Brazilian bus and coach manufacturer, Marcopolo, should build on existing strengths

through the continuation of international expansion initiative, focused specifically on

joint ventures in South America. By focusing on South America, they can retain
flexibility in their production process as well as focus on a more culturally familiar
market.

Marcopolo is a leading Brazilian bus body manufacturer. Since its

inception in 1949, the company has seen consistent domestic
growth, establishing a strong foothold and competitive advantage in
its country of origin with a 46% market share. Marcopolo’s core
competencies in production and customization have been critical to
its growth in Brazil and have allowed the company to expand its
presence in neighboring countries.

Marcopolo can attribute its early success to a three-pronged

internationalization strategy. First, Marcopolo’s production followed
a verticalization model where approximately 80% of parts needed to
produce a bus body were manufactured internally and only as
needed, i.e. “just in time” concept. Second, Marcopolo was able to
manage flexible production lines to meet varied requirements of
customers without compromising quality. Additionally, the company
forged partnerships with global manufacturers, allowing buses to be
produced on demand in other markets and reducing storage costs.
Finally, Marcopolo took pride in its customization capabilities which
addressed production needs and budget constraints of customers
from different cultures and regions.

Until 2005, this strategy proved successful in international markets,

reinforcing the company’s position as a formidable global player.
However, in 2006, fierce local market competition, higher cost of
raw materials and inputs, and increased export cost due to currency
fluctuations of the Real led Marcopolo to make strategic changes in
its export processes. From producing in-house, exporting
components, and doing final assembly in the destination country,
Marcopolo decided to capitalize on joint ventures with local partners
to both manufacture and assemble parts abroad. Though this new
strategy allowed Marcopolo to continue its expansion into other
markets, two factors limited the strategy’s effectiveness. First, they
faced major internal issues, such as lack of control and delays in
production. Concurrently, they faced turbulent macroeconomic
factors caused by weaker institutions, such as poor government
regulations and currency swings. As pressure to maintain growth
increases, Marcopolo needs to decide whether to focus its efforts
on the domestic market or continue its global expansion despite the
political and socio-economic instability and increased threat of
competition.

We identified three different areas for Marcopolo to find

growth. First, we discussed potential geographic expansion.
Next, we discussed investing more in research and
development. Finally, we discussed revamping the company’s
human resources strategy. Most of this discussion revolved
around geographic expansion. Specifically, the class
discussed the pros and cons of pursuing expansion in Latin
America and in Africa.

When discussing Latin America, there were a few different options

considered. One option was using Marcopolo’s current operations
in Mexico as a base to expand into the rest of Central America. This
would allow Marcopolo to increase demand for its Mexico
operations, which had been struggling with low demand in Mexico.
Simultaneously, it would allow Marcopolo to capitalize on the
emerging economies throughout central America. The biggest
challenge to this was that Marcopolo’s operations in Mexico were
already struggling due to the learning curve, and it didn’t seem clear
that this type of expansion could be possible until Mexican
operations had improved.

We discussed consolidating market share in South America. The

idea here was to use joint ventures to target countries close to
Brazil in geography and culture, allowing Marcopolo to dominate the
continent’s bus market. Targeting these natural markets would
decrease Marcopolo’s expansion risk because it would require less
investment in terms of human resources and operational
capabilities. Further, by using joint ventures, Marcopolo could
mitigate some of the currency risk of the increased Real value. A
challenge with this natural expansion included that Brazil’s
neighbors speak Spanish, not Portuguese. While the languages
and shared culture between Brazil and the rest of Latin America are
more similar than many other areas of the world, there is still a
cultural barrier Marcopolo would need to overcome to be
successful. During this part of the discussion, we also mentioned
why only focusing on Brazil wasn’t a great option, as Marcopolo
was facing much more intense competition in the Brazilian market
resulting in squeezed margins.

Outside of Latin America, there is the potential for a geographic

expansion into Africa. The idea here was to utilize the successful
joint venture in India with Tata Motors to begin exporting PKDs into
major markets in Sub-Sahara Africa. These markets are massive
and growing quickly, with a fragmented market presenting an
opportunity for growth. By utilizing the existing joint venture in a
country close to major East African port cities, Marcopolo can
minimize its investment risk and production costs. The biggest risk
to this strategy would be that most of Africa has little cultural
similarities to Brazil, with only a handful of Portuguese speaking
nations and only one Spanish speaking nation. However, Tata
Motors had significant experience operating in Sub-Sahara Africa,
giving Marcopolo a great risk mitigator by utilizing the already
existing joint venture.

Other areas of discussion include investing more in R&D.

Specifically, recognizing that what had made Marcopolo so strong
in the beginning was its ability to innovate through the PKD design
and building highly customizable products. If Marcopolo focused on
continued investment in R&D, it would be able to create more
innovative products to help continue building a competitive
advantage. Many pondered whether such an investment could even
lead to Marcopolo creating the first electric bus. This R&D
investment could help the company be successful in the existing
markets it is already in, as well as new markets. It would also help it
continue to consolidate market share and fight off competitors in its
home market of Brazil. The biggest risk to R&D investment is that it
may not lead to an improvement in Marcopolo’s offerings quick
enough to help continue building growth, as there isn’t a clear-cut
timeline for how long R&D investments would take to pay off.
Finally, the last area of discussion for growth was the idea that
Marcopolo could invest in HR. The idea here is that Marcopolo
could increase its expertise in various markets by developing
global-focused leaders from Brazil and hiring top level talent from
other countries with cultural similarities to markets that Marcopolo
was already in or considering expanding to. This approach would
help Marcopolo’s team deal with the complexities of managing a
global operation and expanding into cultural markets that differ
significantly from Brazil. However, this big investment is very risky
and will take a lot of time. Developing this type of globally capable
workforce in Brazil would take years of training and a dedicated,
expensive pipeline to maintain. Hiring this globally capable
workforce from abroad requires Marcopolo to compete with other
global MNCs, including those from developed markets that can beat
Marcopolo in pay and benefits.

In the end, the recommendation to Marcopolo is to build on its

existing strengths through the continuation of its international
expansion initiative, focused specifically on joint ventures in South
America. By focusing on South America, they can retain flexibility in
their production process as well as focus on a more culturally
familiar market. Simultaneously, Marcopolo could fine-tune its
human resources practices to increase its international appeal.
While it will take a few years to build a globally focused
management training system, by investing now Marcopolo can lay
the groundwork for further expansion down the road. Finally, the we
recommend the company establish a strategic framework to help
management prioritize geographic expansion, including key
performance metrics, a comprehensive country risk analysis, and
market sizing criteria, in order to more accurately assess the risks a
specific new market may impose.