American Rice Inc. in Vietnam

American Rice’s strategy is to expand internationally by using one of the three main rice manufacturers in Vietnam. The horizontal integration with Vianafood allowed ARI to expand internationally and enter new markets. This expansion within the same industry was necessary for ARI in order to achieve an economy of scale. This venture brings ARI a larger customer base, bigger facilities, the first American rice maker in Vietnam, a larger work force, lower cost production, new relationships with suppliers and customers, and tax benefits as a result of the joint venture.

ARI’s main input for the joint venture is to set up a management team that will run the operation and to consult the plant operation, plant design, improvements, and marketing. Also, ARI will provide machinery, equipment, technology and some working capital. In contrast, Vianafood’s main input was to provide a sufficient quantity and decent quality rice at a competitive cost, obtain government license, and tax benefits from the government. In addition, Vianafood will provide their Can Tho property, rice milling, equipment, labor, and other infrastructure at Can Tho.

Another aspect that ARI was able to benefit from is that Vietnam offered consistent exportable rice volumes. The Vietnamese rice industry did not overlap with the same markets as ARI. This can potentially increase the market share and sales for both companies. U. S. share of world rice trading was in decline and U. S. rice imports were rising. Vietnamese offered low cost rise production, room for expansion, increasingly business friendly. I believe that ARI is taking the right steps in order to become a bigger international competitor in the rice market.

However, I don’t think it will be enough to reach their goals. Also, I think that their plan for this joint venture is not coordinated tightly enough from a managerial aspect. ARI is not paying enough attention to the culture of this business in Vietnam and to the uncertainty and dependency of Vianafood on the government regulations that can dramatically affect the success of this venture. On the other hand, ARI research on the rice market in Vietnam proves that there is a potential of success and growth in this market.

Exhibit B shows that both sides mostly work in the same line of business, and both companies can benefit from the relationship. For example, ARI can benefit Vianafood with their higher quality rice, while Vianafood can benefit ARI with lower production costs. I believe that what will determine the success of the venture is whether ARI will be able to culturally develop their business strategy in a collaboration with Vianafood and whether the government regulation will change, and as a result force changes on the terms of the arrangement.

The expansion mode that ARI uses to expand into Vietnam is an Alliance, but more specifically, it is a joint venture mode. Both sides come into an agreement of investing funds and resources, and agreeing on a management team that will lead the venture. Yes, I believe that this mode is a good mode of expansion for both of the companies. Both exhibit A and exhibit C show the benefits of an alliance for both sides. This analysis shows that the risk to benefit ratio of ARI acquiring Vianafood is too great and therefore it will be much smarter to go with an alliance.

ARI has other alternatives for expanding into Vietnam. Those alternatives are; buying out an exciting company in Vietnam, merging with a company in Vietnam for a certain amount of equity, or a non equity merging. I think that their decision of expansion mode was the best choice out of these options and their potential of success in the Vietnamese market will be higher relative to the risk that is invested. Yes, I think that this investment will be necessary for the success of this venture.

In exhibit D, you can see the potential gains relative to the investment, which clearly shows that according to the net present value calculation the investment should be made. Adding to the finances the value from this investment is very substantial for the ability of both companies to be successful in the global rice market. If we play with the numbers a little and add depreciation to the equation we can see that the useful life of the equipment is 17 years, which can be depreciated in a value of $472,753 per year.

System savings plus market premium totals at $1,990,000, giving a total income from the investment after depreciation (before tax) of $1,517,246 per year. Also, the added value of this machinery (taking the financials out of the equation) is very substantial for this ventures success because it can make a higher quality rice with more nutrients and still be saleable at a competitive price. The parboil facility will increase the total yield of rough rice, prevent the loss of nutrients, salvage wet or damaged rough rice and rice germination.

Other than the health and quality benefits, the parboil facility has major economic benefits as well. The cost savings were the process of drying the rice, which made the whole process more efficient, the decrease in loss of rice, which was 30%, and the improvement of the whole grain rice yield of about 10%-20%, which increased the quality of rice as well. I believe after looking at the whole picture of financials and the added value that the parboiling facility will add it is an important investment for the success of this joint venture.