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Case:

Business opportunities in High Potential


developing markets.

Letter of transmittal

To
Mr. David Sullivan,
Vice president, sales

From
Alexandra Jones
International division
Date: 04th July, 2006
Attached report analyses the various alternatives for the expansion in the developing markets
of Asia based on the criteria of timeliness, quality, capacity and scope of future growth.
I recommend the acquisition of Quan thanh furniture, a Vietnam furniture manufacturer.

AJ

Executive summary

ACH need to fulfill a huge order of $100 million from the US government. Capacity
constraints in the US force us to look into the viable options internationally. Despite
complicated tax system and corruption in Vietnam, acquisition of QTF is the best possible
option given its expertise in high quality products, scope for increase of production and most
of all, the quick entry into the local market. Other options of setting up new production
facilities in China, India or Vietnam would not be able to supply the required quantity within
the given timeframe.

(93 words)

Table of contents
S.NO

Page No.

1) Situation Analysis

2) Problem Statement

3) Options

4) Criteria

5) Evaluation of options

6) Recommendation

7) Action Plan

8) Exhibit 1

10

Situation analysis
ACH may be offered a contract worth $100 million this year and probably $200 million next
year from the US government. The order of such magnitude will give an opportunity for
greater exposure and an exponential boost to our companys revenue and consequently for
our sustainability in the market.
Above contract is being revoked from the other company due to repeated delays
and declining product quality. Thus we need to match the expectation of the client in terms of
supplying high quality products within the given time frame. However our US operations
have neither the production facilities nor any spare capacity for supplying the order of this
magnitude. Moreover there is little option of expanding our US operations; the only
alternative left to us is to expand our international operations. The Asian market presents a
lucrative opportunity before us given the low operation costs and cheap labor present there.
While we have been lagging in our expansion abroad owing to concerns of quality, most of
our competitors have already established their operation in China and India. The Asian
market is growing at a robust speed and showing a conspicuous shift towards high quality
furniture. So it is imperative for us to expand our manufacturing facilities in Asia initially to
service the current order and later on to tap the Asian market.
If we choose to expand, we can either opt for China or India or Vietnam. The product landing
cost at the US for all the above mentioned countries are approximately same owing to cheap
labor and low operation costs. (Exhibit 1). However the anti dumping tariffs and increased
dependence on imported raw materials increases the uncertainty in prices of Chinese
products. While setting up operations in any country may take up to 12 months or more

depending upon the ease of government approvals, acquiring QTF in Vietnam would
probably take only up to 3-4 months.
Thus ACH is facing a dilemma on the decision to choose a market to expand.

Problem
Where should ACH expand to fulfill the current order in the short term and to achieve
sustainable growth in the long run?

Options:
1.
2.
3.
4.

Set up production facilities in China.


Set up production facilities in India.
Set up production facilities in Vietnam.
Acquire QTF in Vietnam.

Criteria:
1.
2.
3.
4.
5.

Timeline and capacity for the fulfillment of order.


Quality of the products.
Cost effectiveness of the products.
Scope of growth in domestic market.
Conducive atmosphere for investment.

Evaluation of option
1. Expansion in China

(a) Timeline and capacity for fulfillment of order: Setting up operations depends upon
the ease of approvals and it may take up to approximately 12 months which would
go against the clients requirement of fulfillment of the order within this year
itself.
(b) Quality of products: Our competitors have faced serious issues of quality in China
and non adherence to high quality standards would lead to erosion of client base.
(c) Cost-effectiveness of the products: Although the labor available is cheap, the
increasing dependence on imported raw materials and fluctuating oil prices creates
an uncertainty in the future cost prices. Moreover the anti dumping tariffs have
increased the costs.
(d) Scope of growth in domestic market: Although the Chinese market is growing
robustly, there is a noticeable schism in the taste of Chinese people and style of
ACH furniture.
(e) Conducive atmosphere for investment: Although the government has been
encouraging the expansion projects, government influence and corruption pose as
2.

certain inhibitions to the investment.


Expansion in India
(a) Timeline and capacity for fulfillment of order: Setting up operations would
depend upon ease of approval and bureaucratic problems in India would prolong
it. In such a case it would be impossible to service the current order.
(b) Quality of products: The skilled and flexible labor would ensure the consistency
of high quality.
(c) Cost- effectiveness of products: The labor available is cheap and reduced shipping
costs minimize overall production costs.
(d) Scope of growth in domestic market: Fragmented and rapidly growing market
with the taste of Indian people shifting towards Western style constitutes a great
opportunity.
(e) Conducive atmosphere for investment: Although the democratic government and
effective legal system are conducive to the investment, the government

interference, bureaucratic problems and large-scale corruptions will create hurdles


for investment.
3. Expansion in Vietnam
(a) Timeline and capacity for fulfillment of order: Setting up the manufacturing
facilities will take up to 12 months and capacity of these facilities will not be
sufficient to supply the requisite volume.
(b) Quality of products: The quality of the product will have to be improved by
training the labor forces for which huge cost may have to be incurred.
(c) Cost effectiveness of products: The cheap labor and low operating costs will
ensure minimal production cost.
(d) Scope of growth in domestic market: The Vietnam is showing steep increase in
exports and it can become a focal point of supply to the Asian market.
(e) Conducive atmosphere for investment: The government has introduced tax
incentives and waiver of import duties on equipments and machinery. However
the benefits are uncertain under US tax law.
4. Acquisition of QTF
(a) Timeline and capacity for fulfillment of order: Since the acquisition will give us a
ready setup for production in 3-4 months, it will be possible to service the current
order. Current production facilities are $30 million and with the introduction of
our efficient production techniques; it can be further increased to meet the order
requirement.
(b) Quality of products: QTF has received accolades for high quality standards and
coupled with our quality control techniques, the clients requirements can be met.
(c) Cost effectiveness of products: The availability of cheap labor, dependency on
variety of woods, reduced tariffs and reduced shipping costs make the product
cost effective.
(d) Scope of growth in domestic markets: Proximity to China and India would help
ACH in capturing the market after the fulfillment of the current order. We can set
it up as the central point for supplies to European and Asian markets.
(e) Conducive atmosphere for investment: The Stable communist government is
extremely supportive of foreign investment although there are issues of ineffective

judiciary, corruption and complicated tax systems. However the government is


actively taking efforts to sort out these issues.

Recommendation:
Acquisition of QTF

Action Plan:
1.
2.
3.
4.

Immediate initiation of dialogue for the acquisition of QTF.


Bid for the Contract.
Completion of the formalities of the acquisition.
Introduction of our production techniques and logistics to improve the efficiency and
production.

(1094 words)

Exhibit 1
Comparison of production cost per unit for US, China, India and Vietnam
Cost
Labor
Raw Materials
Operating costs
Shipping costs
Total
(Costs in $)

China
25
230
48
105
408

India
22
220
55
118
415

Vietnam
20
230
45
110
405

US
100-130
230-250
218-240
0
620