Which location provides Polaris the greatest cost advantage? Calculate the NPV of the three locations using a 10% discount rate. Would your recommendation change if the foreign exchange rate increased or decreased by 15%? What other factors should be considered in making this decision?

Polaris Industries Overview

American manufacturer of All-Terrain Vehicles (ATV's), Side-by-Sides, and Snowmobiles Based in Medina, Minnesota Established in 1954 Strong player in the powersports market - $10 billion industry: Polaris Industries dominates 20% of market - Competitors: Yamaha, Honda, Arctic Cat, Ski-Doo, and Harley Davidson Total revenue grew more than 20% in 2010 ($2 billion) - Expected to grow 8-11% in 2011

Case Overview

The economic slowdown in the United States (c. 2010) has put significant pressure on Polaris' overall profitability The company is considering whether it should follow their competitors and open a manufacturing facility in a lower cost country (Mexico or China) or continue manufacturing in the United States By the end of the current year (2010) Suresh Krishna (VP of Operations and Integrations) needs to recommend to the CEO whether Polaris should build a new plant abroad or remain in the U.S.

Products

Polaris' strength is in the powersports market - ATVs, Side by Sides, Snowmobiles 1992: Entered into personal watercraft business - Exited in 2004 due to lack of success 1998: Entered into parts, accessories and apparel market - Remains small percentage of Polaris' total revenue 1998: Introduced an on-road vehicle to compete with Harley Davidson

Current Operations

- Headquarters: Medina, Minnesota - Product Development and Innovation Center: Wyoming, Minnesota - Three Manufacturing Facilities: 1. Roseau, Minnesota 2. Osceola, Wisconsin 3. Spirit Lake, Iowa Operate internationally in Canada, Northern Europe, and Australia Sources almost 40% of components and materials from outside United States (2010) - Up from 30% in 2008 - Increased its LCC (low cost country) sourcing

Considerations for Manufacturing Location

Future Sales Growth Shipping Cost Location of Demand Communication "Made in America" Reputation Moving Abroad = U.S.A. Layoffs - Total of 60 workers would be laid off, each paid a one-time severance of $20,000

Courses of Action

1. Move Manufacturing to China 2. Move Manufacturing to Mexico 3. Continue Manufacturing in the USA

China Option - Pros

Excited about future sales growth in emerging Asian markets Lower wages than U.S.

China Option - Cons

Concerns on ability to collaborate with Chinese factory due to time-zone differences and cultural dissimilarities Wages increasing in China Long lead time, highly variable Shipping companies claim 20 days, range is 19-33 days 5% tariff on Chinese imports More expensive start-up cost than Mexico ($10 million)

Mexico Options - Pros

Closer proximity to U.S - Majority of Side-by-Side customers in Southern United States - Expected near-term growth in this region - Increasing Oil prices, cheaper shipping costs vs. overseas transit Stronger cultural familiarity compared to China - Easier in-person collaboration - Significantly shorter lead time than China (ranges from 2 to 7 days) - No tariffs on Mexican imports (NAFTA) - Cheaper start-up costs than China option ($9.5 million)

Mexico Options - Cons

Polaris has always been associated with a strong "Made in America" culture Would result in laying off American Workers

United States Remain Option - Pros

Would align with Polaris's strong "Made in America" culture Would keep jobs in the U.S. No up-front capital expenditure Close proximity to headquarters and product development facilities - Quick and easy collaboration with design engineers and technical staff

United States Remain Option - Cons

Higher wage costs Upper management concerned about manufacturing talent gap in U.S. - Difficult to find skilled technical talent, easier in Mexico and China Expecting future sales growth to come from international markets

Recommendation

Polaris Industries should move production to Mexico - Lowest long-run financial cost - Though initially it appears cheaper to remain in U.S: - Long-run labor costs would quickly surpass Mexico total costs - More strategic international transition as opposed to China - Monterrey is in close proximity to key customer groups - Facility in emerging market could help Polaris capture predicted future international demand