Deluxe Household Chemicals

Report on Manufacturing in Chile

Political Economy of Latin AmericaMathias Schatt and Rob Sheldon

DHC: The Mandate

» About Deluxe Household Chemicals

» The Problem: US Manufacturing too Expensive

» The Mandate: Find an Alternative Country

» Country Criteria:» Stable Enough Macro Environment » Favorable International Trade Environment» Low-cost, Sufficiently Skilled Labor» Developed Chemical Industry» Overall Benefits Must Outweigh Logistical Costs

DHC: The Chile Report

Part I: Chile’s Macro Environment1) Nation and State2) Inflation and Foreign Exchange3) Labor Environment4) Infrastructure

Part II: Chile’s Household Chemical Industry1) Industry Landscape2) Potential Partners

Part III: DHC Logistics and Entry Strategy1) Joint Venture2) Foreign Branch & Capital Imports

3) Logistical Partners

Chile: Nation & State

» President: Ricardo Lagos Escobar

» Center-left Coalition

» Commitment to Free Market Economy

» Other Factors:» Market-oriented Economic System» Many International Trade Agreements» Few Restrictions on Foreign Investment» Small Number of State-owned Enterprises» High Domestic Savings Rate» Balanced Budget

Part I: Chile’s Macro Environment

lowest (Aug 9): 692.21

highest (Oct 11): 756.56

El dólar trepa hasta los $755

25 de Febrero de 2003

Chile: Inflation and FX

» Banco Central de Chile

» Grow Economy at Fastest Possible Pace

» Maintain Inflation level between 2-4%

» Considerable Volatility Against the US Dollar:

Part I: Chile’s Macro Environment

Chile: Labor Environment

» Unemployment Around 10%

» Relatively High Investment in Human Capital

» Good Local Education

» 48 Hour Work Week

» Lower Wages

Part I: Chile’s Macro Environment

Chile: Infrastructure

Part I: Chile’s Macro Environment

Chile: Chem Industry

» Well-established: $578 Million in 2001

» Dominated by Large Foreign Firms

Possible Partners:

» Quimicas Reno

» Perez & Jacard

P&J is the Better Fit: Location, Size, Infrastructure, Foreign Experience

Part II: Chile’s Household Chemical Industry

DHC: Entry Strategy (A)

» Sign JV Agreement with P&J

» 3 Year Renewable Contract

» Capital Improvements and Guaranteed Orders in Exchange for DHC Ops Manager at P&J

Part III: DHC Logistics and Entry Strategy

» DHC Opens a Foreign Branch in Santiago

» Import Capital Through Decree Law 600

Terms:

» Minimum $1 Million Investment

» No Capital Repatriation for One Year

» Repatriate Profits Immediately

» Unlimited Access to FX Market

» No VAT Until Capital Improvements Done

» 42% Tax Rate Set for 10 Years

Part III: DHC Logistics and Entry Strategy

DHC: Entry Strategy (B)

DHC: Logistical Partners

Potential Partners:

» CSAV: Global Shipper

» Royal Vopak: Specialty Shipper

Royal Vopak is the Better Fit: Specializes in Chemicals, International Network, Small Shipments

Part III: DHC Logistics and Entry Strategy

Conclusion

Chile Meets the Country Criteria:» Stable Enough Macro Environment » Favorable International Trade Environment» Low-cost, Sufficiently Skilled Labor» Developed Chemical Industry» Overall Benefits Must Outweigh Logistical Costs

Main Point: The combination of Chile’s macro environment coupled with the presence of solid industrial and logistical partners makes it a good bet.