o BSc in International Business o International Business Envi- ronment o Exam: 48 hours individual home assignment o 14.10 – 16.10.2015 o Oliver Møller: 3000696-0269 o Number of pages: 9 and char- acters: 23,454 International Business Environment BSc International Business Oliver Møller, 1st year IB Exam start date: 14/10/15 Course Coordinator: Larissa Rabbiosi Exam end date: 16/10/15 Chinese OnePlus enters Brazil 1. OnePlus Since the smartphone manufacturer Oneplus Ltd. was established in 2013 in Shenzhen, China, it has ex- panded with unprecedented force into new markets. OnePlus being Born Global companyi – “We are going to be a lot more aggressive in our international expansion” (Pete Lau, OnePlus co-founder and chief executive officer) – with 88 employees from 13 different countries has led to OnePlus engaging in 3 different continents (Europe, Asia and North America), achieving revenue of $300M+ in the fiscal year 2014! With international operations accounting for 61% of total sales (OnePlus Ltd., n.d.). Offering its’ customers a wide range band support for service providers worldwide while being carrier unlocked, thus suited perfectly for the global market; hence being able to do so because of a limited product port- folio with the OnePlus smartphone as flagship product (Ibid.). Wholly ownedii by parent company OPPO Electronics Corp., one of the largest smartphone manufacturers in Chinaiii; although OnePlus claims to be an exclusive brand with no formal ties to OPPO. Renowned for its smartphone’s incomparable price- to-quality ratio, customization and performance OnePlus has gained a competitive edge over competi- tors as will be explained in the following essay. OnePlus business model is based on an invite-system, which only allows customers with an invite to purchase, exclusively online (Ibid.). This model offers enormous growth potential as echoed in demand for the OnePlus 2 e.g.: exceeded 1,000,000 reserved OnePlus 2 smartphones within 72 hours (Ibid.). OnePlus aims at expanding further internationally as Pete Lau expressed – the Brazilian market then presents favorable conditions as of being the next step in OnePlus’ international expansion plan. 1.1 Why Brazil? Brazil being the fourth largest smartphone market in the world offers huge potential for OnePlus seek- ing to expand as indicators suggest promising conditions. OnePlus being a company leveraging on its business model to produce cheap smartphones with international quality suggest OnePlus prospering from the current economic slowdown, outcompeting competition on price. Moreover smartphone sales are forecasted to grow with 103% between 2013-2018 (Euromonitor: Mobile Phones in brazil, 2014) thus displaying exceptional future consumer growth. According to ABINEEiv 2015 should remain the “year of the tablets and smartphones” in Brazil further acknowledging the possibilities of the Brazilian smartphone market. Hence in the light of OnePlus ambitions Brazil is an attractive destination. 1 International Business Environment BSc International Business Oliver Møller, 1st year IB Exam start date: 14/10/15 Course Coordinator: Larissa Rabbiosi Exam end date: 16/10/15 2. Agenda The aim of this essay is to develop an optimal entry strategy for OnePlus when entering Brazil, based on the findings of the market analysis and internal factors. Agenda is as follows: 1. Customized PESTLE-analysis and summarization 2. Dunning’s eclectic paradigm and entry strategy 3. Conclusively it will be discussed to which extent the proposed internationalization decision in- fluence on the strategy and organization as well as which action might be necessary given the internationalization decision selected. 3. Analysis of the Brazilian market 3.1 Political-legal: Brazil consists of a highly complex regulatory framework, thus complicating the ease of doing business due to long bureaucratic delays, efficiency losses and other red tapes. Additionally companies operating in Brazil need to navigate through burdensome regulations whilst being able to in- teract with the public sector and society, which is commonly denoted ‘jeitinho’. Averaging 92nd out of 202 economies in 2013 in the “Regulatory quality index” (World bank, 2013). Paying tax in Brazil accompanies huge difficulties in regard of doing business due to the numer- ous taxes and contributions, multiple and complex tax schemes and inefficient tax collection proce- dures, which in its essence is a complicating factor in respect to time- and resource management when firms are required to fulfill their tax obligations; the total tax rate as a percentage of profits reached 68,9% of total profits in 2015v. In the face of the slowing economy, the Brazilian government pushed for tax measures aimed at increasing federal revenue. As of February, this year, companies have to pay a higher rate of their profits for social initiatives. Tariff rates and trade barriers still remain relatively high, mainly due to the import duty, Industrialized Product tax (IPI) and the merchandise and Service Circula- tion tax (ICMS)vi – (United States Trade Representative, 2013). However a decree (Portaria No. 87) was issued by Brazil’s Ministry of Communications, which provides an exemption from taxes for smartphones fulfilling the subsequent requirement (1) pre-loaded package of locally developed applica- tions. This tax exemption would essentially lead to a price reduction of up to 30 percent. Thus affecting OnePlus engagement going forward in Brazil as such political initiatives can provide favorable conditions for foreign business. Generally there are few prospective indicators of constructive change in the politi- cal environment due to the uncertainty of the mentioned dynamicsvii; conversely some “loopholes” ex- ist for smartphone businesses like OnePlus. 2 International Business Environment BSc International Business Oliver Møller, 1st year IB Exam start date: 14/10/15 Course Coordinator: Larissa Rabbiosi Exam end date: 16/10/15 3.1.1 bi-lateral and multi-lateral trade agreements: Brazil and china have engaged in multiple bilateral trade agreements, and in 2014 China’s President XI Jinping signed 54 new agreements aimed at improv- ing infrastructure, telecommunication, energy/tech. sector and trade in generalviii. Since China and Bra- zil became part of the BRIC, they have continuously pushed for stronger interaction as regard to trade and finance. Both countries do still have high barriers to entry, as neither side has made any effort to- wards removal of tariffs and noteworthy trade barriers. Having huge effects on the internationalization process, as it wouldn’t allow for the centralization of production in those locations where the factor en- dowments (Heckscher-Ohlin theory, 2014, Hill pp.174), and skill is optimal. Thus not making it attractive to make an FDI, as factor endowments for smartphones are strongest in Chinese markets; the product life-cycle theory (PLC-theory, Ray Vernon) then suggests that Brazil would import smartphones, as the production advantage is greatest in China. 3.1.2 Exchange rate regime: Both the Brazilian real and the Chinese yuan are ‘dirty floating’ currenciesix – mainly targeted at the USD to boost exports, protect industries and competitiveness – currently ex- changeable at a rate of 1.66 yuan to 1 realx. Thus the value of the currencies being relatively similar, meaning the cost of exchange isn’t insuperable. However speculation can create volatile movements in exchange rates and hereby impacting OnePlus’ profitability as exchange rates can quickly change in ei- ther a positive or negative direction. OnePlus competitiveness is consequently affected, calling for greater strategic flexibility when currency markets fluctuate. This increases cost, as OnePlus would get an adequate insurance coverage towards fluctuations, directly hurting profitability. On the other hand governments can intervene if temporary shocks arise, having huge impacts on OnePlus competitiveness as they rely highly on competitive pricing abroad – ultimately affecting profitability. Reversely a fixed exchange rate between China and Brazil could avoid major currency fluctuations, minimizing the use of hedging and removing uncertainty accompanied with exchange of OnePlus’ transactions, increasing profitability. Inflationary pressures are also reduced, assuring no sudden rise in the cost of production – affecting profitability. If the fixed rate is too high it will make exports uncompetitive for OnePlus, if too low it could cause inflation; an economic paradox. 3.2 Economic: The financial crisis had major complications for Brazilian economy as reflected in their real GDP, which is forecasted to contract by 3% in 2015 after a minor growth of just 0.1% in 2014xi. The Brazilian economy shrank by 0.7% in the second quarter of 2015, hereby being the second consecutive quarter of contraction implicating that Brazil is officially in recession. A slow recovery is however pre- dicted to emerge in 2016 driven by the depreciation of the real – boosting exports. Hereafter GDP growth is projected to rebound reaching 3% per year by the end of the decade. Future performance will 3 International Business Environment BSc International Business Oliver Møller, 1st year IB Exam start date: 14/10/15 Course Coordinator: Larissa Rabbiosi Exam end date: 16/10/15 be moderated in accordance with the slowdown in China’s softer demand for imports, since China ac- counts for approximately one third of exports and is experiencing an economic slowdown as well. Constraints on consumer