Procter & Gamble

RISKS IN INTERNATIONAL BUSINESS

GROUP B
Ahmed Mohamed Shaaban Halawa
Farah Nabil Mohamed Sabry Al-Kady
Mohamed Abdelsalam Tawfik Awad
Mohamed Mostafa Mohamed Elfayoumy
Nabil Hossam Hassan Aly Mousa
 
 
Introduction
Company Introduction

P&G started in Cincinnati as a candle & soap making company in 1830’s

P&G is now a multinational company located in 180 different countries

P&G is the 9th largest company in the world

P&G now has 65 brands

Company Introduction

Pampers is P&G’s biggest brand

P&G formally entered China in a joint venture in 1988

P&G’s main competitor are Unilever, Colgate-Palmolive, and

Church & Dwight
Country Risk
China country analysis

Governmental challenges
1

2 Consumer preference

Human resources and Labour

3

4 Administration and Bureaucracy

05
China country analysis

5 Market access

6 Intellectual property rights

7 Competition

8 Money Transfer
China country analysis

9 Need for local consultant.

10
Relation with other countries.
China country analysis
P&G China Entry Mode

P&G entered Firstly, Country Contributing

through JV introduced specific to China's
with products approaches
Hutchison overall
Whampoa development
CROSS-CULTURAL
RISKS
Cultural Differences

 P&G adopted an ethnocentric methodology in it’s initial stages of globalization

 This strategy separated the company from the culture and standards of host
country
 This resulted in some doubtful managerial & marketing mistakes in France and
Japan
Cultural difference

 In Japan, P&G run a TV commercial were a Japanese lady was having a bath &
her husband walked in rubbing her shoulder
 Japanese viewers found the ad. Inappropriate for tv which is seen by all ages at
home & the husband was seen to be insensitive.
 P&G’s sales dropped down during the launch of operation in Japan
 In France, P&G underestimated the sensitivity of dandruff as a considerable social
problem when producing a commercial for it’s products.
 After five years of the product introduction in France there market share didn’t
exceed 1%.
Decision-making styles

 “During unstable moments is when innovation becomes more relevant”, that’s

what the P&G president in Brazil believed was one of the key factors for success
in Brazil.
 P&G took the decision of investing more than 200 million dollars in a new
innovation center in Brazil.
 The intent was to use not only the knowledge of the researches made in the other
centers but also look directly to the best way to attend to the Latin-American’s
specific needs.
Decision-making styles

 The most important strategic decision at Procter & Gamble in 1993 was to change
the supply chain model, from a Push‐Based model to a Pull‐Based model.
 The company moved from brand and product management towards customer
management.
 To achieve this, the company built systems that would trigger shipments only
when customers bought a product.
 The company now used data from retailers’ point‐of‐sale terminals.
Ethical practices

 P&G had major areas of improvement to make in not only air pollution and waste
production but also on a personnel level in ensuring that company professionals
ethically conducted themselves based on a cohesive set of principles and values.
 The Global Sustainability Department ensures responsible reporting of corporate
impact on the environment, consumers, and culture.
 This has led not only to the development of products such as dye and color-free
detergents but also the development of a slate of long-term goals to generate sales
of more environmentally friendly products.
Ethical practices:

 By 2012 P&G has committed to generating $20 billion in cumulative sales from
products with reduced environmental impact.
 In addition, at the 170th anniversary of P&G in 2007, the company pledged to
reduce emissions of carbon dioxide, energy & water consumption, and waste per
production unit by 10 percent.
 This will result in a 40% reduction in environmental impact by 2012.
Negotiation patterns
 The acquisition of Gillette by P&G
 Gillette was a smaller in size company but also had known brands.
 In 2004 the company's sales amounted to 10.3 billion dollars and the profits at 2.3 billion
dollars.
 A very positive point for the brand portfolio of Gillette was that its brands were either golden
cows with large market share and slow growth or stars with large market share and rapid
growth.
 Procter & Gamble (P&G) signed an agreement in 2005 with Gillette to acquire 100% of the last
over 57 billion U.S. dollars.
 Maximizing the company's size was also a counterbalance to the increasing bargaining power
of the retailers and especially Wal-Mart’s which is prevalent in the U.S. and famous for its hard
bargains with the suppliers.
Financial Risk
Financial Risk Management

1 Currency Exposure

2 Foreign Taxation

3 Inflationary and transfer pricing

4 Asset Valuation
 1. Currency Exposure

P&G starts approaching the Chinese market in

X8
1985.

P&G entered Mainland China in 1988 by

establishing its first joint venture with a Hong
Kong company, Hutchison Whampoa.

Chinese government adapting the undervaluing

policy of the Chinese Yuan, resulting two kinds of
risks:

1. Accounting Exposure

2. Economic Exposure
 1. Currency Exposure
Accounting Exposure

 Company's equities, assets, liabilities or income will be  Occurs when currency exchange rates change after
subject to change in value as a result of exchange rate the companies have already entered financial
changes. obligations.

 Translation Exposure occurs due to the need of translating  Obligations could result from selling and buying
the financial statements of P&G China (as a subsidiary of contacts on credit with prices stated in foreign
P&G, USA) currency

 P&G China was exposed to the translation exposure led to a

potential changes in Owner's equities
 1. Currency Exposure
Economic (Operating) Exposure

 the extent to which the firm's future cash flows gets

affected due to the change in the foreign exchange
rates along with the price changes

 This caused a change in the future sales volume,

costs, and prices.

Production Cost of a detergent per unit

COGS ¥ 25
Sales Price ¥ 38
Gross Profit ¥ 13
Old USD/CNY Rate $1 = ¥ 6.34
New USD/CNY Rate $1 =¥ 6.38
Profit as per old rate $ 2.05
Profit as per new rate $ 2.03
 1. Currency Exposure
Mitigating Currency Exposure..

 Risk Evaluation: P&G uses a sensitivity analysis tool

which considers different sales and expense options with
different exchange rate scenarios to measure its economic
exposure.

 Risk Management: To manage this exchange rate risk, P&G

primarily utilize forward contracts and options with
maturities of less than 18 months and currency swaps with
maturities up to five years.

 Cash Flow Hedges: to manage variability in cash flows of

future transactions
 2. Foreign Taxation
P&G China was exposed to a foreign taxation risk;
especially that foreign investment taxation in China is
complex.

It includes 14 kinds of taxes as follows:

 Value Added Tax

 Business Tax
 Consumption Tax
 Individual Income Tax
 Income Tax on Enterprises with Foreign Investment
and Foreign Enterprises.
 Urban Real Estate Tax
 Land Appreciation Tax
 Slaughter Tax
 Deed Tax
 Resource Tax
 Vehicle and Vessel Usage License Tax
 Customs Duties
 Agriculture Tax
 Stamp Tax
 2. Foreign Taxation
Core Tax Principles to mitigate foreign tax risk

 Transparency in Relationships with Governments and Tax

Administrations

 Robust Tax stewardship and governance

 Highest level of compliance with financial & tax reporting

requirements.

 Efficient, Consistent and administrable tax and trade

policies.
3. Inflationary & Transfer pricing

 Transfer Price is the price which is used for the supply of products
and services between sister companies or affiliates within the same
group.

 Multinational Companies can use transfer pricing for tax avoidance

and tax advantages. For instance, companies can report profits in a
country that have lower tax rate and vice versa.

 During the period of entry for P&G to China, The Chinese

government was noticed that more than 50% of the foreign
investment enterprises were reported losses.

 China enacted strict transfer pricing law to help tax

authorities investigate the reported profits and losses by the
foreign investment enterprises
4. Asset Valuation

 Asset Valuation Risk refers to the financial risk that an asset

is overvalued and is then worth less than expected when it
sold or matures.

 P&G China was exposed to asset valuation risk concerning

the non-cash contribution and intangible assets valuation
such as goodwill and brands.

 The valuation of these intangible assets and non-cash

contribution is subjective and cannot be translated in the
profit generated by the joint venture.
 4. Asset Valuation

Therefore, this issue was significant because:

 The contributed capital ratio is the basis for profit distribution between
partners in which non-cash contribution and intangible asset were not
counted.

 A minimum percentage of capital contribution was stated by the Chinese

law from the foreign partner. JV
 Different accounting perspective between P&G and the Chinese partners;

 whereby land in China is classified as intangible asset, however it is

classified in USA as tangible asset.

Significant judgment was required to estimate the fair value of P&G goodwill units and intangible assets.
 4. Asset Valuation

 P&G obtained the assistance of third-party valuation specialists for significant goodwill reporting units and
intangible assets.

 The fair value estimates are based on available historical information and on future expectations.

 typically estimate the fair value of these assets using the income method, which is based on the present value of
estimated future cash flows attributable to the respective assets.

 P&G increased its initial 69 percent stake in the venture to 80 percent in 1997 and 100 percent in 2004.