International Trade Strategy and Techniques Synthenia and Vietchem Group - Case Study Example

? International trade strategy and techniques Table of Contents Introduction 3 Question 3 Vietnam 3 Viet se Market 4 Favorable factors for investment in Vietnam 5 Risks factors in investing in Vietnam 6 Question 2 7 Advantages of a joint-venture with Vietchem 7 Risk factors of a joint-venture with Vietchem 8 Question 3 10 Advantages of a joint-venture with Synthenia 10 Risk factors for a Joint Venture with Synthenia 10 Question 4 11 Conclusion 12 Name of Student: Name of Professor: Course Number: Date of Paper: International trade strategy and techniques Introduction The following sections of the report foreground the joint-venture of two business giants Synthenia and Vietchem Group. The report elaborates on both the favorable and unfavorable factors which will probably affect the joint venture (JV). The newly ventured, The Vietnam Polymer Company has 49% of ownership in both the companies and the remaining 2% of the ownership is under the Vietnamese minority partners. The new company concentrates on the manufacturing and marketing of polymers at 20,000 tons/year. The total investment for the ventures is 12 million Euros. The sections of financing are 4 million EUR by equity financing, Export credit obtained from COFACE up to 6 million EUR and other debt financing of about 2 million EUR. The favorable and the risk factors which would be faced by owing to its joint venture with Vietchem are elaborated in the report. Question 1 Vietnam Vietnam is a developing economy which is planned with a market well connected to the other parts of the world. The economy of Vietnam has shifted their concentration from centralized planned economy to socialist market economy that employs both indicative and directive planning. After the shift, the economy has rapidly grown. The Vietnamese population has been estimated to be 87 million. This estimation includes 3 million who lives in Hanoi and in Hochiminville; the estimated number has been 9 millions. About 11 million of the population are working in the industry or engaged in industry related works. The unemployment rate has been 2.3%. The GDP value amounts to $300 billion with a growth rate of 5.9%. The FDI inflows have amounted to $7.4 billion. The average tariff rate of trade has been 5.7% that includes some of the non-tariff barriers which had limited the gains of trade (The Heritage Foundation, “Vietnam”). Though there have been serious efforts from the FDI but it has been hindered by the government regulations by imposing various restrictions. With the evolving capital markets of Vietnam, the financial sector has also expanded (“China struggles with the way forward on reform”). Vietnamese Market Although the Vietnamese market has shown a rapid growth, it is still extremely price sensitive. Thus if the JV has to take place, Synthenia has to face this issue. Vietnamese market is a monopoly market with only a single producer of polymers i.e. Polyviet Company Limited. The company is based in Japan and sells 80% of its end products in the Vietnamese market. The company produces polymers and their main customers are the seekers of textile glues and formulators of buildings. Thus, the JV is looking for a reliable polymer supplier with a very good Research and Development department so that the products are adequately tested (“Investing in Vietnam – A risk worth taking?”). The favorable and unfavorable factors that Synthenia will probably run into while doing business in Vietnam are elaborated in the next section. Favorable factors for investment in Vietnam For establishing an investment plan in Vietnam the chemical giant group, Synthenia will have many advantages few of which are elaborated below. Synthenia has spread its existence in the Asian market. The Asian agents and the distributors have helped the company to develop their business in Asia. So with its expansion in Vietnam, it will provide a wider Asian market for the company. The country had a growth rate of 4.9% in 2009 which has increased to 5.9% in 2012 and has stabilized at that point. Thus the country has been growing rapidly along with the growth of the industries. So, for Synthenia, Vietnam can prove to be a good option for setting up their business (“The rise of Chinese contractors in Vietnam”). Apart from the growing economy, Vietnam has a remarkably high population of around 90 million. The figure takes into account 6 million middle class families and 11 million workers who are employed in the industrial sector (Central Intelligence Agency, “Vietnam”). The most advantageous part of the demography is the majority of youth below the age of thirty. So the company will run the advantage of employing the young populace. They are a good source of consumerism. Apart from consumerism, the young population is best suited as labor force. They are energetic and hard working and therefore the abundance of cheap labor in the Vietnamese market. It has always been cheaper than other South-East Asian countries. The total working hours in Vietnam is fifty. But the wages paid to them in return of these long hours of hard work are as low as forty Euros (“The investment case for Vietnam.”). Vietnamese market has been experiencing huge rise in price of polymer over the years which is favorable for a company to set its business in Vietnam. It has set the price of polymer up to 20-30% above the world’s price (“The investment case for Vietnam”). This will yield a good return to Synthenia for a given amount of products sold compared to any other global market where they operate. The case study also highlights the fact that the National government in Vietnam has given pioneer status to foreign ventures on non-Japanese investment. Therefore any company which establishes a business they will receive tax exemption for a minimum span of five years. This tax exemption criteria acts as a lucrative incentive for Synthenia and any other foreign company that plans to establish business in Vietnam. In Vietnam, the credit institutions consist of the commercial banks that are owned by the state and joint venture institutions. The banks provide credits on the demand deposits and payment services. Thus Synthenia will receive good services from the banks by setting up their business in Vietnam. Vietnam is one of the fastest growing countries in Asia and also may emerge as a fierce global competitor. It encourages the investment opportunities which involve long term growth. Vietnam has also adopted strict programs which aim at lowering the inflation rate. They intend to achieve a credible monetary framework to revive the lost confidence of the investors. Thus, Vietnam can be put forward as a country with a lucrative opportunity to invest (“Starting business in Vietnam”). Risks factors in investing in Vietnam There are myriad factors which favor investment in Vietnam but there are few reasons which act as the barriers for investment in Vietnam. The following are elaborated below. The financial crisis which started in 2009 had volatilized the currency. The Vietnamese dong was devaluated thrice against dollar. The devaluation was due to the problems of inflation that was existent. The situation was very critical and thus the authorities in Vietnam had decided to be stringent with their credit. The interest rates were increased and the value of the dong was lowered against dollars. It led to a shortage in foreign-currency reserves which fueled the rise of the deficit. So then the Vietnamese mass had withdrawn their cash from the banks for converting it into gold or dollars. Therefore, this is a major risk factor for the companies who are interested in setting up their business in Vietnam. Synthenia may face this impediment if the situation arises again. Another major risk factor for these interested companies is the political barriers. Foreign companies that decide to set their business in Vietnam need to take into account the complied regimes in the country, to avoid ideological discrepancies. The official name of Vietnam is the Socialist Republic of Vietnam and therefore clearly is a Communist state. Thus, it can be inferred that Communism can be a major barrier for the companies as it follows certain specificities which are crucial and should be considered (Central Intelligence Agency, “Vietnam”) Question 2 Advantages of a joint-venture with Vietchem The advantages that will be enjoyed by Synthenia if they indulge in a joint venture with Vietchem are explained below. Vietchem is famous for the distribution of chemicals in Vietnam. It also controls the distribution of the same in Indonesia and Singapore. The company has captured approximately 40% of Vietnamese market. They have established good relationship with their partner companies. It owns and controls fifteen companies including the foreign companies. Thus, if Synthenia invests in the JV with Vietchem, then it will naturally be positioned in the Vietnamese market. Vietchem has acquired a good status in the related sectors in the global market. So it will be advantageous for Synthenia to invest in the venture. Another important advantage for Synthenia is the availability of cheap labor. It can do well by efficiently utilizing the cheap labor of Asia. Starting a business in one of the countries with the cheapest labor entails certain financial advantages to companies. Vietchem has propagated the cheap labor position of Asia to the foreign companies. The chemical giant has a large and well developed distribution channel for obtaining raw materials for the production of polymers. This venture will allow Synthenia to avail further benefits by acquiring large and well developed distribution channel and achieve the raw materials at a reasonable tariff. Owing to the JV, both the companies will have the equal responsibility to administer the machineries of the venture. The venture will not allow the minority partners to undertake any fraud. Another opportunity for Synthenia is that it does not need to make a large investment in the venture with Vietchem. The French entity, COFACE will put up with 50% of the total investment in the venture (“Non-Audit Remains Point for Discussion within Europe.”). Vietchem shares a good relationship with the Chinese diaspora and other PRC officials. So a good publicity of the company among the Chinese will add to the recognition needed by Synthenia for the venture. With the success of the venture, it would be possible for them to establish long-term business with China. It may also encourage the extension of the business to different areas of the United Kingdom. Risk factors of a joint-venture with Vietchem Though a JV has a lot of advantages in developing activities outside the motherland, it also has its risk factors which are explained below. The major disadvantage of establishing JV with a foreign company within the national territory is the loss of employment which is suffered by the natives of the land. Therefore, if Synthenia does manage to establish this venture, the local employees of Vietnam might lose their jobs as Synthenia will be bringing in their existing employees to Vietnam. Thus, the company will go through a delocalization process though not entirely. Vietchem group personnel do not speak in English even though they hold communication with foreign companies. So, there might be a communication gap. Communication gap may lead to misunderstanding which can be fatal for the venture. This can be a big barrier for the JV as it can postpone or even stall the venture from taking place. The companies thus have to hire translators to facilitate a successful communication between the personnel and the management. The personnel should be trained in a manner that they are able to understand the languages which are mostly used. It might be a major problem for the companies as many workers might resist the idea. Thus it helps to explain another major risk that might be faced by Synthenia. The most significant drawback that can be observed in the joint venture project is the closeness of the Chief Executive Officer of Vietchem, Mr. Bichlien, with the officials from the People’s Republic of China. The closeness can infuriate the Communists in Vietnam and lead to collusion between China and the thriving regimes of Vietnam. There can also be a possibility of bribery in order to acquire the tenders which can negatively affect the venture (“Asian currencies advance for third week on fed stimulus optimism”). Question 3 Advantages of a joint-venture with Synthenia The advantages that will be enjoyed by Vietchem if they are investing in Synthenia are elaborated below. Synthenia, being one of the most powerful chemical groups in France, has a good public image. Thus by establishing a JV with such a company, Vietchem will get to expand their operations and product lines in France too. Synthenia is famous for the upgraded technology that they use for the production of polymer. In this case, the advantage that will be enjoyed by Vietchem is the technological transfer. The technological transfer will help Vietchem to use the advanced techniques in polymer production. The transfer will be a continuous process from France to Vietnam. The transfer will encourage a higher production of polymers by using fewer workers per year. The JV thus can position them competitively ahead of the only polymer producer in Vietnam, Polyviet Company Limited who has been using the discontinuous process. It is examined that Vietchem will be accountable for 49% of the JV under the name of The Vietnam Polymer Company. This therefore establishes an equivalent relationship with Synthenia. The financing of the JV highlights that Vietchem is spending much less in the JV. The French entity, COFACE would take care of the financing part and Synthenia would fund the rest. Risk factors for a Joint Venture with Synthenia There are various reasons for investing in Synthenia but there are several risk factors too which are enumerated below. The first and the foremost risk of investing in a French company for a Vietnamese company indicate a few facts which run back in history. In the past, France colonized Indo-china and the independence war from 1946 to 1954 involved the French Army who was supported by the US Army. The war had devastated the country and two million were held as causality on both the sides. Thus the venture can remind the customers of the dark phase that the two countries had once faced. These can be a barrier to the success of the JV. It can also harm the daily business of the company in Vietnam. 2) Synthenia has always relied upon the independent distributors and agents for executing their work in the Asian market instead of themselves. So Vietchem will face difficulty if they invest in the JV. Vietchem has no knowledge about this strategy and thus will be dissuaded to work (Bloomberg, “Vietnam”). Synthenia is from a market driven economy whereas Vietchem is from a planned economy. Thus the expectations are different and it can affect the day to day operation rendering the venture as short-termed. Question 4 The recommendations for a successful JV between Vietchem and Synthenia are highlighted in this section. The past history of the countries can restrict the investors and customers to invest in any foreign company or JV. So the companies should concentrate on conducting realistic evaluations of the actual existent opportunities in the country. They should exploit those opportunities and make the mass aware of the benefits that entail from the venture. If the JV makes good contribution to the country then the people will whole heartedly accept the same. The JV should also examine the Vietnamese market and then launch the venture since the consumers are brand and price conscious. The consumers had always relied on Polyviet Company Limited for polymer owing to its singular position in the market. So in order to build a beneficial and strong competition, the JV will have to execute a rigorous market research to recognize the weak points of their competitors and also help in understanding the minute needs of the customers. By cultivating those needs, the JV can produce a better quality and a deserving price of polymers to the customers of the Vietnam. For the joint venture to be successful, employee training is essential for both the companies. Since the Vietchem personnel are not well-versed in English, it would be difficult for the personnel of Synthenia to successfully communicate with them. The communication problem can lead to misunderstanding and therefore can affect the venture unfavorably. Thus the companies’ personnel should receive proper training in the prevalent languages of communication. The employees of Vietnam work in a non-formalized environment whereas those of Synthenia work in a very formal environment. To ease this dispute, the employees of requires proper training so that they enjoy working in the new work environment (“Driving Forces and Success Factors for Mergers, Acquisitions, Joint Ventures, and Strategic alliances among Local Cooperatives”). Conclusion It can be concluded that in order to make the JV successful, both the companies should take care of the elementary factors that can affect the successful functioning of the venture. Synthenia belongs to a well connected market economy whereas Vietchem dwells from a planned economy. Despite their difference in the context of economy the companies can prosper by going into a JV by implementing a successful market plan. The companies should undertake a serious market research in order to stay ahead of the competitor of the venture. By gaining competitive advantage from the new venture, the companies can create a new pathway to success. Works Cited “Asian currencies advance for third week on fed stimulus optimism.” Bloomberg News. 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