HCF was established in year 1974. It started as a family-owned business and grew into a public listed company in early 2007. HCF is a contract manufacturer in clothing. It provides high quality clothes for mainly European and American fashion houses. HCF is not producing its own label. The clothes manufactured by HCF are all under clients’ own labels. To support its production, HCF owns three factories which are located at Butterworth, Jitra and Chieng Mai. The first factory at Penang was being shut downed due to financial crisis in 1998 but it was not sold. 2. Problems Confronted by HCF
Jeffrey Cheong, who is the managing director, has received a bad news that HCF’s two major clients might shift to China’s contract manufacturer as the prices there were very competitive. The loss of these two clients would make HCF’s current situation even worst. Over the last few years, HCF had been experiencing falling margins and profits whereas increase in COGS and overdraft as shown in table below. Increases in trade payable and bank overdraft by 92% and 86% respectively have resulting in overall increase of current liabilities by 45%. These are not healthy signs for a business. Table 1: Financial Analysis between year 2007 and 2008 | Increase| Decrease| Differences| Percentage|
Revenue| | √| RM 10 mil| 7.7%|
COGS| √| | RM 4.74 mil| 6.5%|
Operating Profits for the period| | √| RM 6.749 mil| 73%| Overdraft| √| | RM 1.415 mil| 86%|
Trade payable| √| | RM 6.654 mil| 92%|
Current liabilities| √| | RM 5.528 mil| 45%|
3. Strategic Options Identified
To address the situation HCF was currently facing, the management team has identified three strategic options: i. Setting up its own factory in China or joint venture with a Chinese manufacturer ii. Closing down or remaining factories in Malaysia and Thailand iii. Manufacturing HCF’s own label for Malaysian and Asean market
4. Evaluation of Strategic Options
As a consultant being appointed by HCF to advice the Board on which direction they should take, evaluations below have been done. 4.1 Proposal to expand to China
i. Setting up own factory
By opening own factory in China, HCF can be more independent. If HCF expands to China as a joint venture, it will not have full control upon the factory because the point of view from partner has to be considered when making any decisions. Ideas with partner will not always be the same. Besides that, HCF can enjoy the whole return with no profit sharing. HCF also will not meet problem of interest conflict which means that it is free to make any decision that suit to their objectives and goals. The new factory is big enough and it is estimated to be able to manufacture at a similar capacity as its current operation in Butterworth, Jitra, and Chieng Mai. However, when there is high return which means there will have high risk that HCF has to fully bear. First of all, the legal requirement and the culture environment are different compare to Malaysia. HCF may face problem of adopting the political and culture environment in China. Next, it is high cost to build a factory in China with cost of RM 15milion. Currently, HCF does not have enough funds for this expansion. Apart from that, the new factory takes longer time to become operational which will only be ready in 18 months.
ii. Joint venture with a Chinese manufacturer By joint venture, it requires a much shorter period to be ready for operational compare to setting up own factory. HCF will be able to service its customers in about 6 months instead of 18 months. Besides that, HCF may reduce cost by reducing labor cost because Celestial Clothes has many experienced and expertise employees. HCF may focus on its specialty such as design own label clothes as there is few top designer in HCF. Next, HCF may easy to adopt the environment in China such as political, culture,...