Directory UMM :Data Elmu:jurnal:J-a:Journal Of Business Research:Vol50.Issue1.2000:

Rheem–Saiar
Guillermo D’Andrea
INSTITUTO DE ALTOS ESTUDIOS EMPRESARIALES

Sergio Postigo
INSTITUTO DE ALTOS ESTUDIOS EMPRESARIALES

Juan Florin
INSTITUTO DE ALTOS ESTUDIOS EMPRESARIALES

Saiar, S.A. was created in the 1940s as a joint venture between a diversified
Argentine business group with interests in petrochemicals and a European
manufacturer of water heaters to produce steel containers, but as frequently occurs in Latin America, the original objectives of the joint venture
were broadened to take advantage of the foreign firm’s expertise. Thus,
Saiar became the first company to introduce the tank water heater to the
Argentine market, which had previously relied upon pilot electric heaters.
As part of a global divestiture strategy, the European manufacturer sold
its interest in Saiar to the Argentine group, allowing the company to
continue selling under the Rheem brand name. Faced with economic
recession and a declining domestic market, Saiar embarked upon a strategy
of product diversification and geographic expansion. The company broadened its product line and began to export to less sophisticated markets

in the neighboring countries of South America and in the Caribbean.
Having thus gained international experience, it leaped into the far more
demanding markets of Australia and the United States in the early 1990s.
Saiar now faced an array of strategic decisions typical of the Latin
American company attempting to go global. The decision that faced a
company about to export to a new market was the selection of an appropriate distribution channel. In the U.S. market, Saiar has received three
offers: from a small family-owned company over which it would have a
strong negotiating position; from a Japanese company that saw potential
in adding Rheem-Saiar to its product line; and from a leading U.S.
manufacturer that, despite its size, proposed to begin with a very modest
sales volume. The decision that faced a company that has achieved limited
market penetration with exports is whether to move into overseas manufacturing. Saiar was considering this alternative in Australia because it would
enable the company to adapt its products to the needs of the local market
while cutting shipping costs by more than half. However, such a move
was threatening to local industry and could have provoked retaliation.
The Rheem subsidiary in Australia had threatened to retaliate by entering
the Argentine market. Finally, a company that had established an overseas
subsidiary was faced with the decision of when to “pull the plug” on a
losing operation. Saiar management had to decide what to do about its
Address correspondence to G. D’Andrea, Instituto de Altos Estudios Empresariales, IAE Universidad Austral, Aguero 2373 (1425), Buenos Aires, Argentina.

Journal of Business Research 50, 47–55 (2000)
 2000 Elsevier Science Inc. All rights reserved.
655 Avenue of the Americas, New York, NY 10010

Chilean subsidiary, Hometech, which was losing money as a result of low
sales volume and high fixed costs. The company has received an offer
from an important national distributor which would help gain volume
but would mean losing control. Apart from these decisions, the case raises
several issues about global strategies in Latin American companies that
deserve reflection and discussion. One issue is whether the formula used
by Saiar, to first gain a dominant position in the domestic market, then
export to less demanding neighbors, and finally to penetrate the toughest
world markets, is one which makes sense and may be replicated. A second
issue is whether the temporary role of the foreign partner is desirable,
and if so, how such temporary arrangements might be structured so as
to maximize technology transfer while benefitting both parties. J BUSN
RES 2000. 50.47–55.  2000 Elsevier Science Inc. All rights reserved.

O

ur international strategy has produced results. We
have gone beyond the stage of slow and sporadic
sales to continuous distribution of our products in
some overseas markets. But we are confronting new problems
in Australia, and we must decide how to distribute our products in the North American market. We must also decide
what to do about Hometech in Chile, and that decision will
have an impact on our export plans. . . .”
With these words Fernando Zapiola, general director of
Saiar S.A., welcomed José Flores, his export manager, in his
Buenos Aires office on a humid morning in late 1992. Both
had been worried about the scope of the company’s export
business, now in its fourth year, and a recent communication
from their competitor in Australia had brought the situation
to a head.

Company Background
Saiar, S.A. was formed in 1947 as a joint venture between
Garovaglio y Zarroquín (G&Z), a prominent Argentine busiISSN 0148-2963/00/$–see front matter
PII S0148-2963(98)00107-6

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G. D’Andrea et al.

ness group, and Rheem Manufacturing, a European multinational, for the manufacture of 20-litre metal pails for use in
the chemical, agrochemical, and oil industries. The G&Z
Group also manufactured textiles and household goods and
had investments in the petrochemical industry, mining, farming, animal husbandry, and insurance. Rheem was the leading
world producer of water heater tanks.
The company soon was becoming the leading metal can
producer in the Argentine market. It introduced gas water
heater tanks in Argentina in 1962, when the only water heaters
in use were of the automatic pilot type, that heated water
instantly by electric coils. Over the next 20 years, Saiar developed an important market for this new product. By 1982,
water heater tanks had captured 60% of the market, versus
40% for automatic water heaters. Two competitors, Orbis and
Longvie, had appeared in the water heater tank segment,

capturing 20% of the market between them.
As part of its worldwide divestment policy, Rheem Manufacturing sold its interest in Saiar, S.A. to G&Z in 1985. This
decision was hastened by the strong recession in the Argentine
economy and by the continued loss of the water heater market
share to lower-priced products offered by local competition.
However, the European company allowed Saiar S.A. to continue using the name “Rheem” on its products and in its
advertising.

stat-controlled air flow that regulated the temperature of the
environment by means of an adjustable flame, using French
technology obtained through a licensing agreement. Competing space heaters in the domestic market did not have a
thermostat mechanism and the flame; therefore, the temperature had to be controlled manually.

Company Products

Economic instability continued to prevail in Argentina
throughout the 1980s, and the domestic market shrank drastically as a result. Mr. Zapiola, eager to develop export markets
and stabilize the company’s financial situation, hired Mr. José
Flores to screen market opportunities abroad. Rather than
gathering information through foreign commercial attachés,

he resolved to visit the potential export markets personally.
During the following six months, he visited Australia, New
Zealand, Europe, the United States, and South Africa. “Only
in this way could I get a feel for which of our products would
have a chance of success in the marketplace,” he said. “At
times it was frustrating, not only because of the large number
of useless contacts, but also because we realized that most
of the products we made were not suitable in any of the
markets. . . .”
Mr. Flores concluded in his report, presented in December
1989, that the Rheem-Saiar products currently did not meet
the four requisites for success in the countries he visited:
quality, service support, flexibility to adapt products to local
markets, and low price. He recommended initiating efforts to
improve quality and flexibility, while seeking outside technical
support. He did note, however, that there was a potential
market for space heaters in the United States and that Australia
had a very interesting market potential for water heaters. On
the other hand, South Africa had very high tariff barriers, and
the company was precluded from selling space heaters in

Europe because of the licensing agreement terms with the
French.

The principal products offered by Saiar, S.A. in 1992 were
water heater tanks and space heaters. The water heater tanks
ranged in capacity from 60 to 150 liters. They heated water
by accumulation and maintained it at a given temperature.
The advantage over the automatic pilot heaters was that the
temperature of the water remained constant and did not vary
according to the number of electric outlets being used. Water
heater tanks were internally lined with enamel to prevent
corrosion and contained an exterior layer of polyurethane
insulation, a burner, and a thermostat. The gas connections
and burners were tested in 100% of the units before leaving
the production line to ensure that the gas combustion product
installed in the home was totally safe. Improvements in design
were continually made by the research and development department.
Sales in the domestic market were made directly to retail
household goods stores, to housing construction professionals, and to contractors. Proper presentation and merchandising
in the store windows of retail outlets were important factors

in sales to final consumers. Service was another important
factor, and a technical services department was created to
assist with installation and to make mechanical adjustments.
All products were sold with a one-year warranty. Sales of tank
water heaters were seasonal, with the peak buying period
occurring in the winter months between March and October.
Saiar, S.A. also sold gas space heater units with a thermo-

Exports
Faced with continued sales declines in the domestic market
and mounting losses, Saiar management began exporting to
the neighboring countries of Bolivia, Peru, Chile, and Paraguay
in South America and to Cuba and Trinidad and Tobago in
the Caribbean, attaining sales of US$128,000 in 1989. Domestic sales in that year were approximately US$20 million. In
that same year, Mr. Fernando Zapiola became general director
of the company. He was young and was described by acquaintances as “a hands-on manager [and] dynamic,” who had a
clear vision of the importance of exporting as a means of
improving the company’s competitiveness. In his first meeting
with the executive team, he said,
We are not taking advantage of our product technology,

a strategic advantage that made us market leader. We must
identify and develop new markets for our products since
the domestic market will not allow us a long-term growth.

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49

Table 1. Export Sales by Products and Year
Unit
(US $)
TTG
TTE
BP
BA

1988–1989

1989–1990

106
13,793.63
213
31,114.06
16,720
28,742.6
11,000
24,920

196
27,586.7
710
60,424.3
44,540
79,152.6
35,810
77,849.3

Variation
(%)
100
94
175
212

TEA
CON
VAR

14,390.41

500
5,000
179,383

100
1,147

1990–1991
611
83,528.58
477
34,466.62
75,340
102,122.4
63,920
134,022
189
22,018.73
3,390
44,643.9
96,153.04

Variation
(%)
203
243
29
72
100
793
246

Total
913
124,908.9
1,400
126,005
136,600
210,017.6
110,730
236,791.3
189
22,018.73
3,890
49,643.9
289,926.5

Abbreviations: TTG, gas thermotanks; TTE, electric thermotanks; BP, plastic pails; BA, steel pails; TEA, thermostabilizers; CON, containers; VAR, spare parts, tippers, clips, bags,
covers, etc.

During the 1989–1992 period, Saiar, S.A. sold products
valued at US$1.7 million in eight export markets (see export
sales statistics, Table 1). Of particular interest to Mr. Zapiola
and Mr. Flores was the company’s competitive position in
Australia, the United States, and Chile.

The Australian Market
On the basis of the Flores report, Saiar sought to have its
products approved by the National Regulatory Agency
(N.R.A.), which enforced some of the most rigorous quality
control standards in the world. During 1990, Saiar performed
all the necessary testing to have its products approved. At the
same time, information on the new market constantly was
being assessed.
The total market for water heaters in Australia was 500,000
units per year with a retail sales value of US$200 million.
Ninety percent of the units were thermal tanks, and the remaining 10% were automatic electric coils. Forty percent of
the total units, or 200,000, were thermal tanks fueled by gas,
with a retail sales value of $90 million.
The gas heating industry in Australia was dominated by
Rheem Australia, with a 95% share of the total number of
water heaters sold. However, its product was considered to
be high priced and unattractive. Rheem Australia relied upon
its strength as a market leader, but because it had only one
product to sell, its relations with marketing channels were
poor. The remaining 5% of the market was shared by importers who sold to retail outlets, contractors, and gas companies.
The gas companies represented 40% of the water heater market. They sold domestic and imported products to consumers,
contractors, and other gas companies by using salespeople
who received one commission based on the price of the product sold and another commission on the volume of gas that

was consumed. Advertising was placed mainly through the
specialized trade press, by using pictures of the product.
Saiar became associated with an importer-distributor in
Australia who had excellent ties with several of the most
important gas companies. Once its products had been approved by the Australian N.R.A., they were introduced in
the market under the brand name Cassis, the name of the
distributor. Annual sales were projected to be 1,500 water
heaters, which represented 3% of the market.
Because of their functional and modern design, RheemSaiar products were attractive to contractors and customers,
and this contributed to rapid initial acceptance. Just as rapidly,
however, complaints about the product came in about such
defects as noisy burner operation and uneven alignment of
burner ports. In one case, Mr. Joe Conway, service manager
for the International Gas Corporation Pty Ltd., repeatedly
warned of problems with Cassis water heaters supplied to one
of his major clients, Gas & Fuel Corp. of Victoria. On July
23, 1991 that client ordered a field inspection which revealed
nineteen different types of technical problems (see Field Inspection Report, Table 2). Soon afterward, Gas & Fuel Corp.
of Victoria suspended purchase of all Cassis water heaters.
Upon learning of this and other complaints in Australia,
Chile, and in the home market of Argentina, Fernando Zapiola
reacted immediately, issuing a memorandum to key Saiar
managers on July 31 in which he stated,
. . . I know, we lack processes, controls, technology, but
we have plenty of enthusiasm and we should also be deeply
worried about correcting these grave problems. We do not
have a future as a company and each of the four of us
(F.Z. included) will have to look for another job. I am
asking you to have a summit meeting and to diagnose this
sickness called no quality and that you propose how to
quickly solve these serious problems. In Argentina and in
the world, with all sincerity, there can be no more of this!!!!!

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G. D’Andrea et al.

Table 2. Field Inspection Report: Cassis A150N Storage Hot Water Services
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.

Burner operation noisy and slight lifting off.
Noticeable smell of gas on burner ignition.
Burner ports having uneven alignment and variation port sizes.
Delayed ignition.
Burner support bracket out of place. Burner supported only by supply pipe.
Excessive condensation.
Condensation overflowing onto burner ports due to burner not being level.
Condensation entering through burner ports and leaving via burner venturi.
No condensation tray provided.
Flue baffle changed by service agent prior to inspection because of condensation problems.
Flue baffle dislodged and sitting on burner. (Baffle support location is suspect.)
Replacement required as initial Cassis A150N H.W.S. had water leak.
Draincock knob only turns on shaft and will not operate.
Draincock leaking.
Draincock connection to cylinder leaking.
Piezo ignition bracket fixing to thermostat faulty.
Due to the combustible warning stickers location on the circular label at the top of the
appliance, this warning was not clearly visible in any of the installations.
18. Incorrect down draught diverter fitted.
19. Connection of piezo ignitor lead to spark plug subject suspect to damage when either removing
or replacing burner into combustion chamber.
20. Sharp edges and corners on appliance at entry to combustion chamber.

9
4
8
5
1
5
7
1
1
1
1
1
1
2
1
2
9
1
9
9

Available statistics indicate the Gas and Fuel Corporation had sold 31 Cassis A150N storage hot water services up to July 19, 1991. Technical Services personnel from Highett had
made inspections at nine of these appliance installations in the field with the results shown.

The memorandum produced results. On September 19,
José Flores received a fax from Mr. Conway that said, in part:
. . . we are very pleased with the new shipment of heaters.
The packing is good, the baffle is good, the sealant on the
thread of the draincock, unitrol and anode is good. The
pilot supply tube is correctly offset and the new burner is
much better. The ports of the burner are drilled even and
clean. My only reservations are in regard to the size of the
reservoir for holding the condensate. I feel it should be
double the volume. I also sent a fax to Dino on the 5th of
September with regards to my concern about the suitability
of the draincock. Apart from these two points we are very
pleased. . . .
As its quality problems were being overcome and sales
growth resumed, Saiar was confronted by a new threat. Rheem
Australia filed a legal accusation charging the Argentine company with plagiarism in the service manuals that accompanied
its products, and even advised Saiar to take its products off
the market. New complaints began coming in, and Mr. Flores
suspected that Rheem Australia was using its strong ties with
gas company executives to drive Saiar from the market. Furthermore, a recession in late 1992 produced a severe decline
in the market for gas appliances. Saiar products were not
immune to this recession and company management began
to consider options for continued growth in the Australian
market.
One proposed project was to build an assembly plant in
Australia in association with Cassis. José Flores commented,
. . . with this new project we could manufacture a water

heater different than the one we make in Argentina, that
would be better adapted to the Australian market, since
over there the equipment is installed in the exterior of the
houses. It is not profitable to make this in Argentina due
to the fact that its new design and larger size would increase
shipping costs. A specialized product, assembled in Australia, would allow us to penetrate a much larger market
segment, estimated at about 50% of that market. A quick
calculation also shows that we could save half of the shipping costs, which add up to US$50.00 per unit.
The assembly plant required an investment of approximately $1.5 million with estimated sales of $8 million within
five years, representing approximately 10% of the water heater
market in Australia. It would be complete by mid-1993 and
during the initial stage, from July to December 1993, approximately 500 units would be sold at a factory price of
US$100,000.
As Saiar management was evaluating the decision to invest
in Australia, Mr. Zapiola received a communication from
Rheem Australia’s executive general manager which read, in
part,
. . . we believe that Mr. José Flores has recently visited
Australia but did not make contact with us. We also understand that part of the reason for Mr. Flores’ visit was to
establish a final assembly plant for the Cassius [sic] branded
gas water heater using cylinders and components imported
from SAIAR. Clearly we would view this as an unwelcome
and unfriendly move which would negate any prospects
of a future relationship.

Rheem–Saiar

Since your visit we have received Justice Department
approval to purchase another water heating company in
the USA, Mor-Flo. The combination of the Bradford-White
business and the Mor-Flo business will make us the largest
manufacturer of mains pressure water heaters in the US
and worldwide. Off this substantial US base we would
consider taking a similar position in Argentina to that which
we believe you are planning in Australia to offset any potential erosion of our Australian business.
This is a serious issue and I would appreciate your
reviewing it with your people in the water heater business
and advising us of your intentions before we take any
further steps.
Yours sincerely.
Mr. Zapiola wondered whether this was an emotional reaction to Mr. Flores’ unannounced visit to Australia or an admonition that should be taken seriously.

The United States Market
Based on the conclusions of the 1989 Flores report, a decision
was also made by Saiar management to enter the United States
with its largest model controlled air flow space heater. The
size of the U.S. space heater market was approximately
250,000 units per year, huge in comparison to the Argentine
market. An 80% market share in Argentina would translate
to only a small niche market share in the U.S. Of the total
market, the controlled air flow segment of space heaters was
50,000 units per year. There was significant growth potential
since consumers replaced manually controlled space heaters
for controlled air flow space heaters.
The importance of personal safety and environmental concerns had led to strict laws in some states in which the use
of space heaters without a controlled air flow mechanism is
prohibited. An example was the state of California. Aware
that California was precisely the state where many new trends
started in America, Saiar management reasoned that the future
in the United States was great for the market segment in which
Saiar wished to participate. There was only one potential
competitor in this segment, who sold a product designed in
1950 with a rustic and old-fashioned appearance. The price
was the same as Rheem-Saiar’s product in Argentina.
In February 1991, Saiar contacted a consulting company
in Los Angeles to conduct a technical diagnosis of the product
changes that would be required for the U.S. market to obtain
technical approval from the American Gas Association (AGA),
which regulated the design of products that used gas to ensure
consumer safety. Management hoped to gain approval for
its product within four months, allowing the company to
begin selling by August or September, right before the winter
season in North America. The AGA granted product approval
in April 1992.
In mid-1992, the company initiated a direct marketing
campaign within mailings to contractors and distributors, pro-

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51

viding them with information about the product and asking
their opinion on the possible degree of client satisfaction,
expectations, and product name suggestions. Based on the
results of the direct mailing, a trip to the U.S. was organized
between July and August of 1991 to visit potential contractors
and distributors. After spending almost a month in the United
States, traveling through eight states and visiting 25 prospective distributors, both national and regional, Mr. Flores succeeded in identifying three potential national distributors who
were interested in selling the products in the United States,
two of whom were recruited by the direct mail campaign and
a third who was referred to the company by a third party.
The candidates were:
Controlled Energy (CE), a small organization in business for
10 years. It imported and sold approximately 10,000 water
heaters annually. The space heater would be an important
complement to CE’s narrow product line. CE committed
itself to sell 2,000 units in the first year and was anxious
to work closely with Saiar in penetrating the market.
Molitor, a Japanese company that sold high technology kerosene space heaters. These heaters had a temperature control
the advantage of not emitting exhaust, as controlled air
flow heaters did. Current sales volume was 5,000 units
per year. Molitor welcomed with pleasure the sarnple sent
by Saiar and saw great potential in adding the Argentine
space heater to their product line.
DESA, a U.S. manufacturer and market leader of manually
controlled space heaters. It sold 150,000 units per year
and was very interested in marketing the Saiar product as
a means of broadening its line of heaters. However, it
was felt that this company would be reluctant to share
information about the market. DESA proposed to start with
approximately 1,000 units per year. They also proposed
lower prices to ensure market penetration, even if this
meant sacrificing some quality.

The Chilean Market
By the 1990s, Chile was experiencing the most favorable economic situation of all the countries in Latin America, and its
continued prospects for growth were good. However, it suffered from problems of poor infrastructure and environmental
contamination. Natural gas lines as they commonly existed
in other countries were only installed in the southern part of
the country, in the Punta Arenas region. The capital, Santiago,
was fed with gas made of cracking fuel and distributed through
pipes. Construction projects to extend the natural gas line
system from Argentina to Santiago were in progress.
Air pollution was a serious problem in Santiago de Chile.
Every day the pollution index was announced along with the
temperature. During the day, regulations existed to control
vehicular traffic based on a license plate serial system. At times,
schools were closed because of environmental contamination.

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Before 1988, Saiar, S.A. regularly sold its products in the
Punta Arenas region. In 1988, Saiar participated in the wellknown International Trade Fair of Santiago, resulting in the
identification of several key contacts, and subsequently in the
sale of industrial containers. As the Chilean market became
more interesting to Saiar, and the natural gas line system
appeared a certainty, it considered setting up an office in that
country.
An engineer with close contacts in the gas companies was
hired to perform a market analysis. He reported that automatic
water heaters constituted 95% of the water heater market,
and that Chilean consumers had a negative concept of the
water heater tank because they believed that the tanks could
not supply enough water. Consequently, there was no distribution system for water heater tanks. Space heaters with controlled air flow were unknown. The commercial structure
was thus similar to that of Argentina in 1962. “We had the
impression that we had already seen this movie,” recalled José
Flores.
The Chilean makers of the water heaters were almost all
small job shop operations. Their design was antiquated and
their cost ranged in the neighborhood of $600. The producers
of space heaters in Chile were better established. An important
segment of the space heater industry was that of paraffin and
kerosene space heaters, and an even more important segment
was occupied by calalytic space heaters, originally imported
from Spain. Since catalyic space heaters had a gas cylinder
mounted inside them, they were ideal for a city with no
residential gas line systems.
Customs duties on water and space heater products were
15%. The Chilean regulatory agency was responsible for approving the product, but in addition, each shipment entering
the country had to be checked by testing a sample. The entry
was authorized by placing a stamp on the product.

Hometech
At the end of 1989, the subsidiary company was founded
with the name Hometech, S.A. Ninety-nine percent of the
shares were owned by Saiar, S.A. In accordance with Chilean
law, two of the four members of the board of directors were
Chilean, having been identified through connections that the
G&Z Group had in Chile. The other two board members were
Argentine. Beyond the top management level, the company
was staffed with Chileans. A marketing manager was hired
from a local university, as was a gas technician and were the
administrative personnel. The outstanding traits of this work
group were flexibility and very low operating costs.
The most important gas companies in the country gave
Saiar their support, not only because they were satisfied with
the products but also because they realized that the more
units they sold, the more gas would be consumed by the
population.
Nevertheless, initial operations were modest (Hometech

G. D’Andrea et al.

Table 3. Hometech, S.A.: Balance Sheet, December 30, 1990
Assets
Current assets
Cash
Merchandise
Value-added tax.
Dollar current acct.
Prov. taxes
Customers
Shareholders
Total current assets
Fixed assets
Tools
Furnishings
Leasing building and equipment
Accum. depreciation
Total fixed assets

10,000
16,274,325
4,438,600
2,164,823
107,372
7,704,114
3,820,500
34,519,734
417,253
985,996
2,291,682
(84,160)
3,610,771

Total assets
Liabilities
Current liabilities
Suppliers
Creditors (short-term)
Loan SAIAR
Accounts payable
Leasing payable
Bank
Total Liabilities
Capital
Paid-in capital
Current liabilities
Accumulated losses

38,130,505

34,546,000
27,188,514
(23,604,009)

Total Liability and Capital

38,130,505

24,080
22,388,859
3,129,259
273,170
374,821
998,325
27,188,514

financial statements are presented in Tables 3 and 4). Though
the number of water heaters sold was much less than the sales
projection, the Saiar executive responsible for the Chilean
market entry, Roberto Deleo, noted:
We sold more water heaters in Chile in 1990 than we had
in Argentina the first year. Everything improved even more
when we added the space heater to our product line since
people did not have a negative preconception toward this
product, as was the case with water heaters.
At a cost of US$80,000, Hometech organized an advertising
campaign for the space heaters called “Clean Air,” in recognition of the importance of pollution in Chile. The Rheem-Saiar
product took in and expelled air with minimum pollution,
and it was thought that this would make a strong impression
on consumers.
Only a few complaints were received from Hometech customers, and these were mostly due to defects in installation
and not to the quality of the product itself. The company
went so far as to offer a complete installation service in which

Rheem–Saiar

J Busn Res
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Table 4. Profit and Loss Statement (to December 30, 1990)
Sales
Other income
Cost of good sold

8,722,716
137,915
(6,370,632)

Gross Margin
Administration and sales costs
General expenses
Rent
Salaries and benefits
Advertising and promotion
Honoraria
Travel costs
Loss from previous period

2,489,999
1,702,874
1,098,567
2,428,240
6,970,927
285,105
329,189
12,677,997

Net operating income
Monetary Adjustments
Loss to 12/30/90

(60,109)
23,604,009

53

Table 5. Summary of Exports, by Product (April 1998–March 1991)
% FOB
TTG
TTE
BP
BA
TEA
CON
VAR
Total

11.79
11.89
19.83
22.35
2.08
4.69
27.37
100

FOB $US
124,908.9
126,005
210,017.6
236,791.3
220,187.3
49,643.9
289,926.5
1,059,311.9

(25,492,899)
23,002,900

Hometech paid all installation expenses, including masonry,
and provided a guarantee.
Saiar continued to provide a subsidy to Hometech that had
begun at the time the Chilean company was formed. As the
Saiar board of directors was pondering what to do with Hometech, Mr. Deleo informed Mr. Zapiola that he had received a
firm offer from the main domestic distributor of catalytic space
heaters in Chile. The offer included taking over the exclusive
distribution of all Saiar products. This Chilean firm, part of
a financial group headed by a gas company, already accounted
for 30% of Hometech sales. It had a large distribution network
at the national level and had a good customer service reputation. It had also hired, within the past few days, the marketing
manager of Hometech. See Table 5, Table 6, and Table 7.

Teaching Note
Case Purpose and Teaching Objectives
The purpose of this case is to analyze the strategic issues
facing a local manufacturer in the process of expanding to
different markets within and outside Latin America. The case
poses decisions in Saiar’s key markets of Australia, the United
States, and Chile. Learning objectives include:
• Understanding the choices on the sequencing of alternatives for a Latin American company entering international markets.
• Developing criteria with which to evaluate distributors
in a large, unknown market.
• Assessing the benefits of market expansion and the risks
of retaliation in establishing overseas manufacturing
facilities.
• Acquiring knowledge of the factors involved in evaluating subsidiary performance.

Suggested Questions for Discussion
1. What was the Argentine group’s objective in founding
Saiar and how did this objective change over time?
2. What is your assessment of Saiar’s expansion strategy?
3. What are the major problems and opportunities that
the company faces in 1992?
4. Which distributor would you recommend that the company select in the U.S.? Why?
5. How should the company react to the threat from
Rheem Australia? Should it pursue plans to install an
assembly plant in that country?
6. What should Mr. Zapiola do about Hometech? Why?

Case Analysis
WHAT WAS THE ARGENTINE GROUP’S OBJECTIVE IN FOUNDING
SAIAR AND HOW DID THIS OBJECTIVE CHANGE OVER TIME? At

the time of Saiar’s creation, the Argentine group (G&Z) had
petrochemical investments and Rheem produced heaters with
metal tanks, so it may be inferred that G&Z’s interest was in
backward integration into metal containers as a means of
import substitution. There was no initial interest in Rheem’s
water heaters. Indeed, the kind of heater produced by Rheem
was unknown in Argentina. Rheem no doubt saw this as a
way of gaining presence in the Argentine market, still one of
the world’s most affluent in the 1940s.
The decision to introduce tank-type water heaters in Argentina in 1962 signalled a new stage in the relationship between
Rheem and G&Z. Both partners saw this as an opportunity
to diversify beyond containers and launch a new product, and
the new objective was to become national market leader in
water heaters. This meant changing the household standard
from automatic pilot heaters to the storage tank water heater,
which was accomplished over the next 20 years by capturing
60% of the market.
With the departure of Rheem, Saiar set a new objective of
market expansion to neighboring countries and to the Caribbean. When this had been achieved, company management
set its sights on the larger but more demanding markets of
Australia and the United States.

54

J Busn Res
2000:50:47–55

G. D’Andrea et al.

Table 6. Export Sales by Product and by Country (Period 1988–1991)
TTG
Units
Australia
Bolivia
Chile
Cuba
Paraguay
Peru
Trinidad T.
Uruguay
Totals
Dollars
Australia
Bolivia
Chile
Cuba
Paraguay
Peru
Trinidad T.
Uruguay
Totals
Percentage participation
Australia
Bolivia
Chile
Cuba
Paraguay
Peru
Trinidad T.
Uruguay

320
152
407

34
913
3,200
18,217.84
62,221.3

TTE

BP

430
8
700
9

104,500
30,100
2,000

250
3
1,400

25
136,600

184,677.6
24,100
1,240

CON

110,730
100

164

3,790

110,730

189

3,890

236,791.3

18,984.23

VAR

48,557.9
1,086

206,453.5
39,020
804

12,469.72
124,908.86
25.62%
14.58%
49.81%

13,197.5
321.42
126,005

210,017.6

236,971.3

3,034.5
22,018.73

42.56%
0.61%
45.24%
0.86%

87.93%
11.48%
0.59%

100.00%

86.22%

49,643.9

41,900.49
289,926.7

97.81%
2.19%

0.60%
71.21%
13.46%
0.28%

10.47%
9.98%

0.26%

13.78%

nied by careful preparation, appeared to be paying off by the
early 1990s. Saiar began by exporting to its neighbors and to
less demanding markets in the Caribbean such as TrinidadTobago and Cuba. This allowed the company to gain the
experience required for success in more demanding markets.
On the negative side, with the exception of neighboring Chile,
export volumes to these small markets were very low in relation to the effort required.
Table 7. Summary of Exports by Country

Australia
Bolivia
Chile
Cuba
Paraguay
Perú
Trinidad T.
Uruguay
Totals

TEA

1,748.68
53,626.14
764
57,010.7
1,085.22

WHAT IS YOUR ASSESSMENT OF SAIAR’S EXPANSION STRATEGY? The strategy of gradual outward expansion, accompa-

Country

BA

Total
FOB
32,000
73,592.66
758,449.79
121,216.7
2,325.22
804
13,197.5
57,726.13
1,059,312

FOB
(%)
3.02
6.95
71.60
11.44
0.22
0.08
1.25
5.45
100

14.45%

Before exporting outside South America and the Caribbean,
the company conducted careful market studies. Some alternatives, such as Europe and South Africa, were eliminated. The
most promising opportunities were in Australia and the United
States.
WHAT ARE THE MAJOR PROBLEMS AND OPPORTUNITIES THAT

Two major problems had
arisen: first, the Rheem subsidiary in Australia was threatening
retaliation if Saiar moved to establish an assembly plan there.
Second, Saiar’s Chilean subsidiary, Hometech, was suffering
serious financial problems due to low sales levels and high
fixed costs. The major opportunity was in the United States,
where several potential distributors had made offers to the
company.
THE COMPANY FACES IN 1992?

WHICH DISTRIBUTOR WOULD YOU RECOMMEND THAT THE COMPANY SELECT IN THE UNITED STATES? WHY? The company has

received three offers for the distribution of its space heater line:
from Controlled Energy (CE), a small family-owned company
over which it would have a strong negotiating position; from
Molitor, a Japanese company that sees potential in adding
Rheem-Saiar to its product line; and from DESA, a leading
U.S. manufacturer that, despite its size, proposes to begin
with a very modest sales volume.

Rheem–Saiar

The advantages of CE were the strong motivation on the
part of this small company to succeed because of the opportunity offered by Saiar to complement its product line of water
heaters (sales of 10,000 units per year). It has committed itself
to sell 2,000 space heaters in the first year. Moreover, company
management believed that a relationship with CE would present an important opportunity to learn about the U.S. market.
Like CE, Molitor saw an opportunity to broaden the line
of products that it offered to its customers. It then offered a
high technology kerosene space heater but sold only 5,000
units. Molitor management saw “great potential” in the Saiar
product but did not commit itself to a specific sales target.
DESA is the only one of the three that appeared capable
of generating significant volume, selling 150,000 units of its
own space heater per year. Moreover, it offered to reduce its
margin in order to facilitate market entry. However, it insisted
that Saiar upgrade the product quality, and its commitment
is for only 1,000 units per year. Saiar management was concerned that DESA will provide them with little information
about the market. One might question DESA’s motives. Since
Saiar offered a more advanced technology (thermostat controlled versus manually controlled), there is a risk that the
distributor may incorporate the technology in its own products.
HOW SHOULD THE COMPANY REACT TO THE THREAT FROM
RHEEM AUSTRALIA? SHOULD IT PURSUE PLANS TO INSTALL AN

The Australian market
represented a significant opportunity for Saiar, and the construction of an assembly plant would allow the company to
increase its market share from 3 to 50%. In 1991, Saiar sold
320 gas water heaters, meaning the total market was approximately 11,000; so with an assembly plant, the company could
increase sales by around 5,000 units, for a total sales volume
of $8 million over the next five years (5,300 units 3 $300
per unit 3 5 years). Rheem Australia dominates the market
with 95%, but it has a very narrow product line, and there
is some dissatisfaction on the part of intermediaries. Saiar’s
products were well received, and there is evidence to indicate
that initial quality problems have been resolved to the satisfac-

ASSEMBLY PLANT IN THAT COUNTRY?

J Busn Res
2000:50:47–55

55

tion of the gas companies. Rheem understandably wanted to
preserve its monopoly, but Saiar should not be intimidated.
The opposing argument is that the penetration of Australian
market is not worth placing at risk the home market, where
sales volume is $20 million per year (though not all in water
heaters) versus the $1.6 million expected in Australia. The
threat of Rheem Australia was credible since it had already
purchased Bradford-White in the United States, and with the
purchase of Mor-Flo, it will apparently become the largest
water heater manufacturer in the United States and the world.
WHAT SHOULD MR. ZAPIOLA HAVE DONE ABOUT HOMETECH?
WHY? A third strategic decision facing the company was

whether to close its Chilean subsidiary, which had been losing
money. If the decision is made to continue, Saiar had to decide
whether to accept the offer of exclusive distribution that had
been received by the board.
The argument for closing the Chilean subsidiary is that
the company has already accumulated losses of $67,000, in
addition to a subsidy provided by Saiar and despite a costly
advertising campaign. The argument against closing is that
the subsidiary has been in operation less than two years, and
space heaters were added even later. First year sales of water
heaters were higher than in Argentina when that product
was first introduced. Moreover, the company has made an
investment in advertising for space heaters and the benefits
of the “Clean Air” campaign have not been fully realized.
If these arguments for giving Hometech more time are
accepted, Saiar must next decide whether to accept the offer
of exclusive distribution. It is from the country’s largest distributor of catalytic space heaters, with a large distribution network and a good reputation for customer service. Since the
firm is part of a financial group headed by a gas company,
Saiar might assume that it is financially solvent and has close
links to customers. It already sold 30% of Hometech products,
though one might ask why actual sales are so far off target.
Also, this same company apparently hired away the Hometech
marketing manager, which might raise some questions about
the ethics of its business practices.