Malaysia and Vietnam Market Potential for TNA - Report Example

International Engineering Management TNA Assignment Table of Contents Introduction 3 1.0 Preliminary analysis of the Malaysian market potential 4 1.1 Market Value Chain 4 1.2 Market Trends and Opportunities 5 1.3 Market Entry 5 1.4 Relative advantages and disadvantages in terms of market profit potential 6 Advantages 6 2.0 Preliminary analysis of the Vietnamese market potential 8 2.1 Market Overview 8 2.2 Market Entry 9 2.3 Competition Landscape 9 2.4 Relative advantages and disadvantages in terms of market profit potential 10 3.0 Main risks associated with these two potential markets 11 3.1 Risks associated with Malaysian market 11 3.2 Risks associated with Vietnamese Market 11 4.0 Conclusions 13 References 15 Introduction Many companies have identified overseas expansion as a vital component of their growth strategy. This is not only beneficial to a company, but also an acceptable way of development of technology and system support. There are a number of reasons that may make a business organization wanting to go global. The most obvious reason is expansion, growth and global presence to increase product sales and improve profits. Other reasons include: improving business security through diversification of product market, increase innovation, exclusivity, enjoy economies of scale, gaining advantage on competition from companies with similar products by moving to fast-growing and less competitive markets, controlling expenses, and many more. These objectives should produce different strategies at the time of entry into an international market. However, it is important to note that moving to international market may not be easy due to their rapid evolution resulting from political, cultural and social influence - factors which a company may struggle to keep up with. In this paper, a preliminary analysis and report on two overseas markets – Malaysia and Vietnam - as potential markets for products sold by TNA has been done. TNA is an Australian company that provides ready solutions to the food packaging and processing with the packaging and distribution systems. TNA products include: Vertical Form Fill & Seal systems, flavoring systems, Product transfer and distribution, checkweighers, multihead scales, metal detectors, date coders, case erectors, case packers, palletizers, seasoning systems, shrink wrappers and complete processing equipment. The company’s packaging and processing solutions are widely used in industries such as baked snacks, salty snacks, pasta, confectionary, fresh produce, cereals, nuts, meat and poultry, pet foods, frozen foods, powders and many other. The aim of analyzing the two markets is to establish their relative advantages and disadvantages in terms of their potential profits. Based on these analyses and other available information, recommendations are made on which market would be the best option for TNA to introduce its products. Last but not least, the risks associated with these two potential markets have been identified and their influence on foreign investment discussed. 1.0 Preliminary analysis of the Malaysian market potential 1.1 Market Value Chain Over years, Malaysia is slowly shifting from low-end manufacturing activities toward leveraging its strengths and focusing on its natural advantages. This is being achieved through invigorating sectors such as agro-based industries, agriculture, and biotechnology. In short, this simply means shifting the basis of economic growth towards high value activities that utilize the country’s strengths and natural advantages. As reported by the World Bank (see figure 1), the country’s GDP per capita as recorded in 2015 was 10876.73 USD, which is 86% of the world’s average. On average, Malaysia’s GDP per capita is 4909.30 USD between 1960 and 2015. Panelists at Focus Economics Consensus Forecast have forecasted that in 2016, the GDP will grow by 4.0% - 4.5% (Focus Economics, 2016). Figure 1: Malaysian GDP per capita from 2006 to 2015 Malaysia is largely focused on locating service and manufacturing delivery function in locations that are cost-effective, and in some instances, resorting to outsourcing this to other third parties. The distribution structures have also been simplified to meet various requirements in the markets served (Vietnamnet, 2015). In addition, the country is working towards centralization of high value activities, including sales and marketing, procurement and central sourcing, supply chain management, and research and development. 1.2 Market Trends and Opportunities Since the 1970s, Malaysia has rapidly developed from a producer of raw materials into a middle income multi-sector economy with emphasis on domestic growth to wean their economy off dependence on exports. Consumption of packaging products in Malaysia is on a positive growth rate as consumers continue to demand fast-moving goods. The increasingly changing lifestyles has resulted in growth opportunities for a variety of pack types (Euromonitor Internatinal , 2015). Consumers in Malaysia have shown an increased level of purchasing confidence as they demand more fast-moving consumer goods. The demand for certain packaging types has increased due to growth in areas such as coffee pod capsules and ready meals with increasing hectic lifestyles. The highest volumes of growth in 2014 were particularly registered in rigid plastic cartons, metal, and liquid cartons. The continued increase in the sales of beverages such as vegetable juice/ beverage fruit and pasteurized/fresh milk stored in liquid cartons increased the volume of sales for these pack types. Other interesting areas that drive this growth are cigarillos/cigars in metal packaging. Greener packaging has been adopted in Malaysia as an initiative to embrace environmentally friendly packaging and build a healthy corporate image. For instance, the use of folding cartons has reduced to minimize wastage, and there has been a shift to use of PET bottles which can be recycled. In addition, some companies have adopted the use of sustainable raw materials in their production lines. Domestic packaging companies in Malaysia have maintained high level of competition by launching new types of packaging. Companies like Tomypak Berhad, Glaspak Sdn Bhd and Kian Joo Can Factory Berhad produce a variety of packaging made from paper, plastic, glass and metal for domestic market and export (Euromonitor Internatinal , 2015). Ecological reasons have contributed to poor performance of some pack types, a factor that has seen a rise in the use of flexible packaging and other new pack types made from PET bottles. This creates an opportunity in the packaging industry. PET bottles, liquid cartons, stand-up pouches and thin wall containers are some of the pack types that are expected to record a high performance 1.3 Market Entry Malaysia is one of the most attractive business hub for foreign direct investment in the Southeast region of Asia. This has been achieved through the country’s efforts to put up legal infrastructure and maintain a stable economy to support foreign investment (Vietnam Customs Statistics, 2014). The government of Malaysia has a long-standing policy to encourage foreign investment into the country. Although the government is seeking to encourage and promote domestic investment and growth of home companies, there is no intention to reduce inflow of foreign investments. The development of domestic companies welcomes partnerships, specifically in value added activities. As outlined in the UNCTAD 2014 World Investment Report, Malaysia closes the top 5 position of the largest foreign investment recipient in Southeast Asia. International companies in distribution, manufacturing, mining, insurance and finance have shown interest to invest in Malaysian market. 1.4 Relative advantages and disadvantages in terms of market profit potential Advantages As a key focus to on attracting foreign investors, Asia offers tax incentives such as the regional distribution center (RDC) incentives, international procurement center (IPC) and operational headquarters (OHQ) incentives. Malaysia provides strong investor protection policies which have been strengthened by the country being ranked number 5 on the World Bank’s Doing Business 2015 investor protection index. The Kuala Lumpur Regional Centre for Arbitration was established in 1978 to offer efficient and confidential system to be used in settlement of investment, trade and commerce disputes in the region. Foreign Direct Investment (FDI) is an attractive strategy and Malaysia is a secure location due to: competitive costs, a transparent and liberal investment policy, rationalization of public services, developed infrastructure, significant resources, attractive investment incentives, strategic location to the proximity of Asian markets and the growing spending power. All these factors are geared to increasing investor profit potential and stability while operating in Malaysian market. The Malaysian economy is relatively stable and continuously growing. In 2008, when there was a global credit crisis, Malaysian banks were not adversely affected and they were able to easily recover from the crisis. This fact indicates that profit levels are not likely to be heavily affected by global credit crisis. Disadvantages The packaging industry has a very high competition from local players and international players, such as Tetra pack. Another disadvantage of investing in Malaysian market is political tensions - like it was experienced in 2008. A reoccurrence of the situation will lead to political instability which is likely to slow down business operations - a factor that will lower the profits gained by an investor. 2.0 Preliminary analysis of the Vietnamese market potential 2.1 Market Overview Vietnam has a remarkable record of development within the past 25 years spurred with political and economic reforms (referred to as Doi Moi in Vietnam). As reported by the World Bank (see figure 2), Vietnam’s GDP per capita was 1684.87 USD in 2015. This is equivalent to 13% of the world’s average figure. Between 1984 and 2015, the country’s GDP per capita has averaged at 859.36 USD with 1684.87 USD as an all-time highest figure and the lowest recorded was 389.42 in 1984 (Trading Economics, 2016). Figure 2: Vietnamese GDP per capita from 2006 to 2015 The economic growth is driven by its young, educated and energetic population and the country is 55th largest economy on the global map. In 2014 and 2015, the country was in the first position in the emerging markets index for FDI, surpassing 13 other countries in an FDI Intelligence study. This has made Vietnam an attractive market destination for foreign investors. The fast growth of Vietnam market provides a number of attributes – including stability, increased integration, unlimited upside, and transparency – which have made foreign investment in the country attractive. Vietnam has witnessed growth in urbanization, a factor that has resulted in a more hectic lifestyles in big cities like Hanoi and Ho Chi Minh (Euromonitor International, 2016). Majority of consumers are increasingly becoming busy, and as a result, they appreciate convenient packaging formats to save effort and time. For instance, there was a positive growth in cat and dog food packaging as well as plastic stand-up pouches. 2.2 Market Entry Generally, the packaging industry in Vietnam witnessed a positive growth in 2015. This has been attributed to expansion of corresponding industries such as alcoholic and non-alcoholic drinks, packaged food, and beauty care. Different manufactures are coming up with more appropriate packaging brands to distinguish themselves with other players in their respective industries. As such, the industry is moving forward to increase premiumisation. In 2007, Vietnam signed to be a member of the World Trade Organization. This commitment has been the main catalyst to ease the situation that favors foreign investment in the country. Opportunities have been created for foreign investors who want to move into the country, with the government recently passing a legislation and getting engaged in international trade negotiations to ease involvement of foreigners (The Heritage Foundation, 2016). 2.3 Competition Landscape Vietnam is one of the most competitive foreign investment destinations in the Asian region. The country is attracting many business investors by fulfilling their treaty obligations with focus on succeeding in FDI inflows. This has made the government to remain committed to creating a stable socio-economic and political environment, legitimately protecting investors’ rights and interests, and creating an enabling environment. In 2015, a large percent of consumer goods industries in the country - including non-alcoholic drinks and packaged food, faced an intensive competitive landscape when they witnessed more and more brands being launched in their industries. This has given both domestic and international players a focus to provide more improved packaging and the image of their packaging brands (Euromonitor International, 2016). Wage rates are much lower compared to its neighboring labor markets - and it has better demographics, high literacy rate, healthier banks, and an economy that is expected to grow faster in the future. As a result, Vietnam has attracted several foreign investors and will continue to attract more investors, both in medium term and long term. These implies that competition for its market share in the packaging industry will remain high and continue to grow tremendously in the future 2.4 Relative advantages and disadvantages in terms of market profit potential Advantages Vietnam has a competitively young, and cheaply available workforce. A high percent of Vietnamese citizens live in the rural country, a factor that has dampened wage pressures. This means that real wages are low for a competitive advantage, and therefore, investor profits will be maximum. Another Vietnam positive is low capital stock, which yields more in investment. This has been made successful by creating tremendous opportunities to unlock potential through market reforms. Disadvantage There are many players in the packaging industry, which sets the competition level very high. There are about 38 companies which are major manufacturers of packaging in Vietnam. Examples include Kureha Vietnam, Asia Packaging Industries Vietnam, Sunway Precision Steel Corporation, EPE Packaging Vietnam and many more. The high level of competition has shifted manufacturers’ focus to improving packaging quality to enhance consumer awareness and improve the positioning and image of their packaging brands. 3.0 Main risks associated with these two potential markets Like any other foreign investment, there are risks that come with investing in these two markets. 3.1 Risks associated with Malaysian market Political risk – Malaysia experienced political turmoil in 2008 elections. Such political transitions occur unexpectedly with a lot of uncertainty (Asia Briefing, 2016). This exposes an investor in a state of uncertainty. Corruption – Corruption is practiced in Malaysia, especially by the leading coalition. Major companies in the country linked with the government are used as the preferred vehicles for implementation of government projects. Foreign investors may be disadvantaged when it comes to competing with such companies, losing in the end (Focus Economics, 2016). Currency and transaction cost risks – TNA is an Australian company that wants to start business in Malaysian market. These two countries have different currencies. In doing business between the two countries, there will be regular execution of purchases and sales, although the actual transfer of funds may take place at a later time. This causes uncertainty about the actual expenditure or revenue involved in the transaction. Sometimes the levy on the transaction may be costly depending on the rates in the financial market. 3.2 Risks associated with Vietnamese Market Political risks – Accountability, transparency and policy formulations made by the government impact on the effectiveness of the political class to implement policies and reforms. Undermining of investor friendly policies by entrenched political interest is likely to interfere with foreign investment. There has been increased number of protests, strikes and land disputes, which often affects foreign business. Corruption – Corruption is pervasive among leaders of the government and society. In routine business operations, companies are most likely to encounter corruption in the process of dealing with customs officials or tax officials. According to the International Transparency report released on 27 January 2016, Vietnam ranks 112/168 globally. Disturbances have been witnessed in the rural areas of Vietnam due to government expatriations of land resources as well as corruption of officials. These activities are often unpredictable. Currency risks – Vietnam has a fixed exchange policy that has often resulted in build-up of economic pressures. The cost and rate of exchanging currencies when business transactions are made may fluctuate sometimes, creating a situation of uncertainty. 4.0 Conclusions Overseas expansion or international market entry is a critical step in the growth of any company with this potential. Both Malaysia and Vietnamese markets are among Asia’s most growing markets, with their advantage of strategic location that can access the Indian and Pacific Oceans. For TNA to sell its products in these markets, it requires different strategies from those that have worked in its domestic market or in other international markets. However much the markets may look attractive, the company should be strategically positioned to meet challenges arising from socio-economic and political risks. This requires proper and careful market analysis before making a decision in which market should TNA introduce its products. Vietnam is a Socialist Republic characterized by lack of civil liberties and political oppression with nearly 70% of its people living in the rural areas of the country. The country’s economy is mismanaged by the ruling government and it is expected that signing to be a member of WTO and party to Trans-Pacific Partnership will help the country’s economic liberalization. In this view, Vietnam can be seen as a gradually transforming economy, opening its markets to international investors. It is steadily integrating its market-oriented economy into the global commercial system. There is a lot of competition from both local and international players in the packaging industry. Compared to Vietnam, Malaysia has a well-structured economy that has been performing very well for the last few decades. Despite recent political problems, the country has strong prospects for the future. The GDP and per capita income of Malaysia is lower compared to that of Malaysia. GDP and per capita income level has a direct influence on product sales. This translates into a ready market for TNA products because high GDP and per capita income means there are high expenditures on goods. 5.0 Recommendation Actions 1. TNA should avoid entering a market with many players in the packaging industry – the Vietnamese market. This is to avoid very competitive markets where an extra cost will have to be incurred to “catch” the consumers’ attention. In case they would make a decision to enter this market, there packing products should be declared more quality than those in the market, but then this might be expensive for the consumers. 2. The high GDP and per capita income of Malaysia favors it as a potential market target for TNA’s packaging products. More sales are likely to be recorded in a country with higher GDP and per capita income than a country with low per capita GDP. In addition, the Malaysian economy is more stable with impressive growth over the years. Doing business in a stable economy reduces uncertainty and economic risks, creating a better environment for TNA to trade its products in this market. In regard to the highlights above, and the evaluation of the two markets, it is recommend that TNA introduces sale of its packaging products in the Malaysia market. This is because the Malaysian market has a better growth and sales opportunity compared to the Vietnamese packaging market. References Read More