by James Godbout, and Nicola de Vera (10/20/17)
Marcopolo is a leading Brazilian bus body manufacturer. Since its inception in 1949, the company has seen consistent domestic growth, establishing a strong foothold and competitive advantage in its country of origin with a 46% market share. Marcopolo’s core competencies in production and customization have been critical to its growth in Brazil and have allowed the company to expand its presence in neighboring countries.
Marcopolo can attribute its early success to a three-pronged internationalization strategy. First, Marcopolo’s production followed a verticalization model where approximately 80% of parts needed to produce a bus body were manufactured internally and only as needed, i.e. “just in time” concept. Second, Marcopolo was able to manage flexible production lines to meet varied requirements of customers without compromising quality. Additionally, the company forged partnerships with global manufacturers, allowing buses to be produced on demand in other markets and reducing storage costs. Finally, Marcopolo took pride in its customization capabilities which addressed production needs and budget constraints of customers from different cultures and regions.
Until 2005, this strategy proved successful in international markets, reinforcing the company’s position as a formidable global player. However, in 2006, fierce local market competition, higher cost of raw materials and inputs, and increased export cost due to currency fluctuations of the Real led Marcopolo to make strategic changes in its export processes. From producing in-house, exporting components, and doing final assembly in the destination country, Marcopolo decided to capitalize on joint ventures with local partners to both manufacture and assemble parts abroad. Though this new strategy allowed Marcopolo to continue its expansion into other markets, two factors limited the strategy’s effectiveness. First, they faced major internal issues, such as lack of control and delays in production. Concurrently, they faced turbulent macroeconomic factors caused by weaker institutions, such as poor government regulations and currency swings. As pressure to maintain growth increases, Marcopolo needs to decide whether to focus its efforts on the domestic market or continue its global expansion despite the political and socio-economic instability and increased threat of competition.
We identified three different areas for Marcopolo to find growth. First, we discussed potential geographic expansion. Next, we discussed investing more in research and development. Finally, we discussed revamping the company’s human resources strategy. Most of this discussion revolved around geographic expansion. Specifically, the class discussed the pros and cons of pursuing expansion in Latin America and in Africa.
When discussing Latin America, there were a few different options considered. One option was using Marcopolo’s current operations in Mexico as a base to expand into the rest of Central America. This would allow Marcopolo to increase demand for its Mexico operations, which had been struggling with low demand in Mexico. Simultaneously, it would allow Marcopolo to capitalize on the emerging economies throughout central America. The biggest challenge to this was that Marcopolo’s operations in Mexico were already struggling due to the learning curve, and it didn’t seem clear that this type of expansion could be possible until Mexican operations had improved.
We discussed consolidating market share in South America. The idea here was to use joint ventures to target countries close to Brazil in geography and culture, allowing Marcopolo to dominate the continent’s bus market. Targeting these natural markets would decrease Marcopolo’s expansion risk because it would require less investment in terms of human resources and operational capabilities. Further, by using joint ventures, Marcopolo could mitigate some of the currency risk of the increased Real value. A challenge with this natural expansion included that Brazil’s neighbors speak Spanish, not Portuguese. While the languages and shared culture between Brazil and the rest of Latin America are more similar than many other areas of the world, there is still a cultural barrier Marcopolo would need to overcome to be successful. During this part of the discussion, we also mentioned why only focusing on Brazil wasn’t a great option, as Marcopolo was facing much more intense competition in the Brazilian market resulting in squeezed margins.
Outside of Latin America, there is the potential for a geographic expansion into Africa. The idea here was to utilize the successful joint venture in India with Tata Motors to begin exporting PKDs into major markets in Sub-Sahara Africa. These markets are massive and growing quickly, with a fragmented market presenting an opportunity for growth. By utilizing the existing joint venture in a country close to major East African port cities, Marcopolo can minimize its investment risk and production costs. The biggest risk to this strategy would be that most of Africa has little cultural similarities to Brazil, with only a handful of Portuguese speaking nations and only one Spanish speaking nation. However, Tata Motors had significant experience operating in Sub-Sahara Africa, giving Marcopolo a great risk mitigator by utilizing the already existing joint venture.
Other areas of discussion include investing more in R&D. Specifically, recognizing that what had made Marcopolo so strong in the beginning was its ability to innovate through the PKD design and building highly customizable products. If Marcopolo focused on continued investment in R&D, it would be able to create more innovative products to help continue building a competitive advantage. Many pondered whether such an investment could even lead to Marcopolo creating the first electric bus. This R&D investment could help the company be successful in the existing markets it is already in, as well as new markets. It would also help it continue to consolidate market share and fight off competitors in its home market of Brazil. The biggest risk to R&D investment is that it may not lead to an improvement in Marcopolo’s offerings quick enough to help continue building growth, as there isn’t a clear-cut timeline for how long R&D investments would take to pay off.
Finally, the last area of discussion for growth was the idea that Marcopolo could invest in HR. The idea here is that Marcopolo could increase its expertise in various markets by developing global-focused leaders from Brazil and hiring top level talent from other countries with cultural similarities to markets that Marcopolo was already in or considering expanding to. This approach would help Marcopolo’s team deal with the complexities of managing a global operation and expanding into cultural markets that differ significantly from Brazil. However, this big investment is very risky and will take a lot of time. Developing this type of globally capable workforce in Brazil would take years of training and a dedicated, expensive pipeline to maintain. Hiring this globally capable workforce from abroad requires Marcopolo to compete with other global MNCs, including those from developed markets that can beat Marcopolo in pay and benefits.
In the end, the recommendation to Marcopolo is to build on its existing strengths through the continuation of its international expansion initiative, focused specifically on joint ventures in South America. By focusing on South America, they can retain flexibility in their production process as well as focus on a more culturally familiar market. Simultaneously, Marcopolo could fine-tune its human resources practices to increase its international appeal. While it will take a few years to build a globally focused management training system, by investing now Marcopolo can lay the groundwork for further expansion down the road. Finally, the we recommend the company establish a strategic framework to help management prioritize geographic expansion, including key performance metrics, a comprehensive country risk analysis, and market sizing criteria, in order to more accurately assess the risks a specific new market may impose.