Export, Licensee or Subsidiary

Published on: Sat Dec 06 2008

This is an assignment to provide a compare and contrast of three potential choices, and to make a final recommendation of the three choices. Pakistan is home to an underdeveloped economy, with a violate political structure. Tensions between Pakistan and its neighbor India run high, and both are nuclear nations. Pakistan has annual exports of $18.2 billion, and one of their primary exports is carpets and rugs. The labor force includes children, and unemployment is moderate, at 5.6%, with significant underemployment present. Literacy of the total population is 50% and the GDP per capital is $2,400.1 Pakistan lies along the Arabian Sea and is connected via the Indian Ocean to the South Sea where Singapore lies. Piracy is a concern within these waters. Ms. Jenny Chang has three choices, to import her CAD system from Singapore, to license her product for manufacture and marketing, or to establish a wholly owned subsidiary within Pakistan. By choosing to import her CAD system to Pakistan from Singapore Ms. Chang would have the benefit of maintaining complete control of the production and marketing of the system. It would also remove the potential risks of political and religious turmoil within Pakistan. Though labor would be more costly in Singapore it will be easier to find skilled, literate workers. Transportation and delivery of the final product to the global market will be simplified with access to Singapore’s international ocean and air ports. As a negative, within Pakistan initial sales and marketing will be more difficult; without the benefit of pre-established connections to the carpet industry within Pakistan. Exchange rates could prove challenging, as the Pakistan rupee suffers from high inflation of 7%. The Singapore dollar is more stable, with inflation of 2%.2 The Pakistani government could choose to place import tariffs or restrictions of the CAD system, in an attempt to protect the labor intensive aspect of the carpet industry. The prospect of selling to other global carpetweavers might cause problems in Pakistan, which may choose to continue using their skilled carpet weaving labor force, as a mark of distinction . By giving up their local weavers Pakistan would enter a market where price is a greater part of the competitive environment.3 Once Ms. Chang enters the local Pakistan market it will be important to provide easy access to support and maintenance for the CAD system. This will be more challenging, with all of the skilled employees located in Singapore, and is another drawback to manufacturing the CAD system within Singapore. The second option, of licensing the CAD system for manufacture and marketing by a Pakistani company, would provide a great benefit to the initial marketing efforts, by giving Ms. Chang immediate access to the inside of the Pakistan carpet weaving industry. It would limit the role of Ms. Chang herself, and instead give nearly complete control of the production and sales to the Pakistani firm. The patents owned by Ms. Chang would be her sole bargaining chip in this situation. Political risks would be reduced, as the Pakistani government would be less likely to interfere with a business owned by a citizen. With careful selection a Pakistani firm which is familiar with the local culture and able to find skilled employees should be selected. The success of the licensing would rely on finding an honest business partner who respects the laws and would not take her CAD system and simply refuse to pay licensing fees once the manufacturing and marketing centers are established. As previously mentioned, the Pakistan Rupee is not a stable currency, and could provide troubles with sales to other international countries. The climate in Pakistan is wide ranging, but primarily desert. There are significant water shortages, which could prove problematic to the manufacturing process. If potential military conflict with India were to erupt the manufacturing and marketing licensee would suffer the consequences, and unrest may affect the ability of the licensee to deliver orders to other countries. By choosing to set up a wholly owned subsidiary within Pakistan to produce the CAD system Ms. Chang would have the benefit of close location to her main geographic market, as well as direct control over the production process. In establishing the wholly owned subsidiary, there are two available methods to decide between. It may be possible to purchase a company already engaging in the production of mechanical or computer systems. The second available method would entail developing a manufacturing and sales operation within Pakistan from scratch. Risks include the potential for an overdependence upon a local contact, difficulty sourcing raw materials within a local delivery range, security concerns and communication barriers. Less likely risks to take into consideration are the potential for war with India, poor transportation, and concerns about water, electric and telecommunication systems. Government risk is another factor, because without at least part Pakistani ownership the government may decide to impose additional taxes or fines, or even restrict operations completely. The risks could be mitigated, but not obscured by choosing to purchase a company in entirety. This action would minimize the vulnerable down-time aspect of initiating the production and sales process. A pre-established company would presumably have already worked through the myriad of risks and at the minimum have established access to transportation, literate employees, raw materials, electricity, and telecommunications. The best option for Ms. Chang to expand into international markets is through continuing production of the CAD system within Singapore. The first choice is the least risky, and taking into consideration the potential for troubles to arise between India and Pakistan, right now less risk is the best option. In addition the strong manufacturing environment within Singapore as well as easy access to global shipping routes makes the location an ideal location for an international home base. My primary concern with locating the manufacturing base within Pakistan is the low literacy levels and lack of a strong manufacturing industry. The production of a CAD system requires access to advanced manufacturing techniques and suppliers, as well as college educated programmers and Pakistan does not have these things readily available. These deficiencies can not be easily fixed by a single company and trying to establish a manufacturing facility within Pakistan despite these problems would cause high costs as well as quality issues. The potential political risks of locating within Pakistan are not worth the trouble, since the Singapore location meets all of the requirements including providing a stable international port for global delivery of the CAD system. The only drawback of a manufacturing base located outside of Pakistan is the greater difficulty gaining access to the local market. This is easily solved by establishing a strong sales and support branch for the CAD system. The work of sales does not require years of specialized training and specially trained repair technicians could be brought in from Singapore on a regular schedule. Despite the higher costs of manufacturing the product within Singapore the benefits of a stable system of suppliers, basic necessities and a literate workforce outweigh the merits of developing a Pakistan location.