KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ACADEMIC YEAR 2019/2020
BBMC3064 INTEGRATED CASE STUDY

PROGRAMME :

TUTOR :

No. Group Member’s Name Student ID No.

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Issues Identified

1. Dependent on key customers

Total revenue contributed by Kiki and Houida was approximately 44% of the total revenue.
(Appendix 2) It shows that HCF are over-dependent on the two major clients. Over-dependent on
only a few customers could disrupt the company’s cash flow if those customer delay payments or
exploit the dependence on them to push your prices down. Moreover, it will also contribute a
major loss to the company immediately if these key customer switch to another supplier.

2. Profit margin in contract manufacturing

The fashion houses which HCF had contracts with would supply the material for their clothes to
maintain the quality of the output. Therefore, HCF will need to purchase the materials directly
from the Fashion Houses and would then source for appropriate accessories locally and produce
the clothes. This would result in HCF having lower profit margins as compared to producing the
materials required by the Fashion Houses internally. A part from that, purchasing materials from
the Fashion Houses also impose them to foreign exchange risk as their contracts are made 6
months in advance. This reduces their profits margins too as HCF would incurred cost for
hedging.

3. Falling margin and profits over the last few years.

Performance and market trends was not good. According to the Financial Statements (Appendix
1), revenue was declining and cost of goods sold was increasing. It show that HCF might be
offered better quality or cheaper selling price in order to maintain its market share. Besides, TR
and TP had been increased, which shows that HCF are not performing well as the collection of
the receivables are late and payments are delayed to suppliers (Appendix 3).

4. Decline of Demand
Due to its market trend of emerging market economic in China, many companies are seeking to
import clothes or material from China as China offers lower labor cost and operating expenses.
China can manufactured clothes that are higher quality at much lower costs. Thus, there are high
possibility that most of the customers of HCF would shift to China as a result of their competitive
prices. This will result HCF incurring losses in the near future or maybe cease manufacturing due
to significantly decline in demand.

5. Relatively unknown company

Over the past, HCF had established well customer base and also its reputation for high quality
clothes but HCF was relatively unknown in the region as HCF never manufacture this products
under its own brand name. Thus, if HCF plans to create its on brand name it will be an uphill task
as it would require high advertising costs to penetrate the market.
6. Closing down or Selling of Factories
If HCF decides to close down their current factories in Malaysia and Thailand, HCF might face
difficulties in selling its factories in Jitra and Ching Mai. This is because, factories in Jitra and
Ching Mai have very low resale value as it were located in rural areas. Since it is difficult to sell
these two factories the only option would be to shut down the factories. To do so, the factories
will have to be pulled down that would cost HCF RM 1.2 Million. If not, the factory would
become a haven for drug addicts. In another way, HCF can choose to board up the factories for a
cost of RM 200 000.

7. Loss of human capital

If HCF decides to move all its operations to China and close down all tits current operation, this
would cause HCF to lose its entire human capital. HCF current employees all do have specialized
skills, losing them will cause HCF to incur huge cost in employing such specialized individuals
and also huge cost in retraining new workers in China. Moreover, HCF might face reputation risk
as a large number of employees would have to be retrenched and most of them had been working
with HCF more than 10 years. A sudden retrenchment of this employees would signal a bad
reputation of HCF in the market, as many of their employees will find it hard to seek
employment, if they were retrenched by the HCF. Apart from that, HCF is also expected to incur
a redundancy cost of RM 3million at a minimum.

8. Threat of New Entrance

China’s clothes industry which HCF is unfamiliar with will result in higher risk to penetrate the
market in China. Besides that, the competitors in China could produce outputs with economic of
scales which will create high barrier of entry to HCF to enter into the industry. HCF will also face
difficulties in funding its own factory due to not having sufficient funds as a result of its past poor
performance.

9. Different law and regulation

If HCF plans to expand its operation to China, it will need to comply with different law and
regulation which can be very complex. When company expanding into a new market, a business
must adapt and operate accordingly to the country’s regulations. As China is one of the largest
emerging market in the world and its economy are expected to grow further. Therefore, there will
be more rules and regulation to be complied. HCF will need to remain compliant for successful
global expansion. Failure to remain compliant can lead to serious cases and costs.

10. Different Business practices and cultural barriers

Culture and business operations are different in each country and as such can present some
challenges. China’s business practices and culture could be different from Malaysia and therefore
it is necessary to provide cultural training to the employees before expanding its operation to
China. This would lead HCF to incur huge costs to train and educate its employees to understand
China’s business practices and culture.
SWOT Analysis

Strength
We have identified some of the advantages from it which is this business had run more than 30 years.
Besides that, the company had a lot of talent employees with high skills and knowledge because most of
their employees start work in the business since the first corporation and it may create loyal and
hardworking employees. Other than that, the employees with high skills can produce high quality of
garments that can meet to the demand of European and American market.

Weaknesses
The weaknesses element that we found in the case is the area of financial strength where the business
needs to improve to remain competitive. From the case, we found that the business has no enough
financial strength to expand their operation to China for contract manufacturing. In addition, the majority
of the business are relying on contract manufacturing activity and are not trying to seek for other sources
of income. Normally, financial situation of a company plays an important role in decision making.

Opportunity
HCF need to adjust their business strategy as china textile industry is becoming a potential threat to it as
its two major customers are now thinking of outsourcing to China. The opportunity arrive from the
business is HCF need to move all the current operation to china and maintain existing customers. HCF
also might need to expand to China by joint venture and maintain existing local operation to create own
brand name. Moreover, HCF also might exit contract manufacturing activity and create own brand name
using existing factories and equipment.

Threat
For the threat of China Dolls, the treat for them are to reduce the trade barriers between countries. Due to
the higher population of China, it will be a treat to them as they provide lowest labor cost and their major
client may switch to China for prices as it is very competitive.
PEST Analysis
Political Factor
China is one of the most powerful countries in the world and it is also the 4th largest country in the world
by land area. China is a great destination for foreign investment due to its stable political environment,
cheap labour and improved infrastructure. Thus, it is an opportunity for HCF expands to China to increase
its revenue. However, even China enjoys a stable political environment, the lack of political freedom is an
area of concern. The expansion of HCF to China need to take into consideration of the presence of
Communist Party where need to ensure all the advertisements and marketing strategies will not against
the ideals of the Communist Party. Besides, the relationships between China and United States has been
very challenging for a long time. The recent trade war with USA and protests in Hong Kong had resulted
deep impacts on the Chinese market on its government’s international policies. HCF might face
difficulties when dealing with the unfamiliar legal and political system.

Economic Factor
The clothing industry is a highly competitive market as the fashion trends in the field are continuously
changing. China is currently dominating the industry mainly due to its low operating cost. China
consumer purchasing power is increasing and labor cost are the lowest in the world. Foreign brands profit
from hiring Chinese workers as much as selling to Chinese consumers. This is attracting more foreign
brands to invest in this economy. Therefore, if HCF expand its operation to China, it would be able to
retain its current clients and increase its profits at the same time. However, if there is a sudden downturn
in the economy would lead to reduce demand for luxury clothes as well as increase in currency
fluctuation. Besides that, if China continues to dominate the clothing industry, it is possible for China to
impose trade barriers in the future.

Social Factor
With the total population of approximately 1.4 billion (World Meters, 2020). This is a massive market for
consumer products as well as clothing industry market. As mentioned above, average wage level has gone
up over the years resulting in an increase in consumer spending. Therefore, social trend of increase in
consumer spending are great opportunities for both domestic and foreign companies to invest in China’s
market. Apart from that, China’s safety standards in the cloths production may be lower as compare with
Malaysia and thus the quality of the products might not be consistent and required to have more control
over it if HCF expands to China.

Technological Factor
As China being a country, which is very much advance in developing new technologies, HCF would be
able to develop new skills, knowledge and technology by expanding to China. This would also allow
HCF to utilize new machines which would have faster through put, increasing its overall production
volume. This is because technology in China is more advance than Malaysia, thus if HCF joint venture
with a company in China, indirectly they will be exchanging their technology, which would in return
allow them to utilize the technologies too.
Suggested Proposal
Proposal – Expand operation to China with joint ventures, and maintain current factories
operations to create own brand name.
The proposal of expanding its operation to China while maintaining its existing operation to create own
brand name will require large amount of capital. Thus, HCF will face difficulties in funding to maintain
both segment of business as HCF currently lacks of capital. Therefore, in order to solve this, HCF should
expand its operation to China by a way of joint venture.
By expanding its operating through a joint venture, HCF would incur a much lower cost. The cost of
setting up its own factory in China is RM15 million and this process take 18months to complete, while
the cost of a joint venture with a well-known manufacturer (Celestial Clothes) in China is RM8million
with HCF investment at RM2.4million and this process only takes 6months to complete. As, HCF is
currently lacks of capital it would not be feasible to raise RM15million for its expansion plan, therefore,
the best option would be to form a joint venture. Apart from that, the Net Present Value (NPV)
Calculation (Appendix 4) of the joint venture shows a higher NPV than setting up its own factory.
Celestial Clothes being a well established high quality clothes manufacturer, allows HCF to be able to
enjoy economic of scale which would enable HCF to produce high quality clothes at low production cost.
As a result, this would enable HCF to attract more customers in Malaysia due to the lower price offered
by HCF for such high quality product. This will contribute to increase the profit margin of the company
and also the revenue of the company. Moreover, joint venture with Celestial Clothes allow HCF to enjoy
the well established customer base built by Celestial Clothes.
As HCF has many talented employees with high skills and most of them had worked for HCF for more
than 10years, maintaining existing local operation to create own brand name could help to avoid loss of
human capital whom possess the necessary skills and experiences to produce high quality clothes. A part
from that, it will also improve the brand name of HCF for being such an ethical company that are
responsible to the employees who worked for them for a long period.
Creating its own brand name using existing factories and equipment will enable HCF to enjoy more cost
savings as HCF was being known as a high quality contract manufacturer in European and American
market. Furthermore, HCF might be relatively unknown to the customers as they only engaged in
manufacturing activities without its own brand previously, but being a manufacturer for more than
30years would definitely carry a certain percentage of reputation in the clothing industry. Therefore, HCF
could be a reputable brand in a short period of time with proper advertising strategy.
However, the drawbacks in this proposal is that HCF would loss its control by joint venturing with
Celestial Clothes. This is because HCF only owns 30% shareholding while Celestial Clothes owns 70%
shareholding. HCF owning 30% would only allow it to exercise significant influence but not control.
HCF would have lesser control in decision making as Celestial Clothes do own a higher percentage in the
Joint Venture. This is not much of a disadvantage as Celestial Clothes do have much experience in the
clothing industry and it is much more experienced then HCF, thus HCF losing control should not be much
of an issue here.
As a conclusion, the benefits from this proposal outweighs the drawbacks in this proposal. Therefore, we
suggest HCF to undertake this proposal.
Appendix

Appendix 1: Changes in revenue and cost of goods sold

Appendix 2: Analysis of HCF customers

Appendix 3: Ratio Analysis

Ratio Analysis / Year 2008 2007

Current Ratio (Current Asset / Current Liabilities) 4.0775 5.0218
Acid Test Ratio (Current Asset-Stock / Current 2.4827 3.2619
Liabilities)
Debt to asset Ratio (Total Debts / Total Assets) 25% 19.5%
Debt to equity Ratio (Total Debts / Total equity) 26.6% 20.65%

Profitability ratio 2018 2107

Gross Profit margin 36% 44%
Net Profit margin 2% 7%

Efficiency ratio 2018 2017

Inventories turnover 134 109
(days)
Trade receivables 133 112
turnover (days)
Trade payables 66 36
turnover (days)

Appendix 4: Joint venture vs setting up its own factory

Year Current 2020 2021 2022 2023 2024 Total

No. of year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
HCF’s share of post-
tax inflow (2.4) 0.4 1.8 2.5 4.1 5.6 14.4
(RM’million)
Discount factor
1 0.893 0.797 0.712 0.636 0.567
(12%)
Present Value – JV
(2.4) 0.36 1.43 1.78 2.61 3.18 6.95
(RM’million)
Present Value – On
6.3
its own (8%)
JV arrangement vs
0.65
setting up its own