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Global expansion plan for Ford

Cars In Algeria

Project beneficiary:
Ford Motors, Corporate

FOR COURSE EVALUATION

Date: 25/11/2009
Prepared by

SECTON D GROUP 6

Name Roll No Role Email Ph


Shamin S PGP/12/ Operations
Vishwas D S PGP/12/244 Marketing &
Finance
Claire Juillet FX/12/008 Strategist
de St Lager

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Table of Contents
1. EXECUTIVE SUMMARY......................................................................................4
2. OVERVIEW & OBJECTIVES...............................................................................5
Introduction............................................................................................................5
Background...........................................................................................................5
Vision....................................................................................................................5
Justification............................................................................................................6
Importance............................................................................................................6
Benefits.................................................................................................................6
Objectives...............................................................................................................6
General objectives................................................................................................6
Specific objectives................................................................................................6
3. PROJECT METHODOLOGY...............................................................................7
The project framework..........................................................................................7
Market Analysis....................................................................................................10
Car market in the People’s Democratic Republic of Algeria...........................10
Investment Types.................................................................................................13
Analysis of Alternatives.......................................................................................13
Exporting.............................................................................................................14
Wholly Owned subsidiaries.................................................................................14
Partially owned with remainder widely held........................................................15
Joint Ventures.....................................................................................................15
Licensing.............................................................................................................15
Franchising..........................................................................................................15
Recommendation................................................................................................16
Cash Flow.............................................................................................................16
Ford Algeria Cash Flow......................................................................................16
Risks 18
Operational Risk.................................................................................................18
Price risk.............................................................................................................18
Pure risk..............................................................................................................19
Credit risk............................................................................................................19
Marketing Plan......................................................................................................20

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4. CONCLUSIONS..................................................................................................21
5. ANNEXURES......................................................................................................22
MEMBER CONTRIBUTION..................................................................................22
6. REFERENCES....................................................................................................23
References

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1. EXECUTIVE SUMMARY

Ford is the 3rd largest producers of cars in the world. It is a global company with
presence across six continents in the world and has about 90 plants worldwide. Now
it looks to expand into the remaining big car markets where their presence directly
does not exist as of now.
We found that Algeria is one market which is suitable for Ford to make its entry. It is
the second largest market in Africa. Here in our project we have identified the pros
and cons of Fords entry into the Algerian Market and how Ford can establish itself in
it.

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2. OVERVIEW & OBJECTIVES

Introduction
The Ford Motor Company is an American multinational corporation. The automaker
was founded by Henry Ford and incorporated on June 16, 1903. In addition to
the Ford, Lincoln, and Mercury brands, Ford also owns Volvo Cars of Sweden, and a
small stake in Mazda of Japan and Aston Martin of England. Ford's former UK
subsidiaries Jaguar and Land Rover were sold to Tata Motors of India in March
2008.

Ford is currently the fourth-largest automaker in the world based on number of


vehicles sold annually. As of 2008, Ford is also the second largest automaker
in Europe, only behind Volkswagen. Ford is the seventh-ranked overall American-
based company in the 2008 Fortune 500 list, based on global revenues in 2008 of
$146.3 billion. In 2008, Ford produced 5.532 million automobiles and employed
about 213,000 employees at around 90 plants and facilities worldwide.

Background
Ford currently has it spread across 6 continents and most countries in the world.
They now look to expand in to the remaining countries to further increase their global
presence. To this objective we identified Algeria as a potential country where Ford
has not yet been established but which had good presence of Ford through used
cars till recently, until used cars import was banned in 2005. So people here are
aware of the company and so it would be a right market for Ford to establish itself.

Vision
The vision of this project is to analyze the suitability of Algerian Car Market for Ford
and come up with a Marketing Plan for Ford to establish itself in that market. We

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also see this project as a learning opportunity to understand the way businesses
operate globally and the various factor that are to be considered before any
company goes global.

Justification

Importance
This project helps in identifying various factors that need to be taken into account
when a company goes global. The various strategies that the company can use to
enter a foreign market had to be analyzed and a proper decision taken. This analysis
gives a complete brief of international business.

Benefits
The project will give Ford a complete overview of the Algerian market and a
business plan on how to enter the market.
Apart from the company, the team gets to learn international business concepts and
a complete know how of how to analyze a market that it can enter. Also the team
learns to build a business plan that it can use later when the individuals have an
entrepreneurial assignment and have an expansion plan.

Objectives

General objectives
The general objectives of the project are to analyze African markets and decide
upon one country that Ford Motors can enter other than Egypt and South Africa
where they are present. And as a next stage come up with a strategy and plan as in
how they can enter the African market.

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Specific objectives
The global business plan includes various reports which analyze each module of the
project. They are listed below

Targets Deliverables
Selection of Market Market Analysis Report
Understanding the target market and Marketing Plan
positioning
Identifying Entry modes Risk Analysis Report
Investment Analysis Report
Projections Cash Flow projection

PROJECT METHODOLOGY

The project framework


Description Objective Targets Sources & Remarks/
Verification assumption
Overall Ford, one of the Finding a suitable Africa which has
goal market leaders in market for Ford in been in a lot of
automotive North Africa with trouble in recent
industry has its which it can enter years has been
presence in all the that part of the an untapped
continents in the continent and use it market. Various
world. Its presence to tap the other companies have
is least in Africa. In markets close by. tried earlier but
Africa the largest failed. With the
market lies in current situation,
South Africa and the first mover
Egypt. Ford has its will benefit more.
presence only in
the truck sector in
rest of Africa. The
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goal is to identify a
suitable market for
Ford in Africa.
Objective Try to penetrate Algeria is a rapidly Analyze the Several
and attract new growing market with technology assumptions will
market and 3.5 million vehicles feasibility. have to be made
develop a product registered of which Understand the based on the
portfolio to cater to a majority are used market, growth amount and
the target market. cars. In 2006 rate etc for finding reliability of
Algeria has banned the cost- benefit market
Selected Market: imports of used cars analysis. information
Algeria and the industry is regarding
open now. requirements of
Identifying and customers.
converting the
potential consumers
to buy Ford
vehicles.
Output To come up with Identify the demand Analyse the impact Availability of
results an ideal plan to in smaller cars and image ford accurate
and develop and category in Algeria has in the minds of consumer and
deliverab introduce smaller and later to other potential market data is
les cars and there by countries in Africa. consumers. essential. Data
cater to the needs To provide them Verification based on the actual
of that segment. with an objective on market data market segment
Ford also needs to reason for moving to and techniques we and value has to
pay attention to these markets. used for cost- be obtained
high end segment benefit analysis.
in this market.
Input Market potential Assessing the Information from Involves
Resourc needs to be potential customers authentic sources corrective action
es and assessed properly. who would be target on the market and as reviewed on a
Planning Special skills the cars. We can its value. Data has constant basis.
required to analyse use the data from to be fool proof. The global

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and predict the existing market and We use the data expansion should
market properly. forecast future sales from existing be thoroughly
Proper usage of and growth of market of sales studied and
historical data is market. and past growth of implementation
necessary market for should be
somewhat scrutinised
common properly so as to
technology. achieve desirable
results.

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3.
4. MARKET ANALYSIS

Car market in the People’s Democratic Republic of Algeria


The Algerian vehicle fleet has more than 3 millions of cars and it is the largest car
market among the Maghreb Countries (Morocco, Algeria and Tunisia); though an
average age of operated vehicle fleet is quite old: 55% of the cars are older than 20
years and more than 80% of them are older than 10 years.

Tab.1.The structure of the Algerian vehicle fleet by the end of 2005., units
Total: 3 165 539
Motors cars 1 891 920
Commercial cars 633 727
Lorries 312 211
Buses 51 373
Trailers 99 396
Prime movers 50 324
Special cars 2 948
Farm tractors 12 3640
Source: “OSN” (National Statistical Department)

Lately the vehicle fleet of the country started to renovate aggressively due to the
three following legislative innovations.
In September 2005, used cars were banned for import. The permission for duty-
free importation has been granted to former participants of the national liberation
struggle. From 2006 they have had an opportunity to buy cars on domestic market
after deduction of import duty. The permission for duty-free entry of motors cars
were also granted to the Algerians who have been resided permanently abroad for
more than three years, have been registered constantly in consular sections and
could prove the facts by documents. In both pointed things imported cars cannot be
sold or passed to other persons for 5 years otherwise it must be paid all sum owing
taxes and fees.

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Secondly, obligatory tech inspection of cars has been made compulsory, that
is carried out by the national organization for Technical Control “ENACTA”.
Thirdly, from 2001 auto credits were put into practice. Primarily these credits
were allotted by savings-banks of “CNTP Banque – Algerie”, which has been
reoriented to finance dwelling’s acquisition, and other banks are engaged in auto
credits including “Societe Generale”, the Algerian – Saudi Arabian “El Baraka”, the
Jordanian “Housing Bank”, Algerian banks “Credit Populaire Algerien” (“CPA”) and
“Cetelem”. Filial branches of auto manufacturers such as “Renault” and “Peugeot”
and exclusive importers “Citroen”, “Ford” are engaged in auto sales.

From February 2007 more than 20 concessionaires have merged into association
“L’Association des Concessionaires Automobiles d’Algerie” (“ACAA”). The largest
increase of the vehicle fleet (up to 40% against last year) was marked in 2004 when
sales of new automobiles reached 120 thousand units. Year 2005 was defined by
reallocation of places between seller firms. In 2006 at the Algerian car market
dominated the South Korean manufacturers like “Hyundai”, “KIA” and “GM-Daewoo”
(trade mark “Chevrolet”), occupying overall 30.4% of the market. French trademarks
“Renault-Dacia”, “Peugeot” and “Citroen” which hold 60% of sales before 2006,
gained only 26%, but the share of Japanese companies accounts for 22%. By
estimate, the share of German companies “BMW” and “Mercedes” hardly exceeded
6%. Other trademarks, including the Italian “Fiat” and the Indian “Tata” occupied the
rest of 28%. Year 2007 is defined by expansion of operations of the Iranian company
“Iran Khodro” that increases cars “Samand” deliveries with gas-engines that is very
important for the large gas producer in the world as Algeria.
Under consumer pressure and on the growing competitive market sales, cars’
maintenance sector is gradually getting professional in Algeria. In order to stand out
against the Chinese manufacturers’ expansion, counted on low prices, other
producers focused on improvement of service quality and for this purpose there are
a lot of possibilities.
Firstly, the local auto service sector suffers from absence of professionalism;
secondly, the better part of service stations or garages are ill-equipped; thirdly, in the
country there are only 124 operating centers for technical control and car’s

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diagnostics, 40 of them are in the capital district; the fourth, specialized transporters
(recovery vehicles) barely entered the Algerian market.
Liberalization of trade, including automotive parts, started to realize only 15 years
ago. Some acting suppliers of automotive parts mainly provide service to such
national companies as “L’Enterprise Nationale de Materiel de Travaux Publiques”
(“ENMTP”, manufacture of road – building engineering), “Complexe Moteur
Tracteur” (“CMT”, manufacture of engines) and “Societe Nationale de Vehicules
Industrielles” (“SNVI”, manufacture of trucks and buses).
As for auto parts, the best part of them is imported. According to the National Centre
of Informatics and Statistics, in 2005 the volume of import deliveries of this
production grew up to $160 mln (up to 22.65% against 2004). The number of regular
importers made 122 enterprises.

Tab.2.The volume of auto parts’ deliveries to Algeria in 2005, thousand $


Supplying country Volume of deliveries ($,Increase by 2005 (%)
thousands)
Totally: 165 870 - 2,41
France 41 120 15,85
Germany 23 620 27,24
Italy 12 500 - 39,32
Turkey 12 220 - 0,19
China 11 290 - 1,14
Spain 10 870 4,80
Japan 8 860 10,16
Republic of Korea 7 260 43,82
USA 5 530 13,73
Ukraine 5 510 79,22
Source: the facts of the National Centre of Informatics and Statistics (“Le Centre
Nationale de l’Informatique et des Statistiques” – “CNIS”).

By estimate, more than 50% of realized auto parts are the counterfeit production
mainly from China and in a less degree – from the Eastern Europe. According to
statistics of the National Traffic Safety Centre, accidents related to unfit auto parts
made 6% of the registered road traffic accidents in 2005, chiefly due to bad quality of
tires and unsatisfactory quality of brakes.
The imports of luxurious cars in Algeria increased by over 400% in 2008 marking a
staggering hike compared with the previous year. These imports concern notably
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4x4 drive vehicles, "Mercedes Benz" and "BMW" whose unitary price is estimated at
around 10 million dinars in Algeria. 2756 "Mercedes" cars were imported in Algeria
in 2008 by very wealthy people for a financial package of around 3.441 million
dinars. According to recent statistics collected by "Echorouk Al Yaoumi" from the
Algerian customs services, these vehicle imports skyrocketed in the year 2008 to
reach 447.91%. The imports of another high brand car, namely "BMW", increased by
199% in 2008 with 720 cars imported to the Algerian market. Renault, Hyundai,
Diamal firm for the import of Chevrolet and Opel and many other brands has all
recorded a very high increase in imports. According to customs' figures, Algeria
imported a total of 352315 vehicles, all types taken together, in 2008 for 286.9 billion
dinars. In 2007, the overall number of imported vehicles reached 217742 for a
financial package estimated at 172 billion dinars. So we can see that the market for
high end vehicles is also huge in Algeria along with the common model cars.

Investment Types

Analysis of Alternatives

The different types of investment are illustrated below than listed as pictures say
more than words

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An analysis of the appropriate investment types for Ford

Exporting
By a special agreement with the European Union (EU), Algerian industrial products
are granted duty-free entry into the EU market and agricultural products get
seasonal tariff reductions, while Algeria gives reciprocal treatment to EU imports.
Tariffs on imports ranged from 3-40% in 1998, in addition to a value-added tax (VAT)
of 7%, 14%, or 21%. Some imports are also eligible for the Taxe Spécifique
Additionnelle, ranging from 20-110% and generally applied to luxury goods. As part
of its application to join the World Trade Organization, Algeria lowered its rates to
bring them within acceptable WTO levels.
This makes importing cars manufactured in other countries other than Europe a
problem.

Wholly Owned subsidiaries


Setting up wholly owned subsidiaries involves a huge upfront investment. And
Algerian government does not allow a completely owned subsidiary by a foreign
investor to enter the market. The government wants the development of the country
and its industrial sector.
If the parent company exercises excessive control for example has the same board
of directors, use of common letterhead, in such case the parent company and the
subsidiary are treated as one and the parent company is responsible for the
subsidiaries debts etc.

Partially owned with remainder widely held


Control also becomes an issue when a subsidiary is partially owned by another
outside organization.

Joint Ventures
In a growing number of countries, joint ventures with host governments have
become increasingly important. These may be formed directly with State-owned
enterprises or directed toward national champions. This is the case in Algeria as
well. Joint ventures can be used to reduce political friction and improve local/national
acceptability of the company.

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Licensing
Licensing makes the local company in Algeria own the technology, trademark etc of
Ford. Ford only gets royalties and not a share of the profits. A licensee can become
the licensor’s competitor. The licensee may ‘cannibalize’ sales of the licensor,
causing the latter to gain less from royalties than it loses from sales that go to its
new competitor. The licensee may be more effective or get to the market faster than
the licensor because it may have fewer development costs or may be more efficient.
The licensor depends on the skills, abilities and resources of the licensee as a
source of revenue. This dependence is even greater in an exclusive licence where
an ineffective licensee can mean no royalty revenue for the licensor. Contractual
provisions for minimum royalties and other terms can guard against this, but it is still
a concern.

Franchising
Franchising gives the fastest means to set up business in Algeria. This person that
Ford allows to franchise out from you is also taking Ford’s name. Therefore, if they
mess up it may reflect on the company as well as their own. This may cause Ford to
lose business even though you may not have done anything wrong. Those are the
main disadvantages to allowing Ford to be franchised out.

Recommendation
Joint Venture seems to be the un-debatable option for Ford. For Ford the joint
venture can prove an effective method of obtaining the necessary resources to enter
a new market. This can be especially true in Algeria, where local contacts, access to
distribution, and political requirements may make a joint venture the preferred or
even legally required solution. Joint ventures may provide specialist knowledge of
local markets, entry to required channels of distribution, and access to supplies of
raw materials, government contracts and local production facilities.

Cash Flow

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Ford Algeria Cash Flow

From the above the projections are that Ford will be able to sell another 10,000 cars
in Algeria in its initial years after which it will increase.
From the above illustration we find the production costs to be 129,200/5.532 = $
23,355 approximately. This figure takes all segments into picture. So speaking the
production costs would be as low as $ 10,000 for the small cars.

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The market share of the Algerian Market will be in the same number as other African
countries. It is shown that in 2008 Ford had a market share of 2.4 % and so
projecting it to Algeria as well, we already saw that the current new car registration is
close to 200,000.
The functional currency is taken as USD as is the case of all subsidiaries of Ford.
Of this the 2.4% will be close to 5000. This is just the initial projections.
From the market we can see that the price that Ford can charge will be at an
average of $ 40,000. The production cost of the small car that Ford uses to enter the
Algerian market has been projected at $ 15000

Costs
Car Sales (units) 5,000
Cost of production (in $) 10,000
Total Production Costs 50,000,000
Sales & Revenue
Car Sales (units) 5,000
Price 15,000
Total Sales ($) 75,000,000
Profits before taxes ($) 25,000,000
Corporate Tax @ 30% + 3% ($) 8,250,000
Profit after Taxes ($) 16,750,000

Risks

Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal
processes, people, and systems, or from external events. There is no expected
reward or return on investment, like one would expect from taking market or credit
risk. The only “reward” from successfully managing or mitigating an operational risk
is the reduction of a potential loss. Operational risk is the risk of loss from
something’s unexpectedly going wrong.
The risk is reduced as Ford enters the market with a joint venture. The operational
risk is mitigated or shared with the local partner, who will take care of the people.
Ford will have to take charge of the systems and process. The external events risk
cannot be mitigated as no one can predict what is going to happen.
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Price risk
a. Product price risk
Product price risk depends on both input and output. This can further be classified
as input price risk and output price risk. If the price of a Ford car is fixed and the
price of raw materials increases, there is a chance that Ford might have to increase
prices and also lose sales. Else it might happen that the government puts in ceiling
prices for the cars that may cost more. These are part of the risks Ford has to
encounter with the government or with the suppliers.
b. Interest rate Risk
Interest-rate risk refers to the uncertainty of future market values and of the size of
future income, caused by fluctuations in the general level of interest rates. In other
words, as the cost of money changes for nearly risk-free securities (USGs), the cost
of money to more risk-prone issuers (Private sector) will also change. The
projections of Ford are all dependent on the future market values, which play a
major role in the risk.

Pure risk
Pure risk is a risk in which there is only a possibility of loss or no loss. There is no
possibility of gain. Pure risk can be categorized as personal, property, or legal risk.
a. Loss of profit
The market is new and the entire world knows of the African crisis. Algeria has had
its share of political problems. The political scenario and the economic scenario play
important factors in the sales of Ford Cars. There is always a risk of loss of profit for
Ford.
b. Damage to assets
Damage to assets happen either by natural forces or by manual forces; the damage
by natural forces cannot be escaped though can be insured as in any other country.
c. Cost of paying and defending liability claims
Legal risk (aka liability risk) is a particular type of personal risk that you will be sued
because of neglect, malpractice, or causing wilful injury either to another person or
to someone else's property. Legal risk is the possibility of financial loss if you are
found liable, or the financial loss incurred just defending yourself, even if you are not
found liable.
Legal risks are insurable in Algeria as in other nations across the world.
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d. Employee turnover
Employee turnover is one problem that Ford cannot try to solve directly. But it can be
done indirectly, by have programs for training, motivation and keeping them content.

Credit risk
Companies carry credit risk when, for example, they do not demand up-front cash
payment for products or services. By delivering the product or service first and billing
the customer later.
The credit risk occurs if Ford plans to sell its cars under a loan or an instalment
basis. Ford can use banks and collection agencies by which the risk is mitigated to
them.

Marketing Plan

For Ford to establish in Algeria various factors have to be taken into consideration.
We have already seen that the market in Algeria is advancing fast with brands like
Toyota, Hyundai, Daewoo etc making huge inroads along the premium segment
ones like BMW and Mercedes. We have also seen that Ford is familiar to the people
of Algeria through the used cars market and already has a Brand name. SO it is the
right market for Ford to go ahead and Tap.

Ford should initially set up dealerships across Algeria. These dealerships can be
linked with the already existing dealerships in Morocco. So supply of Ford cars to
Algeria can be done form Morocco. This can be followed till we access the actual
amount of inroads Ford can make into the Market. Once this is identified, Ford can
start importing directly to Algeria. Considering the fact that Algeria is a leader in
making of spare parts in Africa, this can be tapped and Algeria can be used as the
base of spare parts manufacturing for Ford cars for the entire region of Northern
Africa which is currently nonexistent. These are currently manufactured and
imported from South Africa.

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Once it establishes itself in Algeria it opens up other options of Ford as well. Tunisia
and Libya, the other two neighbours of Algeria other that Morocco, does not have
good presence of Ford. In Tunisia its nonexistent while in Libya, Ford is present but
not a leader. Once Ford forms a root in Algeria to will be able to cater to these
markets and be able to establish well in these markets as well. For this they need to
come up with a mode that will suit well to the people of Algeria or in general
Northern Africa. For this they need to design a model that suits well for the desert
conditions here. A fuel efficient model similar to that of Ford Fiesta may also do well
in African countries where common people are more money constrained. Ford can
also learn from the fact that high end models are imported to Algeria in large
numbers as we saw above. So it should focus in bringing high end models also to
Algeria.
Once it is able to establish well in Algeria the next focus should be to leverage on
the low cost labour available in Algeria by setting up a plant in Algeria that can cater
to needs of Northern Africa. This will help Ford cut its costs as well.

1. CONCLUSIONS

Analysing these situations we found that Algeria is a country to which Ford should
not delay its expansion. Algeria is a market which already has a good presence of
Ford cars through used cars market and the market imports large number of high
end cars too. Algerian car market is also the second largest car market in Africa and
therefore one where Ford should not hesitate more.

Moving initially with dealerships linked with already existing dealers in Morocco and
then focussing on establishing direct dealers in Algeria would be the right strategy.

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2. ANNEXURES
MEMBER CONTRIBUTION

NAME MEMBER DESCRIPTION OF Projec OUTCOMES


ROLES INDIVDUAL TARGETS & t
TASKS (HRS)
Shamin S COO Country Analysis 24 Marketing Plan
(Operation Market Plan
s and
Marketing
lead)

Vishwas D CMD & Country Analysis 20 Risk Analysis


S CFO Market Analysis Report
(Marketing Risk Plan Investment
and Cash Flow projections Analysis Report
Finance Financial
lead) Projection
Document
Claire CEO Country Analysis 18 Market Analysis
Juillet (Strategist) Investment Types Report
Analysis Strategy
Strategy Development

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3. REFERENCES

http://www.nationsencyclopedia.com/Africa/Algeria-CUSTOMS-AND-
DUTIES.html#ixzz0XKb8L2VG
http://ec.europa.eu/agriculture/markets/export_refunds/forms/dz.pdf
http://www.ford.com/doc/2008_annual_report.pdf
http://cars4fast.blogspot.com/2009/04/ford-cars.pdf
http://www.export.by/en/?act=s_docs&mode=view&id=1648&doc=64
http://www.ford.com/about-ford/company-information/ford-international-websites

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