Week 6: Foreign direct Investment in China

Foreign Direct Investment in China

Foreign direct investment is the process of investment outside of the origin country of the business. In other words, Foreign Direct Investment is the process of investment that dealing with the long-term correlation interest and with the purpose of an effective voice in the management in the enterprise. Foreign Direct investment has developed intensely as the main method of the international capital transfer. In addition, when the company investing for the production facilities in the other country rather than the origin country of the business itself, it can be called as the foreign direct investment. 

Some companies choose to go international in order to increase their brand image in the market or to reduce their production cost expense, seeking for the best quality of product with a cheap labor cost. However. The process from the foreign direct investment the company should take the control of what they had invested in the new location.

China is the country, which had the largest population in the world and also knows as one of the cheap labor cost in the world. China takes this opportunity by simplifying their country’s producer for the foreign investor; in sequence to attract more investor comes to their country and their economic will automatically growing.

On February 2013, the foreign direct investment in China was recorded increased 6.32 percent compared to the previous year. The government of China expected steady growth in foreign direct investment in the next following months. The increasing foreign direct investment in china is being supported by the investment from the European Union country with the amount of $2.05 billion; Japan is also one of the sources from the foreign direct investment in China with the amount of $2.29 billion, and the corporate investors from United States of America recorded invested $3.60 billion in China.

Pepsi, Wynn resorts, Apple corporation, Ford motor, Nike, HJ Heinz, GAP, these are the example of the big companies from United States of America that invested in China. In the case of Pepsi, this company has committed to $1billion for the next four years to build 14 new beverages products plan and it will doubled the production capacity in China. Besides Pepsi, Wynn resort will create tough competition with their competitors Las Vegas sands in Macau by opening their second casino this year. Last but not least, Ford motor is improved their production capacity for expanding their company to China. Ford motor is joint venture with Chang’an Ford Mazda Automobile and planning to manufacture the new generation of Ford Focus and they spare $490 million for this project. To conclude, I think it can be a good opportunities for the foreign company to make an investment in China due to the rapid economic growth in that country.

Week 5: The risk of multinational currency for BMW

The risk of multinational currency of BMW Group

The foreign exchange can be one of the aspects that international company like BMW group should considered, because the rate of the currency in this world could be change every hour or maybe every minute. The groups of BMW are consisting of three famous car brands in the world, which are BMW, Mini, and Rolls Royce. BMW Group operates for almost in 30 countries worldwide, and there should be a good management for their multinational currency.

China has become the fastest BMW growing market with 14 percent from the global sales of BMW Group, while the sales of BMW Group in their origin country Germany only 17% from their total worldwide sales. The exchange rate of currency had takes the attention from the BMW Group, because this company aware that some of their profits was diminished due to the different rate of currency in every Country. The rate of the currency can be predicted from the economy of the country.

In the 2005 – 2009 annual report of BMW Group, it is stated there are reduction €2.4 billion due to the negative impact from the exchange rates. BMW Group does not want to cover this loss by increasing their car’s price, because they see from the case of Porsche. The sales of Porsche were drop immediately in Unites States of America in 1980’s after this company increase the price of the car, in sequence to cover their loss in the exchange rates.

In dealing with the risk of the exchange rates of the currency, BMW Group use “Natural hedge” strategy. By using this strategy, BMW Group will use the same currency as the business takes place or the revenue would also be the same currency as their origin currency. The factory (Spare parts) of BMW Group nowadays has increased to 13 countries in order to reduce the supply chain risk in the company.

The process of natural hedge is involving the founding of factories in the market, where the products want to be sold. In the late 90’s, BMW Group is the first company of premium car who wants to open the factory in South Carolina, United States of America. Seeing the potential from this factory, BMW Group decided to invest $750 million for factory expansion in the South Carolina. Besides the expansion in the United States of America, BMW Group also joint venture with Brilliance China Automotive, this joint venture deal is to help BMW Group in selecting the potential supplier for their car in China. In 2010, BMW Group also declared about the investment in India with 1.8 billion rupees for the production plant. To conclude, all this things are the strategy from BMW Group in order to reduce their supply chain risk from German to each country of their business and automatically there will be lesser risk for the foreign exchange in their company, since the production process is now closer to the consumer. In my opinion, in the future if I have international company like BMW Group, I would like to do the same strategy like BMW Group has done.

Week 4: The fundamental of raising finance in the company

Why company should raise their capital?

 

Every company needs to raise their finance in order to make some new project to make the company growth. There are lots of ways to raising finance in a company like lend from bank and etc. I think bank is the first place that every company will approach to get some extra money, but the finance department from the company should carefully select the bank since every bank have different interest rate. Besides that, company can also issuing bond in order to increasing their capital. The more parties buy the bond, the more company can make a new project in their company. Increasing the capital in the company should be start from today, because the faster company has more capital, the faster company can grows.

In my opinion this discussion can be refers to the case of Blackstone Group, currently this company borrowed $2 billion from banks to invest in single-family homes it intends to rent out. Blackstone’s group has the agreement for increasing debt with Deutsche bank, Bank of America, and Credit Suisse Group AG. The previous debt is tripled from the previous loans to $2.08 billion from $600 million. From the increasing debt, Blackstone’s group could get more capital to invest in the single-family homes property. Based on my observation, recently, Blackstone group already has 20,000 homes. Blackstone intends to end its buying binge by the end of this year. With housing prices on the rebound, particularly in Western markets like Phoenix and southern California; the firm predicts homes could soon turn expensive. Blackstone has been relying on its $13.3 billion real-estate fund, based on my observation, this is the largest fund ever raised by Blackstone’s group. This company takes this decision to dominate the single-family home market.

 

As we can see here that Blackstone’s group dare to take the risk, they chose to raise their finance by borrowing from Deutsche bank, Bank of America, and Credit Suisse Group AG with tripled amount of money that they have lend before, because they aim to dominate the single-family home. Since this company is the investor, they must be believe that from the investment from single-family homes will bring high rate of return since the property price kept increasing every year. I observed that Blackstone group already dominate the single-family home by having the highest single-family home ownership with the amount of 20.000 homes, whereas the majority competitor of this company only having 8.000 houses. This thing happened because Blackstone group dares to take high amount of debt from the bank. In conclusion, it is very important to increase the capital in the company to take the start.