Case Study # 01: Battery-Powered Rush to Build Cars in Mexico
Ford recently announced plans to assemble battery-powered cars in Mexico. Over the last several years, many automobile companies have rushed to build plants in Mexico to take advantage of the low cost of labor in addition to a growing demand for cars in parts of Latin and South America. Wages in Mexico are in the range of $8-$10 per hour, as compared to $29 per hour in the United States.
Because profit margins on electric vehicles are still slim, a result of costly batteries and sales volume that hasn't reached its potential, the move to Cuautitlán, north of Mexico City, will allow Ford to begin assembling a small, battery-powered sport-utility vehicle in 2020. The electric vehicle boasts a 300-mile driving range before the need for charging.
The investment is part of the company's ongoing "One Ford" global engineering structure and strategy, which emphasizes global competitiveness. "One Ford" is the company's effort to get its global operations in sync for greater efficiencies and economies of scale. In less than a decade, Ford has reduced its product platforms (examples include subcompact, compact, midsize, SUV, and truck) from 27 down to just 9.
Ford manufactures the Fiesta, Fusion, and Lincoln MKZ in Mexico. As Mexico continues to transform into a world-class manufacturing destination, foreign carmakers like Nissan, Mazda, Toyota, and Volkswagen have also taken notice by investing billions of dollars into the country. As auto manufacturing continues to gain momentum in Mexico, look for more investments by global carmakers, led by "One Ford."
Discussion Questions:
A) Discuss your perception of Ford Motor Company, its cars, and its brand. Does the fact that many of its cars are made in Mexico and throughout the world impact your perception of Ford as an American brand? Why or why not?
B) Mexico is the fourth-largest vehicle producer, the fourth-largest engine producer, and the second-largest nation supplying Ford's global manufacturing facilities. Despite Ford's success, what challenges do you see for automobile manufacturing in Mexico?
Case Study # 02: Let's Be Honest
The Honest Company is a consumer-goods business that sells nontoxic, eco-friendly items for baby and personal care, household cleaning, and a healthy lifestyle. Cofounded by actress Jessica Alba a little more than six years ago, Honest Co. is built on the promise of "telling all and doing our best to live up to your expectations."
Over the years the company has received high praise and media buzz about its ethical approach to making products that are not only good for people but good for the environment. On its website, Honest Co. goes to great lengths to share with consumers its guiding principles that products are made without harming people or the planet.
A little over two years ago, however, the company experienced some bad press when The Wall Street Journal reported that two independent lab tests found samples of Honest laundry detergent containing a cleaning agent on the list of chemicals the company pledged to avoid. At first, pushback from company officials was loud and clear: they denied their products were anything but eco-friendly and safe for consumers and went as far as calling the report "false" and "junk science."
Unfortunately, the reports about Honest products and their harmful ingredients didn't go away. After the laundry detergent story faded, the company quietly reconfigured the ingredients that went into the detergent as well as other products. But that wasn't the end of the story. Several months later, Honest Co. voluntarily recalled organic baby powder that might cause infections and more recently recalled diaper wipes that appeared discolored.
Despite these recent challenges, Honest Co. continues to be successful and was rumored to be on the short list of possible acquisitions for global conglomerates such as Procter & Gamble, Johnson & Johnson, and Unilever. These consumer-good giants are snapping up smaller, eco friendly firms that have blossomed into full-fledged ethically and environmentally conscious organizations with strong sales and solid reputations among consumers. Recently, however, Unilever acquired one of Honest Co.'s biggest rivals, Seventh Generation, Inc., leaving Honest Co. to again rethink its business strategies, including hiring a new CEO.
Discussion Questions
a) How ethical is Honest Co. in your opinion?
b) Do you think the company's reaction to reports of hazardous ingredients hurt its reputation for honesty and ethical behavior?
c) Why do you think Unilever acquired Honest Co's biggest rival although it was rumored that Honest Co. was on its shortlist for acquisition?
d) How the Honest Co. Carry out its corporate social responsibility?
e) If you were an advisor to the new CEO, what suggestions would you give him for getting the company back on track, especially when it comes to corporate social responsibility?
Case Study # 03: Why Did Global Food Prices Rise?
For the last 25 years, global food prices have been falling, driven by the increased productivity and output of the farm sector worldwide. In 2007, this came to an abrupt end as global food prices soared. By September 2007, the world price of wheat rose to over $400 a ton-the highest ever recorded and up from $200 a ton in May. The price of corn (maize) surged to $175 a ton, some 60 percent above its average for 2006. An index of food prices, adjusted for inflation, which The Economist magazine has kept since 1845, hit its highest level ever in December 2007.
One explanation for rising food prices has been increased demand. The increased demand has been driven by greater food consumption in rapidly developing nations, most notably China and India. Rising consumption of meat, in particular, has driven up demand for grains; it takes eight kilograms of cereals to produce one kilogram of beef, so as demand for meat rises, consumption of grains by cattle surges. Farmers now feed 200 to 250 million more tons of grain to their animals than they did 20 years ago, driving up grain prices.
Then there is the issue of bio-fuel subsidies. Both the United States and the European Union have adopted policies to increase the production of ethanol and bio-diesel in order to slow down global warming (both products are argued to produce fewer CO2 emissions, although exactly how effective they are at doing this is actively debated). In 2000, around 15 million tons of American corn were turned into ethanol; in 2007 the figure reached 85 million tons. To promote increased production, governments have given subsidies to farmers. In the United States subsidies amount to between $0.29 and $0.36 per liter of ethanol. In Europe, the subsidies are as high as $1 a liter. Not surprisingly, the subsidies have created an incentive for farmers to plant more crops that can be turned into bio-fuels (primarily corn and soybeans). This has diverted land away from the production of corn and soy for food and reduced the supply of land devoted to growing crops that don't receive bio-fuel subsidies, such as wheat. This highly subsidized source of demand seems to be having a dramatic effect on demand for corn and soybeans. In 2007, for example, the U.S. increase in demand for corn-based ethanol accounted for more than half of the global increase in demand for corn.
What is complicating the situation is that high tariffs are shutting out producers of alternative products that can be turned into bio-fuels, most notably sugar cane, from the U.S. and EU markets by high tariffs. Brazil, the world's most efficient producer of sugar cane, confronts import tariffs of at least 25 percent by value in the United States and 50 percent in the European Union, raising the price of imported sugar cane and making it uncompetitive with subsidized corn and soybeans. This is unfortunate because sugar cane is widely seen as a more environmentally friendly raw material for bio-fuels than either corn or soy. Sugar cane uses less fertilizer than corn or soy and produces a higher yield per hectare in terms of its energy content. Ethanol is also produced from what used to be considered a waste product, the fiber removed from the cane during processing.
If policymakers have their way, however, the situation may get even worse. Plans in both the United States and the European Union call for an increase in the production of biofuels, but neither political entity has agreed to reduce tariff barriers on sugar cane or to remove the trade-distorting subsidies given to those who produce corn and soy for biofuels. Brazil is not sitting on the sidelines; in 2007 it asked the World Trade Organization to probe U.S. subsidies to corn farmers for ethanol production.
Discussion Questions
a) Who benefits from government policies to (a) promote the production of ethanol and (b) place tariff barriers on imports of sugar cane? Who suffers as a result of these policies?
b) One estimate suggests that if food prices rise by one-third, they will reduce living standards in rich countries by about 3 percent, but in very poor ones by about 20 percent. According to the International Food Policy Research Institute, unless policies change, cereal prices will rise by 10 to 20 percent by 2015, and the expansion of biofuel production could reduce calorie intake by 2 to 8 percent by 2020 in many of the world's poorest nations. Should rich countries do anything about this potential problem? If so, what?
c) The argument for giving subsidies to ethanol producers rests upon the assumption that ethanol results in lower CO2 emissions than gasoline and therefore benefits the environment. If we accept that global warming is a serious problem in itself, should we not be encouraging the government to increase such subsidies? What are the arguments for and against doing so? On balance, what do you think is the best policy?
Case Study # 04: Argentina's Monetary Crisis
In the 1990s Argentina was the darling of the international financial community. The country had fixed the exchange rate for the Argentinean peso to the U.S. dollar at $1 = 1 peso. Maintaining the exchange rate required Argentina to adopt strict anti-inflationary policies, which had succeeded in bringing down Argentina's historically high inflation rate and stimulating economic growth. By 2001, however, the economy was running into trouble. Global economic growth slumped and demand for many of the commodities that Argentina exported had fallen in tandem. Argentina's large neighbor and main trading partner, Brazil, was grappling with a financial crisis of its own and had devalued its currency against the dollar, and thus the peso, effectively pricing many Argentinean goods out of its market. To compound matters, the dollar had appreciated against most major currencies, taking the peso up with it, and making Argentinean goods more expensive in other international markets.
Starting in 1999, the Argentinean economy entered into a tailspin that was to take unemployment up to 25 percent by 2002. Anticipating that the country would have to devalue the peso against the dollar, corporations and individuals started to pull money out of pesos, placing their funds in dollar accounts. As people sold pesos, the Argentinean government used its foreign exchange reserves to buy them back in an effort to maintain the exchange rate at $1 = 1 peso. The government quickly ran down its reserves and in 2000, negotiated a loan from the International Monetary Fund (IMF) to prop up its currency. In return for the loan, which ultimately reached $15 billion, the Argentinean government agreed to adopt a financial austerity program to balance its budget. However, conditions in the country continued to deteriorate, in no small part, some critics claimed, because the strict IMF policies, by contracting government spending, made an already bad recession worse.
By late 2001, with government tax revenues plunging as the economy contracted, the Argentinean government defaulted on its debt repayments, effectively rendering $80 billion of government-issued bonds worthless. This created a massive crisis of confidence, which put further pressure on the peso. Throughout 2001 the Argentinean government had been trying to support the value of the peso with the help of a loan from the International Monetary Fund, but it was becoming ever more difficult, and the debt default was the final nail in the coffin. In early 2002, the government bowed to the inevitable and decoupled the peso from the dollar, allowing it to float freely. It immediately fell to $1=3.5 pesos.
The fall in the value of the peso helped to revive Argentinean commodity exports, which were now much cheaper for foreign buyers. A rebound in global economic growth after 2001 also helped, as did an economic recovery in neighboring Brazil. By 2003, the economy was once more on a growth path and unemployment was falling. In 2005 Argentina repaid its entire debt to the IMF. Commenting on the debt repayment, Argentinean President Nestor Kirchner criticized the IMF for promoting policies that "provoked poverty and pain on the Argentine people." While that view was popular in Argentina, some outside observers worried that freed from IMF constraints, the Argentinean economy would return to its historic norm of losing monetary policy and high inflation.
Discussion Questions
a) How did the fixed exchange rate against the dollar that Argentina adopted in the 1990s benefit the economy?
b) Why was Argentina unable to maintain its fixed exchange rate regime? What does this tell you about the limitations of a fixed exchange rate regime?
c) Do you think that the IMF was correct to insist that the Argentinean government adopt a fiscal austerity program? What other approach could the IMF have taken?
d) In the end, the Argentinean government was forced to abandon its peg to the dollar. In retrospect was this a good thing? Why? What are the risks inherent in a floating exchange rate?