You are required to carefully read the case (UPS in India -- A Package Deal?) and then highlight the key issues in a one-page summary (single-spaced, approximately 525 words). The case preparation is an integral part of our discussion in the class. Thank

62 InternationalBusinessStrategy REGIONALCARRIERS. Regionalairlines (or"region- als") operated short-andmedium-haul scheduled airline service connecting smallercommunities with larger citiesandwith thehubs ofthe major airlines.

Although mostwereindependently owned,severalof the largest regional carrierswereactually subsidiaries of the major airlines, including AtlanticSouthwest, Comair (Delta),andAMR Eagle (American Airlines).

Many regionals benefited fromarrangements with the majors, including code-sharing arrangements, scheduling assistancetoensure flightconnections in majors' hubs,andthebranding ofamajor airline.

With low-cost structure andimproved servicelevels, regionals asawhole became themost profitable seg- ment inthe aircarrier business. Regionals continuedto replace turboprops onlow-density routesanddeveloped new routes thatextended airlinenetworks, enabling those carriers toserve unserved orunderserved mar- kets more cost-efficiently. Regionalswereabletodo that because newer,smaller jetswere significantly faster than existing fleetsofturboprop planes,hadgreater range, and burned lessfuel (amajor per-flight fixedcost). The regionals werethefastest-growing segmentofcommer- cial aviation andcontinued toserve avaluable segment of travelers unaddressed bylow-cost andmajor carriers, Fabiano lopes,Alexandre Zimath,Andrea Maat, and Cel. Nivaldo Silva WHILE TRAVELINGTOaninvestor conference inMontreal, Canada, on Embraer's Legacybusiness jet, Mauricio Botelho,CEOofEmbraer, reflected onhis company's dramatic ascent toits position asthe world's leadingregional aircraft manufacturer. Sincebecoming aprivate com- pany, Embraer hadsuccessfully introducedseven commercial aircraftmodels tothe market, including its latest, thellB-seat EMBRAER 195.Asthe jetbegan its runway approach justafew miles fromtheheadquar- ters ofrival company Bombardier, Botelhopondered the potential competitive responsetohis company's recent attacks onthe commercial aircraftmarket.

The U.S, Airline Industry With thepassing ofthe Airline Deregulation Actof1978 by the U.S, Congress, government controlofroutes and fare pricing wereeliminated, resultingingrowth, increased competition, andtheemergence ofthree new business models:major,regional, andlow-cost carriers.

lOW-COSTCARRIERS.Low-costcarriers(LCCs) offered airfares atalower pricethanmajor and regional carriers.Thelargest LCCsincluded JetElue, AirTran, Southwest Airlines,andAmerica West,as well asnew upstarts SongandTed, which wereowned by Delta andUnited, respectively.

Many ofthe LLCs started offasregionals, offering short-haul serviceconnecting businessandleisure trav- elers between high-volume destinations. Byoperating MAJOR CARRIERS. Thedistinguishing featureinthe business modelofamajor carrier (ora"major") wasthe hub-and-spoke system.Thissystem wasbased oncentral hubs towhich feedernightsweredirected. Passengers from thefeeder flightstransferred tonumerous other flights provided atthe hub totheir finaldestinations.' The enormous capitalrequired toexpand geo- graphically wasasubstantial barriertoentry fornew airlines. Aslow-cost andregional carriersprimarily competed onprice andlocal market convenience, the rationale forthe majors' costlymodel laylargely on the improved customerloyaltygenerated bythe con- venience andreach ofthese airlines.

To further enhance breadthofservice andincrease the number ofcustomers whilelimiting capitalout- lays, most majors turned lO code-sharing andglobal alliances withother major andregional airlines.The major global alliances includedStarAlliance, Sky Team, andOne World.

This casewasprepared byFabiano Lopes.

Alexandre Zlmath,AndreaMaar.andrevised by Cel. Niva1do Silva,EADS Representative to Embraer, underthesupervision ofMing- Jer Chen, Leslie E.

Grayson Professor of . BusinessAdministration.

It was written as 8 bas~s forclass discussion ratherthantoillustrate effectiveorineffective handl.m~ ~f an administrative situation.Copyright C2007 bythe University of Vlrgml~ DardenS~hoolFoundation, Chanonesville, VA.Allrights reserved.

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BUSINESS PU~LlSHINC; \JNM"""''''''''''INlA C382 Embraer:

ShakingUpthe Aircraft Manufacturing Market 63 CASE 25 I Embraer: Shaking Up the Aircraft Manufacturing Market C383 I out ofunderuti Ii zed airports inthose markets, theLLCs were abletokeep alow profile. Thelargest LCCswere already operating nonstoptranscontinental flights.

Contrary tothe major airlines' hub-and-spoke sys- tem, LCCs generally operatedapoint-to-point route system. Thisfeature was credited inthe aircarrier industry withproviding higherlevelsinthe quality of passenger serviceinterms ofon-time departures and arrivals, limitedlostluggage, etc.Inorder toeffectively utilize thepoint-la-point system,Leesoffered service to the same general destinations asmajors andregion- als but used satellite airports, whichweretypically less congested thanhubairports andcharged lowerfees.

LCCs limited theirfleetofplanes toone ortwo midsize, morefuel-efficient models,thusreducing training andmaintenance costs.Moreover, byavoid- ing congested airports,LCCswereabletoachieve faster turnaround times.Theneteffect wasthatplanes were kept in the airlonger, increasing theasset utiliza- tion. Additionally, LCCstended tohave lower labor costs because ofthe nonunion workforce.

U,S. Market Conditions The airline industry experienced uninterrupted growth in revenues throughout the1990s. Aweakening global economy, however,coupledwiththeSeptember II, 2001, terrorist attacks,haddrastically reducedair- line traffic bythe end of2001. Asaresult, theindus- try posted unprecedented lossesof$7.7 billion for the year, as revenues dropped13.5%fromarecord high of$93.6 billion in2000. Theslowdown contin- ued into 2002 and2003 as major airlines, facedwith reduced sales,continued to reduce capacity andtrim ranks. United Airlines, thesecond-largest airlineinthe world, filed forbankruptcy atthe end of2002 2 The U.S. domestic availableseatmiles (ASM)' evolution (Exhibit I)demonstrates theshift incapacity from majors to regionals andLCCs.

LCes, whosecoststructures werealready tailored to the current fareenvironment, hadnotbeen affected as greatly asthe majors. Infact, theycontinually reported profitseveninthe difficult post-September II environment." Market Conditions inEurope In Europe, majorairlines werefaced withmany of the same competitive issuesasmajors inthe United States.

Successful low-fare carriersexerteddownward pressure onfares, andfall-off inpassenger demand made itmore difficult tomaintain presenceinexisting EXHIBIT 1 Embraer: Shakingup the Aircraft Manufacturing Market Shifting Capacity amongBusiness Models 200 ..

U.S.

Domestic ASMEvolution Iindex100)' 180 160 ..· 140··· ......··· 120 60 --,------,--:-:---,-:---;---;--;-;-::-:-=--;::-;~;;:::---;:-:-:-;:::_;::;__;;::__;:::_ Jan- Apr- Jul- Oct- Jan- Apr-Jul-Oct- Jan- Apr- Jul- Dct- Jan- Apr-Jul·Oct- Jan- 00 000000 01 mm 01 ~~~~ rorororo N 1_ Majors -lowCost _ Regional I 1 "tommercfat JetsMarket Assessment: http://www.llmbraer.com.br(accessed 10November 2006).

IIIIIIilT _ 100· ... -· 80 .......... ·.... 64 InternationalBusiness ~St:::r.:'t:eg~y:....... _ C384 CASE25 I Embraer: Shaking Up the Aircraft Manufacturing Market structures andsubassemblies, suchaswings andfuse- lages, tomanufacturers offinished aircraft.Thosesub- contractors, intum, were supplied byupto4,000 firms that manufactured componentsorraw materialS. Parts that differentiated aproduct, orthose strongly identi- fied with acompany, wereusually produced in-house given theirstrategic andcompetitive importance.

A strong customer baseandcareful order-book man- agement wereneeded to recoup thecost ofdeveloping new commercial orbusiness jets.Standards forsafety, quality, andvalue werecrucial. Because ofthe capital- intensive natureofthe industry, manufacturers needed to sell hundreds ofunits globally inorder tobreak even on the design andmanufacture ofnew aircraft.

The 1990s wereyears ofconsolidation inthe air- craft industry. In1997, twoofthe industry's largest producers, BoeingCompany andMcDonnell Douglas Corporation, merged.Otherwell-known companies, markets, muchlessexpand to new ones. Regional operators hadsoftened theblow ofthe downturn. With their lower coststruclUres andgreater flexibility, they had proven lessvulnerable to outside marketforces and capable ofgrowth underadverse conditions.

The milestones in the airline industry ror both the United StatesandEurope arepresented inExhibits 2 and 3.

It is important tohighlight thatthese trends inthe global airline industry wereakey driver of the recent developments inthe commercial aircraftindustry.

The Commercial AircraftIndustry OVERVIEW. Sincemostmodern aircraftwereincred- ibly complex (theBoeing 747,forexample, hadsix million pans),aworldwide networkofapproximately 400 subcontractors wasrequired tosupply major EXHIBIT 2 Embraer: Shakingupthe Aircraft Manufacturing Market Milestones inthe Airline Industry-United statas' HUB·ANO-SPOKE » U.S. Congress passes the Airline Deregulation Actof1978, initiating a period of intense competition and paving the way foranew operational model,thehub-and-spoke system.

» Deregulation makesroom for low-fare.

point-ta-point service expansion.

» By1984, code-sharing alliances between majorcarriers andregional operators begintobe formed.

» Majors begintorely more on low-cost regionals.

Numberofshort-haul turboprop routes increase.

MARKET OUTSOURCING » Regional jetsare introduced in1992.

» In 2002.

U.S.orders forregional jetsnear 400.

Turboprop orderscollapse.

» ~egional jetnetworks growdramatically asmajors shift routes tothe lower-cost aircraftsanddeploy themto d Into new markets. expan » Regional jetsbecome acrucial partofairline strategy toremain profitable inpre-September 11downturn.

REGIONAL JETS » Terrorist an~CkSinth~ United StatesonSeptember 11,2001, deliver acrippling blowtothe airline industry.

» FAA enacts Its Operational EvolutionPlan.

» Airlines respond toplunging demandbycutting frequencies andtrim i .,...

profitably witl1lowloadfactors offsetlosses frommainlines operatin~~hn~:~~~~'a~~~,onallets abilitytooperate » Regional jetsused tocomplement or replace narrow-body aircraftonunprofitable short-haulroutes.

'''2004-2023 EmbraerMarketOutlook." ..

----------~ 7 Embraer:ShakingUpthe Aircraft Manufacturing Market 65, CASE 25 I Embreer: ShakingUpthe Aircraft Manufacturing MarketC385 EXHIBIT 3 Embraer: Shakingupthe Aircraft Manufacturing Market Milestones inthe Airline Industry-Europe' LIBERALIZATION INEUROPE » European airlinesevolved ahub-and-spoke systemindependently, primarilyoperating fromeach nation's capitalcity.

» Europe takesafour-step approach toliberalization. Thefirst phase isimplemented in 1988.

» Airlines begintobe restructured andprivatized.

» High labor costs inacompetitive, deregulatedenvironment forceairlines totake drastic measures.

MARKET EXPANSION » Regional jetsareintroduced in1992.

» European airlinessuccessfully deployregional jetsinthe current established airtransport system.

» Regional jetsreplace manyturboprops, butturboprops with40·plus seatsremain inservice.

» tow-tare carrierssuchasRyanair andEasyJet seedramatic growthinRPKfrom 1995to2001.

REGIONAL JETS » The regional airlinemarket inEurope averages 12%growth duringtheperiod from1995 to 2002, » Terrorist attacksinthe United StatesonSeptember 11,2001,deliveracrippling blowtothe airline industry.

» As inthe United States, theregional jets'ability toadapt to different demandenvironments helpssustain allied majors through crisis.

1 "2004-2023 EmbraerMarketOutlook." such asPiper Aircraft Corporation andFairchild Aircraft inthe United States,aswell asFokker N.Y.of the Netherlands, filedforbankruptcy duringthatperiod.

The market forcommercial aircraftwastypically divided intotwoproduct categories: narrow-body and wide-body aircraft.Narrow-body aircraftweresingle- aisle, short-range aircraft(upto6,000 kmorroughly 3,700 miles) thattypically carriedupto200 passen- gers. Leading aircraftinthat category weretheBoeing 737, theBoeing 757,andtheAirbusA-320. Wide-body aircraft weredouble-aisle, medium-tolong-range air- craft (upto14,000 kmorroughly 8,700miles) that could carryfrom200 to 450 passengers. Leadingair- craft inthat category weretheBoeing 747,theBoeing 777, andtheAirbus A-300. Boeing andAirbus were the industry leadersinthese segments.

REGIONAL JETS.Theregional jetssegment, which was included within the narrow-body category, was traditionally composedofaircraft thatcarried between 20 and 70passengers. Bombardier andEmbraer were themarket leaders inthis segment, whichhad consistently expandedsince1992,whenBombardier introduced thefirst regional jetasa replacement for turboprop planes.

Even before regional jetsbecame widelyavailable, growth amongregional airlineswasconsistently robust.

Between 1971and1993, regional carriersoutgrew the majors virtually everyyear.Theexpansion couldbe traced to two contributing factors.First,inthe years leading up to J 978, many citiespreviously unserved had been introduced toair service, mainlyonturboprop aircraft. Second, regional carriersinthe years afterthe Deregulation Actof1978 began tofill gaps inthe ever- expanding hub-and-spoke networksofthe majors.

By 1989, themajors changed theirairline operations to increase thenumber ofpassengers flowinginto the networks byadding capacity onitsfeeder routes, offering moredestinations, andincreasing frequency.

It was astrategy thatplayed against thestrengths of regional turboprops, whoseshorter rangemadethem ineffective in reaching newmarkets.

The neteffect was a surge inregional jet adoption and deployment, largelybecause ofthe replacement I \ International BusinessStrategy 66 C386CASE25\Embraer: ShakingUpthe Aircraft Manufacturing Market of iurcoprope onlow-density routesandthedevelop- ment ofnew routes thatextended airlinenetworks. As the regional jetssegment expanded, thecapability of the jets themselves expandedtocomprise roomyand cost-effective modemaircraftthatflew upto4,000 krn (3,700 miles), enough tooperate withinmost continents.

Based onexpected growthofLCCs andregional carriers, aswell as tile aging ofaircraft currently inuse, the market forregional planesappeared tobe poised for significant growth.Embraer hadprojected deliver- ies of30- to120-seat planes to total nearly 8,500units over thenext 20years, representing aUS$175 billion business. TheUnited Stateswasexpected to gener- ate 56% ofthis demand, while19%ofdemand would come fromEurope (Exhibit 4).

EMBRAER.

In2004. Embraer wasthefourth-largest commercial airplanemanufacturer inthe world in terms of volume, behindBoeing, Airbus,andBombardier.

Airbus andBoeing ledthe market withdeliveries of 320 and285 commercial airplanes,respectively. In the regional market, Bombardier andEmbraer demon- strated aclose rivalry byachieving 158and 148deliver- ies, respectively (seeExhibit 5for Embraer marketshare evolution).

Embraer, foundedin1969, wastheproduct of an aeronautical technologycenter(CTA) thathad been established in1945 byBrazil's Ministry of Aeronautics. TogetherwithEmbraer, the eTA also generated one ofthe world's leadingaeronautical engineering schools,theAeronautical Technological Institute (ITA).MostofEmbraer's aeronautical engi- neers hadbeen hired outofITA.

Moreover, Embraer'sfirstgreat commercial suc- cess wasLheBandeirantc, a15-seat planewitha design basedonaneight-seat prototypeassembled inside theCTA. Overall, 500Bandeirantes weresold over a10-year period.Thefirst80were soldtothe Brazilian military,asan indirect government support to the new enterprise.

From 1972 to 1983, Embraer introduced sev- eral small turboprop planes.Ernbraer's firstinter- national success, introduced in1983, wastheEMB 120 Brasilia, a30-seat pressurized twinturboprop. In 2006, theBrasilia wasstillinproduction, withmore than 350planes operating worldwide. Embraer'sjet era began in1985 withtheintroduction oftheAMX, a military jetdeveloped inpartnership with Aermacchi, an Italian aircraft manufacturer.

Embraer wasprivatized inDecember 1994aspart of President FernandoHenriqueCardoso's privati- zation program. Cia.Bozano, Simonsen (CBS),the leader ofthe consortium thattook Embraer private, was aconglomerate withdiversified investments in financial services, agriculture, realestate, andindus- trial products (seeExhibit 6for Embraer's ownership structure).

In 1995, Embraer enteredthecommercial jetmar- ket with theintroduction ofits ERJ family. TheERJ 145 (introduced in1995), ERJ135(introduced in 1998) andERJ 140(introduced in2000) hadaseating capacity of50, 37,and 44seats, respectively. Those planes weredeveloped in accordance withEmbraer's strategy ofentering the30- to50-seat markettocom- pete against Bombardier's Q-Seriesturboprop planes as well asits CRJ family ofregional jets.

In 1999, while stillcelebrating thesuccessful intro- duction ofthe ERJ family, Embraer begandevelop- ing anew aircraft familythatwould servethe70- to 120-seat market.InFebruary 2002,the70- to78-seat EMBRAER 170completed itsfirst flight, taking off from SaoJose dosCampos. Inthe following two years, Embraer completed themaiden flightsofits 78- to86-seat EMBRAER 175aswell asthe 98- to 106-seat EMBRAER 190.Tocomplete thefamily, in December 2004,the108- to118-seat EMBRAER 195 accomplished itsfirst successful flight(seeExhibit 7 for alist ofEmbraer's productsasof2006).

THE 70- TO120·SEAT MARKET.

Severalreasons moti- vated Embraer tomanufacture 70-to120-seat planes.

First, Embraer identified agap between capacity and demand forthis range ofplanes. Theabsence ofatrue 70- toI20-seat jetfamily hadforced airlines todeploy planes thatwere either toolarge ortoo small tooperate efficiently inthe inteImediate-demand market.

In 2002, 61 %of flights inthe United Statesdeparted theairport with loads appropriate for70- to11O-seat aircraft.

Several trendsinthe airline industry alsocontrib- uted to Ernbraer's interestinthis segment. First,the continued growthofLCCs hadcreated ashift inair- craft demand towardsmaller, moreefficient planes.

In addition, thedownturn inthe airline industry that began withSeptember 11,2001,alongwiththe resulting pricewars, hadhighlighted thefact that the ~ajors required ahigh-load factortocompete effec- tively agamst theLCCs. Furthermore theincreased volatility ofpassenger demandcreated'agreater need for fleXIbilIty amongairlines. Asaresult, themajors 7 Embraer:ShakingUpthe Aircraft Manufacturing Market 1t.7 CASE 25 I Embraer: ShakingUpthe Aircraft Manufacturing MarketC387 30-60 61-90 91-120 Total 1,150 1,300 1,250 UOO 1,450 1,600 1,700 4,750 2,600 2,900 2,950 8,450 EXHIBIT 4 Embraer: Shakingupthe Aircraft Manufacturing Market Market Outlook DeliveryForecast by Segment andReg.on 1 30· to120·5eat Commercial JetCategory, WorldDeliveries bVSeat Segment Segment 2004-132014--23 2004-23 Deliveries by Region, 30-to120-seat Segment Regions 2004--132014-232004--23 North America 2,245 2,495 4,740 Latin America 255370 625 Europe 636944 1,580 Africa & Middle East 154 236390 t China 240 395635 Asia Pacific 170310 480 Total 3,700 4,750 8,450 Deliveries by Region andSegment 30- to60-seat Segment 61- to90-seat Segment 91- to120-seat Segment Regions 2004--132014--23 2004--23 2904--13 2014-23 2004-232004--13 2014--232004-23 North America 8401,030 1,870 715 650 1,365 690 8151,505 Latin America 2570 95 90130 220 140 170310 Europe 85152 237 263424 687288368 656 Africa & Middle East 8038118 52106 158 2292 114 China 100100200 90160 250 50135 185 Asia Pacific 2060 80 90130 220 60120 180 Total 1,150 1,4502,600 1,3001,6002,900 1,250 1,7002,950 1 -2004-2023 EmbraerMarketOutlook." 68 InternationalBusinessStrategy C388 CASE25\Embraer: ShakingUpthe Aircraft Manufacturing Market 72% 67% 64% EXHIBIT 5 Embraer: Shakingupthe Aircraft Manufacturing Market Embraer MarketShareEvolution 30- to60-seat Planes Data source: hnp://'MVW.embraer.com.br {accessed 10 November 20061.

60% 54% 52% 51% 50% 49% 46%50% 51% 43% 42% 45% 45% 45% 44% 40% 32% 20% 11% 8%5%6% 4% 4%5% 1% 2% 3% 0% 19961997 1998 19992000 20012002 2003 2004 I _ EMBRAER _ BOMBAROIER AVCRAFT 100% 93% 61- to 90-S98t Planes Date source; tlttP;//www.embraar.com.br(acCessed10November2006).

36% .. ~7 83% 80% 67% 100% 100% 80%60% 40% 20% 0% L- _ 1995 19961997 199819992000 FAIRCHILO OORNIER I 87% 53% 52% 49% 32% 30% 27%28% 19% 2001 2002 I_ EMBRAER _BOMBARDIER 33% Embraer:ShakingUpthe Aircraft Manufacturing Market 69 CASE 25 I Embraer: ShakingUpthe Aircraft Manufacturing MarketC389 EXHIBIT 5 (Continued!

91- to 120-seat Planes Dare source; http://www.embraer.com.br1accessed 10November 20(6), 100% 100% 100% 100%100% BO% 73% 67% 66% 60% 61%59% 55% 40% 20% 0% 199B19992000 2001 I_ EMBRAER -BOEING _AIRBUS I 1997 1996 1995 1969,yethas remained underthemajority controlof t the Bombardier familythroughout thecompany's his- tory. Inthe 1970s, Bombardier begantodiversify into other transportation industriesthroughacquisitions of various train,plane, bus,andboat manufacturers.

Notable aerospace acquisitions includedthepurchases of Canadian aircraft manufacturer Canadairin L986, business jet manufacturer LearjetCorporation in1990, and deHavilland, manufacturer ofthe Dash-8 turbo- prop, in1992.

In 1992, Bombardier enteredtheregional jetmar- ket with thelaunch ofits 50-seat CRJl00I200. After Embraer's entryintothatmarket in1995, Bombardier began toface asignificant erosionofits competitive position. Financial problemscompounded thechal- lenges posedbyEmbraer; theyprevented Bombardier from launching majordevelopment projectsoutsideof the CRJ family ofjets. Instead, Bombardier racedto beat Embraer tothe emerging 70-to90-seat regional jet market byannouncing in1997 itsplans tointro- duce the64- to75-seat CRJ700/705, astretched version ofthe CRJ1001200. TheCRJ700/705, first delivered in2001, wasfollowed bythe 86- to90-seat CRJ900, anotherstretched CRJ100/200, whichwas announced in1999 andinservice by2003. In2000, Bombardier's plans to develop anew generation jet that could havebeaten Embraer tothe 100-plus-seat were becoming increasingly receptivetothe notion of using smaller planesforshort- tointermediate-range flights. Aswell, thefinancial problems experienced by the majors duringthisperiod hadprompted theirU.S.- based unions torelax clauses thatlimited thescope of their regional airlinesto50-seat jets,Asaresult, sev- eral airlines werebeginning toexpand regional opera- tions toinclude planeswithmore than70seats.

Another keyreason wasrelated toaging fleets.

More thanone-third ofthe planes serving the61- to 120-seat marketweremore than20years old.Those planes amounted toapproximately 690units, which would begradually replacedwithinthenext fiveto 10 years (seeExhibit 8for details).

Embraer alreadydelivered nineEMBRAER 170s to customers, includingUSAirways, whichhad broken inits new 170s withflights fromPittsburgh, Pennsylvania toAlbany, NewYork onApril 4,2004.

JetSlue Airways had100EMBRAER 190sonfirm order-at atotal costof$3 billion-having chosen that model overthe107-seat AirbusA318.Thetotal number offirm orders forthe 1701190 family,asof December 2004,was343.

BOMBARDIER.

Foundedin1942 byArmand Bombar- dier asasnowmobile manufacturer, Bombardierhas been publicly listedonthe Toronto StockExchange since 70 lnternation~.I~B.":us~in'.':e~ss~5:':tr.~t':.!eg~y --------------- C390 CASE25 I Embraer ShakingUpthe Aircraft Manufacturing Market EXHIBIT 6 Embraer: Shakingupthe Aircraft Manufacturing Market Embraer CapitalStructure Data source: httPJ/WWW.llmbraer.com.br{aCCeSSed10November20(6).

CommonShares(242,544,448 Sharesl-33% ofshares BOVESPA FreeF'oat'l Cia.Bazano, 19.20% Europeanrl Group, 20% PREVI, 20% Brazilian Government, SISTEL, 0.80% 20% The European groupincludes: Thales15.67%1, Dassault 15.67%1, Snecma (2.99%1,andEADS (5.67%1 Preferred Shares(476,720,786 Sharesl-66%ofShares BOVESPA, 34.40% NYSE'l 56% -.:_...........BNDES, 9.60% Total (719,265,234 Sharesl European --~ Group, Controlling Shareholders, 32.60% 7.70% 1 NYSE, ---l 37.10% BNOES,~ 6.90% Boves pa, 15.40% 0.30% CASE25 I Ernbraer:

Shaking Up the Aircraft Manufactunng Market C391 EXHIBIT 7 Embraer: Shakingupthe Aircraft Manufacturing Market Embraer's 2006Product Mix Commercial Aviation MilitaryAviation Corporate Aviation Embraer:

ShakingUpthe Aircraft Manufacturing Market 71 EMB 120 ERJ 135 ERJ 140 ERJ 145 Embraer 170 Embraer 175 Embraer 190 Embraer 195 Super Tucano AMX EMB 145AEW&C EMB 145RS/AGS P 99 Legacy Legacy Data source:

htlp:/lwww.embraer.com.br(accessed 10November 2006).

EXHIBIT 8 Embraer: Shakingupthe Aircraft Manufacturing Market The 70-to un-seat Capacity Gap Data source: http://www.embraer.com.br(accessed 10November 2lJ06).

North American Region South American Region European Region Asian Region 150170 110 130 90 Seating Capacity 30 5070 (continued) 72 InternationalBusinessStrategy C392 CASE25 1 Embraer SnakmgUpthe Aircraft Manufacturing Market EXHIBIT 8 (Continued) How Overcapacity or Undercapacity HurtstheBottom Line .' r loads better suited for70- to un-seat aircraft.

Note: Morethsnhalf0ls1l U.S.domestic airlinesoperallng narrow-body malnlmeaucranhavepassenue 27% 34% appropriate for 70- appropriate for 90- to 90-seat aircraft to110-seat aircraft ~ ,-----'-----\ 17% 17% ~ € m ...

~ Q ]I ~ 'a i !

2% 0% tn.

0- L--'-'- L- <50 506070 8090100 110 120 Passengers perDeparture 14% 13% 9% 8% 7% market wereabandoned owingtofinancial constraints, and Bombardier wasforced tocontinue relyingonits existing platform.

After several yearsofescalating financial and busi- ness challenges, in2003, Bombardier appointedfor- mer CN Railway CEO PaulTellier asthe company's president and CEO.

Tellier quickly implemented a recapitalization program,featuring anequity issue and asset divestitures, tostrengthen Bombardier's balance sheetandrefocus onitsaerospace andrail- car businesses, Theaerospace businesscontinued to struggle, however,with2005 production estimates 4% 130140>150 Seating Gap Aircraft in Service (as of 2002\ Note: Morethanone-third ofthe world's letfleet serving the51-to 120-saat seement is more thal120years old and should beretired in the coming veers.

001<1 sourcll:

http://WwW.embraer.com.br(accessed 10 November 2006).

500 689 aircraft olderthan 20 years (34% oftotal fleetinservice) r~---.A----, 453 400 372 330 304 208 100 o L-J1::-0_~5-~6:-_~1 0'---!1~'-~15'---!16::-_"!:20'-----;21-25 26-30 Aircraft AgeIVe.,s) +30 Embreen ShakingUpthe Aircraft Manufacturing Market 73 CASE 25 I Ernbraer ShakingUpthe Aircraft Manufacturing MarketC393 for the 50-seat CRJ200 reducedfrom98to54, asthe market continued tomigrate towardlargerregional planes. Furthermore, thefinancial strengthofairlines still interested in50-seat jets,such asUS Airways and Delta Airlines, continued todecline. InNovember 2004, Standard & Poor's andMoody's Investor Service downgraded Bombardier's creditrating to junk status. Onemonth later,afterlessthan twoyears on the job, Tellier wasremoved fromhisposition as president andCEO ofBombardier. ReplacingTellier was Laurent Beaudoin, amember ofBombardier's founding family,chairman ofBombardier since1979, and previously CEOofthe company from1979-1999.

Beaudoin hadreportedly pushedTellierasideafterdis- agreeing withhislong-term visionforBombardier.

The CSeries:

Theentrepreneurial Beaudoinwas believed tobe anenthusiastic supporterofthe CSeries development projectthatbegan feasibility studiesat Bombardier in2004. TheCScries, anew family of thuee jetsranging fromII0 to 135 seats, would serve as Bombardier's entryvehicle intothecommercial jet market. Bombardier's boardofdirectors wasexpected to decide inearly 2005whether toproceed withdevel- opment efforts,withtheobjective oflaunching theproj- ect inspring of2006 anddelivering thefirst jetin20.10.

The Canadian government, attracted to the opportunity to replace thethousands ofjobs thathadbeen lost because ofthe scaled-back productionofBombardier's CRJ200, hadreportedly agreedtofinance one-third of the expected $2billion ofcapital costsassociated with the prototype development. Inexchange, Bombardier would commit tolocating theCSeries manufacturing and development facilitiesinCanada.

The CSeries jetswere expected tocompete directly with Embraer's EMBRAER 190,Airbus's A318,and Boeing's 737-600.Bombardier claimedtheCSe.ries would bethe only jetspecifically designedforthe 110- to135-seat market,asEmbraer's 190was an upward stretchfromthe170, andAirbus's and Boeing's jetswere downsized versionsoftheir larger narrowbody jets.Asaresult, Bombardier claimedthe CSeries wouldoutperform eachcompeting jetwith respect toweight, size,orrange. Bombardier expected the CSeries toachieve unmatched operatingefficiency, reducing coststo15% to20% below thecost ofoper- ating competing planes.

Bombardier's recenthiringofformer Boeing executive GaryScott, whohadpreviously workedon Boeing's development ofthe 737, todirect theCSeries program sparkedconjecture inthe Canadian pressofa Bombardier plantocreate ajoint venture withBoeing.

Bombardier calledthereports "purespeculation," but Boeing Commercial AirplanesPresidentAlanMulally confirmed thathiscompany hadserved asa"consul- tant" toBombardier. Arelationship withBoeing could add significant value to the CSeries, particularly ifit allowed Bombardier to create cockpit commonality with Boeing's 737.

BOEING.

Boeingwastheworld's second-largest manufacturer oflarge commercial jets behind Airbus, as well asthe world's largestaerospace company, focusing onmilitary aircraft,satellites, missile de- fense, human spaceflight, andlaunch systems and services. Since2001, Boeing's commercial airplane sales hadplummeted from60%to 40% ofBoeing sales. Boeing responded tothat downturn bycutting costs, curtailing productdevelopment, andplacing more emphasis onitsmilitary andspace operations.

In 2005, Boeing's commercial development efforts were primarily focusedonthe 787 Dreamliner, asuper- efficient, long-range (9,500kmto11,000 krn,or7,000 to 8,000 miles), 200-to250-,eat aircraftthatwas t expected tobe inservice by2008.

The smallest Boeingairplane infull-scale produc- tion asof2005 wasthe162- to189-seat 737.Boeing announced inJanuary 2005thatthe106- to114-seat 717, which wasinherited inBoeing's 1997acquisition of McDonnell Douglas,wouldbetaken outofproduc- tion assoon asits existing orderswerefilled. Boeing cited insufficient demandasthe reason forthe deci- sion, adding thatthe717's market nichewassimply too small forBoeing to continue serving.The717 was considered bymarket analysts tobe too big and heavy tooperate efficiently relativetosmaller regional jets such asBombardier's CRJ900andEmbraer's EMBRAER 190.Furthermore, the717 wasanorphan product, withnocockpit orengine commonality with other Boeing jets,andhadnotreceived agreat dealof marketing anddevelopment supportfromBoeing dur- ing itssix years ofproduction.

AIRBUS S.A.S.Theworld's largestcommercial aircraft maker,Airbus, was80% owned bythe European Aeronautic DefenseandSpace Company (EADS), withU.K.-based BAESystems controlling the remaining 20%.Airbus wasfounded in1970 to address severalEuropean governments' wishesto have aEu.ropean competitor inthe aerospace industry.

In 2005, Airbus wasthemanufacturer ofthe world's 74 InternationalBusinessStrategy TheDecision C394 CASE25\Embraer: ShakingUpthe Aircraft Manufacturing Market largest, lowest-cost, andlongest-range aircraft.The company hadrecently beenfocused onthe super- jumbo market, withthedevelopment ofthe SSO-seat A380. InDecember 2004,however, Airbusannounced plans todevelop amidsized piane,theA3S0, tocom- pete directly againstBoeing's 787,sealing 24Sto28S passengers. Airbus's productlinecomprised fourfamilies: the single-aisle A320family, thewidebody A300/310 family, theiong-range A330/340 family,andthenew super-jumbo A380 Family.

Airbus's smallestairplane, the 318, wasa107- toI32-seat short-haul jetlaunched in 1999 tocompete withBoeing's 717.TheA318 ben- efited fromahigh degree ofcommonality withthe entire A320family interms ofairframes, on-board systems, cockpits, andhandling characteristiCS, which meant thattheentire family couldbeflown bythe same pilots andmaintained bythe same engineers. Still,as a downsized versionofthe ISO-seat A320,detractors considered theA318 tobe larger andheavier thanis desirable forjets inthe IaD-seat market.

Competitive History(1989-2005) i 989 Embraer begandevelopment ofthe ERJ 14S.

1992 Bombardier enteredtheregional jetmarket with theSO-seat CRJI00I200, developedfrom the CL-60 1Challenger businessjet.

1993 Airbus launched development ofthe 120-seat A319.

1996 Embraerbegan deliveringtheERJ i4S.

1997 Embraer launched the37-seat ERJ13S.

Bombardier announcedpianstodevelop the 64- to7S-seat CRJ700170S.

1998 Embraer begandelivering theERJ 13S.

1999 Bombardier begandevelopment ofthe 86- to 90-seat CRJ900.

Embraer launched development ofthe 44-seat ERJ 140andlaunched itsEMBRAER 1701190 family beginning withthedeveiopment ofthe 70-seat EMBRAER 170.

Airbus launched development ofthe 107- to I 32-seat A318.

After twoyears ofdiscussion aboutgovernment subsidies, Canadachallenged theBrazilian subsidy program PROEXbeforetheWTO.

The WTO decided thattheBrazilian PROEX was aprohibitive exportprogram thathadtobe withdrawn. Thevalue ofthe PROEX subsidy to Embraer wasworth $1.4billion. Following that, Canada chosetoretaliate byimposing tar- iffs onthe Brazilian exportsincluding atempo- rary banonBrazilian beef.

2000 Bombardier abandonedplansfordevelopment of anew IOO-seat jet,theBRJ-X.

2001 Bombardier's CRJ700170Sbeganservice.

2003 Bombardier's CRJ900beganservice.

Embraer's EMBRAER 170began service.

2004 Bombardier announcedthatitwas studying the feasibility ofanew jetfamily, theCSeries, which would servethe11O-to I35-seat market.

Embraer begandelivery ofthe EMBRAER 175 andEMBRAER 190.

200S Boeing announced planstostop production of the 717 because ofinsufficient marketdemand.

As hemade finalpreparations forhis upcoming inves- tor presentation, MauricioBotelhowasconcerned that Embraer stilldidnot know whattoexpect from Bombardier, Boeing,andAirbus. Howwould they respond toEmbraer's successful launchofits recent family ofjets? Would Bombardier reallyfollow through with itslaunch ofthe CSerles? WouldAirbus and Boeing perceive thelatest attacks byEmbraer and Bombardier asattacks ontheir ownfamilies ofjets?

Most importantly, givenBotelho's expectations of rivals' future competitive moves,whatshould Embraer do next toprotect itsposition andinfluence itscom- petitors' actions?

Endnotes 1.

"Air Transportation," Encyclopedia ofGlobul Industries online edition, Thomson Gale,2005. Reproduced in Busin~ss and Company ResourceCenter(Michigan: GaleGroup. 2005), hup:!lgalenet.galegroup.comlservletlBCRC.

2. "Air Tmnsportatlcn," EncyclopediaafGloba/lndustries, Gale Research International Ltd.,PubID:GE66 (IDecember 2(02).

3. AV,ailable seatmiles (ASM) measure available passenger capacity.

4.

"Airli~e.lndusn-y:

ABusiness inTransition," Optimizing Air Travel Mini-Conference Presentation.BostonMassachusets 24 March 2004. " UPSinlndia-A PackageDeal?

7S It's challenging. ButUPS is all about global trade.Global tradeisgoing to pull usout ofthis recession.

-UPS CEOSCOTT DAVISINA2009 CNBC INTERVIEW Marne l.

Arthaud-Day Kansas StateUniversity Shreyasi Banerjee Intel Corporation Frank T.Rothaermel Georgia Institute ofTechnoloqv I T HADBEEN sixmonths sinceRobin Pagefirst walked intotheSandy Springs headquarters of United ParcelService (UPS)andassumed her role asChief Strategy Officer.Th9ugh shehad been doing strategic analysisandplanning for years, shefeltanunusual amountofpressure toprove herself inthis new position. ChiefExecutive Officer ICEOI ScottDavis hadmade itclear when heoffered her the jobthat hehad high expectations ofwhat she could dofor the company, andthat hewanted tosee concrete resultsbythe end ofthe first year.

Ms. Page glanced atthe pile ofreports sittingon her desk, manyofthem describing recentinternational acquisitions andalliances. Sheknew thatoneofthe rea- sons shehadbeen Mr.Davis's topchoice forthe posi- tion was herextensive international experience.UPS already hadapresence inmore than200countries, but they wanted topenetrate thosemarkets more deeply, especially therapidly growing economies of Southeast Asia.Ms.Page hadtraveled extensively around theregion bothforwork andforpleasure, and Mr. Davis wascounting onher insights tohelp the company withitsAsian expansion.

First andforemost onher mind wasIndia. She remembered fondlyavacation shehadtaken there just ayear orso ago, andhow thecity marketplaces had stnuck herasaunique mixofthe modern andthe ancient. Peoplemilledaround everywhere, pushing their waythrough crowded streets,families piledon motor bikesweaving inand outoflanes ofstandstill traf- fic. Yet everywhere shelooked, someone wastalking on acell phone, andmodern buildings linedthehorizon with names ofmultinational corporationsfromallover the world. Anentrepreneurial spiritseemed tofill the air, with newbusinesses comingtolife onadaily basis; for every venture thatfailed, twomore sprouted up to claim itsspace. Thecountry wasawash withbusi- ness opportunities amidsttheclamor, congestion, and complexity thattypified modern lifeinIndia's major cit- ies like Mumbai, Delhi,andBangalore. Thesheer vol- ume ofpeople promised seemingly unlimitedmarket potential. Although UPShadestablished afootprint inIndia, it had yettopenetrate themarket onthe scale that Ms. Page andother UPSmanagers hopedfor.They formed analliance withJetAirin2005, which led to the opening ofthe first" UPSStore" inMumbai and several othermajor cities. In2008, UPSestab- lished asecond alliance withAFL Private Ltd,gain· ing access tothe logistics company's fieldstocking locations andsignificantly increasingitsaccess points for international delivery.Sincethen,however, UPS's attention hadshifted toother Asian markets likeChina and Malaysia, leavingIndiawide open toinvading competitors. Sureenough, inUPS's absence, DHL acquired theIndian delivery company BlueDartand had become theclear market leaderinboth theinter- national anddomestic segments. Today,DHI:Blue Dart hadacombined marketsharethreetimes higher than thenext largest company.' Clearly,itwas totime to reformulate UPS'sIndiastrategy.

In many ways, theIndia situation reminded Ms.

Page ofwhen UPSfirstbegan tooffer overnight delivery backinthe 1980s. Amajor competitor (the U.S. Postal Service) dominated themarketplace, and Professor Marne L.

Arthaud-Day, ResearchAssociate ShreyasiBanerjee (lndustrial EngineerandSystems Analyst. Inte1),lindProfessor FrankT.

Rorhaermel preparedthiscase from public sources. Thiscaseisdeveloped for the purpose ofclass discussion. Itis nor intended to be used rorany kind of endorsement, sourceofdata. ordepiction ofefficient orinefficient manage- ment. CAnhaud-Day, Banerjee.andRothaennel, 2013. ('l!,''''' , ..._~7.:6:.._~_~ln:.:t:.r:.:n::atiOnal Business S~t~ra~t.~9':Y _ C396 CASE26 I UPS InIndia-A Package Deal?

while UPShadstrongholdS inall ofthe major loca- tions, thechallenge wastofigure outhow to con- nect ruralAmerica toits major transportation hubs.

UPS hadpromised overnightdeliverybetween any two addresses inthe United States, andthey weren't joking.

If apackage neededtoget tothe base ofthe Grand Canyon, theplan was todrive thepackage on a dirt road for50miles fromValentine, Arizona,to the rimofthe Canyon. Amule trainoperator would then taketheletter overtothe rocky finallegfora $35 charge toUPS. UPSwould deliver theletter ata loss inorder tomaintain itscommitment toovernight delivery. Ms.Page knew thatvast regions ofrural India still lacked adequate roadways, andshechuckled think- ing that mule trains might notbesuch afar-fetched idea after all.Delivery atthe local level wasstillvery much asmall business, especially indeveloping coun- tries. It'slike Kent Nelson, UPS'ssenior vicepresident for finance andcustomer service,saidina 1985 inter- view, "When youareinthe package-delivery business, you arereally inthe pennies business. Thetrick isto have thepennies builduptobe profitable:" If UPS wastobe amajor player inthe current "India Mania:' thecompany wouldhavetofigure outthe answers toseveral difficult questions. Howunique was theIndian situation compared toother develop- ing countries? UPShadbeen inbusiness forover 100 years andhadexperience inover 200 worldwide mar- ketplaces. Surelysomeofthe lessons learnedwould transfer toIndia, buthow could theydetermine which ones? Competitors alreadyhadahead start, soUPS could notafford toexperiment basedsimply ontrial and error. Howshould theygoabout tapping theexten- sive potential ofone ofthe world's largesteconomies?

How difficult woulditbe tostreamline theirsupply and distribution chaingiven thelack ofinfrastructure devel- opment? Withthesize ofIndia's population andthe economy's rapidgrowth, therewards forsuccessfully addressing theseissues weresizeable tosay theleast.

Ms. Page satdown andstarted reviewing the pile of documents sittingonher desk, hoping thedeals ofthe past would helpherfigure outthe right pathforUPS's future inIndia.

EARLY HISTORY.

ClaudeRyanandJim Casey hada big idea andasmall amount ofdebt capital. Working from aSeattle basement, theybegan running errands and carrying notesonfoot, aswell asmaking horne deliveries fordrugstore customers. Asthe arrival ofnew technologies suchasthe telephone andautomobile led to adecrease indemand formessaging services,the company shifteditsemphasis todelivering packages for retail stores. "Merchants ParcelDelivery" quickly built astrong reputation basedonitspersonalized cus- tomer service andthecare with which ithandled every package.' Theyoung enterprise changeditsname to United ParcelService in1919 asitentered agolden period ofdomestic expansion. Theword "United" was chosen toreflect thateven asthe company expanded into other cities likeOakland andLos Angeles, they still belonged tothe same organization.

Throughout itsearly history, UPSfunctioned pri- marily asan intra-city deliveryservice,innovating in response toconsumers' changing [jfestyles andshop- ping pattems.Lln theI920s, UPSadded several unique service features suchasdaily pick-ups, acceptance of C.O.D. payments, andmultiple deliveryattempts.

It also developed anew conveyor beltsystem for handling packages.' Whenfuelshortages leadingup to World WarTlcaused retailerstocurtail theirdeliv- ery activities andencourage customers tocarry their parcels home,UPSstepped upand expanded itsretail store service." Afterthewar, aspeople migrated tothe suburbs andbought carsthatcould holdtheir goods, UPS shifted itsfocus tothe business-lO~business segment.i COMMON CARRIERRIGHTS, Inthe next phase of its expansion, UPSdecided topursue common carrier rights, meaning thatitcould deliver packages between both private andcommercial customers.Thiswastra- ditionally thedomain ofthe U.S. Postal Service, as stipulated bythe Interstate Commerce Commission and multiple stateregulatory bodies.Aseries oflegal battles ensued asUPS fought toexpand itsoperat- ing authority toall 48 states, agoal which itfinally achieved in1975. By1978, UPSalsoprovided nation- wide airtransport services,flyingpackages inthe cargo baysofcommercial airlines.!

The UPS Story The UPS sagahasallthe elements ofaremarkable success story.

Twoteenage entrepreneurs in1907 started whatwould oneday become theworld's larg- est package deliverycompany.

UPS AIRLINES.

Inresponse tothe deregulation of the airline industry, manyestablished carrierstrimmed flights during the1980s, leading toreduced airfreight capacity. UPSsawthisasan opportunity toenter the • ~7 UPSinIndia-A PackageDeal? 77 CASE 26 I UPS Inlndta-c-A PackageDeal?C397 air delivery business andbegan toacquire cargojets.

It offered next-day airservice to48 states by1985, and in1988, UPSAirlines wasformally recognized by the Federal Aviation Administration.

It was the fastest airline startup in FAA history, takingjustover one year toget allsystems intoplace.' Building on the success ofits airline service, thecompany shifted from anational delivery company toaglobal foot- print throughout the1990s. UPSnowprovides deliv- ery services tomore than four billion people in over 200 countrtes.'?

GOING PUBLIC.

Thelatter halfofthe 1990s brought both major challenges andnew business opportuni- ties. InAugust 1997,theTeamsters Unionledabout 185,000 UPSworkers onastrike. Theywanted more union control ofemployee pensionfundsandobjected to UPS's increasing useof part-lime workers.UPS controlled about80percent ofall package deliver- ies inthe United States,sothe repercussions ofthe IS-day strikeforboth thecompany anditscustomers were severe.

UPS lost$650 million inbusiness overa disagreement thatthen CEO James Kellycommented could havebeenworked out"without astrike,"!

I UPS recovered quickly,however, andwent public in1999, almost 100 years afteritsconception. Areport in The New YorkTimes said,"Investors havegreeted thenew stock withanenthusiasm usuallyreserved fordot-com ventures whosefounders' parentshadnoteven been born by1907,',12 Infact, theUPS !POwasthelargest public offering todate. (SeeExhibits Iand 2for UPS financial data.) SYNCHRONIZED COMMERCE.

Inthe meantime, UPS continued toredefine itselfinresponse tochanges in its external environment. Nolonger restricting its activities todelivery services, UPSsought tobecome a "solutions company"thatoffered services tailoredto its customers' businessprocessvalue chain.P Itformed the UPS Logistics Groupin1995 tostreamline service operations overitscustomer base,andUPS Capital in 1998 toprovide financial productsandservices tohelp small businesses grow." Thecompany madeabout 30 acquisitions intotal, including freight forwarders, customer clearers,andabank forthe efficient move- ment ofgoods, information, andfinancing alongtheir supply anddistribution network.PWhenastudy by FutureBrand concludedthatUPS hadnoterminology to explain theirexpanded businessmodeltocustom- ers, they coined the term "Synchronized Commerce," 16 By modifying itssupply chaintostreamline theflow between buyersandsellers, UPSwasable to"synchro- nize" goods, information, andfunds todeliver more products andservices toits customers.

By thestar! ofthe new millennium, UPSwaswell on itsway tobecoming afull-service business.'?

In 2001, UPSacquired MailBoxes Etc.,thentheworld's largest franchisor ofretail shipping, postal,andbusi- ness service centers.

18 This strategic moveenabled the company totarget smaller businesses andincreased its accessibility toresidential andhome-office cus- tomers.

Over3,000 MailBoxes Etc.locations were re-branded as"The UPSStore," inthe largest re- branding campaign inhistory. MailBoxes Etc.'s CEO saidthattheinitiative helpedsetlower maxi- mum retailprices forUPS shipping. Headded, "By pooling MBE'sexpertise inretail business services with UPS's expertise inshipping andother expanded capabilities. TheUPS Store offers anextensive port- folio ofproducts to our franchisees andtheir custom- ers." Currently, ''TheUPSStore" and"Mail Boxes Etc," haveover4,800 locations inthe United States, Canada, andIndia alone.

19 .

Today, UPS maintains itsfocus onservices asits core business whilecontinually lookingtogrow new revenue sources. Toensure thatthecompany keepsits strategic focus,former CEOMike Eschew introduced the "Four Quadrant" growthstrategy that"focuses on innovating existingbusiness operations internally and externally, and,likewise, focusesinnovation on new entrepreneurial venturesbothinternally and externally,',20 Thisstrategy hashelped toland UPS among thetop 15most respected companies andin the top 10of all logistics companies worldwide(see Exhibits 3and 4).

HUB AND SPOKE MODEL.

UPS'sdelivery network is based onthe hub andspoke model," acentralized and integrated approachtologistics managemem.f It consists ofahub (the center), wherepackages aresent for consolidation, andspokes thatlinkthehub toall other points inthe system. UPS'srival,FedEx, pio- neered thehuh andspoke system inthe U.S. domes- tic express delivery sector,andthen extended itto its international operations.FedEx'sfirstAsian hubwas at Hangzhou XiaoshanInternational Airport,located in east China's Zhejiang Province.

23 UPS transitioned from direct shipping tothe hub andspoke system somewhat laterthanitsmajor competitor, buthas stiLI benefitted fromsignificant costsavings bydoing so. 78 InternationalBusinessStrategy C398 CASE 26 I UPS inlndia-A PackageDeal?

EXHIBIT 1 UPS Income Statement (U.S.

$ in millions) YearsEnded December 31, 2010 2009 2008 2007 Revenue $49,545 $45,297 $51,486 $49,692 Operating Expenses:

Compensation andbenefits 26,324 25,640 26,063 31.745 Repairs andmaintenance 1,131 1,0751,194 1,157 Depreciation andamortization 1,792 1,7471,814 1.745 Purchased transportation 6,640 5,379 6,550 5,902 Fuel 2,972 2,3654,134 2,974 Other occupancy 939 9851,027 958 Other expenses 3,873 4,305 5,322 4,633 Total Operating Expenses 43,671 41,496 46,104 49,114 Operating Profit 5,874 3,801 5,382 578 Other Income and(Expense):

Investment income 3 10 75 99 t Interest expense ~) ~I~I ~I Total Other Income andIExpense) ~) ~I~I ~I Income BeforeIncome Taxes 5,523 3,3665,015 431 Income TaxExpense 2,035 ~ 2,012 __ 49 Net Income 3,488 2,1523,003 382 ~ ~ Basic Earnings PerShare $3.51 ...!ill ...E!

$0.36 - - Diluted Earnings PerShare $3.48 $2.14 ~ ~ - - source:

SEC,gov, EXHIBIT 2 UPS Consolidated BalanceSheetsIU.S.

$ in millionsl December31, 2010 2009 200S2007 ASSETS Current Assets:

Cash andcash equivalents $ 3,370 $1.542 $ 507 s 2,027 Marketable securities 711 558 542 577 Accounts receivable, net 5,627 5,369 Finance receivables, net 5,547 6,084 203 287 480 468 Deferred incometaxassets 659 585 494 606 .. ~7 UPSinIndia APackage Deal? 79 CASE 26 I UPS in India-A PackageDeal?C399 EXHIBIT 2 (Continued) December31.

2010 20092008 2007 Income taxesreceivable 2872661671,256 Other current assets 712668 ~ 742 Total Current Assets 11,5699,2758,84511,760 Property, PlantandEquipment, Net 17,387 17,97918,265 17,663 Goodwill 2,0812,089 1,9862,577 Intangible Assets,Net 599596 511628 Non·Current FinanceReceivables, Net 288337 476431 Other Non-Current Assets 1,6731,6071,796 5,983 Total Assets $33,597 ~ $31,879 ~ LIABILITIES ANDSHAREDWNERS' EQUITY Current Liabilities:

Current maturities oflong-term debtandcommercial paper s 355 s 853 $ 2,074 s3,512 Accounts payable 1,974 1,7661,855 1,819 Accrued wagesandwithholdings 1,505 1,416 1,436 1,414 t Self-insurance reserves 725 757 732 704 Other current liabilities 1,343 1,447 1,7202,391 Total Current Liabilities 5,902 6,2397,817 9,840 Long-Term Debt 10,491 8,6687,797 7,506 Pension andPostretirement BenefitObligations 4,663 5,457 6,323 4,438 Deferred IncomeTaxLiabilities 1,870 1,293 5882,620 Self-Insurance Reserves 1,809 1,7321,710 1,651 Other Non-Current Liabilities 815 798 864804 Shareowners' Equity:

Class Acommon stock 1285 and 314 shares issuedin 2009 and 2008) 3 3 3 3 Class Bcommon stock 1711 and 684 shares issuedin 2009 and 2008) 7 7 7 7 Additional paid-incapital 2 Retained earnings 14,164 12,745 12,41214,186 Accumulated othercomprehensive loss 16,195) (5,127) (5,6421 12,013) Deferred compensation obligations 103 108 121137 Less: Treasury stock (2 shares in 2009 and 20081 ~~ ----.i.11!l ~ Total Equity forControlling Interests 7,979 7,6306,780 12,183 Noncontrolling Interests 68 66 Total Shareowners' Equity 8,047 7,696 6,78012,183 Total Liabilities andShareowners' Equity ~ $31,883 ~ $39,042 Source: SEC.gov. II II 80 InternationalBusinessStrategy C400 CASE26 I UPS InIndia-A PackageDeal?

EXHIBIT 3 The World's MostRespected Companies Company Mean Rank 4.15 3.98392 3.763.75 3.74 3.56353 3.473.42 3.42 3353.29 3.29 3.22 1.

2.

3 4.5.

6. 7.

8.

9.

10.

11.

12.

13.

14.15.

Johnson andJohnson Berkshire Hathaway Procter & Gamble Apple Walmart Stores Exxon Mobil McDonald's Toyota Motors (Japan) Coca-Cola Cisco Systems United ParcelService PepsiCo 3M IBM Abbott laboratories Source:

Barron's Magazine, 2009, EXHIBIT 4 The Top15Global Logistics Companies 2008Revenues Rank Company (million USSI Base Country Coverage 1 DHL Logistics $39,900 Germany Globai 2 Kuehne +Nagel $20,220 Switzerland Global 3 DB Schenker Logistics $12,503 Germany Global 4 Geodis $ 9,700 France Global 5 CEVA Logistics $ 9,523 Netherlands Global 6 Panalpina $ 8,394 Switzerland Globel 7 Altadis/Logista $ 8,190 United Kingdom Europe 8 C.H, Robinson Worldwide $ 7,130 USA Global 9 Agilitv Logistics $ 6,316 Kuwait Global 10 UPS Supply ChainSolutions $ 6,293 USA Global Source: TrafficWorld, 2009.

-.------------------- = ____ -----------------------------------U::.p.:.s:.:i:.:n:.:ln:::d:::ia_-.:.A:.:P.:.a:::c:.=:kage Deal?

81 CASE 26 I UPS In Indla-A PackageDeal?C401 UPS BRAND ANDCULTURE.

ClaudeRyanandJim Casey started UPSwiththegoal ofproviding thebest service atthe lowest rates.Jim'scommitment to reli- ability, courtesy, neatness,andhigh ethical standards helped establish thevalues thatcontinue toguide UPS today." "TheytrustUPS, ourtechnology andvisibil- ity tools. It'sgood toget there ontime," saidCEO Scott Davis, whenasked whatloyalcustomers think of the brand.'5 Since itsinception, UPShasstressed employee ownership asaway toget itspeople tofeel responsible and involved. "Weareallowners, thatisabig part of enhancing culture.Atsome point, allofour employees have hadamoment whentheyrealize what it means to be apartner," saidformer UPSCEO Mike Eskew.

The company cultivates furtherloyaltybyfollowing a "promote fromwithin" principle. Overtheyears, many delivery workersandmail sorters haverisen to management levels,including Eskewhimself. Before serving asCEO from2002 to2007, Michael Eskew started asan industrial engineering managerin1972 and worked hisway upthe ranks for30years.

India Mania In a2006 address, Dr.Manmohan Singh,thePrime Minister ofIndia, declared, "Webelieve thatIndia is now onasustained pathofhigh growth. Wehave developed anew model forservice-led andtechnology- driven integration withtheglobal economy,,,26 As if on cue, India's GDPtopped the$1triLlion markinearly April 2007, making itthe 12th wealthiest nationin the world according toSwiss investment finnCredit Suisse.27 India'sGDPnowstands at$1.16 trillion, with anannual growth rateof 7.9 percent evendur- ing theglobal financial crisis."Whenaskedabout the biggest benefitofdoing business inIndia, Steve Hochradel, AssistantVPofdistribution forPBD Worldwide said, "India offersgreatgrowth opportuni- ties, anditis easier todo business therethaninmany other international markets.Indiahasahigh popula- tion ofEnglish speakers, whichmakes iteasy toenter the market, negotiate withvendors andpartners, and set upoperations."Z9 ECONOMIC REFORM.

However,prosperity didnot follow immediately afterIndia's emergence from British control andestablishment asan independent nation in1947. Forthefirst 40years orso, the new socialist government tookanextreme protectionist stance, structuring societyonthe basis ofcollective action asopposed to capitalist acquisitiveness, The License Rajrepresented thestate's efforts to con- trol allaspects ofthe economy. Elaborate permits and regulations wererequired toset uporrun busi- nesses, severely limitingtheirgrowth. Though there was economic discipline atthe macro levelandinfla- tion waslowcompared toother developing countries, the Indian economy draggedalongatasubsistence level withalow GDP percapita. Basicindustries such assteel andtextiles wereconspicuous bytheir absence.

3o The UPA (United Progressive Alliance),acoalition of political partiesthatconstitutes theGovernment of India stilltoday, iscredited withopening upthe economy. Aneconomic crisisduring the 1991 general election triggered thebeginning ofmicro-economic liberalization.

Torectify thesituation, then-finance minister Dr.Manmohan Singhproposed changessuch as repealing the "License Raj"andlifting aban onfor- eign direct investment. Theeconomy grewby 9 percent the foLlowing yearasaresult ofthese changes. The Manmohan Singhgovernment showedfurthersup-~ port forinternational tradethrough theachievement of two keyforeign tradepolicy objectives in2004:

(I) todouble India'spercentage shareofglobal mer- chandize tradeinafive-year period;and(2)touse trade expansion forboth employment generationand economic growth." Toexpand uponthese objectives, the government establishedseveralSpecial Economic Zones (SEZAct,2005) in2006 toattract foreign and domestic investment. Companiesoperatinginthese zones receive significant taxbenefits andface much simpler clearance andcompliance procedures. India's worldwide tradeislinked tothe world economy. For example, withtherecession hittingmostofIndia's major trading partners liketheUnited States,United Arab Emirates, andSingapore, exportdemand from India declined by16percent inJanuary 2009." KEY INDUSTRIES.

Indiaboasts atechnical work force of4million andtrains 60,000 software engineers every year.

33 Combined withlower wages, thesefac- tors make Indiaaprime source forinformation tech- nology (IT)services andachoice business process outsourcing (EPO)destination. Inturn, large-scale employment inthe ITand BPO sectors hashelped to create anupwardly mobileworking class,driv- ing increased purchasing/spending powerforIndia's younger generations. 82 InternationalBusinessstrategy:- _ C402 CASE26 1 UPS inIndia-A PackageDeal?

Extentof Fall in Manufacturing Sector Growth 1%) Extent of Fall in GDP Growth (%1 Source Studyonoilprice Impact, Federation ofIndian Chambers ofCommerce andlnd t us ry.

zation ofresources fromtheprivate sectortocomple- ment government efforts.

India has2.1million milesof roadways thatcarry 80 percent ofits total passengers and65percent of India's freight(seeExhibit 6).As of2000, roughly 74 percent ofIndia's rura!population lackedadequate road access, while40percent ofthe existi.ng roads lacked all-weather capability.Asaresult, thegovern- ment plans toinvest $70billion inIndia's roadinfra- structure overthenext fewyears;" $33million has been dedicated toproviding ruralconnectivity" De- velopmental projectssuch as the Golden Quadrilateral Project arehelping linkIndia's fourmajor metropo- lises (Delhi, Mumbai, Kolkata,andChennai), whilethe Prime Minister's RuralRoads Program (pMGSY) aims to provide increased accesstoagricultural communities.

India's civilaviation industrywasborn in1912 with thefirst airflight between KarachiandDelhi (see Exhibit 7).The government monopolized theindustry for most ofthe 20th century through thestate-owned Air India andIndian Airlines Corporation, untilthe passage ofthe "open sky"policy inApril 1990(effec- tive as of 1994). Under "opensky,"airlines could receive foreigndirectinvestment ofup to 49 percent, opening themarket toahost ofnew players likeJet Airways andSahara. Deccan Airlines wasstarted by Captain Gopinath inAugust 2003asano-frills bud- get airservice, becoming thefirst inthe industry tofly to second-tier citiesfrommajor metropolitan areas.

38 However, afteraninitial period ofrapid growth, the Indian airlineindustry fizzledaround 2007.Today, the industry operates atfares below itscosts andis weighed downbyhuge debt.When oilprices hit$75 a barrel inearly 2009, theindustry asawhole was expected topost a$9 billion loss.Major carriers like Extent of Increase in WPI(%) 2.1 9.7 16.9 24.5 0.4 19 3.4 4.9 1.5 3.6 5.7 7.9 India's economic climateishighly dependent on the oilindustry, whichuntilrecently hasbeen closely regulated by the national government. An RCCI (Federation ofIndian Chambers ofCommerce and Industry) reportfoundastrong positive correla- lion between theprice ofoil and commodity prices across different sectorsofthe Indian economy (with the exception ofmanufacturing, seeExhibit 5).This was largely duetothe fact that political pressures ensured thatthegovernment absorbedalarge partof the increase inoil prices, Publicsectoroilcompanies reported lossesofapproximately US$28million per day onthe sale ofpetroleum productsatgovernment- mandated prices.Thegovernment offsettheselosses by selling oilbonds, providing crudeoiltostate-owned oil retailers atdiscounted rates,andmaking periodic adjustments inretail oilprices." InJune 2010, the Indian government madeasurprising announcement that itplans toderegulate theoilindustry. Thismove is expected todrastically reduceIndia's fiscaldeficit by shifting increased oilcosts tothe end consumer, and level theplaying fieldbetween publicandprivate sector oilcompanies, a,.;.

-"------------ TRANSPORTATION SECTOR.

Transportation in India hasundergone rapiddevelopment onlyinthe last two decades. Theonus ofcovering 1,269,210 square miles ofland areaandsupporting apopulation of more thanonebillion (1,028,737,436) peoplemakes the sustainable development ofIndia's transportation sector dimcult." TheEleventh Five-Year plan,which detailed thelatest plans forthe Indian economy, pro- jected that$500 billion wasneeded toachieve com- prehensive growthinaviation, roads,railways, and waterways combined.Theplan alsoproposed mobili- EXHIBIT 5 The Impact of Oil Prices onVarious Factors International Oil Prices Per BarrollS) Increase in International Dil Pricos (%) 50 60 70 80 38.9 66.7 94.2 122.2 c UPSinIndia APackage Deal?

83 t - \...

t- \...

National Highway Network ofIndia CASE 26 I UPS inindia-A PackageDeal?C403 EXHIBIT 6 The Road Network inIndia, Showing MajorWarehouse Hubs Source: CygnusResearch andConsulting.

NorthandEast /- I- South andWest ..

...... 101.

tlh _ Indian, Jet,and Sahara havebeenforced toturn their full-service businessesintobudget fleetsbycutting down onfrills, duetothe government's refusaltopro- vide bailouts.

While passenger airlinesaresuffering, thegov- ernment hasincreased themaximum levelofforeign direct investment incargo carriers from49percent to 74 percent inorder toattract overseas playersto increase theirnetwork inIndia.

39 Research forAir Cargo India20 I 0 indicates thataircargo nowcom- prises 19percent ofthe total freight inIndia-the same amount asocean andrailfreight combined.

Overall, aviationisexpected togrow atarate close to 25 percent inthe next decade. Aircargo isexpected to post aCAGR of11.2 percent, expanding tomore than three times itspresent sizeby2025. Currently, India has126functional airports,12ofwhich are international andaremanaged bythe Airport Authority of India (5of these havebeen privatized fordevelop- ment). Pricing inthe industry isdirectly dependent on high sales taxes onaviation turbinefuel(ATF) andhigh airport charges. Playersinthe industry alsofacemajor challenges inacquiring land,developing infrastruc- ture, andother issues suchasenvironmental clearance.

India's firstrailline was setupasan experimental line during theMadras Presidency in1836. Later, the British government encourageddevelopment ofarail- way system tohaul construction materialsaroundthe country, securing 9million poundsfromBritish com- panies inguarantees. In1951, theIndian Railway was nationalized andintegrated intooneunit toform one of the largest railnetworks illthe world. Today, ithas ..

84 InternationalBusinessStrategy C404 CASE26 I UPS In Indla-A Package Deal?

N t EXHIBIT 7 The Air Network inIndia Source: PrsQ8t1lnlosoft Pvt tid, indlaeduc8tion.net Pakistan China(Tibet) Mumbai IBombavl Arabian Saa 0, LAKSHAOWEEP ••• Pert Blair a ANDAMAN & NICOBAR ISLANDS - AirRoutes·lndian a Other Alrlinu - AlrRoutu-Alrlndla • Airports • International AirportS B more than7,500 railway stations connected by tracks spanning 39,233milesthat,most importantly, reach both metropolitan citiesandrural villages," Railroads in India carryoveramillion tonsoffreight everyday (see Exhibit 8), India has12major seaports, whichaccount for about 90percent. ofIndia's tradeinterms of vol- ume." Inland, thepresence ofcanals, rivers,back- waters, andcreeks hasfacilitated thedevelopment of an extensive waterway network,maintained by the Inland Waterways AuthorityofIndia, Tenofthese inland waterways havepotential significance atthe national level.Although closeto5,700 milescanbe used bymechanized crafts,freight transportation is limited toonly 0,Ipercent ofthe total inland traf- fic inIndia. Thevolume ofcargo carried byInland Waterways Transporthasbeen declining consistently in recent yearsinfavor ofalternative modesoftrans- portation," Nevertheless, futuredevelopment ofthe inland waterway systemcouldbringeconomic aswell • UPSinIndia APackage Deal?

8§ Railway Network Map of India -Schematic CASE 26 I UPS inIndia-A Package Deal?C405 EXHIBIT 8 The RailNetwork ofIndia Source: Imp:l/www.nationmaster.com/encyclopedia/Rail-transport-in-India as environmental advantages.andunder somecondi- tions, maybethe only feasible modeofcarrying cargo.

Logistics IndustryinIndia A World Bankresearch papersumsupthe Indian eco- nomic climate ashaving "ahighly fragmented service industry. Outdated regulations, heavygovernment con- trol, aconstrained privatesector.andlargely inadequate infrastructure havecurtailed effortstoimprove trade "".1 ~""'.1flo<,,]f].d) -1"'.1 ......

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,.~, logistics."" Despitetheseobstacles, theWorld Bank projects thattheIndian logistics industrywillgrow at an annual rateof1.5percent to20 percent, achieving revenues of$385 billion by2015.44 By2013, approxi- mately 110logistics parksand45,000,000 squarefeel of warehousing spaceareexpected tobe developed across thecountry byvarious logistics companies (see Exhibit 9).Tier-2 andtier-S cities havebecome favorable destinations duetothe availability oflarge pieces ofland atlower prices. connectivity tomultiple 86 InternationalBusinessStrategy C406 CASE26 I UPS In India-A Package Deal?

EXHIBIT 9 Warehouse CapacityPlansof3PL Players inIndie (inmillions ofsquare teetl ExpectedbyYear Planned Capacity Current Capacity Company 2010 2010201020102010 20092010 2011 2013 10.0 100 5.0 3.5 2.0 202.0 7.5 10.5 52.5 7.5 3.0 1.5 20 1.0 1.0 0.5 TCI Safexpress ORS Logistics Indo Arya Blue Oart Gati TNT Prologistics TranSmart Total 16.5 Source: Industry, tantrumResearch.

partofthe industry, andthey aretypically character- ized bylow capacity andpoor technology. Meanwhile, the power supply iserratic andsubject toprolonged outages inmany partsof[he country. Allofthese inefficiencies leadtoincreased costs,Compared to European countries, railtransportation inIndia costs about threetimes moreandtheaverage transittime by road isabout threetimes longer. Airport charges and related operating expensesarethemajor contribu- tors tothe cost structure inthe aviation segment, while shipping isplagued byhigh operating expenses, staff markets, andtheproximity toindustrial clusters,Such improvements inlogistics capabilities couldpoten- tially spurnational GDPgrowth [0 II to 12percent (see Exhibit 10).

Impediments tothe dcvelopment ofthe Indian logistics industryincludegovernment bureaucracy, a fragmented marketstructure, andinadequate infra- structure. Indianbureaucracy remainsaquagmire; it takes about 20days toclear import andexport cargoat India's ports,whilethesame process lakesonly4days on average inSingapore, Smallerplayersformamajor EXHIBIT 10 Contribution oflogistics toIndia's GOP Growth Source: CygnusResearch andConsulting.

2006-07 2001-02 4% 17% •Storage I • Sea _Air _Services .. .:.-s CASE 26 I UPS InIndia-A Package DeallC407 cost and depreciation.P Inthe Indian context, operat- ing expenses generally exceedthecosts ofraw materi- als (see Exhibit 11).

A study byCygnus Business Consulting and Research listedthreemaingrowth driversforthe Indian logistics industryinthe near future. Since transportation accountsforover 40percent ofthe total costofproduction inIndia, growth inquality physical infrastructure isessential forimproving the efficiency ofthe industry." Secondly,theintroduction of aValue Added Tax(VAT), aconsumption taxlev- ied onany value thatisadded toaproduct, hasledto increased demandforintegrated logistics solutions."?

Manufacturers arcseeking to reduce thenumber of independent warehousesspreadovervarious regions to minimize unnecessary handlingandprocessing (and thustheir VAT burden). Lastly,globalization in the manufacturing sectorhashighlighted theneed to UPS inIndia-A PackageDeall 87 EXHIBIT 11 Cost Structure AnalysisforSupply ChainManagement (SCMICompanies Source: SSEIndia; Cygnus Research.

Cost Structure AnalysisofSCM companies SCM Industry CostStructure forOU Ended JFM09vsJFM 08 50 ~ 40 3j 30 l; 20 z "S 10 .,. ol--~- -10 01 "" ~ ·5 el ....

a ~~ ~~ g~ 0~ ,lj I.

JFM 200S • JFM 20081 Shipping IndustryCostStructure for Qtr Ended JFM09vs JFM 08 35 ~ 30 ~ 25 '" 20 ~ 15 "S 10 .,. 5 a I.

JFM 2008.

JFM 200S] Aviation IndustryCostStructure forOtr Ended JFM09 vsJFM 08 40 35 :tl 30 "ii 25 '" 20 l; 15 z 10 "S 5 #- a -5 -10 I.

JFM 200S • JFM 20081 88 InternationalBusiness Strateg,c.y ~_ C40B CASE26 I UPS In Ind,,-A PackageDeal?

UPSinthe Asia-Pacific Region imegrate fragmented andindependently operatedfunc- tions (forexample, transportation, warehousing,freight forwarding, andsoon) inorder toachieve greater efficiency (seeExhibit 12)."Despite strongpoten- tial, theIndian logistics sectorcurrently comprises only about 2percent ofthe estimated $5,000billion global logistics industry.

Another potential growthdriverise-commerce and theassociated increaseindemand forshipping larger volumes ofsmall packages directtoconsumers.

Online retailing hasbeen somewhat slowtodevelop in India due LO the lack ofinfrastrucLUre. Manyofthe country's ruralpopulation of700 million stilllack lnternet access,thoughCornatTechnologies isactively working toestablish Internetcentersinvillages with populations ofmore than5,000. Otherproject col- laborators includerCIClBank, India's second-largest private bank,andWyse Technologies, a manufacturer of computer terminalequipment.

49 Anotherbarrier is that Indians value a personalized shoppingexperi- ence andarenot as discount-driven asthe American consumer. Creditcardtransactions inIndia arenot as secure asthey areinother countries. Nevertheless, many analysts expectthatIndia willwarm uptothe idea oflntemet shoppingasthe technology infrastruc- ture improves.

UPS entered theAsia-Pacific market in 1986, byset- ting uparegional headquarters inSingapore. Today,the company's presenceinthe Asia-Pacific regionspans more than40countries andterritories, andemploys more than13,300 people. Additional airhubs are located inHong Kong, Shenzhen, andShanghai, China.

UPS's initialforayintoIndia wasits2005 partner- ship with JetAir. This agreement ledtothe opening of the first "UPS Store" inMumbai, whichalsomarked the brand's firstexpansion outsideNorthAmerica. The UPS Store wasIndia's firstfull-service retailoutlet to offer shipping, packaging, andother business ser- vices under oneroof. Speaking atthe official opening of aUPS Store inNew Delhi in2007, David Abney, then President of UPS International said,"India's role inthe global economy continues togrow impres- sively ...'The UPS Store' willprovide businesses as well asconsumers aconvenient channeltomarkets throughout theworld."so To better consolidate businessprocesses andgain faster, morecost-effective outputsinIndia, UPS established asecond alliance withAFL Private Ltdin 2008. AFLisalogistics serviceprovider withasig- nificant footprint inIndia. Thealliance wasmutually beneficial: UPSgained accessto130 ofAFL's field stocking locations and increased itsnumber of access pointsforinternational deliverycustom- ers from 26to200, while AFLgained accessto UPS's export capabilities. UPS'spenetration into the Asian markets deepened furtherwiththeincor- poration of101 additional fieldstocking loca- tions inChina intoUPS's service partslogistics network.i!' 5' Globally, UPSmaintains 1,000such distribution centerstoprovide customer inventory and order management servicesinaddition tocore packaging services.Someofthose facilities also house specialized contractservicessuchastechni- cal diagnostics andrepair.

UPS continues toform alliances andcollabo- r~lions with other localAsian companies to target different segments. Forexample, inMay 2010, UPS formed analliance withAliExpress, asubsid- iary ofthe China-based Alibabagroup.AliExpress IS the world leader ine-commerce forsmall busi- nesses andhosts theworld's largestbaseofsup- pliers inthe segment." JordanColletta, VPof E-commerce andMarketing atUPS, explained the purpose ofthe agreement asfollows: "Through our ~ ..... ~r EXHIBIT 12 Trend ShiltToward "Integrated SupplyChainModels" Source: CygnusResearch andConsultmg.

Enhanced valueproposition --- • • Overall supply chainvisibility and optimization forthe customer Traditional3PL value proposition --- • • .....

-.

Cost reduction Cost reduction UPSinIndia-A PackageDeal?

80 CASE 26 I UPS in lndta-e-A Package Deal?

C409 alliance withAlibaba, wehope topartner withmore small andmid-sized Chinesebusinesses tosimplify their logistics processes andconnect themwithnew buyers andsellers worldwide.v'" Lessthanonemonth later, UPSformed another alliance withPosLaju, the leader inthe Malaysian domesticcourierbusiness with a 27 percent marketshare.Together, thecompanies created PosLaju International Premium,whichboasts money-back guaranteedovernightinternational deliv- ery service to215 Asian locations.P Competition inIndia India wasproving tobe one ofthe more difficult Asian markets topenetrate duetothe sheer number of competitors. Currently,thesubcontinent boasts more than2,500 parcel carriers andcourier services, all competing todifferentiate themselvesbasedon cost, speed, andterritorial coverage. Largerplayers have aclear advantage withrespect toinfrastructure, business-consumer interface,andspeed ofdelivery.

Smaller ormore localfirms tendtohave better access to local information andease ofpenetration atthe domestic level(seeExhibit 13for market sharedata, Exhibit 14for performance metrics,andExhibit J 5 for key success factors,respectively). Thesedifferent EXHIBIT 13 Non-document CargoandRoad Freight, Comprising 40Percent 01 the Express Delivery Market Source: Author's interview withlogistics sectorexpert.

Market Share-India approaches arereflected intheir respective invest- ments ininformation systems:largerfirmsdevote close to20 percent oftheir development fundstoin- formation technology, comparedtojust over 7percent for smaller firms.

Blue Dart-DHL Express isthe clear market leader in both theinternational anddomestic segments, with a combined marketsharethreetimes higher than that ofthe nearest cornpeutor/" Priortoits acquisi- tion byDHL, BlueDarthadan8percent sharein the non-document cargoandroad freight sector.The next largest competitor inthe international segment is TNT, which hasdouble themarket shareofFedEx and UPS.

57 AFL,GATI, andFirst Flight areBlue Dart- DHL's mainchallengers inthe domestic sector.See Exhibit 16for acomparison ofthe stock performance of some ofthese keycompetitors.

Started in1989, GAT! hasbecome aleader in express cargodelivery. Withoperations touching603 out of6II districts inIndia, GAT! isone ofthe most sought-after freightcarriers inthe country.

58 The com- pany covers 200,000 milesevery dayandclaims to have brought Indiaandtheworld closer byvirtue of their "deeply entrenched networkanddomain knowl- edge." Inrecent years,GAT!hasdiversified bothits services anditsgeographic reach.GAT!nowoffers distribution andsupply chainmanagement solutions aswell asdelivery services, and has spread acrosstheAsian subcontinent.

While expanding itsinternational pres- ence through theestablishment ofoffices in Singapore, HongKong, China, and Sri Lanka, GATIcontinues todevelop highly focused expertise inIndia-centric operations. Ofcourse, allofthese private companies also compete againstthe Indian Department of Posts, thegovernment-run postalser- vice. TheDepartment ofPosts hasthelarg- est network ofpost boxes inthe world, and close to90 percent ofthis network spans rural India. TheDepartment alsooffers express delivery throughitsEmergency Mail Service (EMS),whichcomprises 13 percent ofthe express marketsharein India." ThePost Office (Amendment) Bill of 2006 gives theDepartment amonopoly in the debvery ofsmall letters andpack- ages (weighing lessthan 0.66 Ibs),limits foreign directinvestment inthe industry _ Safex(270Crl _XPS(150Crl _Speed age(70erl -AFL(130erl Bluedart 1100erl_Gatil350 Crl_OM, TVS etc1130 erl :" 90 InternationalBusinessStrategy C410 CASE 26 I UPS in India-A PackageDeal?

EXHIBIT 14 Significant Dependency Relationships amongPerformance Metrics andKeySuccess Factors Micro & Small Companies 178responses) All Companies 1133responses) Independent Type of p-value Independent Typa of p-value variable relationship variable relationship Revenue growth Pricing ofservices 0.013 Coverage + 0.007 Breadth ofservices + 0.028 Client relations + 0.034 Integration of + 0.005 services Profit growth Experience 0.012 On-time delivery 0.029 Coverage + 0.029 Breadth ofservices + 0.027 Integration of + 0.008 Integration of + 0.000 services services Shipment volume noor-to-door + 0.039 Breadth ofservices + 0.001 growth service t Integration of 0.019 Investment in + 0.002 services information systems Shipment value Door-to-door 0.007 Breadth ofservices + 0.024 growth service Breadth of 0.006 Client relations + 0.001 services Humanresources + 0003 Return on Door-to-door investments (ROI) service + 0.010 Coverage + 0.000 Coverage + 0.025 Breadth of 0.045 Integration of services services + 0.001 Return onassets On-time delivery + 0.048 Coverage + 0.001 (ROA) Integrationof + 0.002 services Customer Client relations + 0.006 Reputation + 0.015 satisfaction Creditfacilities + 0.021 Client relations + 0.039 Investment in Investment in assets 0.030 information systems 0.046 Human resources + 0.023 Business Industry focus 0015 Industry focus relationship 0.Ql9 Client relations + 0.002 Clientrelations + 0.000 Human resources + 0.005 Humanresources + 0.000 .. ~r UPSinIndia APackage Deal?

g, CASE 26 I UPS inIndia-A PackageDeal?C411 EXHIBIT 14 (Continued) Micro & Small Companies (78responses) AllCompanies 1133responses) Independenl Typeof p-value Independent Typeof p-velue variable relationship variablerelationship Breadth of 0.009 services + Coverage + 0.000 Industry focus 0.015 Experience + 0.000 Experience + 0.015 Humanresources + 0.003 Coverage + 0.005 Coverage + 0.001 Industry focus + 0.004 Industryfocus 0.003 Reputation + 0.038 Investment in + 0.001 assets Client relations 0.006 Integration of + 0.000 services Customer acquisition Grographic reach Source: ASurvey of Indian Express Delivery Providers, liMe, EXHIBIT 15 Comparative StudyofKey Success Factors Cluster Micro & Small Medium Large No. ofObservations 78 15 7 Key Success Factor Rank % Rank % Rank % Door-to-door service 97.44 1008 85.71 On-time delivery & reliablity 97.44 293.33 I 100 Coverage (national/international) 655.13 780 I 100 Breadth ofservice offerings 11 15.38 9 60 1100 Focus onspecific industries 12 11.54 14 6.67 13 57.14 Experience ofservice provider 588.46 293.33 11 71.43 Reputation ofservice provider 3 9359 2 93.33 I 100 Competitive pricingofservices 4 92.31 8 73.33 885.71 Extension ofcredit facilities 6 55.13 12 40 14 28.57 Relationship withcustomers 8 53.85 5 86.67 8 85.71 Investment inassets 12 11.54 1146.67 I 100 Investment ininformation systems 9 3846 586.67 I 100 Quality ofhuman resources 9 38.46 1053.33 11 7143 Integration ofservices 14 513 1326.67 1100 Source; ASurvey of Indian Express Delivery Providers, liMe. 92 InternationalBusinessStrategy C412 CASE26 I UPS inIndia-A PackageDeal~ EXHIBIT 16 Comparative Studv;Domestic vs.Global Market Major Indian Domestic Playersvs.the Sensex (Bombay StockExchange) Source: CygnusConsulting 150················..·..

.................................

" .

Relative MarketCapPerformance, 2009 1_ Sensex ...

Blue Dart ~Gsti I 130 .

110·················· .

UPS vs.

S&P 500and Dow Jones Transportation Index Source: UPSlonn 10K.Annual Report filed February 2.1,2.009.

Comparison ofFive Year Cumulative TotalReturn $220.00·· .

$200.00········ $190.00 . .

$160.00····· ~...... :~ .

$140.00·······.. .~. ....

$120.00 ....···......... ~ .,..~, ..

$100.00············ ..~ ~ .

$80.00········ ....... ...

$60.00 """ $40.00 2003 2004 200520062007 I ...

S&P 500_UPS ...OJTransport I 2008 to 49 percent, andrequires allprivate carriers to par- ticipate inan expensive andcumbersome registra- tion system. Everyregistered serviceprovider with a turnover of$50,000 ormore isrequired todeposit 10 percent ofits annual turnover toaUniversal Service Obligation Fund(USO Fund).60 Despiteitslegal man- date, asurvey ofusers ofdelivery servicescarriedout by the Indian Institute ofManagement revealedthat 60 percent ofconsumers didnotuse India Post.The 40 percent thatdiduse itsent only letters ordocuments (but notpackages). Forallother shipments, customers preferred expressdelivery serviceproviders fortheir reliability andaccountability.

What LiesAhead?

At the end ofthe day, Ms.Page gathered upthe remain- ing reports, shutdown hercomputer, andheaded out to her car. She figured she'd catch up on some more "liqht" reading onceshegothome. Atleast shewas starting tofeel likeshe hadabetter sense ofwhat UPS had done thusfar,aswell assome ofthe obstacles the company facedifthey were topenetrate theIndian market moredeeply. Howcould theytakeadvantage of India's growth potential? DidUPS's strategy of promising deliveryto"every address" intheir areaof reach makebusiness senseinthe Indian context 7Was a" ....

r