BackgroundThe CEO of Heritage Manufacturing Company, wishes to expand the business into emerging markets. In the past, he successfully managed to export the sales to industrial countries. Although his plans are being supported by the Vice President of the Global Marketing, the CFO and some other staff of the company are not so enthusiastic about the idea. In 1998, the Vice President of the Global Marketing, Jeffrey Parker received an offer worth $25 million from an Egyptian company. If the project is successful, Heritage will be able to successfully break into an emerging market.

History of Heritage Manufacturing Company Founded in 1950, Heritage had been actively involved in the oil industry. It became a dealer for oil storage buildings and tanks, acquired their suppliers line of oil storage tanks and also purchased manufacturing facilities located in Europe. It mainly deals with fabricating steel products and cement, steel oil storage and support buildings. Heritage managed to carve a reputation for itself for supplying products with good quality and durability. Soon they became the largest suppliers of oil and pumping facilities and their tanks are also used for commercial transportations and storage. Following its success, Heritage slowly started to enter international markets in the 1980s. It bought manufacturing plants in Europe and set up production plants in places like Wales. It soon started to target the emerging economies like Latin America and Middle East. Competition in these markets was very low, so Heritage will be able to enjoy higher profits. But these markets had a lack of buyers who can afford the companys oil storage systems. Moreover, the buyers also ask for credit up to five years, which the Heritage Company hesitates to give. Since the buyers in the emerging markets generally ask for longtime credits, some people within the company were reluctant about the move. Heritage Company was not experienced with international credit. Any mistake in the process can cost millions of dollars to the company and Heritage was not willing to take the risk in case if any of their international clients failed to pay on time.The deal and the Egyptian Market Amidst all this, Heritage Manufacturing Company received an offer from an Egyptian company. The deal was to sell equipment worth $25 million to the Egyptian Company. If this deal was successful, Heritage Manufacturing Company will be able to break into an emerging market. The prospect seemed very lucrative to the Vice President of Global Marketing, Jeffrey Parker. From the economic side, Egypt was emerging as one of the fastest growing markets. Economically, Egypt is facing a consistent Annual GDP growth over the years. Strict fiscal and monetary policies were keeping inflation under control and product growth was high. Both the private and public sectors were indulging in heavy investment and tax rates were increasing government revenues. The Egyptian government was taking the initiative to reduce tariffs to increase competition in the economy. Moreover, the high GDP growth was increasing imports, which slightly reduced the current account deficits. Egypt was importing raw materials like Petroleum, oil, textiles and garments from other countries. Being a major importer of oil products, they will demand heavily for the equipment supplied by Heritage Manufacturing Company. There was less pressure on the exchange rate and Egypts foreign reserve held around $20 billion. Despite the slow rate of privatization, the economic prospects of Egypt remained high as it emphasized on export led growth.On the other hand, Egypt was politically unstable. Tensions were arising as President Hosne Mubarak was set to win his fourth term in the upcoming elections. There were attacks carried out by Muslim extremists. The attacks in Luxor and the US embassy happened a few months before Heritage Manufacturing Company received the order. If Heritage Manufacturing Company goes through with the deal, there are chances that they will face a setback in case of sudden attack from the militants. But, Egypt had excellent relations internationally. They were establishing ties with Middle Eastern countries which are rich in oil and petroleum. They also made a partnership agreement with European Union.International Bank of Pennsylvanias ProposalJeffrey Parker was optimistic about the prospect. However, the terms set by the Egyptian firm were problematic. The Letter of Credit through The National Bank of Egypt asked for payment in three installments: 15% down payment after Heritage Manufacturing Company verifies that the oil storage system has been shipped off, 75% of the payment will be made on the course of eighteen months after the equipment fulfills all the criteria set and the rest of the 10% will be paid three years after the first payment. Jeffrey calculated that it will take almost 3 and half years to get the full payment from the firm. Moreover, since National Bank of Egypt was a government owned bank, only an US bank can take the risk on behalf of Heritage Manufacturing Company. The Letter of Credit needs to be verified by an US bank and also receive the payments. The National Bank of Egypt wanted to send the Letter of Credit through International Bank of Pennsylvania which can discount the payments and also approve the Letter of Credit, as per Heritage Manufacturing Companys wishes. But International Bank of Pennsylvania would charge 1.5% per year for approving the Letter of Credit and the discounts will be at LIBOR 3.5%. Since, Heritage Manufacturing Company does not have the experience with international credit; they were unwilling to take the risk. International Bank of North Americas ProposalHeritage Manufacturing Company has always done its domestic banking with the International Bank of North America, which recently established an international branch. The CEO of Heritage Manufacturing Company contacted the International Bank of North America and asked for their price. The bank in turn contacted their Egyptian desk officer, Brad Lanker. They were informed of a countrys exposure limit and the limits for individual borrowers. But there were no limits for Egypt and thus, there were no credit lines for the National Bank of Egypt. Moreover, any new country with the credit limit exceeding $10 million needs to be documented with a full PESTLE analysis and marketing strategies and the credit manager was reluctant to pursue more than $1 million credit. Moreover, even US Export-Import Bank already reached the limit for National Bank of Egypt and giving more credit to them will be time consuming. After consulting with his boss, Brad Lanker chalked out a plan. He made a list of foreign, out-of-state banks in New York which received participations in credits from US banks. Brad contacted these banks and received some positive replies for the National Bank of Egypts risk. But none of them wanted to extend the credit for more than two years. To solve that problem, Brad took out insurance for the third part of the installment from an insurance company dealing with export receivables. He proposed that 90% of the transaction should be sold to the foreign banks, and 85% of the last installment can be insured, making International Bank of North Americas exposure to be around $400,000. Even if the deal is for three years, it will be within the exposure limit.

ThemeThroughout this case, there a number of problems faced by the Heritage Manufacturing Company. Firstly, Heritage Manufacturing Company had no experience in international credits nor did it have anyone with the proper expertise for it. Moreover, because of the lack of expertise, the company was facing internal resistance from some of the employees including the Chief Financial Officer. There was little cooperation and encouragement for this deal. In addition to that, the full payment for the equipment will be in installments for three and a half years. Secondly, since Egypt was an emerging market, the buyers cannot usually afford the expensive equipment of the company and thus, ask for long term credit. Heritage Manufacturing Company was unwilling to give credit especially to international customers. Also, the National Bank of Egypt was hoping to get the Letter of Credit approved by International Bank of Pennsylvania, but Heritage Manufacturing Companys CEO was unsure of the terms and thus, was not willing to accept this proposal. Also, upon analyzing, it was found that despite the economic potential of Egypt, it was politically unstable and the constant threats of attacks from extremists can severely affect the business. Another major problem was that the preferred bank of Heritage Manufacturing Company, The International Bank of North America also lacked the necessary expertise despite having an international branch. Initially, no foreign banks were willing to extend a credit more than $1 million dollars and certainly not for more than two years. Also, The National Bank of Egypt already reached its credit limit with US Export-Import Bank. Therefore, there were a number of obstacles to overcome before the deal could go through.

Issues1) Should Heritage Manufacturing Company extend its credit limit till 5 years due to the potentially profitable Egyptian market?2) Should Heritage accept the deal with Egypt despite the lack of expertise in international credit?3) Should Heritage accept IBOPs offer and sell the transaction to an US bank or should it accept IBONAs and sell the transaction to a foreign bank?

Political AnalysisThe internal political situation of Egypt was very unstable. The increasing numbers of attacks on foreign tourists by the Muslim Fundamentalists were a grave concern. Operating in Egyptian market would mean that the constant threat of attacks or opposition from these militants will hamper production activities. Moreover, Egypt was under the dictatorship of Hosne Mubarak, who was about to serve his fourth six-year term as the President. The election time was full of uncertainty and sudden political tensions were a probability.Moreover, a few months before the Egyptian firm offered the deal to Heritage Manufacturing Company, there were a series of bombing which took place in the US embassy. This also raised the question of whether Heritage Manufacturing Company can safely operate in a country where foreign officials and workers were being constantly targeted. Also the Luxor massacre took place recently. The volatile situation of the country was not favorable for Heritage Manufacturing Company and operating in that market can cause tremendous amount of loss for the company.However, Egypt was working to improve the relations with other countries. It was trying to sort out its issues and establish a cordial relationship with Middle Eastern countries. P.S: This can be advantageous for Heritage Manufacturing Company because Middle Eastern countries have an abundance of oil and petroleum. They will demand for the oil storage equipment which Heritage can supply. Moreover, Egypt was trying to form a partnership agreement with European Union. In the long term, this can help Heritage Manufacturing Company to break into the European Unions market as well. However, with the elections and resistance from fundamentalist groups, future political stability was unlikely to be sustained. Analyzing Egypt was very difficult and there are concerns about the unpredictable political situations. Attacks from the fundamental groups can severely affect Heritage Manufacturing Companys operations.

Economic AnalyisisEconomically, Egypt was facing a very rapid growth. There were indications that Egypt would open its markets for foreign firms as capital investments were increasing. The Annual GDP was stable and growing, and the implementation of strict demand side policies were keeping inflation low. The government was also increasing its revenues through increased taxes and was coming up with new incentives and lowered tariffs. This was steadily increasing competition in the economy and Hosne Mubarak was pushing for an export led growth. Moreover, the government was lowering many barriers to trade in order to get 10% annual growth in exports. Increasing imports also helped to reduce the trade deficit. Both the private and public sectors were investing heavily to earn profits. The foreign exchange reserves had around $20 billion even though the current account deficit was falling. Egypt was importing raw materials like oil, petroleum, cotton, garments etc from countries like Libya and exporting Liquid Natural Gas to Turkey. As Egypts economy grows, Heritage Manufacturing Company will benefit because they will be able to provide good quality products for the increasing demands of the customers. Since Egypts main importing products were oil and petroleum, Heritage Company will find plenty of buyers for their storage tanks and equipment. This deal is crucial for them to break into the promising Egyptian market.However, despite the economic growth, the privatization of public industries was very slow. There were talks to privatize many industries but the plans were not coming to fruition. Moreover, an economic crisis was slowly spreading throughout Asia, which was also affecting the emerging markets like Egypt. For a sustainable economic performance, Egypt needs to have an efficient government and a stable political environment. Therefore, an unpredictable fall in economic performance can cause severe loss for Heritage Manufacturing Company. P.S: One of the biggest advantages for Heritage Manufacturing Company is that the competition in emerging countries was very low. There were not many suppliers of oil storage tanks, which would make it easier for the company to achieve a dominant position in these markets.However, the number of buyers in these markets was also very low. This is mainly because of the fact that the prices of the equipment were too high and the buyers wanted to take out the long term credit for them. Heritage Manufacturing Company did not have any experience with international credit and were unwilling to extend it for more than two years. Egypt was trying to improve their relations with other countries through trading. This can be a good opportunity for Heritage Manufacturing Company to not only extend their business to Egypt, but also gain more international clients through them. But there were constant worries about an economic instability in Egypt. The chances of economic prosperity would be high only if the political situation was stable. With the deteriorating government, the economic progress can be slowed down and cause a loss for the company.

SocialThe increasing attacks by Muslim fundamentalist groups made Egypt very volatile. Foreign tourists felt unsafe there because of the sudden attacks and killings carried out by the militants. One of the most horrific attacks carried out in Luxor by the militants, killed many tourists visiting the sites. Moreover, even foreign diplomats were targeted by the militants. Bombings at the US embassy received severe backlash from the international communities and emphasized on the importance of stopping the militants.Other than the threat of the militants, there were tensions in rural areas as well. The increases in rents prompted many people to protest against it. Moreover, Egypt was under the dictatorship of Hosne Mubarak and therefore, there was a lot of tension between his opponents and his supporters.P.S: The local protests were curbed after a new minister re-shuffled the cabinet. However, the increasing violence from the militant groups remained a grave concern for Heritage Manufacturing Company. However, due to the attacks on foreign tourists, Heritage Company will find it difficult to hire any foreign executives to negotiate with the Egyptian client. They might be unwilling to go there and risk their lives.

TechnologicalOver the years, Heritage Manufacturing Company has been able to provide high quality equipment for their clients. This has been mainly due to the advanced production methods used by the company. Over the years, they acquired their suppliers oil storage tanks line and buildings. They also bought manufacturing plants in England to increase their production and expand their business. Their reputation for providing excellent equipment made them one of the largest suppliers of oil storage and pumping facilities. P.S: Their advanced production method and durable oil storage tanks will attract many buyers in the Egyptian market. Their product quality backed up by their reputation will be a strong asset when they break into the emerging markets.However, Heritage Manufacturing Company lacked the expertise to extend international credit. They did not have any personnel who can advise them on this. Despite the potentially advantages, they were unwilling to extend credit to the Egyptian client. Moreover the international division of IBONA was also relatively new. Any mistake on IBONAs part can be disastrous for the company.

LegalThe Egyptian government was introducing new incentives and reducing tariffs for the benefit of the businesses. They were aiming to increase competition in the economy and also raise the exports. Moreover, they were increasing the taxes to increase their revenues. They implemented strict fiscal and monetary policies to control the inflation rates. However, this caused rent prices to increase. But the protests were calmed down by a cabinet re-shuffling.They were also attempting to privatize the public companies and introduced schemes to increase private and public investments. The government was pushing towards an export led growth in the economy and was designing their policies as per such.P.S: Reduced tariffs and increasing imports, would allow Heritage Manufacturing Company to operate in Egypt at lower costs. This will raise their profit margin.However, these policies will increase competition for the company. If more local oil tank suppliers come into the market, then the potential buyers might opt for the alternatives and get the equipment at prices lower than that of Heritage Company. Moreover, the privatization of the public industries was immensely slow and still under negotiations. But, increasing investment can allow Heritage Manufacturing Company to operate in Egypt at lower costs. Moreover, their high quality and extremely durable products can give them a competitive edge and attract more buyers.

Human Resource IssuesThe Vice President of Global Marketing at Heritage, Jeffrey Parker was extremely supportive of this deal. If it was successful, the marketing department will achieve their sales target very early. However, he faced many obstacles.Firstly, this was the first time Heritage Manufacturing Company was about to extend international credit. Clients from emerging markets asked for long term credit but the executives at Heritage especially the Chief Financial Officer were against this proposal. They were objecting to the credit terms. Also, they were very skeptical of Heritages ability to deal in these markets because up until then, they were mainly dealing with domestic clients or clients from developed countries. Their staff was not skilled enough nor accustomed to dealing with emerging markets.Secondly, no one at Heritage Manufacturing Company had the required expertise or knowledge to deal with international credit. Even the CEO himself had little to no knowledge about this and was very hesitant to take this deal any further. When IBOP stated their terms and prices, he could not assess if those terms were reasonable or not. On the other hand, IBONAs international division was new and inexperienced as well. The lack of expertise could have caused the deal to go awry.

RecommendationAfter assessing all the possibilities, Heritage Manufacturing Company chose to send the risk through IBONA. IBOP would have transferred the risk to an US bank with 1.5% charged to confirm the Letter of Credit 3.5% LIBOR for discount. IBONA, on the other hand, sold 90% of the risk to a foreign bank for two years and insured 85% of the remaining amount through an insurance firm. The rest of the risk was taken by IBONA. This scheme was extended till two years, which fell in line with Heritages wishes. So their decision to choose IBONA was correct.But, it would be wise for Heritage Company to contact and negotiate with banks which have more experience in international credit. This will help them to diffuse similar problems in the future.We would suggest Heritage Manufacturing Company to hire employees who are experienced with international credit and has good knowledge about the emerging economies. They can help in negotiating with foreign clients and cater to their needs. They should also open an international division for their foreign clients. They will need employees who are familiar with the norms and languages of different countries. Moreover, if Heritage Manufacturing Company manages to break into the Egypts market, they should hire Egyptian employees who are familiar with the market and the clients. This is crucial because the constant attacks on foreigners in Egypt will dissuade workers to go there. Therefore, they will need local employees to handle transactions.It would also be wise for Heritage Manufacturing Company to introduce policies for the clients who want long term credits. If Heritage Company manages to break into the emerging market, they need to attract buyers. If the prices are too high, then many buyers in these markets will ask for long term credit which can extend till 5 years. Heritage Company needs to give them discounts or credit facilities in order to do business with them.

ImplementationHeritage Manufacturing Company should start hiring employees with the necessary skills. They can post up advertisements in newspapers and job websites to attract the people with the necessary skills. This has to be an external recruitment because the existing employees at Heritage Manufacturing Company do not have the necessary skills or the expertise to work on this deal.They should make a list of all the skills and experience required from the new recruits. The most important skill they will need is the experience in handling international credit. This is where they need to further narrow down the process. Firstly, they cannot hire fresh graduates for the posts because they lack the experience. The candidates must have the knowledge on international credit and have previously dealt with such issues. The HR executives must interview the candidates thoroughly and analyze their expertise.Heritage Manufacturing Company should also hire temporary workers from Egypt till the duration of this deal. Since it is dangerous for foreign officials to work there, it will be more prudent to allow the local recruits to work alongside them. The temporary workers also need to be experienced in international trading and credit terms. They must be fluent in English and must have good knowledge about the market.Moreover, with the help of IBONA, Heritage Manufacturing Company should make long term credit schemes for their international clients. They should take out insurance for major contracts like they did this time. This will protect them against the risks till a certain extent. Moreover, Heritage Manufacturing Company should also deal with other banks which have experience in international banking. Despite the success of this deal, IBONAs international division is still new. It might not be able to use the same method again if Heritage Company tries to enter other markets. Thus, keeping another bank as a backup will be more prudent.

ConclusionAll in all, Heritage Manufacturing Company managed to successfully break into the Egyptian market thanks to IBONA. IBONAs planning and technique not only complemented with Heritages goals but also managed to bring in a lot of profit for them. This established a lone, sustainable relationship between the two firms.Thus, Heritage Manufacturing Company made the correct choice in entering the emerging markets despite the internal misgivings.

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