Volex Groups Strategy on International Activity - Essay Example

? Volex Group Issue Evaluating Volex Group's Strategy on International Activity Companies go global for greener pastures and sustained growth. That works as a cushion particularly, when domestic markets are in a grip of recession. It is a fact that that the operations of the companies are becoming increasingly international in nature. Objectives are many such as increased competitiveness achieved through offshore production facilities, exploring new emerging markets with high GPD growth rates such as China, India, Brazil or Russia. International operations have diverse implications depending upon the activities such as low cost manufacturing bases, market expansion or exploring the relatively inexpensive R&D facilities Volex is spearheading its growth locally and internationally through various product lines such as power cords, fiber optic cable assemblies, high speed cable assemblies, industry standard cable assemblies and radio frequency cable assemblies. Volex is known in the market to provide engineering design expertise for all associated solutions. Product development has been Volex’s forte. Internationally, Volex is well established with wide manufacturing bases and deep sales/service network. Volex has taken a lead in establishing manufacturing bases at 9 strategic locations considering the logistics and needs of all the major OEMS. These 9 locations are capable of product development, manufacturing and testing. 1. The companies which are strong in meeting the servicing needs of the consumers emerge victorious in the market place. This philosophy is strongly grasped by Volex that is why it runs more than 20 sales and support offices in Asia, Europe, North and South America. 2. The delivery within short time frame is considered one of the most essential strategies in the international arena to thwart competition. Keeping that in mind, the company has created several stocking hubs across all major consuming regions of the world. (Company Profile, 2011) Having seen some of the basic infrastructure facilities of Volex globally, it will be appropriate to look at the new activities and achievements of Volex in the international arena. Global Healthcare Strategy Volex has identified healthcare sector as one of the most prominent thrust area on a global basis. Rising disposable incomes in the hands of the people in emerging markets, increased awareness and rising living standards have given a great boost to the healthcare market there. Increased average lifespan in the developed countries coupled with greater emphasis on the preventive measures have also caused a huge demand in healthcare sector in this part. Moreover, the current recessionary trend has a little effect on the demand of healthcare sector. That definitely goes well with the company’s healthcare strategy. The company proudly proclaims that Volex has obtained ISO 13485:2003 accreditations this year for its three international manufacturing facilities in Poland, India, and China. The ISO-13485 certifies the design, manufacturing and project management capabilities of medical devices of the company. It establishes product safety, traceability, risk management and design transfer activities in product development. Prior to that, the company had the accreditation of its design centre in Ireland last year. This is an indication of the company's foray into the health care sector strengthening its product portfolio and achieving the industry standards that the market requires. The three manufacturing facilities at Chennai (India), Suzhou (China) and Bydgoszcz (Poland) are equipped with the state-of-the-art facilities to deliver complex interconnect products for advanced applications such as CT (computed tomography), MRI (magnetic resonance imaging, X-Ray and ultrasound. This will certainly help the company to create enough customer confidence among the health care sector. (Volex Builds, 2011) Volex's ISO achievement displays its commitment towards design processes for product delivery. This amply testifies the credentials of the Volex in the healthcare market. Volex's future strategy is to get the ISO accreditation for more healthcare related products such as electrosurgical equipments, heart-lung machines, defibrillators, dialysis equipment, incubators, ventilators, ECG, respiratory and patient monitoring carts, clinical diagnostic equipments such as cancer screening, hematology. The above strategic actions will certainly fortify the Volex’s standing in the global healthcare sector. ZTE Selects Volex for Far East Market ZTE, a leading global provider of telecommunications equipment, chose Volex to supply high-speed SFP copper cable assemblies for LTE (4G) mobile network solutions for the Far East market. That being the first large-scale contract with ZTE opens up new vistas of growth for Volex as ZTE operates in 140 countries and services more than 50 operators. It is a big strategic win for Volex and that will put them in the high trajectory of growth. (Volex to Provide…2011) Volex's Foray in 3G Mobile Rollout in India Emerging markets such as India is witnessing high growth rate in telecommunication sector. In fact, the telecommunication market in India is growing at the average rate of more than 20 percent for last 10 years. That provides huge opportunity to the companies in this sector. Volex’s timely initiative by associating with a major global telecom solutions provider to supply copper cable assemblies that will be used in 3G rollout in India. Volex has struck a deal to supply nine types of cable assembly in 22 network areas to be operated by four companies. Volex's previous presence in the country has come handy when the company used to supply copper cable assemblies to many telecom operators for broadband and mobile access. This has been possible by using local manufacturing facility and flexible logistical approach in finalizing such deals. Such cable assemblies are capable of transmitting increasing amount of data at high speed without compromising the signal integrity and with reduced heat loss. Thus Volex has been to optimize the design and manufacturing process to provide the best solution in the industry. The support provided by the Volex and its staff at Chennai is found to be one of the most cost effective propositions that is not easy to match for such applications. (Volex Supplies, 2011) Volex Partnered with Huawei to Serve Indonesian Markets Huawei Indonesia and Huawei India selected Volex Group as the preferred global partner for the customized electrical and optical interconnects solutions. Huawei required a reliable supplier capable of delivering and meeting its stringent quality requirements and Volex successfully grabbed the opportunity to supply high-quality cable assemblies. Huawei's Indonesian facility covers almost 30 other countries in the region. And Volex's Batam and Jakarta factories are perfectly located to meet the delivery time required by Huawei. (Volex Works, 2011) Recommendations Thus, Volex's global credentials continue to stand in good stead in ever expanding market. In the current recessionary economic scenario that is prevailing in Europe and America, Volex’s strong presence in the emerging markets is a good long term strategy for the survival and growth. The emerging markets are displaying high growth rates and that will continue for many years to come. Secondly, Volex’s entry in the healthcare market globally is a sound strategy because recessionary effect of the economy is seen minimal in healthcare sector. Thus, revenue loss in traditional sector of the business will be offset by the healthcare to a great extent. Volex’s partnering with Huawei give the company a continuous stream of revenues year after year. Volex should continue with the ongoing strategy of expanding in the healthcare and emerging markets and at the same time maintaining the turf at its traditional markets. Issue 2: Evaluating Volex is more concerned with shareholder value than any other type of stakeholder The Objective of any company is to enhance shareholder’s value. Maximizing the shareholder value is new corporate mantra. The rationale behind this is that the company needs fund for the growth and expansion of the company. The fast paced company’s growth cannot be met with only internal accruals because the fund requirement is huge, neither can it be always met with borrowed funds called debt. The debt route is flawed with the danger of high leveraging that could be disastrous during the recessionary period. If the interest out go is more than the receipt in terms of surplus then the company would be in financial trouble. High debt–equity ratio is therefore not preferred and is considered a bad financial management. It simply means that the company is prone to the cash flow or liquidity problem. The safe route therefore goes via equity but it has its own share price dynamics. Higher equity and lower debt of the company will reduce shareholder’s value or worth for the reasons enumerated in the following paragraph. (Optimum Capital Structure, 2011) Higher equity will reduce the earning per share of the company for a given size and operation of the company. Lower earnings will eventually drag down the price in the market assuming the same industry P/E applied to the company. Further, due to high floating stock of equity of a given company in the market, there would be a constant selling pressure in the market that would not allow the normal P/E (price-earnings ratio) to the share of the company that is usually commanded by other companies in the same industry. This finally results into a lower valuation for the shareholders. The servicing cost of equity is always high compared to debt. People ask higher dividends against the share (risk) they hold. It is a risk bearing instrument from the share holder’s point of view and risk always demands more return. In view of the above, there has to be an ideal mix of debt-equity ratio depending upon the nature of the industry. The appropriate debt-equity ratio, in fact plays a critical role in enhancing the shareholder value. The first landmark study was done by Modigliani and Miller in 1950 regarding the ideal capital structure of the company. That study later on prompted other study on the subject and that decided what capital structure the company should adopt to maximise shareholders value. The Trade-off View of the Cost of Capital The trade-off study states that there is an optimal capital structure. There is a specific debt/equity ratio that minimises company's cost of capital and that is also a point at which the company's value or in other words shareholder’s value is maximised. The shape of the cost of capital curve is fairly shallow. It gives a range at which the cost of capital is low. The following graph demonstrates that the overall cost of capital of the company is a weighted average of the cost of debt and the cost of equity. Source:http://campus.murraystate.edu/academic/faculty/larry.guin/FIN330/Optimal%20Capital%20Structure.htm The interesting fact is that when the company is new, it has no option but to finance it entirely with equity. But as the company grows, lenders get attracted and start lending the fund. That is how the equity portion decreases and debt gradually increases and the process of enhancing the company's value begins. Over time the company replaces expensive equity with cheaper debt. However, this phenomenon is true to a certain range because at very high debt same lenders will have concerns with the company's payout capacity (the company's ability to pay for interest and principal). It is quite obvious that looking at the higher risk involved, lenders will ask for higher interest charge. That is also true with the shareholders for in the event of default their own equity in the company will be in jeopardy. That raises the cost of equity. This proves that the capital structuring involving equity and debt is a prudent financial management in the process of enhancing the shareholder value. Volex and Shareholder Value It would be most appropriate to see now how Volex applies above understanding in debt-equity financing to maximise the share holder value. Volex’s debt-equity ratio has always been within the acceptable range except in 2009 for some quarters when the debt-equity ratio touched almost 80/20. Otherwise, it remained fairly within the range, around 40/60. That is what the Volex’s prudent financial management has been able to do in enhancing shareholder value. It will be appropriate to check whether this is reflected in the share price valuation and dividend payout or not. Source: http://www.lse.co.uk/ShareChart.asp?sharechart=VLX&share=volex_grp The last 5-year-graph of Volex shows that the stock price that was moving between ?60 and ?200 during 2006 and 2009 starts rising after mid 2009 and after that it remained between ?250 and ?350. The current stock price is ruling around ?305. The shareholder’s value has enhanced in last 2 years. Volex’s net debt reduced to ?4.6million as on 3 April, 2011 from the ?7.6million as on 4 April, 2010 making the more favourable debt-equity ratio. This has been achieved in spite of the difficult market conditions. The prudent financial management also helps increase the earning per share of the company that is reflected finally in the share price and shareholder’s wealth. This has been demonstrated in the earnings per share of the company, which was 2.8 pence in 2009 jumped to 9.3 pence in 2010. The earnings for the year ended 3 April 2011 further increased by 130% at 20.9 pence in 2011. This resulted in the value enhancement for the shareholders of the company in terms of stock price. Further the dividend payout of 2p for the year ended April 2011is substantially up from the last year’s dividend (nil) enhancing the return to shareholders substantially. (Volex Results, 2011) Volex has been able to increase the shareholder value through various means including prudent financial management. The company wants to continue with this philosophy in the future also so that the shareholders continue to get enhanced value for their investments. References 1. Company Profile (2011). Retrieved 23 July 2011 from http://www.volex.com/index.php?option=com_content&task=view&id=15&Itemid=105 2. Volex Builds Healthcare Market Presence with ISO 13485:2003 Accreditations for Three Worldwide Manufacturing Facilities (2011). Retrieved 23 July 2011 from http://www.electronicsproductionworld.com/articleView~idArticle~71414_30539153132011.html 3. Volex to Provide the Majority of High-speed Sfp Cable Assembly Requirements to ZTE's Far East Market (2010). Retrieved 23 July 2011 from http://www.electronicspecifier.com/Cables-and-Wires/Volex-To-Provide-The-Majority-Of-High-speed-Sfp-Cable-Assembly-Requirements-To-ZTEs-Far-East-Market.asp 4. Volex Supplies Cable Assemblies to Support Indian 3g Mobile Rollout (2011). Retrieved 23 July 2011 from http://www.volex.com/images/pdf/productnews/volex-supplies-cable-assemblies-to-support-indian-3g-roll-out.pdf 5. Volex Works With Huawei to Supply Cable Assemblies to Customers In South Pacific And Indian Markets (2011). Retrieved 23 July 2011 from http://www.volex.com/images/pdf/productnews/huawei-indonesia-india-18032011.pdf 6. Optimal Capital structure, Retrieved 23 July 2011 from http://campus.murraystate.edu/academic/faculty/larry.guin/FIN330/Optimal%20Capital%20Structure.htm 7. Volex Share Charts (2011), Retrieved 23 July 2011 from http://www.lse.co.uk/ShareChart.asp?sharechart=VLX&share=volex_grp 8. Volex Results (2011), Retrieved 24 July 2011 from http://www.volex.com/images/pdf/RNS/2011/fy11prelimannouncement.pdf Read More