MAV Corporation Business Expansion Plan from Directors

1. MAV CorporationBusiness Expansion Plan from Directors Group 7: Ryan M Lucas Kyo Hyug Koo Rian A Maguire Anthony S Martinez Reshel Kurniadi

2. Outline • MAV Corp. General Facts • MAV Corp. Business and Marketing Strategy • Proposal to CEO • Demographics and History of South Africa • Economic Background of South Africa • Key Advantages of Proposal • Barriers to Entry and Negative Impacts • Final Recommendation to CEO

3. MAV Corporation – General Facts • Company founded in 1989 • Developed 7 large factories over the last 15 years • Has over 1,000 employees

4. MAV Corporation - Products • 100% of MAV’s production is passenger cars • Specializing in compact, fuel-efficient models • Production consists of 5 different models of cars and 2 models of small SUV’s

5. MAV Business Strategy • Low cost supplier • Price range from $12,000 to $25,000 • Capitalize on cost savings from foreign production through exports to American markets • To increase sales presence through exports to Japan, Europe and other Asian markets

6. MAV Marketing Strategy • Target markets: • Low to middle income families and singles • First time buyers • Environmentally concerned consumers • Primarily marketed in urbanized environments

7. Proposal to CEO • Develop a market presence in Japan, Europe and the remainder of Asia • Accomplish multi-national presence by building car manufacturing plant in South Africa near ports and rail spur • South Africa offers central shipping location to all major markets of interest

8. South Africa • Located on the southern coast of Africa • Total land 1,219,912 sq km and has 2,798 km of coastline • Abundant natural resources • Large portion of land unusable for irrigation

9. Demographics of the People • Population: 42,718,530 • 65.3% between the ages of 15 and 65 • Median age: 24.7 years • Ethnic groups • Black 75.2% • White 13.6% • Colored 8.6% • Indian 2.6% • Literacy rate: 86.4% • Unemployment rate: 31% • 11 official languages

10. Social History of South Africa • Racial conflict date from the Dutch arrival at the Cape of Good Hope in 1652 • European established a company to acquire goods to re-supply its ships • Europeans took up arms and drove most of the local population into the interior • Expanded the use of slave labor

11. A Time of Change • The discovery of minerals in the late nineteenth century--diamonds in 1867 and gold in 1886--dramatically altered the economic and political structure of southern Africa • Valuable resource that attracted foreign capital and large-scale immigration

12. Government and Economic History • In the early 1900’s, laws were put in place to ensure that Africans would have to seek jobs from white employers • Many Afrikaners pooled their funds to established banks, insurance companies, etc to wrest a portion of the economy out of the control of English businessman • In 1948, the National Party won the election on its apartheid platform • Blacks, led by Nelson Mandela, rose up in protest against apartheid in the 1950’s • Government banned all organizations opposed to apartheid; Nelson Mandela was sentenced to imprisonment for life

13. Growing Economy • Despite growing international criticism for apartheid, the government’s success in capturing its enemies fueled an economic boom • Foreign investment more than double between 1963 and 1973 • Beginning in 1973, people grew fearful of instability in South Africa, causing foreign investors to withdraw their money or move it into short-term rather than long-term investments

14. Democracy Introduced • Through the 1970’s and 1980’s, the world publicly denounced the apartheid, causing the value of the Rand to collapse • On May 9, 1994, Nelson Mandela was unanimously elected president by the National Assembly • The government has made substantial progress in expanding social services, health care, and education • The continuing violence and political uncertainty contributed to a steady decline in the value of the Rand in late 1996 and early 1997

15. Destination for Private Sector and Foreign Investment • The government is offering incentives to increase foreign participation in South Africa • The Ministry of Finance outlined new economic strategies aimed at: • liberalizing foreign-exchange controls • imposing stricter fiscal discipline • lifting of import tariffs and exchange controls to expand foreign trade • Pressing for fiscal responsibility, private-sector development is likely to receive even greater emphasis in the early twenty-first century

16. Economic Background (I) • The automotive sector is a fast growing industry in the South African economy • This sector’s contribution to the GDP in 2002 was 6.3% up from 5.7% in 2001 • The close correlation between vehicle sales and GDP growth is a positive sign for the future since GDP is forecasted to grow by over 16% over the next 3 years • All major multinational motor vehicle manufacturers are represented in SA, some of which share the same manufacturing facility

17. Economic Background (II) • There are 7 passenger car assemblers, 12 medium and heavy commercial assemblers and 8 independent importers currently operating in South Africa • In the automobile component part sector, there are approximately 270 first tier suppliers and over 300 second and third tier suppliers • Persons per passenger car in South Africa are 10.2 to 1. The major proportion of vehicles are however 10 years and older

18. Multinational Motor Vehicle Manufacturers • The leaders in the passenger car sales segment in the domestic market during 2002 were • Volkswagen South Africa with a 22% market share • Toyota with a 19.5% market share • Industry is mainly concentrated in Gauteng, Eastern Cape, and Kwazulu-Natal, all located near ports

19. Multinational Investments • Investment in the vehicle assembly industry has increased steadily since 1995 • From 2001 to 2002 investment increased by 14.6% following the 31.2% increase from 2000 to 2001 • The German OEM’s were first to reap the benefits of the Motor Industry Development Programme (MIDP), and as a result, have increased their investments in South Africa for solid financial reasons • It is expected that General Motors’ recent buyout of all Delta shares will result in component suppliers expanding their presence in South Africa

20. Other Key Industries in South Africa • Agro processing • Banking and Finance • Chemicals • Food and Beverages • IT and Electronics • Mining and Minerals • Tourism • Telecoms • Textiles

21. Industry Advantages • Infrastructure • Flexible production ability • Raw material availability • Labor and Productivity

22. Key Advantages • Location • Access to Ports • Large population in surrounding areas • Stable Employment Rates Nationwide • Ample supply of ‘able-bodied’ laborers • Low wage rate average • Educated labor force

23. Governmental Advantages • Multiple Tax Breaks including: • Import and Export taxes • Property taxes • Corporate Income taxes • Further Capitalization incentives for expenses • Accommodating Monetary Policy

24. Governmental/Economic Advantages • Low interest rates • Allow us to borrow at lower rates than we could worldwide • Low inflation rates • Encouraging statistic for long-term growth

25. Economic Advantages (I) • Price Stability for Raw Materials • In real terms, domestic prices have actually decreased due to the increasing strength in the Rand • Exchange Rate Benefit • Thus far in 2004, the Rand is the strongest it has ever been

26. Economic Advantages (II) • Positive Business and Consumer Sentiment • Strong Replacement Demand • Enhanced New Vehicle affordability

27. Manufacturing Advantages • Ample Supply of Most Raw Materials • Large rail network and port location will allow for lower transportation charges • Capital expenditures have increased by 700% over the last 4 years

28. Manufacturing Advantages • Production capacity nationwide has increased 33% Over the last 4 years

29. Manufacturing Advantages • Domestic passenger car sales have increased 23.9% over the last 12 months

30. Manufacturing/Sales Advantages • Per day selling rates have increased by almost 62% over the last 10 years

31. Barriers to Entry • Language barrier • Low availability of Steel and Rubber • Supply problems due to vendors lack of logistics planning

32. Negative Social Impact • High crime rates • Both organized crime and petty street thugs • AIDS epidemic – over 21% of population has HIV/AIDS • Water shortage • Lack of major arterial rivers

33. Negative Economic Impact • Decreased exports • Due to increasing strength of Rand

34. Final Recommendation • MAV Corporation SHOULD go through with development of a factory in South Africa • MAV Corporation needs to act fast as the MIDP will end in 2012

35. Appendix

36. Appendix Auto Industry overview • The auto industry is one of the key oligopolistic, dynamically complex and networked global industries. • To produce car, which consists of some 20,000 parts and components, a producer needs to orchestrate the logistics and assembly of various kinds of input factors such as steel, glass, rubber and plastic, semi-assembled components though many manufacturing technologies that are spatially distributed and located internationally. • Therefore, this industry has specific impacts on other industries that arise from vertical integration functions across producing countries.

37. Appendix Competitive Advantages • Infrastructure -SA has one of the best infrastructure and service industries among developing nations, particularly in roads, telecommunication, harbors, banking systems, insurance and shipping. With its 3000 kilometers of coastline and 7 commercial ports, SA has by far the largest and best-equipped network of ports in Africa. With the major upgrading of these ports underway, SA will be able to function as a hub for increasing commercial traffic emanating from and destined for Europe, Asia, the Americas as well as the east and west coasts of Africa. • Flexible production ability -The SA automotive industry has retained its ability where single production facilities manufactured a range of quality products at competitive prices to satisfy the domestic market. Given this flexibility, SA has a unique competitive advantage when it comes to low volumes, such as the case with lower volume vehicles and niche markets or at model run out, compared to other countries where production is set up for long runs. • Raw material availability- SA has an abundance of raw material availability including steel, stainless steel, aluminum, chrome, plastics, leather and precious metals. • Labor and Productivity • The African Growth and Opportunity Act (AGOA)

38. South Africa Key Other Industries

39. Significant advantages in terms of raw materials and labor Union-employer partnership focus on results and quantum improvements in productivity and flexible skills – direct labour cost in the vehicle assembly industry has been reduced by 30% over the past 5 years. Average labour costs/month for an operator amounts to approximately US$1.05/hour, for a technician to approximately US$ 4.65/hour and for anengineer/professional person to approximately US$ 1 700/month. Cost excludes medical, pension and car allowance contributions by the employer ranging between 30% and 40%. (2002 US$ = R10.52) Appendix Labour and Productivity Labor costs (SA Rand vs. US $) (1US$ = R10, 52) • *The PPP rate on 1/1/2002 was R3, 80 = 1US $. This rate represents the rate of a comparable fixed basket of commodities purchased in SA and the USA. • Source: DeLoitte & Touche

40. Appendix The African Growth and Opportunity Act (AGOA) • The African Growth and Opportunity Act (AGOA) represents a non-reciprocal gesture by the USA aimed at assisting growth and development of sub-Saharan African countries by extending duty free and quota free access into the USA market in respect of a broad range of products for a period of 8 years. SA, together with 37 other African countries had been designated as an eligible country in terms of the Act. • The effective commencement date of the duty free access provisions in terms of AGOA is 1 January 2001 until 30 September 2008. Various automotive components and, importantly, motor cars as well as motor vehicles for the transportation of persons and of goods will, subject to rules of origin, qualify for a duty free and quota free access into the USA. In terms of the rules of origin SA products exported to the USA must represent at least 35% of the free on board (FOB) value of the product into the USA - up to a maximum of 15% of such USA inputs of the FOB customs value will qualify as SA local content.

41. Appendix Motor IndustryDevelopmentProgramme (MIDP) • The strong growth in the automotive sector has been the result of well-designed and managed government policies and in particular the MIDP. • The MIDP, implemented in September 1995, has now been in operation for nearly 9 years and is regarded as a prime example of public and private sector co-operation. • The extension of industry support until the end of 2012 will ensure a ten year window as well as policy certainty for industry’s long term strategy and planning and create the platform for sustained future development. • Linkages with multi-national companies lead to participation in global sourcing from SA and will become all the more important in future. • Total industry exports in total have grown by 38% on an average annual basis since 1995 when the MIDP was introduced

42. Appendix Exports • Total automotive related exports have grown by 38% on an average annual basis and component exports by 31% since 1995 when the MIDP was introduced. • The main destinations for passenger cars exported from SA during 2002 were the USA, Japan and the UK with the EU accounting for nearly 30% of total exports in Rand terms. • SA’s main destination for medium and heavy commercial vehicles during 2002 was SADC that accounted for 52% of exports. During 2002 SA produced 404,441 vehicles of which 125,306units were exported.

43. Appendix Market Size?: Total Domestic Production & Total Aggregate Exports Source: National Association of Automobile Manufacturers of South Africa (NAAMSA)