Case Study

Atlas Elctrica: International Strategy

Atlas Elctrica, founded in 1961 as a small factory in the province of Cartago, Costa Rica, had become the largest manufacturer of white goods in Central America by 1999 with sales of US$43 million. More than half of its sales came from exports to 24 Latin American countries.

In June 2000, Mr. Jorge Rodriguez, Atlas's CEO, was rethinking the company's internationalization strategy in light of the opportunity to acquire its largest regional competitor, La Indeca. Market share and profitability had been under pressure, and Rodriguez was looking for solutions.

Brief History of Atlas Elctrica

Richard Beck and Fred Aspinall, Costa Rican entrepreneurs who had started several companies, established what would later become the largest appliance factory in Central America in June 1961 in a small 30-square-meter building on a farm. At first, Atlas Elctrica was dedicated exclusively to the manufacture of commercial refrigeration equipment, including industrial freezers and coolers. A freezer would usually take from 30 to 45 days to be manufactured using manual methods.

The company initially served the Costa Rican market and later, when Costa Rica joined the Central American Common Market, the region. During the early common market era, regional tariff protection ranged from 120% to 150%.

In 1964, the company began manufacturing home appliances under contract with U.S.-based Admiral. While Atlas had carried out some experiments in home refrigerators, the contract marked its first home appliance production at industrial scale. Atlas-produced home refrigerators (sold under the Admiral brand) were well received by consumers, and sales began to slowly increase. In 1967, Atlas terminated its relationship with Admiral and entered into a technical licensing agreement with Kelvinator (United States), allowing the company to introduce Kelvinator-designed home refrigerators under its own Atlas brand for the first time.

In the 1970s, Atlas added gas and electric stoves based on technical assistance provided by Benavent (Spain). At the time, there was no local competitor in stove manufacturing. A decade later, the firm expanded into washing machines and microwave ovens, as well as the distribution of Moulinex small appliances and Ray-Ban eyeglasses.

In 1989, after experiencing difficulties with some product lines, Atlas decided to focus, discontinuing washing machines, microwave ovens, Moulinex appliances, and Ray-Ban eyeglasses. Atlas also decided to exit the commercial refrigeration business despite a leading position in the regional market, because despite representing about 50% of sales, the business generated less than 10% of company profits. According to Mr. Rodrguez: "Atlas Elctrica was facing a serious problem in the late '80s: we had too many models and our production system was very small-scale. The system was focused on the traditional manufacturing model. To be efficient you need to make long runs of a one single model, have huge inventories, and have all machines operating at all times. There was a lot of work in process and we were not profitable enough."

Operations

Atlas manufactured external parts and assembled final products but sourced most internal components from foreign manufacturers. In refrigerators, for instance, Atlas manufactured the outer metal cabinet, the inner box, and other plastic components but imported the compressor, evaporator, controls, and some other parts.

In the mid-1990s, Atlas had streamlined its refrigerator production with a major (US$15 million) investment in a flexible manufacture system (FMS) that allowed the production of different refrigerator models in batches as small as one unit. This allowed lower inventory levels, shorter delivery times, and greater flexibility. It was possible, for example, to deliver containers loaded with a mix of different refrigerator and stove models according to specific customer orders, reducing the need for inventory. Since the product was bulky and retail stores were relatively small, the ability to manufacture and ship small quantities was extremely valuable. In 1999, Atlas's stove production was modernized through a $12 million investment. The process of obtaining ISO 9001 certification was also underway. Microwave ovens were sourced from Korea, and washing machines (reintroduced in 1997) were sourced from Mexico and Korea.

Atlas's product development group was based in Costa Rica, with staff from marketing and engineering backgrounds. The group had the goal of launching at least three innovations per year in both refrigerators and stoves. AB Electrolux provided technological assistance when needed. Atlas constantly attended leading international appliance fairs such as Domotechnica in Cologne, Germany, to stay abreast of the latest product and other trends.

Atlas's Internationalization Process

Atlas initially served the Costa Rican market and later the countries of the Central American Common Market. It began exporting its commercial refrigeration line to Nicaragua and Guatemala in the late 1960s. After some years it was exporting throughout Central America, with bottling companies (Coca-Cola, Pepsi, and Central American breweries) as its main customers. Competition came only from imports, mostly from the United States.

In the early 1970s, Atlas began making inroads in Central America with its domestic appliances. Exports of refrigerators and stoves were initially opportunistic based on production surpluses in Costa Rica.

Atlas also started experimenting in markets outside the immediate region. In the mid-1970s, its commercial refrigeration product line was exported to Panama, Belize, Grand Cayman, Haiti, Aruba, Curaao, Trinidad and Tobago, and Surinam. In the mid-1980s, efforts were made to export commercial products to the United States, Mexico, Puerto Rico, and Jamaica. Although the Central American economies experienced severe problems in the early 1980s, Atlas continued to grow in both the commercial and the household segments

After the decision to narrow its product range in 1989, Atlas stopped exporting outside of Central America. In 1994, it restarted exports outside the region. After Costa Rica's signing of the Free Trade Agreement with Mexico, effective January 1995, Atlas began exporting to Mexico

In 1999, a subsidiary was established in the Dominican Republic to distribute Atlas products in that country. A free trade agreement with the Dominican Republic was imminent. The Dominican market was twice as big as the Costa Rican market, and there was no local refrigerator production.

Through its history, Atlas had entered into a variety of alliances with international companies In 1964, a manufacturing contract with Tyler Refrigeration Corporation had enabled Atlas to enhance its commercial refrigeration line. In 1967, a technology license with Kelvinator allowed Atlas to manufacture its own brand of refrigerators based on the Kelvinator design. Atlas's entry into the stove market was made possible through a technical assistance agreement with Benavent, which sold Atlas an exact replica of the dies used in its stove models as well as used production equipment.

In the early 1970s, White Consolidated Industries (WCI) licensed Atlas to manufacture and market the White-Westinghouse, Kelvinator, and other WCI brands in Central America. In the mid-1990s, Atlas established a joint venture with Sweden's AB Electrolux, which had acquired White Consolidated Industries in 1986. AB Electrolux had no connection to Atlas's main competitors.

Under the joint venture agreement, AB Electrolux acquired 20% of Atlas's stock via the purchase of additional stock issued by Atlas for this purpose. Under this agreement, Atlas's products gained access to new export markets through Electrolux's distribution network and technical assistance. AB Electrolux gained greater access to the Latin American market including Mexico, because of the free trade agreement between Costa Rica and Mexico.

The alliance helped Atlas expand its presence with Atlas brand appliances in various markets. In the Caribbean, expansion was carried out through White Consolidated channels in markets where WCI had a presence. Through Electrolux Home Products, Atlas expanded its penetration in South America (Venezuela, Peru, Argentina, and Uruguay), the Caribbean, and Mexico. The Atlas brand name was utilized in Central America and in selected Caribbean countries, while Atlas-made products were sold under the Electrolux, Frigidaire, and White-Westinghouse brands in northern South America and Mexico.

Issues in 2000

Atlas's profits had been under pressure since 1998, and its market share in refrigerators had declined from 75% in 1996 to 69% in 1998 in Costa Rica and from 40% to 37% in Central America overall. Atlas's major local competitor, La Indeca, was also up for sale. While La Indeca had always been profitable, its parent company had experienced serious financial problems that led to both La Indeca and La Curaao store chain being put up for sale. Mr. Rodriguez knew that a change in ownership would surely shift the nature of competition in the region.

Question 1 (10 points)

• Evaluate Atlas' internationalization strategy using at least two distinct theories on internationalization.

• What kind of strategy Atlas has pursued to be successful.

• Do you believe Atlas has done the right strategy for its business model?

Question 2 (6 points)

What kind of benefit did Atlas get when Costa Rica joined the Central American Common Market. Do you think tarde blocks are beneficial for countries in International Business?

Question 3 (8 points)

Mr. Rodriguez knew that a change in ownership [of La Indeca] would surely shift the nature of competition in the region." Expand this sentence by describing what Mr. Rodriguez sees in this "opportunity." What are the cost/benefit tradeoffs to acquiring La Indeca?

Question 4 (6 points)

Evaluate whether Mr. Rodriguez should consider the acquisition of

La Indeca when has had success in alliances.