1. How would you convince Dow headquarters to invest in the project? What are the key risks behind it?
There are several reasons to support the project.
First of all, From Dow’s performance, sales of chemicals and metals including the ethylene sales increases 7% in 1994, and then 34% in 1995. Sales of Plastics including polyethylene increase 22% in 1994, and 28% from in 1995.This high growth rate especially in 1995 attributes mostly to the high growth in European market (33%) and rest of the world (24%). Also, the demand for polyethylene in Latin America is expected to triple in next ten years. With a globally expanding market, Dow has to increase its capacity to at least maintain its market share. An acquisition seems to be a good way to increase its production capacity.
Secondly, PBB and Polisur have a natural advantage of location. They are close to two largest Argentine gas basins, Neuquen and Austral, which provide ample raw material for the production of ethane. Easy transportation through maritime, road and rail ensures low cost of transportation. The proximity to Buenos Aries ensures easy access to nearly 50% of the Argentine market which is expanding fast because of improving standard of living. Service infrastructure and high educated human resources also make PBB and Polisur attractive to Dow. With the acquisition, Dow not only expands its capacity, but also gains easier excess to raw material as well as a huge domestic market.
Moreover, Argentine economy becomes more open in 1995 with the removal of all duties between members of Mercosur. Hence, the Latin American Market implies higher profit margin than before. Gaining access to the market and increasing scale to cover the increasing demand in this market are crucial to Dow’s plan to control.
Although the project is highly profitable and strategically crucial, there are several risks behind it.
First, currency risk is likely to happen as Argentina had experienced more than 8 major...