Shipwreck Marine Recycling Ltd. — Case Study

FDI in Brazil — an attractive opportunity?
A case study by Diana Schalko, Mona Saß, Verena Riepl, Thorsten Meier,
Caroline Loudon, Peter Hrcka and Roman Abashin
International Business Applications SS2013 Group B
Shipwreck Ltd. — The Case
You work for the small, privately owned recycling company Shipwreck Ltd. The
venture buys private and state owned ships found sunk and abandoned on
seashores. These ships are disassembled on site and their parts are then sold
profitably all over the world for further processing. Recently, the venture founded a
wholly owned subsidiary in Spain and bought 35 ships for recycling purposes. To cut
them down the venture rented a dry dock and hired 80 locals. Unfortunately, your
colleague and his team got the job to manage the business activities in Spain.
However, your boss heard from his friend, a famous Brazilian soccer player, that
hundreds of sunken ships are scattered along the Brazilian shores. Now he wants to
invest in Brazil. You are assigned to develop an entry strategy for the Brazilian
market.
What are the key features of FDI? Which factors need to be considered when
selecting FDI locations? Would you recommend a different entry strategy? Apply
these questions to the case and explain your recommendations.
2

Hundreds of sunken ships scattered along the Brazilian shores?
7,500km
3
Earthstar Geographics SIO
© 2013 Microsoft Corporation © Nokia

FDI in Brazil
An attractive opportunity?
A case study by:
Diana Schalko
Mona Saß
Verena Riepl
Thorsten Meier
Caroline Loudon
Peter Hrcka
Roman Abashin

Content
A The ship recycling market:
Big opportunities, big threats
B Brazil: An emerging market
on the verge to a developed economy
C Choice of market entry mode:
Are FDI the best bet?
5

Ship recycling:
Big opportunities, big threats
6
A

Traditionally, ship breaking is the practice of beaching a
discharged ship and dismantling it by the use of unskilled labor.
7

Nowadays, more environmentally friendly, green methods of
ship recycling are being used (esp. in developed countries).
8

The price and value of a scrap ship is determined mainly by its
lightweight tonnage (not to be confused with gross tonnage).
Lightweight tonnage
= weight without fuel, cargo, crew…
9
kg
75-85 %
1 %
+
Steel scrap
non-ferrous metals(e.g. copper)
Machinery, equipment, fittings, furniture and
hazardous materials

$
Four factors have to be considered when recycling a ship that is
stranded: Weight, price, salvage and contents/surroundings.
10
? ? ?

The ratio of gross tonnage vs. lightweight varies a little
between different types of ships.
Ø19,000 tons
in LDT, derived from an average of 80,000 BRT per recycled ship
11

Ø19,000 tons
in LDT, derived from an average of 80,000 BRT per recycled ship
Market price: 400-500 US$ / ton
 Buying price: 7,6M - 9,5M US$
Covered by market price of ferrous
and non-ferrous metals +
equipment?
Being caught between both the shipping and steel industries
makes the price and scrap value of recycled ships fluctuate.
12

1. Salvage
2. Towage
3. Scrapping
The salvage and towage of stranded ships requires meticulous
preparation. Scrapping itself is another cost factor.
13

Questions about ownership status, condition and possible
contents / cargo have to be taken into account for evaluation.
14
? ? ?
1. Ownership
2. Corrosion
3. Contents

$
The ship recycling market is therefore largely determined by
insecurities and good research is needed to make a profit.
15
? ? ?

Brazil: an emerging market
on the verge to a developed
economy
16
B

Shipwreck Ltd. can take advantage of Brazil‘s attractive
economic opportunities.
17
Political
stability
&
economic
growth
Large domestic
market
- Customers
- Cheap labor
Highly growing
economic areas
e.g.
shipbuilding,
machinery,
construction

On the other hand, especially four areas are of concern when
doing business in Brazil.
18
Legal insecurity
Poor infrastructure
Time-consuming, expensive and
difficult market entry - bureaucracy
Volatile exchange rates

Choice of market entry
mode: Are FDI the best bet?
19
C

FDI
2020
Foreign Direct Investment (FDI)
refers to the establishment of a physical
presence in a foreign country —
the company itself crosses boarders
Strategies in FDI
– Green Field Investment
– Brown Field Investment

• large GDP and market potential
• advanced know-how
• skilled work-force
• low labor cost and wages
• low taxation
• lower environmental protection
• high tariff protection
• favorable laws and public incentives
• intentional and professional territorial marketing
Country attractiveness for investements is determined by
various factors.
21

To determine the attractiveness of FDI in Brazil‘s ship recycling
market we propose a four-tiered approach
1. Are there any (valuable) ships?
2. Ownership: permission granted?
3. Are there government incentives?
4. Hire local workers?
22
yes
yes
yes
yes
no
no
no
FDI is the best entry
strategy under certain
circumstances
no investment
no investment
risky & expensive

References
Mikelis, Nikos E. (2007): A statistical overview of ship recycling. In: International Symposium on Maritime Safety 2007, Security & Environmental Protection,
Athens, Greece.
http://www.imo.org/blast/blastDataHelper.asp?data_id=23449&filename=shiprecycling.pdf — Accessed on April 22nd 2013.
Mikelis, Nikos E. (2013): Ship recycling markets and the impact of the Hong Kong Convention. In: International Conference On Ship Recycling 2013, World
Maritime University, Malmö, Sweden.
http://www.imo.org/knowledgecentre/papersandarticlesbyimostaff/documents/shiprec%202013%20-
%20international%20conference%20on%20ship%20recycling.pdf — Accessed on April 22nd 2013
N.A. (2012): Ship-Scrapping Prices Plunge in Buyer’s Market: Freight. In: Bloomberg News.
http://www.bloomberg.com/news/2012-07-11/ship-scrapping-prices-plunge-in-buyer-s-market-freight.html — Accessed on April 22nd 2013
Seetharam, G.V. (1993): Analysis of the scrap ship market. Financial evaluations of the options. MBA thesis. In: City University Business School, London, UK.
http://gumatech.com/G-V-Seetharam-ANALYSIS-OF-THE-SCRAP-SHIP-MARKET.pdf — Accessed on April 22nd 2013
Helton, Doug (2012): What Happens After Abandoning Ship. In: NOAA‘s Response and Restoration Blog.
http://usresponserestoration.wordpress.com/2012/05/11/what-happens-after-abandoning-ship/ — Accessed on April 22nd 2013
N.A. (2007): Overview of Ship Recycling in the UK. In: Department for Environment, Food and Rural Affairs, Nobel House , London, UK.
http://archive.defra.gov.uk/environment/waste/strategy/documents/shiprecycle-strategy-overview.pdf — Accessed on April 22nd 2013
Sundelin, Oskar (2008): The Scrapping of Vessels – An examination of the waste movement regime’s applicability to vessels destined for scrapping and
potential improvements made in the IMO Draft Convention on Ship Recycling. Master’s Thesis. Department of Law, School of Business, Economics and Law,
University of Gothenburg, Sweden. https://gupea.ub.gu.se/bitstream/2077/18245/1/gupea_2077_18245_1.pdf — Accessed on April 22nd 2013
23

Backup
Additional figures and analysis
24

Brazil is a hierarchical, long-term oriented, high-context society
with a strong need for laws but little impetus to obey them.
PDI = Power distance
IDV = Individualism
MAS = Masculinity
UAI = Uncertainty avoidance
LTO = Long term orientattion
http://http://geert-hofstede.com/brazil.html
25

Using steel scrap has several environmental advantages
0
0.2
0.4
0.6
0.8
1
1.2
0
0.2
0.4
0.6
0.8
1
1.2
Recycling Savings
Iron ore
Coal
Recycled steel
26
Air pollution:
86% less
Water usage:
40% less
Water pollution:
76% less

Shipbreaking workers‘ GDP-adjusted wages in Bangladesh are
not that low in comparison to developed countries
Bangladesh United Kingdom
Unskilled pay / day $ 4.4
Skilled pay / day $ 8.6
GDP / capita (2011) $ 743 $ 39,038
GDP-ratio (2011) 1 52.5
Equival.: Unskilled/day $ 231
Equival.: Skilled/day $ 452
27
http://www.imo.org/knowledgecentre/papersandarticlesbyimostaff/documents/shiprec%202013%20-%20international%20conference%20on%20ship%20recycling.pdf p.14

Deadweight vs. Gross Tonnage vs. Lightship weight
28

Average recycling tonnage by year
29

Average age of scrap ships
30

Average price per ton
31

Leading recycling states (tonnage)
32

Leading recycling states (market share)
33

Example calculation
34
Ship weight 19,000 LDT
per LDT Scrap ship price min 400.00$
per LDT Scrap ship price max 500.00$
total Scrap ship price min 7,600,000.00$
total Scrap ship price max 9,500,000.00$
per ton Ferrous scrap price 1,322.77$ 0.6 per lb
per ton Non-ferrous scrap price 2,976.24$ 1.35 per lb
Ferrous content min 75%
Ferrous content max 85%
Non-ferrous content 1%
Ship value min 19,415,012.45$
Ship value max 21,928,282.67$

Shipwreck Marine Recycling Ltd. — Case Study

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