Harding Tool Corporation

Paul CHEVRIER, Dimitri ESMAILZADEH, Thomas POLLIAND

ECE-Paris – 2014 - Crisis as opportunity

Background Companies:

Harding Tool Corporation : an American manufacturer of large and small machine tools and parts, gears, valves, and bearings, was a major supplier to industries and companies worldwide

Companhia Internacional de Comercio : a Brazilian commodities broker

Overseas Development Corporation :an American commodities broker

Harding Tool CorporationCompanhia Internacional de

ComercioOverseas Development Corporation

Main characters:

Lloyd Willcox : Overseas sales manager, Harding Tool Corporation

Jose Cabral : President, Companhia Internacional de Comercio

Julia Peters : Commodities broker, Overseas Development Corporation

Background

Presentation of the deal

Because of the rise of the U.S. dollar on foreign exchange markets and serious financial crises in many countries in which Harding did business, sales, particularly to Latin America, began to decline.

In the fall of 1986, a unique proposition was received from Companhia Internacional de Comercio: In exchange for US$400,000 in assorted gears, Harding would receive the equivalent in Brazilian shoes, which it could sell in the American market.

Presentation of “countertrade” ?

Countertrade or Barter : Exchange of goods or services directly for other goods or services without the use of money as means of

purchase or payment.

Countertrade start growing during the 1970s. Nowadays, it is estimated that countertrade accounts for between 20 to 25 % of total world trade.

At the start of it, it was mainly the developing country that were using it for common and basic goods.

Countertrade can also occur when countries lack sufficient hard currency.

Dialogue n°1

$400 000 worth of gears $400 000 worth of shoes

Harding Tool CorporationCompanhia Internacional de Comercio

(CIC)

Commission on the sale of the shoes : +7% sales worth $430 000

HTC doesn’t have the assurance to be paid

Call specialists to deal with the shoes will cost money

$9.60 for each pair of shoes

Dialogue n°1

Lloyd Wilcox Jose Cabral

Surprised and skeptical

Wants to talk with his associates and specialists

before giving an answer for the deal

Try to set Mr. Wilcox’s mind at ease

Advises on how to handle the situation

Agrees to send specs and samples

Wants more information and some samples

Exhibit n°1

Men Women

13 200 pair of shoes

31 670 pair of shoes

7, 7½, 8, 8½, 9, 9½, 10, Widths: B, C, D, some E, 11, 11½, 12, 12½

5, 5½, 6, 6½, 7, 7½, 8, 8½, 9, 9½, 10 Widths: some A, B, C

brown, black, gray, burgundy, leather uppers, crêpe soles, foam insole; natural dark brown

eather uppers and soles; natural light brown, natural dark brown, black, tan, navy

Exhibit n°2

Interested in selling the shoes, used to handle countertrade

Needs more information to proceed

A 2% commission on the sales

$9.6 => $9.4 for each pair of shoes

1978 1979 1980 1981 1982 1983 1984 19851000

1200

1400

1600

1800

2000

2200

2400

Total

Exhibit 3:Total Harding’s Gross Sales to Latina America, 1978-1985(in thousands of US$)

1978 1979 1980 1981 1982 1983 1984 19850

100

200

300

400

500

600

700

Argentina Brazil Colombia Venezuela Mexico Chile

Exhibit 3:Harding’s Gross Sales to Latina America, 1978-1985(in thousands of US$)

1978 1979 1980 1981 1982 1983 1984 19850

100

200

300

400

500

600

700

Brazil

Exhibit 3:Harding’s Gross Sales to Brazil, 1978-1985(in thousands of US$)

Brazil Economy

Currency Inflation (Cruzeiro-US Dollar) between 1978 and 1985 : + 50 000%

Foreign debt between 1977 and 1982 :+ 225 %

By the end of the 1970s, country is forced to meet payment interest

Self-sufficiency policy during the ‘70s : Promote import of basic industrial equipment

During the 1980s, also called the « lost decade », the GDP (Gross Domestic Product) increased at an average annual rate of only 2.9%.

Harding Tool sales rose

Harding Tool sales nose-dived

1978 1979 1980 1981 1982 1983 1984 198510

100

1000

10000

100000 Exchange rate Cruzeiro-US Dollar, 1978-1985(in thousands of Cruzeiro)

Exhibit n°4

Harding should add 5-10 percent on to the cost of the gears to cover additional

costs.

Harding needs to make sure they could actually sell the shoes.

The title to the shoes should be received before “even one gear” was shipped.

New situation for Harding Tool Corporation

No final decision taken during the meeting

Statement

Should we take the risk and change our business habits ?

What is the long-term vision of Harding tool

company ?

Solution 1 – Decline the offer

+• No risk with the shoes -

• Loss of a potential benefit

-• Loss of influence in the

Latin American market

Advantage Drawback

Solution 2 – Accept the offer

+ • Develop a new way of trading for the future

+

• Make profit

+ • Increase our influence on the Latin American market

-

• Take the risk to not sell the shoes

-• Pay the 2% commission

-• Appear desperate

Advantage Drawback

Solution 3 – Negotiate the offer

+• Bargain to gain a better

deal

+

• More time to think about it

-• Take the risk to cancel the

deal

-

• Increase the commission

Advantage Drawback

Solution 4 – Try with a sample of the shoes

+• Decrease the risk

+

• Check the integrity of the Brazilian company

-• CIC may lose patience

-• Slower income

-• Complicate the process

Advantage Drawback

Solution 5 – Create a subdivision to deal with the shoes

+ • Save money by not paying the commission

-• Take a big risk

-• Invest money

-• Take time

Advantage Drawback

Sum Up1

Reject the offer

5Create a

subdivision

2Accept the

offer

3Negotiate the offer

4Try a little

deal to test

Suggested Solution

2Accept the offer

1Reject the offer

Sum Up1

Reject the offer

5Create a

subdivision

2Accept the

offer

3Negotiate the offer

4Try a little

deal to test

Thank you for your attention.Any questions ?

Sources : International Economics

G.W. University

Analysis of recent trends in U.S. Countertrade