This teaching model relates to the case Polaris Industries Inc., Case #5-112–003.
©2012 by the Kellogg School of Management at Northwestern University. This case was
prepared by Ioana Andreas ’12, Sigmund Gee ’12, Ivi Kolasi ’12, Stephane Lhoste ’12, and
Benjamin Neuwirth ’12 under the supervision of Professor Sunil Chopra. Cases are developed
solely as the basis for class discussion. Cases are not intended to serve as endorsements,
sources of primary data, or illustrations of effective or ineffective management. To order
copies or request permission to reproduce materials, call 847.491.5400 or e-mail
cases@kellogg.northwestern.edu. No part of this publication may be reproduced, stored in a
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Kellogg School of Management.
ASSUMPTIONS
Labor Assumptions Used by Polaris
U.S. hourly wage $/hour 26
# of working months per year #12
Avg hours per year hours/year 2,080
U.S. employee severance cost $/worker 20,000
# of U.S. employees laid off workers 60
# of foreign employees hired workers 60
Operating Metrics
Production
Cost
Currency
Production
Cost
Transportation
Cost
Transport Cost
Multiplier
United States $/unit 400 158.75$ 1
Mexico MXN/unit 4,560 125.21$ 1
China CNY/unit 1,950 190.00$ 1
Capital investment
United States $–
Mexico $9,500,000
China $10,000,000
Annual demand for Side-by-side units/year 14,500
Tariffs (imports from China) 5%
Expected Exchange Rates Multiplier
Pesos 11.92 Pesos/$ 1
Yuan 6.47 Yuan/$ 1
Projected Annual Wage Growth
Multiplier
Mexico 7.1% 1
China 13.4% 1
ANALYSIS SUMMARY (in US$). We assume that Year 1 starts in 2011.
United States Mexico China
Capital investment – 9,500,000 10,000,000
Severance – 1,200,000 1,200,000
One-time expense in Year 0 – 10,700,000 11,200,000
Production cost 5,800,000 5,546,980 4,370,170
Labor cost 3,244,800 325,679 327,349
Transportation cost 2,301,862 1,815,540 2,755,000
Tariffs – – 356,259
Annual Cost Year 1 11,346,662 7,688,199 7,808,777
Production cost 5,800,000 5,546,980 4,370,170
Labor cost 3,244,800 348,942 371,286
Transportation cost 2,301,862 1,815,540 2,755,000
Tariffs – – 356,259
Annual Cost Year 2 11,346,662 7,711,462 7,852,714
Production cost 5,800,000 5,546,980 4,370,170
Labor cost 3,244,800 373,866 421,120
Transportation cost 2,301,862 1,815,540 2,755,000
Tariffs – – 356,259
Annual Cost Year 3 11,346,662 7,736,387 7,902,548
Production cost 5,800,000 5,546,980 4,370,170
Labor cost 3,244,800 400,571 477,643
Transportation cost 2,301,862 1,815,540 2,755,000
Tariffs – – 356,259
Annual Cost Year 4 11,346,662 7,763,091 7,959,071
Production cost 5,800,000 5,546,980 4,370,170
Labor cost 3,244,800 429,184 541,752
Transportation cost 2,301,862 1,815,540 2,755,000
Tariffs 0 0 356,259
Yearly expense Year 5 11,346,662 7,791,704 8,023,180
United States Mexico China
Transport cost / total cost 35.7% 4.9% 5.4%
Labor cost / total cost 25.4% 23.5% 34.8%
Discount rate 10%
Results
United States Mexico China
Net present cost (US$) 43,012,777 40,015,174 41,143,953
Savings vs. United States 0 2,997,603 1,868,824
International Labor Costs
International Labor Costs (Monthly Wages)
Year China Mexico China Mexico China Mexico
Yuan Peso Yuan Peso
1999 649.5 2392.0 3.7 13.8 – –
2000 729.2 2910.5 4.2 16.8 12% 22%
2001 814.5 3367.6 4.7 19.4 12% 16%
2002 916.8 3537.5 5.3 20.4 13% 5%
2003 1041.3 3737.7 6.0 21.6 14% 6%
2004 1169.4 3858.8 6.7 22.3 12% 3%
2005 1313.1 3983.8 7.6 23.0 12% 3%
2006 1497.2 4112.9 8.6 23.7 14% 3%
2007 1740.3 4246.2 10.0 24.5 16% 3%
2008 2016.0 4383.7 11.6 25.3 16% 3%
Mean 13.4% 7.1%
SD 1.6% 6.4%
Exchange Rate History
Year CNY/USD MXN/USD
2000 8.28 9.34
2001 8.28 9.66
2002 8.28 10.8
2003 8.28 11.29
2004 9.19 10.9
12005 7.97 10.9
22006 7.61 10.93
32007 6.95 11.16
42008 6.83 13.5
52009 6.77 12.63
62010 6.65 12.4
Mean (from 2005 on) 6.47 11.92
SD (from 2005 on) 1.08
Monthly Wage Rate
Hourly Wage Rate
Wage Growth Rate
SUMMARY OUTPUT (CNY vs. USD exchange rate)
Regression Statistics
Multiple R 0.92730711
R Square 0.859898477
Adjusted R Square 0.824873096
Standard Error 0.222890107
Observations 6
ANOVA
df SS MS F Significance F
Regression 1 1.21968 1.21968 24.55072 0.00773432
Residual 4 0.19872 0.04968
Total 5 1.4184
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 8.054 0.207499398 38.81457 2.63E-06 7.477889313 8.630110687 7.47788931 8.630110687
X Variable 1 -0.264 0.053280927 -4.95487 0.007734 -0.411931568 -0.116068432 -0.41193157 -0.11606843
There seems to be pretty strong evidence that the Chinese yuan has been strengthening since 2005.