Kea Fashion Ltd., a national New Zealand garment chain, has come to an important point in its development: the decision to internationalize its business and to enter a foreign market. In general, and it is also the case here, such a decision can have a double goal. One would be to find sources of production that would decrease production costs. This is usually done by extending the company's activity in the production area in a country where the wages are much lower than in the country of origin. Usually, the developing countries are the best places to relocate one's business in this sense, because of two reasons. One of them is related to lower wages, as I have mentioned here above. Another reason is that, even if the wages are low, the workers' experience is notable and it would not affect the quality of the products they make. In the case of the garment's industry, China seems an excellent choice here. The Chinese people has a long time experience in what clothing is concerned and it is almost sure that they will be able to produce garments at the same quality our customers have been accustomed to.
Another goal refers to sales and it is to be analyzed whether or not relocating to China would prove a challenge or an opportunity in this case. Things like how large the market is, its capacity for absorption, as well as social and economic issues will be discussed in the Discussion of Findings part.
As such, we can resume the mission of the company as international presence and awareness. This can be translated in the following goals for the company:
Growth in foreign markets and on the international market
Lower production costs
Higher net profit margins growing trend in the number of customers
Discussion of Findings
The first thing we need to analyze and discuss involves the reasons for internationalization. A first clue is presented in the chart and data from the first appendix. The chart is full of significance. It shows us that the retail sales follow a seasonal trend, in the sense that the highest sales are achieved in the winter holiday period, while the lowest are generally in the months following Christmas and New Year, with an all time yearly low in February. The reasons for this are easy to explain. In general, no matter what the products commercialized, the Christmas holidays are a time when everybody has to buy presents. Clothing and garments are appropriate gifts for this season. Additionally, in the months that follow, the customers choose to make less or no investments, partially because the funds they dispose of are lower, because of the holidays.
However, the chart shows another significant thing, which is one of the most important decisions for internalization. I am referring here to the fact that the company's sales seem to stagnate over the last two years. Indeed, the yearly high of close to $200 million in December 2001 was barely surpassed in December 2002 (notice that the difference between the two values is not even $4 million) and the forecast for 2003 is quite as bleak. This leads us to believe that either the market is saturated or the company's brand is no longer appreciated. In both cases (although the first one seems more likely, since the volume of sales have not actually decreased), the company needs to find other debouches in other countries.
Everything I have discussed here above is clearly underlined by the centered moving average. This is a statistical tool that smoothes fluctuations in data so that the pattern or trend of the collected data can be seen more clearly. If we examine the chart in Appendix 1, we can clearly notice that the growth trend for Kea Fashion over the last years is barely ascending and that from July 1999 to January 2003, the company's volume of retail sales has grown at an ever decreasing rate. Hence, this is the first reason to internationalize we should keep in mind: saturation of the home market.
The second appendix, describing the sales per capita and the deflated sales per capita seem an even more appropriate indicator in favor of discovering new potential target markets. There is one thing that may be encouraging: even if the New Zealand population has grown during the last years, the sales per capita indicator has also shown consistently higher values. If we relate data from September 1992 to June 2003, in both population increase and retail sales increase, we will have the following findings. The population has increased by 13.26%, while the company's retail sales have also increased by 39.01%. This may seem to contradict our findings from the previous appendix. Not if we compare some of the highs of the sales per capita indicator. The high in June 2003, the last month presented on the chart can be compared to a high in December 1995. This means that during almost eight years, the company has not been able to improve its sales capabilities.
We have so part analyzed the appendices that refer to sales and the market perspectives.
If we are to look at production and production costs, the third appendix is quite eloquent in what efficiency and productivity is concerned.
The first thing that comes to my attention when looking at this last set of data is the negative correlation between turnover and the average labor cost per hour.
This is - -0.62033, which means that the more the average labor cost per hour increases, the more the turnover decreases. This shows that the company is no longer cost efficient in using its labor and that it is paying more and more to obtain the same amount of turnover (at best). Reasons for this may include an increasing rate of wages in New Zealand and the fact that the company's employees are no longer motivated enough to produce at high efficiency rates.
We are now able to resume and analyze our finding in what the volume of sales and the rates of production are concerned and to discover two of the most important reasons for which the company has decided to expand overseas. On the demand side, the market is clearly oversaturated, which is shown both by the trend of the center moving average of retail sales and by the sales per capita indicator. Especially the former shows a stagnating trend during the last few years.
On the supply side, it is obvious that the company is no longer producing at the most efficient production costs, mainly due to the increasing wages, which in turn increases the average labor cost. Additionally, the negative correlation between the company's turnover and the labor cost is worrying and shows that the company should be considering additional means of production. As I have mentioned in my introduction, perhaps the best choice is a developing country. China seems to be a good choice from this point-of-view.
At this moment, we need to analyze and examine the double implications of expanding to China, both in terms of production and in terms of sales, being careful to have a look at the challenges and opportunities in each case.
In terms of production, the first thing we need to consider when referring to China is the extraordinary potential on the labor force market. Indeed, we should always keep in mind during our analysis that China has a total population of 1.2 billion people, many of them working and living on wages of around $150- $200. From this point-of-view, expanding production to China seems to provide a double advantage. First of all, one has where to choose from here: it is to be believed that the company should never have to worry about workers in China, both in terms of sheer numbers and in terms of their capacity and ability. Indeed, China has been a serious producer of clothing and garments and specialized personnel should be available here.
The second advantage relates to the working wages. As I have said, the average pay in China seems to revolve around $150 per person. In any conditions, if the company decides to offer around $250- $300, this will certainly be considered a more than generous offer and the company will be able to attract the local workers in its factories.
However, a serious challenge needs to be considered here: the workers' coordination. We should always keep in mind throughout our analysis the tremendous cultural differences between China and New Zealand. The first idea would be to send managers and top managers from New Zealand in China, so that the company's objectives should be better reached and work might be better coordinated this way. In my opinion, this would be a mistake. Indeed, the Chinese have a different philosophy towards work and motivating means that are usually used in the Occident will probably fail in China. I will give only one suggestive example. A common motivation used in the Occidental countries is…