Expanding Global Trade of Polaris Products And/or Services to Russia

Business Memo #2

Expanding Global Trade of Polaris Products and/or Services to Russia

Business Memo #2: Polaris Global Trade Expansion

Background:

        Traditionally known for building “American Made” products, we (Polaris Industries Inc.) are currently facing pressures to increase profits and to follow suit with our competitor’s actions of opening a facility outside of the U.S. in order to potentially decrease labor costs. As a member of the Supply Chain Department at Polaris, our team has been instructed to investigate opportunities for expanding Polaris’ global trade of products and services to Russia and to present a recommendation to top management regarding our findings.

Recommendation:

Our Supply Chain team has concluded that it would not be in the best interest of Polaris Industries Inc. to expand Polaris’ trade of products and services globally to Russia. We have deemed that this would be a strategically inefficient decision for the company, largely because global opportunities elsewhere may better align with our collaborative strategy.

Russia Trade Information:

        At the end of 2016, Russia ranked 30th of the top 30 trading partners with the United States (1). Russia’s primary export to the United States according to 2014 data was petroleum (~48% of all exports). Other commonly exported materials to the U.S. include iron (~10%), aluminum (~5%), and various chemicals (~5%) (2). Common imports from the United States to Russia include parts for planes, helicopters, and spacecraft (~32%), cars and car parts (~12%), and medical instruments (~2%) (2). Notice that parts from the transportation vehicles space are already being imported to Russia from the United States, highlighting the assumption that Russia is lacking in having the off-road vehicle core competencies that Polaris is looking for.

Justification of Recommendation:

While trade between Russia and the United States is occurring, it is important to highlight that this trade relationship is minimal in comparison to other countries in question around the globe. According the U.S. Census Bureau, the United States has held a trade deficit with Russia since 1993 (3), meaning the United States has consistently imported more goods (mainly petroleum) from Russia than it exports to them. Independently, Russia has seen a negative GDP growth rate for the last two years, ranging anywhere from -0.50% to -1.31% (4). Dropping oil prices for the last one and a half years as well as sanctions placed on Russia by the United States and other Western countries have contributed to this decrease in GDP (4). This GDP decline typically indicates high unemployment rates and poor buying power of consumers. When thinking about expanding Polaris products and services, consumers in this setback economy may not be willing or able to afford the leisure type of product that we produce. We make a potential assumption here in that a weak economy provides many people looking for employment, most likely at any (low) price. If we were to expand in to Russia at its current economy, we could leverage this by taking advantage of the willing workforce at low wages.

        Our Polaris Investor Relations Report for 2014 highlighted that Polaris sales of snowmobiles in particular decreased 28% largely because of the “ongoing Russian economic uncertainty” (5). We have identified Russia’s current economy and lack of consumer buying power as a risk. If we were to expand our product and service trade into Russia we fear a lack of loyalty to the Polaris brand and lack of knowledge of the Polaris product and service portfolio. With a market that does not prioritize Polaris off-road products, we fear that potential Russian employees may experience a detachment to the products and services themselves, severely affecting the “American Made” image and operational quality we value so dearly. Another risk identified is that there may be a knowledge gap experienced when doing business with Russian counterparts. We find that it would be absolutely necessary to increase education (also increasing the financial investment for this potential deal) of Polaris products and services and off-road vehicles in general to our potential employees in Russia in order to continue to create products and services that meet our quality standards.

        Another risk to consider when entering into a more extensive trade relationship with Russia is that of the sanctions currently placed on Russia by the United States. Russian military entered unwelcomingly into the Ukrainian territory of Crimea in March of 2014, resulting in the annexation of the territory that still is under the control of the Russian Military today (6). Because of these actions of the Russian Military, President Obama placed sanctions on behalf of the U.S. on specific Russian individuals involved in the incident, companies involved, and financial institutions (7). All of these sanctions have and continue to drastically affect the business relationships between Russia and the United States. We are assuming that these sanctions continue to contribute to the poor economy in Russia as well.

Future Growth Opportunity:

        Although we recommend not pursuing expanded trade of Polaris products and services to Russia, we have identified a possible opportunity if this idea were sought after. As the first few months of 2017 are behind us, we have seen that U.S. President Trump has placed a less adversarial stance on Russia than presidents in the past. According to investors, this seemingly cordial relationship between President Trump and Russian President Putin may open doors for Russia’s economy in terms of lifting sanctions and potential new trade agreements with the United States (8). It is important to note here that there is a huge risk being taken with this assumption of a positive relationship between these two leaders in that if this relationship turns sour, any agreements or business relationships between the U.S. and Russia may be severed at any time.  

Possibilities Elsewhere:

        Russia is a part of Eastern Europe and a close neighbor to the Middle East.  As a team, we have also concluded that these regions in general would not be the strongest strategic locations for expanding trade for Polaris. Many of these countries lack extensive trade agreements with the United States. For example, Russia joined the World Trade Organization just 5 years ago in 2012 (9). We identify a risk here in that it takes time to build relationships with countries that are strong enough to do quality business with. In order to be able to meet our competitor’s global strategies, we need to be timely with our expansion, and this current climate might hinder that. Aside from the tremendous help of the Suez Canal in Egypt “creating the shortest link between the East and the West”, many countries located in these regions are difficult and expensive to reach, more difficult and expensive to reach than other potential global business partners (10). Many of these countries are also natural resource (oil) based, meaning that their economies are largely built on the export of their prominent natural resources, not the leisure off-road vehicles that we produce.