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ADMS 4900 Lecture Notes - Swot Analysis, Renminbi, Joint Venture

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orchidherring200
28 Oct 2012
School
York University
Department
Administrative Studies
Course
ADMS 4900
Professor
Brian Dunn

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Document Summary

"98, set up a leather furniture facility in mexico (for midwest/southern n. a market) Chose facility" in mexico over china back then, here"s why: Lower distribution cost: mexico being closer to texas. Fdi in china were mainly joint venture. Mexico was considered due to closer to the u. s. market, and more meaningful comparison. Mexican taxation practices & disagreement w/ the local taxation authorities ( what they allow and not allow weren"t clear) Other costs involved mexico-u. s border : trucks from mex cannot cross the border; transferred only using u. s trucks (a. k. a friction cost ) Order allocation process favoured canadian facility: orders given to winni plants first -> balance then allocated to mexico. Mexico plant fight with headquarters for orders -> a positive impact on the mexican overhead recovery rate. Palliser had yet to focus on how to lower the costs through changes in its mexican supply chain. Gone tremendous change: due to rise of china (furniture exports grown @ ann.

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Related Questions

3. The labor supply and demand equations in Mexico and the US are

Ndmex = 180 – 2 Wmex and Nsmex = 60

NdUS = 540 – 4 WUS and NsUS = 180

(Notice: To make the exercise simple, we are assuming that the labor supply curves are perfectly vertical at 60 in México and at 180 in the US).

where Ndmex and NdUS are the number of workers demanded in Mexico and the US (in millions of workers). Wmex and WUS are the yearly wage rates in Mexico and the US (in thousands of dollars). Nsmex and NsUS are the number of workers supplied in Mexico and the US (in millions of workers).

a. What are the equilibrium wages in Mexico and the US.

b. Due to the higher US wages (see your answer to part a), millions of Mexican workers

want to emigrate to the US. However, the US inmigration authorities issue work

permits for only 10 million Mexican workers. How will this limited flow of Mexican

workers affect wages both in Mexico and the US (hint: if these flows take place, how

many workers will there be left in México, how many workers will there be in

the US, i.e., how do the labor supply curves shift?).

c. If an unlimited flow of Mexican workers is allowed (free movement of labor across

borders), at the end, wages will be equal in both countries (basically, in practice,

there will be just one unified labor market). What would be this wage? How many

Mexican workers will emigrate to the US? How many Mexican workers will be

demanded in the US? At the end, how many workers will there be in México and the

US? (Hint: Find the total labor supply and demand equations).

d. With the creation of a Free Trade Zone in North America between the US, Mexico and

Canada (the NAFTA agreement), the demand for Mexican food (produced mainly using

labor intensive techniques) will increase. This in turn, will increase the demand for

labor in Mexico. Asume that the new demand for labor in Mexico is:

Ndmex = 240 – 2 Wmex

Suppose that at the same time, the Mexican government sets a minimum wage of 90.

Discuss the effects of these two simultaneous events on the Mexican labor market.

e. The US authorities know that wages for unskilled labor in the US will go down with the

immigration of Mexican workers to the US. Suppose that the US authorities want to

keep US wages at 88. How many Mexican workers should be allowed to enter to the US

(i.e., how many work permits should the US government issue)?

Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico,€ Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,” The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,” Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

Assume that you live in the United States and invest $60,000 to establish a language school called Escuela de Inglés in Mexico City, Mexico. You set up a small subsidiary in Mexico with an office and an attached classroom that you lease. You hire local individuals in Mexico who can speak English and teach it to others. Your school offers two types of courses: a 1-month structured course in English and a 1-week intensive course for individuals who already know English but want to improve their skills before visiting the United States. You advertise both types of teaching services in local newspapers. All revenue and expenses associated with your business are denominated in Mexican pesos. Your subsidiary sends most of the profits from the business in Mexico to you at the end of each month. Although your expenses are fairly stable, your revenue varies with the number of clients who sign up for the courses in Mexico. Answer the following questions as if you were serving on the board or as a manager of the business. The questions force you to assess the firm’s opportunities and exposure and to consider potential strategies that your business might pursue.

1. Explain how the theory of competitive advantage could justify the existence of your business in Mexico.

2. Assume that your business in Mexico grows. Explain how global financial markets could help to finance the growth of the business and which criteria could use to make the correct financing decisions.

3. Explain how your business could be adversely affected by economic, political, cultural, demographic and legal issues in Mexico.

4. Describe the type of economic or other conditions in Mexico that could cause the Mexican peso to weaken and thereby adversely affect your business.

5. Under this situation what is your recommendation about the appropriate financial tools that could apply by management to minimize the negative effect of peso depreciation.

6. Explain how the activities of your business are related to the Balance of payments of the USA and Mexico?