The Foley Company

Zaid Asfoor
David Do
Nikhil Jeevaraj
Byung Kim
Younghee Kwon
Yongzhu Kwong
Andrew LoCascio
Luis Medina
Michelle Yang

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The Foley Company
This case study focuses on The Foley Company, a soybean-harvesting manufacturer,
which sells machines in Brazil. The Foley Company learns that a local company has begun to
produce machines also, which would affect Foleys market share. The Foley Company has no
experience with business in foreign markets, but is interested in expanding in the Brazilian
market. This study explains the different methods of entering into a foreign market, and
recommends what steps The Foley Company should take in order to keep their market share.
As the demand for agricultural equipment grows worldwide, especially in developing
nations, Brazil remains as one of the largest producers. According to the World Agricultural
Equipment Market, it is expected that the demand for agricultural equipment worldwide will
increase by 6.7% every year until 2016 (Bombourg, 2012). In addition, plowing and cultivation
machinery have been expanding by 9.1% each year since 2011, with tractors corresponding to
30% of all agricultural machinery sales (Bombourg, 2012). Sales growth in South America is
mostly powered by Brazil, and because of this, companies would make good investments if they
outsourced their manufacturing to Brazil. Understanding that Brazil is currently a big market for
investors, Foley would need to keep in mind that there would be a lot of competition in business
when it comes to expanding into this newly blooming market.
Although Brazil is a large producer of agricultural equipment, a company must be
cautious when selecting its mode of entry. In all legal cases, companies have authorized
representation in Brazil. This could take the form of joint venturing, contract manufacturing,
distributors, and other methods. A seller needs to have an identification number on the invoice. If
the seller is not registered with Brazilian authorities, then it is not considered a legal entity, and it
will not have an identification number on the invoice.

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Since the start of AGCO, an agricultural equipment manufacturer based in Georgia, USA,
in 1990, has been rapidly expanding through modes of entry, joint venturing in particular, and
market growth (AGCO, n.d.). AGCO remains one of the largest manufacturers of agricultural
equipment worldwide. One of the companies that it bought, Massey Ferguson, has been the
worlds primary seller of tractors for five decades. In 2005, Massey Fergusons first quarter sales
were 36%, making it the top company in Brazil (McMahon, 2005). Valtra, another company
owned by AGCO, was second, with a sales rate of 26% (McMahon, 2005).
With Foley expanding either directly or through some type of co-operational method,
there are many barriers that the company needs to keep in mind to succeed. The first challenge is
the language and culture in Brazil. By having employees who will be working in Brazil, it is
important that they understand the language of Brazil. Although some people may assume that
Portuguese is similar to Spanish, which is a completely inaccurate assumption. Therefore,
knowing not to mix up these two very different languages is very important for the company.
Going deeper into language and speech in Brazil, the representatives of The Foley
Company in Brazil need to understand the culture of Brazil. By understanding the culture of that
country, it will help establish a better relationship with them as partners in business. For example,
during a business meeting, it is a given that conversation about matters outside of business will
be brought up. Therefore, by understanding the important matters of Brazil and working those
topics into the conversation can help Foleys establish a stronger relationship on a personal and
professional level.
Bureaucracy, a complex and burdensome tax system, and high interest rates are other
obstacles to trade and should be taken into account when looking to expand a business in Brazil.
Brazil imposes taxes at the federal, state and municipal levels for individuals and companies.

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Companies domiciled in Brazil, as well as branch offices, agencies and representative offices in
Brazil of companies domiciled abroad, are subject to Brazilian corporate taxation as independent
entities. The corporate income tax is charged at a 15% rate, with a surtax of 10% applicable to
profits exceeding R$240,000 a year. In addition, Brazil imposes a social contribution tax on
corporate profits. The social contribution tax works similarly to income tax and it is charged at a
9% rate. Therefore, the combine tax rate is 34%. Ordinary tax losses may be carried forward
with no time limit. However, loss utilization is limited to 30% of taxable income (Doing
Business, 2011).
Besides corporation income tax, other taxes like income tax, vehicle tax, goods and
services tax, and property tax should also be considered when doing business in Brazil. The
income tax applies to labor income, capital income, remittances abroad and other income, such
as prizes, advertising services provided by legal entities and remuneration for services provided
by legal entities and the rate is from 15%-27.5%. Vehicle tax is applied to the possession of
motorized vehicles (cars, trucks, motorcycles, airplanes, boats, etc). It is a state tax and must be
paid by anyone who owns a motorized vehicle. Tax on goods and services is a value-added tax
on sales and services and applies to the movement of goods, transportation and communication
services, and to the supply of any goods. It is paid by private people and legal entities who
commercialize any goods and by those who import products from abroad, those who acquired
the goods seized by customs, and those who acquire petroleum products from abroad. The tax
rate is variable from 7% to 25%. Property tax is a real-estate tax applied to the property located
within urban limits. It is charged by the municipality and must be paid by the property's owner.
Rates vary according to the municipality (Novias, 2012). Income tax paid after the due date may
be subject to the following interest and penalties:

Official interest (SELIC) charged at a monthly rate published by the government; and

A daily fine of 0.33% on the tax due, up to a maximum penalty of 20% (excluding
interest) (Doing Business, 2011).

As you can see, the tax system does have significant differences from that in the United
States. It is very important for The Foley Company to ensure that reliable legal, financial, and
fiscal advice are taken at the earliest possible stage, rather than risk long and potentially
expensive wrangling at a later date.
Direct exporting occurs when a company directly sells and distributes its products to a
seller in a foreign market. Directly exporting goods allows the firm greater control over its brand
name, image, and general decision-making. It gives the firm a larger market share and higher
profits as the middle-man (marketing and distribution companies) will no longer receive a
commission on their sales. The firm also gains valuable insight into all the intricacies of that
local export market, it otherwise wouldn't have. In addition, many companies, especially those
outside the West, want to do business directly with their seller, where a middle-man may make
the product less desirable.
Direct exporting is no small operation however, and with added responsibility comes
added risks. Taking on a project that often requires a new department to be successful takes a
large amount of capital and smaller companies often dont have the luxury of direct exporting. It
is often companies who have mastered economies of scale, larger corporations, which are able to
make this transition. With more time, capital, and manpower devoted to exporting to foreign

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markets, companies run the risk of losing home market share. Finally, the biggest and often most
insurmountable obstacle to direct exporting is language and culture barrier. For the firm to see a
return on their investment (often takes 3-5 years) it is vital that sales representatives speak the
native language and understand the culture; a task that is much easier said than done.
Turnover project is another foreign method of entry. Just like the other methods, it has its
advantages and disadvantages. A company is most likely selecting turnkey project if it wants to
export its business system to a foreign country. Plants are established in the foreign country
along with its technology and businesses processes. First, a company employs a contractor to
generate an operation in chosen country. The contractor is responsible for the designing,
maintenance, construction, manufacturing, and services. The contractor also provides raw
materials and trains the operating team. Once the operation has gone through several effective
trial runs, it is then turned over to the buyer.
A company might want to use this strategy because it can earn the company great
economic profit. Countries that do not have good expertise in a particular industry can use this
method also. A turnkey company will know where to buy and where not to buy in the foreign
market. This will also free up the companies resource because they will not have to manage the
project. Although it has great benefits it has several drawbacks. One is that it can create a
competitor. Second, a company will not have a long-term interest in the industry. Finally, it gives
away the secrets of the company to the host country.
Another foreign method of entry is by management contract, which is an agreement
between firms that states one firm will provide managerial support to the other firm for a
determined fee. The fee usually ranges from 2 to 5 percent of the sales of that company. These
management contracts are usually made with firms who have no ownership, joint venture

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partners, and wholly owned subsidiaries.
Another non-equity mode of entry that is an option to the Foley Company for entering
foreign markets is by way of contract manufacturing. Contract manufacturing can happen in two
ways. The first allows the company to enter a foreign market without having to invest in
manufacturing facilities and equipment. The company would instead seek out a local
manufacturer who would agree to produce a specified product the firm desires for a certain price
(Kwak). The manufacturer then would be responsible for the production and shipping, while the
firm would be in charge of marketing their own products under its own company name and brand.
The second way contract manufacturing can be carried out is through subcontracting the
production of individual parts of a whole product to independent companies overseas. This is
similar to foreign direct investment, but without any investment in the subcontractor.
Advantages and disadvantages make contract manufacturing a viable method for foreign
market entry. This method is cost-effective, where firms do not need to purchase expensive
production equipment. It also reduces risk for the firms, who can spread the development of new
products across a few different companies. It also diminishes risk if the product fails. Negative
points of contract manufacturing include that it is a binding contract. Disagreement between the
firms and the manufacturers could create hardship, and both parties risk damaging their
reputations. Another disadvantage of this method is that because it is considered a form of
outsourcing, it creates loss of jobs in the home country. Outsourcing can be defined as hiring
employees outside the home firm to provide services or products. It could also include buying
physical products from another manufacturer in order to save costs. However, firms usually try
to employ outsourcing as a way to lower costs and improve their products simultaneously
(Outsourcing).

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The third method, joint ventures, brings together two companies from different countries
with similar goals to establish a new market entry. Each partner brings specialized skills that
make different contributions to manufacturing and distribution capabilities. It is as simple as
joining together to form a greater product. This helps both parties with time, money, and effort to
build on the project. There are many risks involved when dealing with a joint venture; such as
waste of time, loss of money, and letting go of important technology. Short-term and long-term
successes are both important. In order to achieve success, honesty, integrity, and communication
within, joint venture is necessary. Selecting the right partner is also crucial. There are many
advantages and disadvantages to joint ventures. Some of the advantages are that joint ventures
provide companies with the opportunity to gain new capacity and expertise. It can also be very
flexible and have access to greater resources.
Although joint ventures represent a great way to pool capital and expertise and reduce the
exposure of risk to all involved, they do present some challenges as well. It takes significant
amount of time and effort to build the right relationship with the right foreign business entity. It
may be favorable to the potential growth of the company, yet there are some downsides.
First of all, joint ventures are often structured so that all members of the two entities have
a say in making decisions. Since each issue has to go through agreement of all parties, this
requirement for consensus drags down the time for an action. The complexity involved in
coordinating policies, decisions, and execution can be first downside of joint ventures.
Second of all, the potential for conflicts and disputes is another disadvantage present in a
joint venture. Different cultures and management styles can result in poor integration and
cooperation, defeating its chances for success. When more than one person has an ownership
interest in a business, it opens the door for a multitude of conflicts to arise between partners.

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Thus, a written partnership agreement, which clarifies venture's objectives and its leadership
structure, needs to be strictly in place.
Third of all, rewards and contributions of success have to be shared. If the joint venture
of two companies is based on an equal stake, each takes only half of profit generated. Every
successful transaction has to be shared.
Last but not least, an issue arises regarding the safety of a companys intellectual
property. The risk of companys product or technology being copied or counterfeited increases
participating in joint venture since one is not the only entity in charge. The theft of intellectual
property by the local partner is also an issue to deal with, especially in countries rife with piracy.
As seen above paragraphs, a joint venture has a number of disadvantages in terms of potential
conflicts amongst partners and lack of personal asset protection.
Overall, the best foreign market entry method for The Foley Company would be by a
joint venture. Observing other companies and business tactics, the Brazilian government has only
allowed joint ventures for foreign investment. Taking into consideration Brazils culture and
background, by bringing two companies together that have similar goals in mind, engaging in a
joint venture would encourage business.