Entering the Motorcycle market in colombia
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Published: Mon, 5 Dec 2016
Motorcycle has always been a signature of freedom, on top of that, Eagles has successfully branded their motorcycle with prestige and style. To expand the business into a new market, research in depth will be required. This report weights both opportunities and risks of the new rising country in Latin America, Colombia. Colombia is located at the northern most tip of South America, owned the only ground pathway to North America. This gives Colombia a unique advantage for trading between North and South America. With this geography advantage, it has shown a continues growth and recovery after financial crisis in year 2009(WorldBank 2010). Colombia is known as the fourth largest economy, similar to developing countries, the fast growth of country has caused an inequity distribution of income and wealthiness(WorldBank 2010).However, the inequity is a double edge blade for Eagles, increase of wealthy class and high percentage of poverty (WorldBank 2010). In the recent decade due to globalization, there is an increase influence from American culture such as Pop music, movies or lifestyle (JOHNSON 2010). This may provide an opportunity to introduce Eagles motor bicycle into Colombia. Further more, Colombia signed free trade agreements with United States to allow smooth trading between the two countries.
This report will identify the main opportunities and risks in depth from four perspectives as mentioned briefly above, they are economics, culture, environment, government policies, followed by recommendations and evaluations of the market potential. Each of these is given analysis and evident data to support. By considering all the opportunities and risks, a final suggestion will be given at the end to show that Colombia should be consider to continue investigation and invested.
Range of the Report
This report will require putting several assumptions before entering the analysis. One of the main limitation is the actual customer behavior, the variables of it is too high which cannot be predicted accurately. Secondly, to supplement for insufficient data, assumption of neighbor countries having similar conditions on economic growth and behaviors. It is given that Eagles Motorcycle is priced around $20,000, however, there will be price difference for higher/lower end products. On the other hand, the target customers is assume to be higher-middle class since Eagles motorcycle is a luxury product instead of necessity.
Colombia has a population growth has slow down in the recent years decreasing around 0.2 per year, in year 2010 only 1.184% growth (SCRIVENER 2010). Within the population of 45,659,709, Eagles should focus on the top 20% of the population because they acquired more than half of the gross income of Colombia which they are the ones with enough purchasing power for luxury motorcycle, this will be discuss further in the following economic analysis.
As mentioned above, Colombia’s borders owns the sole pathway from South to North America, the land transportation provide a basis of basic supplies. In order to make urgent shipments on the motorcycle, a smooth transportation of goods through air mail would be required to deliver it around the country. Having 40 regional airports, with the major international Airport in Bogotá’s El Dorado handling cargo weight “350 million” metric tons annually, 1st for cargo capacity and one of the busiest in Latin America(Division 2007). Colombia’s aviation transportation system grants it great advantage with direct flights to 984 international airports. This provides a pivotal opportunity for Eagles to keep their stock flows. Thus, the transferring of goods is reliable, leading to the ability to catch up on tight schedules of these custom made motorcycles provides a key element for a sustainable and rapid logistics.
Colombia in the recent decade has had continued growth after the recession in the late 90’s. Strong growth is seen between 2005-2007, when the growth rate increased from 5.7%-7.5%, while the inflation rate remained below 6% (BARRIENTOS 2010). This shows that the Colombian economy is recovering slowly without signs of an overheating economy. Its GNI had significantly increased from $1700 to $8600 in the past 5 years even with the impact of the financial crisis in year 2009 (Bank 2010). These factors show steady economic growth. As a result, there is an improvement in the Colombian economic stability, leading to higher confidence for investments. In addition, other businesses have increased confidence investing in Colombia. There has been an increase in investments from 15% to 26% of the GDP from 2002 till 2009 respectively (Anonymous2009a). The Colombian FDI in the year 2010 reached $6.4B in the first 8 months and rose to 19.7%, compared to figures last year. Reputed journal Business Week even published an article on the Colombian economy and titled it “Colombia: the most extreme emerging market on Earth” (Farzad 2007, Alsema 2010). All of these positive indicators show that the Colombian economy will prove to be a favorable environment to start business in. For the case of motorcycles, a stable GDP with low inflation, plus a rapid increase of GNI, will allow a higher demand of luxury motorcycles. This is a critical element because many neighboring countries such as Brazil have not shown economic potential and its recovery averages 2% less GDP growth as compared to Colombia (Anonymous 2009b), giving Colombia a competitive edge.
In considering the relationship between the cost of a motorcycle and income earning, to the Colombians, a motorcycle is considered as a luxury good with an estimated average price of $20000. As such, motorcycle manufacturers targets high income earners in the country. However, Colombia has a significant unequal distribution of income with a GINI index of 58.5 (Bank 2010), and 62.7% of the income belongs to only 20% of the population (Development 2008). On the other hand, by observing the fact that the population with disposable income higher than $25,000 had increased critically from 6.2% to 11.2%, in unit terms, there are 608,000 Colombians who now have the ability to spend $18,750 on luxury goods on the average (Euromonitor 2010) .Such statistics signifies a quick growth in disposable income as a result of an increase in the demand of luxury goods in Colombia. The trend can also be seen by the clear increase in the constant PPP since early 90’s as compared to the figures now. In 2010, the value of PPP is $1273, amounting to 18, 6 times of that in 1990 (Nations 2010). Colombians are also observed to be boosting their living standard to allow themselves to spend their money on luxury goods such as Eagle Motorcycles. Such luxury products require a continuous growth for its demand to increase, and Colombia’s growth in disposable income therefore provides a favorable environment for the company’s expansion.
On the other hand, the literacy rate of the country is 95%, while unemployment rate is 12%. This indicates labor with basic skills is widely available, plus the high poverty rate, it may means there are large amount of cheap labors that can be hired. This also has create a risk for the damaging the potential of Colombia’s market.
Other than the issue of the revaluation of Colombian peso, other economic infrastructure proves to be worrying. Colombia’s unemployment rate has not seen a decrease since year 2006 and reached 12.5% last year, with 49% of Colombians remaining in poverty (Benford 2010 , John 2009) These conditions create a significant income gap which would discontinue the growth of potential customers due to a lack of confidence in this area. Eagles will require a constant increase in the Colombian population to enter the upper middle class to serve as their new customers. However, if a large unemployed population exists, proving the lack in of middle class Colombians, potential customers will be increasingly difficult to attract.
From the high growth and continue strong economy, Colombia’s market is fairly attractive despite the fact that it may be overheating with no support from the lower income classes. The huge income gap between the rich and the poor can cause problems while setting up the dealerships because if in a long term Eagles realized that the rich-population-customers does not meet their sales needs, any further development will have minimal result due to the lack of raising income class. For now, the economics opportunity is higher than risk, but the risk may cause potential problems in the future.
Culture – (HOFSTEDE 2009)
(the follow analysis are based on Hofstede’s data and research of cultural model)
Base on the cultural model designed by Hofstede, it is separate into four parts, individualism, Power distanced, Masculinity and Uncertainty avoidance. The first three parts gives Eagles opportunity while Uncertainty avoidance is a threat. By using this model, we can weight and evaluate Colombia’s culture. To provide a more vivid idea other countries will use as a comparison. While comparing Colombia with other Latin America Countries, the data shown that it maybe very similar is most ways.
Colombia’s Individualism is considerably low compare with other Latin America countries, 13 and 21. The low individualism index indicates that the society value loyalty, and commitment highly. Eagles customers in the United States has shown a loyalty attributes(SHTIFFIRG 2008). The collective society will allow Eagles to have an opportunity by introducing loyalty while establishing dealerships.
Considering that Colombia have a high difference between the rich and the poor, 49% of poverty (Benford 2010), the high power distance ranked 67 which reveals the imbalance in the society for both wealthiness and social power. This is an opportunity is because one of the value in Eagles product is Prestigious , when customers who believe in high power distance purchase an Eagles motor cycle, he/she may feel a status boost. Another influence on their and opportunity we have on higher power distance level countries is that, people from poverty maybe keen to life the “American Dream”. Through Globalization, the pop culture of United States has increase, where Eagles products are constantly ride by celebrities and appearing on the Movie screen. It would give the impression of high power/ rich people that are trendy will use Eagles motorcycle and reach result of being one of the key opportunities of power distance.
Alongside with the high power distance, Colombia also has a high masculinity ranking of 64 which illustrates the gender inequality. Eagles motor cycle is a signature of freedom, purchasing the motorcycle can be an imagery of having a fresh start and freedom, result as reaching equality in ideal.
As everyone knows, motorcycle is more dangerous compare to other automobiles despite the brands and quality. Colombians have a high uncertainty avoidance, which means they may not support the usage of motorcycle because it may be dangerous when accident happens. The Uncertainty avoidance level is 80 which is significantly high, the low tolerance of risk may cause a risk for Eagles since the restrictions and policy will be implemented. If a major accident happened that is cause by motorcycle, the country may increase the barrier of safety to lower the chances of uncertainty occurs. In addition to that, the society of Colombia may not be ready for the new idea of luxury motorcycle since it may not be common in Colombia.
Out of the four cultural analyses made above, it is obvious that it has more opportunities than risks. The risk of uncertainty level is hard to alter by Eagles Motorcycle, they must clearly point out their motorcycles are safe and will not create risks of customer’s life.
Having a free trade agreement with the United States is one of the major opportunity of the legal environment. It will allow Eagles to export their products into Colombia with lower tariffs( United States Trade Representatives 2006). This allows Eagles to have a lower cost of production which increase the advantage. Therefore, having a free trade agreement policy with United States gave Eagles an opportunity to establish dealerships at a lower price.
Other neighbors such as Ecuador do not possess the economic ability to digest excess supplies from Colombia. As a result, weak demand from neighboring countries cannot provide as a buffer for the occurrence of any incidents that might occur to hamper Colombia’s economic growth. United States has a free trade agreement with Colombia in year 2006 that gives advantage on both country reducing trade barriers (Defaer 2010, Smith 2008), once the relationship between the two trading partners breaks down(United States Trade Representatives 2006), there will be less exports to Colombia and therefore it is important to spread Colombian exports to surrounding countries. With weak demand coming from the surrounding countries, an excess in the amount of stocks would occur which will be detrimental to the economic strength of Colombia (STUMO 2008).
The free trade agreement between Colombia and United States can be simplified into a basic game theory model. Colombia has bad reputation of betraying their trading partners (DAMME 2010). As the logic of game theory, United States was hoping for a stag hunt style game theory, which if both parties ratifies then they can get the stag, if Colombia cheat, then both parties may not get the prize. This may cause a risk, because in this case, United States Government may end up expecting the worse and cheat no matter Colombia follows or not, breaching the Free trade agreement, then both countries will end up with no benefits to each other at the end. As a result, businesses will be the victims of the bad decisions made by the two governments.
There is an apparent lack of interest in Colombian peso and this is a crucial problem to be resolved. It is suggested that they revalue the currency (STRAITS 2010) in order to resolve the problem. Trade with neighboring countries should be taken into account, particularly since Venezuela had implemented a trade ban on Colombia (Anonymous 2010e). This will be affecting the export of Colombia which because Venezuela is one of the biggest importers of Colombian goods. This trading limitation is because Venezuela government trying to decrease the inflation, which also have military forces implanted on both countries’ borders (SWIFT, 2009). The decision can cause both economic development slow down and chaos for Colombia which will be a risk. Moreover, after the trade ban, the Trade Minister of Colombia Sergio Diaz-Granados has rush to claim a $800 million debt payment from Venezuela, however, this may cause heating up of two countries’ relationship as a result longer trade ban and possibly serious military actions taken by Venezuela.
Having a free trade agreement with United States is a plus for Eagles, however, the unstable situation and infamous for their trading agreement and weak relationship is fairly risky. Therefore, under the scope of government policies, it is risk over opportunity.
The air pollution in Colombia is being worsen due to the large amount of transportation, it already have reached to a hazard level that if the days are bad, it is suggested people should stay home(Diaz 2010). The pollution, smog, is caused by large amount of cars being stuck on the road. This can be an opportunity to motorcycles is because it is easier to continue traveling between cars while there is a traffic jam.
However, having a motorcycle requires exposed in atmosphere the whole time, if the smog is seriously causing trouble, customers may prefer a normal with air conditioned so that they can be healthier.
Eagles can design their motorcycle to have less pollution emission and advertise on single/couple travelers does not requires a four wheeled, instead picking a Eagles can save the environment and as a collectivist society, people will be willing to input effort for the greater good. So, it is an opportunity rather than a risk.
There has been a boom in the demand of motorcycles in the Latin American countries (Corredor 2002). It has been observed that Latin America has the 2nd highest increase in the demand of motorcycles, ranking just below the Asia Pacific (Paul 2007) in this respect. The increase in exports from major competitors proves that a similar increase in the demand of motorcycles (Farlex 2007) is occurring as well. Two major competitors in the industry, Honda and Mitsubishi, had increased their exports to 100,000 units to meet the increasing demand of motorcycles in Colombia (ANONYMOUS. 2010c, Anonymous 2010d). Although such statistics may vary with the actual statistics of each product, it is a sure indication of the high demand of motorcycles observed in Colombia. As a result of the steady increase in demand, Eagles might be able to gain a profitable market share during the boom in demand of motorcycles, especially since the target market is only 11.2% of the population, and thus has more room for growth..Nonetheless, Eagles may consider lowering their price or starting a new product line with cheaper motor cycle to compete with Toyota and Mitsubishi. It is hard for $20000 to compete with $600 especially in a developing country.
Colombia is a very attractive market which meets the requirements for a rising market. Even though there are several risks, the opportunity has outweighed them. While examining the risks, political threats are the most dangerous, as mentioned above, the intense situation between United States and Colombia may be complicated. If a breakage of trading agreement and friendship, the chaos will have a great impact and damage the business. However, most of the developing countries require a lot of risk to allow the business to become successful. Once the branding is built and recognized, more people will be attracted and the business will grow. Finally it, Eagles should investigate further and consider setting up dealerships in Colombia.
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