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Copy of Russell Corporation: Choosing between Global and Regional Tree Trade
Transcript of Copy of Russell Corporation: Choosing between Global and Regional Tree Trade
and Ajit Kunnathur Case Summary Would if be better to allow free trade to take its natural course? • Positive Effects of Regional Integration o Higher standard of living, increased market size, economies of scale, foreign investments •Negative effects of regional integration o Economic dependence, overwhelming FDI or imports, ethical dilemmas • Regional Blocs – Hurdle or step towards global free trade o Hurdle • Power consolidation/monopolization •Another layer of regulation • Substitute for actual global free trade •Trade diversion o Step •Level the Economic playing field •Free Trade proliferates more easily in level environments • Deepens political integration, erases degrees of sovereignty Question 1 continued. • DR-CAFTA in CentAmer o Bolsters Apparel Industry o Detriment to Agricultural sector • Do Rescind • Agriculture resurgence • Industry Dependence on DR-CAFTA, weakening of long-term economy •Don’t Rescind •Decline of apparel industry and overall economic growth due to Chinese imports and smaller market • Decline of urban investments and development, stagnating development of comparative advantage •Don’t Rescind, Reform o Wean off artificial market advantages o Invest in national infrastructure to build true comparative advantages Question 3 What can the Honduran government do to help? •Honduras o Predominantly Industry/Services (27%/61%) – Agriculture (%13) o Exports =44% of GDP, Imports = 65% of GDP oEconomy doubled between 2000-2010, DR-CAFTA in 2005 • FDI or No FDI ? o Foreign influence, less control over foreign industry o Infusion of Industry and potential markets o Regional Development of industry clusters oEthical concerns – labor unions, farmers, environmentalists (labor/land/safety regulations) Question 3 Continued • Attracting FDI o DR-CAFTA removal of trade barriers – tariffs, quotas, some regulatory policies (customs hang-ups for example o Investments in infrastructure, both social and physical. Education, Roads, Electricity, etc.. o Subsidization of agricultural imports and low-cost labor – promoting industrial cluster o De-regulation of labor markets • Concerns and Moving Forward o Need to balance autonomy with foreign investment and involvement o Global approach should bolster domestic economy, investments in infrastructure. o Will not succeed without being able to compete globally, will not succeed with too great a reliance on regional bloc benefits. Need to balance the two. Question 4 What should Russell do to counter Adidas and Nike? Question 4 Contined Russell Corporation is a leading manufacturer of sportswear. Runs every step of the manufacturing. Brands include: JERZEES American Athletic Brooks Cross Creek Huffy Sports Russell Athletic Spalding Competitors Include: Adidas Nike Benetton Zara Sells through merchandisers in about 100 countries Recently contacted Kangwei, China which runs more than 1000 retail stores to manufacture and market there. Little brand loyalty
needs to manufacture in low-cost countries. Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) (2005) Eliminated trade barriers between the United States and six Latin American countries: Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, & Dominican Republic Following DR-CAFTA’s passage, Central American countries experienced a significant rise in FDI from abroad. (Virtually eliminated tariffs on trade between the U.S., Central America, and the Dominican Republic) Russell could cost-effectively source raw materials in Central America, manufacture fabric in the U.S., and then send the fabric to its factories in Honduras for assembly. Once the garments are completed, they are re-exported to the United States for distribution. Background on DR-CAFTA Imposed strict import quotas. Expired in 2005 Protected Latin American countries from international competition in the textiles sector. Multi- Fibre Agreement (MFA) When it expired, China increased its apparel exports to the U.S. China had flooded the U.S with apparel. 50%+ share in some segments. U.S. made some temporarily trade barriers against Chinese exports. DR-CAFTA helps maintain much apparel production by creating a bigger apparel market in the region & granting favorable trade status to apparel producers who manufacture their products using raw material from the DR-CAFTA region. Honduras gets to export to the U.S and the U.S. has the opportunity to sell it's products in Central America. The Situation in Honduras poor Central American country with much of its population illiterate.
annual per-capita GDP is around $4,500
unemployment rate of 28%. (2008)
send more then 2/3 of its exported goods to the U.S. & receives about 50% of its imports from them.
Honduras needs the DR-CAFTA to increase trade so that it can survive as a country Their government gives incentives for clusters of apparel firms. Truck their merchandise to Puerto Cortes, Central America’s largest port, in only 30 minutes. It takes only twenty-two hours to ship to Miami. Russell's Dilemmas They must decide if they want to keep things Honduras or if they should move everything to China. They could also establish production in Eastern Europe to gain access to the huge EU market. Management at Russell is keeping an eye on the proposed FTAA, which would widen access to the Latin American marketplace with 500 million consumers. • Advantages to Honduras and Local Firms o Opportunity to expand market size with increased access to the United States. •Cost and geographic benefits • Prompts infrastructure improvements o Job creation o Influx of FDI creates efficiencies o Fewer trade barriers allow for cheaper access to goods and services from non-local sources. •Disadvantages to Honduras and Local Firms o Economic Situation in Honduras •Low, middle-income country with significant wealth gaps. • Low-skilled labor force with little education • Loose labor regulations oPolitical Situation in Honduras • Relatively new democracy with long history of military coups and corruption •United States Trade Representative (USTR) certification o Unleveraged power of the United States and lack of self-reliance •Free Trade Area of the Americas o Geographic benefits o Offer greater balance of power • 9 countries in IMF listing of top 50 countries based on GDP o Congregation of similar industries: agriculture and textiles o “Legalized colonization of the Americas.” – Evo Morales, Belizean President • The challenge for the Russell Corporation is to maintain and grow its market share while countering the mounting competitive pressures from the influx of low-cost athletic apparel from Asia. •By using Michael Porter’s Diamond Model, we can assess, which geographic strategy the company should utilize. o Firm Strategy, Structure and Rivalry
o Factor Conditions
o Demand Conditions
o Related and Supporting Industries
• Firm Strategy, Structure and Rivalry oCapitalize on barrier-free flow of goods between DR-CAFTA nations oFDI has translated to an efficient production operation oNo significant domestic rivalry • Factor Conditions o Central America is a key player in the textile industry oSkilled textile laborers with same labor costs as Asian competitors • Demand Conditions oRegion can benefit from Russell’s low-cost apparel oDR-CAFTA to increase the standard of living in Central America •Related and Supporting Industries oRussell can benefit from the synergies that already exist in an area that has long supported the global textile industry • Company should continue to investigate where inefficiencies exist and either out-source or consider a joint venture.