You are required to carefully read the case (UPS in India -- A Package Deal?) and then highlight the key issues in a one-page summary (single-spaced, approximately 525 words). The case preparation is an integral part of our discussion in the class. Thank

62 International Business Strategy

REGIONAL CARRIERS. Regionalairlines (or "region- als") operated short- and medium-haul scheduled airline service connecting smaller communities with larger cities and with the hubs of the major airlines. Although most were independently owned, several of the largest regional carriers were actually subsidiaries of the major airlines, including Atlantic Southwest, Comair (Delta), and AMR Eagle (American Airlines). Many regionals benefited from arrangements with

the majors, including code-sharing arrangements, scheduling assistance to ensure flight connections in majors' hubs, and the branding of a major airline. With low-cost structure and improved service levels,

regionals as a whole became the most profitable seg- ment in the air carrier business. Regionals continued to replace turboprops on low-density routes and developed new routes that extended airline networks, enabling those carriers to serve unserved or underserved mar- kets more cost-efficiently. Regionals were able to do that because newer,smallerjets were significantlyfaster than existing fleets of turboprop planes, had greater range, and burned less fuel (a major per-flight fixed cost). The regionalswere the fastest-growingsegment of commer- cial aviation and continued to serve a valuable segment of travelers unaddressedby low-cost and major carriers,

Fabiano lopes, Alexandre Zimath, Andrea Maat, and Cel. Nivaldo Silva

W HILE TRAVELING TO an investor conference in Montreal, Canada, on Embraer's Legacy business jet, Mauricio Botelho, CEO of Embraer, reflected on his company's dramatic

ascent to its position as the world's leading regional aircraft manufacturer. Since becoming a private com- pany, Embraer had successfully introduced seven commercial aircraft models to the market, including its latest, the llB-seat EMBRAER 195. As the jet began its runway approach just a few miles from the headquar- ters of rival company Bombardier, Botelho pondered the potential competitive response to his company's recent attacks on the commercial aircraft market.

The U.S, Airline Industry With the passing of the Airline Deregulation Act of 1978 by the U.S, Congress, government control of routes and fare pricing were eliminated, resulting in growth, increased competition, and the emergence of three new business models: major, regional, and low-costcarriers.

lOW-COST CARRIERS. Low-cost carriers (LCCs) offered airfares at a lower price than major and regional carriers. The largest LCCs included JetElue, AirTran, Southwest Airlines, and America West, as well as new upstarts Song and Ted, which were owned by Delta and United, respectively. Many of the LLCs started off as regionals, offering

short-haul serviceconnecting business and leisure trav- elers between high-volume destinations. By operating

MAJOR CARRIERS. The distinguishing feature in the business model of amajor carrier (ora "major") was the hub-and-spoke system.This systemwasbasedoncentral hubs to which feeder nights were directed. Passengers from the feeder flights transferred to numerous other flights provided at the hub to their finaldestinations.' The enormous capital required to expand geo-

graphically was a substantial barrier to entry for new airlines. As low-cost and regional carriers primarily competed on price and local market convenience, the rationale for the majors' costly model lay largely on the improved customer loyalty generated by the con- venience and reach of these airlines. To further enhance breadth of service and increase

the number of customers while limiting capital out- lays, most majors turned lO code-sharing and global alliances with other major and regional airlines. The major global alliances included Star Alliance, Sky Team, and One World.

This case was prepared by Fabiano Lopes. Alexandre Zlmath, Andrea Maar. and revised by Cel. Niva1do Silva, EADS Representative to Embraer, under the supervision of Ming- Jer Chen, Leslie E. Grayson Professor of

. Business Administration. It was written as 8 bas~s for class discussion rather than to illustrate effective or ineffective handl.m~~f an administrative situation. Copyright C 2007 by the University of Vlrgml~ Darden S~hool Foundation, Chanonesville, VA. All rights reserved. 10. order. cUfles. semi an e-mail 10 [email protected]. "!u part oflll/s publ,CMOII //lay be f/;!produced,stored in a retrieval ~'SIt'1Il used III a spr;udsheel, or transmitted in uny jorm or by an)' l11e(J/ls-dect'ro~ic 1~:cl''"Dlllcal.photocopying. recording. or OIhenvise-withollt the perl/lissio~ oJ me arden School Foundation.

DARDEN. BUSINESS PU~LlSHINC;

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C382

Embraer: Shaking Up the Aircraft Manufacturing Market 63

CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing Market C383

I out of underuti Iized airports in those markets, the LLCswere able to keep a low profile. The largest LCCs werealready operating nonstop transcontinental flights.Contrary to the major airlines' hub-and-spoke sys- tem, LCCs generally operated a point-to-point route system. This feature was credited in the air carrier industry with providing higher levels in the quality of passenger service in terms of on-time departures and arrivals, limited lost luggage, etc. In order to effectively utilize the point-la-point system, Lees offered service to the same general destinations as majors and region- als but used satellite airports, which were typically less congested than hub airports and charged lower fees.

LCCs limited their fleet of planes to one or two midsize, more fuel-efficient models, thus reducing training and maintenance costs. Moreover, by avoid- ing congested airports, LCCs were able to achieve faster turnaround times. The net effect was that planes were kept in the air longer, increasing the asset utiliza- tion. Additionally, LCCs tended to have lower labor costs because of the nonunion work force.

U,S. Market Conditions The airline industry experienced uninterrupted growth in revenues throughout the 1990s. A weakening global

economy, however, coupled with the September II, 2001, terrorist attacks, had drastically reduced air- line traffic by the end of 2001. As a result, the indus- try posted unprecedented losses of $7.7 billion for the year, as revenues dropped 13.5% from a record high of $93.6 billion in 2000. The slowdown contin- ued into 2002 and 2003 as major airlines, faced with reduced sales, continued to reduce capacity and trim ranks. United Airlines, the second-largest airline in the world, filed for bankruptcy at the end of 20022 The U.S. domestic available seat miles (ASM)' evolution (Exhibit I) demonstrates the shift in capacity from majors to regionals and LCCs.

LCes, whose cost structures were already tailored to the current fare environment, had not been affected as greatly as the majors. In fact, they continually reported profits even in the difficult post-September II environment."

Market Conditions in Europe In Europe, major airlines were faced with many of the same competitive issues as majors in the United States. Successful low-fare carriers exerted downward pressure on fares, and fall-off in passenger demand made it more difficult to maintain presence in existing

EXHIBIT 1 Embraer: Shaking up the Aircraft Manufacturing Market

Shifting Capacity among Business Models

200 .. U.S. Domestic ASM Evolution Iindex 100)'

180

160..·

140···......···

120

60 --,------,--:-:---,-:---;---;--;-;-::-:-=--;::-;~;;:::---;:-:-:-;:::_;::;__;;::__;:::_ Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Dct- Jan- Apr- Jul· Oct- Jan- 00 00 00 00 01 m m 01 ~ ~ ~ ~ ro ro ro ro N

1_ Majors - low Cost _ Regional I 1 "tommercfat Jets Market Assessment: http://www.llmbraer.com.br(accessed 10 November 2006).

IIIIIIilT _

100· ... -·

80 ..........·....

64 International Business~St:::r.:'t:eg~y:....... _

C384 CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing Market

structures and subassemblies, such as wings and fuse- lages, to manufacturers of finished aircraft. Those sub- contractors, in tum, were supplied by up to 4,000 firms that manufactured components or raw materialS. Parts that differentiated a product, or those strongly identi- fied with a company, were usually produced in-house given their strategic and competitive importance.

A strong customer base and careful order-book man- agement were needed to recoup the cost of developing new commercial or business jets. Standards for safety, quality, and value were crucial. Because of the capital- intensive nature of the industry, manufacturers needed to sell hundreds of units globally in order to break even on the design and manufacture of new aircraft.

The 1990s were years of consolidation in the air- craft industry. In 1997, two of the industry's largest producers, Boeing Company and McDonnell Douglas Corporation, merged. Other well-known companies,

markets, much less expand to new ones. Regional operators had softened the blow of the downturn. With their lower cost struclUres and greater flexibility, they had proven less vulnerable to outside market forces and capable of growth under adverse conditions.

The milestones in the airline industry ror both the United States and Europe are presented in Exhibits 2

and 3. It is important to highlight that these trends in the

global airline industry were a key driver of the recent developments in the commercial aircraft industry.

The Commercial Aircraft Industry OVERVIEW. Since most modern aircraft were incred- ibly complex (the Boeing 747, for example, had six million pans), a worldwide network of approximately 400 subcontractors was required to supply major

EXHIBIT 2 Embraer: Shaking up the Aircraft Manufacturing Market

Milestones in the Airline Industry-United statas'

HUB·ANO-SPOKE » U.S. Congress passes the Airline Deregulation Act of 1978, initiating a period of intense competition and paving the

way for a new operational model, the hub-and-spoke system. » Deregulation makes room for low-fare. point-ta-point service expansion. » By 1984, code-sharing alliances between major carriers and regional operators begin to be formed. » Majors begin to rely more on low-cost regionals. Number of short-haul turboprop routes increase.

MARKET OUTSOURCING

» Regional jets are introduced in 1992. » In2002. U.S.orders for regional jets near 400.Turboprop orders collapse. » ~egional jet networks grow dramatically as majors shift routes to the lower-cost aircrafts and deploy them to d

Into new markets. expan

» Regional jets become a crucial part of airline strategy to remain profitable in pre-September 11 downturn.

REGIONAL JETS » Terrorist an~CkSinth~ United States on September 11,2001,deliver a crippling blow to the airline industry. » FAA enacts Its Operational Evolution Plan. » Airlines respond to plunging demand by cutting frequencies and trim i ., . . .

profitably witl1low load factors offset losses from mainlines operatin~ ;~hn~:~~~~'a~~~,onallets abilityto operate

» Regional jets used to complement or replace narrow-body aircraft on unprofitable short-haul routes.

'''2004-2023 Embraer Market Outlook."

..----------~ 7

Embraer: Shaking Up the Aircraft Manufacturing Market 65,

CASE 25 I Embreer: Shaking Up the Aircraft Manufacturing Market C385

EXHIBIT 3 Embraer: Shaking up the Aircraft Manufacturing Market

Milestones in the Airline Industry-Europe'

LIBERALIZATION IN EUROPE

» European airlines evolved a hub-and-spoke system independently, primarily operating from each nation's capital city. » Europe takes a four-step approach to liberalization. The first phase is implemented in 1988. » Airlines begin to be restructured and privatized. » High labor costs in a competitive, deregulated environment force airlines to take drastic measures.

MARKET EXPANSION

» Regional jets are introduced in 1992. » European airlines successfully deploy regional jets in the current established air transport system. » Regional jets replace many turboprops, but turboprops with 40·plus seats remain in service. » tow-tare carriers such as Ryanair and EasyJet see dramatic growth in RPKfrom 1995to 2001.

REGIONAL JETS

» The regional airline market in Europe averages 12% growth during the period from 1995to 2002, » Terrorist attacks in the United States on September 11,2001, deliver a crippling blow to the airline industry. » As in the United States, the regional jets' ability to adapt to different demand environments helps sustain allied

majors through crisis.

1 "2004-2023 Embraer Market Outlook."

such as Piper Aircraft Corporation and Fairchild Aircraft in the United States, as well as Fokker N.Y. of the Netherlands, filed for bankruptcy during that period.

The market for commercial aircraft was typically divided into two product categories: narrow-body and wide-body aircraft. Narrow-body aircraft were single- aisle, short-range aircraft (up to 6,000 km or roughly 3,700 miles) that typically carried up to 200 passen- gers. Leading aircraft in that category were the Boeing 737, the Boeing 757, and theAirbusA-320. Wide-body aircraft were double-aisle, medium- to long-range air- craft (up to 14,000 km or roughly 8,700 miles) that could carry from 200 to 450 passengers. Leading air- craft in that category were the Boeing 747, the Boeing 777, and the Airbus A-300. Boeing and Airbus were the industry leaders in these segments.

REGIONAL JETS. The regional jets segment, which was included within the narrow-body category, was traditionally composed of aircraft that carried between 20 and 70 passengers. Bombardier and Embraer were the market leaders in this segment, which had

consistently expanded since 1992, when Bombardier introduced the first regional jet as a replacement for turboprop planes.

Even before regional jets became widely available, growth among regional airlines was consistently robust. Between 1971 and 1993, regional carriers outgrew the majors virtually every year. The expansion could be traced to two contributing factors. First, in the years leading up to J 978, many cities previously unserved had been introduced to air service, mainly on turboprop aircraft. Second, regional carriers in the years after the Deregulation Act of 1978 began to fill gaps in the ever- expanding hub-and-spoke networks of the majors.

By 1989, the majors changed their airline operations to increase the number of passengers flowing into the networks by adding capacity on its feeder routes, offering more destinations, and increasing frequency. It was a strategy that played against the strengths of regional turboprops, whose shorter range made them ineffective in reaching new markets.

The net effect was a surge in regional jet adoption and deployment, largely because of the replacement

I

\

International Business Strategy66

C386 CASE 25 \ Embraer: Shaking Up the Aircraft Manufacturing Market

of iurcoprope on low-density routes and the develop- ment of new routes that extended airline networks. As the regional jets segment expanded, the capability of the jets themselves expanded to comprise roomy and cost-effective modem aircraft that flew up to 4,000 krn (3,700 miles), enough to operate within most continents.

Based on expected growth of LCCs and regional carriers, as well as tile aging of aircraft currently in use, the market for regional planes appeared to be poised for significant growth. Embraer had projected deliver- ies of 30- to 120-seat planes to total nearly 8,500 units over the next 20 years, representing a US$175 billion business. The United States was expected to gener- ate 56% of this demand, while 19% of demand would come from Europe (Exhibit 4).

EMBRAER. In 2004. Embraer was the fourth-largest commercial airplane manufacturer in the world in terms of volume, behind Boeing, Airbus, and Bombardier. Airbus and Boeing led the market with deliveries of 320 and 285 commercial airplanes, respectively. In the regional market, Bombardier and Embraer demon- strated a close rivalry by achieving 158 and 148 deliver- ies, respectively (see Exhibit 5 for Embraer market share evolution).

Embraer, founded in 1969, was the product of an aeronautical technology center (CTA) that had been established in 1945 by Brazil's Ministry of Aeronautics. Together with Embraer, the eTA also generated one of the world's leading aeronautical engineering schools, the Aeronautical Technological Institute (ITA). Most of Embraer's aeronautical engi- neers had been hired out of ITA.

Moreover, Embraer's first great commercial suc- cess was Lhe Bandeirantc, a 15-seat plane with a design based on an eight-seat prototype assembled inside the CTA. Overall, 500 Bandeirantes were sold over a 10-year period. The first 80 were sold to the Brazilian military, as an indirect government support to the new enterprise.

From 1972 to 1983, Embraer introduced sev- eral small turboprop planes. Ernbraer's first inter- national success, introduced in 1983, was the EMB 120 Brasilia, a 30-seat pressurized twin turboprop. In 2006, the Brasilia was still in production, with more than 350 planes operating worldwide. Embraer's jet era began in 1985 with the introduction oftheAMX, a military jet developed in partnership with Aermacchi, an Italian aircraft manufacturer.

Embraer was privatized in December 1994 as part of President Fernando Henrique Cardoso's privati- zation program. Cia. Bozano, Simonsen (CBS), the leader of the consortium that took Embraer private, was a conglomerate with diversified investments in financial services, agriculture, real estate, and indus- trial products (see Exhibit 6 for Embraer's ownership

structure). In 1995, Embraer entered the commercial jet mar-

ket with the introduction of its ERJ family. The ERJ 145 (introduced in 1995), ERJ 135 (introduced in 1998) and ERJ 140 (introduced in 2000) had a seating capacity of 50, 37, and 44 seats, respectively. Those planes were developed in accordance with Embraer's strategy of entering the 30- to 50-seat market to com- pete against Bombardier's Q-Series turboprop planes as well as its CRJ family of regional jets.

In 1999, while still celebrating the successful intro- duction of the ERJ family, Embraer began develop- ing a new aircraft family that would serve the 70- to 120-seat market. In February 2002, the 70- to 78-seat EMBRAER 170 completed its first flight, taking off from Sao Jose dos Campos. In the following two years, Embraer completed the maiden flights of its 78- to 86-seat EMBRAER 175 as well as the 98- to 106-seat EMBRAER 190. To complete the family, in December 2004, the 108- to 118-seat EMBRAER 195 accomplished its first successful flight (see Exhibit 7 for a list of Embraer's products as of 2006).

THE 70- TO 120·SEAT MARKET. Several reasons moti- vated Embraer to manufacture 70- to 120-seat planes. First, Embraer identified a gap between capacity and demand for this range of planes. The absence of a true 70- to I20-seat jet family had forced airlines to deploy planes that were either too large or too small to operate efficiently in the inteImediate-demand market. In 2002, 61 % of flights in the United States departed the airport with loads appropriate for 70- to 11O-seat aircraft.

Several trends in the airline industry also contrib- uted to Ernbraer's interest in this segment. First, the continued growth of LCCs had created a shift in air- craft demand toward smaller, more efficient planes. In addition, the downturn in the airline industry that began with September 11,2001, along with the resulting price wars, had highlighted the fact that the ~ajors required a high-load factor to compete effec- tively agamst the LCCs. Furthermore the increased volatility of passenger demand created' a greater need for fleXIbilIty among airlines. As a result, the majors

7

Embraer: Shaking Up the Aircraft Manufacturing Market 1t.7

CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing Market C387

30-60

61-90 91-120 Total

1,150 1,300 1,250

UOO

1,450 1,600 1,700 4,750

2,600 2,900 2,950 8,450

EXHIBIT 4 Embraer: Shaking up the Aircraft Manufacturing Market

Market Outlook

Delivery Forecast by Segment and Reg.on 1

30· to 120·5eat Commercial Jet Category, World Deliveries bV Seat Segment

Segment 2004-13 2014--23 2004-23

Deliveries by Region, 30- to 120-seat Segment

Regions 2004--13 2014-23 2004--23

North America 2,245 2,495 4,740

Latin America 255 370 625

Europe 636 944 1,580

Africa & Middle East 154 236 390 tChina 240 395 635Asia Pacific 170 310 480Total 3,700 4,750 8,450 Deliveries by Region and Segment

30- to 60-seat Segment 61- to 90-seat Segment 91- to 120-seat Segment

Regions 2004--13 2014--23 2004--23 2904--13 2014-23 2004-23 2004--13 2014--23 2004-23

North America 840 1,030 1,870 715 650 1,365 690 815 1,505

Latin America 25 70 95 90 130 220 140 170 310

Europe 85 152 237 263 424 687 288 368 656

Africa & Middle East 80 38 118 52 106 158 22 92 114

China 100 100 200 90 160 250 50 135 185

Asia Pacific 20 60 80 90 130 220 60 120 180

Total 1,150 1,450 2,600 1,300 1,600 2,900 1,250 1,700 2,950

1 -2004-2023 Embraer Market Outlook."

68 International Business Strategy

C388 CASE 25 \ Embraer: Shaking Up the Aircraft Manufacturing Market

72% 67% 64%

EXHIBIT 5 Embraer: Shaking up the Aircraft Manufacturing Market

Embraer Market Share Evolution

30- to 60-seat Planes Data source: hnp://'MVW.embraer.com.br {accessed 10 November 20061.

60% 54% 52%

51% 50% 49% 46%50% 51%

43% 42% 45% 45% 45% 44%

40% 32%

20% 11% 8% 5% 6% 4% 4%

5%

1% 2% 3%

0% 1996 1997 1998 1999 2000 2001 2002 2003 2004

I _ EMBRAER _ BOMBAROIER AVCRAFT

100% 93%

61- to 90-S98t Planes Date source; tlttP;//www.embraar.com.br(acCessed10November2006).

36%

.. ~7

83% 80%

67%

100% 100%

80%

60%

40%

20%

0% L- _

1995 1996 1997 1998 1999 2000

FAIRCHILO OORNIER I

87%

53%52% 49%

32% 30% 27%28%

19%

2001 2002

I_ EMBRAER _ BOMBARDIER

33%

Embraer: Shaking Up the Aircraft Manufacturing Market 69

CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing Market C389

EXHIBIT 5 (Continued!

91- to 120-seatPlanes Dare source; http://www.embraer.com.br1accessed 10November 20(6),

100%

100% 100% 100% 100%

BO%

73% 67% 66%60% 61% 59%

55%

40%

20%

0% 199B 1999 2000 2001

I_ EMBRAER - BOEING _ AIRBUS I 199719961995

1969, yet has remained under the majority control of t the Bombardier family throughout the company's his- tory. In the 1970s, Bombardier began to diversify into other transportation industries through acquisitions of various train, plane, bus, and boat manufacturers. Notable aerospace acquisitions included the purchases of Canadian aircraft manufacturer Canadair in L986, business jet manufacturer Learjet Corporation in 1990, and de Havilland, manufacturer of the Dash-8 turbo- prop, in 1992.

In 1992, Bombardier entered the regional jet mar- ket with the launch of its 50-seat CRJl00I200. After Embraer's entry into that market in 1995, Bombardier began to face a significant erosion of its competitive position. Financial problems compounded the chal- lenges posed by Embraer; they prevented Bombardier from launching major development projects outside of the CRJ family of jets. Instead, Bombardier raced to beat Embraer to the emerging 70- to 90-seat regional jet market by announcing in 1997 its plans to intro- duce the 64- to 75-seat CRJ700/705, a stretched version of the CRJ1001200. The CRJ700/705, first delivered in 2001, was followed by the 86- to 90-seat CRJ900, another stretched CRJ 100/200, which was announced in 1999 and in service by 2003. In 2000, Bombardier's plans to develop a new generation jet that could have beaten Embraer to the 100-plus-seat

were becoming increasingly receptive to the notion of using smaller planes for short- to intermediate-range flights. As well, the financial problems experienced by the majors during this period had prompted their U.S.- based unions to relax clauses that limited the scope of their regional airlines to 50-seat jets, As a result, sev- eral airlines were beginning to expand regional opera- tions to include planes with more than 70 seats.

Another key reason was related to aging fleets. More than one-third of the planes serving the 61- to 120-seat market were more than 20 years old. Those planes amounted to approximately 690 units, which would be gradually replaced within the next five to 10 years (see Exhibit 8 for details).

Embraer already delivered nine EMBRAER 170s to customers, including US Airways, which had broken in its new 170s with flights from Pittsburgh, Pennsylvania to Albany, New York on April 4, 2004. JetSlue Airways had 100 EMBRAER 190s on firm order-at a total cost of $3 billion-having chosen that model over the 107-seat Airbus A318. The total number of firm orders for the 1701190 family, as of December 2004, was 343.

BOMBARDIER. Founded in 1942 by Armand Bombar- dier as a snowmobile manufacturer, Bombardier has been publicly listedon theToronto Stock Exchange since

70 lnternation~.I~B.":us~in'.':e~ss~5:':tr.~t':.!eg~y ---------------

C390 CASE 25 I Embraer Shaking Up the Aircraft Manufacturing Market

EXHIBIT 6 Embraer: Shaking up the Aircraft Manufacturing Market

Embraer Capital Structure Data source: httPJ/WWW.llmbraer.com.br{aCCeSSed10November20(6).

Common Shares (242,544,448 Sharesl-33% of shares

BOVESPA Free F'oat'l Cia. Bazano,

19.20% Europeanrl Group,

20%

PREVI,

20%

Brazilian Government,

SISTEL, 0.80% 20%

The European group includes: Thales 15.67%1,Dassault 15.67%1, Snecma (2.99%1, and EADS (5.67%1

Preferred Shares (476,720,786 Sharesl- 66% of Shares

BOVESPA,

34.40%NYSE'l56%

-.:_ ........... BNDES,

9.60%

Total (719,265,234 Sharesl European --~ Group,

Controlling Shareholders,

32.60%7.70% 1 NYSE, ---l

37.10% BNOES,~

6.90%

Boves pa,

15.40%

0.30%

CASE 25 I Ernbraer: Shaking Up the Aircraft Manufactunng Market C391

EXHIBIT 7 Embraer: Shaking up the Aircraft Manufacturing Market

Embraer's 2006 Product Mix

Commercial Aviation Military Aviation Corporate Aviation

Embraer: Shaking Up the Aircraft Manufacturing Market 71

EMB 120

ERJ 135

ERJ 140

ERJ 145

Embraer 170

Embraer 175

Embraer 190

Embraer 195

Super Tucano

AMX

EMB 145 AEW&C

EMB 145 RS/AGS

P 99

Legacy

Legacy

Data source: htlp:/lwww.embraer.com.br(accessed 10 November 2006).

EXHIBIT 8 Embraer: Shaking up the Aircraft Manufacturing Market

The 70- to un-seat Capacity Gap Data source: http://www.embraer.com.br(accessed 10 November 2lJ06).

North American Region

South American Region

European Region

Asian Region

150 170110 13090Seating Capacity 30 50 70

(continued)

72 International Business Strategy

C392 CASE 25 1 Embraer Snakmg Up the Aircraft Manufacturing Market

EXHIBIT 8 (Continued)

How Overcapacity or Undercapacity Hurts the Bottom Line .' r loads better suited for70- to un-seataircraft. Note: More thsn half 0ls1l U.S. domestic airlines operallng narrow-body malnlme aucran have passenue

27% 34% appropriate for 70- appropriate for 90- to 90-seat aircraft to 110-seat aircraft

~ ,-----'-----\ 17% 17%

~ € m...~ Q

]I ~ 'a

i ! 2%

0% tn. 0- L-- '- '- L- <50 50 60 70 80 90 100 110 120

Passengers per Departure

14% 13%

9% 8% 7%

market were abandoned owing to financial constraints, and Bombardier was forced to continue relying on its existing platform.

After several years of escalating financial and busi- ness challenges, in 2003, Bombardier appointed for- mer CN Railway CEO Paul Tellier as the company's

president and CEO. Tellier quickly implemented a recapitalization program, featuring an equity issue and asset divestitures, to strengthen Bombardier's balance sheet and refocus on its aerospace and rail- car businesses, The aerospace business continued to struggle, however, with 2005 production estimates

4%

130 140 >150

Seating Gap Aircraft in Service (as of 2002\ Note: More than one-third of the world's let fleet serving the 51-to 120-saat seement is more thal120years old and should be retired in the coming veers.

001<1sourcll: http://WwW.embraer.com.br(accessed 10 November 2006).

500 689 aircraft older than 20years (34% of total fleet in service) r~---.A----,

453

400 372 330 304

208

100

o L-J1::-0_~5-~6:-_~10'---!1~'-~15'---!16::-_"!:20'-----;21-2526-30 Aircraft AgeIVe.,s)

+30

Embreen Shaking Up the Aircraft Manufacturing Market 73

CASE 25 I Ernbraer Shaking Up the Aircraft Manufacturing Market C393

for the 50-seat CRJ200 reduced from 98 to 54, as the market continued to migrate toward larger regional planes. Furthermore, the financial strength of airlines still interested in 50-seat jets, such as US Airways and Delta Airlines, continued to decline. In November 2004, Standard & Poor's and Moody's Investor Service downgraded Bombardier's credit rating to junk status. One month later, after less than two years on the job, Tellier was removed from his position as president and CEO of Bombardier. Replacing Tellier was Laurent Beaudoin, a member of Bombardier's founding family, chairman of Bombardier since 1979, and previously CEO of the company from 1979-1999. Beaudoin had reportedly pushed Tellier aside after dis- agreeing with his long-term vision for Bombardier.

The CSeries: The entrepreneurial Beaudoin was believed to be an enthusiastic supporter of the CSeries development project that began feasibility studies at Bombardier in 2004. The CScries, a new family of thuee jets ranging from I I 0 to 135 seats, would serve as Bombardier's entry vehicle into the commercial jet market. Bombardier's board of directors was expected to decide in early 2005 whether to proceed with devel- opment efforts, with the objective oflaunching the proj- ect in spring of 2006 and delivering the first jet in 20.10. The Canadian government, attracted to the opportunity to replace the thousands of jobs that had been lost because of the scaled-back production of Bombardier's CRJ200, had reportedly agreed to finance one-third of the expected $2 billion of capital costs associated with the prototype development. In exchange, Bombardier would commit to locating the CSeries manufacturing and development facilities in Canada.

The CSeries jets were expected to compete directly with Embraer's EMBRAER 190, Airbus's A318, and Boeing's 737-600. Bombardier claimed the CSe.ries would be the only jet specifically designed for the 110- to 135-seat market, as Embraer's 190 was an upward stretch from the 170, and Airbus's and Boeing's jets were downsized versions of their larger narrowbody jets. As a result, Bombardier claimed the CSeries would outperform each competing jet with respect to weight, size, or range. Bombardier expected the CSeries to achieve unmatched operating efficiency, reducing costs to 15% to 20% below the cost of oper- ating competing planes.

Bombardier's recent hiring of former Boeing executive Gary Scott, who had previously worked on Boeing's development of the 737, to direct the CSeries program sparked conjecture in the Canadian press of a

Bombardier plan to create ajoint venture with Boeing. Bombardier called the reports "pure speculation," but Boeing Commercial Airplanes President Alan Mulally confirmed that his company had served as a "consul- tant" to Bombardier. A relationship with Boeing could add significant value to the CSeries, particularly if it allowed Bombardier to create cockpit commonality with Boeing's 737.

BOEING. Boeing was the world's second-largest manufacturer of large commercial jets behind Airbus, as well as the world's largest aerospace company, focusing on military aircraft, satellites, missile de- fense, human space flight, and launch systems and services. Since 2001, Boeing's commercial airplane sales had plummeted from 60% to 40% of Boeing sales. Boeing responded to that downturn by cutting costs, curtailing product development, and placing more emphasis on its military and space operations. In 2005, Boeing's commercial development efforts were primarily focused on the 787 Dreamliner, a super- efficient, long-range (9,500 km to 11,000 krn, or 7,000 to 8,000 miles), 200- to 250-,eat aircraft that was t expected to be in service by 2008.

The smallest Boeing airplane in full-scale produc- tion as of 2005 was the 162- to 189-seat 737. Boeing announced in January 2005 that the 106- to 114-seat 717, which was inherited in Boeing's 1997 acquisition of McDonnell Douglas, would be taken out of produc- tion as soon as its existing orders were filled. Boeing cited insufficient demand as the reason for the deci- sion, adding that the 717's market niche was simply too small for Boeing to continue serving. The 717 was considered by market analysts to be too big and heavy to operate efficiently relative to smaller regional jets such as Bombardier's CRJ900 and Embraer's EMBRAER 190. Furthermore, the 717 was an orphan product, with no cockpit or engine commonality with other Boeing jets, and had not received a great deal of marketing and development support from Boeing dur- ing its six years of production.

AIRBUS S.A.S. The world's largest commercial aircraft maker, Airbus, was 80% owned by the European Aeronautic Defense and Space Company (EADS), with U.K.-based BAE Systems controlling the remaining 20%. Airbus was founded in 1970 to address several European governments' wishes to have a Eu.ropean competitor in the aerospace industry. In 2005, Airbus was the manufacturer of the world's

74 International Business Strategy

The Decision

C394 CASE 25 \ Embraer: Shaking Up the Aircraft Manufacturing Market

largest, lowest-cost, and longest-range aircraft. The company had recently been focused on the super- jumbo market, with the development of the SSO-seat A380. In December 2004, however, Airbus announced plans to develop a midsized piane, the A3S0, to com- pete directly against Boeing's 787, sealing 24S to 28S passengers.

Airbus's product line comprised four families: the single-aisle A320 family, the widebody A300/310 family, the iong-range A330/340 family, and the new super-jumbo A380 Family. Airbus's smallest airplane, the 318, was a 107- to I32-seat short-haul jet launched in 1999 to compete with Boeing's 717. TheA318 ben- efited from a high degree of commonality with the entire A320 family in terms of airframes, on-board systems, cockpits, and handling characteristiCS, which meant that the entire family could be flown by the same pilots and maintained by the same engineers. Still, as a downsized version of the ISO-seat A320, detractors considered the A318 to be larger and heavier than is desirable for jets in the IaD-seat market.

Competitive History (1989-2005) i 989 Embraer began development of the ERJ 14S. 1992 Bombardier entered the regional jet market

with the SO-seat CRJI00I200, developed from the CL-60 1 Challenger business jet.

1993 Airbus launched development of the 120-seat A319.

1996 Embraerbegan delivering the ERJ i4S. 1997 Embraer launched the 37-seat ERJ 13S.

Bombardier announced pians to develop the 64- to 7S-seat CRJ700170S.

1998 Embraer began delivering the ERJ 13S. 1999 Bombardier began development of the 86- to

90-seat CRJ900. Embraer launched development of the 44-seat ERJ 140 and launched its EMBRAER 1701190 family beginning with the deveiopment of the 70-seat EMBRAER 170. Airbus launched development of the 107- to I32-seat A318. After two years of discussion about government subsidies, Canada challenged the Brazilian subsidy program PROEX before the WTO. The WTO decided that the Brazilian PROEX

was a prohibitive export program that had to be withdrawn. The value of the PROEX subsidy to Embraer was worth $1.4 billion. Following that, Canada chose to retaliate by imposing tar- iffs on the Brazilian exports including a tempo- rary ban on Brazilian beef.

2000 Bombardier abandoned plans for development of a new I OO-seatjet, the BRJ-X.

2001 Bombardier's CRJ700170S began service. 2003 Bombardier's CRJ900 began service.

Embraer's EMBRAER 170 began service. 2004 Bombardier announced that it was studying

the feasibility of a new jet family, the CSeries, which would serve the 11O-to I35-seat market. Embraer began delivery of the EMBRAER 175 and EMBRAER 190.

200S Boeing announced plans to stop production of the 717 because of insufficient market demand.

As he made final preparations for his upcoming inves- tor presentation, Mauricio Botelho was concerned that Embraer still did not know what to expect from Bombardier, Boeing, and Airbus. How would they respond to Embraer's successful launch of its recent family of jets? Would Bombardier really follow through with its launch of the CSerles? Would Airbus and Boeing perceive the latest attacks by Embraer and Bombardier as attacks on their own families of jets? Most importantly, given Botelho's expectations of rivals' future competitive moves, what should Embraer do next to protect its position and influence its com- petitors' actions?

Endnotes 1. "Air Transportation," Encyclopedia of Globul Industries online edition, Thomson Gale, 2005. Reproduced in Busin~ss and Company Resource Center (Michigan: Gale Group. 2005), hup:!lgalenet.galegroup.comlservletlBCRC. 2. "AirTmnsportatlcn," Encyclopedia afGloba/lndustries, Gale Research International Ltd., Pub ID: GE66 (I December 2(02). 3. AV,ailable seat miles (ASM) measure available passenger capacity. 4. "Airli~e.lndusn-y: A Business in Transition," Optimizing Air Travel Mini-Conference Presentation. Boston Massachusets 24 March 2004. "

UPSin lndia-A Package Deal? 7S

It's challenging. But UPS is all about global trade. Global trade is going to pull us out of this recession.

-UPS CEO SCOTT DAVIS IN A 2009 CNBC INTERVIEW

Marne l.Arthaud-Day Kansas State University

Shreyasi Banerjee Intel Corporation

Frank T. Rothaermel Georgia Institute of Technoloqv

I THAD BEEN six months since Robin Page first

walked into the Sandy Springs headquarters of United Parcel Service (UPS) and assumed her role as Chief Strategy Officer. Th9ugh she had been doing strategic analysis and planning for

years, she felt an unusual amount of pressure to prove herself in this new position. Chief Executive Officer ICEOI Scott Davis had made it clear when he offered her the job that he had high expectations of what she could do for the company, and that he wanted to see concrete results by the end of the first year.

Ms. Page glanced at the pile of reports sitting on her desk, many of them describing recent international acquisitions and alliances. She knew that one of the rea- sons she had been Mr. Davis's top choice for the posi- tion was her extensive international experience. UPS already had a presence in more than 200 countries, but they wanted to penetrate those markets more deeply, especially the rapidly growing economies of Southeast Asia. Ms. Page had traveled extensively around the region both for work and for pleasure, and Mr. Davis was counting on her insights to help the company with its Asian expansion.

First and foremost on her mind was India. She remembered fondly a vacation she had taken there just a year or so ago, and how the city marketplaces had stnuck her as a unique mix of the modern and the ancient. People milled around everywhere, pushing their way through crowded streets, families piled on motor bikes weaving inand out of lanes of standstill traf- fic. Yet everywhere she looked, someone was talking

on a cell phone, and modern buildings lined the horizon with names of multinational corporations from allover the world. An entrepreneurial spirit seemed to fill the air,with new businesses coming to life on a daily basis; for every venture that failed, two more sprouted up to claim its space. The country was awash with busi- ness opportunities amidst the clamor, congestion, and complexity that typified modern life in India's major cit- ies like Mumbai, Delhi, and Bangalore. The sheer vol- ume of people promised seemingly unlimited market potential. Although UPS had established a footprint in India,

it had yet to penetrate the market on the scale that Ms. Page and other UPS managers hoped for. They formed an alliance with Jet Air in 2005, which led to the opening of the first" UPS Store" in Mumbai and several other major cities. In 2008, UPS estab- lished a second alliance with AFL Private Ltd, gain· ing access to the logistics company's field stocking locations and significantly increasing its access points for international delivery. Since then, however, UPS's attention had shifted to other Asian markets like China and Malaysia, leaving India wide open to invading competitors. Sure enough, in UPS's absence, DHL acquired the Indian delivery company Blue Dart and had become the clear market leader in both the inter- national and domestic segments. Today, DHI:Blue Dart had a combined market share three times higher than the next largest company.' Clearly, it was to time to reformulate UPS's India strategy.

In many ways, the India situation reminded Ms. Page of when UPS first began to offer overnight delivery back in the 1980s. A major competitor (the U.S. Postal Service) dominated the marketplace, and

Professor Marne L. Arthaud-Day, Research Associate Shreyasi Banerjee (lndustrial Engineer and Systems Analyst. Inte1), lind Professor Frank T. Rorhaermel prepared this case from public sources. This case is developed for the purpose of class discussion. It is nor intended to be used ror any kind of endorsement, source of data. or depiction of efficient or inefficient manage- ment. CAnhaud-Day, Banerjee. and Rothaennel, 2013.

('l! ,''''' ,

... _~7.:6:.._~_~ln:.:t:.r:.:n::atiOnalBusiness S~t~ra~t.~9':Y _

C396 CASE 26 I UPS In India-A Package Deal?

while UPS had strongholdS in all of the major loca- tions, the challenge was to figure out how to con- nect rural America to its major transportation hubs. UPS had promised overnight delivery between any two addresses in the United States, and they weren't joking. If a package needed to get to the base of the Grand Canyon, the plan was to drive the package on a dirt road for 50 miles from Valentine, Arizona, to the rim of the Canyon. A mule train operator would then take the letter over to the rocky final leg for a $35 charge to UPS. UPS would deliver the letter at a loss in order to maintain its commitment to overnight delivery. Ms. Page knew that vast regions of rural India still lacked adequate roadways, and she chuckled think- ing that mule trains might not be such a far-fetched idea after all. Delivery at the local level was still very much a small business, especially in developing coun- tries. It's like Kent Nelson, UPS's senior vice president for finance and customer service, said in a 1985 inter- view, "When you are in the package-delivery business, you are really in the pennies business. The trick is to have the pennies build up to be profitable:"

If UPS was to be a major player in the current "India Mania:' the company would have to figure out the answers to several difficult questions. How unique was the Indian situation compared to other develop- ing countries? UPS had been in business for over 100 years and had experience in over 200 worldwide mar- ketplaces. Surely some of the lessons learned would transfer to India, but how could they determine which ones? Competitors already had a head start, so UPS could not afford to experiment based simply on trial and error. How should they go about tapping the exten- sive potential of one of the world's largest economies? How difficult would it be to streamline their supply and distribution chain given the lack of infrastructure devel- opment? With the size of India's population and the economy's rapid growth, the rewards for successfully addressing these issues were sizeable to say the least. Ms. Page sat down and started reviewing the pile of documents sitting on her desk, hoping the deals of the past would help her figure out the right path for UPS's future in India.

EARLY HISTORY. Claude Ryan and Jim Casey had a big idea and a small amount of debt capital. Working from a Seattle basement, they began running errands and carrying notes on foot, as well as making horne deliveries for drugstore customers. As the arrival of new technologies such as the telephone and automobile led to a decrease in demand for messaging services, the company shifted its emphasis to delivering packages for retail stores. "Merchants Parcel Delivery" quickly built a strong reputation based on its personalized cus- tomer service and the care with which it handled every package.' The young enterprise changed its name to United Parcel Service in 1919 as it entered a golden period of domestic expansion. The word "United" was chosen to reflect that even as the company expanded into other cities like Oakland and Los Angeles, they still belonged to the same organization.

Throughout its early history, UPS functioned pri- marily as an intra-city delivery service, innovating in response to consumers' changing [jfestyles and shop- ping pattems.Lln the I920s, UPS added several unique service features such as daily pick-ups, acceptance of C.O.D. payments, and multiple delivery attempts. It also developed a new conveyor belt system for handling packages.' When fuel shortages leading up to World War Tl caused retai lers to curtail their deliv- ery activities and encourage customers to carry their parcels home, UPS stepped up and expanded its retail store service." After the war, as people migrated to the suburbs and bought cars that could hold their goods, UPS shifted its focus to the business-lO~business segment.i

COMMON CARRIER RIGHTS, In the next phase of its expansion, UPS decided to pursue common carrier rights, meaning that it could deliver packages between both private and commercial customers. This was tra- ditionally the domain of the U.S. Postal Service, as stipulated by the Interstate Commerce Commission and multiple state regulatory bodies. A series of legal battles ensued as UPS fought to expand its operat- ing authority to all 48 states, a goal which it finally achieved in 1975. By 1978, UPS also provided nation- wide air transport services, flying packages in the cargo bays of commercial airlines.!

The UPS Story The UPS saga has all the elements of a remarkable success story. Two teenage entrepreneurs in 1907 started what would one day become the world's larg- est package delivery company.

UPS AIRLINES. In response to the deregulation of the airline industry, many established carriers trimmed flights during the 1980s, leading to reduced air freight capacity. UPS saw this as an opportunity to enter the

• ~7

UPSin India-A Package Deal? 77

CASE 26 I UPS In lndta-c-A Package Deal? C397

air delivery business and began to acquire cargo jets. It offered next-day air service to 48 states by 1985, and in 1988, UPS Airlines was formally recognized by the Federal Aviation Administration. It was the fastest airline startup in FAA history, taking just over one year to get all systems into place.' Building on the success of its airline service, the company shifted from a national delivery company to a global foot- print throughout the 1990s. UPS now provides deliv- ery services to more than four billion people in over 200 countrtes.'?

GOING PUBLIC. The latter half of the 1990s brought both major challenges and new business opportuni- ties. In August 1997, the Teamsters Union led about 185,000 UPS workers on a strike. They wanted more union control of employee pension funds and objected to UPS's increasing use of part-lime workers. UPS controlled about 80 percent of all package deliver- ies in the United States, so the repercussions of the IS-day strike for both the company and its customers were severe. UPS lost $650 million in business over a disagreement that then CEO James Kelly commented could have been worked out "without a strike,"! I UPS recovered quickly, however, and went public in 1999, almost 100 years after its conception. A report in The New York Times said, "Investors have greeted the new stock with an enthusiasm usually reserved for dot-com ventures whose founders' parents had not even been born by 1907,',12In fact, the UPS !PO was the largest public offering to date. (See Exhibits I and 2 for UPS financial data.)

SYNCHRONIZED COMMERCE. In the meantime, UPS continued to redefine itselfin response to changes in its external environment. No longer restricting its activities to delivery services, UPS sought to become a "solutions company" that offered services tailored to its customers' business process value chain.P It formed the UPS Logistics Group in 1995to streamline service operations over its customer base, and UPS Capital in 1998 to provide financial products and services to help small businesses grow." The company made about 30 acquisitions in total, including freight forwarders, customer clearers, and a bank for the efficient move- ment of goods, information, and financing along their supply and distribution network.P When a study by FutureBrand concluded that UPS had no terminology to explain their expanded business model to custom- ers, they coined the term "Synchronized Commerce," 16

By modifying its supply chain to streamline the flow between buyers and sellers, UPS was able to "synchro- nize" goods, information, and funds to deliver more products and services to its customers.

By the star! of the new millennium, UPS was well on its way to becoming a full-service business.'? In 2001, UPS acquired Mail Boxes Etc., then the world's largest franchisor of retail shipping, postal, and busi- ness service centers. 18 This strategic move enabled the company to target smaller businesses and increased its accessibility to residential and home-office cus- tomers. Over 3,000 Mail Boxes Etc. locations were re-branded as "The UPS Store," in the largest re- branding campaign in history. Mail Boxes Etc.'s CEO said that the initiative helped set lower maxi- mum retail prices for UPS shipping. He added, "By pooling MBE's expertise in retail business services with UPS's expertise in shipping and other expanded capabilities. The UPS Store offers an extensive port- folio of products to our franchisees and their custom- ers." Currently, ''The UPS Store" and "Mail Boxes Etc," have over 4,800 locations in the United States, Canada, and India alone. 19 .

Today, UPS maintains its focus on services as its core business while continually looking to grow new revenue sources. To ensure that the company keeps its strategic focus, former CEO Mike Eschew introduced the "Four Quadrant" growth strategy that "focuses on innovating existing business operations internally and externally, and, likewise, focuses innovation on new entrepreneurial ventures both internally and externally,',20 This strategy has helped to land UPS among the top 15 most respected companies and in the top 10 of all logistics companies worldwide (see Exhibits 3 and 4).

HUB AND SPOKE MODEL. UPS's delivery network is based on the hub and spoke model," a centralized and integrated approach to logistics managemem.f It consists of a hub (the center), where packages are sent for consolidation, and spokes that link the hub to all other points in the system. UPS's rival, FedEx, pio- neered the huh and spoke system in the U.S. domes- tic express delivery sector, and then extended it to its international operations. FedEx's first Asian hub was at Hangzhou Xiaoshan International Airport, located in east China's Zhejiang Province.23 UPS transitioned from direct shipping to the hub and spoke system somewhat later than its major competitor, but has stiLI benefitted from significant cost savings by doing so.

78 International Business Strategy

C398 CASE 26 I UPS in lndia-A Package Deal?

EXHIBIT 1 UPS Income Statement (U.S. $ in millions)

Years Ended December 31,

2010 2009 2008 2007

Revenue $49,545 $45,297

$51,486 $49,692

Operating Expenses: Compensation and benefits

26,324 25,640 26,063 31.745

Repairs and maintenance 1,131 1,075

1,194 1,157

Depreciation and amortization 1,792 1,747

1,814 1.745

Purchased transportation 6,640 5,379

6,550 5,902

Fuel 2,972 2,365

4,134 2,974

Other occupancy 939 985

1,027 958

Other expenses 3,873 4,305 5,322

4,633

Total Operating Expenses 43,671 41,496 46,104

49,114

Operating Profit 5,874 3,801 5,382

578

Other Income and (Expense): Investment income

3 10 75 99

t Interest expense ~)

~I ~I ~I

Total Other Income and IExpense) ~) ~I ~I ~I

Income Before Income Taxes 5,523 3,366 5,015 431

Income Tax Expense 2,035 ~ 2,012

__ 49

Net Income 3,488 2,152 3,003

382 ~ ~

Basic Earnings Per Share $3.51 ...!ill ...E! $0.36- -

Diluted Earnings Per Share $3.48 $2.14 ~ ~- -

source: SEC,gov,

EXHIBIT 2 UPS Consolidated Balance Sheets IU.S. $ in millionsl

December 31,

2010 2009 200S 2007

ASSETS Current Assets: Cash and cash equivalents $ 3,370 $ 1.542 $ 507

s 2,027 Marketable securities 711 558 542 577

Accounts receivable, net 5,627 5,369

Finance receivables, net

5,547 6,084

203 287 480 468

Deferred income tax assets 659 585 494 606

.. ~7

UPSin India A Package Deal? 79

CASE 26 I UPS in India-A Package Deal? C399

EXHIBIT 2 (Continued)

December 31.

2010 2009 2008 2007

Income taxes receivable 287 266 167 1,256 Other current assets 712 668 ~ 742 Total Current Assets 11,569 9,275 8,845 11,760 Property, Plant and Equipment, Net 17,387 17,979 18,265 17,663 Goodwill 2,081 2,089 1,986 2,577 Intangible Assets, Net 599 596 511 628 Non·Current Finance Receivables, Net 288 337 476 431 Other Non-Current Assets 1,673 1,607 1,796 5,983

Total Assets $33,597 ~ $31,879 ~

LIABILITIES AND SHAREDWNERS' EQUITY

Current Liabilities: Current maturities of long-term debt and commercial paper s 355 s 853 $ 2,074 s 3,512 Accounts payable 1,974 1,766 1,855 1,819

Accrued wages and withholdings 1,505 1,416 1,436 1,414

tSelf-insurance reserves 725 757 732 704Other current liabilities 1,343 1,447 1,720 2,391Total Current Liabilities 5,902 6,239 7,817 9,840 Long-Term Debt 10,491 8,668 7,797 7,506

Pension and Postretirement Benefit Obligations 4,663 5,457 6,323 4,438

Deferred Income Tax Liabilities 1,870 1,293 588 2,620

Self-Insurance Reserves 1,809 1,732 1,710 1,651

Other Non-Current Liabilities 815 798 864 804

Shareowners' Equity: Class A common stock 1285and 314 shares issued in 2009 and 2008) 3 3 3 3

Class B common stock 1711and 684 shares issued in 2009 and 2008) 7 7 7 7

Additional paid-in capital 2

Retained earnings 14,164 12,745 12,412 14,186

Accumulated other comprehensive loss 16,195) (5,127) (5,6421 12,013)

Deferred compensation obligations 103 108 121 137

Less: Treasury stock (2 shares in 2009 and 20081 ~ ~ ----.i.11!l ~ Total Equity for Controlling Interests 7,979 7,630 6,780 12,183

Noncontrolling Interests 68 66

Total Shareowners' Equity 8,047 7,696 6,780 12,183

Total Liabilities and Shareowners' Equity ~ $31,883 ~ $39,042

Source: SEC.gov.

II

II

80 International Business Strategy

C400 CASE 26 I UPS In India-A Package Deal?

EXHIBIT 3 The World's Most Respected Companies

Company Mean

Rank 4.15

3.98

392

3.76

3.75

3.74

3.56

353

3.47

3.42

3.42

335

3.29

3.29

3.22

1.

2. 3 4.

5. 6. 7.

8. 9.

10.

11.

12.

13.

14.

15.

Johnson and Johnson

Berkshire Hathaway

Procter & Gamble

Apple

Walmart Stores

Exxon Mobil

McDonald's

Toyota Motors (Japan)

Coca-Cola

Cisco Systems

United Parcel Service

PepsiCo

3M

IBM Abbott laboratories

Source: Barron's Magazine, 2009,

EXHIBIT 4 The Top 15 Global Logistics Companies

2008 Revenues Rank Company (million USSI Base Country

Coverage

1 DHL Logistics $39,900 Germany Globai

2 Kuehne + Nagel $20,220 Switzerland Global

3 DB Schenker Logistics $12,503 Germany Global

4 Geodis $ 9,700 France Global

5 CEVA Logistics $ 9,523 Netherlands Global

6 Panalpina $ 8,394 Switzerland Globel

7 Altadis/Logista $ 8,190 United Kingdom Europe

8 C.H, Robinson Worldwide $ 7,130 USA Global

9 Agilitv Logistics $ 6,316 Kuwait Global

10 UPS Supply Chain Solutions $ 6,293 USA Global

Source: Traffic World, 2009.

-.------------------- =

____ -----------------------------------U::.p.:.s:.:i:.:n:.:ln:::d:::ia_-.:.A:.:P.:.a:::c:.=:kage Deal? 81

CASE26 I UPSIn Indla-APackageDeal?C401

UPS BRAND AND CULTURE. Claude Ryan and Jim Casey started UPS with the goal of providing the best service at the lowest rates. Jim's commitment to reli- ability, courtesy, neatness, and high ethical standards helped establish the values that continue to guide UPS today." "They trust UPS, our technology and visibil- ity tools. It's good to get there on time," said CEO Scott Davis, when asked what loyal customers think of the brand.'5

Since its inception, UPS has stressed employee ownership as a way to get its people to feel responsible and involved. "We are all owners, that is a big part of enhancing culture. At some point, all of our employees have had a moment when they realize what it means to be a partner," said former UPS CEO Mike Eskew. The company cultivates further loyalty by following a "promote from within" principle. Over the years, many delivery workers and mail sortershave risen to management levels, including Eskew himself. Before serving as CEO from 2002 to 2007, Michael Eskew started as an industrial engineering manager in 1972 and worked his way up the ranks for 30 years.

India Mania In a 2006 address, Dr. Manmohan Singh, the Prime Minister of India, declared, "We believe that India is now on a sustained path of high growth. We have developed anew model for service-led and technology- driven integration with the global economy,,,26 As ifon cue, India's GDP topped the $1 triLlionmark in early April 2007, making it the 12th wealthiest nation in the world according to Swiss investment finn Credit Suisse.27 India's GDP now stands at $1.16 trillion, with an annual growth rate of 7.9 percent even dur- ing the global financial crisis." When asked about the biggest benefit of doing business in India, Steve Hochradel, Assistant VP of distribution for PBD Worldwide said, "India offers great growth opportuni- ties, and it is easier to do business there than in many other international markets. India has a high popula- tion of English speakers, which makes it easy to enter the market, negotiate with vendors and partners, and set up operations."Z9

ECONOMIC REFORM. However, prosperity did not follow immediately after India's emergence from British control and establishment as an independent nation in 1947. For the first 40 years or so, the new socialist government took an extreme protectionist

stance, structuring society on the basis of collective action as opposed to capitalist acquisitiveness, The License Raj represented the state's efforts to con- trol all aspects of the economy. Elaborate permits and regulations were required to set up or run busi- nesses, severely limiting their growth. Though there was economic discipline at the macro level and infla- tion was low compared to other developing countries, the Indian economy dragged along at a subsistence level with a low GDP per capita. Basic industries such as steel and textiles were conspicuous by their absence.3o The UPA (United Progressive Alliance), a coalition

of political parties that constitutes the Government of India still today, is credited with opening up the economy. An economic crisis during the 1991 general election triggered the beginning of micro-economic liberalization. To rectify the situation, then-finance minister Dr. Manmohan Singh proposed changes such as repealing the "License Raj" and lifting a ban on for- eign direct investment. The economy grew by 9 percent the foLlowing year as a result of these changes. The Manmohan Singh government showed further sup- ~ port for international trade through the achievement of two key foreign trade policy objectives in 2004: (I) to double India's percentage share of global mer- chandize trade in a five-year period; and (2) to use trade expansion for both employment generation and economic growth." To expand upon these objectives, the government established several Special Economic Zones (SEZ Act, 2005) in 2006 to attract foreign and domestic investment. Companies operating in these zones receive significant tax benefits and face much simpler clearance and compliance procedures. India's worldwide trade is linked to the world economy. For example, with the recession hitting most of India's major trading partners like the United States, United Arab Emirates, and Singapore, export demand from India declined by 16percent in January 2009."

KEY INDUSTRIES. India boasts a technical work force of 4 million and trains 60,000 software engineers every year.33 Combined with lower wages, these fac- tors make India a prime source for information tech- nology (IT) services and a choice business process outsourcing (EPO) destination. In turn, large-scale employment in the IT and BPO sectors has helped to create an upwardly mobile working class, driv- ing increased purchasing/spending power for India's younger generations.

82 International Business strategy:- _

C402 CASE 26 1 UPS in India-A Package Deal?

Extentof Fall in Manufacturing

Sector Growth1%)

Extent of Fall in GDP Growth (%1

Source Study on oil price Impact, Federation of Indian Chambers of Commerce and lnd tus ry.

zation of resources from the private sector to comple-

ment government efforts. India has 2.1 million miles of roadways that carry

80 percent of its total passengers and 65 percent of India's freight (see Exhibit 6). As of 2000, roughly 74 percent of India's rura! population lacked adequate road access, while 40 percent of the existi.ng roads lacked all-weather capability. As a result, the govern- ment plans to invest $70 billion in India's road infra- structure over the next few years;" $33 million has been dedicated to providing rural connectivity" De- velopmental projects such as the Golden Quadrilateral Project are helping link India's four major metropo- lises (Delhi, Mumbai, Kolkata, and Chennai), while the Prime Minister's Rural Roads Program (pMGSY) aims to provide increased access to agricultural communities.

India's civil aviation industry was born in 1912 with the first air flight between Karachi and Delhi (see Exhibit 7). The government monopolized the industry for most of the 20th century through the state-owned Air India and Indian Airlines Corporation, until the passage of the "open sky" policy in April 1990 (effec- tive as of 1994). Under "open sky," airlines could receive foreign direct investment of up to 49 percent, opening the market to a host of new players like Jet Airways and Sahara. Deccan Airlines was started by Captain Gopinath in August 2003 as a no-frills bud- get air service, becoming the first in the industry to fly to second-tier cities from major metropolitan areas.

38

However, after an initial period of rapid growth, the Indian airline industry fizzled around 2007. Today, the industry operates at fares below its costs and is weighed down by huge debt. When oil prices hit $75 a barrel in early 2009, the industry as a whole was expected to post a $9 billion loss. Major carriers like

Extent of Increase in

WPI(%) 2.1 9.7 16.9 24.5

0.4 19 3.4 4.9

1.5 3.6 5.7 7.9

India's economic climate is highly dependent on the oil industry, which until recently has been closely regulated by the national government. An RCCI (Federation of Indian Chambers of Commerce and Industry) report found a strong positive correla- lion between the price of oil and commodity prices across different sectors of the Indian economy (with the exception of manufacturing, see Exhibit 5). This was largely due to the fact that political pressures ensured that the government absorbed a large part of the increase in oil prices, Public sector oil companies reported losses of approximately US$ 28 million per day on the sale of petroleum products at government- mandated prices. The government offset these losses by selling oil bonds, providing crude oil to state-owned oil retailers at discounted rates, and making periodic adjustments in retail oil prices." In June 2010, the Indian government made a surprising announcement that it plans to deregulate the oil industry. This move is expected to drastically reduce India's fiscal deficit by shifting increased oil costs to the end consumer, and level the playing field between public and private sector oil companies,

a,.;.-"------------

TRANSPORTATION SECTOR. Transportation in India has undergone rapid development only in the last two decades. The onus of covering 1,269,210 square miles of land area and supporting a population of more than one billion (1,028,737,436) people makes the sustainable development of India's transportation sector dimcult." The Eleventh Five-Year plan, which detailed the latest plans for the Indian economy, pro- jected that $500 billion was needed to achieve com- prehensive growth in aviation, roads, railways, and waterways combined. The plan also proposed mobili-

EXHIBIT 5 The Impact of Oil Prices on Various Factors

International OilPrices

Per BarrollS)

Increase in International Dil Pricos (%)

50 60 70 80

38.9 66.7 94.2 122.2

c

UPSin India A Package Deal? 83

t - \... t- \... National Highway Network of India

CASE 26 I UPS in india-A Package Deal? C403

EXHIBIT 6 The Road Network in India, Showing Major Warehouse Hubs Source: Cygnus Research and Consulting.

North and East

/- I-

South and West

.. ...... 101.

tlh _

Indian, Jet, and Sahara have been forced to turn their full-service businesses into budget fleets by cutting down on frills, due to the government's refusal to pro- vide bailouts. While passenger airlines are suffering, the gov-

ernment has increased the maximum level of foreign direct investment in cargo carriers from 49 percent to 74 percent in order to attract overseas players to increase their network in India.39 Research for Air Cargo India 20 I0 indicates that air cargo now com- prises 19 percent of the total freight in India-the same amount as ocean and rail freight combined. Overall, aviation is expected to grow at a rate close to 25 percent in the next decade. Air cargo is expected to post a CAGR of 11.2 percent, expanding to more than three times its present size by 2025. Currently,

India has 126 functional airports, 12 of which are international and are managed by theAirport Authority of India (5 of these have been privatized for develop- ment). Pricing in the industry is directly dependent on high sales taxes on aviation turbine fuel (ATF) and high airport charges. Players in the industry also face major challenges in acquiring land, developing infrastruc- ture, and other issues such as environmental clearance. India's first rail line was set up as an experimental

line during the Madras Presidency in 1836. Later, the British government encouraged development of a rail- way system to haul construction materials around the country, securing 9 million pounds from British com- panies in guarantees. In 1951, the Indian Railway was nationalized and integrated into one unit to form one of the largest rail networks ill the world. Today, it has

..

84 International Business Strategy

C404 CASE 26 I UPS In Indla-A Package Deal?

N

t EXHIBIT 7 The AirNetwork in India Source: PrsQ8t1lnlosoft Pvt tid, indlaeduc8tion.net

Pakistan China(Tibet)

Mumbai IBombavl

Arabian Saa

0, LAKSHAOWEEP

••• Pert Blair a

ANDAMAN & NICOBAR ISLANDS

- Air Routes·lndian a Other Alrlinu

- AlrRoutu-Alrlndla • Airports • International AirportS

B

more than 7,500 railway stations connected by tracks spanning 39,233 miles that, most importantly, reach both metropolitan cities and rural villages," Railroads in India carry over a million tons of freight every day (see Exhibit 8),

India has 12 major seaports, which account for about 90 percent. of India's trade in terms of vol- ume." Inland, the presence of canals, rivers, back- waters, and creeks has facilitated the development of an extensive waterway network, maintained by the

Inland Waterways Authority of India, Ten of these inland waterways have potential significance at the national level. Although close to 5,700 miles can be used by mechanized crafts, freight transportation is limited to only 0, I percent of the total inland traf- fic in India. The volume of cargo carried by Inland Waterways Transport has been declining consistently in recent years in favor of alternative modes of trans- portation," Nevertheless, future development of the inland waterway system could bring economic as well

•

UPSin India A Package Deal? 8§

Railway Network Map of India - Schematic

CASE 26 I UPS in India-A Package Deal? C405

EXHIBIT 8 The Rail Network of India Source: Imp:l/www.nationmaster.com/encyclopedia/Rail-transport-in-India

as environmental advantages. and under some condi- tions, may be the only feasible mode of carrying cargo.

Logistics Industry in India A World Bank research paper sums up the Indian eco- nomic climate as having "a highly fragmented service industry. Outdated regulations, heavy government con- trol, aconstrained private sector. and largely inadequate infrastructure have curtailed efforts to improve trade

"".1 ~""'.1flo<,,]f].d) -1"'.1 ...... -Ol""~"".' --.-- 1/1\ ......... 11I. ( ", ••

"'''''·'1101 ij, ",1IO,..."..-_'",~."I"....,.",""

o ...Io'T 1 J.. ,.t ••I•• 1,_ ....t" . 0) .,1~.... '11.. .,.•••'" II 'IIo'Dr'I>I"""II ••~•• "",,

-e..

................,.~,

logistics."" Despite these obstacles, the World Bank projects that the Indian logistics industry will grow at an annual rate of 1.5percent to 20 percent, achieving revenues of $385 billion by 2015.44 By 2013, approxi- mately 110 logistics parks and 45,000,000 square feel of warehousing space are expected to be developed across the country by various logistics companies (see Exhibit 9). Tier-2 and tier-S cities have become favorable destinations due to the availability of large pieces of land at lower prices. connectivity to multiple

86 International BusinessStrategy

C406 CASE 26 I UPS In India-A Package Deal?

EXHIBIT 9 Warehouse Capacity Plans of3PLPlayers in Indie (inmillionsof square teetl

Expected byYearPlanned CapacityCurrent CapacityCompany 2010 2010 2010 2010 2010 2009 2010 2011 2013

10.0 100 5.0 3.5 2.0 20 2.0 7.5 10.5 52.5

7.5 3.0 1.5 20 1.0

1.0

0.5

TCI Safexpress ORSLogistics IndoArya BlueOart Gati TNT Prologistics TranSmart Total 16.5

Source: Industry, tantrum Research.

part of the industry, and they are typically character- ized by low capacity and poor technology. Meanwhile, the power supply is erratic and subject to prolonged outages in many parts of [he country. All of these inefficiencies lead to increased costs, Compared to European countries, rail transportation in India costs about three times more and the average transit time by road is about three times longer. Airport charges and related operating expenses are the major contribu- tors to the cost structure in the aviation segment, while shipping is plagued by high operating expenses, staff

markets, and the proximity to industrial clusters, Such improvements in logistics capabilities could poten- tially spur national GDP growth [0 I I to 12 percent (see Exhibit 10). Impediments to the dcvelopment of the Indian

logistics industry include government bureaucracy, a fragmented market structure, and inadequate infra- structure. Indian bureaucracy remains a quagmire; it takes about 20 days to clear import and export cargo at India's ports, while the same process lakes only 4 days on average inSingapore, Smaller players form amajor

EXHIBIT 10 Contribution of logistics to India's GOP Growth Source: Cygnus Research and Consulting.

2006-072001-02

4%

17%

• Storage I• Sea _ Air _ Services

.. .:.-s

CASE 26 I UPS In India-A Package Deall C407

cost and depreciation.P In the Indian context, operat- ing expenses generally exceed the costs of raw materi- als (see Exhibit 11). A study by Cygnus Business Consulting and

Research listed three main growth drivers for the Indian logistics industry in the near future. Since transportation accounts for over 40 percent of the total cost of production in India, growth in quality physical infrastructure is essential for improving the

efficiency of the industry." Secondly, the introduction of a Value Added Tax (VAT), a consumption tax lev- ied on any value that is added to a product, has led to increased demand for integrated logistics solutions."? Manufacturers arc seeking to reduce the number of independent warehouses spread over various regions to minimize unnecessary handling and processing (and thus their VAT burden). Lastly, globalization in the manufacturing sector has highlighted the need to

UPSin India-A Package Deall 87

EXHIBIT 11 Cost Structure Analysis for Supply Chain Management (SCMICompanies Source: SSE India; Cygnus Research.

Cost Structure Analysis of SCM companies SCM Industry Cost Structure for OU Ended JFM 09 vs JFM 08

50

~ 40 3j 30 l; 20z "S 10 .,.ol--~- -10

01 "" ~·5 el .... a ~~ ~~ g~ 0 ~

,lj I. JFM200S • JFM20081

Shipping Industry Cost Structure for QtrEndedJFM09vs JFM 08

35 ~ 30 ~ 25 '" 20 ~ 15 "S 10 .,. 5

a

I. JFM2008. JFM200S] Aviation Industry Cost Structure for Otr Ended JFM09 vs JFM 08

40 35

:tl 30 "ii 25 '" 20 l; 15 z 10 "S 5 #- a

-5 -10

I.JFM200S • JFM20081

88 International BusinessStrateg,c.y ~ _

C40B CASE 26 I UPS In Ind,,-A Package Deal?

UPS in the Asia-Pacific Regionimegrate fragmented and independently operated func- tions (for example, transportation, warehousing, freight forwarding, and so on) in order to achieve greater efficiency (see Exhibit 12)." Despite strong poten- tial, the Indian logistics sector currently comprises only about 2 percent of the estimated $5,000 billion global logistics industry.

Another potential growth driver is e-commerce and the associated increase in demand for shipping larger volumes of small packages direct to consumers. Online retailing has been somewhat slow to develop in India due LO the lack of infrastrucLUre. Many of the country's rural population of 700 million still lack lnternet access, though Cornat Technologies is actively working to establish Internet centers in villages with populations of more than 5,000. Other project col- laborators include rCICl Bank, India's second-largest private bank, and Wyse Technologies, a manufacturer of computer terminal equipment.49 Another barrier is that Indians value a personalized shopping experi- ence and are not as discount-driven as the American consumer. Credit card transactions in India are not as secure as they are in other countries. Nevertheless, many analysts expect that India will warm up to the idea oflntemet shopping as the technology infrastruc- ture improves.

UPS entered the Asia-Pacific market in 1986, by set- ting up a regional headquarters in Singapore. Today, the company's presence in the Asia-Pacific region spans more than 40 countries and territories, and employs more than 13,300 people. Additional air hubs are located in Hong Kong, Shenzhen, and Shanghai, China.

UPS's initial foray into India was its 2005 partner- ship with Jet Air. This agreement led to the opening of the first "UPS Store" in Mumbai, which also marked the brand's first expansion outside North America. The UPS Store was India's first full-service retail outlet to offer shipping, packaging, and other business ser- vices under one roof. Speaking at the official opening of a UPS Store in New Delhi in 2007, David Abney, then President of UPS International said, "India's role in the global economy continues to grow impres- sively ... 'The UPS Store' will provide businesses as well as consumers a convenient channel to markets throughout the world."so

To better consolidate business processes and gain faster, more cost-effective outputs in India, UPS established a second alliance with AFL Private Ltd in 2008. AFL is a logistics service provider with a sig- nificant footprint in India. The alliance was mutually beneficial: UPS gained access to 130 of AFL's field

stocking locations and increased its number of access points for international delivery custom- ers from 26 to 200, while AFL gained access to UPS's export capabilities. UPS's penetration into the Asian markets deepened further with the incor- poration of 101 additional field stocking loca- tions in China into UPS's service parts logistics network.i!' 5' Globally, UPS maintains 1,000 such distribution centers to provide customer inventory and order management services in addition to core packaging services. Some of those facilities also house specialized contract services such as techni- cal diagnostics and repair.

UPS continues to form alliances and collabo- r~lions with other local Asian companies to target different segments. For example, in May 2010, UPS formed an alliance with AliExpress, a subsid- iary of the China-based Alibaba group. AliExpress IS the world leader in e-commerce for small busi- nesses and hosts the world's largest base of sup- pliers in the segment." Jordan Colletta, VP of E-commerce and Marketing at UPS, explained the purpose of the agreement as follows: "Through our

~ ..... ~r

EXHIBIT 12 Trend Shilt Toward "Integrated Supply Chain Models" Source: Cygnus Research and Consultmg.

Enhanced value proposition

---• • Overall supply chain visibility and optimizationforthe customer

Traditional3PLvalue proposition

---• • .....-.Cost reduction

Cost reduction

UPS in India-A Package Deal? 80

CASE 26 I UPS in lndta-e-A Package Deal? C409

alliance with Alibaba, we hope to partner with more small and mid-sized Chinese businesses to simplify their logistics processes and connect them with new buyers and sellers worldwide.v'" Less than one month later, UPS formed another alliance with PosLaju, the leader in the Malaysian domestic courier business with a 27 percent market share. Together, the companies created PosLaju International Premium, which boasts money-back guaranteed overnight international deliv- ery service to 215 Asian locations.P

Competition in India India was proving to be one of the more difficult Asian markets to penetrate due to the sheer number of competitors. Currently, the subcontinent boasts more than 2,500 parcel carriers and courier services, all competing to differentiate themselves based on cost, speed, and territorial coverage. Larger players have a clear advantage with respect to infrastructure, business-consumer interface, and speed of delivery. Smaller or more local firms tend to have better access to local information and ease of penetration at the domestic level (see Exhibit 13 for market share data, Exhibit 14 for performance metrics, and Exhibit J 5 for key success factors, respectively). These different

EXHIBIT 13 Non-documentCargoandRoadFreight, Comprising40Percent 01 the ExpressDeliveryMarket Source: Author's interview with logistics sector expert.

MarketShare-India

approaches are reflected in their respective invest- ments in information systems: larger firms devote close to 20 percent of their development funds to in- formation technology, compared to just over 7 percent for smaller firms. Blue Dart-DHL Express is the clear market leader

in both the international and domestic segments, with a combined market share three times higher than that of the nearest cornpeutor/" Prior to its acquisi- tion by DHL, Blue Dart had an 8 percent share in the non-document cargo and road freight sector. The next largest competitor in the international segment is TNT, which has double the market share of FedEx and UPS.57 AFL, GATI, and First Flight are Blue Dart- DHL's main challengers in the domestic sector. See Exhibit 16 for a comparison of the stock performance of some of these key competitors.

Started in 1989, GAT! has become a leader in express cargo delivery. With operations touching 603 out of 6I I districts in India, GAT! is one of the most sought-after freight carriers in the country.58 The com- pany covers 200,000 miles every day and claims to have brought India and the world closer by virtue of their "deeply entrenched network and domain knowl- edge." In recent years, GAT! has diversified both its services and its geographic reach. GAT! now offers

distribution and supply chain management solutions as well as delivery services, and has spread across the Asian subcontinent. While expanding its international pres- ence through the establishment of offices in Singapore, Hong Kong, China, and Sri Lanka, GATI continues to develop highly focused expertise in India-centric operations.

Of course, all of these private companies also compete against the Indian Department of Posts, the government-run postal ser- vice. The Department of Posts has the larg- est network of post boxes in the world, and close to 90 percent of this network spans rural India. The Department also offers express delivery through its Emergency Mail Service (EMS), which comprises 13 percent of the express market share in India." The Post Office (Amendment) Bill of 2006 gives the Department a monopoly in the debvery of small letters and pack- ages (weighing less than 0.66 Ibs), limits foreign direct investment in the industry

_ Safex(270Crl _ XPS(150Crl _ Speedage (70erl - AFL(130erl Bluedart1100erl _ Gatil350Crl _ OM,TVSetc 1130erl

:"

90 International Business Strategy

C410 CASE 26 I UPS in India-A Package Deal?

EXHIBIT 14 Significant Dependency Relationships among Performance

Metrics and Key Success Factors

Micro & Small Companies 178 responses) All Companies 1133 responses)

Independent Type of p-value Independent Typa of p-value

variable relationship variable relationship

Revenue growth Pricing of services 0.013 Coverage + 0.007

Breadth of services + 0.028

Client relations + 0.034

Integration of + 0.005 services

Profit growth Experience 0.012 On-time delivery

0.029

Coverage + 0.029

Breadth of services + 0.027

Integration of + 0.008 Integration of + 0.000

services services

Shipment volume noor-to-door + 0.039 Breadth of services + 0.001

growth service

t Integration of 0.019 Investment in + 0.002 services information systems

Shipment value Door-to-door 0.007 Breadth of services + 0.024

growth service Breadth of 0.006 Client relations

+ 0.001

services Human resources + 0003

Return on Door-to-door investments (ROI) service

+ 0.010 Coverage + 0.000

Coverage + 0.025 Breadth of 0.045

Integration of

services services + 0.001

Return on assets On-time delivery + 0.048 Coverage + 0.001

(ROA) Integration of + 0.002 services

Customer Client relations + 0.006 Reputation + 0.015 satisfaction Credit facilities + 0.021

Client relations + 0.039 Investment in Investment in assets

0.030 information systems

0.046

Human resources + 0.023 Business Industry focus 0015 Industry focus relationship

0.Ql9

Client relations + 0.002 Client relations + 0.000 Human resources + 0.005 Human resources + 0.000

.. ~r

UPSin India A Package Deal? g,

CASE 26 I UPS in India-A Package Deal? C411

EXHIBIT 14 (Continued)

Micro & Small Companies (78 responses) All Companies 1133responses)

Independenl Type of p-value Independent Type of p-velue variable relationship variable relationship

Breadth of 0.009services + Coverage + 0.000

Industry focus 0.015 Experience + 0.000 Experience + 0.015 Human resources + 0.003 Coverage + 0.005 Coverage + 0.001 Industry focus + 0.004 Industry focus 0.003 Reputation + 0.038 Investment in + 0.001

assets

Client relations 0.006 Integration of + 0.000 services

Customer acquisition

Grographic reach

Source: A Survey of IndianExpress Delivery Providers, liMe,

EXHIBIT 15 Comparative Study of Key Success Factors

Cluster

Micro & Small Medium Large

No. of Observations 78 15 7

Key Success Factor Rank % Rank % Rank %

Door-to-door service 97.44 100 8 85.71 On-time delivery & reliablity 97.44 2 93.33 I 100

Coverage (national/international) 6 55.13 7 80 I 100

Breadth of service offerings 11 15.38 9 60 1 100

Focus on specific industries 12 11.54 14 6.67 13 57.14

Experience of service provider 5 88.46 2 93.33 11 71.43

Reputation of service provider 3 9359 2 93.33 I 100

Competitive pricing of services 4 92.31 8 73.33 8 85.71

Extension of credit facilities 6 55.13 12 40 14 28.57

Relationship with customers 8 53.85 5 86.67 8 85.71

Investment in assets 12 11.54 11 46.67 I 100

Investment in information systems 9 3846 5 86.67 I 100

Quality of human resources 9 38.46 10 53.33 11 7143

Integration of services 14 513 13 26.67 1 100

Source; A Survey of IndianExpress Delivery Providers, liMe.

92 International Business Strategy

C412 CASE 26 I UPS in India-A Package Deal~

EXHIBIT 16 Comparative Studv; Domestic vs. Global Market Major Indian Domestic Players vs. the Sensex (Bombay Stock Exchange)

Source: Cygnus Consulting

150················..·.. ................................. " . Relative Market Cap Performance, 2009

1_ Sensex ... Blue Dart ~ Gsti I

130 .

110·················· .

UPS vs. S&P 500 and Dow Jones Transportation Index Source: UPS lonn 10K.Annual Report filed February 2.1,2.009.

Comparison of Five Year Cumulative Total Return $220.00·· .

$200.00········ $190.00 . .

$160.00····· ~.... .. : ~ . $140.00·······.. . ~. .. .. $120.00 ....···......... ~ ., ..~, ..

$100.00············.. ~ ~ . $80.00········ .. . .... . .. $60.00 "" "

$40.00 2003 2004 2005 2006 2007

I ... S&P 500 _ UPS ... OJ Transport I 2008

to 49 percent, and requires all private carriers to par- ticipate in an expensive and cumbersome registra- tion system. Every registered service provider with a turnover of $50,000 or more is required to deposit 10 percent of its annual turnover to a Universal Service Obligation Fund (USO Fund).60Despite its legal man- date, a survey of users of delivery services carried out by the Indian Institute of Management revealed that 60 percent of consumers did not use India Post. The 40 percent that did use it sent only letters or documents (but not packages). For all other shipments, customers preferred express delivery service providers for their reliability and accountability.

What Lies Ahead? At the end of the day, Ms. Pagegathered up the remain- ing reports, shut down her computer, and headed out to her car. She figured she'd catch up on some more "liqht" reading once she got home. At least she was starting to feel like she had a better sense of what UPS had done thus far, as well as some of the obstacles the company faced if they were to penetrate the Indian market more deeply. How could they take advantage of India's growth potential? Did UPS's strategy of promising delivery to "every address" in their area of reach make business sense in the Indian context 7 Was

a".... r