p&g report
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Final project report for the class Global Business and Corporate Social ResponsibilityTRANSCRIPT
Saralise MingYanbin LiMadhura DeshpandeRaghuveer ReddyShankar KarJoseph Coyne
P&G: Financial Plans and CSR Issues In Costa Rica And Australia
MGMT-7750 GLOBAL BUSINESS AND CSR
P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Table of contents
Part 1: Costa Rica
Financing Plan for Costa Rica:........................................................................................................2
The Potential CSR Issues and Solution-Costa Rica.........................................................................3
Result Expected-Costa Rica............................................................................................................5
Part 2: Australia
Financing Plan for Australia:..........................................................................................................6
The Potential CSR Issues and Solution-Australia............................................................................7
Result Expected-Australia..............................................................................................................9
Exhibits and Reference
Exhibit 1....................................................................................................................................... 11
Exhibit 2....................................................................................................................................... 12
Exhibit 3 Costa Rica’s Investment Climate Indicators..................................................................13
Exhibit 4 Expected Financial Results For P&G’s Strategy In Costa Rica.......................................14
Exhibit 5 Expected Financial Results For P&G’s Strategy In Australia.........................................15
References:..................................................................................................................................16
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Costa Rica
Financing Plan for Costa Rica:
We have assumed that for setting up a plant in Cost Rica P&G has to spend about $150 Million.
We arrived at that number by making certain assumptions.
Assumptions and Process:
1. Population of Costa Rica is 4,519,126
2. Average spending per person on P&G products is $14 ( Data taken from Harvard case study)
3. Projected revenue structure is approximately $60 million (4,519,126*14)(Population*Avg.
Spending).
4. Cost of Production of Goods is $30 million. ( Data obtained from income statement of P&G)
5. Average labor cost in Costa Rica is $1.4/hour ($2800 per year).
6. Assumed number of employees are 500 which implies $1.5 million as total labor costs per
year.
7. Costa Rica tax structure 30% which implies $10 million. ( 30 % of the Revenue $60M-Costs
of Goods Sold $30 M)
8. Cost of land in Costa Rica is $75 M (2700 acres for plant). ($27500/acre--data obtained from
real estate statistics)
9. Estimated cost of equipment and other non foreseen costs are $25M.
10. Working capital $10million.
Therefore the total costs add up to $111.5 million.
Lending Structure:
Banking Intermediation dominates Costa Rica’s financial sector. Overall, through
consolidation, the number of financial intermediaries has increased as shown in Table 2.1 (see
Exhibit 1) and in addition, it has strengthened the onshore banking sector which accounts for
84% of the systems lending to the private sector (Figure 2.1, see Exhibit 1). Investment funds
have grown rapidly and are therefore, becoming significant institutional investors. As in figure
2.4(see Exhibit 2), it can be seen that the credit line to the private sector has been steadily
increasing and therefore, based on Procter and Gamble’s worldwide recognition, it will be able
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
to successfully obtain funds from banks for setting up their plans in Costa Rica. (Data obtained
from World Bank report on Costa Rica).
Costa Rica lending rates are around 7.5% which is above the US rate of 5%. So we
recommend raising capital from US. Costa Rica FDI rules are also very flexible and the country
encourages FDI inflows generally.
The Potential CSR I ssues and Solution-Costa Rica P&G already has a significant presence in Costa Rica with sales marketing share of 0 and
60 US$ million investment in 2000 with 1700 employees. The services provided are back-office
operations such as finance, human resources, payroll, employee benefits, purchasing and IT
services. As of 2004, P&G had already been presented with an award for Corporate
Responsibility by the Costa Rican Chamber of Commerce for its continuity in coordinating,
implementing, and supporting activities that benefit either communities or society in general for
several years in succession1. As P&G expects to expand its operations into manufacturing, the
company needs to continue its work in building the local communities and needs to start putting
efforts into minimizing and ideally preventing any potential environmental issues.
Costa Rica has an open foreign investment system with some exceptions including:
importation2. When P&G entered Costa Rica initially for administrative purposes, the
Government treated this foreign company in the same manner in which it would have treated any
other company. There were no favors involved but the advantages of moving in were still
exceptional. P&G was able to enjoy the usual 100 percent exemption on income tax for the first
eight years and 100 percent exemption on import duties (Horvath, J. 2001). P&G can obtain an
income tax exemption for the first 8 years and the exemption also on import duties
The World Bank indicates that even in a country as ‘peaceful’ as Costa Rica, bribery does
exist but on a small scale relative to its neighboring countries at just less than 2% of sales ( see
Exhibit 3). Whilst this figure is considered low, P&G should still take note of it and resist being
involved in questionable activities because it is a well respected company in Costa Rica and
around the world. P&G needs to have all procedures completed within the legal limits regardless
1 P&G’s Sustainability Report 20042 Deloitte’s Doing Business In Costa Rica, Jan 2010
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
of the time required. P&G is a US based company and is subject to US laws and hence, it is
crucial that it stays away from illegal activities in Costa Rica and Caribbean.
The next phase of P&G’s plan to export products which are manufactured in Costa Rica to the
Caribbean islands isn’t likely to be met with difficulties since the Costa Rican Legislative
Assembly approved a free trade (commercial) agreement between Costa Rica and twelve
countries of the CARICOM in 20053.
P&G has already been active in the education industry of Costa Rica. It launched a
program, in conjunction with Live, Learn and Thrive, which provides disabled children with
equal opportunity to be educated. This program not only makes learning more possible but it
makes education facilities more accessible; hence, eliminating the physical and psychological
barriers. Teachers have been specially trained to deal with such circumstances and approximately
16,000 children have already benefited. P&G employees have also been encouraged to volunteer
for this program in order to ensure its success. Since P&G will be expecting to further tap into
Costa Rica’s work force, it should consider building more education oriented programs for the
local communities, especially for the children.
Costa Rica takes great pride it its pristine environmental conditions and diverse flora and
fauna. This country benefits greatly from this through its popular ecotourism industry and its
worldwide recognition of environmental performance4. In 2007, the government of Costa Rica
set its target on making the country the first carbon neutral country in the world. Therefore, this
is the biggest likely issue that P&G could encounter since a manufacturing plant generally
produces by-products which may have negative impacts on the environment. However, P&G is
already committed environmental sustainability for its products as well as manufacturing. For
products, P&G expects to use 100 percent renewable/recyclable material, have no consumer
waste in landfills and maximize on the conservation of nature resources. Its manufacturing plants
will be powered by 100 percent renewable energy, will have no carbon dioxide or toxic
emissions, preserving or improving water quality and eliminating manufacturing wastes. P&G
must carefully convince Costa Rica’s officials that it is very capable of achieving its goals and is
committed to the preservation of Costa Rica’s environmental conditions.
3 Deloitte’s Doing Business In Costa Rica, Jan 20104 Method of quantifying and numerically benchmarking the environmental performance of a country's policies
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Result Expected-Costa Rica
If P&G’s project is successful in Costa Rica, the results would be as follows:
Access to High Quality Employees
Costa Ricans are highly educated and typically multi lingual. The country has a literacy rate of
95.8% and the overall secondary school attendance rate is around 70%, which shows that the
skill sets available for manufacturing are plenty. They are eager to work for P&G since this
company is highly respected in Costa Rica. Therefore, P&G is expected to have increased access
to the local talent pool and would have the opportunity to relocate highly skilled employees.
Strategic Location
Due to Costa Rica’s strategic location, P&G expects to use it to export products to the Caribbean
islands. The islands of the Caribbean are in close proximity to Costa Rica and are in very close
proximity to each other. This geographical advantage will work to P&G’s advantage to capture
significant market share in the Caribbean.
We are actually proposing to start the site in Limon (port city) which is well connected to central
valley of Costa-Rica, inhabited by the majority of the population, via road or air transportation
and also it is the closest port available to cater to Caribbean islands.
Market Share
The overall market that P&G is looking into when entering Costa Rica is a population of 4.5
million and 21 million in Caribbean region. Assuming US$14 average spending per year per
person on P&G products, the potential market share will be US$ 357 million (25.5 million * 14).
Increasing the availability of P&G’s products coupled with marketing, branding campaigns and
an increase in environmentally friendly perception of the company are expected to result in an
increase in P&G’s market share in Costa Rica and the Caribbean.
Establishing manufacturing operations in Costa Rica would allow P&G to increase their market
share and also market share in the Caribbean islands would increase as P&G markets its products
there after creating a logistics center in Costa Rica and warehouses in the various islands.
Financial Results (see Exhibit 4)
Three case scenarios were considered and the underlying assumptions are as follows:
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Scenarios NPV Assumptions
Worst case -1526221.472Cost of capital - 8.25%, Sales - 1% average
growth rate, cost of goods sold - 52% of revenue, labor costs - 5%
Average case 11037238.86Cost of capital - 7.25%, Sales - 3% average growth
rate, cost of goods sold - 50% of revenue, labor costs - 3%
Best case 27602627.03Cost of capital -6.25%, Sales - 5% average growth rate, cost of goods sold - 48% of revenue, labor
costs - 1%
Financial projections were calculated with the following assumptions, an organic growth rate of
2% year on year including cost of goods sold, labor cost and revenue. The discount rate used is
the current average lending rate of the Central Bank of Costa Rican, around 7.25%. The project
life is projected to be at least 10 years with break-even occurring in 7 years. Taking these
assumptions into account, the NPV for the project is expected to be approximately $40 million.
Australia
Financing Plan for Australia:We have assumed that for setting up a plant in Australia P&G has to spend about $150 Million.
We arrived at that number by making certain assumptions.
Assumptions and Process:
1. Present Revenue of Australia is $533,000,000
2. Cost of Production of goods is $267 million. ( Data obtained from income statement of
P&G)
3. Avg. labor costs in Australia are $528 per week ($27500 per year).
4. Assumed number of employees are 500 which implies $14 million as total labor costs per
year
5. Australia tax structure 30% which implies $75 million. ( 30 % of the Revenue $308M-Costs
of goods Sold $150 M)
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
6. Cost of land in Australia is $621 M (2700 acres for plant). ($230000/acre--data obtained
from real estate statistics)
7. Estimated cost of equipment and other non foreseen costs is $50M.
8. Working Capital $25 million
Therefore the total cost add up to $710 million.
Lending Structure:
Main types of financial institutions:
a) Authorized Deposit Taking Institutions
b) Non-ADI Financial Institutions
c) Insurers and Funds Managers
In Authorized Deposit taking institutions (ADI), banks account for 81% of all financial
institutions and the remainder 19% is catered by building societies (raise funds by providing
mortgage loans) and credit unions (provide deposit, personal/housing loan and payment services
to members). In Non-ADI, money market corporations (merchant banks, total assets of US$
123Billlion), finance companies (general financiers and pastoral finance, total assets
US$133Billion) and securitizes (total assets US$ 229 Billion) are the key players. Life and
general insurance companies in addition to public trust units, cash management trusts and
friendly societies are major components in the insurers and fund managers aspect of the financial
system in Australia.
Australia banks lend at 8.5% which is way above the US lending rate around 5%. So, we
recommend raising capital from US for Australian plant. However, Australia has strict
regulations regarding capital flows into and out of the country. So, we suggest that company
should raise part of it from US and part from Australia.
The Potential CSR I ssues and Solution -Australia
Australia is one of the most attractive business locations in the world and is a strategic
location for multinational companies targeting market opportunities in the Asia Pacific region.5
5 http://www.doingbusiness.org/data/exploreeconomies/australia/
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Australia welcomes foreign investment and is a relatively easy country in which to do business.
Nevertheless, it is essential that prospective investors obtain advice concerning regulatory, legal
and cultural issues arising from the conduct of business in Australia.
English being the national language, P&G will not face language issues expanding into
Australia. Australian political and legal systems are very stable. There is a system of courts at
both the Commonwealth and State level. Australia has a relatively deregulated and open
economy.
Major industries in Australia include property and business services, manufacturing,
wholesale and retail trade, finance and insurance, construction, health and community services,
transport and storage, mining, education, distribution, and agriculture. These industries are
favorable for establishing P&G’s product line in Australia. P&G can build a strong local network
to support its business in Australia by cooperating with these industries.
Probably the largest risk for the Australian economy is the level of credit growth. Rises in
interest rates would impact on consumer spending and repayments. P&G’s expansion in
Australia would create new jobs. This will help strengthen stability of Australian economy.
The Foreign Investment Review Board (FIRB) approves most foreign investment in
Australia unless the investment is judged to be contrary to the national interest. P&G needs to
analyze the value it would bring to Australian business with its entry into the country. Generally
speaking, the Government normally raises no objections to proposals above the notification
thresholds where the relevant total assets/total investment is below $50 million6. However,
P&G’s investment in Australia is going to be much higher and hence to tackle this issue P&G
will have to build credibility in Australia by leveraging its brand and global recognition and
effectively communicating its value proposition to the Australian market and economy.
There are controls against restrictive trade practices. For example, anti-competition,
consumer protection, and resale price maintenance. Tariffs and anti-dumping measures exist,
although Australia has recently entered into free trade agreements with, amongst others,
Singapore, the United States of America and Thailand. P&G needs to be careful to abide by the
Australian trade practices.
6 MT-100716-LT-DOING BUSINESS IN AUSTRALIA GUIDE FINAL1.DOC
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All employees in Australia are protected by legislation. The intention of the legislation is
to ensure that all employees are treated fairly. Around 22% of the fulltime workforce in Australia
is unionized. Promoting employee welfare and fair employee treatment will help P&G hold firm
ground in Australia.
Australia maintains a thorough system of laws and regulations designed to counter
corruption. In addition, the government procurement system generally is transparent and well
regulated, thereby minimizing opportunities for corrupt dealings. Accordingly, corruption has
not been a factor cited by U.S. businesses as a disincentive to investing in Australia, or to
exporting goods and services here.7 The level of foreign investment in Australia increased by $66
billion (US$61 billion)8 in 2008 to reach $1.72 trillion (US$1.58 trillion). This is a favorable
factor that to encourage P&G’s entry into the Australian market. Furthermore, Australia has not
signed the GATT/WTO Agreement on Government Procurement, which means that it is not
bound by conditions prohibiting specification of locally made product in tenders. However, the
Australian Government procurement policy framework is non-discriminatory. That is, potential
suppliers will not be discriminated against on the basis of their degree of foreign affiliation.
The Australia-United States FTA (AUSFTA) entered into force on January 1, 2005. AUSFTA is
a comprehensive agreement that covers goods, services, investment, financial services,
government procurement, standards and technical regulations, telecommunications, competition-
related matters, electronic commerce, intellectual property rights, labor and the environment. The
agreement has guaranteed U.S. access to the Australian market and the gradual expansion of this
access. This will be very beneficial for P&G’s entry and development in Australia.
Result Expected-Australia
Market Share
7https://docs.google.com/viewer? a=v&pid=gmail&attid=0.1&thid=12c4c659a9b47e4a&mt=application/pdf&url=https://mail.google.com/mail/?ui%3D2%26ik%3D6175b1461b%26view%3Datt%26th%3D12c4c659a9b47e4a%26attid%3D0.1%26disp%3Dattd%26realattid%3Df_ggigvuff0%26zw&sig=AHIEtbTzDQeCZSmyem5UnEHRCWA7hQfJ9g&pli=18 MT-100716-LT-DOING BUSINESS IN AUSTRALIA GUIDE FINAL1.DOC
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Establishing R&D and manufacturing operations in Australia would allow P&G to increase their
market share in the country. Through targeted marketing campaigns and an increase in
environmentally friendly perception of P&G, market share will be increased, which will boost
total revenues from the Australian market.
Strategic Location
Establishing a presence in Australia has strategic implications for P&G, providing a jumping-off
point to export products to the rest of Oceania and southern Asia. Australia itself represents a
large market opportunity for P&G, and also can serve as a central manufacturing and distribution
point for P&G’s southern Asia operations.
Environmentally Friendly Image/Knowledge
Due to the strict environmental regulations in place in Australia, knowledge and skills gained in
Australia regarding environmentally friendly practices and manufacturing techniques could be
applied to other global operations. Environmental concerns are rapidly growing throughout the
world, providing P&G and opportunity to improve its corporate image by demonstrating
environmental sympathy and taking measures to ensure compliance with environmental
regulations. This is of particular importance to P&G, as there are NGOs which scrutinize P&G’s
environmental track record and criticize their use of animal testing9.
Specific Knowledge Development
Australia has a high rate of skin cancer amongst the population, providing an opportunity to
develop knowledge around this specific cosmetics area which could then be applied to other
markets. Through cooperation with local cosmetics manufacturers and specific efforts to develop
skin-care products for the Australian market, P&G can develop expertise in skin-cancer-related
cosmetics which could be applied globally to other markets which also have a high skin-cancer
risk.
Financial Results (see Exhibit 5)
9 “ECG Profile – Procter & Gamble Australia” - http://www.ethical.org.au/company/?company=533
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Financial projections were calculated with the following assumptions, an organic growth rate of
2% year on year including cost of goods sold, labor cost and revenue. The discount rate used is
the current average lending rate in Australian banks, around 8.5%. The project life is projected to
be at least 10 years with break-even occurring in 9 years. Taking these assumptions into account,
the NPV for the project is approximately $560 million, indicating an attractive project to
undertake.
Exhibit 1
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Exhibit 2
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Exhibit 3 Costa Rica’s Investment Climate Indicators
As a % of Percentages
Governance and Insecurity
Crime Losses Sales 0.7Judiciary Distrust Firms 17.4Undeclared Revenues Sales 31.6Bribes Sales 1.8Inspections # per year 5.3
InfrastructureWater Interruptions # per year 3.9Power Out Losses Sales 3.0Internet Use Firms 32.1Email Use Firms 61.5
Access to FinanceAccess to Lines of Credit Firms 43.2Banks – Working Capital Firms 36.7Banks – Investment Firms 18.7Supplier Credit Firms 34.7
Technology
Computer Use Workers 19.5Worker Training Firms 46.4ISO Certification Firms 9.3R&D Activities Firms 30.9Computer Control Mach Firms 30.3
Source: World Bank
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Exhibit 4 Expected Financial Results For P&G’s Strategy In Costa Rica (Unit: Dollar)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11
Revenues 60,000,000
61,200,000
62,424,000
63,672,480
64,945,930
66,244,848
67,569,745
68,921,140
70,299,563
71,705,554
Cost of Goods Sold
30,000,000
30,600,000
31,212,000
31,836,240
32,472,965
33,122,424
33,784,873
34,460,570
35,149,781
35,852,777
Labor Costs 1,500,000
1,530,000
1,560,600
1,591,812
1,623,648
1,656,121
1,689,244
1,723,029
1,757,489
1,792,639
Taxes 8,550,000
8,721,000
8,895,420
9,073,328
9,254,795
9,439,891
9,628,689
9,821,262
10,017,688
10,218,041
Net Income 19,950,000
20,349,000
20,755,980
21,171,100
21,594,522
22,026,412
22,466,940
22,916,279
23,374,605
23,842,097
18,601,399
17,690,841
16,824,855
16,001,261
15,217,983
14,473,046
13,764,576
13,090,785
12,449,977
11,840,538
Capital Expenditure(Land & Equipment)
100,000,000
Working Capital 10,000,000
9,324,009
149,955,261
NPV 40,631,252
Discount Rate 0.07250
1.07250
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
Exhibit 5: Expected Financial Results For P&G’s Strategy In Australia (Unit: Dollar)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11
Revenues 533,000,000
543,660,000
554,533,200
565,623,864
576,936,341
588,475,068
600,244,569
612,249,461
624,494,450
636,984,339
Cost of Goods Sold
266,500,000
271,830,000
277,266,600
282,811,932
288,468,171
294,237,534
300,122,285
306,124,730
312,247,225
318,492,170
Labor Costs 14,000,000
14,280,000
14,565,600
14,856,912
15,154,050
15,457,131
15,766,274
16,081,599
16,403,231
16,731,296
Taxes 75,750,000
77,265,000
78,810,300
80,386,506
81,994,236
83,634,121
85,306,803
87,012,939
88,753,198
90,528,262
Net Income 176,750,000
180,285,000
183,890,700
187,568,514
191,319,884
195,146,282
199,049,208
203,030,192
207,090,796
211,232,612
162,903,226
153,144,046
143,969,518
135,344,616
127,236,413
119,613,955
112,448,142
105,711,618
99,378,664
93,425,103
Capital Expenditure(Land & Equipment)
671,000,000
Working Capital
25,000,000
23,041,475
1,253,175,303
NPV 559,133,828
Discount Rate
0.0850
1.0850
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P&G: Financial Plans and CSR Issues In Costa Rica And Australia
References:
http://finance.yahoo.com/q/is?s=PG+Income+Statement&annual
http://www.zawya.com/story.cfm/sidZAWYA20090625035825/P%26G%20to%20set%20up%20$100m%20plant%20in%20Pakistan%20%20
http://ww-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/05/09/000020953_20070509092200/Rendered/PDF/354240CR.pdf
http://www.rba.gov.au/fin-stability/fin-inst/index.html
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