INTERNATIONAL BUSINESS PROJECT PART 2 CIA - II

Date: Feb 27, 2013

Submitted by, Karanjeet Sharma, 1121013, Section I, II yr MBA Marketing, CUIM.

TABLE OF CONTENTS

S.NO. 6 7 8 9 10

TOPIC
FINANCIAL AND FOREIGN EXCHANGE ASPECTS OPERATIONAL ASPECTS INTEGRATED STRATEGIC ASPECTS OPPORTUNITIES FOR IMPORTS FROM OTHER NATIONS (HOST COUNTRIES) FUTURE PLANS

PAGE NO. 3 6 12 15 16

6. FINANCIAL AND FOREIGN EXCHANGE ASPECTS

6.1 Taxes-Taxes are generally classified asI. II. Direct Taxes- Taxes are calculated directly on firms icome. Indirect Taxes- Taxes applied to non-income items, such as value added taxes, excise duty, tariffs and so on. a. MalaysiaCorporate tax rate- 25% Upto 500,000 ringgits- 20% of the total profits Above 500,000 Ringgits- 30% Resident companies with a paid up capital of MYR2.5 million and below (as defined) at the beginning of the basis period for a Year of Assessment (YA) are subject to a corporate income tax rate of 20 percent on the first MYR 500,000 of chargeable income. For chargeable income in excess of MYR 500,000, the corporate income tax rate is 25 percent. Leasing income (from moveable property) derived by a permanent establishment in Malaysia is taxed against a rate of 25 percent whereas a non-resident corporation with no Malaysian permanent establishment is taxed against a rate of 10 percent. A special 5 percent rate applies to corporations involved in qualified insurance businesses. Income generated by a life fund of an insurance company is taxed against a rate of 8 percent. A non-resident corporation with shipping or air transport income may also benefit from a special tax regime. Income of resident corporations derived from the transportation of passengers or cargo on Malaysian ships is exempt. Companies engaged in petroleum operations are subject to a rate of 38 percent. 1 Malaysian Ringgit = 17.38 INR b. Sri LankaCorporate Tax Rate- 28% The corporate income tax rate is 28 percent (effective 1 April 2011).

Small companies (with taxable income not exceeding LKR5 million and not belonging to a group of companies) are taxed at 12 percent. Certain sectors enjoy concessionary rates, such as exports (other than traditional products), tourism and construction are taxed at 12 percent, and agriculture which is taxed at 10 percent, with an exemption on offshore services. Companies

engaged in liquor or tobacco products are taxed at a higher rate of 4 percent. The social responsibility levy of 1.5 percent on income tax was rescinded effective 1 April 2011. A deemed dividend tax at 15 percent is applicable for non-declaration of at least 10 percent of distributable profits. 1 Sri Lankan Rupee= 0.42 INR c. TaiwanCorporate Tax Rate- 17% The corporate tax rate is 17 percent. The 17 percent rate is applicable to income in excess of TWD 120,000. However, the income tax payable shall not exceed half of the part of taxable income that exceeds TWD 120,000. 1 New Taiwan Dollar = 1.82 INR 6.2 International cash flow management The management of cash balances owned by the firm held by banking and other financial institutions. Financing Cash Flows- The servicing of existing funding sources, interest or existing debts and dividend payments to shareholders constitutes potentially large and frequent cash flows. We will apply periodic additions to debt or equity through new bank loans, new bond issuances, or supplemental stock sales may also add to the volume of financing cash flows in the multinational firms. Intra firm cash flows and transfer prices- Cash flows between our Indian parent and Malaysian subsidiary will be both Operational and Financial in nature. The sale of the major product line to the Malaysian subsidiary creates intra firm account payables and receivables. These transactions can either be in INR or Malaysian Ringgits. o Transfer Prices- It will be the price at which we will be selling to our foreign subsidiaries. Cash Managemento Netting- Cash flow coordination between a corporations global units so that only one smaller cash transaction should be made. Like we will be having exchanges

between the parent body and the subsidiaries in different currencies it will help us to save from currency exchange charges. o Leads and Lags- The timing of payments between units of multinationals is somewhat flexible. Again, this will allow the management of payments between Indian and Malaysian or Sri Lankan subsidiaries to be much more flexible, which will allow us to position our cash flows where it is most favorable, but also helps to manage currency risk. For ex. If our foreign subsidiary is expecting its currency to fall in value relative to US currency may try to speed up or Lead its payments to parent. Similarly, if the local currency is expected to rise versus the Dollar, the subsidiary may want to wait, or Lag, payments until exchange rates are more favorable. Re-invoicing- We can also use the re-invoicing strategy in this we will employ one office or a center or subsidiary that is more economical to take ownerships of all invoices and payments between units. The site for re-invoicing center will have lower tax rates and fewer restrictions. It will allow us to take advantage of lower tax rates. 6.3 Foreign Exchange Exposure Our firm may be exposed to three kind of Foreign exchange exposure. These are1. Transaction exposure- It is the potential for currency losses or gains during the time when a firm completes a transaction in a foreign currency- For ex. If we are sending our products to US and receiving payments in US Dollars than it will be the gain or loss that I will incur in converting payments received into local currency. 2. Economic Exposure- This is a risk to our firm wherein our long term cash flows will be affected, positively or negatively, by unexpected future exchange rate changes. 3. Translation Exposure- This is the potential effect of a change in currency values on a firms financial statements.

7. OPERATIONAL ASPECT
Plant Location The geographical location of the final plant can have strong influence on the success of the industrial venture. Considerable care must be exercised in selecting the plant site, and many different factors must be considered. Primarily the plant must be located where the minimum cost of production and distribution can be obtained but, other factors such as room for expansion and safe living conditions for plant operation as well as the surrounding community are also important. The location of the plant can also have a crucial effect on the profitability of a project. The choice of the final site should first be based on a complete survey of the advantages and disadvantages of various geographical areas and ultimately, on the advantages and disadvantages of the available real estate. The various principal factors that must be considered while selecting a suitable plant site, are briefly discussed in this section. The factors to be considered are:

1. Raw material availability. 2. Location (with respect to the marketing area.) 3. Availability of suitable land. 4. Transport facilities. 5. Availability of labors. 6. Availability of utilities (Water, Electricity). 7. Environmental impact and effluent disposal. 8. Local community considerations. 9. Climate. 10. Political strategic considerations. 11. Taxations and legal restrictions Our plant will be located at Gihlot near Alwar, Rajsthan . Reason for setting plant at Gihlot Ghilot is located approximately 100 km from the Delhi airport, off the Jaipur-Delhi National Highway (NH-8) along the interstate natural gas pipe-line. The Zone promises to be an ideal

location for units manufacturing ceramic floor tiles & wall tiles, sanitary ware, porcelain & bone china tableware, ceramic colors & pigments, glass insulators, float glass, bio ceramics, refractories and industrial ceramics. 7.1 Sources of supply for Raw Material Rajasthan is endowed with rich traditions in the mining of ceramic materials. The deposits ofBall clay and fire clay Kolayat Silica Sand - Bundi Feldspar -Beawar and Ajmer Gypsum- Nagaur, Ganganagar and Bikaner, China Clay - Neem Ka Thana Limestone -Gotan, Talcum from Dausa Dolomite - Bhilwara, Alwar and Udaipur Our companies headquarters in respective countries will be located ina. Sri Lanka- Colombo Reasons for choosing Sri lanka The Sri Lanka Ceramics industry has some significant operational strengths, including a highly skilled workforce, relatively low labor costs, excellent management at the factory level, and design confidentiality/integrity. Total industry employment currently stands at approximately 20,000 thought the quality of the workforce is considered sound, inflation and rising wages have been fast eroding the advantage of low cost manufacturing. b. Malaysia- Sepang Developed Infrastructure Malaysia's persistent drive to develop and upgrade its infrastructure has resulted in one of the most well-developed infrastructure among the newly industrialising countries of Asia.

Efficient

Seaports

International trade, especially seaborne trade, has traditionally been the lifeblood of Malaysia. Today, 95% of the country's trade is by sea via Malaysia's seven international ports - Penang Port, Port Klang, Johor Port, Port of Tanjung Pelepas, Kuantan Port and Kemaman Port in Peninsular Malaysia and Bintulu Port in Sarawak. Hong Kong-based Cargonews Asia placed Port Klang and Port of Tanjung Pelepas among Asia's top ten best seaports and top ten best container terminal operators. Industries in Malaysia are mainly located in over 200 industrial estates or parks and 13 Free Industrial Zones (FIZs) developed throughout the country. New sites, fully equipped with infrastructure facilities such as roads, electricity and water supplies, and telecommunications, are continuously being developed by state governments as well as private developers to meet demand. c. Taiwan- Yingge For the past two centuries, Yingge has been known as the ceramics center of Taiwan. The towns cobblestone-lined Yingge Old Street . Japanese colonial-era architecture and world-class ceramics museum are all especially picturesque in the autumn sunshine. According to local tradition, the seeds of Yingges flagship industry were planted when a potter from Guangzhou Province, Wu An , settled in the area 200 years ago. The abundant forests and ample coal deposits around Yingge provided plenty of fuel for kilns and the city is still known for the manufacture of plumbing fixtures and cable insulators, as well as the abundance of ceramic dishware, fine-art pieces and kitsch available for tourists to purchase. 7.2 Transportation It is quite important to evaluate the transportation risk in international trade for better financial stability of export business. About 80% of the world major transportation of goods is carried out by sea, which also gives rise to a number of risk factors associated with transportation of goods. The major risk factors related to shipping are cargo, vessels, people and financing. So it becomes necessary for the government to address all of these risks with broadbased security policy responses, since simply responding to threats in isolation to one another can be both ineffective and costly. While handling transportation in international trade following precaution should be taken into consideration.

In case of transportation by ship, and the product should be appropriate for containerization. It is worth promoting standard order values equivalent to quantities loaded into standard size containers.

Work must be carried out in compliance with the international code concerning the transport of dangerous goods.

For better communication purpose people involve in the handling of goods should be equipped with phone, fax, email, internet and radio.

About the instructions given to the transport company on freight forwarder. Necessary information about the cargo insurance. Each time goods are handled; there risk of damage. Plan for this when packing for export, and deciding on choice of transport and route.

The expected sailing dates for marine transport should be built into the production program, especially where payments is to be made by Letter of Credit when documents will needs to be presented within a specified time frame.

Choice of transport has Balance Sheet implications. The exporter is likely to received payments for goods supplied while they are in transit.

Driver accompanied road transport provides peace of minds, but the ability to fill the return load will affect pricing.

Transport Insurance Export and import in international trade, requires transportation of goods over a long distance. No matter whichever transport has been used in international trade, necessary insurance is must for ever good. Cargo insurance also known as marine cargo insurance is a type of insurance against physical damage or loss of goods during transportation. Cargo insurance is effective in all the three cases whether the goods have been transported via sea, land or air. Insurance policy is not applicable if the goods have been found to be packaged or transported by any wrong means or methods. So, it is advisable to use a broker for placing cargo risks. Scope of Coverage The following can be covered for the risk of loss or damage:

Cargo import, export cross voyage dispatched by sea, river, road, rail post, personal courier, and including associated storage risks.

Good in transit (inland). Freight service liability. Associated stock.

However there are still a number of general exclusion such loss by delay, war risk, improper packaging and insolvency of carrier. Converse for some of these may be negotiated with the insurance company. The Institute War Clauses may also be added. Regular exporters may negotiate open cover. It is an umbrella marine insurance policy that is activated when eligible shipments are made. Individual insurance certificates are issued after the shipment is made. Some letters of Credit Will require an individual insurance policy to be issued for the shipment, While others accept an insurance certificate.

7.3 Logistics Management

The term Logistics Management is the part of Supply Chain

Management that plans, implements, and controls the efficient, effective, forward, and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer's requirements.

THE LOGISTICS SYSTEM

The Procurement (or Supply) System Raw Material Supply Points The Operating System The Distribution System

Raw Material Storage

Manufacturing

Finished Goods Storage

Markets

Movement/Transportation

Movement/Transportation

Movement/Transportation WAREHOUSE Rajasthan

Movement/Transportation

R A W M A T E R I

STORAGE
PLANT #1 Rajasthan

A
B

WAREHOUSE Taipei

STORAGE
WAREHOUSE
PLANT #2 Sri Lanka Sepang
WAREHOUSE

C D

A L S

STORAGE

Colombo

Physical Supply Materials Management

Physical Distribution Marketing Logistics

8. INTEGRATED STRATEGIC ASPECTS TO CREATE THE INDIAN MNC a. Operational Aspects

I. Production- Presently Production activities will taken care of by the plant located in India. Finished goods will be shipped to Malaysia, Sri Lanka and Taiwan. But in the future we are also looking for establishing our production activities in Sri Lanka and Taiwan to take advantage of various factor endowments and also to increase our market coverage. Our decision making will be based on three factors1. Country factor Economic, Political and Cultural condition- Decision will be mainly based on optimum economic, political and cultural condition. Economic growth in the country and cultural condition in the country also. 2. Technology factor- One of the main criterion of deciding about the technological factors is toa. Reduce setup time for complex equipments. b. Technological factors can also help in improving quality of products produced. II. Make or Buy DecisionWe will manufacture the components in which we have the core competencies and will buy or outsource other components where we cannot take advantage of cost factors. Advantages of Buy Decision a. It will give us strategic flexibility in sourcing components. b. It will allow us to get competitive advantages by buying products or components from low cost manufacturers.

b. Marketing Aspects- Today the business world is at a cross-roads: are we heading for
further integration through globalization or are we returning to increased regionalism? Either way, businesses ignore trends in the environment at their peril. A comprehensive understanding of the issues that are beyond national boundaries has become an essential intellectual asset in all types of business, particularly within international business and marketing. Within international organizations, marketing is the key activity in creating customer focus and in delivering the value added required to acquire an international competitive advantage.

I. Multi domestic Strategy Main aim is maximum local responsiveness- The main aim of pursuing this strategy is gain local responsiveness by making adjustments to the products and services and ways of conducting business at the local level, taking into consideration local culture and needs. Although local responsiveness is costly strategy for the firm to pursue but it does allow for a positive brand building and creating awareness about the brand. Customize product offering, market strategy including production and R&D according to national conditions- Again, customizing product offerings according to the needs of the consumers and carrying out the marketing strategies including production and R&D according to the national conditions allow for better customer responsiveness to the brand. Other Marketing strategies for our firm will be divided into three phasesI. Reaction Elimination- It is a strategy for a firm to increase their acceptance in the foreign market among customers. Firms follow this strategy before going on with a full fledge expansion. We will continuously assess our position in the market. II. Consolidation- During this phase we will try to consolidate our position in the established markets by increasing our product offerings and also by expanding our market coverage. III. Aggression- During this phase our firm we will go on with full fledge expansion by expanding our distribution network to Hotels, Motels and other sectors. We will also try to capture smaller players in the existing market to add more products to our offering.

c.Financial Strategies We will use the following strategies to minimize our transaction exposureI. Forward Hedging- To counterbalance a present sale or purchase with a sale or purchase for
future delivery as a way to minimize loss due to price fluctuations; to make counterbalancing sales or purchases in the international market as protection against adverse movements in the exchange rate. II. Forward Contracts- To enter into agreements between firms and banks which permit the firm to either buy or sell a specific foreign currency at a future date at a known price.

d. Human Resource strategiesHRM policies should be congruent with the firms strategy and its formal and informal structure and controls. Task complicated by profound differences between countries in labor markets, culture, legal, and economic systems We will adopt Ethnocentric policy to start with and in the future we will adopt a Geocentric policy. Ethnocentric Policy- We will fill key management positions by parent country nationals. This strategy will allow us to overcome lack of qualified managers in the host country and will also help in the transfer of core competencies. Geocentric Policy- we will adopt this strategy once we are settled in the host country. With this policy we will try to seek the best talent regardless of nationality. It will enable the firm to make the best use of its Human resources and will also help in building a unified national culture and informal management network.

9. OPPORTUNITIES FOR IMPORTS FROM SELECTED COUNTRIES

Sri LankaSri Lankas ceramics industry is able to produce high-quality products because it has an abundant supply of raw material such as Kaolin Feldspar Quartz Dolomite Ball clay in its southeastern and central regions

The geographic distribution of the industry also reflects product categories and the availability of raw material. For example, tableware is manufactured in Piliyandala and Negombo; porcelain in Mathale, Dankotuwa, and Kosgamuwa; and tiles in Balangoda, Jalathara, Horana, and Meepe. The Geological Survey & Mines Bureau (GSMB), formerly the Geological Survey Department, has identified mineral deposits of economic importance. Reserves for some mineral commodities cannot be estimated mainly because they occur in veins, pockets, and lenses rather than as continuous and extensive deposits. Most known mineral reserves are inferred. Assessing the tonnage of proved reserves for each mineral commodity requires detailed investigation. But most reservesinferred, proved, or exploitedare sufficient for periods of 20 years and more, the approximate period for the amortization of most industrial units.

Malaysia- Malaysia has an abundant supply of raw materials for ceramic industry. It is well known for some of the very important raw materials for ceramics. One of the major advantages of importing raw materials from Malaysia is the cost advantage attached with it. The raw material imported is of high quality and also gives the companies a competitive advantage.

10. FUTURE PLANS

a. Expanding the Product line- Our future plan is to expand the line of product offerings. Presently we are in the crockery segment and now trying to expand our offerings to Tiles and Sanitary ware. This will allow us to reduce the risk by relying on line of business. Expanding our product line will also give us other cost advantages such as We can use our existing distribution network for the supply of new products, which will give us the cost advantages. Economies of scale- we can achieve economies of scale by optimum utilization of resources. b. Expanding into new Markets- Future plan is to expand into newer markets by setting up our subsidiaries into newer high growth market having growth potential. Newer markets wherein we can go for Market development (Existing products in new markets) or Diversification strategy (New products in newer markets), this strategy allows a company to expand and grow. c. Acquisition of small companies- Future plan is to acquire small companies to expand our product line and also it will make it easier for us to enter into new markets. This strategy will allow us to take advantages of complementary skills that our counterparts have. It is also a much faster method to grow because we dont need to establish everything from the scratch. Risk of expansion into unknown territory is also reduced to a great extent.

d. Forming an Alliance- Forming an alliance with other companies having complementary resources and skills. It will allow us to expand into newer markets and also gain additional competencies. We may go into forming a strategic alliance with our counterparts to gain from the competencies of other players in the market. It also acts as a risk distribution strategy, and also it will allow us to focus on our core competencies.