A Case Study on

Dell Mercosur : Getting Real in Brazil

A mini project report submitted to

Manonmaniam Sundaranar University, Tirunelveli.

In partial fulfilment of the requirement for the award of degree of

BACHELOR OF BUSINESS ADMINISTRATION

Submitted by
Anjana N - 20193081201208
Soorya Mol C J - 20193081201255
Annie John S M - 20193081201210

Under the guidance of

Dr. Nithin Raja Shelly. R, MBA, M.phil, Ph.D. (asst prof)

DEPARTMENT OF BUSINESS ADMINISTRATION

MALANKARA CATHOLIC COLLEGE, MARIAGIRI
NOVEMBER -2021
 A Case Study on
Dell Mercosur : Getting Real in Brazil
A mini project report submitted to

Manonmaniam Sundaranar University, Tirunelveli.

In partial fulfilment of the requirement for the award of degree of

BACHELOR OF BUSINESS ADMINISTRATION

Submitted by
Anjana N - 20193081201208
Soorya Mol C J - 20193081201255
Annie John S M - 20193081201210

Under the guidance of

Dr. Nithin Raja Shelly. R, MBA, M.phil, Ph.D. (asst prof)

DEPARTMENT OF BUSINESS ADMINISTRATION

MALANKARA CATHOLIC COLLEGE, MARIAGIRI
NOVEMBER -2021
 DECLARATION

We hereby declare that the work entitled, “A CASE STUDY ON DELL MERCOSUR:
GETTING REAL IN BRAZIL” submitted to Manonmanium Sundaranar University
Tirunelveli. In partial fulfillment of the requirement for the award of degree
Bachelor of Business Administration, it is a original work done by us during the
period of study at Malankara Catholic College, Mariagiri under the guidance of Dr.
Lenin John (asst prof)

Signature
ANJANA N
SOORYA MOL C J
ANNIE JOHN S M

Place: Mariagiri

Date:
 ACKNOWLEDGEMENT

At the outfit, I thank the Almighty God for his presence and abundant
grace in giving, wisdom and strength to take up this project and complete it in
time.

I express my sincere and deep sense of gratitude to Dr.Thampi Thanka Kumaran,

MSc Ph.D., Principal MCC Mariagiri for giving me the opportunity to undertake
this project.

I Express my deep of gratitude to Dr.S.Karthikeyan M.B.A., M.com., M.A., M.A.,

B.G.L., M.Phil., Ph.D. Head of the Department Bachelor of Business
Administration, MCC Mariagiri for the valuable guidance are every stage of
preparation of this project and encourage complete this dissertation work in this
stipulated time.

I would also like to thank my guide Dr. Lenin John, MBA, M.phil, Ph.D. (Asst prof)
and all teaching and nonteaching staff of the college and my friends for extending
their support and the help during the course of this work.

I would be failing in my duty if do not offer my thanks to God almighty for the
blessing on me.

ANJANA N
SOORYA MOL C J
ANNIE JOHN S M
Dell Mercosur: Getting Real in Brazil

Todd Pickett, CFO of Dell Mercosur, was facing the end of 2002 with conflicting
predictions of the value of the Brazilian currency, the real, and what to do to
hedge Dell's operation in Brazil.47 Although Pickett was concerned about Dell's
exposure in the other Mercosur countries, especially Argentina, Brazil was clearly
the largest concern.

The year 2002 began with the shocks resulting from the Argentine financial crisis
that started at the end of 2001, and it ended with the election in October of Luiz
Inácio Lula da Silva, known simply as Lula, as the president of Brazil. Lula, the
leader of the Workers' Party and a longtime leftist politician, had held the lead
throughout the year. The markets were skeptical of Lula's potential leadership, a
factor that caused the real to weaken from 2.312 reals per U.S. dollar at the end
of 2001 to a record 4 reals to one U.S. dollar at one point just prior to the
election. After the election, the real began to strengthen somewhat, as noted in
Figure 19.9 below, but Pickett had to base his strategies on whether the real
would continue to strengthen or would weaken again.
The Brazilian Real and the U.S. Dollar: Exchange Rate, (2000-2016):
A Little Background

U.S.-based computer company Dell was founded in 1984 by Michael Dell. In 2002,
at the time of the case, Dell was operating in 34 countries with 36,000 employees,
of which about 14,400 are outside the United States, and recorded $32 billion in
sales. In the previous five years, Dell had expanded beyond PCs to servers,
storage, and communications equipment. Most PC manufacturers have claimed
poor results since the technology bubble burst in 2000-BM left the industry in
2000 and Compaq and HP merged in 2001 in hopes of boosting their competitive
position. Unlike its competitors, Dell had thrived in the previous few years,
moving from a market share of 12 percent to 15 percent in 2001, the number-one
spot in the industry.

Fiscal 2002, however, was one of the toughest years to date in the PC industry.
Because of the softening of the global economy and the events of 9/11, demand
for PCs was down sharply. Dell responded with an aggressive price strategy and
reduced costs through workforce reductions and facility consolidations. Although
global industry shipments fell in 2002 by 5 percent, Dell's unit shipments
increased by 15 percent, thus enabling Dell to retain its number-one position,

Dell bases its success on its build-to-order, direct sales model. Dell has eliminated
resellers and retailers and sells directly to the customer by phone or over the
Internet. Dell customizes every computer to the customer's needs and waits to
build the computer until it is ordered. As a result, Dell requires little inventory
(four days on average) and is able to deliver the newest technology to its
customers. Costs are kept to a minimum compared with its competitors because
it has no costly retail outlets and little inventory. Dell began assembling
computers in Round Rock, Texas, in 1985 and moved to global production in the
following order:
1990: Opened manufacturing plant in Ireland
1996: Opened manufacturing plant in Malaysia
1998: Opened manufacturing plant in China
1999: Opened manufacturing plants in Tennessee and Brazil

According to the company's 2002 Form 10K:

Sales outside the United States accounted for approximately 35% of the
Company's revenues in fiscal year 2002. The Company's future growth rates and
success are dependent on continued growth and success in international markets.
As is the case with most international operations, the success and profitability of
the Company's international operations are subject to numerous risks and
uncertainties, including local economic and labor conditions, political instability,
unexpected changes in the regulatory environment, trade protection measures,
tax laws (including U.S. taxes on foreign operations), and foreign currency
exchange rates.

Dell in Brazil
Dell's production facility in Brazil is in Eldorado do Sul, close to Porto Alegre, the
capital of Rio Grande do Sul, the southernmost state in Brazil. In addition, its call
center in Brazil, which is similar to Dell's call center in Bray, Ireland, services both
Brazil and Argentina. Its Brazilian manufacturing facility, which consists of 100,000
square feet of leased property, is the smallest of its facilities outside the United
States, but the potential in Brazil and Argentina is huge, and Dell is planning
further expansion.

Because of the tariff-free provisions of Mercosur and the close proximity of Dell's
manufacturing facilities in the south of Brazil, Dell is well positioned to service all
of Mercosur with its Brazilian manufacturing operations. In fiscal year (FY) 2002, it
held a 4.5 percent market share in Brazil, behind HP/Compaq, IBM, and a Brazilian
company. However, it was rapidly moving up to third place in the market and
growing quickly.
Although Dell is divided into products and customers, it is managed generally
geographically. Terry Kahler, the general manager of Dell Mercosur, reports to
Rosendo Parra, the vice president of the Americas/International Group in Austin,
Texas. Pickett works very closely with Kahler to decrease currency risk and meet
budget targets in dollars, but he reports directly to the CFO staff in Austin to
coordinate hedging strategies.

Dell's revenues in Brazil are denominated in reals, and most of its operating costs
are also denominated in reals. However, about 97 percent of Dell's manufacturing
costs in Brazil are denominated in U.S. dollars because Dell imports parts and
components from the United States. Most general and administrative costs are in
U.S. dollars. It translates its financial statements according to the current-rate
method, which means that assets and liabilities are translated into dollars at the
current exchange rate, and revenues and expenses are translated at the average
exchange rate for the period. Because of business development loans from the
Brazilian government, Dell's net exposed asset position in Brazil is quite small, but
it is subject to foreign-exchange gains and losses as the rate changes.

How Dell Hedges Its Bets

In its Form 10K for FY 2002, Dell states its foreign-currency hedging strategy as
follows:
The Company's objective in managing its exposure to foreign currency
exchange rate fluctuations is to reduce the impact of adverse fluctuations on
earnings and cash flows associated with foreign currency exchange rate changes.
Accordingly, the Company utilizes foreign currency option contracts and forward
contracts to hedge its exposure on foreign currency exchange rate changes.
Accordingly, the Company forecasted transactions and firm commitments in most
of the foreign countries in which British pound, Japanese yen, euro, and Canadian
dollar. The Company monitors its the Company operates. The principal currencies
hedged during fiscal 2002 were the foreign currency exchange exposures to
ensure the overall effectiveness of its foreign currency hedge positions. However,
there can be no assurance the Company's foreign currency hedging activities will
substantially offset the impact of fluctuations in currency exchange rates on its
results of operations and financial position.

The Company uses purchased option contracts and forward contracts designated
as cash flow hedges to protect against the foreign currency exchange risk inherent
in its forecasted transactions denominated in currencies other than [the] U.S.
dollar. Hedged transactions include international sales by U.S. dollar functional
currency entities, foreign currency denominated purchases of certain
components, and intercompany shipments to certain international subsidiaries.
The risk of loss associated with purchased options is limited to premium amounts
paid for the option contracts. The risk of loss associated with forward contracts is
equal to the exchange rate differential from the time the contract is entered into
until the time it is settled. These contracts generally expire in 12 months or less.

The Company also uses forward contracts to economically hedge monetary assets
and liabilities, primarily receivables and payables that are denominated in a
foreign currency. These contracts are not designated as hedging instruments
under generally accepted accounting principles, and, therefore, the change in the
instrument's fair value is recognized currently in earnings and is reported as a
component of investment and other income (loss), net. The change in the fair
value of these instruments represents a natural hedge as their gains and losses
offset the changes in the underlying fair value of the monetary assets and
liabilities due to movements in currency exchange rates. These contracts
generally expire in three months or less.

Based on these general statements of principle, Dell's strategy is to hedge all

foreign-exchange risk, which is a very aggressive hedging strategy. Because there
is no options market for Brazilian reals, Pickett uses forward contracts to hedge
the foreign-exchange risks in Brazil. Corporate financial management monitors
currency movements worldwide and provides support to Pickett's Brazilian
financial-management group in terms of currency forecasts and hedging
strategies. Within the broad strategy approved by corporate finance, the Brazilian
group establishes a strategy and then works with corporate on specific execution
of the strategy

The Two-Part Strategy

There are two key parts to the strategy. One has to do with forecasting exposure,
and the other has to do with designing and executing the strategy to hedge the
exposure. Although the balance sheet exposure is not material, it still must be
forecast and is partly a function of the cash flows generated by revenues. Because
the revenue side is more difficult to forecast, Pickett hedges about 80 percent of
forecasted revenues.

However, the Dell team in Brazil has become very adept at forecasting revenues
and in executing a strategy to reach its target forecast. The team works hard on
identifying the challenges in reaching its target and in devising policies to
overcome those challenges. Its execution strategies vary widely quarter by
quarter, and the management team has become very good at meeting its targets
by working closely together and being flexible. Pickett and Kahler work closely
together daily to execute their strategy.

The second key to the strategy is designing and executing the hedging strategy.
Because revenues vary every day, Pickett does not enter into contracts all at once.
Instead, he works with corporate finance to enter into contracts in different
amounts and different maturities depending on when it expects to generate the
operating revenues. Revenues are generally lower at the beginning of the quarter
and are always higher in the last week or two of the quarter, so he enters into
contracts accordingly.

Timing is a crucial issue. The gain or loss on a forward contract is the difference in
exchange rates between when the contract is entered into and when it is settled.
The key is to unwind (or settle) the contracts while the rate is still favorable.
Pickett noted that if Dell began to unwind the contracts in the last week or two of
the quarter instead of the last day or two of the quarter, it could get much more
favorable foreign-exchange gains. His strategy was so successful that in some
quarters, Dell was generating more financial income than operating income.

Although Pickett and his finance team have some flexibility in designing and
implementing strategy, corporate finance keeps in close touch, depending on
their forecasts of the exchange rate and the strategy that Dell Brazil is following.
Corporate finance uses a consensus forecast of exchange rates that is provided by
a group of banks, but banks have different scenarios. For example, in the last
quarter of 2002, corporate was relying on bank forecasts that the real would
revalue even more by the end of the year.

Pickett's dilemma was that his gut feeling was telling him the real would actually
fall instead of rise. That would indicate a different hedging strategy. He was
resisting entering into hedges while corporate was pressuring him to do just that.
But he was closely watching the forward market, and when it began to move, he
decided it was time to enter into the contracts. He was also considering entering
into operating strategies that would provide natural hedges for Dell in Brazil. But
who knows what will happen to Brazil if Lula, Brazil's new president, loses fiscal
control of the ninth largest economy in the world, resulting in another round of
inflation and a falling currency? Dell has significant market opportunities in
Mercosur, but the financial risks will make for exciting times in the years to corne.
 Summary

This case examines the exposure management strategy of the Dell

Mercosur company, in terms of it expanding into Brazil.
In the end of 2001, argentine financial crisis was started which resulted on Brazil’s
markets and currency. The problem was being effective on the computer markets,
although other computer companies like Compaq and HP were also facing same
problems during this period, Dell was more effected.
Dell came up with an aggressive price strategy and reduced costs through work
force reductions and facility consolidations.
This case explains how the company manages its foreign currency exposure and
how it hedges exposures to minimize risks. The following are the steps to an
exposure management strategy, according to

✤Collecting and consolidating existing currency information that is already

exposed
✤Tracking the collection process and centrally managing information and
documentation

✤Analyzing risks and exposures, which includes monitoring changes and

presenting data with existing hedging relationships
✤Transferring exposures to hedge management
The article states that Dell strategy includes aggressive product
marketing in Brazil to expand its market base.
Dell’s success is largely due to its build-to-order, direct sales model, however, it is
expanding retail space in Brazil because of the strong potential there. The foreign
currency in Brazil is denominated in reals, which is used for Dell’s revenues and
operating costs.
However, Dell’s manufacturing and administrative costs are in U.S. dollars. In
Brazil, Dell has a relatively small exposed asset position; however, the company
has to deal with foreign-exchange gains and losses whenever the exchange rate
changes.
Dell’s exposure management strategy regarding foreign currency exchange rate
fluctuations and reducing the impact of these fluctuations on earnings and cash
flows includes using foreign currency option contracts and forward contracts. This
is to hedge its exposures on company commitments and forecasted transactions.
The company also uses forward contracts for cash flow hedges to protect them
from foreign currency exchange risks.
Basically, Dell’s exposure management strategy consists of aggressively hedging
all foreign exchange risks, because market exists in Brazilian currency.
The company’s foreign exchange risks in Brazil are hedged with forward
contracts. In addition, currency movements are monitored by corporate financial
management for execution of the strategy. In a nutshell, Dell’s exposure
management strategy is divided into two key parts, which are
✦ Forecasting Exposure: In this strategy, Dell team in Brazil has become very
adept at forecasting revenues and in executing a strategy to reach its target
forecast.
✦ Designing Strategy to Hedge the Exposure: The revenues of the company were
varying everyday , Pickett did not enter into contracting at once. Instead, he
works with corporate finance to enter into contracts in different amounts and
different maturities. These strategies had been the most effective strategies
which helped Dell to not only survive the crisis, but also helped them to sustain in
the markets till today.
 INTRODUCTION

Dell is an American multinational computer technology company that

develops, sells, repairs, and supports computers and related products and
services, and is owned by its parent company of Dell Technologies. Founded in
1984 by Michael Dell, the company is one of the largest technology corporations
in the world, employing more than 165,000 people in the U.S. and around the
world.

Dell sells personal computers (PCs), servers, data storage devices, network
switches, software, computer peripherals, HDTVs, cameras, printers, and
electronics built by other manufacturers. The company is well known for its
innovations in supply chain management and electronic commerce, particularly
its direct-sales model and its "build-to-order" or "configure to order" approach to
manufacturing—delivering individual PCs configured to customer specifications.
Dell was a pure hardware vendor for much of its existence, but with the
acquisition in 2009 of Perot Systems, Dell entered the market for IT services. The
company has since made additional acquisitions in storage and networking
systems, with the aim of expanding their portfolio from offering computers only
to delivering complete solutions for enterprise customers.

Dell Computer Company has proven that mission and vision statements are the
ideal tools whose proper implementation guarantees consistent growth and
performance. The focus on being the leader in computer technology has
particularly enabled the company to remain focused on its primary goals while
adapting to the constantly changing business terrain.

A corporate vision statement directs the business development towards a

particular future. In the case of Dell, the vision statement of the company is all
about the influence and advancements the company can stimulate in the
computer and related accessories sector. A corporate mission statement, on the
other hand, highlights the general strategies appropriate for growing a business in
line with the vision.

For Dell, its mission states the impacts the company wants to have on the market.
The core values incorporated by Dell within this company are also instrumental in
the progress of the company towards its vision. They essentially guide the entire
organization’s practices and attitudes, and these are critical for the achievement
of the goals and objectives of the company as well.

MISSION OF DELL:
Dell’s mission statement is “to be the most successful computer
company in the world at delivering the best customer experience in markets we
serve. In doing so, Dell will meet customer expectations of the Highest quality

VISION OF DELL:
Dell’s vision statement is “It’s the way we do business. It’s the way
we interact with the community. It’s the way we interpret the world around us–
our customers’ needs, the future of technology, and the global business climate.
Whatever changes the future may bring our vision — Dell Vision — will be our
guiding force. So Dell needs full customer satisfaction. In order to become the
most successful computer company, they need the newest technology and loyal
customers.” In this statement, Dell outlines its major attitudes and practices that
demonstrate it is the leader in the computer technology industry. The statement
has the following characteristics.

Core Values:
Dell’s core values include “customer-oriented, innovation, results, and integrity.”
Dell has consistently maintained a rich corporate culture for over 35 years due to
the presence of these guiding principles.
At Dell, the customer is considered the primary influencer of the success in the
company. That shows the passion for designing innovations that are not only
sensitive but also meet their needs.

While doing so, Dell emphasizes the importance of being result-based as a mark
of the accountability of the company to its exceptional standards. While the
desire of Dell to win, the company values achieving this in the right way through
integrity-driven processes.
QUESTION AND ANSWERS:

QUESTION 1.
Given how Dell translates its foreign-currency financial statements into dollars,
how would a falling Brazilian real affect Dell Mercosur’s financial statements?
What about a rising real?

As stated in the case study, Dell MERCOSUR’s financial statements is

translated based on the current rate methods, which means both assets and
liabilities of the companies are translated into dollars by using the current
exchange rate whilst the revenues and expenses are translated at the average
exchange rates for the period.
Accordingly, when the exchange rate changes, Dell can either benefit from the
foreign exchange or suffer a lost. In the case of the falling real affect, it can be
easily seen that Dell MERCOSUR’s revenues, income statement along with
balance sheet will be affected.
Regarding the revenues, if the value of the real falls, the value of the foreign
revenue would reduce (Andersen and Schroeder, 2010). Subsequently, the value
of revenues that are translated into US dollar in the consolidated income
statements would also reduce.
As the currency of the host country strengthens, the foreign operating income
would go down.
This situation will be vice versa in case of the rising real. However, only the equity
of the Dell would be unchanged despite of the lower or higher value of the
foreign exchange that is used to translate (Sarno and Taylor,2003).
It is as the balance sheet or the shareholder’s equity, reflects the assets subtracts
the liabilities.
Given that all Dell’s subsidiaries have both of their assets and liabilities relied on
financial statements in the same currency, the value of the assets denominated in
foreign currency would fall (if the real falls), but the value of the foreign-currency
denominated liabilities do not fall.

QUESTION 4:
Build a graph on the value of the real against the dollar by quarters since the
third quarter of 2002 using the spot rate and at the end of each quarter. What
has happened to the value of the real? Based on the chain in the exchange rate,
How would you evaluate Dell’s hedging philosophy strategy?