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FMG (Fortescue Metals Group Ltd) which is Australia’s third largest iron ore exporter, was founded in 2003. Since its establishment, with its 300 million Australian dollars of market value and successful operation continues to grow reputation at an astonishing speed and makes FMG become a new force in iron ore and a very important iron ore exports company in Australia. Its iron ore are mainly exported to China (Corporate Overview 2011). In order to meet the increasing global market’s demand, Group Company plans to expand its investment in Brazil, a country rich in mine resources to increase its annual output. As the international investment is very complex, this report will analyse the PESTL environments and further evaluate its SWOT to operate in the foreign country. At the end of the report, based on the findings, some recommendations will be concluded to solve the identified problems.
Brazil has just gone through the regular exchanging government with outcome of existing government led by Labour Party, Dilma Rousseff in the beginning of 2011 and ended 8-year governed by Lula (Raul Zibechi 2010). Brazil government remains relatively stable as in the last few years led by Labour Party the country’s economy has developed very fast and political environment remains stable without big riots happen. The newly elect government will continue to boost and deepen the policies applied by the formal government and lead Brazil to be prosperous.
Government and contribution
Brazil government under Lula applies a flexible diplomatic relations with other countries. Lula government has established a good foreign relationships and tries to avoid differences and conflicts with both developed and developing countries. Brazil positively participates in globalization. Brazil encourages foreign investment, and while foreign investors are granted national treatment, certain restrictions do apply to some fields. Brazil Government is trying to eliminate domestic poverty, strengthen education, sanitation, public security etc. to promote its stability (Alberto and Bandeira 2006, 20).
Under a stable political environment with encouraging foreign investment, it has built a general sound external environment to Fortescue Metals Group Ltd to invest in Brazil in terms of its secure working condition in the foreign country.
Brazil has established a set of regulations for foreign investment. It has extended the scope of foreign investment including petroleum, natural gas, mine exploitation fields. Brazil has established relevant mining policies (Mining Act) which must be followed by mine investors. According to the Act, investors must obtain the Exploration License, Exploitation License, Operation License and Local Permission etc.
Brazil has been pursuing a policy of trade liberalization and become increasingly open to various imports and exports. With the development of world economy, the demand of international markets is expanding, Brazil’s trade to other countries also increases a lot.
“Consolidation of Brazilian Labour Laws–CLT” is issued in 1943 to regulate labour rights in Brazil. Companies in Brazil should follow the regular procedure to hire an individual through the establishment of an employment relationship under the CLT’s rules and regulations. It has regulated 8 working hours per day and 44 hours per week in private firms (Labor Law in Brazil 2011).
Brazil has various kinds of taxes which are generally divided into federal tax, state tax, city tax levels. Brazil has favorable Taxation laws to foreign investors. In Brazil, there are mainly two taxes influencing manufacturing businesses including Income Taxes: Corporate Income Tax (tax rate: 15%+10% surtax), Social Security Tax (9% of Company taxable income) and Operation Taxes: Federal import taxes, Federal Consumption Tax, Sales and Services Tax (Johnson 2005, 220).
In Brazil, the legal policies for foreign investment is quite favorable. However, there are still some weak policies which investors should pay attention to, such as the labour law is not quite perfect, taxation laws are very complicated. Therefore, before investing in Brazil, one should conduct a detailed analysis on the relevant legal systems.
Bralian Central Bank announced to maintain 10.75% as the bench interest rate in Dec., 2010. But in Mar., 2011, the Central Bank increased the benchmark interest rate to 11.75% (Brazil Interest Rate 2011).
According to relevant statistics, inflation rate in Brazil is 5% in last year and in Mar., 2011 the inflation rate is reported at 6.01% (Brazil Interest Rate 2011). If Brazilian currency continues to appreciate and inflation rate continues to rise, it will greatly threaten Brazilian stable economy growth.
Currency exchange rate
The current currency exchange rate of BRL to USD is 1.67 to 1 (Brazil Interest Rate 2011). The exchange rate to USD has increased by 30% since 2009. It has already affected the Brazilian exports businesses.
Brazil is a market-based economy and is the largest economy in South America. Brazilian industrial sector is among the best developed in the region.
Since the awareness of protecting natural and energy resources is increasingly focused by public, Brazil as a country rich in resources also starts to convert to low-carbon economy as the future economic development trend.
Economic environment is very important for investors to consider when planning to invest in foreign countries. Generally speaking, Brazil’s economic environment is suitable for investment. But investors should also carefully watch the economic elements during the investing process.
Hofstede’s Cultural Dimensions
Brazil is a multi-racial country with white and black races, and mixed races with diversified cultures. It stresses individualism focusing on individual interests. Brazilian people accept inequality in power in organizations, which shows Brazil is a high power distance society. Brazil has a low uncertainty avoidance because people are prepared to face the changing or unpredictables. In Brazil, Women’s social position is not as high as men. It could be recognized as a masculinity country. Brazil Government is making efforts to make better preparation for national future development, so Brazil holds a high long term orientation (Fang 2003, 358).
Social-cultural envrionment is different from country to country. For foreign investors, such as Fortescue Metals Group Ltd, have to adopt the corporate strategies to suit the society environment in which to operate. It is also a great challenge for Fortescue Metals Group Ltd to manage and combine ethnic, culture and gender diversity in workforce.
Brazil is making efforts to perfect and reinforce its technological management, innovation systems. The Science & Technology Department has established the “Strategic plan” and “Innovation Act” for Science & Technology development. In addition, the country attach great importance to hold senior creative talents so as to improve its technological infrastructure and serve for industries better.
Brazil has the world’s most advanced Telecommunication equipment and network. The mobile communication system is also developing very fast. Its network is also becoming mature. Brazil Government has formed “National Communication Plan” to realize nationwide communication network (Brisolla and Etzkowitza 1999, 345).
Brazil has the following disadvantages in logistics network: inadequate infrastructure, slow-development of port system. Currently Brazilian ports are saturated with outdated equipment.
Fortescue Metals Group Ltd as a large mining company, technology is recognized as the backbone for its operation. Therefore, the technology environment including basic technological infrastructure, communication system, network, logistics in the foreign country are quite important for Fortescue Metals Group ‘s investment.
Fortescue Metals Group Ltd has the following internal strengths: strong market occupation, focusing on mineral exploration, expansion of market share (Herod, McGrath-Champ and Rainnie 2010, 150). In addition, Fortescue Metals Group Ltd adopts advanced exploitation technologies and skilled workforce which contribute to a high manufacturing efficiency.
The internal weaknesses faced by Fortescue Metals Group Ltd are generally reflected in the following aspects: recent decrease in iron mines globally, inexperienced operation in Brazil, Financial Crisis remains.
Political stability, economic growth, favorable foreign investment policy in Brazil gives Fortescue Metals Group Ltd a good opportunity to invest in Brazil’s mine industry. Foreign-funded enterprises enjoy national treatment in Brazil. Brazil is rich in energy resources, iron mine, which will result in high output and meet the iron mine demands of South America and Middle East markets.
There are several threats for Fortescue Metals Group Ltd to expand its operation including continual global economic recession, exchange rate risk, increase of labour cost, decrease in demand of steel, increasing costs for operation in foreign countries (Munck 2004, 150). Poor transport facilities and high transportation cost increases production cost. Too many and complicated regulations, statutes and sometimes, temporary regulations are enacted. In addition, new entrants (investors)/competitors with strengths will pose serious threats to Fortescue Metals Group Ltd to expand in Brazil.
Considering the weaknesses and threats faced by Fortescue Metals Group Ltd Rio Tinto, the following recommendations are listed to solve the situation.
Firstly, Fortescue Metals Group Ltd can try to cooperate with other mining Companies to strengthen its financing capability and enhance its competitive advantages.
Secondly, Fortescue Metals Group Ltd can improve or upgrade its management system to be more flexible since it may operate in a new environment which requires the management system to be more adoptable. To operate in foreign environment, it is unavoidable to face some risks such as assets damage, safety accidents, environment destruction, etc. resulting in decrease of Company reputation. Therefore, to strengthen the management is the key measure to enhance Group Company’s image and maintain a sustainable growth.
Fourthly, facing the huge labour cost, Fortescue Metals Group Ltd should develop a better salary & welfare plan to hold employees and improve employee’s loyalty or try to invest in countries with lower labour costs.
Lastly, Fortescue Metals Group Ltd should carefully study the related laws, regulations before expanding the operation in foreign countries so that it will reduce the further punishment charges by violating relevant laws or regulations.
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