on P&G products, the potential market share will be US$ 357 million (25.5 million * 14). Increasing the availability of P&G’s products coupled with marketing, branding campaigns and an increase in environmentally friendly perception of the company are expected to result in an increase in P&G’s market share in Costa Rica and the Caribbean. Establishing manufacturing operations in Costa Rica would allow P&G to increase their market share and also market share in the Caribbean islands would increase as P&G markets its products there after creating a logistics center in Costa Rica and warehouses in the various islands. ,[object Object],Three case scenarios were considered and the underlying assumptions are as follows: ScenariosNPVAssumptionsWorst case-1526221.472Cost of capital - 8.25%, Sales - 1% average growth rate, cost of goods sold - 52% of revenue, labor costs - 5%Average case11037238.86Cost of capital - 7.25%, Sales - 3% average growth rate, cost of goods sold - 50% of revenue, labor costs - 3%Best case27602627.03Cost of capital -6.25%, Sales - 5% average growth rate, cost of goods sold - 48% of revenue, labor costs - 1% Financial projections were calculated with the following assumptions, an organic growth rate of 2% year on year including cost of goods sold, labor cost and revenue. The discount rate used is the current average lending rate of the Central Bank of Costa Rican, around 7.25%. The project life is projected to be at least 10 years with break-even occurring in 7 years. Taking these assumptions into account, the NPV for the project is expected to be approximately $40 million. Australia Financing Plan for Australia: We have assumed that for setting up a plant in Australia P&G has to spend about $150 Million. We arrived at that number by making certain assumptions. ,[object Object]

Present Revenue of Australia is $533,000,000

Cost of Production of goods is $267 million. ( Data obtained from income statement of P&G)

Avg. labor costs in Australia are $528 per week ($27500 per year).

Assumed number of employees are 500 which implies $14 million as total labor costs per year

Australia tax structure 30% which implies $75 million. ( 30 % of the Revenue $308M-Costs of goods Sold $150 M)

Cost of land in Australia is $621 M (2700 acres for plant). ($230000/acre--data obtained from real estate statistics)

Estimated cost of equipment and other non foreseen costs is $50M.

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