MGM  1  -­‐  AEBE   Francine  Carron     Prof.

 Haiyan  Zhang     Assignment  3   _______________________________________________________________________________                         OUTLINE     I.  Location  Advantage     A.  China   1)  Production  Plant     2)  Innovation  Centers  (R&D)   3)  Sales  &  Administration   4)  Chocolate  Academy     B.  India   1)  Sales  &  Administration   2)  Chocolate  Academy     C.  Malaysia   1)  Production  Plant     2)  Innovation  Centers  (R&D)   3)  Sales  &  Administration     D.  Singapore   1)  Production  Plant   2)  Innovation  Centers  (R&D)   3)  Sales  &  Administration     II.  Location  Selection  Callebaut     III.  Doing  Business  2011                
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  Francine  Carron-­‐  MGM1-­‐  AEBE  

I.  Location  Advantages:       Callebaut   is   a   company   with   value-­‐chain   activities   worldwide.   As   this   assignment   relates   to   the   Asia   divisions,   I   will   focus   on   Callebaut’s   activities  in  this  continent.       A.  CHINA:     Callebaut   has   a   production   plant,   innovation   center,   sales,   &   administration  activities  in  China.       1)  Production  Plant:       One   obvious   benefit   of   producing   in   China   would   be   the   cheaper   labor   cost.   The   labor   rates   remain   up   to   one-­‐thirtieth   of   those   in   Germany   for   example.   China   has   a   poor   rural   labor   force   of   900   million   people   that   are   willing   to   join   the   industrial   workforce.   1   However,   the   benefits   of   manufacturing   in   China   go   beyond   ‘cheap   labor’.     Experts   believe   that   if   companies   align   their   China   manufacturing   strategy   with   their   overall   Business   Strategy  and   Goals,   the   company   can   benefit   from   local   technical,   financial,   and   marketing  knowledge  of  China.  2   China   is   said   to   have   advantages   when   it   comes   to   manufacturing   over  other  Asian  countries.  One  reason  for  this  is  the  experience  and   education   the   country   has   in   delivering   products   that   adhere   to   the   rigorous   standards  that  are   required   by   both   western   legislation   and   consumers.3       Below  I  list  a  few  of  the  advantages  of  producing  in  China:     • China  is  always  busy  increasing  manufacturing  prowess   • Reduction  in  Direct  Labor,  Material,  and  Overhead  Cost   • Reduction  in  Indirect  Engineering,  Marketing,  Financial  Labor  &     Transactional  Cost   • Simplify  supply  chain  logistics  &  service  to  your  Asia  customers  
                                                                                                                1  China’s  Cost  Advantage.  Manufacturing  Engineering,  August  2005.   http://findarticles.com/p/articles/mi_qa3618/is_200508/ai_n14880665/   2  Manufacturing  in  China,  The  Best  Choice?  http://www.usa-­‐ chinanet.com/China-­‐Manufacturing.aspx   3  The  Advantages  of  Direct  Manufacturing  Outsourcing  in  China  by  John  Roker  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

• Center  for  Material  Sourcing  throughout  Asia  for  Domestic  and   China  Production   • Fast-­‐turnaround  of  Low  Cost  Tooling  &  Fixtures   • Currency  Transaction  Flexibility  between  Multi-­‐National  Countries   • Knowledge  of  Emerging  Local  Chinese  and  Asian  Markets   Manufacturing  in  China  Considerations4   Items   that   are   interesting   to   know   in   China   is   that   labor   costs   and   Labor  availability  are  typically  more  favorable  outside  China’s  major   centers,   such   as   Shanghai,   Guangzhou   and   Beijing.  5   Another   benefit   of  producing  in  China  is  that  there  are  many  other  foreign  companies   in   the   area   that   manufacture.   Therefore,   the   mix   of   industries   available   in   the   area   can   affect   the   supply   chain,   logistics   management,   and   the   availability   of   local   talent   familiar   with   the   foreign  company’s  type  of  business.  6       2)  Innovation  Centers  (R&D):       There  are  now  approximately  1,000  R&D  centers  in  China  (of  which   50  percent  are  attached  to  companies  in  the  technology  sector),  and   this   number   continues   to   rise   thanks   to   the   ongoing   investment   by   multinational  corporations  (MNCs),  the  increasing  need  to  be  close  to   the   local   customer   base   and   low   labor   costs.7   The   Vice   President   of   Global   Engineering/   Greater   China   Engineering   Lead,   a   leading   IT   company   stated   the   following:   “For   multinational   technology   companies,   if   they   haven’t   set   up   their   R&D   facilities   in   China   yet,   the   chances   are   that   they   will…but   I   have   seen   as   many   failures   as   successes  so  far.”8  China  doesn’t  have  many  R&D  centers  yet  but  the   number  keeps  going.  The  government  is  also  implementing  plans  to   increase   the   number   of   foreign   R&D   centers   in   China.   I   myself   am   convinced   of   the   fact   that   having   innovation   centers   in   China   could  
                                                                                                                4  The  benefits  are  retrieved  from  Manufacturing  in  China,  The  Best  Choice?   http://www.usa-­‐chinanet.com/China-­‐Manufacturing.aspx   5  The  Advantages  of  Direct  Manufacturing  Outsourcing  in  China  by  John  Roker   6  Id.   7  Building  Successful  Research  and  Development  Centers  in  China:  Leadership   and  Organizational  Challenges.   http://www.russellreynolds.com/content/building-­‐successful-­‐research-­‐and-­‐ development-­‐centers-­‐china   8  Id.  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

lead   to   great   competitive   advantage   for   China.   If   they   can   excel   at   production,  I  am  sure  that  they  can  excel  at  innovation  as  well.       3)  Sales  &  Administration:        The   advantages   of   having   sales   and   marketing   in   China   is   that   a   company,  in  this  case  Callebaut  can  respond  much  faster  to  the  local   market.   One   could   say   that   the   benefit   of   having   a   sales   activity   in   China   is   that   increases   local   responsiveness.   Nowadays   it   is   important   that   the   producer   is   close   to   its   customers,   because   it   is   important  to  understand  the  rapidly  changing  consumer  preferences   and  tastes.  Having  a  sales  activity  in  India  is  in  line  with  Callebaut’s   strategy  of  establishing  its  presence  in  promising  emerging  markets.   9According   to   the   international   market   intelligence   provider   Euromonitor,   the   relatively   small   Indian   chocolate   market   (with   volumes   of   about   55,000   metric   tons   of   chocolate   and   compound   per   year),   is   expected   to   grow   on   average   per   year   by   around   17.8%   between  2008  and  2012.10     The   director   of   Paul   Halliwell,   Director,   Gourmet   Business,   Barry   Callebaut,  Asia  added  on  the  above  benefits  with  the  following  quote:   “The   opening   of   this   Chocolate   Academy   is   a   tribute   to   the   importance   Barry   Callebaut   places   on   the   Indian   market   and   the   tremendous   talent   we   have   witnessed   in   the   country’s   culinary   industry  that  can  be  further  nurtured.”11       Barry   Callebaut   has   the   intention   to   grow   sales   out   of   China   by   six   times   in   2012,   having   a   factory   and   a   sales   division   in   one   country   will  enable  them  to  reach  this  target.       4)  Chocolate  Academy:       A  chocolate  academy  is  a  training  center.  Here  they  offer  workshops,   seminars,   and   demonstrations,   designed   to   inspire   artisans   and   culinary  professionals  with  an  active  interest  in  Gourmet  chocolate.12  
                                                                                                                9  Id.   10Id.   11Id.   12  Barry  Callebaut,  Corporate:  http://www.barry-­‐ callebaut.com/56?release=4481  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

There   is   no   need   for   me   to   go   in   detail   on   what   the   benefits   are   of   having  such  a  training  center  included  in  the  value  chain  activities  in   China;   I   can   describe   the   need   with   one   quote   of   Patrick   De   Maeseneire,   CEO   of   Barry   Callebaut:   “China   will   be   our   key   target   market   in   Asia   for   the   next   coming   years.   Today’s   consumption   per   capita  may  be  low  and  may  pick  up  only  slowly  in  rural  areas.  But  the   development   speed   of   urban   areas   along   the   belt   from   Beijing   to   Shanghai   and   to   Hong   Kong   is   breathtaking.   There   alone,   we   are   talking   of   about   500   million   potential   chocolate   consumers   who   start   traveling,   who   are   open   to   novelties   including   new   foods   and   who   have   enough   disposable   income   to   buy   chocolate,   which   is   seen   as   a   premium   product.   Through   our   industrial   and   artisanal   customers,   whom  we  will  serve  out  of  Suzhou,  we  can  offer  Chinese  consumers  and   tourists  visiting  China  new  and  exquisite  taste  experiences.”13     B.  INDIA:     Callebaut   has   the   following   value-­‐   chain   activities   in   India:   A   sales   organization  and  chocolate  academy  (training  facility)  in  India.       1)  Sales  &  Administration:       One  of  the  benefits  of  having  a  sales  activity  in  India  is  that  India  has   a   growing   middle   class   with   a   reasonable   disposable   income.   This   benefit  actually  counts  for  China  as  well.  Another  advantage  of  having   sales  in  India  is  that  it  can  increase  its  local  responsiveness  as  well  as   in  China.  Due  to  the  fact  that  India  is  a  service  economy,  it  could  serve   as  a  hub  for  more  Asian  sales.       2)  Chocolate  Academy:       The   reason   for   installing   such   training   centers   is   too   have   a   quick   entry  into  the  Indian  market  in  line  with  company  strategy  to  capture   growth  opportunities  in  fast  emerging  markets.  14     C.  MALAYSIA:    
                                                                                                                13  Id.   14  Id.    

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

1)  Production  Plant:       Malaysia   has   always   been   very   attractive   for   foreign   companies   to   invest   in   production   plants.   However   over   the   past   years,   there   is   been   an   increase   in   the   rate   of   manufactories   opening   in   Malaysia.   The   reason   for   rapid   production   expansion   are   that   Malaysia’s   balance   of   payments   goes   from   strength   to   strength   as   does   its   financial  system.15  Malaysia  in  2010  had  a  GDP  growth  of  5%.16  At  the   same   time,   Malaysia   is   shifting   from   low-­‐end   manufacturing   toward   activities   that   better   leverage   its   strengths   and   natural   advantages.  17   With   strong   competencies   in   production,   assembly   and   substantial   talents  in  fabrication  and  product  testing,  the  country  has  remained  a   relevant   player   in   the   global   manufacturing   industry.18   Although   there   is   increased   competition   in   the   region,   which   has   prompted   Malaysia   to   expand   its   manufacturing   philosophy   even   more.   Malaysia   is   a   good   candidate   for   any   foreign   company   to   invest   in   a   manufacturing   facility   because   it   has   a   stable   socioeconomic   environment  and  is  located  in  the  heart  of  Asia.  It  has  a  great  physical   infrastructure  and  a  well-­‐trained  workforce.       2)  Innovation  Center:         Malaysia   is   an   ideal   base   for   a   production   center   but   also   for   an   operation   headquarter,   distribution   or   center   for   shared   services.   The   success   in   this   key   sector   is   based   on   a   close-­‐knit   network   of   relationships   between   industry,   science,   and   research.   Malaysia   has   the  world’s  largest  single  research  establishment  dedicated  to  rubber   –   the   Malaysian   Rubber   Board   (MRB).19   The   fact   that   they   have   the   largest   R&D   center   immediately   attracts   more   companies   to   open   innovation   Centers   in   Malaysia.   Also,   the   Malaysian   government’s  
                                                                                                                15  Malaysia  -­‐  Moving  Forward  Up  the  Global  Value  Chain:  Sound  economic   policies  and  a  focus  on  high-­‐value  activities  puts  Malaysia  in  an  advantageous   position  for  future  growth.   http://www.areadevelopment.com/InternationalLocationReports/dec08/Malay sia-­‐high-­‐value-­‐growth-­‐028.shtml   16  Id.   17  Id.   18  Id.   19  FDI  Opportunities’  in  Malaysia.  Tun  Abdul  Razak  Research  Centre  2005   http://www.tarrc.co.uk/pages/fdi.htm   6  

 

 

  Francine  Carron-­‐  MGM1-­‐  AEBE  

commitment   to   R&D   is   reflected   in   the   increasing   financial   resources   devoted  to  R&D  in  each  development  plan  as  well  as  the  introduction   of  various  incentives  and  support  schemes.     3)  Sales  &  Administration  (Marketing):       The   reasons   and   benefits   for   having   Sales   activities   in   Malaysia   are   the  same  as  in  China  and  India.  Malaysia  as  previously  mentioned  has   the   perfect   location   for   being   a   center   of   shared   services.   Hence,   there   is   no   need   for   repetition   and   I   refer   to   the   above   mention   China/  India  benefits.       D.  SINGAPORE:       1)  Production  Plant:       As   Malaysia,   Singapore   has   natural   strategic   advances   from   their   locations   as   gateways   to   Asia.   They   have   used   their   location   to   become   major   financial   centers,   and   they   provide   tax   incentives   to   encourage   the   transfer   and   development   of   technological   and   intellectual   property.   20     Both   governments   are   committed   to   high   levels  of  GDP  growth.  21     There   are   cases   in   Malaysia,   where   the   government   has   provided   100%  financing,  and  investment  to  multinationals  that  could  enhance   technology   transfer.   Multinationals   are   transferring   state-­‐of-­‐the-­‐art   development   and   manufacturing   to   take   advantage   of   the   financial   incentives  offered  by  Malaysia.  22     When   looking   at   the   facts   it   seems   that   investing   production   in   Malaysia  could  lower  tax  costs  throughout  the  entire  value  chain.  The   great   tax   benefits   probably   explain   why   Singapore   was   one   of   the   first  places  that  Callebaut  opened  its  manufacturing  facilities.       2)  Innovation  Center  (R&D):    
                                                                                                                20  Singapore  &  Malaysia’s  Growing  Competitive  Capabilities,   http://www.wtec.org/loyola/em/04_08.htm   21  Id.   22  Id.  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

  According   to   PriceWaterhouseCoopers   (PWC)   Singapore,   offers   tax   advantages   for   foreign   companies   investing   in   R&D.   There   is   a   100   per   cent   tax   deduction   allowed   for   R&D   expenses   incurred   for   new   business  on  R&D  projects,  provided  the  resultant  benefits  of  the  R&D   is   owned   in   Singapore.23   Currently,   a   150   per   cent   tax   deduction   is   allowed   only   in   respect   of   consumables   and   staff   costs   incurred   for   qualifying   R&D   activities.   This   should   be   expanded   to   include   other   incidental   expenses,   (such   as   utilities,   rental,   professional   fees,   license   fees,   etc)   which   are   incurred   for   undertaking   R&D   in   Singapore.24   Whenever   countries   provide   great   tax   initiatives   for   foreign  corporation,  it  is  always  a  good  strategy  as  a  foreign  company   to  enter  those  markets,  as  this  will  reduce  costs.       3)  Sales  &  Administration:       The  reasons  and  benefits  for  having  Sales  activities  in  Singapore  are   the  same  as  in  China,  India,  and  Malaysia.    As  previously  mentioned,   it   has   the   perfect   location   for   being   a   center   of   shared   services.   Hence,   there   is   no   need   for   repetition   and   I   refer   to   the   above   mention  China/  India/  Malaysia  benefits.       II.  Location  Selection  Analysis  Callebaut:       I   mostly   explained   in   the   above   section   already   why   it   is   good   for   Callebaut   to   have   its   presence   in   China,   India,   Malaysia,   and   Singapore.   But   here   I   will   further   extend   my   reasoning.   Callebaut   entered   Asia   through   the   Singapore   market   and   so   spread   to   Malaysia,   China,   and   India.   India   was   the   last   country   they   entered.   Callebaut  is  speculating  on  the  rise  of  the  growing  middle  classes  in   India   and   China   to   source   its   chocolate   products.   Therefore,   having   selected   the   previous   locations   Callebaut   can   respond   quickly   to   customer   needs.   I   believe   that   Callebaut’s   Asia   Strategy   was   a   very   well  thought  through  plan,  as  they  haven’t  made  any  mistakes  in  Asia   so  far.  Sometimes  one  hears  from  companies  that  failed  entering  the   Asian  market  but  Callebaut  is  not  one  of  them.  The  fact  that  they  have  
                                                                                                                23  Encouraging  R&D  by  fine-­‐tuning  tax  rules.  Price  Waterhouse  Coopers:   http://www.pwc.com/sg/en/budget-­‐2011/budget-­‐2011-­‐01.jhtml   24  Id.  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

a   few   production   plants   and   training   center   in   Asia   will   help   them   reach   their   2012   targets.   For   the   near   future,   I   recommend   that   Callebaut  also  opens  a  production  in  plant  to  better  cater  the  Indian   customer.       III.  Doing  Business  2011:     When  analyzing  the  document  named  ‘Doing  Business  2011’,  one  can   read  from  the  statistics  that  it  is  relatively  easy  to  import  and  export   from   China   at   a   very   low   price   compared   to   other   countries.     China   has   installed   in   their   ports   a   TC-­‐SCAN   system,   which   reduces   clearance  delays.  The  DB  2011  text  also  mentions  that  the  tax  system   and  making  payments  in  China  is  relatively  easy.  China  has  a  one  tax   per   tax   base   system.   On   Chinese   taxation   it   mentions   that   “China   unified   accounting   methods   and   expanded   the   use   of   electronic   tax   filing   and   payment   systems   in   2007,   saving   firms   368   hours   and   26   payments   a   year.   In   2008   and   2009   China   unified   criteria   for   corporate   income   tax   deduction   and   shifted   from   a   production-­‐ oriented   value   added   system   to   a   consumption-­‐oriented   one,   saving   firms  another  106  hours  a  year.”25  China  and  Malaysia  also  lowered   the  profit  tax  rates  of  the  past  6  years.       This  is  in  contrast  with  India  that  still  has  a  complex  tax  system  that   varies  from  region  to  region.  Maybe  the  former  sentence  provides  a   possible   explanation   on   why   Callebaut   hasn’t   opened   a   production   facility   in   India.   One   of   the   implementation   India   has   done   to   make   the   foreign   companies   lives   easier   is   the   roll   out   of   an   online   VAT   registration   system,   which   replaces   the   old   physical   stamp   system.   The  DB  2011  highlights  the  online  improvements  of  India,  Singapore,   and  Malaysia.  Singapore  has  a  strong  and  efficient  e-­‐government  for   example.     It   is   also   very   cheap   to   import   and   export   from   Malaysia.   Malaysia   being   number   one   for   exporting   and   Singapore   is   the   cheapest   for   import.   Malaysia   also   improved   in   2011   in   registering   property   this   is  very  interesting  for  MNC’s  buying  properties.  Another  advantage  of   Malaysia   is   Malaysia   now   offer   strict   protections   for   minority   investors:   regulated   approval   of   related-­‐party   transactions,   a   high  
                                                                                                                25  IFC-­‐  Doing  Business  2011  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

level   of   disclosure,   clear   duties   for   directors   and   easy   access   to   corporate  information.26     Other  advantages  of  Singapore  are  that  it  has  increased  its  minority   investor   protection   laws.   It   also   implemented   tax   cuts   to   cope   with   the   global   recession.   Singapore   retains   the   top   ranking   on   the   ease   of   doing   business   this   year,   followed   by   Hong   Kong   SAR   (China),   New   Zealand,   the   United   Kingdom,   the   United   States,   Denmark,   Canada,   Nor-­‐  way,  Ireland  and  Australia.27     When   reviewing   the   report   Doing   Business   2011,   it   becomes   obvious   that   China,   India,   Malaysia   and   Singapore   are   strategically   well   chosen   countries   to   locate   value   chain   activities   in   as   a   result   of   their   strategic   locations   in   Asia,   lower   production   costs,   trained   labor,   lucrative   tax   laws   and   desire   for   continuous   overall   development   in   all   the   areas   of   the   value   chain.   Once   again,   I   must   say   Callebaut   picked   out   Asia’s   top   performing   countries   and   it   must   continue   to   expand  further  in  Asia  and  other  emerging  markets.    

                                                                                                                26  Id.   27  Id.  

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  Francine  Carron-­‐  MGM1-­‐  AEBE  

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