Strengths And Weaknesses Investment In The Automotive Industry - Book Report/Review Example

Strengths And Weaknesses Investment In The Automotive Industry Table of Contents 1.Executive Summary 2 2.Introduction 3 3.Performance Analyses for Investment 4 3.1.Nissan 4 3.1.1.Financial performance and prospects 4 3.1.2.Corporate governance performance 6 3.1.3.Environmental protection credentials 8 3.1.4.Contextual factors 8 3.2.Rio Tinto 9 3.2.1.Financial performance and prospects 9 3.2.2.Corporate governance performance 11 3.2.3.Environmental protection credentials 13 3.2.4.Contextual factors 14 3.3.Vestas 15 3.3.1.Financial performance and prospects 15 3.3.2.Corporate governance performance 18 3.3.3.Environmental protection credentials 19 3.3.4.Contextual factors 20 4.Conclusion and Recommendation 21 5.Reference 23 1. Executive Summary The project tries to make a comparative analysis between the performance of three different companies, namely, Nissan, Rio Tinto and Vestas and chooses the one most suitable for making investments. Firstly the financial statements as published by each company have been compared with each other. Each company’s financial statements have been analysed using the various financial ratios, the future profitability and their performance in the share market. Their performances in the field of corporate governance and environment protection have also been researched and presented. A number of contextual factors have been taken into consideration like the legal, political and economic influence on the each company. A critical analysis has been presented to provide the basis on which the company has been chosen for investment. Finally the project ends with a list of recommendations arising from the discussion which provides the basis for which the company has been chosen as the most suitable one for long term investment. 2. Introduction This project aims to bring forth the relative merits and demerits of investing in three different companies and also selecting the most suitable one for investment. Nissan is a multinational automobile manufacturer in Japan. It is one of the largest car manufacturers in the world. The next company in question is Rio Tinto which is also a multinational company headquartered in London and Melbourne. Vestas is the Danish manufacturers and service provider of wind turbines. Research has been conducted to understand the prospects of the above companies in terms of their financial prospects and performance. This project also takes into account other factors like the company’s corporate governance performance and their steps towards protecting the environment. The legal, political and economic aspects have also been taken into account. The most important criteria on which the comparison has been done is based on their financial performance. The data obtained for the project is mainly based on secondary research. Data has been obtained from those published by the companies themselves as well as a number of academic sources. A comparative and critical analysis has been done between the three companies and suitable recommendations have been presented for the same. 3. Performance Analyses for Investment 3.1. Nissan 3.1.1. Financial performance and prospects Nissan is a Japan Based world renowned automobile company. The company has expanded its operation and market in many world countries. Nissan’s financial performances have been its one of the major strength. During the global crisis in 2008, the company’s financial performance was satisfactory comparing to other leading multinational companies. In order to figure out the latest financial performances of the company for the investment purpose, the annual report for 2009 will be analysed. During 2009, the company’s net sales have been declined comparing to the previous years. Figure 1 presents the historical data of Nissan’s net sales. Figure 1: Net Sales (Billions of Yen) (Source: Nissan-a, 2009) The company has experienced significant decline in its sales during 2009. It has affected its operating and net income. Figure 2 shows its performances based on its historical net incomes. Figure 2: Net Income (Billions of Yen) (Source: Nissan-a, 2009) The above figure shows that due to decrease in sales, the net income of the company in 2008 was negative and it earned very little growth during 2009. However, the management of the company predicts that in 2010, the company will regain its financial position with higher profit. During 2008, the company issued ¥10 dividend per share (DPS) but due to the negative growth, company was unable to offer dividend in 2009. It is expected that the company will issue ¥11 DPS during 2010. In Tokyo Stock Exchange, its shares are traded at ¥749 and its ROE is 1.6 (TSE, 2010). The following figure shows it monthly performance of its share prices. Figure 3: Monthly Stock Performance (Source: TSE, 2010) 3.1.2. Corporate governance performance The Nissan Motor Company strives to maintain the trust in its stakeholder by following fair and transparent corporate governance in its operations. The company has developed a high value internal and external control system with fair business model by practising Company Law related rules and regulation. The company has implemented standard accounting methods for making its financial reports more reliable, relevant, comparable and transparent. In order to support the legal framework, the company has developed its own code of conduct. For maintaining corporate social responsibly (CSR) and growth, the company motivates its members to focus on value creation for the customer. Figure 4 narrates the company’s mindset and action to meet the CSR objectives. Figure 4 (Source: Nissan-b, 2010) The company has also developed its internal governance system to control and to manage the corporate governance. Figure 5 portrays the structure of its internal governance system. Figure 5: Nissan’s Internal Governance System (Source: Nissan-b, 2010) 3.1.3. Environmental protection credentials Firstly, it is worth mentioning that the company has been certified as the cleanest gasoline fuelled car in the world. The company has won several awards for its works towards environment protection and the steps taken for reducing the hazardous effects on the environment. The environment Leadership program was developed by Nissan. Under this program, eight students across the nation are selected and given awards. They receive a cash of $5000 and are also provided with the opportunity of attending the environmental summit that is held in Washington D. C. They are also allowed to go for research expedition in South Africa. This is organised by the Earthwatch Institute. Nissan undertakes these activities with the view to empower the young students in America to become effective environment advocates (WWF, 2006). 3.1.4. Contextual factors The year 2008 was a crucial year for Nisan like all global companies. This is because this year was seriously hit by the recession. This was the most challenging year for the company. The three most crucial challenges faced by the organisation during this time were the economic downfall, the financial crisis and the fluctuating exchange rates in the economy. However the company continued to expand its business and diversify its field of operations all over the world. It continued developing its products, brands and technologies in such a way that it was rather efficient in countering the effects of the recession and recover from it (Nissan-c, 2008). One problem that the company faced was the implementation of Japanese practices. This was the major reason behind the organisation’s downfall. This is a company in which each department is compartmentalised. This led to least accountability and responsibility for each department and each one holding the other responsible. It was also felt that management styles and practices were followed differently for Japan and the European countries. Moreover the Japanese culture was significantly different and there was least sectionalism among the company employees. It did not allow the formation of cross functionalism teams unlike the European companies (IBSCDC, 2005, p.3). 3.2. Rio Tinto 3.2.1. Financial performance and prospects Rio Tinto is one of the leading exploring and mining multinational companies and its headquarters are present in London and Australia. The core function of the company is to mine and process the mineral resources of the earth for making essential product for daily use (Rio Tinto-a, 2010). The profitability of the company depends on the volume of the explored mineral resources. The company has acquired many potential areas enriched with mineral resources. The company uses very advanced technology for the exploration process that reduces the overall cost for obtaining and processing the minerals. The financial performance of the company for the year 2009 has been enhanced comparing to the previous years. The following table depicts the profit for the last five years. Figure 6: Profit for the Last 5 Years (US$m) (Source: Rio Tinto-b, 2010) The management of the company has been efficient in managing the financial activities. The financial results of the company have been commendable as it has experienced a faster recovery after the global crisis. In order to improve its balance sheet, the company has recapitalized its balance sheet. The strong operational performance is another major factor that has enhanced its financial performances. The following figure shows the historical data of total shareholders’ return. Figure 7: Total Shareholders’ Return (%) (Source: Rio Tinto-b, 2010) During the years 2009, the investors of the company have received significant growth in its stock price. The company’s dividend policy has enhanced the company’s share value. The following table shows the dividend per share declared by the company in US, UK and Australia. Figure 8 (Source: Rio Tinto-b, 2010) 3.2.2. Corporate governance performance Rio Tinto has developed proper ethical standard to maintain its governance system within its work culture and operational activities. The management of the company strives to manage its “business with openness and accountability” and it has also set of process that guides its employees for maintaining “global code of business conduct” (Rio Tinto-c, 2010). The company’s code of business conduct is known as ‘The way we work’. “It contains principles and standards of conduct which reaffirm our commitment to corporate responsibility” (Rio Tinto-d, 2009). The sustainable development policy of Rio Tinto includes a set of commitments. The following figure shows the process that helps to meet these commitments. Figure 9 (Source: Rio Tinto-d, 2009) In order to manage the CSR, proper governance body and management structure has been designed that ensures the internal control over financial reporting and proper disclosure to the stakeholders of the company. For better transparency and ethical standard, the company focuses on its communication with its cross functional teams and with the investors (Rio Tinto-e, 2007). The following figure represents the governance body of the company which is responsible for meeting the objectives of CSR. Figure 10: Governance structure of Rio Tinto (Source: Rio Tinto-b, 2010) 3.2.3. Environmental protection credentials One of the main objectives of this company has been the improvement of safety performance with the objective of causing “zero harm” (Rio Tinto, 2009, p.1). It tries to achieve this by delivering the best customer service, achieving sustainable development and also ensuring the safety of employees. The company’s social responsibility reflects from the fact that it was able to reduce emission of green house gases by 9.9%. This resulted from the “divestment of the Ningxia joint venture smelter in China, closure of some older operations, curtailment of production at selected facilities and increased operational efficiencies” (Rio Tinto-f, 2009, p.3). Rio Tinto Alcan finds the topmost position in generating low GHG intensity power. It has been working towards continuous improvement in site performances in all projects. It has also been trying to leverage its energy efficiency. The company’s consciousness towards environment protection is apparent from its adoption of best practices in maintaining environment protection. It lays special emphasis in the field of research and development with the view to achieve GHG reductions and formation of low carbon. Rio Tinto Alcan is the major contributor of Rio Tinto’s total gas emissions. As a result this company has also contributed significantly towards Rio Tinto’s intensity improvement programs (Rio Tinto, 2009, p.3). 3.2.4. Contextual factors During the time when the world was struck by the economic downturn, a number of sectors remained isolated from the global turmoil. First was the agricultural sector, which was greatly benefitted from prior investments and favourable climatic conditions. Another sector worth mentioning was mining. This progress can be attributed to the production initiation of Rio Tinto. Sheritt was among the major constructions projects which were the main driving force for the sector. But the company had to fight against a number of hurdles arising out of the recession. There was substantial drop in the energy consumption in the economy. Petroleum products consumption and energy consumption in the economy was reduced by 15%. The mining sector did not lose much because of the recession. The company’s exports also remained steady during the time. But there was another hurdle that the company had to face. This was reduction in the level of FDI inflows (World Bank, 2010, p.9). Recently the company faced problems in dealing with a case in which four of its company executives were imprisoned because of charges of bribery. This has spoilt the organisation’s image in front of the world. The company has been trying hard to regain its long lost international image. The obvious consequence of the trial was that the company had to be more conscious about ensuring compliance with the local laws and jurisdictions (Polivnick & Farley, n.d., p.2). 3.3. Vestas 3.3.1. Financial performance and prospects Vestas is a Denmark based company engaged in manufacturing, selling, installing of wind turbines. This multinational company is operating in many countries including India, Italy, Germany, US, Australia, China etc with its numerous manufacturing units. The financial reports of the company disclose its financial performances. The following figure depicts the revenues and earnings before income tax (EBIT) for the last five years. Figure 11: Revenue and EBIT (mEUR) (Source: Vestas-a, 2009) The above figure indicates the slow and steady growth of the company. Since last five years, the company is growing at decent rate with lower risk factors. During the global crisis, the company was able to earn significant amount of profit. As per its dividend policy, the company did not offer any dividends to its share holders. However, the company’s stock performance is better that increases the shareholders’ value. The strong financial performance of the company has led to increase the demand of its shares. The following chart shows the stock performance of the company for last three years. Figure 12: Stock Performance of Vestas (In US$) (Source: Reuters, 2010) The above chart shows that in 2010, Vistas’ stock price has been declined comparing previous 2008. Currently, the company’s shares are traded at US$12.68. The following table shows the different financial ratios of the company for the last five years. Table 1: Financial Ratios of Vestas (Source: Vestas-a, 2009) The rate of return on equity has been decline in 2009 comparing to the previous year’s return and the return on invested capital has also declined. However, the earning per share of the company has been increased by 0.1% and the book value of per shares has been rose significantly. 3.3.2. Corporate governance performance Vestas’ executive management teams are responsible for taking care of the entire operations, guidelines and recommendations that has been laid down by the Board of Directors. In order to comply with the international level of corporate governance, the executive management and the Board has taken necessary initiatives. The company follows the legal frameworks of Danish Companies Act. Every year the Board of Directors evaluate the company’s corporate governance policies and they recommend suggestions for bringing necessary improvements. The necessary areas of consideration that is included in the recommendations are as follows. The rights and ownership of the shareholders. The company’s policies for maintaining the relationship with its stakeholders. Transparency and openness in reporting financial statements and other information. The responsibilities and tasks of the Board of Directors. Developing the committee for the Board of Directors. Proper remuneration structure for the company’s members. Managing risks of the company. Assignment of the Auditing Committee (Vestas-b. 2009-2010). The above areas of responsibility help the organisation to achieve its CSR objective by controlling and managing the internal and external management system. 3.3.3. Environmental protection credentials The company had introduced the quick build system which was mainly aimed at attaining more efficiency as well as reducing the environmental degradations caused due to its production. Its wind turbines had to produce at much faster rate and increase its efficiency to a higher level. It was said that “this turbine model earns its own worth more than 35 times than its design lifetime” (Vestas, 2005, p.1). This company manufactures and develops such wind power systems which are able to generate as much energy that is sufficient for the entire world’s consumption. The company produces some of the most efficient wind power generators which consumes the least amount of electricity and delivers the maximum amount of energy. It is also said that the power generated by Vestas’ turbines in 2004 was equivalent to the saving of about 400, 900, 00 tonnes of carbon dioxide. This was significantly higher than the average amount of electricity that was produced in the European countries. The company considers environmental protection maintenance to be one of its primary objectives. It also takes into account the health and safety aspects in the development, manufacturing, sale, erection, servicing and maintenance of the wind mills. That is why the company publishes an environmental statement annually which describes the company’s occupational health and safety aspects (Vestas-c, 2005, p.2). 3.3.4. Contextual factors The company has been able to gain a number of assignments for the future. The company is also expected to spend huge amounts of finance to expand its production capacities in the United States. It is supposed to compete with General Electric Company which is known for having the best wind resources in the world. This is an important opportunity that the company has to utilise to its benefit. It is also a challenge that the organisation has to face from the US economy (Climate Progress, 2010). Recently the company was faced with a problem for refusing its age old contract with a company in Iran which was the supplier of critical components to the company. The company has been held responsible for the losses incurred by the Iranian company. To counter adverse effects arising from the recession the company has been trying to support alternative energy development programs (Wright, 2008). 4. Conclusion and Recommendation The above discussions and analyses of the three companies’ performances have disclosed their position in their respective industries. The above discussions include analyses of their performances relating to finance, corporate governance, environmental awareness and other contextual aspects. On the basis of the financial performances, Vestas has been found to be the most suitable company for making the investment of $100,000. The financial performance of Vestas has been better that the other two companies. The revenue of the company has been growing at a decent rate since last five years. During the financial crisis of 2008, the company has performed better that Nissan and Rio Tinto. Vestas has not provided any dividend to its shareholders and there has been very little growth in earning per share. However, the risk factors associated with the stock of Vestas is lower than the other two companies. The three companies are committed to maintain the corporate governance and corporate social responsibility. For this propose, they have developed proper management structures. In this respect, Vestas’ Board of Directors evaluates and restructured its governance policies every year for improving its corporate governance. It indicates that the management of Vestas is more active in maintain CSR policies. In terms of the industry future prospects, wind energy sector is a growing sector and the competition in this industry is comparatively low. The wind energy sector promotes the awareness for reducing global warming. The governments’ legal and political frameworks strive to encourage this industry. Considering all theses factors, Vestas’ performances has been better that the other two companies and the future prospect of the company is also higher. Therefore, for making long term investment, Vestas is the most desirable company. 5. Reference Climate Progress. July 22, 2010. Energy and Global Warming News for July 22: Vestas wins largest wind turbine order; As oil spills, China sends in the bugs. [Online]. Available at: http://climateprogress.org/2010/07/22/energy-and-global-warming-news-for-july-22-vestas-wins-largest-wind-turbine-order-as-oil-spills-china-sends-in-the-bugs/. [Accessed on October 4, 2010]. IBSCDC. 2005. Carlos Ghosn as CEO of Nissan and Renault: Can He Rework the ‘Nissan Magic’?. [Pdf]. Available at: http://www.ibscdc.org/Free%20Cases/LDS0007-1.pdf. [Accessed on October 4, 2010]. Nissan-a, 2009. Annual Report. [Pdf]. Available at: http://www.nissan-global.com/EN/DOCUMENT/PDF/AR/2010/AR2010_E_All.pdf. [Accessed on October 4, 2010]. Nissan-b, 2010. NISSAN Sustainability Report 2010: Corporate Governance. [Pdf]. Available at: http://www.nissan-global.com/EN/DOCUMENT/PDF/SR/2010/SR10E_P071_Governance.pdf. [Accessed on October 4, 2010]. Nissan-c. January 2010. Free Flow Cash Management. [Online]. 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[Accessed on October 4, 2010]. Vestas-c. April 12, 2005. Wind turbines - a great advantage to the environment. [Pdf]. Available at: http://www.vestas.com/files//Filer/EN/Press_releases/VWS/2005/050412-PMUK-02.pdf. [Accessed on October 4, 2010]. TSE. 2010. NISSAN MOTOR CO., LTD. [Online]. Available at: http://quote.tse.or.jp/tse/quote.cgi?F=listing%2FEDetail1&MKTN=T&QCODE=7201. [Accessed on October 4, 2010]. World Bank. February 1, 2010. Madagascar – Economic Update: 2009 and Beyond. [Pdf]. Available at: http://blogs.worldbank.org/files/africacan/MADAGASCAR%20update%20feb%201%202010.pdf. [Accessed on October 4, 2010]. Wright, A. December 29, 2010. Iranians Ponder Their Future With an Obama Administration. [Online]. Available at: http://www.truth-out.org/122908A. [Accessed on October 4, 2010]. WWF. May 16, 2006. Nissan-WWF Environmental Leadership Program Award Winners Selected. [Online]. Available at: http://www.worldwildlife.org/who/media/press/2006/WWFPresitem856.html. 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