INTERNATIONAL FINANCE

CROSSWELL
INTERNATIONAL
AND BRAZIL
ASSIGNMENT
Submitted By:
10/9/2014

1. How are pricing, currency of denomination, and financing interrelated in the value-chain
for Crosswells penetration of the Brazilian market? Can you summarize them using
Exhibit 2?

Sol. A variety of sensitivities can be analyzed using the cost analysis of Exhibit 2; the
spreadsheet on the following page reproduces the analysis.

Pricing - Valuation of the product based on the factors of cost, freight, insurance, duties,
taxes, competition and profit. For successful market penetration, Crosswell needs to hit
the consumer market at a price of about R$0.65 to R$0.68; the preliminary cost analysis
indicates a price of R$0.70 is too high.

Currency of denomination - Based on the prices paid and determined for the product in
terms of making the product in order to prevent foreign exchange risks for both importers
and exporters worldwide. Obviously, currency risk will always be present for
Crosswell/Sosa because the product is being imported from the United States with a
dollar-cost basis, and the primary competitors are all manufactured locally. According to
the preliminary analysis, a case of small diapers which costs R$97.95 in the Santos
harbor (port city closest to Sao Paulo), ends up costing R$245.48 per case to consumers.

Financing - Covers the foreign exchange risks and provides a common ground of
financing between two unaffiliated countries doing business internationally. Financing is
a significant cost concern in the competitive analysis. The cost of financing the diaper
inventory needed for distribution in Brazil, according to Sosa, is 7.000% for a one month
inventory period, exceedingly high by either U.S. or international standards. Crosswell
should explore this cost with Sosa, and evaluate to what degree this rate truly reflects
Brazilian costs of funds, whether they can be reduced, and what types of alternative
(cheaper) financing may be available.


2. How important is Sosa to the value-chain of Crosswell? What worries might Crosswell
have regarding Sosas ability to fulfill his obligations?


Soln. The role of Mr. Sosa in the success of a product for a consumer product is critical.

Crosswells entire success in the Brazilian marketplace will depend on not only the price-
quality offering of Crosswells products, but also the ability of Sosa to search out and
penetrate retail distribution outlets to reach the consumer, its methodology of handling
complaints and the general acceptance Material Hospitalar can create in the minds of
Brazilian customers.

If Sosa is not a credible or reliable distributor, it could very possibly result in a failed
market entry and will affect Crosswells brand name and future. This may limit chance of
a entry into Brazilian market and if the entry is a disaster, it will be difficult for a re-entry
in near future.
If Sosa is not adequately financed or staffed to handle the scope of the distribution, costs
and reliability may hinder market entry, again resulting in poor service, higher prices than
competitors, or both. This also includes poor storage facilities that may tamper the
products and may hurt the brand name of Crosswells products or even improper supply
chain facilities may result in shortage of product in stores.


3. If Crosswell is to penetrate the market, some way of reducing its prices will be required.
What do you suggest?

Soln. It is very expensive to enter foreign market. From the time product leaves U.S. (FOB
price), to the final selling price in Brazil, it has increased 270%. When product reaches
the shelves in Brazil, its roughly 8% higher in price than competitive brands in the same
market segment. It is very much required to reduce the prices so as to sustain in the
Brazilian Market.

Following are the methods that could be implemented to reduce prices.

Financing expenses may be one area where savings could still be found. Sosas margin
on distribution, 20% in Exhibit 2, also is relatively high given that the retailers
themselves will add on another 30%.

Retailers themselves carry differing levels of negotiating strength, depending on whether
they are major chains of supermarkets which have higher reach in the society and possess
higher bargaining power, or smaller shops who have lower bargaining power.

Taxes and government charges are clearly not negotiable, and represent the costs and
complexities of attempting to compete through importation. The possible option is setting
up a manufacturing unit in Brazil or any Latin American countries thereby reducing the
cost of shipping the product and Crosswell may claim tax benefits as a part of Latin
American Free Trade Association (LAFTA) and Mercosur. This will help Crosswell in
entering other Latin American countries.

Note:
1. The goal of the LAFTA is the creation of a free trade zone in Latin America. It should
foster mutual regional trade among the member states. It came into effect on 2
nd
January
1962 and includes 13 Latin American nations. (Source: www.princeton.edu)
2. Mercosur (is a sub-regional bloc): The objectives are free transit of produced goods,
services and factors of production, elimination of customs rights and lifting of nontariff
restrictions on the transit of goods or any other measures with similar effects on it among
the member states and Fixing of a common external tariff (CET) for non-member
countries.(Source: www.cfr.org)