Assignment 2: Risk Analysis

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Running head: RISK ANALYSIS

RISK ANALYSIS 2

Risk Analysis

Packaging Corporation of America (PCA)

Packaging Corporation of America (PCA) is the fourth largest producer of containerboard in the United States on the basis of capacity. In North America, it is the largest producer of uncoated freesheet. The packaging segment of the company includes: five containerboard mills, one containerboard machine located at the Wallula, Washington, white paper mill, and 100 converting operations (PCA, 2015). The packaging products include conventional containers for shipping used for protection and transportation of manufactured goods; there are multi-color boxes and displays to promote packaged products in retail stores; there is honey comb protective packaging, the company also produces packaging for meat, fresh fruits and vegetables, for processed foods, and for beverages (Finance.yahoo.com)

The paper segment is being operated under the trade name Boise paper, which is a division of Packaging Corporation of America. This segment manufactures white papers (both commodity and specialty papers) at three white paper mills located in the United States. This product includes: communication papers such as office papers, printing and converting papers; and pressure sensitive papers such as release liners (Finance.Yahoo.com). PCA employs about 13,600 employees. It operates primarily in the United States, but has some converting operations in Europe, Mexico, and Canada. For 2013, the PCA’s net sales stood at $3.7 billion. The company was founded in 1867 and has its corporate headquarters in Lake Forest, Illinois (PCA, 2015).

The company is in the consumer goods sector of the packaging and containers industry. The key competitors in the industry include: Georgia Pacific LLC (PvT1), International Paper Company (IP), and Rock-Tenn Company (RKT). With revenue of $5.85B in 2014, PCA performed above the industry average of $2.20B, however, it performed below the competitors, whose performance includes: $23.62B for IP and $10.05B for RKT (Finance.yahoo.com).

Risk Analysis

For the purposes of this assignment, PCA is looking for opportunities to expand its operations globally. The two countries under consideration include: a well-developed country – Australia and an emerging country – India. These two countries are in Asia-Pacific region. This region is intentionally chosen since the company does not currently have operations in that region.

Australia. Australia is a country characterized by well-established open market policies which enable it to sustain flexibility, competitiveness, and large flows of investment and trade in the country. According to the 2015 Index of Economic Freedom, the economy of Australia ranks the 4th freest with an economic freedom score of 81.4 (The Heritage Foundation, 2015). Out of 42 countries in the Asia-Pacific region, Australia also ranks the 4th. Australia values trade liberalization against protectionism. It has an average tariff rate of 1.8 percent with low non-tariff barriers. The financial system is well developed and offers a variety of financing instruments, with very stable, privately owned banking system (The Heritage Foundation, 2015).

Australia has an institutionalized regulatory efficiency. There is great flexibility in licensing and other regulatory frameworks for start-up companies. In fact, starting a business requires only one procedure and there is no minimum capital requirement. Labor regulations are flexible making the labor market very dynamic. Also, the country has a well-functioning independent judiciary which ensures that property rights are well protected and corruption minimal (The Heritage Foundation, 2015).

India. India has a “mostly unfree” economy and ranked 128th freest in the 2015 index, with freedom score of 54.6 (The Heritage Foundation, 2015). Among the 41 Asia-Pacific countries, India ranked the 26th. There is heavy government presence in India’s economy through state owned enterprises. India values protectionism against trade liberalization. The average tariff rate is 7.7 percent and there are different non-tariff barriers that interfere with the free flow of goods, services, and investment. The high state interference makes the changing financial sector vulnerable. Exchange rate fluctuation of the Rupee is another risk factor. This affects the prices of all imported materials and has a direct impact on the profitability of the durable goods manufacturers (People in Business India Pvt Ltd, 2009). The banking sector is also vulnerable as the state retains significant ownership in the sector (The Heritage Foundation, 2015).

The regulatory system is inefficient. Although the country has reduced business registration fees, licensing requirements for new start-ups remain time consuming. The judiciary is independent; however, a weak rule of law exacerbated by corruption in many areas of economic activity undermines the emergence of a more vibrant private sector (The Heritage Foundation, 2015).

Opportunity to be Pursued

The analysis above shows that Australia might be a better option to pursue given the stability and efficiency of the business environment. However, the country is well developed and research shows that the packaging industry in Australia is almost saturated. However, despite the riskiness of the business environment in India, the country possesses great opportunity for a packaging company to thrive. According to INDIAPACK (2015), the packaging industry in India is one of the fastest growing industries, influencing all other industries either directly or indirectly. There is a continuous growth in the industry, with a total worth of $24.6 billion and an annual growth rate of about 13 – 15%. An evidence of growth potential in Indian packaging industry is the fact that the per capita consumption of packaging is only 4.3 kgs, while that of the neighboring Asian countries like China and Taiwan stood at 6kg and 19kg respectively. This is therefore a clear indication that there are many more commodities that need to be marketed in packaged condition, and thus, a great business opportunity stands for the Indian packaging industry (INDIAPACK, 2015).

References

Finance.yahoo.com. Packaging Corporation of America (PKG). Retrieved from

http://finance.yahoo.com/q?s=PKG

INDIAPACK (2015). Industry overview. Retrieved from http://www.indiapack.org/

PCA (2015). Investor Relations. Retrieved from

http://phx.corporate-ir.net/phoenix.zhtml?c=113281&p=irol-irhome.

People in Business India Pvt Ltd. (2009). Case for analysis: Managing uncertainties in

procurement costs, Whirlpool India. Whirlpool Ideate. Retrieved from

http://wconnect.whirlpoolindia.com/ideate/Managing%20uncertainties%20in%20

Procurement%20Costs.pdf

The Heritage Foundation (2015). 2015 Index of economic freedom. Retrieved from

http://www.heritage.org/index/ranking