What Raque Food Systems Will Achieve by Opening Production Line in Malaysia and Mexico - Example

RAQUE-FOOD SYSTEMS By Name Course Instructor Institution City/State Date Raque-Food Systems What Raque Food Systems Will Achieve By Opening Production Line in Malaysia and Mexico As pointed out by PKF (2011), the Malaysian economy has a competitive advantage in the production and processing of products because of its world class telecommunications and transport infrastructure and vast natural resources. Malaysia will provide Raque with a low-cost environment for producing products, relatively low salary costs for executives and qualified professionals and high skill levels. Besides that, educational opportunities, climate, lifestyle, as well as the accessibility of pool of multilingual professionals skilled in major languages such as Asian and English are some of the advantages that Malaysia would offer to Raque. According to PKF (2011), special financial incentives and taxation have been introduced in Malaysia with the aim of encouraging foreign investment, especially investments into promoted activities like industrial related technology, manufacturing, and ICT. Malaysia will offer Raque a good proposition since it serves as an investments entry point into the South-East Asian region, which is growing swiftly. Since Raque will be investing in the manufacturing sector, it will be subjected to two major tax incentives; the Investment Tax Allowance and Pioneer Status. If Raque will granted a Pioneer Status, it will enjoy a partial exemption from what the company pays as income tax for a period of 5 years. For that reason, Raque will be paying tax on 30 per cent of its statutory income and the Production Day marks the day when exemption period commences. Production Day can be described as the day when the level of the company’s production reaches 30 per cent of its capacity. The incurred accumulated losses as well as unabsorbed capital allowances at the time of pioneer period would be carried forward as well as subtracted from the company’s post pioneer income. Besides that, Raque can apply for Investment Tax Allowance (ITA), whereby it will be offered a 60 per cent allowances on the incurred its qualifying capital expenditure after 5 years from the day when they incurred the initial qualifying expenditure. As mentioned by PKF (2011), this allowance could be offset against 70 per cent of the company’s statutory income for every assessment year. More importantly, all allowance that has not been used could be carried forward to the subsequent years till they have been used completely. The remaining 30 per cent of statutory income is taxable. In Mexico, Raque is inclined to benefit more because the transportation costs will be reduced tremendously and labour costs have reduced tremendously. By moving its production line to Mexico, Raque will be able to exploit the low cost of labour and production. As pointed out by Arvilla (2017), Mexico’s strikingly low labour cost has become more attractive to U.S. manufacturing companies. Raque will also benefit from increasing productivity rate of Mexican labour as well as the additional advantage of having production close to the US markets. Scores of American companies such as Nucor, Ford, General Motors and Caterpillar have offshored to Mexico with the aim of taking advantage of the low cost of labour (Arvilla, 2017). Some of the benefits that Raque will achieve when it opens production line in Mexico includes cost advantage; the company will be able to make tremendous cost savings because Mexico boasts dependable and highly skilled labour, which is 80 per cent cheaper as compared to U.S. labour cost. Besides that, the company would be able to access modern and affordable infrastructure. In general, the operating costs in Mexico are much lower. Another advantage is attributed to manufacturing economies considering that Mexico is close to high-demand markets; therefore, the company will be to produce products cheaply. Furthermore, Raque will be able to do business with a growing base of Tier 1 firms and Original Equipment Manufacturers (OEMs). Besides that, it is easier to open a production line in Mexico because it has similar language and culture with the US and is strategically located. As mentioned by Alsever (2013), Mexico's lower customs and transport cost makes it ideal for offshoring. Analysis of Malaysia and Mexico Economy Malaysia, according to PKF (2011), is a middle-income country, which has revolutionise itself into an emerging multi-sector country. The country’s economic growth has been steered mainly by exports, especially electronics. For that reason, Malaysia was enormously affected by the slump in IT sector and global economic downturn. In 2010, the GDP of Malaysia grew 7.2 per cent. More importantly, the country’s banks are conservatively managed, well capitalised and less vulnerable to the U.S. sub-prime market. Malaysia’s central bank has prohibited a number of riskier assets with the aim of maintaining a conservative regulatory environment. Furthermore, the foreign exchange reserves maintain in the country is exceedingly high and the external debt is relatively little. Reduced external debt, low inflation, and healthy foreign exchange reserves are some of the economic factors that make Malaysia less likely to experience a financial crisis like the one experienced in 1997 (PKF, 2011). Still, Malaysian economy relies on continued growth of other economies, especially Japan, China and the U.S., which are world’s top destinations for exports and key foreign investment sources. As evidenced by the figures below, Malaysia’s employment, labour force and nominal GDP has been increasing progressively. The country has also experienced some growths in the exchange rate, exports and imports, and GNI per capital PPP. Figure one: Malaysia Basic Statistics (EPU, 2017) Figure Two: Key economic indicators (EPU, 2017) Figure Three: GDP, Investment and Consumption (EPU, 2017) Since its independence, Malaysian economy has experienced a major structural transformation considering that the country is now relying more on the industrial based economy than the traditional rubber plantation and tin mining. The Malaysian economic progress is influenced by financial markets, foreign direct investments and public delivery system. The country’s economic progress has been derailed by the poor public delivery system. Besides that, FDI has played a crucial role to the country’s human and financial capitals. The country has been granting different investment incentives and has developed special investment zones like the Northern Corridor Economic Region (NCER) as well as Iskandar Development Region (IDR) with the aim of attracting FDI. As pointed out by Ramli et al. (2013), New Economic Policy (NEP) inception was introduced as a result of 1969 racial riots, which led to serious economic imbalances and uneven economic development. The policy has since its inception improved Malaysia’s economy making it suitable for FDI. Mexico, according to OECD (2017), is the 11th largest economy in the world and it has experienced tremendous structural changes over the last the last 30 years. Until the early 1990s, Mexico was an oil-dependent economy but has progressively become a manufacturing centre. After the North American Free Trade Agreement (NAFTA), has become a global trade hub. Its closeness to US export market gives it a competitive advantage. Furthermore, Mexico has boosted strategically free trade by signing various trade agreements with many countries. Currently, Mexico is one of the world’s leading exporters of flat TV screens, cars, and many other products. Still, the economic potential of Mexico has been obstructed by many challenges like extensive informality, high poverty levels, gender inequality, financial exclusion, poor educational achievement, and high levels of crime and corruption. To handle such problems, the modern-day government has since 2012 introduced major reforms with the aim of improving income distribution, well-being and growth. The reforms have resulted in noteworthy economic progress across various sectors. Recently, there have been some improvements in the country’s productivity growth, which can be attributed to the structural reforms in the financial, telecom and energy sectors. FDI, trade openness, innovation incentives and global value chains integration have improved Mexico’s exports, particularly the automotive sector. According to OECD (2017), the other sectors are lagging behind because of local regulations that are overly stringent, rooted informality, weak legal institutions, as well as corruption. Figure Four: Total factor productivity (OECD, 2017) As evidenced by figure five, Mexico’s total productivity has been increasing progressively. The majority of families are living in poverty, the level of security is poor and discrimination is high. In Mexico, gender gaps and income inequality is high as evidenced by figure six. Figure Six: Income Inequality and Gender Gaps (OECD, 2017) According to World Bank Group (2017), the economy of Mexico has been decelerating considering that the annual GDP dropped from 2.6% in 2015 to 2.3% in 2016. This reversal is attributed to the external environment of stagnant trade and modest global growth, suppressed by the diminished capital flows and rising oil prices. In 2016, Mexico’s economic growth was exclusively driven almost by low inflation, private consumption, credit expansion, workers’ remittances, and higher real wages. Mexico’s external conditions have been weakening and this has resulted to currency depreciation. As mentioned by World Bank Group (2017), annual consumer price inflation would likely increase because of high domestic fuel prices. Currency depreciation has resulted to high external competitiveness, which consequently has resulted in a vigorous exports expansion. World Bank Group projects that there will be a further economic slowdown because of uncertainty attributed to the scope of the possible renegotiation of NAFTA and the U.S.-Mexico future relations is decelerating Mexico’s gross fixed investment, especially with regard to trade-related activities expansion in the manufacturing sector. Advantages and Disadvantages of Establishing a Production Operation in both Malaysia and Mexico Establishing a production line in Mexico would result in numerous advantages; for instance, Raque will experience cost advantages without sacrificing quality. Mexico will enable the company to increase profits, avoid the litigious U.S. labour markets, capitalise on the country’s favourable foreign trade agreements, and remain competitive. More importantly, Raque will benefit from low-cost, high-quality workforce. Mexico will eliminate the employee medical cost increases as experienced in the US and would gain from a highly concentrated pool of English speaking employees. Besides that, Raque will achieve from NAFTA trade agreement, which will lead to cost savings. Since Mexico close to the U.S., Raque will have easy access to U.S. based technical support and customers can access the plant more easily (TACNA, 2014). Still, Raque will face many risks if it establishes production operation in Mexico; for instance, crime is a major issue in Mexico and this can pose serious challenges to the company. Although the country’s conditions have improved tremendously, violence rate and the narcotics trade is very high than in the US. Another risk is attributed to the federal laws with regard to severance pay, employee recruiting process, labour unions, as well as absenteeism and attrition. Besides that, Raque is likely to encounter logistical challenges, especially with regard to routes running south and north, which have a slower rail service. This challenge is offset by Mexico’s improved major airports, ocean ports and contemporary road system. Furthermore, Raque will face some difficulty while trying to access raw materials and the country’s financing rates are exceedingly higher (Offshore Group, 2017). Another issue is attributed to cultural differences and high-level corruption. If Raque decides to establish its production operation in Malaysia it will also experience some benefits; for instance, the Malaysian economy is projected to grow significantly in the coming years. Without a doubt, a vibrant and strong economy would lead to a number of business opportunities. One advantage of opening a production line in Malaysia is the stable economy which is attractive as since it has lesser risks for overseas investors and entrepreneurs. Furthermore, the Malaysia’s working population is recognised worldwide because it possesses skills, which can enable Raque to operate efficiently. Malaysia’s labour force is one of the beneficial factors since companies can easily find labour with the precise type of skill set needed. The Malaysian government is somewhat pro-active in its determination to convert Malaysia into one of the highly developed economies; therefore, Raque is likely to get lots of support from the government. Malaysia has improved infrastructure, which would enable Raque to operate efficiently. Despite these advantages, Malaysia poses some risks to Raque; for instance, there is a great threat of terrorism. Although terrorists’ attacks are normally indiscriminate, terrorists normally target places frequented by foreign travellers and expatriates. Expatriates are likely to be kidnapped, especially in the islands off eastern Sabah because it is more close to rebels’ area in the southern Philippines (GOV.UK, 2015). Besides that, Malaysia’s economic and political environment is somewhat shaky and a business environment that is relatively volatile could influence the company’s business operations. As mentioned by Wan (2016), Malaysia workers are aggressive and are ready to move on to companies that are willing to take them. Labour mobility in Malaysia is somehow high, particularly amongst the young workers. Raque will face the risk of ‘search and hop’ amongst the workers because Malaysian employees move jobs until they feel irrational satisfied. The company will risk losing its workers to other sectors if the workers believe that their company is performing poorly. As mentioned by Financial Times (2017), political risks are increasing in Malaysia following the arrests of the opposition politicians and journalists. This crackdown could affect Raque’s production operations. Besides that, the increasing number of highly skilled expatriates has an effect on local employees in terms of job satisfaction and career advancement. Special benefits and privileges given to expatriates can aggravate the situation further if organisational injustice is perceived by local employees. Raque will face some challenges while trying to manage foreign a workforce from diverse cultures. The Importance of Cultural Differences between Malaysia and Mexico and the Risk for the Company Due To Cultural Differences As pointed out by Winkler et al. (2008), the ‘cultural differences’ is the extent to which the members of two diverse groups are different on cultural dimensions, specifically, their shared assumptions, norms, values and beliefs which could enable them structure and organise the world. Hofstede’s classic model established four cultural dimensions, namely individualism-collectivism, power distance, uncertainty avoidance and masculinity-femininity (Fontaine & Richardson, 2005). In Mexico, as mentioned by Gregory and Charles (1995), Mexicans normally exhibit compromising and gentle behaviour. But still, there exists a significant gap between the executive level and other levels of the company; therefore, the executive normally makes nearly all decisions. In Mexico, it is imperative for the company to retain personal relationships since it is crucial for business achievement. Gender distinctions, in Mexico, are demarcated strongly as compared to the U.S., but the country is experiencing some modifications. Scores of Mexican women have started joining the professional settings. Dress code in Mexican business is extremely conservative, both women and men are expected to wear suits during a formal business setting. Employees are expected to present themselves in a polished and professional manner both in formal and informal settings. Unlike Mexico, Malaysia is a country that is extremely multicultural and has different rules of conduct. Given Malaysia is a Muslim country, physical touch between men and women is considered inappropriate. Malay men hardly shake hand with women. Besides that, men are required to wear a suit while women have some slight freedom with regard to their dress the etiquette. More importantly, revealing clothes are considered inappropriate. The business appointment should not be scheduled on Friday, because this important day for Muslims to pray. The business culture is very hierarchical so employees are required to treat their seniors with great respect. People should be polite when communicating and people should be addressed by their title and their surname. References Alsever, n., 2013. Is Mexico the New China? [Online] Available at: HYPERLINK "https://www.inc.com/magazine/201306/jennifer-alsever/manufacturing-in-mexico.html" https://www.inc.com/magazine/201306/jennifer-alsever/manufacturing-in-mexico.html [Accessed 31 July 2017]. Arvilla, J., 2017. Mexico Labor Costs Continue to Benefit Manufacturing. [Online] Available at: HYPERLINK "https://www.tecma.com/mexico-labor-costs-2/" https://www.tecma.com/mexico-labor-costs-2/ [Accessed 31 July 2017]. EPU, 2017. The Malaysian Economy in Figures 2016. Kuala Lumpur: Economic Planning Unit. Financial Times, 2017. The political risks in Malaysia are growing. [Online] Available at: HYPERLINK "https://www.ft.com/content/8ceb5f68-d7ac-11e4-849b-00144feab7de" https://www.ft.com/content/8ceb5f68-d7ac-11e4-849b-00144feab7de [Accessed 31 July 2017]. Fontaine, R. & Richardson, S., 2005. Cultural values in Malaysia: Chinese, Malays and Indians compared. Cross Cultural Management: An International Journal, vol. 12, no. 4, pp.63 - 77. GOV.UK, 2015. Overseas Business Risk - Malaysia. [Online] Available at: HYPERLINK "https://www.gov.uk/government/publications/overseas-business-risk-malaysia/overseas-business-risk-malaysia" https://www.gov.uk/government/publications/overseas-business-risk-malaysia/overseas-business-risk-malaysia [Accessed 31 July 2017]. Gregory, K.S. & Charles, R.G., 1995. Doing business in Mexico: Understanding cultural differences. Organizational Dynamics, vol. 24, no. 1, pp.39-55. OECD, 2017. OECD Economic Surveys: Mexico. Survey. Economic and Development Review Committee. Offshore Group, 2017. Advantages of Manufacturing in Mexico. [Online] Available at: HYPERLINK "https://offshoregroup.com/manufacturing-mexico/advantages-manufacturing-mexico/" https://offshoregroup.com/manufacturing-mexico/advantages-manufacturing-mexico/ [Accessed 31 July 2017]. Offshore Group, 2017. Challenges of Manufacturing in Mexico. [Online] Available at: HYPERLINK "https://offshoregroup.com/manufacturing-mexico/challenges-manufacturing-mexico/" https://offshoregroup.com/manufacturing-mexico/challenges-manufacturing-mexico/ [Accessed 31 July 2017]. PKF, 2011. Doing business in Malaysia. Kuala Lumpur, Malaysia: PKF Malaysia. Ramli, S.I., Kamarunzaman, N.Z. & Ramli, I.M., 2013. Malaysia’s New Economic Policy: Issues and Debate. American Journal of Economics, vol. 3, no. 2, pp.108-112. TACNA, 2014. Why Manufacture in Mexico? [Online] Available at: HYPERLINK "http://tacna.net/why-manufacture-in-mexico/" http://tacna.net/why-manufacture-in-mexico/ [Accessed 31 July 2017]. Wan, H.L., 2016. The Manufacturing Sector in Malaysia. In Organisational Justice and Citizenship Behaviour in Malaysia. Singapore: Springer Science. pp.21-36. Winkler, J.K., Dibbern, J. & Heinzl, A., 2008. The impact of cultural differences in offshore outsourcing—Case study results from German–Indian application development projects. Information Systems Frontiers, vol. 10, pp.243–58. World Bank Group, W., 2017. Mexico Overview. [Online] Available at: HYPERLINK "http://www.worldbank.org/en/country/mexico/overview" http://www.worldbank.org/en/country/mexico/overview [Accessed 31 July 2017]. Read More