Research Topics: Manufacture And Assembly

Supply Chain Process

Introduction The supply chain process is a complex systematic flow of events that captures a segment of the operations of the business from the procurement of suppliers and supplies to the manufacturing of products in anticipation of demand or based on actual orders to the storage of manufactured products to the pull-out of store products for delivery to distributors or dealers and to customers until the receipt of feedback from the customer.             Supply chain process is basically an important process involved in the supply chain management because it encompasses every effort in producing and delivering a final product or service, from the supplier’s supplier to the customer’s customer (Muffatto & Payaro, 2002). Therefore, the supply chain of an organization is composed of interdependent processes that are important in the production and delivery of goods. It does not only involved knowing how to produce products but to know how and where to obtain the needed materials and supporting materials in order to produce the products, how much to produce and to whom the products are produced . It also involved knowing the right process of delivering the final product to the customers on time and at its best form. Therefore, supply chain management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across al channels, and delivery to the customer (Muffatto & Payaro, 2002).                         In order to do the activities involved in managing the supply chain, it is important to determine and be familiar with the activities within the different process in the supply chain. One of the key processes in the supply chain is procurement. In this report, the different activities and the value-added elements in the activities in the procurement function is examined and measured. The paper includes defining procurement and its function before enumerating the activities involved in the process. This study is conducted in order to determine the crucial activities that make up the procurement process and to describe the importance of these activities in a business organization.   Procurement Defined             Procurement can be simply defined as the purchasing of materials needed by an organization. In a business organization, purchase of goods or materials is not as simply as just buying it to the vendor and then using it in the business process to whatever purposes they served. According to Hough & Ashley (1992) and Zenz & Thompson (1994), procurement includes all of the activities involved in acquiring goods or services and managing their flow from the supplier to the different areas of the company purchasing the goods or services. These goods are the raw materials needed in the manufacturing of the company’s products, and the support materials such as computers and office supply products that the company uses.               The definition above means that procurement process does not end when the goods are already purchased; it also involves management of the flow of the goods purchased. When we say management of the flow, it means knowing the demand of goods in the company or determining how many of the materials to be purchased are needed to produced a particular number of products; and determining the number of suppliers and who among them can provide the needs of the company thus procurement involves establishment of good business relationship to the suppliers.             Moreover, in many organizations especially the manufacturing companies, procurement function is categorized into two: direct or production-related and indirect or non-production-related procurement (Gebauer & Segev, 2001).   Direct Procurement Direct procurement refers to the purchasing of items that immediately enter a manufacturing process (Gebauer & Segev, 2001). Items bought in direct procurement become part of an end product, such as the processor for computers or engine for car manufacturing. Since this kind of procurement is directly related to the production of products, it is considered to be critical and is often the center of attention of researchers, managers and engineers who are the ones responsible for making direct procurement efficient and effective. They are focused on how they reduce the cost of the material but at the same time acquire high quality materials that are used in making high-quality products.             Some of the issues related to direct procurement that has captured the attention of organizations include relationship and communication with the suppliers, product life cycle, inventory period, innovation, and cost reduction. These issues are actually related to each other. Having a good relationship and communication with the suppliers helps a company determine the latest development and technology in the materials or parts they used. This will help a company in product innovation, helps shorten its products’ life cycle and helps achieve timely inventory and delivery. A good example of this Dell Computer; In order to build its computers and sell it directly to the customers, the company is required to depend heavily on close relationship with its suppliers that resulted to just-in-time inventory and shorter delivery period.   Indirect Procurement             Indirect procurement refers to the non-production-related purchases but supports the manufacturing process and other processes in the company such as clerical works, information systems management, marketing and sales. Indirect procurement includes purchase of maintenance, repair and operations supplies that are require to keep up the manufacturing process, as well as items such as office supplies, computer equipment, promotional material, travel and other services as well as capital goods (Segev, Gebauer, Farber, 2000 on Gebauer & Segev, 2001). Indirect procurement also involves the procurement of capital goods which have significant value, are purchased less often and are not included in a company’s regular procurement but involves greater risk thus all of the necessary information regarding both the potential supplier and the good to be purchased must be gathered (Gebauer et al, 1998). Examples of capital goods are equipments, machineries, robots and other related equipments and technology. The demand involved in indirect procurement depends on the needs of the employee unlike in direct procurement that depends on the demands of external customers thus it covers a wider range of products and services with less predictability with respect to volume and frequency (Gebauer & Segev, 2001).    Procurement Activities             Procurement, as noted above, includes various activities that are needed to be performed in order to have efficient and effective procurement function in an organization. According to Lancioni et al (2000) and Wikipedia (2006), the stages of the procurement process in businesses today are: (1) the need to procure a particular good or service/identifying the needs of the company/information gathering; (2) the search for potential suppliers and the definition of other possible alternatives; (3) evaluation of the alternatives; (4) contact with suppliers to begin the negotiating process which may involve requesting for information, bids, quotes or proposals; (5) background review on the suppliers and evaluation of the offers; (6) negotiation and agreement on the type of supply; (7) contract signing and sending of orders; (8) fulfillment which involved receiving the order, managing the transaction, warehouse management, managing transportation, customer response, and reverse logistics management (Qulin and Duncan, 2000 on Muffatto & Payaro, 2002); (9) consumption, maintenance and disposal; and (10) renewal or the reordering of the products with consideration to whether to continue being supplied by the same supplier or to order to other suppliers.             In some sources like that of Lancioni et al (2000), procurement process end at stage 7 and regards stage 8 to 10 as another process in the supply chain. However, since we defined procurement as the purchase of goods, it thus somehow involved stages 8 to 10 because procurement, aside from the purchasing department, has also impacted other organizational areas in a company that perform stages 8 to 10. The procurement of materials, components, production machinery and equipment, and services required to manufacture a product as well as production of indirect materials is commonly performed by the purchasing department of a company while the logistics and production planning arrange the delivery; the receiving department receive and inspect the goods delivered and is responsible for storing/staging inbound items as well as initial quality and quantity checks; and the accounts payable department is responsible for processing the invoices received form suppliers and then releasing payment to the suppliers under agreed-upon terms (Stephens Inc., 1999).   Classification of Procurement Activities             According to Gebauer & Segev (2001), procurement activities can be categorized according to their “reach”: either long-term-oriented, strategic or short-term-oriented, transactional activities. Long-term oriented, strategic include tasks sourcing activities, identifying vendors and requirements, assuring quality, and establishing and managing supplier relationships, as well as contract negotiations and management, design and implementation of buying procedures, and financial and asset management (Gebauer & Segev, 2001). These activities aimed to strategically build close and longer relationship to the supplier for the advantage of the company.             Short-term-oriented, transactional activities are those activities that involved immediate results such as just-in-time arrangements, supply chain management, standardizing buying procedure, and streamlining buying and approval processes that meet basic requirements.             These procurement activities primarily aimed to reduce cost in the part of the company. However, these procurement activities are considered to be traditional in modern businesses today and needed to be upgraded or added with elements that create more value to these activities.  Value-Added Elements of the Procurement Function             The procurement activities mentioned above are not enough to create value; that is every company are expected to perform the same activities thus it does not ensure competitive advantage. Industry leaders today, according to A.T Kearney (2005), focus on four areas that create value to procurement function: innovation and growth; value chain optimization; advanced cost-management; and risk management and supply continuity.             Innovation and growth is driven by customer demands for new products and features, and improved customer service. Traditionally, the research and development department of a company is the sole responsible for innovation but since procurement functions as the interface between the supplier and the people in the company, it has been found out hat close collaboration between the R&D, procurement and supply chain processes lead to better product innovation. This is because the suppliers are the ones who developed the parts needed by the company while the R&D knows which particular parts should be assembled with the latest product of the company.   A good example of close collaboration of a company’s R&D, procurement department and suppliers is that of Dell Computer. Dell Computer’s R&D is known to have close collaboration with its suppliers that Dell considered them as its business partners. Dell leverages its partners by linking suppliers’ planning and execution activities with Dell’s system; Dell and its suppliers share data on supply and demand trends to forecast how many supplies the suppliers should provide Dell to address just-in-time inventory and to forecast also the demands of customers in terms of innovation. Dell gathers real-time information about the suppliers’ inventory level, capacity outlook and new technology drivers to determine the suppliers’ latest products that can be used and be included with Dell’s products and new designs (Mentzer & Fugate, 2004).             With close collaboration of a company’s R&D, procurement department and suppliers, information such quantity, quality and technology requirements are readily available for the procurement process to be conducted fast and easy. Additionally, with close collaboration, a company can determine its suppliers’ potential to innovate. Potential to innovate is frequently used as a key criterion for selecting suppliers, and track and evaluate contributions to innovation as part of the supplier development process (A.T. Kearney, 2005). This is important to most companies because suppliers can assist them in new product development, help to improve processes, quality and responsiveness (A.T. Kearney, 2005).               Value chain optimization involves determining what process and activities are truly essential for the company’s strategy (A.T. Kearney, 2005). This is important when choosing suppliers. There are suppliers that are worth to build close and long-term relationship with but there are also some that are for short-term, transactional relationship only, depending on the company’s activities.             Advanced Cost-management can be done by applying different strategies properly such as value-based which is using supplier capability to generate other kinds of value such as shorter time to market or innovation (just like what Dell did); collaborative cost reduction  which is generating and implementing cost reduction ideas with suppliers; demand management which is rationalizing requirements, controlling approvals and reducing or eliminating non-essential purchases in certain categories (A.T. Kearney, 2005); and many other strategies that involved supplier in the cost management which will both benefit the company and the supplier.             Since it is the responsibility of the procurement to supply the needed materials by purchasing it to the suppliers, it is also its responsibility to anticipate and manage risks by planning for contingency in case supply disruption happens. Therefore, it must be included in the procurement activities the ensuring that there are multiple suppliers for certain parts or there is single supplier but with multiple locations aside from demanding that key suppliers create contingency plans or better yet, choose suppliers with contingency plans already (A.T. Kearney, 2005) . Discontinuity of supplies can result to significant lost in the part of the company.             Another value-added element that has now become an important tool in performing procurement activities is the use of information technology. IT supports real-time integration of suppliers’ inventory and a company’s applications, real-time collaboration and communication, better management of information needed in the procurement process, web-based purchasing, and on time inventory and delivery.             These elements importance have been measured in terms of what and how it can help procurement in a company better with criteria including responsiveness, reliability, reflection of best practices, alignment with the people and the companies overall strategies and on the quality it can provide directly on the products or on other processes affected by the procurement. Conclusion             Procurement, although considered by others as supporting activity only, it has been proven with this study that it plays important role in an organization thus the activities involved in it should not only be performed in a way the company is comfortable with but there should be value-added elements associated with the procurement activities that help a company become more competitive. The addition of these elements with the procurement activities requires some measurement against the criteria set by the company itself to determine how it can improvement the procurement function of the company.  Credit:ivythesis.typepad.com

Supply Chain Process

Introduction The supply chain process is a complex systematic flow of events that captures a segment of the operations of the business fr...

Supply Chain Process

Introduction The supply chain process is a complex systematic flow of events that captures a segment of the operations of the business from the procurement of suppliers and supplies to the manufacturing of products in anticipation of demand or based on actual orders to the storage of manufactured products to the pull-out of store products for delivery to distributors or dealers and to customers until the receipt of feedback from the customer.             Supply chain process is basically an important process involved in the supply chain management because it encompasses every effort in producing and delivering a final product or service, from the supplier’s supplier to the customer’s customer (Muffatto & Payaro, 2002). Therefore, the supply chain of an organization is composed of interdependent processes that are important in the production and delivery of goods. It does not only involved knowing how to produce products but to know how and where to obtain the needed materials and supporting materials in order to produce the products, how much to produce and to whom the products are produced . It also involved knowing the right process of delivering the final product to the customers on time and at its best form. Therefore, supply chain management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across al channels, and delivery to the customer (Muffatto & Payaro, 2002).                         In order to do the activities involved in managing the supply chain, it is important to determine and be familiar with the activities within the different process in the supply chain. One of the key processes in the supply chain is procurement. In this report, the different activities and the value-added elements in the activities in the procurement function is examined and measured. The paper includes defining procurement and its function before enumerating the activities involved in the process. This study is conducted in order to determine the crucial activities that make up the procurement process and to describe the importance of these activities in a business organization.   Procurement Defined             Procurement can be simply defined as the purchasing of materials needed by an organization. In a business organization, purchase of goods or materials is not as simply as just buying it to the vendor and then using it in the business process to whatever purposes they served. According to Hough & Ashley (1992) and Zenz & Thompson (1994), procurement includes all of the activities involved in acquiring goods or services and managing their flow from the supplier to the different areas of the company purchasing the goods or services. These goods are the raw materials needed in the manufacturing of the company’s products, and the support materials such as computers and office supply products that the company uses.               The definition above means that procurement process does not end when the goods are already purchased; it also involves management of the flow of the goods purchased. When we say management of the flow, it means knowing the demand of goods in the company or determining how many of the materials to be purchased are needed to produced a particular number of products; and determining the number of suppliers and who among them can provide the needs of the company thus procurement involves establishment of good business relationship to the suppliers.             Moreover, in many organizations especially the manufacturing companies, procurement function is categorized into two: direct or production-related and indirect or non-production-related procurement (Gebauer & Segev, 2001).   Direct Procurement Direct procurement refers to the purchasing of items that immediately enter a manufacturing process (Gebauer & Segev, 2001). Items bought in direct procurement become part of an end product, such as the processor for computers or engine for car manufacturing. Since this kind of procurement is directly related to the production of products, it is considered to be critical and is often the center of attention of researchers, managers and engineers who are the ones responsible for making direct procurement efficient and effective. They are focused on how they reduce the cost of the material but at the same time acquire high quality materials that are used in making high-quality products.             Some of the issues related to direct procurement that has captured the attention of organizations include relationship and communication with the suppliers, product life cycle, inventory period, innovation, and cost reduction. These issues are actually related to each other. Having a good relationship and communication with the suppliers helps a company determine the latest development and technology in the materials or parts they used. This will help a company in product innovation, helps shorten its products’ life cycle and helps achieve timely inventory and delivery. A good example of this Dell Computer; In order to build its computers and sell it directly to the customers, the company is required to depend heavily on close relationship with its suppliers that resulted to just-in-time inventory and shorter delivery period.   Indirect Procurement             Indirect procurement refers to the non-production-related purchases but supports the manufacturing process and other processes in the company such as clerical works, information systems management, marketing and sales. Indirect procurement includes purchase of maintenance, repair and operations supplies that are require to keep up the manufacturing process, as well as items such as office supplies, computer equipment, promotional material, travel and other services as well as capital goods (Segev, Gebauer, Farber, 2000 on Gebauer & Segev, 2001). Indirect procurement also involves the procurement of capital goods which have significant value, are purchased less often and are not included in a company’s regular procurement but involves greater risk thus all of the necessary information regarding both the potential supplier and the good to be purchased must be gathered (Gebauer et al, 1998). Examples of capital goods are equipments, machineries, robots and other related equipments and technology. The demand involved in indirect procurement depends on the needs of the employee unlike in direct procurement that depends on the demands of external customers thus it covers a wider range of products and services with less predictability with respect to volume and frequency (Gebauer & Segev, 2001).    Procurement Activities             Procurement, as noted above, includes various activities that are needed to be performed in order to have efficient and effective procurement function in an organization. According to Lancioni et al (2000) and Wikipedia (2006), the stages of the procurement process in businesses today are: (1) the need to procure a particular good or service/identifying the needs of the company/information gathering; (2) the search for potential suppliers and the definition of other possible alternatives; (3) evaluation of the alternatives; (4) contact with suppliers to begin the negotiating process which may involve requesting for information, bids, quotes or proposals; (5) background review on the suppliers and evaluation of the offers; (6) negotiation and agreement on the type of supply; (7) contract signing and sending of orders; (8) fulfillment which involved receiving the order, managing the transaction, warehouse management, managing transportation, customer response, and reverse logistics management (Qulin and Duncan, 2000 on Muffatto & Payaro, 2002); (9) consumption, maintenance and disposal; and (10) renewal or the reordering of the products with consideration to whether to continue being supplied by the same supplier or to order to other suppliers.             In some sources like that of Lancioni et al (2000), procurement process end at stage 7 and regards stage 8 to 10 as another process in the supply chain. However, since we defined procurement as the purchase of goods, it thus somehow involved stages 8 to 10 because procurement, aside from the purchasing department, has also impacted other organizational areas in a company that perform stages 8 to 10. The procurement of materials, components, production machinery and equipment, and services required to manufacture a product as well as production of indirect materials is commonly performed by the purchasing department of a company while the logistics and production planning arrange the delivery; the receiving department receive and inspect the goods delivered and is responsible for storing/staging inbound items as well as initial quality and quantity checks; and the accounts payable department is responsible for processing the invoices received form suppliers and then releasing payment to the suppliers under agreed-upon terms (Stephens Inc., 1999).   Classification of Procurement Activities             According to Gebauer & Segev (2001), procurement activities can be categorized according to their “reach”: either long-term-oriented, strategic or short-term-oriented, transactional activities. Long-term oriented, strategic include tasks sourcing activities, identifying vendors and requirements, assuring quality, and establishing and managing supplier relationships, as well as contract negotiations and management, design and implementation of buying procedures, and financial and asset management (Gebauer & Segev, 2001). These activities aimed to strategically build close and longer relationship to the supplier for the advantage of the company.             Short-term-oriented, transactional activities are those activities that involved immediate results such as just-in-time arrangements, supply chain management, standardizing buying procedure, and streamlining buying and approval processes that meet basic requirements.             These procurement activities primarily aimed to reduce cost in the part of the company. However, these procurement activities are considered to be traditional in modern businesses today and needed to be upgraded or added with elements that create more value to these activities.   Value-Added Elements of the Procurement Function             The procurement activities mentioned above are not enough to create value; that is every company are expected to perform the same activities thus it does not ensure competitive advantage. Industry leaders today, according to A.T Kearney (2005), focus on four areas that create value to procurement function: innovation and growth; value chain optimization; advanced cost-management; and risk management and supply continuity.             Innovation and growth is driven by customer demands for new products and features, and improved customer service. Traditionally, the research and development department of a company is the sole responsible for innovation but since procurement functions as the interface between the supplier and the people in the company, it has been found out hat close collaboration between the R&D, procurement and supply chain processes lead to better product innovation. This is because the suppliers are the ones who developed the parts needed by the company while the R&D knows which particular parts should be assembled with the latest product of the company.   A good example of close collaboration of a company’s R&D, procurement department and suppliers is that of Dell Computer. Dell Computer’s R&D is known to have close collaboration with its suppliers that Dell considered them as its business partners. Dell leverages its partners by linking suppliers’ planning and execution activities with Dell’s system; Dell and its suppliers share data on supply and demand trends to forecast how many supplies the suppliers should provide Dell to address just-in-time inventory and to forecast also the demands of customers in terms of innovation. Dell gathers real-time information about the suppliers’ inventory level, capacity outlook and new technology drivers to determine the suppliers’ latest products that can be used and be included with Dell’s products and new designs (Mentzer & Fugate, 2004).             With close collaboration of a company’s R&D, procurement department and suppliers, information such quantity, quality and technology requirements are readily available for the procurement process to be conducted fast and easy. Additionally, with close collaboration, a company can determine its suppliers’ potential to innovate. Potential to innovate is frequently used as a key criterion for selecting suppliers, and track and evaluate contributions to innovation as part of the supplier development process (A.T. Kearney, 2005). This is important to most companies because suppliers can assist them in new product development, help to improve processes, quality and responsiveness (A.T. Kearney, 2005).                Value chain optimization involves determining what process and activities are truly essential for the company’s strategy (A.T. Kearney, 2005). This is important when choosing suppliers. There are suppliers that are worth to build close and long-term relationship with but there are also some that are for short-term, transactional relationship only, depending on the company’s activities.             Advanced Cost-management can be done by applying different strategies properly such as value-based which is using supplier capability to generate other kinds of value such as shorter time to market or innovation (just like what Dell did); collaborative cost reduction  which is generating and implementing cost reduction ideas with suppliers; demand management which is rationalizing requirements, controlling approvals and reducing or eliminating non-essential purchases in certain categories (A.T. Kearney, 2005); and many other strategies that involved supplier in the cost management which will both benefit the company and the supplier.             Since it is the responsibility of the procurement to supply the needed materials by purchasing it to the suppliers, it is also its responsibility to anticipate and manage risks by planning for contingency in case supply disruption happens. Therefore, it must be included in the procurement activities the ensuring that there are multiple suppliers for certain parts or there is single supplier but with multiple locations aside from demanding that key suppliers create contingency plans or better yet, choose suppliers with contingency plans already (A.T. Kearney, 2005) . Discontinuity of supplies can result to significant lost in the part of the company.             Another value-added element that has now become an important tool in performing procurement activities is the use of information technology. IT supports real-time integration of suppliers’ inventory and a company’s applications, real-time collaboration and communication, better management of information needed in the procurement process, web-based purchasing, and on time inventory and delivery.             These elements importance have been measured in terms of what and how it can help procurement in a company better with criteria including responsiveness, reliability, reflection of best practices, alignment with the people and the companies overall strategies and on the quality it can provide directly on the products or on other processes affected by the procurement. Conclusion             Procurement, although considered by others as supporting activity only, it has been proven with this study that it plays important role in an organization thus the activities involved in it should not only be performed in a way the company is comfortable with but there should be value-added elements associated with the procurement activities that help a company become more competitive. The addition of these elements with the procurement activities requires some measurement against the criteria set by the company itself to determine how it can improvement the procurement function of the company.   References: A.T. Kearney, Inc. (2005), Creating Value through Strategic Supply Management             Accessed online, date: July 31, 2006             <http://www.atkearney.com/shared_res/pdf/AEP_2004_S.pdf> Gebauer, J. & Segev, A. (2001) Changing Shapes of Supply Chains- How the Internet Could Lead to a More Integrated Procurement Function, University of California, Berkeley, Haas School of Business Mentzer, J. and Fugate, B. (2004) Dell’s Supply Chain DNA, Supply Chain Management Review online July 31, 2006 <http://www.manufacturing.net/scm/article/ca527362.html> Muffatto, M. and Payaro, A. (2002) Implementation of e-procurement and e-fulfillment processes: a comparison of cases in the motorcycle industry, Twelfth International Working Seminar on Production Economics, University of Padua, Italy Stephens, Inc. (1999) E-Procurement, A Guide to Buy-side Applications  Industry Report accessed online July 31, 2006 <http://www.b2business.net/intn991227ir.pdf#search=’difference%20between%20fulfillment%20and%20procurement’> Wikipedia, Procurement, Online July 31, 2006             <http://en.wikipedia.org/wiki/Procurement> Credit:ivythesis.typepad.com

Supply Chain Process

Introduction The supply chain process is a complex systematic flow of events that captures a segment of the operations of the busin...

Brazil and Malaysia Risk Comparison and Selection of the Best Alternative with Suggested Measures to Undertake in Managing Risk in the Chosen Country

The product to be manufactured is a prestigious executive car (10 years in exportation in these countries).  After manufacturing in the selected country, it will be sold to this host country and neighboring countries in the region.     Suggested Contents <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal">Introduction</li> <li class="MsoNormal">Automobile industry</li> <li class="MsoNormal">Risk assessment in Brazil </li> <li class="MsoNormal">Risk assessment in Malaysia</li> <li class="MsoNormal">Conclusion and Recommendations</li> </ul>   Search This: Country Risks – Political and Financial Publication Information: Article Title: Corruption and Foreign Direct Investment. Contributors: Mohsin Habib – author, Leon Zurawicki – author. Journal Title: Journal of International Business Studies. Volume: 33. Issue: 2. Publication Year: 2002. Page Number: 291+. COPYRIGHT 2002 Academy of International Business; COPYRIGHT 2002 Gale Group Liberalization since 1986 gives countries at least 20% FDI annually.  Corruption does not affect FDI in absolute terms as illustrated by high corrupt countries like China, Brazil, etc that also have large inflows of FDI.  Corruption is seen to enhance efficient/ rent-seeking companies, increase transaction cost of bribing companies while its effect is largely attached to the goodwill of official to materialize the effects of bribe to social issues.  Corruption halts competition and undermines quality and price in favor of firm’s ability to access officials who accepts bribe.  This condition aggravates when the state has excessive administration power with little transparency.  The study found that corruption is avoided by foreign firms because it is morally wrong, costly and hard to manage.  They may also hesitate to invest in a prospective host country when the level of corruption in their home country varies with it.  The challenge is to combat a competitor who deals with corruption and try to outperform them by instilling values and morals in operations like McDonalds in Russia.     Publication Information: Article Title: Political Risk and the Benefits of International Portfolio Diversification. Contributors: Jean-Claude Cosset – author, Jean-Marc Suret – author. Journal Title: Journal of International Business Studies. Volume: 26. Issue: 2. Publication Year: 1995. Page Number: 301+. COPYRIGHT 1995 Academy of International Business; COPYRIGHT 2002 Gale Group Political Risk exists when (1) discontinuities occur in the business environment, (2) when they are difficult to anticipate and (3) when they result from political change.  It is of significance because it can change the prospects of the profitability of a given investment.    Ø      Note: can be used in managing risk   The Automobile Industry: A Global Perspective Publication Information: Article Title: Strategy, Scale or Policy? Exit in the Australian Car Industry. Contributors: Matthew P. Fleischmann – author, David Prentice – author. Journal Title: Economic Record. Volume: 77. Issue: 239. Publication Year: 2001. Page Number: 351+. COPYRIGHT 2001 Economic Society of Australia; COPYRIGHT 2002 Gale Group               In the closing years of Australian car manufacturing on 1950s, there were at least 24 car manufacturers.  In the onset of the 21st century, however, they were only four as the previous decades illustrated declining trend.  The findings showed that from 1920 to 2000, falling government policy increases the likelihood of exit where exemption applies to a large manufacturer while aggravation applies to a small firm with large production plant.  The theme of Australian car industry of continuous decline in car plants is the ability of industry players to be efficient.  Although the 1940s level of 14 plants (the government protects local assemblers) was increased 1960s to 16 plants (the government encourage manufacturing), this suggests that foreign players started to saturate the industry.  Due to this, at the first quarter of 1980s, the effect of globalizing the industry and entrance of relatively technological and experienced players in the West or those from Japan had caused decline.  This was flamed by the government’s minimal support and protection to domestic producers.  This resulted to managerial decisions to merge and identify strategic links leading to cost-effectiveness, at the same time, small number of companies.            Publication Information: Article Title: Vertical Keiretsu and International Market Entry: The Case of the Japanese Automobile Ancillary Industry. Contributors: Kunal Banerji – author, Rakesh B. Sambharya – author. Journal Title: Journal of International Business Studies. Volume: 27. Issue: 1. Publication Year: 1996. Page Number: 89+. COPYRIGHT 1996 Academy of International Business; COPYRIGHT 2002 Gale Group             The Japanese automobile industry is using the vertical keiretsu that is said to give them competitive advantage in the international arena.  Partly the cause of being the second largest FDI contributor to the United States, interdependence and coordination with competitors and strategic links that supplies activities in the value chain characterized association of such industry.  This aspect provides Japanese manufacturers enhancement in there OLI (Ownership, Location and Internalization) paradigm.  The automobile ancillaries of core Japanese manufacturers are able to overcome the risk (as it is founded that larger firms tend to invest abroad) of FDI due to their relatively small size because there is long-term relationship between the two.  With security of demand and cash flow, there were 97 keiretsu affiliations out of 106 in the US.  The restriction of US to use local components in manufacturing was resolved by including only a limited number of US suppliers while retaining the large number of keiretsu networks.           Hitt, M, Hoskisson, R & Ireland 2003, Strategic Management: Competitiveness and Globalization, 5th Edition, South Western; Thomson Learning, Singapore.               The automobile industry has continues to globalized.  Daimler Benz merged with Chrysler Corporation and focused on integrating operations of individual subsidiaries scattered in the global landscape.  In addition, Ford had acquired Volvo that extended the former global brands also six.  The purpose of these global manufacturers and assemblers is to build economies of scale in performing activities in the value chain particularly in requisition of car components that make the 60% value of the finished product.  Thirty percent of auto market in the US is owned by foreign players while rivalry is tough for luxury brands.  Due to internationalization trend, auto companies are confronted with cultural issues especially the languages.  A concrete example was Ford’s translation in branding its new released car in Japan called Ka which means mosquito.  Apparently, the objective is to enjoy the advantages of scale and localization at the same time.  As a result, cost-effectiveness and value-adding capabilities attributable to the firm are enhanced.         Political Risk Assessment in Brazil Historical Record http://www.ie.ufrj.br/publicacoes/discussao/automobile_demond_and_supply_in_brazil.pdf               The industry played a crucial role in alleviating the economy of Brazil as it shared 10% of GDP in 1998.  This happened despite the government’s move to liberalize importation of automobiles to counter market power and promote innovation.  The action showed that the government is sensitive not to lag behind global breakthrough, at least among developing nations, and undermine technological developments.  It is willing to relax local protectionism if observed that local consumers are induced to choose and buy a line of auto products in affordable but inferior design and quality.  However, when the incumbent president was replaced due to impeachment, the policy was changed that brought back support to local manufacturers of popular/ affordable cars.  The revision is also impacted not only by lack of confidence of political parties (an indication that they prioritized consumers’ price vulnerability than product differentiation) and political instability but also high inflation rates.  During 1990s, there are several efforts by the government to create harmonious local and imported automobile incentives.  They provided loans for potential auto consumers (possibly to buy imported products), reverted this scheme by doubling import tariff rates, induce FDI from foreign automobile producers through Automotive Regime and major exporters are awarded the same tax benefits as multinational corporations in the country.                        With this information, political risk is likely to be confronted by foreign firms due to the historical record of regulating the automobile industry.  The Brazilian experience tells the subjectivity of government decisions with regards to dealing with industry problems.  Important measurement of having a fair to strong lobbying ability of foreign firms is to locate their plants in the Northern region as the Southern region is already saturated.  Another, products should be competitive against trading partners like US, Argentina, Germany, EU and Japan in order to slice market share out of the popular models.                 Present Environment www.trendwatching.com/trends/sachet_marketing.htm             This is the biggest South American country in terms of automobile demand with strong demand on low-cost popular cars (below).  An indication that most Brazilian consumers are basically in the working class, detergents and washing machines have targeted the low-income bracket of the population.  These products are advertised as effective at low cost (detergent) while others are customized in design to fit the fascination and stiff budget of the consumers (whirlpool).  In the demand of automobile, such indication is also relevant as popular and compact models are attached to affordable cars.  The industry under this classification received relaxed competition from imported products that are typically luxurious and expensive while tax rebates for affordable autos intensify the ability of firms to remain price leaders.  As a result, profits from this specific industry are derived in high sales volume.    http://www.brazilianchamber.org.uk/trade_info/referenceinfo.htm             Brazil requires 30% corporate tax and 15% withholding taxes against profit and dividend remittances.  It has double taxation treaty with the United Kingdom and other several countries providing additional incentive to foreign investors and managers which mean unnecessary decrease in their income resulting to higher motivation and lower turn-over in manpower.  Tariff ranges from 17% to 23% depending on the industry.  Automobile sector is highly dependent on the economy.                                  This is due to their   They are friendly and happy people with initiative spirit.  They spend most of their time outside due to the hot climate.  It exports half of its produced motor vehicle parts to US and EU while the remaining goes to Latin countries and within the region.  This is made possible due to the decreasing GDP share of agricultural industry and transfer of capital and labor to service and manufacturing industries        Common Forms of Political Risk Attitude of consumers in the host country Actions of host government: _Taxes _Labour regulations _Capital controls _Investment incentives _Protectionism Blockage of fund transfers War Bureaucracy Corruption   Common Forms of Political Risk   Attitude of consumers in the host country Attitude of consumers should include there consumption of automobiles both quantity and quality.  Factors that affect their consumption (income, prices).  Do they view having a car as commodity, status, etc.  How they buy, what they buy, when they buy and why they buy.    The demand for high-end automobile in Brazil.  According to Luxury Goods Survey 2000 in Brazil, approximately 1.1M million families (around 2% of the population) in the country are considered wealthy wherein their incomes are 14 times greater as the average family income in Brazil at 50 per year (2003 values).  They are concentrated in the Southeast (73.5%) wherein Sao Paulo city has concentration rate of almost 40% followed by Rio de Janeiro and Brasilia.  In a similar study of Brazilian consulting firm, local spending on luxury goods amounts to B annually.  An assumption affecting the purchase of luxury commodities evolved in their features that can provide distinction of social status to the user. http://www.fas.usda.gov/gainfiles/200504/146119373.pdf   Selling a prestigious executive car would likely be aimed to this market segment to consider a rational venture.  Even though the percentage of the segment with regards to whole population is very small, Vertex has several business models to choose with.  It can serve this number exclusively fastening the prospect to export its produced to the neighboring countries with economies of scale.  Another, it ca ever, the sub-optimal demand can support the research that customers would stop buying a product when everybody uses it.  In this view, making the proposed car inaccessible to the middle class seemingly can classify as a strategic move for Vertex because middle class tend to follow trends by high-end consumers and opinion leaders.  Inaccessibility can be attained at a premium price of the proposed car, segregation of its manufacturing plant from wealth-saturated areas and use of direct marketing.      Actions of host government:   _Taxes                           _Labour regulations _Capital controls _Investment incentives _Protectionism Blockage of fund transfers War Bureaucracy Corruption Credit:ivythesis.typepad.com

Brazil and Malaysia Risk Comparison and Selection of the Best Alternative with Suggested Measures to Undertake in Managing Risk in the Chosen Country

The product to be manufactured is a prestigious executive car (10 years in exportation in these countries). After manufacturing in the s...

BRAZIL AND MALAYSIA RISK ASSESSMENT FOR LUXURY CAR

Introduction             External risks can be an opportunity and threat for a firm.  Concentration of risks to the latter is relatively more probable for a multinational firm.  As a result, Vertex-Speed move to build a subsidiary in the foreign soil would tend negative risks to intensify difficulty of anticipation making it riskier venture.  Even though the firm has 10 years trading relationship with countries at hand (Brazil and Malaysia), this has been limited to exportation.  In addition, political and economic experiences of these countries will prove that major indicators have already evolved and stabilize from a decade ago.  Due to this ambiguities, this paper presents global perspective to the automobile industry, risk (political and financial) description and assessment of the two countries including their historical outputs and recommendation on how to manage the risk present in the selected country in which the new subsidiary of Vertex would be located.  The product is a prestigious executive automobile and so analysis is needed to verify its compatibility in the environmental risks present in the two countries.      The Automobile Industry: A Global Perspective The automobile industry continues to be globalized.  Daimler Benz merged with Chrysler Corporation and focused on integrating operations of individual subsidiaries scattered in the global landscape.  In addition, Ford had acquired Volvo that extended the former global brands to six.  The purpose of these global manufacturers and assemblers is to build economies of scale in performing activities in the value chain particularly in requisition of car components that make the 60% value of the finished product.  Thirty percent of auto market in the US is owned by foreign players while rivalry is tough for luxury brands.  Due to internationalization trend, auto companies are confronted with cultural issues especially the languages.  A concrete example was Ford’s translation in branding its new released car in Japan called Ka which means mosquito.  Apparently, the objective is to enjoy the advantages of scale and localization at the same time.  As a result, cost-effectiveness and value-adding capabilities attributable to the firm are enhanced (Hitt, Hoskisson & Ireland, 2003).               In the closing years of Australian car manufacturing in 1950s, there were at least 24 car manufacturers.  In the onset of the 21st century, however, they were only four as the previous decades illustrated declining trend.  The findings showed that from 1920 to 2000, falling government policy increases the likelihood of exit where exemption applies to a large manufacturer while aggravation applies to a small firm with large production plant.  The theme of Australian car industry of continuous decline of car plants was the ability of industry players to be efficient.  Although the 1940s level of 14 plants (the government protects local assemblers) was increased in 1960s to 16 plants (the government encourage foreign manufacturing), this suggested that foreign players gradually saturating the industry.  Due to this, at the first quarter of 1980s, the effect of globalizing the industry and entrance of relatively technological and experienced players in the West or those from Japan had caused decline.  This was flamed by the government’s minimal support and protection to domestic producers.  This resulted to managerial decisions to merge and identify strategic links leading to cost-effectiveness, at the same time, small number of companies (Fleischmann & Prentice, 2001).                       The Japanese automobile industry is using the vertical keiretsu that is said to give them competitive advantage in the international arena.  Partly the cause of being the second largest FDI contributor to the United States, interdependence and coordination with competitors and strategic links that supplies activities in the value chain characterized association of such industry.  This aspect provides Japanese manufacturers enhancement in there OLI (Ownership, Location and Internalization) paradigm.  The automobile ancillaries of core Japanese manufacturers are able to overcome the risk (as it is founded that larger firms tend to invest abroad) of FDI due to their relatively small size because there is long-term relationship between the two.  With security of demand and cash flow, there were 97 keiretsu affiliations out of 106 in the US.  The restriction of US to use local components on Japanese manufacturers was resolved by including only a limited number of US suppliers while retaining the large number of keiretsu networks (Banerji & Sambharya, 1996).            Political Risks in Brazil             The country has the biggest supply and demand of automobiles in the South American continent.  The demand for luxury goods like automobiles is directly relevant to the spending patterns of the elite class situated at the tip of the consumer pyramid occupying around 2% of the total population or 1.1 million families.  They are considered wealthy with annual income 14 times greater than the Brazilian average and whose purchasing behavior is attached to product’s capability to be unique or/and reflect their social status.  Their number are concentrated in the Southeastern region (73.5%) of the country and scattered in the cities of Sao Paulo, Rio de Janeiro and Brasilia.  When the economy is performing well, it will affect the middle class’ incomes which are said to aspire purchasing patterns of their wealthy counterparts (Market Development Reports).               Brazil requires 30% corporate tax and 15% withholding taxes against profit and dividend remittances.  It has double taxation treaty with the United Kingdom and other several countries providing additional incentive to foreign investors and managers which mean unnecessary decrease in their income resulting to higher motivation and possibly lower turn-over in managerial positions assumed to be from home countries.  Tariff ranges from 17% to 23% depending on the industry.  Automobile sector is highly dependent on the economy and share the over 10% of GDP in 1998 figures.  There are few restrictions in fund transfers while the economy accepts all sectors under foreign investments although registration to the Central Bank is required to every aspirant.  In 1990s, Brazil experienced trade liberalization that benefited consumer durables and installed the country as the world’s eight largest automotive industry.  It has intensive partnership with the Argentina and Mercosur where around 30% of its automobile produce is exported.  As a result, economic influence of the region to Brazil can be considered high as illustrated by decline in demand, in effect production, of automobiles when Argentina’s economy slowdown (Brazilian Trade Commerce in Britain).                               Bureaucracy is likely to skew towards excessiveness because of democratic type of governance.  The passing of law is undertaken by two separate but complementary bodies under bicameral system which can hamper the investment policies.  Corruption is guarded by several political parties and other public associations that guard the dealings of the government.  The experience of the country in the impeachment of its 1990s President Fernando Mello can suggest that its system secures the good governance of public servants.  In the process of such impeachment, political parties also had an impact, partly to spark public vigilance in the performance of executive officials.  The interaction of bureaucracy and corruption is a necessary course of a democratic government.  Without bureaucracy, corruption cannot be filtered.  On the other hand, without corruption, bureaucracy is unlikely be necessary.        Political Risks in Malaysia                In general, Malaysians are brand and prestige conscious while information about new products is gathered among close peers.  The experience in 2002 showed that Malaysian consumers are willing to buy luxury products like cars whenever the government supports their purchase through price and quality incentives.  Demand for automobiles can be affected by congestion of public highways that is a continuing concern for the country.  This could imply that purchasing decisions, even though supported by purchasing power, can be hindered by infrastructure underdevelopment (Asia Market Research).    Malaysia’s corporate tax is 28% and considered one of the lowest in the region while raw materials are subject low to zero import duties.  Non-resident employees are subjected to 10% withholding tax.  The country is a main producer of vehicle parts, components and accessories to Asian countries like Thailand, Singapore, Indonesia, Japan and the UK and supplies parts to General Motors, Suzuki and Nissan among others (Malaysia Information).  The liberalization of auto industry started when the country aimed to challenge Thailand as the number one car maker in the Southeast Asia.  The plan gives auto foreign investors incentive on loans and grants but minimizes the upper hand of the national brand Proton Holdings which was protected by government arm (Malaysia Today).  Import tariff rates were also cut in the Southeast Asian countries from 20% to 15% due to the existence of Asian Free Trade Area (AFTA).  Protectionism in the industry against Thailand can be considered not much of pressure because of the latter production focused on trucks and commercial vehicles.  The Asian crisis in 1997 opened the minds of political leaders for globalization (Fiscal Regimes).    Bureaucracy is relatively unlikely due to relatively small number of legislatures while passing of laws are expedited by the fact that the cabinet where the Prime Minister comes from is supportive to the latter, at least in majority.  However, this can be offset by the presence of the King (the religious leader of Islam) which can affect government affairs especially major investment decisions that can connote cultural infiltration which can be a huge concern for his rule.  Corruption is likely because of the fact that media is held by the government that can hamper transparency in transactions.  In 1998, the Deputy Prime Minister Anwar was dismissed by the Prime Minister due to corrupt practices and sentenced and beaten in the prison afterwards.  However, without transparency and media independence, corruption cannot be thoroughly examined by the public especially the business sector.                    Financial Risks in Brazil             The United States is the largest investor in the country.  The Northern part is considered the poorest regions although investments are gradually building up to stimulate its local economy.  Privatization and emphasis on education are major themes in the present government.  However, the economy in history was proven volatile to trading partner’s condition and world affairs including Argentinean, Asian and Russian crises that affected its economic performance.  On the other hand, the present reforms of the government made its economy resistant to international economic shocks.  As a result, it continued to increase real wage and employment suitable for economic exchanges within the economy.  It has close relations with the IMF that helped it developed its economic reforms.                    Foreign direct investment in the country is ranked second to China in 2000 because of its price stability, privatization regimes and flexible policy in foreign capital.  However, this is skewed to service sector wherein 70% of FDI is classified.  The legislation makes no distinction between a foreign and domestic company and the principle of equal juridical treatment remains.  The country protects the intellectual property of foreign companies including technology transfer.  With these, it can be said that the automobile industry is partly saturated.  However, the technology of every new foreign firm can be considered a new development in car making that can provide a good political environment, market and technology ownership.        Brazil has the highest interest rate in the world at almost 20%.  It is meant by government intervention to hit its annual target of inflation rate at 5% down in 2004 of 8%.  It will not consider interest rate pressures like prices of certain goods to be able to maintain the inflationary level.  This caused foreign investments to flock in the economy possibly exploiting the barriers given to local businessmen when it comes to lending and establish a business.  However, this could also result to decrease credibility to Brazil’s Central Bank to leave to market forces the maintenance of equilibrium.  On the contrary, this high interest rate benefits the local economy because long-term credit assistance to local producers is not available making the opportunity for foreign investors to overtake local producers.  This would result to higher income tax remitted to the government, positive pressure to capital and current accounts and employment to local labor.              The real was hit by 2002 elections and depreciated its value.  The population’s move was spending their money by buying tangible goods or simply spending them outside the country.  By the time it reached it all-time low in 2002, the government integrated its efforts by targeting inflation and focusing on trade surplus in order to pay public debt that can relax foreign reserves in the hands of the state.  It adapted partly floating exchange rate to curb major factors that can affect the real drastically.  Tighter fiscal policy and monetary policy with inflation target also helped the real to stabilize into 2 real into .  As can be observed, Brazilian economy is highly integrative because policies in inflation control affected its currency and interest rate at the same time which gave several implications in the economy.  It Real Plan, as a result, can be considered a holistic strategy for the whole economy.                              Financial Risks in Malaysia             Malaysia actively sought WTO and AFTA deliberations to enhance its FDI level.  This is reflected in its five year plan that also seeks to find bilateral agreements.  The country is an open economy and shifted its focus to manufacturing since 1970s.  The economy continuously diversifies that includes automobile industry although its major produce is semiconductors and appliances.  The growth was enhanced by privatizing inefficient government-owned corporations suggesting competition among local and foreign firms with minimal protection.  The labor shortage can in the country can be an opportunity for home workers to proliferate their expertise in the host country with relatively ease of entrance.  Automobile producers and foreign investors can exploit the concern about current account deficit by producing goods that are previously imported in nature.  When they can manufacture in the local soil, they can be allowed and even hand down lucrative investments.  However, this can be hampered by the counter argument of slowing the booming economy of the country as to prevent too much size which the economy cannot handle.                         In 2003, the economy is boosted by government’s move to lower its interest rates due to declining export and weakening tourism industry.  This is intended for hotel owners to pump up their infrastructures and for the business economy as a whole.  Employee bonuses of public workers are also increase partly due to increase their purchasing power, an incentive for local producers to augment fund for foreign export.  The history of low inflation rates is true to the country that helped it avoid further financial difficulties in 1997 recession and also enhance its ability to stimulate the economy faster.  However, this advantage caused its economy to result to deflation since 1998 making imports more expensive to local consumers wherein inflation rate is close zero.  This could further result to delaying purchases due to speculation which can result to stagnant economy.                 It promotes import substitution and export strategy.  Japan is the major investor of the country.  Its foreign investment policy is relatively flexible to suit the current needs of the economy due to the absence of law under this category unlike Thailand.  The government has the final go-signal to foreign firm’s license to operate in the local soil.  The liberalization policy is also aimed to redistribute wealth to the indigenous people.  The protection from expropriation of foreign investments can be fully obtained through bilateral agreements that can negotiate the level of protection, compensation, transfer of capital and profits and other disputes between the private firm and the government.  However, this scheme, according to several studies is not antecedent to increase FDI rather a complementary feature of broader economic reforms.                Malaysian Ringgit is under managed float exchange system giving the government intervention capabilities when necessary.  In 2005, Malaysia lifted its dollar pegged currency transforming its currency closer to perceived market value.  This can enhance confidence of foreign importers on the real value of Malaysian exports stimulating trend.  It also an indication that the money of the country is gradually adjusting to its robust and economy which is brought about by consumer price inflation in 2005 at 3%, a 100% increase in 2004 level.  However, there is pressure to the government to intervene infrequently as to deter the improvement of its currency outlook from world partners’ view.  In 1990s, its Ringgit was cited to be undervalued against the dollar which was partly meant to provide incentive to importing foreign markets and boost its exports.        Assessment and Selection: Who has the Relative Upper Hand?  Political Risks Brazil Malaysia Attitude of Consumers Upper hand due to clear identification of market Lower hand due to needed support of consumers and over-congestion of roads Actions of the Host Government:     ·        Taxes Upper hand due to prevention of double taxation Upper Hand in 2% advantage <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="color: #480404; text-autospace: none"> Labor Regulations</li> </ul> Upper hand because of larger pool of local working class Lower hand due to smaller population <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="color: #480404; text-autospace: none"> Investment Incentives</li> </ul> Lower hand The industry is relatively saturated Upper hand The industry is in growth <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="color: #480404; text-autospace: none"> Protectionism</li> </ul> Lower hand due to saturation of industry Upper hand in tariff at least 2% and the relative rival Thailand mainly produces non-light vehicles Blockage of Fund transfers Upper hand due to minimal restrictions Lower hand due to requirement to enter bilateral agreements Bureaucracy Lower hand due to bigger number of legislatures Upper hand due to smaller number of legislatures Corruption Upper hand due to democracy Lower hand due to governmental ownership of the media; lost transparency Financial Risks Brazil Malaysia Current and potential State of the Economy Upper hand due to the learning curve and resistant economy Lower hand due to the fear of too much diversification Financial Distress and regulatory constraints Upper hand due to relatively high direct investment and equality of local and foreign investments Lower hand due to  plan to redistribute wealth to indigenous people Interest Rates Upper hand due to existence of long-term foreign debt platform and absence of local debt platform, at least in dollars Lower hand due to low interest rate and support to the local producers in times of economic difficulty Exchange Rates Upper hand due to integration in other economic variables Lower hand due to speculation of too much government intervention Inflation Upper hand due to control policies of targeting inflation Lower due to deflation tendencies Expropriation of investments Upper hand due to protection of Intellectual Property especially the technology Lower hand due to bilateral talks requirement and possibility of buying out the foreign firm                   As illustrated, Brazil has the most upper hands compared to Malaysia.  It falls short to provide relatively good investment environment to political factors such as investment incentives, protectionism and bureaucracy.  However, it outlasted the Malaysian economic indicators shown in financial risks partly because of its integrative plan that intended to stimulate one indicator in favor of another.  On the other hand, the Malaysian economy is hampered by its expropriation policies which require larger transaction costs for the foreign investor.  The economy also is impeded to growth by its infrastructures and labor force that diminishes economic indicators to steadily rise to a world competitive level.  Aside from these figures, geographical integration of Brazil is more suitable for lower transportation and communication costs for investors unlike the sea-divided Malaysia whose neighboring countries are separated by waters.   Managing Risks in Brazil   Managing Political Risks             The country has a relatively larger pool of labor that would transform to government support for foreign investor’s installing FDI.  However, the risk of not encouraging labor to the subsidiary due to competitive compensation all over the automobile industry could ensue.  As a result, intensive job vacancies campaign and lucrative packages should be bargained by the firm before or during the building of its business site.  This will prevent human resource problems in the beginning of operations so that the management can focus on more value-creating activities.  In addition, it should also set competitive level of compensation whenever it will choose to locate in the Southeastern region due to saturated car industry.  Otherwise, it can post premium when it decided to locate its plant in the emerging Northern region as to prevent cash outflow.                 As mentioned, Brazil’s automobile industry is very competitive.  However, the demand for luxury cars remained at low levels that can possibly an indication of wealthy family’s exclusive purchase or industry weakness on brand promotion.  If the former is true, the subsidiary could try to export its outputs that cannot be absorbed by local consumers.  On the other hand, marketing pursuits of the subsidiary should be carefully research according to the preferences of not only the wealthy people but also the upper to middle working class.  Prices in luxury cars in the country can be theorized as relatively lower than Malaysia due to competition.  As a result, the subsidiary can also take internal steps to be efficient in operations as to have optimal control on their prices.               Bureaucracy can have positive or negative effects to foreign investors.  Positive in times when the current investment policies is favorable to the investor, otherwise, the foreign firm would be obliged to lobby in the government or possibly to bribe officials due to unfavorable conditions.  In handling these risks, the subsidiary should first adjust its resources and capabilities according to the existing policies.  Opportunities should be identified in order to protect from new legislations.  Threats, on the other hand, should be leveraged as to prevent substantial looses in the future.  To enhance its ability to maintain in this course, it can conduct a number of social services to the local population to reflect its concern to them.  This can be in the form of donations, branding or actual field services.  In doing this, it can strengthen its citizen’s sympathy and government support leading to stronger lobbying force with little requirement of bribes.     Managing Financial Risks                      The high direct investment could add the flame to the already saturated auto industry.  As a result, it can hedge its profitability by investing in portfolio activities to provide the right combination to its financial structure and limit the effects of heavy competition.  It should also exploit its pricing advantage compared to imported cars that are also burdened of tariff fees.  However, when confronted by large multinational auto companies, pricing strategy should be shifted in the firm’s ability to differentiate its product from them or obtain focused differentiation strategy in the already tiny 2% of the population as initial number of potential demand.  Thus, volume sales can be set aside in order for minimal but effective profit would be returned.                      The resistant economy of the country that has fair dependence to durable commodities can deter the positive effects of global business environment like trade liberalization in China.  As a result, the subsidiary should be able to produce component parts and accessories for the global market as it cannot sell luxurious commodities in the emerging economies.  In this process, it would not be forced to concentrate its resources in the local market and developed economies providing a platform for combined competitive advantages.               Finally, the economic integration of government plan to influence economic indicators could defuse a bomb that can affect investments negatively.  The strong real can increase the consumption of imported automobiles. As a result, the subsidiary can loose the targeted market.  This is aggravated by decreasing inflation rate.  In effect, imported products seemingly are favorable for consumers rather while local producers are faced with decreasing return.  As the demand for luxury cars are based on car’s uniqueness, the wealthy market would seek to buy imported cars.  In this advent, the subsidiary should not close its doors to exporting especially on the emerging economies of South America.  Innovation and product design should be enhanced and internalized in order for its products to click in foreign markets.  These recommendations should also be based with the global examples above including merging possibilities to increase power, being efficient (Australia), and analyzing competitor’s activities and maintaining relationships with suppliers (Japan).       Conclusion                         Brazilian political and economic experience, relative stability and integration proved it is better investment climate than Malaysia.  It also have geographic advantages with regards to market access since the continent is compact.  Malaysia’s inability to handle diversification of industries denounced the profitability issues of the subsidiary, if not, the initial establishment to the infrastructure-congested country.  However, locating the subsidiary in the relatively advantageous Brazil does not connote risk-free environment.  The major risks to be leveraged are the inability to convince local labor, bureaucracy, saturation of the supply and demand on automobiles, insensitivity of its economy (either for positive or negative global economic events) and integration of its economic indicators.  In effect, it is recommended for the subsidiary to use its internal resources and capabilities to anticipate recurring and abrupt political and economic developments.    Bibliography Book Hitt, M, Hoskisson, R & Ireland (2003). Strategic Management: Competitiveness and Globalization. 5th Edition. South Western; Thomson Learning, Singapore.   Periodicals Banerji, K & Sambharya, R (1996). Vertical Keiretsu and International Market Entry: The Case of the Japanese Automobile Ancillary Industry. Journal of International Business Studies. 27 (1), 89+.   Cosset, J. & Suret, J. (1995). Political Risk and the Benefits of International Portfolio Diversification. Journal of International Business Studies, 26 (2), 301+.   Fleischmann, M & Prentice, D. (2001). Strategy, Scale or Policy? Exit in the Australian Car Industry. Economic Record, 77 (239), 351+.   Habib, M. & Zurawicki, L. (2002). Corruption and Foreign Direct Investment. Journal of International Business Studies, 33(2), 291+.     Electronic Sources   Internet (2006) Eduardo Fiuza Research. Retrieved on April 18-19, 2006 from http://www.ie.ufrj.br/publicacoes/discussao/automobile_demond_and_supply_in_brazil.pdf   Internet (2006) Trend Watching. Retrieved on April 18-19, 2006 from www.trendwatching.com/trends/sachet_marketing.htm   Internet (2006). Brazilian Trade Commerce in Britain. Retrieved on April 18-19, 2006 from http://www.brazilianchamber.org.uk/trade_info/referenceinfo.htm   Internet (2006). Market Development Reports. Retrieved on April 18-19, http://www.fas.usda.gov/gainfiles/200504/146119373.pdf   Internet (2006). Asia Market Research. Retrieved on April 18-19 http://72.14.203.104/search?q=cache:yeEG89z640EJ:www.asiamarketresearchcom/malaysia/+malaysia+automobile+consumer+demand+&hl=en&ct=clnk&cd=5   Internet (2006). Power Report. Retrieved on April 18-19 http://72.14.203.104/search?q=cache:jC2wjzGsZDIJ:www.jdpa.com/businessservices/automotive/publications/powerreport/200301/0103_out.htm+malaysia+automobile+consumer+demand+&hl=en&ct=clnk&cd=7   Internet (2006). Fiscal Regimes. Retrieved on April 18-19 http://72.14.203.104/search?q=cache:DUiZUSPaQvMJ:www.jmg.gov.my/files/MALAYSIA%26ASEAN/FiscalRegimes.htm+malaysia+corporate+tax&hl=en&ct=clnk&cd=2   Internet (2006). Malaysia Information. Retrieved on April 18-19 http://www.malaysiainformation.com/industries/automotiveindustry.htm   Internet (2006). Malaysia Today. Retrieved on April 18-19 http://72.14.203.104/search?q=cache:BfSDoos5SIsJ:www.malaysia-today.net/Blog-e/2005/10/malaysia-auto-plan-seen-as-another.htm+malaysia+foreign+investment+automobile+policy&hl=en&ct=clnk&cd=1   Internet (2006). BizAsia. Retrieved on April 18-19 http://72.14.203.104/search?q=cache:ti0Hx6P-KDEJ:www.bizasia.com/economy_/fhh89/surprise_move_malaysia_cuts.htm+malaysia+interest+rates&hl=en&ct=clnk&cd=5   Internet (2006). International Monetary Fund. Retrieved on April 18-19 http://72.14.203.104/search?q=cache:ti0Hx6P-KDEJ:www.bizasia.com/economy_/fhh89/surprise_move_malaysia_cuts.htm+malaysia+interest+rates&hl=en&ct=clnk&cd=5   Internet (2006). Deflation. Retrieved on April 18-19 http://www.mier.org.my/mierscan/archives/pdf/azidin20_9_2003.pdf   Internet (2006). Democratic Action Party. Retrieved on April 18-19  http://72.14.203.104/search?q=cache:bL97xp2DhEQJ:www.dapmalaysia.org/english/2006/april06/lks/lks3861.htm+malaysia+expropriation+of+private+investment&hl=en&ct=clnk&cd=5   Internet (2006). Investment Regime. Retrieved on April 18-19  http://www.iisd.org/pdf/2004/investment_country_report_malaysia.pdf Internet (2006). Growth Performance. Retrieved on April 18-19 http://siteresources.worldbank.org/INTEAPHALFYEARLYUPDATE/Resources/550192-1143237132157/malaysia-March06.pdf   Internet (2006). Central Intelligence Agency. Retrieved on April 18-19 http://www.cia.gov/   Internet (2006). Foreign Investments in Brazil. Retrieved on April 18-19 http://www.cni.org.br/produtos/com_ext/src/doing05.pdf   Internet (2006). Forex Blog. Retrieved on April 18-19 http://www.forexblog.org/2005/05/brazil_raises_i.htm   Internet (2006). High Interest Rates in Brazil. Retrieved on April 18-19 http://www.econ.puc-rio.br/Mgarcia/Macro%20II/ABRrevised.040303.PDF   Internet (2006). Ministry of Finance. Retrieved on April 18-19 http://www4.bcb.gov.br/?ARTICLE001   *Other necessary information are gathered in Wikipedia (www.wikipedia.org)   Credit:ivythesis.typepad.com

BRAZIL AND MALAYSIA RISK ASSESSMENT FOR LUXURY CAR

Introduction External risks can be an opportunity and threat for a firm. Concentration of risks to the latter is relativ...