PAMANTASAN NG LUNGSOD NG MAYNILA ; (University of the City of Manila) Intramuros, Manila GRADUATE SCHOOL OF MANAGEMENT MASTER IN BUSINESS ADMINISTRATION . CASE ANALYSIS April 05, 2009 FAR EAST OPTIC CABLE, INC, (FEOCI) April 16, 2005 was a critical day for the FEQCI, a subsidiary of a Belgian Industrial Company in Brussels with a history dating back to 1747 when they started manufacturing rope. FEOCI was incorporated in 1996 in the Philippines, with BOI incentives, with a Manila Office and a modern plant in Mactan, Cebu. it was the date of the Annual Stockholders’ meeting and the Board of Directors’ meeting, scheduled one after the other, starting at 1:30 p.m., at the Board Room at the Cebu Office and Plant. The main item in the agenda was the fate of the Philippine subsidiary. Should it operate as before and let the “red ink” continue to flow, or decide otherwise, or anywise? Back in 1995, the mother company in Belgium decided to put up a fiber optic cable (FOC) plant in Asia, to service the growing requirements for FOC of Cable TV Companies in the region. The final question to resolve was where? Australia was way down under, Singapore was considered but already crowded with American, Japanese, and other European companies. Thailand, yes but the big question was the language; so with Indonesia. Thus, the Philippines was the chosen venue, with a Manila Office, as other international businesses and foreign embassies are headquartered there at the nation’s capital. Cebu has designated industrial zones and at least three free trade zones, where foreign companies enjoy tax and other privileges. It has an international Port for imports and exports, hence the logical choice for the FOC plant. Se Being classified under the Pioneet and Essential Industry of the IPP of the Philippine Government,sand with Filipino stockholders minority, the company was allowed to purchase raw land in the southern tip of Mactan Istand outside the boundary of Lapu-Lapu City. It acquired 5 hectares, with 2 hectares developed for the plant/office building, with an adjoining warehouse for both raw materials/components and finished Products. The remaining 3 hectares were earmarked for future expansion, The whole area was fenced off, with perimeter lighitings and roving security. The Belgian head office took care of procuring the high-tech, state-of-the art equipment in Germany and dispatched it to the plant site, together with the vital raw materials and components. The hired 6 Filipino electronic and mechanical engineers were sent to Belgium and Germany for two months for technical orientation and on-the- job training. They all met the high standards for the modern FOC plant! .8 German expert in FOC technology supplied by the FOC equipment manufacturer was assigned at the plant site. He supervised the construction of the plant, the installation and test-runs of the FOC equipment. Work proceeded with no hitches, typical of German and Belgium efficiency and professionalism. On March 1, 1998, the plant was inaugurated, with top officials from the head office in Belgian andtop government officials of the Philippines headed by President FVR himself. There was the usual press coverage in the major national papers. The pictures are still on display at the lobby of the office/plant building in Cebu. It was really a momentous occasion for the country for being the host of the first FOC plant in the Far East After three months of normal operations of the plant, the German expert left the country, with the plant run entirely by the trained Filipino engineers. The initial capital of $10 million (P280 million at P28/$1 at that time) easily grew to P330 million, with retained earnings, within two years. The FOC’s products were sold not only to big cable TV companies in Metro Manila, including the Lopez owned company, but also to a slew of smaller companies in the Visayas and the Mindanao areas. Exports to Australia, Indonesia and Thailand were the most lucrative, arranged by the Brussels head office which, covers Europe, Africa, the Americas, and Asia. With the initial “sunshine days” fast disappearing, the “rains” started to come! The Filipino stockholder, Mr. J. Vergara, who volunteered to act as President for 2 % years (on part-time basis as he had his own business in Manila) discussed with the Board Chairman, Mr. K. Fourex, in late 1999/early 2000, the need for a full-time President. Searches were made in Belgium and in Netherland. When the $10 million was remitted to the Philippines, it was arranged through PNB Brussels. The remittance coordinator, Mr. ¥. Ezlamonte, although a Filipino with a Commerce degree, was a Dutch citizen. He was asked by Mr. Fourex to help search for and recommend a qualified candidate. Instead, with a furtive twinkle in his eyes, he himself volunteered to be “it”. He forthwith submitted an impressive resume, showing he was President/General Manager of two companies, one in theHague and the other in Rome. on the side. In view of his representations, he was invited to visit the plant site in Cebu. To shorten the narrative, Mr. Ezlamonte was given an employment contract denominated in Euro, with terms and conditions obtaining in Belgium at that time. He was overjoyed although very careful not to show it. After relocation in Cebu July 1, 2001, he immediately hired a former classmate in Hligan City, Mr. L, Gonzalvez, a civil engineer with industrial experience in lligan. He was taken in with a compensation package supposedly the same as the other executives at ‘the plant who were trained in Belgium and Germany. He was made directly reporting to the President as Technical Deputy. The compensation and benefits of the rank and file were overhauled through the unofficial handiwork of the President's daughter who had no background whatsoever in Human Resource Management and never worked in an industrial company. An Executive Secretary to the President was brought in, who turned out to be a GF of Mr. Ezlamonte. In fact, there was a day when the wife of the President “invaded” the office of her husband and really made a big scene! A few weeks thereafter, Mr. Ezlamonte joined 2 Born Again group and began sporting an oversized crucifix as a pendant hanging from his neck. 4A simplified Organigram showing the Administrative Group and the Piant Group below Board of Directors" Executive Committee” President Technical Deputy Secretary i ‘Technical ion* sane AMarketing® Product ‘Administra Services’ || _SProduction’ || AOperations® |) aarita Office) inistr * Seven directors headed by Mr. Fourex, Chairman, Two representatives from Belgium, usually attend Board Meetings. * Three members (a chairman, the President, and Adm. Manager as members). * Quality Assurance group *. Sheathing, Coloring, Stranding, Coding,/Packing, Shipping. 5. Materials and Supply, Warehousing, Inventory Control, Documentation. © Marketing/Sales Manager, Technical Asst., Adm. Asst. “admin, Manager, Accounting Manager and Asst., Personnel Officer/Office Manager, Nurse, Receptionist/Clerk, Security Agency (contracted). **5: 4 The managers and the Deputies were trained overseas Meanwhile, the Marketing Group started to wonder when the supposed wide business contacts of the President. would start ordering FOC’s. Nothing really ever came! The contacts of Mr. Ezlamonte were actually personal (not business) contacts! Bloated sales forecasts were presented to Board of Directors by the President, but except for the ordexs worked on by the Marketing Group, nothing was ever realized! The employment contract of Mr. Ezlamonte signed in Belgium stipulated very clearly that receipts for business expenses were to be periodically submitted to the Accounting Department for proper liquidation. In the more than two years’ stay of the President with the company, no receipts were ever submitted for his business class plane tickets, for the rented house in the exclusive subdivision of Cebu City, for the MRO of the company owned vehicle assigned to him. Because of the “rains” which turned into “typhoons”, Mr. Fourex, the Board Chairman, decided to engage somebody over the head of the President, What could that be? A consultant would have no authority over anybody in the company. The CEO title was already assumed by the President. The company although capital intensive, was really small in terms of manpower complement of 85 employees, The plant operation was practically automated. See the simplified process flow below. 1. Warehouse supplies reels of optic glass fibers {OGF) which are imported. “*%. OGF is run through the sheathing equipment. The sheathed OGF becomes ‘fiber optic cables (FOC). 3. FOC goes to the coloring section. Color coding is very essential for ID purposes in case of breakage of glass fibers already sheathed,4, Colored sheaths (FOC) go to stranding section. FOC’S are ordered in strands of 4, 8, 16, 32, 64, 128 usually. 5. Strands of FOC are coiled in reels. Reels of the OGF in No. 1 above are reused. 6. Reels of FOC’s are packaged for shipment to customers The decision was to engage a Consultant but called Chairman of the Executive Committee of the Board of Directors; with two high-caliber members, namely, The President and the Admininistrative Manager (Ms. Lina Laxamana, a younger sister of Mr. Fourex’s Wife). Ms. Lina (50's) was in a convent studying to be a nun but decided not to continue. Ms. Lina was also appointed Asst. Board Secretary. Mr. N. M. Opradicho (60's) was the “Consultant” chosen. He had good experience in two Inferriational Oil Companies, more than 20 years total. He had advanced studies in the Philippines, both in the masteral and doctoral levels, with special studies in Management at the HBS in Massachusetts, USA. Mr. K, Fourex, the FEOCI Board Chairman (50's) is the only child of the Board Chairman/President of the mother company in Belgium, Mr. Chevalier Fourex, 70's. Mr. KF has a degree in naval engineering, with work experience in his father’s company and in number of West European countries selling FOC’s. Somehow, he found time to come to the Philippines to study anthropology and Filipino culture at UP Diliman. ina vacation in Italy (Venice, Milan, Rome), he met by chance a Filipina tourist enjoying the sights in Naples, Capri, Sorrento. This was the setting of the meeting of Mr. KF and the Filipino lady, Ms. Xena Loxamana, which led to marriage thereafter in the Philippines in a Catholic Church. Both families are Roman Catholics. Ms. Xena comes from a brood of six sisters and one brother. The mother was 2 widow, the father (WWII VETERAN) passed away earlier. This information is significant because when criticisms started to develop at the Belgium head office, some were directed to the big family of Ms. Xena, e.g. company resources ‘were being used for the benefit of the big family, a gross exaggeration. Mr. Opradicho, the “consultant”, later on found out from interviews with executives of the company that the engineer friend from Iligan had secret privileges {free housing and free use of company vehicles during weekends. These were forthwith removed, but Mr. Ezlamonte claimed no knowledge of the privileges! Hierarchical levels of the small company were “flattened”. All managers were put on the same level, so with the supervisors and technical people. Although the compensation package could no longer be adjusted because of Phil. Labor laws, the implementation was made very strict. Only after a year of satisfactory service could employees be considered for salary adjustments. The bloated compensation rates were actually meant to “buy” the loyalty of the employees to the new President. It was also found out that the eagerness of Mr. Ezlamonte to get the top job of FEOCI was really a Solution to the sickness of Mrs. Ezlamonte who could not continue to stay in cold countries, hence the urgent need to relocate to the Philippines despite their acquired Dutch citizenship (and privileges). Mr. Opradicho flew to Cebu from Manila every week and stayed /worked at the Flant Tuesday to Thursday. He was lodged in one of the seven rooms of the two-storey house of Mr. and Mrs. Fourex in a beautiful resort subdivision, 20 minutes drive from the Plant site. He was assigned to use the office of the Board Chairman at the 2" floor of the Plant/Office Building, where frequent discussions with Mr. KF were made on the moves to take to reverse the “misfortunes” of the company. The office manager located in the Ground Floor also acted as Executive Asst. to Mr. KF and Mr. N. M. O. These two bosses would usually eat lunch at the canteen, together with the rest of theemployees. Free lunch and free transport to designated points were among employee benefits The bloated employee benefits of this small company would put to shame those of bigger firms, “thanks” to Mr. Ezlamonte’s daughter who thought perhaps her father ‘owned the company, The presence of Mr. Opradicho started to change the atmosphere of the company. Relationships and activities of employees became formalized, rather than elaxed/casual, The Administrative Manager, Ms. Lina Laxamana, started to hold motivational sessions with the supervisory employees, with the “consultant” sometimes invited to be a Resource Speaker on such topics as Corporate Communication Strategic Planning, and the like. Certificates of Participation were issued after the one week or two weeks seminar/workshops. There was never any talk about unionism, Manpower mplement was streamlined to 70 total, including all levels. The following financial figures highlight the sad. condition of FEOCI as of March 31, 2005 (unless otherwise indicated): Original capitalization as of 1996 280M Capital, with retained earnings (2001) P330M Total Assets P321.077 M Total Liabilities P631.540M. Capital Deficiency 310.473 M Loss for the 2004 P 27.725M Cash on Hand and in Bank P 695TH Trade & Other Receivables P 26.559M Inventories P 68.241M Trade & Other Payables P 64.842M Cost of Goods Sold P 38.373M Gen. & Adm, Exp. P 10.670M Sales Revenue as of 12/31/04 P 8971M For the 7 ~ man Board of Directors of the company, they had a crisis decision to make on that fateful day of 2005 in Cebu. Endnotes: 1. This case is factual, with names of the major players disguised, As such, it must be treated with utmost confidentiality. Only for use as material for case analysis, at GSM. : 2. Mr. k. Fourex, the Board Chairman, was also designatéd by the Belgium Office its Official representative to the FEOCI Board. Additionally, one or two more representatives from Belgium would arrive to attend these meetings. The following day they would leave for home. 3. As tax shield, the marketing activities were under FEOCI’s subsidiary, the FEOC Marketing, Inc. headquartered in Manila. The whole marketing group is composed of employees of this subsidiary. 4. “The “Consultant” was given a stock and appointed a Director, so with the President. 5. The company’s external auditors are from the Cebu Branch of a Manila Accounting firm.10. 1. 22. The FEOCI Board has three lawyers, i.e., two directors and the Corporate Secretary. One lawyer and the corporate secretary come from a prominent family in Cebu and are relatives. Three Directors are based in Cebu, three in Manila, and one in Davao. The Admin, Manager, a younger sister of Mrs K. Fourex, was appointed Asst. Corporate Secretary and attended Board Meetings. She helped in recording minutes of the meetings. ‘ The “Consultant” was recruited through relatives of Mrs. K. Fourex, and whose qualifications were favorably considered by Mr. KF. ‘The President at one time issued a cash check with only one signature (his) instead of the required two, so he could buy the business class tickets himself with rates only known to him. Worse, the Cebu Bank Manager encashed the check. Mr. Opradicho chastised the Bank Manager and if it were not for her apologies, she would have been reported to their Manila head office. The President's alibi was that the second signature was just delayed as the Acctg. Mgr. was not around. Mr. and Mrs. K. Fourex both had hormonal deficiencies and could not have their own child. They adopted a newly born baby girl right there at a Cebu Hospital. Mr and Mrs. C. Fourex in Belgium welcomed their “granddaughter” who would one day be an heir to their wealth. u The competition from China through their Philippine representatives was unbeatable! Initially, there were questions about the quality of their FOC’s but eventually it passed the European standard. In one bidding of PLOT, their price was just the equivalent of the raw material component of FEOCI's bid (with labor, overhead, and mark-up not yet added), The two companies of Mr. Ezlamonte, one in Netherland and another in Italy, were only “alive” when he had imports from or exports to the Philippines. Otherwise, they were dormant. Case Writer: Prof. Ernesto M. Apodaca, GSM faculty te