Chapter 4- Artecola (Brazil: Low R&D /Innovation)

The Case Study: Artecola- Low R&D Innovation Brazil

1. LEAD Team Challenge Brief

2. INVESTMENT Team Challenge brief 

ACTION Team Response & Reports

Action Team A (Argentina & Spain) 

Effectual Action: Turn to Services 

Why?  

From inside 

• Tradable good side highly covered. 

• Expand markets (not only LATAM). 
• Diversify risk (product, market, region), as the company is getting massive. 
• High know-how in technology.  
• Pro-Innovation culture. 
• Prone to work in different business branches. 

• Successful expansion experience (Acquisition & Alliances) 

From outside: 

In 2014, for the first time since records began and almost certainly for the first time in human history, services, rather than goods, accounted for the bulk of the growth in global trade. 

Services such as tourism, entertainment and business services were responsible for 62% of the rise in exports in 2014, and physical goods for just 38%. 

More timely data suggest that, globally, the fortunes of services companies and manufacturers have diverged sharply since the start of 2014.
 

 The global purchasing managers' index, a measure of business confidence, is now markedly higher for the former sector than the latter, as the third chart shows. 

  

Where to set the service centres 

Turkey  

• To supply principally Europe and Middle East. Potentially Africa.  
• Strong recently currency devaluation. About 100% in 2018. Timing to invest seems suitable. 
• Large population to scale economies. 
• Corruption index, better than Artecola faces today in Latam.  
• Total tax and contribution rate (% of profit) 40.9 

• Corporate tax rate: 20%. The corporate tax rate is 20%; however, the rate is temporarily increased to 22% for the 3 consecutive years. 
• Ease of Doing Business Score: Rank 43/190 
• Minimum wage applicable to the worker assumed in the case study (US$/month) 584.7 

Kazakhstan 

• To supply principally Europe, Asia and Middle East.  

• Not large population to scale economies. 
• Highly educated population to work on services. 
• Corruption index, worse than Artecola faces today in Latam. 
• Total tax and contribution rate (% of profit) 29.4 
• Corporate tax rate: 20%. The corporate tax rate is 20%. Branches of foreign companies operating in Kazakhstan are subject to an additional branch profits tax of 15% of their after-tax income. Income tax treaties may reduce the branch profits tax. 

• Ease of Doing Business Score: Rank 28/190 
• Minimum wage applicable to the worker assumed in the case study (US$/month) 87.2 

India 

• To supply principally Asia, Oceania and Middle East.  
• Large and population to scale economies. 

• Low educated population. Particularly well-educated in IT. 
• Corruption index, similar to Artecola faces today in Latam. 
• Total tax and contribution rate (% of profit): 52.2% 
• Corporate Tax rate: The corporate tax rate for other domestic companies remains unchanged at 30 per cent. Further, domestic companies incur a surcharge of 7 per cent on income over INR 10 million and 12 per cent on income over INR 100 million. Foreign companies are taxed at 40 per cent and incur a surcharge of 2 per cent on income over INR 10 million and 5 per cent on income over INR 100 million. An additional 3 per cent education cess is payable on corporate income taxes (including surcharge). 
• Ease of Doing Business Score: Rank 77/190 

• Minimum wage applicable to the worker assumed in the case study (US$/month) 135.9 

China 

• To supply principally Asia and Oceania.  
• Large and population to scale economies. 
• Fairly well educated population.  

• Corruption index, similar to Artecola faces today in Latam. 
• Total tax and contribution rate (% of profit) 67.7 
• Corporate Tax: 25%, The Enterprise Income Tax Law provides a reduced tax rate of 15% for high and new technology enterprises. 
• Ease of Doing Business Score: Rank 46/190 
• Minimum wage applicable to the worker assumed in the case study (US$/month) 353.3 

World map indicating Education Index based 

Dark green: Highly educated, red/black, Low educated

 

KPMG: Tax Rates https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html 

Competitiveness Internationalization is a way to increase the competitiveness of the company. The internationalized company can thus enter a virtuous circle: internationalization allows it to increase its competitiveness, this gain in competitiveness makes it easier to increase sales and investments in international markets, which in turn continues to favor the growth of competitiveness. 

Causal Action: Internationalization 

Why? 

In the first place, internationalization can favor a reduction of costs. The company can find cheaper supplies in international markets. Or it can transfer part of its productive process to locations with better cost conditions (first of all for labor, this has been the key reason for the relocation of numerous industrial companies in the last decades, which moved their production to China, Morocco and other countries on process of development). Secondly, the increase in the volume of production represented by exports can allow the company to take advantage of economies of scale, producing lower unit costs. For example, by producing a greater volume of goods, and therefore needing a greater volume of inputs, the company has greater negotiating capacity to obtain better prices from its suppliers. Producing in large series can allow introducing technology and machinery that would not be profitable in small production series. 

There are four fundamental reasons why companies are internationalized: 

- Increase 

- Competitiveness 

- Market diversification 

- Ensure the supply of inputs for its production 

First of all, in order to make sure your company is able to promote innovative ideas, train properly the people, develop and control new processes, and compete effectively, the first you need to do is to understand that people represent the most important part of the company. Artecola needs more qualified people, for this it could sign agreements of internships with the best Universities to obtain 'future talents'. 

After that, with the aim of international growth and to ensure effective financing, Artecola can list itself in the capital markets, diversifying risks and achieving financing to continue its expansion. 

Action Team B

1.      If Artecola were to move away from their traditional portfolio range and beyond Latin America what countries and industries could they adapt to and why?

2.      With increased levels of debt (to a suitable level) Artecola would need to ensure this doesn’t increase to any further levels, how would you suggest they raise the capital for any future FDI.

Answers of action team B:

Artecola

Peer performances and priorities (LatAm markets)

Henkel - accelerating the innovation cycles and a reduction of innovation lead times. The company plans to achieve this partially via investments of 150 million euros in venturing activities between 2017 and 2020.

Henkel launched Henkel X, an internal and external platform to accelerate the digital transformation of Henkel and established unique mentorship network of around 150 external mentors that include founders, digital experts and thought-leaders.

Efficiency - As part of its strategic priority to fund growth, Henkel continued to focus on cost discipline and efficiency. In this context, the company pursues four initiatives. In 2018, Henkel successfully rolled out its ONE!ViEW and Net Revenue Management initiatives across the company, while Henkel’s integrated global supply chain organization (ONE!GSC) as well as the ongoing optimization of the shared service activities continued to contribute to efficiency improvements. Combined, these initiatives are expected to deliver more than 500 million euros in annual efficiency gains as of 2020. In 2018, Henkel has already realized more than 50 percent of the targeted total efficiency gains.

Rationale – Henkel failed to meet analyst expectations for 2018, and is currently aiming to counter “a challenging market environment, characterised by high uncertainty and volatility, with mixed market dynamics and continued headwinds from currencies and commodities” by pushing towards digitization and innovation.

Analyst reactions to the new strategies were skeptical, and expressed doubts that they’d be able to overcome Henkel’s lack of growth potential.

H.G Fuller

Recent M&A of Royal Adhesives Sealants, new technology center in Malaysia. LatAm growth was driven by growth in higher margin product segments. LatAm growth slower than EIMEA and Asia Pacific.

Comment on competitors – “multinational competitors typically maintain a broad product offering and range of technology, while regional or specialty companies tend to have limited or more focused product ranges and technology.” (Causal action)

On competitive factors – “Principal competitive factors in the sale of adhesives and other specialty chemicals are product performance, supply assurance, technical service, quality, price and customer service.”

Tariffs (Effectual action)

Into EU – 18% (approximate, varied product by product)

IPO

Currently a good time to float – the environment is defined by low interest rates,

Alliance/China push

Henkel – “open for further acquisitions that generate value” – CEO Hans Van Bylen, 22.2.18

Reasons for this:

1)      Competitiveness

China is an attractive market with its development of infrastructure, resource availability (physical and labor), productivity and workforce skills, and the development of the business value chain. 

2)      Capital Availability

In the early 2000s, China overtook the United States as the world's largest strongest issuer of foreign direct investment. Conditions in the global capital markets and general economic environment play a role in determining the flow of FDI into China.

3)      Stability

Political and economic stability can facilitate an influx of FDI.

4)      Big ambitions to enter to the Latin American market (see Appendix 1 below)

 

5)      Openness to International Trade

Market openness serves several important roles in attracting FDI. International trade is embedded in the DNA of the Chinese economy, representing 47% of its GDP. It is the largest exporter of merchandise and the second largest importer.

6)      Economic leadership

China’s share of GDP in relation to global output went from 2.5% in 1980 to 17.2% in 2015.

7)      Increase of profit due to the devaluation of Brazil’s national currency (real) and exporting products in Chinese currency (Yuan).

Thus, an alliance with Chinese market provides Artecola company with a cooperation with chemical companies and an entrance to the global trade area with consequent economy development.

Merger with Eleikoroz

·         Eleikoroz is a close peer, specializing in input and intermediate chemicals for industrial purposes that meet customer requirements in the building and construction, footwear, clothing, automotive, food and various chemical industries.

·         The product mix appears to be complementary rather than competitive

·         Comparable size with Artecola – 300m USD in revenues

·         More compact operations – two major petrochemical sites in Brazil vs Artecola’s pan-LatAm operations

·         Owned by BRL Trust – one of Brazil’s largest institutional investor, which is remains hungry for asset acquisition

Appendix 1

Action Team