Mexico Agricultural Equipment Visible slide while audience is getting seated and ready for the presentation Erik Smith INB300 – International Business Lynn Bertsch August 28, 2005

Market: Basic Need Agriculture is a significant portion of Mexico’s exports and production Farm machinery is a need for their economy Farm Machinery is an established import (The World Factbook - Mexico, August 9, 2005, Economy Section) Introduce the presentation by focusing on the strength of the Mexican economy being heavily based on their agriculture industry. Their demand for agriculture machinery would thus be very large. Furthermore, agriculture equipment is an established import and the necessary hurdles have already been addressed by other companies. This leaves us with the ability to leverage the market and government controls that they went through the expense of developing.

Market: Agriculture Market GDP 1.006 Trillion PPP $9,600 Agriculture Accounts for 4% of GDP (The World Factbook - Mexico, August 9, 2005, Economy Section) With agriculture amounting to over 40 billion dollars of Mexico’s GDP there is a massive market for farm machinery. Furthermore, with this being such a large portion of Mexico’s GDP they are going to be extremely receptive to importation of equipment that services this need.

Market: FDI & FDI Confidence $7.46 billion for 1st Half of 2005 (Mexico’s foreign direct investment falls, August 19, 2005) $75/Capita FDI Confidence .80 (FDI Confidence Index, 2004, p. 3) While there is a substantial level of FDI in Mexico, there is also a significant amount of room left untapped. Furthermore, while the FDI Confidence is lower at .80 it is fairly comparable to doing business in Canada, and does not pose any real concerns especially when dealing in a vital asset like farm machinery.

Corruption Perception Index Scores a 3.6 Compares Favorably with Other Developing Nations Easily Outpaces India (2.8) and China (3.4) which are the top 2 for FDI confidence (Corruption Perceptions Index 2004, 2004, p. 236-237). Mexico scores very well on the corruption perception index as compared to other developing nations. Beats China and India which are the top 2 for FDI as opposed to Mexico’s rank of 22.

Import Restrictions Due to NAFTA there are virtually no trade restrictions on importing farm machinery Used machinery may be banned from import, especially if it is a motor vehicle (Used Equipment and Goods under NAFTA, n.d., para. 1-5) Discuss the favorable nature of doing business with Mexico due to the much more favorable restrictions post NAFTA. There are significant restrictions on used equipment both as part of Mexico law and NAFTA so it would be better to focus on selling new equipment.

Price Controls Mexico does not significantly compete locally for agricultural machinery No price controls are set for almost any product, but especially for agricultural equipment so critical to their economy (The World Factbook - Mexico, July 28, 2005, Economy Section, para. 1) NAFTA has made Mexico an ideal trading partner. Furthermore, they have demonstrated an interest in improving their economy and infrastructure; and products that enhance this are welcome. Agriculture equipment plays a vital role in the Mexican economy and have no interest in impeding its importation

Government and Public Attitude Towards Buying American Products Governmental, and public, tensions focus on other agricultural issues, and not on machinery (Response to Criticism of U.S. Agricultural Policy and NAFTA, December 5, 2002, para. 1) While there are a number of trade disputes with Mexico over a number of items including agricultural trade, it does not have any impact on the trade of agriculture machinery. Instead the agriculture issue stems from United States subsidies. On the other hand the agricultural machinery helps Mexico remain competitive with their agricultural production against heavily industrialized nations.

FDI vs. International Trade Leverage the best of both scenarios US Based Manufacturing Mexico based Marketing and Service There are unique strengths that can be leveraged best locally and some best leveraged within Mexico. US Based Manufacturing: It would be prohibitively expensive to recreate our manufacturing facilities in Mexico. Furthermore, with NAFTA it will be very easy to export our equipment at minimal cost. Mexico Based Marketing and Service: [More later on both of these topics] Leverage local marketing to maximize returns. Offer local service to enhance our bottom line

Global Strategic Planning Process Multi-Domestic or Global Strategy Product Promotion Personnel (Ball, et al., 2006, p. 67) We will focus on a global strategy to minimize the differences between the offices as possible. On the other hand there will be essential differences in Mexico to accommodate their differing market. The key components that will be different: Product: [More on this later] While our Mexican products will be largely the same there may need to be differences to accommodate a market with less money to spend Promotion: [More on this later] The marketing will have to be different, at least at first, as we break into this new market Personnel: This will largely be staffed by local residents. This will avoid much of the language barrier issues since no one is current fluent in Spanish. Furthermore, we can leverage their existing market contacts and expereince

Marketing Leverage Local Talent Appeal to Large Institutional Clients Loss Leader It is critical that we acquire someone heavily connected and familiar with the local nuances of marketing this type of equipment. Possibly someone working, or previously worked for, a competitor. For best return on initial investment it is probably best to leverage large clients (institutional) first and then work on the smaller sectors later. Since we are new to the market the farm machinery may need to be priced at cost or slightly below to get started. We can recoup these losses through servicing of the machines.

Service Train Local Mechanics Additional Revenue Stream Offset the equipment used as a loss leader or low margin item Once again use local mechanics to staff our service centers. This is especially significant because labor costs are much less in Mexico then comparable positions in the United States. Secondarily, the service can provide a much larger revenue stream than the selling of the original equipment. Which is even more important if the farm machinery is used as a loss leader or just breaks even.

Equipment Modification Less Wealth in Mexico Lower-End equipment Use Older Designs There is far less wealth in Mexico and thus there is probably far less interest in the high-end farm machinery that is sold within the United States. Unfortunately, due to heavy restrictions on selling used equipment that is not a feasible option. To offset this the equipment needs to be priced more like used equipment, and thus will require manufacturing changes. Fundamentally, using some of our older designs will probably provide the best initial result that use less expensive materials, but function just as well.

Export Management Company Save Money by hiring outside vendor Allows us to leverage our strengths Save money in the long run Due to the complexities of the exportation of the equipment it will be best to leverage the skills of a Export Management Company. They can then deal with the issues relating to government paperwork, fees, transportation, insurance, etc. This will save us significant time and staff to stay abreast of current developments, and requirement, in these areas. This will then allow us to leverage our resources best by focusing of the manufacture and maintenance of equipment.

Foreign Exchange Mexican Peso vs. US Dollar Forward Hedge for Purchases Quick Conversion for Service While the Mexican Peso has remained fairly stable against the U.S. Dollar as compared to other currencies it still can present enough of a difference to result in a very significant loss if the currency weakens before payment is completed. This can be mitigated by acquiring contracts to exchange currency based on an established exchange rate at a future date. These contracts can be done as orders for new equipment come in and payment details are finalized. This will be especially important if we are selling equipment very close, or below, to our cost. The chart is also showing that the Mexican Peso appears to be weakening against the US Dollar which would be damaging to FX trades. For our service to equipment within Mexico it is best that this money be transferred back to the US Dollar relatively quickly, especially when the Peso is weakening, to minimize our losses. As a secondary alternative we can also use price adjustments for our Mexican Subsidy to account for the weakening currency and minimize our losses. Figure 1. 3yr data on the Mexican Peso (MXN) against the U.S. Dollar (USD). Retrieved on August 24, 2005, from http://web-ip1-ptl.ntrs.com/ptl.public/cgi-bin/ptl/ntrs/jsp/servlet/action/GetQuoteMain

Conclusion Significant Need for Product Extremely Limited Trade Barriers Established Market (The World Factbook - Mexico, August 9, 2005, Economy Section) Easily Accommodate the Complexities of International Commerce Easily Grow our Revenue Mexico is an ideal nation to export our agricultural products to: With their economy resting heavily on agricultural production, and competing against industrialized nations, they have a distinctive need for farm machinery Due to NAFTA, and their proximity (limited shipping issues), there are very few barriers to selling our product there. Mexico has begun importing agricultural machinery and thus the market has grown accustomed to importing this material. Furthermore, the initial hurdles of entering the market have been overcome by other dealers, and thus there is an added advantage of being a later adopter. Easily Accommodate the Complexities of International Commerce. Through the use of Export Management Company rather than trying to manage in-house this can make much of the international trade similar to our domestic sales. Also, through the use of a couple of established techniques we can minimize the risks, and costs, of doing business with a country that has a weaker currency. Bottom Line: Mexico is an extremely attractive locale for expanding our business, and reach new customers with minimal additional overhead.

References Used Equipment and Goods under NAFTA (n.d.). Retrieved on August 4, 2005 from http://web.ita.doc.gov/ticwebsite/naftaweb.nsf/504ca249c786e20f85256284006da7ab/ea62156cda30408c852566c20070b943!OpenDocument The World Factbook (Mexico, August 9, 2005). Retrieved on August 4, 2005 from http://www.cia.gov/cia/publications/factbook/geos/mx.html Response to Criticism of U.S. Agricultural Policy and NAFTA (December 5, 2002). Retrieved on August 25, 2005, from http://www.usembassy-mexico.gov/releases/ep021205realitiesNAFTA.htm Corruption Perceptions Index 2004 (2004). Retrieved July 15, 2005, from http://www.globalcorruptionreport.org/gcr2005/download/english/corruption_research_%20I.pdf Mexico’s foreign direct investment falls (August 19, 2005) Retrieved on August 25, 2005 from http://www.businessweek.com/ap/financialnews/D8C37BKG0.htm These are the references used throughout the presentation.