International Business Management - Eastern Europe - Essay Example

International Business Management Case Study: GM Hungary Questions to be raised to the Hungarian Government and RABA: In respect of the proposed join venture arrangement of GM Europe with RABA, the state owned enterprise of the Hungarian Government the following issues are to be addressed and possible answers/commitments are to be obtained from the respective parties: a. With Hungarian Government : As far as the Hungarian Government is concerned the development of the joint venture project hinges on the positive response from the government in respect of the following issues: Incentives for Investment including Tax Incentives Provision of Infrastructural facilities and Protection from local competition (i) Incentives for Investments: There should be a commitment from the Hungarian government in respect of the following concessions/incentives to make the investment in Hungary attractive: 1. A Tax holiday1 period of first 10 years after the start of the commercial production: The basic incentive that any foreign joint venture partner from a developing economy would expect is the tax holiday period which acts as a financial incentive for any proposal of foreign direct investment. 2. The maximum rate of Income tax that could be levied after the tax holiday period of 10 years should be fixed at not more than 20 percent of the taxable earnings: In addition to benefit of the tax holiday period the developing countries normally offer concessional rates income tax for any joint venture arrangements. 3. Free conversion and free transferability of funds from and to Hungary to European or US destinations2: Though these facilities were available at the time of negotiation the Hungarian government should make a commitment for the uninterrupted continuance of these facilities, which is very important for the profitable functioning of the join venture arrangement. 4. Concessional duty rates on the import of engines and reduction in the VAT (Value Added Tax) being charged by the Hungarian Government: The import duty on engines depending on the size of the vehicle varied from 10 to 40 percent and there was an additional VAT of 25 percent charged by the Hungarian government. Though Hungary is a signatory to the GATT (General Agreement on Tariffs and Trade) the country was free to vary the duty and VAT structures as it may deem fit in the case of automobiles. Hence there is the need to get the government committed on the basic duty structures which is advantageous to GM Europe. (ii) Provision of Infrastructural Facilities: In addition to the tax incentives it is also important that the Hungarian government should provide basic infrastructural facilities to facilitate the successful operation of the project. Such infrastructural facilities may include the provision of natural gas to the site in addition to the provision of water, electrical power as may be required, well maintained roads for easy transportation and hassle-free physical movement of engines, components and cars during import and export. (iii) Protection from Competition: In order to gain a distinct competitive advantage there should be a commitment from the Hungarian government that at least for an initial period of 5 years or so the import of cars needs to be banned. Since the Hungarian market was small and the affordability of Hungarian population was also less there is the need for this condition. The country could get other advantages in the form of generation of additional employment and development of local suppliers which need to be traded against the protection needed by the GM Europe for its joint venture in Hungary. Though at the start, the GM plant would be small the facility could be enlarged with modernizing and restructuring of the economy. This is usually the case with any developing economy where there are going to be economic reforms the local industry would naturally develop along with the measures for economic reforms. b. Issues to be raised with RABA: The following issues are to be discussed with RABA for possible acceptance as the terms of the joint venture arrangement with GM Europe: 1. There should be an agreement to the effect that the existing unutilized facility of RABA will be used for the new joint venture for a fixed period of time on lease. May be a 99 year lease agreement be worked out to acquire the utility of the facility. In case if the plant is going to be offered by RABA as representing its investment in the joint venture then RABA should agree on a proper valuation of the plant to be included in the joint venture agreement. 2. RABA should make the existing facility suitable for car manufacture as it was originally intended for manufacture of tractors. 3. RABA should agree for using the facility as a satellite facility of GM Austria and also for the provision of technical support by them on the purchase and installations of new equipments. RABA's agreement is also essential for the provision of training of the new personnel on GM operational procedures and specifications. 4. All other general terms of the Joint Venture arrangement including the managing day to day operations and profit sharing need to be discussed and mutually agreed upon for a smooth sailing of the join venture. 2. Questions from the Board of GM: The following are the likely questions that the Board of GM would like to get answers for: 1. Has a detailed industry analysis been made in order to determine the optimum volume of cars that can be assembled in the Hungary Plant 2. Has a detailed analysis of economic factors3 - in terms of the profitability and sharing with the joint venture partner, exchange fluctuations and transferability, tax incentives etc; political factors4 - with respect to the stability of the government, its economic policies, policies towards economic reforms with particular reference to the foreign direct investment in the form of joint ventures and social factors - as to the compatibility of the work force and attitude of labour and other major social issues like religion, language and culture been made and a report presented 3. What are the projections in terms of capital expenditure for the proposed project and has an assessment been made as to whether it would be possible to bring the plant in to existence within the budgeted capital expenditure estimates 4. Has the Hungarian government's agreement been obtained on the extension of tax incentives, provision of infrastructural facilities and protection of the Hungarian market at least for a specified initial period 5. Does the terms of the joint venture arrangement with RABA provide for various clauses of management issues including profit sharing, training of the employees and the lease of the plant at Szentgotthard site at Hungary Is a proper valuation of the plant is made to be included in the joint venture arrangement if it is not going to be a lease hold one 6. Has the logistics for the transportation of engines and components from GE Austria to the proposed project site and vice versa worked out and the potential hurdles or issues analysed 7. What are all the likely hiccups in the import and export formalities in an East Bloc Country like Hungary Has these hindrances been analysed and ways to mitigate them established 8. How realistic is the estimate of the local requirements of 11,700 cars during the projected period What is the back up plan if these sales are not achievable during the period 9. How good is the export estimate of 3000 cars to Yugoslavia What is the back up plan here if this export is not achievable 10. Since the proposed project is to be established in an Eastern Bloc country, has a detailed sensitivity analysis of the financial projections been made Has a justification for the proposed investment evolved 3. Minimal Conditions needed for going forward with the Project: The minimal conditions that must be fulfilled for deciding to go forward with this project are: 1. The Hungarian government should agree on the tax incentives and the provision of infrastructural facilities if not on the protection of the local market. The protection need not be considered important in view of the fact that the size like that of the proposed GM plant in Hungary was uneconomical for the GM competitors outside Hungary and hence there may not be any immediate threat of new entrants in to the Hungarian market. Since the import duties of the Hungarian government are likely to fluctuate, it might act as deterrent for the import of the cars as competition to the local production of GM. 2. From the angle of the commitment from the side of RABA it is necessary to at least fix the lease period for the plant and the working relationship on the joint venture including sharing the revenues. If the plant is going to form part of the asset belonging to the joint venture a proper valuation thereof need to be made and agreed before the project could be proceeded with. 3. From the point of view of GM Europe the financial projections in respect of the capital expenditure need to undergo a detailed sensitivity analysis considering the factors presently existing. Back up plans for the domestic and export sales need to be evolved before proceeding with the project. 4. Characterization of the Investment - Strategic Review: The proposed investment in to the Hungarian facility may be characterized as a strategic one for GM Europe due to the following reasons: 1. Hungary because of its strategic geographical location can be converted as the export hub for the emerging markets of Eastern Bloc. 2. Being a developing nation there are bound to be cost advantages and scale economies for the project including the tax incentives from the government. 3. There is an assured domestic market at least for the next five to seven years as no other competitor of GM would think of an investment of the small size in car assembly as GM is planning and this definitely avoids competition in the domestic market 4. The time needed for making the project productive would be less since there is the ready RABA plant available. 5. The biggest advantage of all is the location of the plant in Hungary within 220 kilometers from GM Austria which facilitates the provision of training and technical support not only for installation but also for other production needs. 6. Considering the need for GM to develop additional capacity for manufacture of Family I engines in any of the existing European facilities the plant in Hungary would serve as an ideal hub for all European manufacturing facilities. 5. Right Time to Make the Move into Emerging Eastern European Countries: The 2006 Global Retail Development Index5 observes "as the pace of globalization quickens so does the race into new markets with the promise of large, wealthy emerging markets too attractive to ignore. But success in this race does not necessarily go to the swiftest. Rather, it goes to companies that make the right moves at the right times. Location is still important", but timing is more important. Normally Eastern Europe because of the progressive economic growth and abundance of natural resources with its high potential purchasing power has become an attractive location for making foreign direct investments. However the restructuring of the facilities in Eastern Europe required lot of hard currency as there existed strict exchange controls. While during the late 1980s when the exchange controls are liberalized the countries started tightening the convertibility of currencies which was a potential problem in moving to the Eastern European Countries. The strategic decision to move into the Eastern Bloc Countries can be taken once the investor is convinced that the selected country's economic prospects are thoroughly analysed and are found in favour of the proposal to invest. Moreover it is for the investor to also look in to the government's monetary and fiscal policies. It is vitally important that these policies reflect the progressive ideologies of the government and are also consistent over a period of time. In addition the existence of a stable government is an essential prerequisite for any investment decision in the Eastern Bloc Countries. It is also necessary to consider that skilled labour force is available in plenty that too with good productivity at comparatively cheaper costs. The workers must also be technically capable. If all these conditions are satisfied then that may be considered as the right time to move in to any Eastern European Country. Word Count: 2067 Reference: AmCham 'Hungary' http://www.amcham.hu/Files/FileRedirect.aspxFileID=276e0241-fb8d-4067-b9c9-e5704279e2c6. "Emerging" The 2006 Global Retail Development Index http://72.14.235.104/searchq=cache:z6mhSwAQwmwJ:www.atkearney.de/content/misc/wrapper.php/name/file_grdi_2006%255B1%255D_1147072562a95e.pdf+Right+Time+to+Make+the+Move+into+Emerging+Eastern+European+Countries&hl=en&ct=clnk&cd=14&gl=in&client=firefox-a Foreign Direct Investment in Hungary an Overview http://igitur-archive.library.uu.nl/dissertations/1894404/c3.pdf. Katalin Antalczy and Andrea ltet 'Outward Foreign Direct Investment In Hungary Motivations And Effects' http://mek.oszk.hu/04200/04254/04254.pdf The EU Single Market 'Surveillance and Analysis of Capital Movements' http://ec.europa.eu/internal_market/capital/analysis/index_en.htm Read More