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Dear Mr.

Due to $600,000 of financial deficit appeared again on our financial statements last
quarter, I learned you have been trying to collect new ideas among the whole company
to reduce the deficit and gain profits. I received your email last night, and as a
financial officer, I suggest you to shut down the factory in China as soon as possible. I
am going to help you learn about my opinions through the analysis below.

Why We Built a Factory in China 16 Years Ago?
The main reason was that we got a cost advantage which was brought by the
outsourcing business. In recent four decades, the outsourcing decision has changed that
company not just buy products from other suppliers but build their own subsidiary
corporations or factories over the seas. For the United States specifically, resource
supplies such as raw materials, labors and land are limited, and in a competitive market,
companies are more willing to use limited recourses to gather more profits; thus they
all specializing in high productive products and then purchase other goods they need
from external suppliers.
For nearly 60 years, the United States has been the most prosperous in economy,
possessing highest GDP around the world due to its high productivity, technology and
efficiency. However, the scarcity on resources is more serious in the United States than
in other countries. In order to address attacks of scarcities, 15% companies in the United
States, include us, have attempted to invest their capital to build factories in developing
countries or third world countries where they can get cheap labor forces, plenty of land

and natural resources since 1950. In obvious, these companies can utilize their domestic
labor forces and land on making more profitable products, purchasing natural resources
from developing countries by low prices, as well as conserving local resources. That is
why even at the initial period, the companies have to invest a fortune to build the
factories and spend time to keep the factories on the track, and they are willing to do
this outsourcing business.

Past Outsourcing Business in China:
China has been attracting about 50,000 companies of developed countries to invest
or establish factories there every year (After the reform and the open-gate policy). In
1999, our factory also was established in China. At that time, we could hire a labor
force by a relatively low wage (52 cents per hour, in 2000) due to the large population
and the benefit of real currency exchange rate ($1:¥8.3, in 2000). Although at the
beginning, we spent $17,000,000 on this outsourcing business, and we also had to
afford transportation expenses to ship the goods back to the United States, the
company's net income was more than its spending. (There was $1,000,000 of net margin
in 2000)

Current Outsourcing Situations in China:
The situations nowadays have become totally different than before. Initially, it is
hard for us to hire enough labor forces by relatively low wages now. You may ask that
Chinese population has been increasing to one billion three hundred million, why there

is no enough labor supply? The reason is that the Chinese government implemented the
one-child policy in December 1979 in order to curb population growth rate, so the
number of newborns each year has been decreasing from then on. Although there still
is a large population base, the number of elders occupies 15% of the whole Chinese
population. In other words, Chinese labors of working age are decreasing; thus we have
to pay more wages to hire sufficient labors to work for us. Besides, with the
improvement of the population quality, new Chinese generations do not want to be
strenuous manual labors, and they are more willing to do head works which can bring
higher wages to them.
Except the main labor force factor, there are other three significant causes that make
our factory runs arduously:
1. Yuan's appreciation ceaselessly to U. S. dollar ($1:¥6.1, in 2015) increases the
total cost of the factory's business. This leads we input more capitals on the
factory to buy raw materials, as well as afford more salaries and transportation
expenses than before.
2. The resource exploitation has been restricted hugely by the Chinese
government with the improvement of the environment consciousness. Moreover,
our factory belongs to the plastic industry, and the factory's emission may pollute
the environment; thus we cannot gain a subsidy from the Chinese government
even have to pay tariffs a year higher than a year.
3. Although the transportation is more efficient than before, a rising freight has
been spurred by rising fuel costs that also raise the cost of our production.

My Suggestions:
As far as I am concerned, we should shut down the factory immediately. I know
you worry that if we tend to close the factory, we will lose the front-end investments
include buildings, machines, roads and other infrastructures. Nonetheless, I want you
know all these are sunk costs that means they cannot be changed whatever closing the
factory or running the factory continually. On the one hand, if we keep going, a lager
financial deficit is the only one consequence. On the other hand, the factory also exists
residual values, so if we resell it to another buyer, we can get about $900,000 to offset
our loss. At present, it is hard to run this factory to generate profits for us again, and
this situation also is unlikely to improve (labor wages will become higher and higher).
There is another suggestion I offer to you if you still want to gain benefits from the
outsourcing business. I would recommend that to migrate the whole factory from China
to south-east Asia, like Cambodia and Vietnamese, because:
1. These south-east Asia countries have the relatively cheaper labor force than
2. We can purchase abundance of natural resources with a few local governments'
3. Small countries are conducive to transport raw materials and finished products.
4. The warm and wet climates are more appropriate to our production.

Finally, I have attached our company's financial statements and highlighted all

receipts and disbursements, so you can know the operation performance directly. I also
have attached a news about Adidas who shut down a manufactory in China, 2012.
Please check it to see how the CEO of Adidas do the decision under a similar situation.
I hope my analysis and suggestions can help you to make a right choice. Thank you for
your time to read this e-mail, and if you have any question, please feel free to contact

Yushuang Li
Feb, 19, 2015