Dorchester the Decision for Dorchester, the Decision

Dorchester

The Decision

For Dorchester, the decision about which foreign country in which to invest will be based on a number of different factors. The first of these factors is the economic. We have considered the different elements of the foreign currency issue, but the company must also consider the different local markets. Other factors will have to include the trade environments with the three different countries, because these will also need to factor into the costing and ability to trade. The political environment is also something that needs to be considered, for two different reasons. The first is that these three countries do have different levels of political risk associated with them. The second is that political stability is highly correlated with exchange rate and economic stability. Lastly, Dorchester needs to consider the manufacture of its goods going forward in these countries, in particular for other markets beyond the domestic borders.

Japan

Japan is the most developed economy of the three. The country's entire population is basically middle class or wealthy. Japan's economy, however, is in a state of low growth. Part of this is due to Japan's population, which is not growing, and part of it is due to the fact that Japan has struggled to maintain export dominance in recent years. Japan's government has generally been unable to spur economic growth and there is concern that the company will never truly regain its competitiveness. Japan today competes largely on the basis of technological superiority, and must maintain that in order to continue to be a major world export player.

As noted in the currency analysis, the yen has seen a reduction of its value in the past year, likely a response to the prolonged economic stagnation in the country. A falling yen will make Japanese exports more viable, but the costs of doing business in the country are high. There are also significant cultural and potential political barriers that need to be taken into consideration. The business climate in Japan is substantially different from that in the West. That said, Japan has the ability to produce technologically-advanced televisions, and remains a leader in the industry. If Dorchester intends to pursue a premium acquisition target, Japan is the most natural place to look for that.

China

China represents an interesting proposition. Economically, China is experiencing robust growth. This has improved the ability of Chinese people to purchase consumer goods, with televisions selling well as the result of that. The country also has significant manufacturing capacity and makes a lot of televisions for the world already. Competing with a low-cost platform would guide Dorchester to China. That said, there are some economic challenges. Rising incomes have led to inflation in China, with the result being that labor costs are also rising. This will reduce China's cost advantage, especially given the inflexibility of the yuan. China's currency is pegged to the dollar and supported with intensive foreign currency purchases on the part of the Chinese government. The result of this is that the currency does not move much, despite strong inflationary underlying fundamentals. There is, therefore, considerable risk in China economically, as its current currency regime does not appear to be sustainable in the long run, but the government is nervous about changing the system because to do so would undermine the country's competitive advantage.

There is also considerable political risk in China. The country is welcoming of foreign investment to a point -- it prefers that joint ventures are formed, for knowledge transfer and to exert greater government control over the activities of foreign corporations. There is a high level of corruption in the country as well. That said, firms that have experience in the Chinese market know the risks and different situations, and as a result they perform better, and have little concern. Prior to that point, foreign firms new to the country often struggle with Chinese political and business culture.

South Africa

The South African market is intriguing. As with China, South Africa is a country that has a strong wealth divided. While European South Africa is essentially a Western country with corresponding incomes and living standards, most of the country is third world. Thus, the size of the country is a little bit misleading -- the market of middle class consumers is actually quite small. That said, business culture is quite familiar to Western firms, since the drivers of enterprise tend to be of Dutch or English descent. The political culture is similar, but with more corruption.

Economically, South Africa is a power in the region, but not on the world scale. Far removed from global markets, it is not normally a source of export production despite significant manufacturing capabilities and an ample supply of low wage labor. The rand is declining in value, but while that creates cost-saving opportunities, it also reflects the weakness of the economy as a whole. Additionally, there is greater risk of political uncertainty in South Africa than in either Japan or China.

Recommendations

It is recommended that Dorchester should invest in China. There are several reasons for this recommendation. The first is manufacturing capability. While all three countries have the ability to manufacture televisions, China has a distinct competency in low cost televisions and is building its capabilities with respect to higher end sets as well. Further, China is the base of many components manufacturers, even those that produce for Japanese manufacturers. China's low wages might be rising, but they are still fairly low and the capabilities of Chinese workers are higher than many countries with comparable wage regimes.

China's political and economic situation is stable. While China's growth rates are not as high as they have been of late, this is probably good for the Chinese economy, showing signs of maturity and the stemming of inflation. It is worth noting that China still has strong growth potential as well, given how many of its workers have yet to join the ranks of the middle class. The country's stability is also important. There may be issues with respect to some of the laws and rules of the country, and its political culture, but once these things are learned, they do not change in China.

The currency is cause for concern. Not only is it the strongest of the three countries, but its value is being held down unnaturally. The result is the potential for a rapid appreciation of the yuan at some point down the road, but the arrival of that point is as yet uncertain. However, the ongoing weakness of both the yen and the rand makes those countries more viable from a currency point-of-view. It is also worth considering that pulling capital out of China is a challenge, whereas it is much easier in Japan and South Africa, and currency hedging is by far and away easier in Japan than China.

China and Japan are superior in terms of their proximity to the major markets in Asia. Television sets are basically commodity items sold to any middle class consumer, and many even below that level. While South Africa can reasonably produce for other countries in the region, none but Congo match the size of the larger Asian countries, and Congo is much poorer. Asian markets are critical. But China and Japan also have access to the trade route across the North Pacific, delivering goods to West Coast ports in less than a week. South Africa has better access to Europe and to Brazil, however, and equivalent access to India.