P&G Report

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


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


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


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


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


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:


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)


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/

http://www.doingbusiness.org/data/exploreeconomies/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


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

https://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=1




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

http://www.ethical.org.au/company/?company=533

http://www.ethical.org.au/company/?company=533


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


Exhibit 2


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


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


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


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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