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Expansion to Ethiopia
International Business (BUAD500)
Submitted to:-
Professor William Boyce,
By:-
Christine Reed, Liu Xiaoxing, Tsegaye Mulugeta , Trevor Grandle
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EXECUTIVE SUMMARY
AlTec Industrial has become one of the most successful aluminum producers and
distributors in the United States market over the past 40 years. The variety of the product line, an
experienced sales staff and management team, and the exemplary quality of the product makes
AlTec Industrial a leader in the United States aluminum business. However, despite the
tremendous success experienced at the national level, increasing competition and an almost
entirely saturated aluminum market in the United States has forced us to seek strategic
opportunities for expansion and new market potential at the international level. Therefore, after
extensive market analysis, research, and financial and staff preparation, the company has decided
to enter the international market.
AlTec Industrial plans to export its aluminum products to one of East Africa‟s newly
emerging markets, Ethiopia. Thanks to the current governmental ruling party‟s policy of
developing the service and industrial sector, there has been a new push toward construction of
large energy efficient commercial buildings in the country, and especially in Ethiopia‟s capital
city, Addis Ababa. This is the basic target market of our aluminum products, and the „green‟
construction concept of the country will add to the demand for the product. Although aluminum
is an essential tool in the building process, the market is highly under-saturated, currently being
served by only one major provider.
There are obvious risks associated with the expansion of AlTec Industrial into the
international market, including the challenge of winning new business, the potential change of
priorities of the ruling government, and finally potential supply chain problems not encountered
with the required operating channels within the United States. Although the risks are real, should
this venture proves successful, the future health of AlTec Industrial and our place in the
aluminum market will be solidified. Additionally, we will be primed to expand into surrounding
African countries, as Addis Ababa is the capital city of Africa itself.
The senior management at AlTec Industrial strongly encourages the board members to
approve this new venture and plan to begin working on the expansion immediately. Now more
than ever, the success and future health of this organization is dependent on our willingness and
ability to adapt. We have much to lose by not expanding, and much to gain through the hard
work, preparation and finally success of AlTec Industrial‟s international venture.
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NATURE OF ALTEC INDUSTRIAL’S NEW BUSINESS VENTURE
AlTec Industrial, a United States based company, plans to begin exporting and selling
aluminum to the Ethiopian market. This new venture will include opening a new branch office,
as well as a warehouse facility to store the imported aluminum products. Finished aluminum
alloy parts will be the primary product lines carried, and a limited amount of aluminum ingots
(Fig A1) will be stocked for local manufactures. The Ethiopian operations will be an extension of
the parent company, AlTec Industrial. Our current expertise in sales and logistics across the
company will be leveraged to start local facilities. Supplies will be transported by ship from
existing smelting and finishing locations, primarily from the United States. The primary
customers will be Ethiopian commercial real estate construction projects.
The Ethiopian business will be supported by a local company office in Addis Ababa, the
capital of Ethiopia (Fig A2). The Ethiopian management staff will be led by a current employee
with the United States parent company. Other management staff will include corporate and local
human resources, while the sales staff will start small and grow as required. A local warehouse
facility will be leased or built. This local space will allow for quick delivery to customers and be
supported by the existing global supply chain. Products not stocked locally can be sourced from
other warehouses in US or directly from the manufacturing facilities.
Politics
The Federal Democratic Republic of Ethiopia has a parliamentary based federal structure
which is composed of nine regional and two federal states. Addis Ababa, the capital city, and
Dire Dawa among other large cities, are the federal states capable of generating their own
revenue. The country has two houses: the council of people‟s representatives, the highest
authority of the federal government, and the council of federation which has the power to
interpret the constitution. The position of the head of state is highly honorable, while executive
power is held by the prime minster. The national parliamentary election is held every five years,
and was last held in May of 2005. The government is currently providing support for any
investments in the country to support the growth of the Ethiopian economy in all aspects
(Pearson Education, 2008). Therefore, the Political situation in Ethiopia is stable, making the
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expansion attractive and allowing for our business to thrive in a governmentally supportive
environment.
Economy
The Economist magazine predicts Ethiopia's economy will grow by 7% in 2010 and
predicts that the country will be the fifth fastest growing economy in 2010 (The Economist,
2010). According to the magazine, Ethiopia's Gross Domestic Product (GDP) is expected to
reach $35 billion in 2010 and inflation is estimated at 12% (Nazret.com, 2009). In addition, the
CIA world fact book has reported incremental gains in the country‟s GDP from $71.07 billion in
2008 to $76.04 billion in 2009 (Central Intelligence Agency, 2010). AlTec Industrial therefore
expects the economic trend to continue, allowing the strong economy to support our expansion
into Ethiopia.
The country‟s GDP has also showed incremental gains over the past five years. The
current government is following a free market policy that motivates investment in the country,
and has set up governmental offices to work with any business entity to make the transition and
investment as smooth as possible (Ethiopian Investment Agency, 2005). The below graph
demonstrates the steady increase in real GDP between 1991 and 2007 (Vital Seeds, Inc. 2007).
Technology
The shift that Ethiopia is currently undergoing is from an agriculture based economy to
one of great industrial development. For this reason, there has been massive infrastructure
development, including the construction of tall, energy-efficient buildings. Given the pace of
development, the „green‟ building concept is the most widely used technology alternative that
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helps to utilize sunlight throughout the day, therefore requiring the buildings be covered with
glass. In doing so, construction companies have found aluminum to be the ideal technology in
affixing the glass to the buildings.
Pure aluminum, a silvery-white metal, possesses many desirable characteristics ideal for
this „green‟ movement. It is light, non-magnetic and non-sparking, stands second among metals
in the scale of malleability, and sixth in ductility, making it easier to work with (Los Alamos
National Labs, 2003). Aluminum is remarkable given the metal's low density, and for its ability
to resist corrosion due to the phenomenon of passivation. Structural components made from
aluminum and its alloys are very important in areas of building construction, not only in the
United States and Ethiopia, but increasingly across the globe. Therefore, aluminum‟s increasing
popularity and importance in construction makes it the ideal product to expand with into
developing nations, especially Ethiopia.
Strengths
AlTec Industrial brings a number of strength to this business venture, including a great
deal of brand equity, known for exemplary service and product quality. Our company is
confident in our commitment to and experience in manufacturing as well as in our marketing
professionals, both of which have contributed to our success in the United States market. The
technology available to produce such a wide variety of aluminum products makes us especially
competitive. This, in addition to the employee‟s shared vision of penetrating the Ethiopian
market will help AlTec Industrial to be opportunistic in the new international expansion plan.
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Weaknesses
Despite AlTec Industrial‟s success at the national level, there is no denying that lack of
experience in expansion to an international market is a significant weakness. The unfamiliar
name of AlTec Industrial in Ethiopian market is also the weak side of the company for
expansion. We encounter a number of risks given that fact alone, including insufficient
marketing information, paper based knowledge of the target market and society, lack of
communication style of the target population, shallow information on business communication
styles and implementation in construction industry of Ethiopia.
Complete dependence on the freight transporting companies to ship our various products
is also a weakness, as this takes the control over the timing and arrivals of shipments, including
arrival at the port, the Ethiopian warehouse, and to the consumer. We believe we have found the
solution in stocking over a month‟s worth of product in the Ethiopian warehouse, but recognize
the potential for unseen problems in the future. The financial capacity and limitations of the
detailed market situation information also limit our lead time stock to a month and half only.
Opportunities
Addis Ababa has successfully become a regional business center for Africa, thanks
largely to its business-friendly environment and comparatively stable government, opening the
door for our own business expansion (Expogroup, 2009). The limited number of suppliers in the
city and the significant construction of commercial business buildings becomes a considerable
opportunity for AlTec Industrial. Additionally, the fact that English is the most widely spoken
foreign language in the country will help the United States sales and management teams
communicate easily with the Ethiopian office employees and customers with no language barrier
(U.S Department of State, 2010, Background Note: Ethiopia).
Threats
There are a number of threats we face by opening a satellite office in Ethiopia, including
pricing of the product. Transportation may affect pricing, as the global fuel price is fluctuating. It
is clear that price variation of the product may also affect customers‟ satisfaction with the
products. The raw material cost, which is dependent on the global economy, might also affect the
variable cost of production. Specific to the market area, the upcoming election may bring a
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political change and the new government may change its focus from service industry to some
other sector.
Other threats include the sustainability of US-Ethiopia relationship, as the United States
has warned the Ethiopian leading political party that human rights abuse occurs and will not be
tolerated (U.S. Department of State, 2010, 2009 Human Rights Reports: Ethiopia). Additionally,
the growing presence of pirate activity in the Gulf of Aden threatens shipping lanes throughout
the region. Due to this increased activity, a great deal of attention is being paid to the activity in
this area of the world, and the United Nations in December 2008 approved a measure allowing
international forces to fight the piracy, in addition to the regular patrols (Matthew V. Veazey,
2009).
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wide range of construction undertakings of all types and sizes is among the first line construction
company in the country (MIDROC Ethiopian Construction, 2009).
AlTec Industrial is thrilled the government is committed to opening areas of the economy
to foreign investors, and investors are welcome to invest on their own or as joint ventures. The
government is committed to continuing to improve Ethiopia‟s investment climate in order to
offer sound business opportunities and a stable economic environment.
To encourage private investment and promote the inflow of foreign capital and
technology, Ethiopia grants 100% exemption from the payment of import customs duties and
other taxes levied on imports is granted to all investment capital goods, such as plant, machinery
and equipment. There are additional foreign investment incentives, including exemption from
profit tax for two to five years depending on the investment, the carrying forward of losses
suffered during the tax exemption period for half the tax exemption period, and duty free imports
up to 15% of the value of the capital goods imported for investment purposes (Embassy of the
Federal Democratic Republic of Ethiopia, 2010).
BENEFITS
Ethiopia is the fastest growing non-oil producing economy in Africa (afrol News, 2008).
The strong economy is driving an increase in construction, especially in commercial real estate.
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This growth has encouraged construction projects with modern architecture, and aluminum is
widely used in these projects due to its strength and light weight.
Since 1991, Ethiopia has had a relatively stable political system. It has a hybrid
democratic system ranked 105 out of 167 by the Economist (2007). The government encourages
foreign investments and a large portion of their imports come from the US (Central Intelligence
Agency, 2010).
Success in Ethiopia would prepare the company to expand operations into other countries
in Africa. Relationships and networks built in the trade hub Addis Ababa will allow operations to
expand organically.
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Promotion is centered on four primary marketing concepts – advertising, personal selling,
publicity, and sales promotions. Each of these four factors is influenced by a firm‟s financial
resources, the nature of the market, and nature of the competition. AlTec Industrial is profitable
and has healthy financial resources to invest, is entering into an under-saturated market in
Ethiopia, and will specifically focus on advertising to our target market in addition to personal
selling by the sales team.
The advertising and personal selling will focus on educating construction companies and
their clients not yet utilizing aluminum products, in addition to soliciting the business of those
who already do. AlTec Industrial will strive to further educate potential customer by focusing on
the specific strengths of both aluminum and AlTec Industrial. The strongest selling point is the
product‟s light weight and high strength in addition to the durability of aluminum alloys, and
being corrosion-resistant requiring no protective finishes. Additionally, aluminum is ductile and
can be formed into innumerable profiles, ideal for the modern yet functional buildings being
constructed in Addis Ababa.
Personal selling will also promote aluminum as a provider of a high degree of radiant
heat reflectivity regardless of the roof‟s slope, ideal for the Ethiopian climate, preventing heat
transfer and subsequently lowering energy costs (The Metal Initiative). An additional cost saving
measure is that aluminum is virtually maintenance free, unlike wood and steel.
Regardless of the project, aluminum can be of great use to the construction company. A
newer technique in construction involves aluminum structural framing, capable of handling
heavy loads more effectively than welded steel. Aluminum comes in a variety of applications,
including extrusions, sheet, forgings, castings, and plate. Finally, in most construction scenarios,
aluminum applications are light enough to be handled by one worker, thereby simplifying the
material handling activities and erection process (The Aluminum Association, 2008, Geodesic
Domes).
Place, also known as distribution in the marketing world, is the least exciting of the four
P‟s. AlTec Industrial is primarily concerned with the physical movement of the product from the
United States to Ethiopia, and specifically the physical distribution activities: order processing,
material handling, warehousing, inventory management, and transportation.
The first, order processing, will first take place at the Ethiopian office between the
Ethiopian sales team and the United States supplier office. Concerning material handling, the
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aluminum will be taken from our US warehouse and transported via cargo boat to the Port of
Djibouti. AlTec Industrial will have access to temporary holding at the port, and the aluminum
will then be transported via truck to our office warehouse in Addis Ababa. Customers will have
the ability to pick up the aluminum product or have delivery to their construction sites.
OPERATIONAL NEEDS
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AlTec Industrial will be establishing a Greenfield operation, in that we are a foreign
company investing in the land and infrastructure that will support our aluminum business in
Ethiopia. Although we will be starting from scratch in Ethiopia, we will have the full support of
AlTec Industrial backing the endeavor, and supplying the funds to purchase or construct a
satellite office and warehouse, as well as hire and employ staff, and provide support through a
dedicated team in the United States to coordinate shipments.
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offices when placing orders and scheduling shipments. Finally, a maintenance staff of three
people will be hired to manage the upkeep and cleanliness of the management and sales office
and warehouse.
PROJECTED RISKS
There are several projected risks associated with opening an overseas branch of the
Aluminum Company. The first anticipated risk is winning business, though international trade is
essential to the health of the aluminum industry. U.S. exports of aluminum in 2006 totaled 6.6
billion pounds, which was a 17% increase over 2005 (The Aluminum Association, 2008,
Industry Overview). Although Canada and Mexico are among the U.S. industry‟s largest trading
partners, we are optimistic that expanding into Africa is the right move for the future of the
industry.
The Ethiopian government poses several risks, including the question of the
government‟s stability and unwavering support including current incentives offered. The national
government is a federal republic, or “a state in which the powers of the central government are
restricted and in which regional governments retain a degree of self-government; ultimate
sovereign power rests with the voters who chose their governmental representatives” (Central
Intelligence Agency, 2010). Because of this, although Ethiopia is experiencing a construction
boom, the next government may choose to focus on environmental and farming issues.
According to a general manager at an Ethiopian construction firm, they must regularly
face several bureaucratic obstacles including stiffer governmental regulations, including that
construction firms are now held responsible for building delays, regardless of the cause (delays
from the governmental customs authority), and held responsible for paying fines, thus
encouraging corruption (Ethiopian Business Development Services Network, The Ethiopian
Construction Sector). Nonpayment is another common risk, as individuals may claim lack of
funding following the completion of the project. It can also difficult to obtain letters of credit and
collateral requirements for loans.
We are also cautious regarding supply chain problems, as we do not plan to produce the
aluminum in Ethiopia. It is important to recognize that although very close to the Gulf of Aden,
Ethiopia is a landlocked country. Transported aluminum will have to travel through the port of
Djibouti and over the border into Ethiopia and to Addis Ababa, where a main highway route
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already exists and is used extensively by Ethiopians (Central Intelligence Agency, 2010). The
Ethiopian infrastructure is exceedingly poor and undeveloped according to the U.S. Department
of State‟s Country Commercial Guide (2000). However, it has made great leaps in the past ten
years thanks to China‟s recent investments in road construction, healthcare, telecommunications,
and water infrastructure, as well as a plan established in the late 1990‟s to expand the road
network by 80 percent by 2007 (addisportal.com, 2010). Additionally, the Port of Djibouti is run
by DP World, one of the largest marine terminal operators in world and operates across 31
countries. The port is currently running at 85% of its effective capacity (Fig A3), and continues
to work on identifying areas of improvement (DP World).
RESUPPLYING ALUMINUM
Regarding transportation and storage of our aluminum products, AlTec Industrial will use
marine transportation to get our aluminum products to Ethiopia. Finished products will be loaded
at New York and unloaded at the Port of Djibouti. The total lead time for seaborne shipping is
anywhere from 22 to 30 days. Shipments of the aluminum products will be sent monthly to
Ethiopia.
From the Port of Djibouti to Addis Ababa, there is about 900 km of road to travel. We
will use the transportation company that has been appointed by the Ethiopian government to
carry our products to warehouse, and the same to carry our products from our warehouse to
customers. The transportation lead time from the port to warehouse will be from 3 to 5 days.
Therefore, the total transportation lead time will be 25 to 35 days. In order to avoid shortage of
stocks, 1.5-2 months worth of estimated inventory will always be retained. The local employees
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will be responsible to accept, clean, and check products in the warehouse, and will receive
extensive training prior to the business opening.
The Ethiopian office will translate, supply, and record all of the information for sales and
logistics. Thanks to technology, this in addition to all inventory and sales forecasts will be
constantly available to AlTec Industrial‟s headquarters to monitor and adjust the logistical plan
as needed.
FINANCIAL STRATEGY
Our Ethiopia branch is forecasted to contribute a net profit of $10 million for the first year,
$42 million for the second year, and $73 million for the third year. For the economic
development of Ethiopia and expanding market share, our new company will bring more and
more profit to AlTec Industrial.
We anticipate our new branch will take 10% of Ethiopia‟s market for the first year.
Furthermore, this share will grow to 20% in the second year and 30% in the third year.
Though for the first year (- $11.7 million) and the second year (-$2.6 million), the new
branch is expected to put pressure on AlTec Industrial‟s cash flow. We project that in the
third year ($30.3 million), cash flow will turn positive.
Because AlTec has enough cash to cover the new branch‟s cash flow needs, neither loan
nor long-term debt is required.
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SUMMARY OF PROJECTED REVENUE
Based on our analyzing, the aluminum market of Ethiopia will grow by 7% every year. Our
Ethiopia branch will grain 10% of the market for the first year. The total revenue of the
company will be $293 million.
For the second year, our Ethiopia branch is expected to gain 20% of the market. The total
revenue of the company will be $627 million.
For the third year, our Ethiopia branch will continue growing to 30% of the market share and
the total revenue will be $940 million.
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SUMMARY OF PROJECT PROFITS
According to our increasing total sales in Ethiopia, the net profit will also increase year by
year.
Packing and delivery expense, warehouse & office lease expense will increase as the same
rate as revenue. Because more employees will be hired in order to follow the fast growing
business, salaries and wages will also increase. Furthermore, advertising expense and legal
fee for this new international business will also be paid in a high level.
Our Ethiopia branch‟s net profit is expected to be $10 million for the first year, $42 million
for the second year and $73 million for the third year.
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SUMMARY OF PROJECT ROI
As shown in the graph above, the ROI (return on investment) of our Ethiopia investment is
keeping in high level.
In the first year, the ROI will be 23%. Furthermore, the ROI is 30% in 2011 and 29% in
2012.
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3 YEAR FINANCIALS
INCOME STATEMENT (ETHIOPIA)
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CASH FLOW (ETHIOPIA)
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INCOME STATEMENT (ALTEC)
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CASH FLOW (ALTEC)
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BIBLIOGRAPHY
A.COM.EX, (2009). Available from http://www.acomex.it/ [Accessed 3 May 2010].
addisportal.com, (2010). Ethiopian minister: Co-op with China brings practical, tangible results.
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afrol News, [2008]. Ethiopia sees Africa's fastest growth. Available from
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Matthew V. Veazey (2009). OUTLOOK: Piracy On The Upswing And More Localized.
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http://www.downstreamtoday.com/News/ArticlePrint.aspx?aid=14741&AspxAutoDetectCookie
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The Economist, (2007). The Economist Intelligence Unit’s index of democracy. Available from
http://www.economist.com/media/pdf/DEMOCRACY_INDEX_2007_v3.pdf [Accessed 3 May
2010].
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Ethiopian Business Development Services Network. The Ethiopian Construction Sector.
Available from http://www.bds-ethiopia.net/construction/index.html [Accessed 3 May 2010].
Jimma Times, (2008). Ethiopia has fastest growing non-Oil Economy in Africa – IMF. Available
from http://www.jimmatimes.com/article.cfm?articleID=17566 [Accessed 3 May 2010].
Nazert.com, (2009). Ethiopia - 5th Fastest Growing Economy in the World in 2010. Available
from
http://nazret.com/blog/index.php?title=ethiopia_5th_fastest_growing_economy_in_&more=1&c
=1&tb=1&pb=1 [Accessed 3 May 2010].
Pearson Education, Inc, (2008). Information Please Database – Ethiopia. Available from
http://www.infoplease.com/ipa/A0107505.html [Accessed 3 May 2010].
Thomas P. Ofcansky and LaVerle Berry, editors, (1991). Ethiopia: A Country Study.
Washington: GPO for the Library of Congress. Available from
http://countrystudies.us/ethiopia/55.htm [Accessed 3 May 2010].
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U.S. Department of State, (2010). Background Note: Ethiopia. Available from
http://www.state.gov/r/pa/ei/bgn/2859.htm [Accessed 3 May 2010].
U.S. Department of State, (1999). FY 2000 Country Commercial Guide: Ethiopia. Available
from
http://www.state.gov/www/about_state/business/com_guides/2000/africa/ethiopia_CCG2000.pdf
[Accessed 4 May 2010].
U.S. Department of State, (2010). 2009 Human Rights Reports: Ethiopia. Available from
http://www.state.gov/g/drl/rls/hrrpt/2009/af/135953.htm [Accessed 3 May 2010].
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APPENDIX
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EQUIPMENT AVAILABLE AT THE PORT OF DJIBOUTI, FIGURE A3
Cranes (4) 2 2
Yard Equipment
13 x Reachstackers
2 x Empty Handlers
3 x Forklifts
Gate Operations
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