Lado do Brazil is struggling to remain a profitable importer of cars in the Brazilian market. To remain profitable LDB needs to increase its sales and maintain its efficient cost structure. The recession, regulatory uncertainty, and increased competition are all factors that are reducing and threatening the sales and profitability of the company. In order to counter these threats and increase sales, LDB needs a more aggressive sales strategy, needs to continue to leverage its existing relationships with dealers, local parts manufacturers, and the local government, and should solely focus on being a low cost provider.
This should allow LDB to maintain profitability throughout the recession, and continue to be the import leader in a growing and underserved Brazilian auto market. Although the relationship with the Russian auto supplier (VAZ) is not the primary focus of our analysis, it is important to note that VAZ is in the midst of an uncertain economic and political period. Their ability to provide LDB with cars could be jeopardized, thus, a contingency plan is essential. LDB should explore partnerships with other automakers, Toyota or Hyundai. CURRENT CHALLENGES The most pressing challenge faced by Lada is declining sales.
In the second half of the year, sales declined consistently. LDB’s market share declined in Q4, indicating its competitive edge is diminishing. Mitigation of the challenges below is imperative. Market The Regulatory Environment is a hindrance to our price competitiveness and profitability. The primary issues are high tariffs and potential price freezes, but constantly changing rules (ex. tax exceptions, rate changes) threaten our competitiveness. High inflation and Foreign exchange risk are both consistent threats to our ability to compete in Brazil.
High inflation leads to constant re-pricing and decreases the availability of financing. It also leads to cruzerio devaluation relative to the dollar and has caused us to lose money on otherwise profitable sales in the past (taxis). Increased price competitiveness of the market is also of concern. Domestic producers have recently agreed to cut prices in exchange for tax breaks, and there is speculation of new low cost cars entering the market. Internal Parent Supply As the USSR transitions away from Communist rule to a free market economy, VAZ becomes unable to serve its demands for domestic and foreign supply.
The ability of VAZ to provide LDB with cars at a competitive price is at risk. In addition, theres are speculations that Fiat will purchase a 30% stake in VAZ, increasing uncertainty of the future of LDB’s parent company. RECOMMENDATION By enhancing sales strategies as outlined below, and by taking steps to protect our price advantage, sales should increase and we will retain our position as a price leader. Sales Strategies Refine Product Offering LDB’s value proposition is selling low cost vehicles. The higher priced Samara has consistently sold poorly and dilutes LDB’s brand.
LDB should phase out the Samara in favor of the Laika and Niva. The Laika has been the best seller and should continue to be popular as a cost conscious choice. The Niva’s strong summer sales, coupled with the less competitive S. U. V. market suggests that the Niva is the best opportunity for sales growth. Increase Direct Sales LDB should expand the direct import program. The elimination of a middle man is advantageous because it reduces consumer prices and can increase LDB’s profitability. Implement “Just-in-time Delivery”
To reduce dealer price risks and to incentivize dealers to sell more Ladas, LDB should leverage their bonded warehouse by executing a policy of “Just-in-time Delivery” of the cars. Instead of requiring dealers to front capital and use inventory space, they hold a minimum inventory and could purchase cars as needed knowing LDB would deliver promptly. This helps eliminate currency risk because money and cars are exchanged simultaneously. Argentina The pact between Brazil and Argentina offers LDB the opportunity to increase sales by selling cars in Argentina without additional tariffs.
If the local market continues to stagnate, this could be an alternative market. Supplier Strategy The supplier, VAZ, is operating in an uncertain economic environment and is experiencing difficulties meeting production. To mitigate this risk, LDB should consider partnerships with Hyundai or Toyota. These firm are both low cost manufacturers with an interest in the Brazilian market that would allow us to continue our import business in Brazil. ALTERNATIVES In the process of reaching the stated recommendations, alternative options were considered.
To increase sales, LDB could partner with a local bank to offer financing directly to consumers. This makes our car more accessible to consumers that don’t have the assets to purchase outright. Although we believe this would be an excellent opportunity to increase sales, financing is not a core competency of LDB, and finding a banking partner could prove difficult. An additional alternative would be to sell a more upscale car to cater to a demographic that has higher income, resulting in higher margins. Mercedes is fifth in production displaying that there is an available niche market with few competitors.
However, the higher-priced cars are contradictory to LDB’s value proposition and dilute the brand message as the lowest priced car on the market. Unlike Mercedes, Lada is not associated with luxury and prestige. LDB could increase its total demand by engaging in contracts to supply cars to the Brazilian government and large institutions. Due to experience with secondary sales platforms, LDB would be able to navigate relations outside of traditional dealer relations. The volume of the negotiated contracts would also allow for substantial discounts of 25% or more.
However, in a recession, institutions are unlikely to engage in financial commitments, even though our car is the lowest priced. This option may be feasible under more economically prosperous times when firms are actively expanding. CONCLUSION To increase sales and overall profitability in the current market environment in Brazil, LDB should refine its product mix to better fit the domestic demand. Additionally, LDB should further penetrate the market by focusing on building long-term relations with dealers and expanding to sell directly to consumers without access to dealers. While focusing on increasing market hare, LDB should diversify its supply channels to mitigate the risk of VAZ being unable to supply cars at a competitive price. While mitigating the risks in the short-term, these strategies position LDB for long-term success. 1. Figure 3 Figure 3 LDB ’s Business Process LDB ’s Business Process 2 . 2 . Daily . Daily . 2 . 2 . 1 . 1 . 4 . 4 . 3 . 3 . 1 . 1 . Direct Sales 1. Consumers contact the dealer and purchase the car in full at a 20% discount. 2. LDB sends the car to the consumer directly. 3. LDB exchanges Cr into USD daily to avoid currency risk Direct Sales 4. Consumers contact the dealer and purchase the car in full at a 20% discount. . LDB sends the car to the consumer directly. 6. LDB exchanges Cr into USD daily to avoid currency risk Dealer Sales 1. Dealers sell the cars to the consumers using our demo cars. 2. Consumers pay the dealer in Cr. 3. Dealers pay LDB in Cr. 4. LDB sends the cars to the dealers. (Just in time delivery) 5. LDB exchanges Cr into USD daily to avoid currency risk Dealer Sales 6. Dealers sell the cars to the consumers using our demo cars. 7. Consumers pay the dealer in Cr. 8. Dealers pay LDB in Cr. 9. LDB sends the cars to the dealers. (Just in time delivery) 10. LDB exchanges Cr into USD daily to avoid currency risk