Yue Yuen Industrial (Holdings) Limited:

Site Selection
Jun Lim
1046621
Core 7
March 4th
4SA3 Dr. Zhu

Winter Term 2015

Contract

From: _________________________________________
To: Professor Zhu
I promise that I did not consult in any way with anyone as I completed this
assignment. I also promise I did not use the work completed by any past student in
this course. I agree not to allow future use of my assignment Yue Yuen Industrial
Limited by any person(s) enrolled in Commerce 4SA3 subsequent to this term. I
understand that if I do, at a minimum, my mark on this assignment will be changed
to a zero and my final grade recalculated. I also understand that this will be
brought before the Academic Integrity Committee for their ruling on the matter.

Signed ____________________________________________________________
Date _______________________________

Introduction
Yue Yuen has been a successful footwear manufacturing company. However, the firm is in
need of setting up another production line, as the current capacity cannot cope with the current
demand. The candidate locations include Pearl River Delta of China, Western China, Vietnam,
and Indonesia. In making decision for the right location, three criterions will be assessed
quantitatively. The criterions include infrastructure, government policies on investment, and the
labour cost of the location.
Criterion
Infrastructure should be the first criterion to assess. Does the location have satisfactory level
of networks of roads and ports? Does the location have reliable electrical power network? Yue
Yuen is a manufacturing company that exports most of its goods. The manufacturing plants must
operate without any power outages or tremendous financial loss follows. Also, in order to export,
manufactured goods should be transported out efficiently and reliably. Cheap labour forces and
liberal investment policies are meaningless with such infrastructure.
Labour cost constitutes significant part of total cost for manufacturing plants, and no firms
can survive for long by ignoring labour costs. As the plants hire thousands of workers working
full time, significant savings will rise even from minimal difference. Therefore, as a firm with
large number of labour forces, Yue Yuen should consider locations with lower labour cost.
Lastly, government policies on foreign direct investment should be looked at. There are
countries with conservative investment policies where they limit amount of capital inflow. On
the other hand, in many developing countries, liberal policies exist where they offer incentives in
forms of free trade zone, low corporate tax, and preferential tariffs. The policies are important
because tax is an item that will take away substantial amount of profit. Firms in free trade zone
enjoy no tax on imports and exports. For Yue Yuen, a firm that imports raw materials and export
finished goods; tax may be one of the biggest expenses in its operation. By operating in the
country with such policies, lower production costs and cost savings will likely follow.
In quantifying such measures, I will place 50% weight on labour cost and 25% each for
infrastructure and government investment policies. I put the biggest weight on labour cost, as the

labour cost for a manufacturing firm is the biggest line item. Trivial changes in labour cost affect
manufacturing firms drastically. The other two items also have significant influence on the firm
but the impact is not as large and direct as labour cost. I will give score of 0, 2.5, 5, 7.5, 10
respectively for non-existent, unsatisfactory, satisfactory, good, and excellent. With weight of the
criteria and its respective score, weighted average will be calculated, and it will be the
benchmark for final decision [Appendix 1].
Assessment
Indonesia offers tax incentives, preferential interest rates to its investors. Its physical
infrastructures are lacking of quality and quantity. Electricity is not supplied reliably in many
areas and much of its urban areas are still missing efficient transportation network. The labour
law in Indonesia makes the countrys labour comparably expensive. Its inflexible law enforces
minimum wage increase and allows severance benefits up to 30 months salaries for dismissed
workers. With good incentives, poor infrastructure, and expensive labour, Indonesia scored
4.375/10, making it the least important place for new investment.
Vietnam is a country known for stable politics and economics. Its infrastructure is urbanized,
however, it is heavily congested as a result of manufacturing boom. In attracting investors, it
offers variety of incentives in form of tax benefits. Its labour forces have gone through
widespread industrial actions due to dissatisfaction with levels of pay and working conditions. As
a result, minimum wage has gone up by 40%. With a score of 5.0/10, Vietnam is the 3rd most
important location.
Pearl River Delta Region is a region saturated with thousands of manufacturing plants. The
regions port complex boasts infrastructure specifically designed for manufacturing firms doing
trade. However, shortage of electricity and port congestion is common due to severe logistic
pressure. PRD region, designated as Chinas special economic zone, enjoys government
incentives such as reduced corporate income tax rates, income tax exemptions, and exemption of
custom duties for imported materials. In contrast, the labour cost in the region is not so
incentivizing. One child policy and competition between industries for the labour market has
been dwindling pool of workers. As a result, labour costs have been constantly increasing. With
these factors, PRD region scored 6.875/10, making it 2nd most important location.

Western China is an impoverished region that is home to restive ethnic minorities. The major
barrier to investment is its infrastructure. Transportation network is not as developed as other
locations, and labour forces are not as skilled. As a result, the FDI in the region was trivial
compared to eastern regions. However, government has announced to develop the region
particularly in its infrastructure and education. It has been investing heavily to fix problems in
the two systems. As a result, we can expect efficient transportation system and quality workers in
near future. In promoting FDI in the region, central government is keeping a variety of tax breaks
and preferential interest rates. Along with the incentives, its low labour cost is the regions
biggest strength. In comparison with eastern provinces, the labour costs are significantly lower.
As a result, the location scored 8.75/10 in my assessment, and is the most important location for
expansion.
Conclusion
Based on my assessment, Yue Yuen should consider expanding into Western China.
Indonesias labour forces are too expensive. Vietnam is experiencing logistical frustration with
increasing labour cost. Though PRD is experiencing similar phenomenon, I chose PRD as 2nd for
two reasons. PRD has ports complex specifically designed for export and import of
manufacturing firms. Also, Yue Yuen already has capital invested in the region and itll be better
to expand in a market that a firm is familiar with, than a place with uncertainty. Western China
should be considered first for expansion. With the plans to develop its infrastructure, liberal
investment incentives, and low labour costs, Western China is the most promising location.

Appendix 1 - Assessment

Labour Costs [50%]

Investment Incentives [25%]
Infrastructure [25%]
TOTAL

Indonesia
2.5
10
2.5

Vietnam
5.0
10
5.0

Pearl River Delta

5.0
10
7.5

Western China
10
10
5.0

4.375

5.0

6.875

8.75

**
0 = Non-Existent
2.5 = Unsatisfactory
5.0 = Satisfactory
7.5 = Good
10 = Excellent
Reference
http://www.cnbc.com/id/100651692
http://www.chinabusinessreview.com/going-west-a-progress-report/
http://asia.nikkei.com/Politics-Economy/Policy-Politics/Poor-infrastructure-protectionismthreaten-Indonesia-s-growth
http://www.globalstrategicadvisors.com/media/market-news/foreign-affairs/can-tax-incentivessave-manufacturing-in-the-pearl-river-delta.html
http://www.asiarisk.com/library2.pdf
https://people.hofstra.edu/geotrans/eng/ch5en/conc5en/China_SEZ.html