Proposal for Dorchester Ltd management based on Bolavens case study

Financial Proposal: Dorchester, Ltd.

As discussed in earlier papers, for Dorchester, the final decision as to which particular nation to invest in is dependent on a range of distinct scenarios; these factors naturally impact the selected acquisition target. Before the acquisition target is selected, the nation which houses the potential acquisition target needs to be scrutinized closely. For instance, the trade environment of the nation where the prospective acquisition is located needs to be assessed, since this factor will impact the cost and ability to engage in trade. The political environment of the nation where the prospective target resides is also a crucial factor that needs to be examined closely. No potential targets exist in peaceful vacuums; rather all the prospective nations looked at during this course have some element of political risk attached to them. Furthermore, as discussed during earlier assignments, it's been found that political stability of a nation has strong correlations with the exchange rate and the economic stability of major companies within that nation. As described in earlier paper, Dorchester needs to consider the creation, development and social acceptance of its products in the selected nation, and for the markets of neighboring countries.

Expanding to China would be a wise idea, through investments and target acquisitions. However, with foreign companies in China there can be the danger of being naive. Just because China has gone through such tremendous growth doesn't mean that it's a country that does business the way western nations do. In expanding to china and acquiring certain Chinese companies, Dorchester needs to have completed thorough research and have a clear game plan of not just how to finance such a move but on how to deal with the autocratic government and the corruption which can be quite inherent to the entire nation.

China

Earlier assignments demonstrated how I thought that China was one of the most ideal and most promising nations for future business. As the past few decades have demonstrated, China has experienced robust and substantial growth, something which has bettered the ability of Chinese people to exercise their abilities as consumers and purchase a range of items, including high-tech technological goods. For example, one of the major items for purchase has been televisions, something that has heightened the general sense of a consumer economy: televisions lead to watching commercials which lead to the desire for more products, which leads to even more purchasing by consumers. Part of the economic stability that the company has enjoyed has been a result of the vast manufacturing capabilities of the nation: China makes a great deal of televisions for the world. China is thus a desirable nation for Dorchester because it allows them to compete with a low-cost platform.

The manner in which China treats its economic stability is revelatory of the nature of the national culture as well as the underlying political climate. For instance, in 2010, when China overtook Japan for the place of having the second largest economy in the world, the nation reacted with extreme modesty. This modesty was in part a reflection of the genuine character of the nation, and also a strategic measure. For instance, as Russell Leigh Moses, a political analyst asserted, "I admire the government's retreat from hubris and its embrace of humility, and I don't get any sense it is manufactured" (Ford, 2010). This is in part, an accurate statement; China is not and has never been a country which has been given to hubris. Yao Jian, the Commerce Ministry spokesman, placed emphasis on the fact that China is still not out of the wood. Yao Jian asserted that China is still a developing country, meaning that a massive economy does not negate the fact that the bulk of the nation's population is poor (Ford, 2010). This fact is something to bear in mind when determining target acquisitions and for the future investment in the nation.

Furthermore, "Chinese officials are quick to argue that the simple volume of the country's gross domestic product (GDP) is less important than the approximate value of goods produced per person, known as per capita GDP. Measured that way, according to the World Bank, China ranks 124th in the world, between Tunisia and Angola. The World Bank puts annual per capita GDP in China at $3,620, less than one-tenth of the Japanese figure and one-thirteenth of the U.S." (Ford, 2010). When put in these terms, China doesn't look like a rich country, but a country which has simply made a tremendous amount of progress in the last few decades and which continues to improve. However, China understands that the problems it has looming on the horizon are truly massive, and thus any investor needs to understand those things as well.

This means that while there has been substantial economic growth, there are still also risks, and these risks are immediate. For instance, the property bubble, which has given China so much momentum, might implode, or inflation might grow wild, or the nation might be stunted by social unrest as a result of the increasing inequality between classes (Ford, 2010). Given the fact that so much of the rest of the world truly believes China to be rich, there's the danger of other countries of piling "…on the pressure for Beijing to shoulder the sort of international responsibilities that come with the territory when you have economic clout: do more about climate change, for example, or stop favoring its exporters with an artificially weak currency" (Ford, 2010). Fundamentally, the longer that China is labeled a rich or fully developed nation, the greater the implication is that China should take on problems or responsibilities that it's simply not capable of handling at this time (Ford, 2010). Dorchester needs to take these influencing factors and risks into consideration and to surmise that the economic status of China is far from static: it's going to continue either in a positive direction either at a slow or an accelerated speed, or it's quite possible that the alternative will occur.

As desirable as China is, it is not without some economic challenges. The boost in incomes have led to inflation in China, causing an increase in labor costs, making the task of setting up shop in China more costly. Furthermore, the Yuan, China's currency is extremely inflexible and is something which thus creates a substantial amount of risk in China from an economic standpoint. This indicates that economically, China has not fostered and developed a currency regime which is sustainable in the long run, causing the government to be anxious/reluctant about making any changes to the system despite how such changes might benefit the country in the long-term.

The political risk is China is still present to a certain extent. Even though the country encourages and even welcomes foreign investors to their company, there's still a formidable amount of corruption that is innate to the nation as well. Foreign investment and businesses are fostered generally in the form of joint ventures, so that information can better be shared -- and also so that the Chinese government can exert the level of control that they most strongly desire.

It would be wise for Dorchester to seek out the help and experience of firms (non-competitive firms in different fields) in their native land who have experience dealing with the Chinese market in a range of situations, so that Dorchester has a higher likelihood of performing better. Such mentoring firms will be able to provide more of a guide for navigating Chinese political and business culture.

Fundamental Recommendation

Having examined the economies and political climates of China, Japan and South Africa, the ultimate assessment was that Dorchester should invest in China. The overarching and most important reason for that was because of the manufacturing capability of China. All three of the companies manufacture technological goods such as televisions; however, China has a distinct advantage in that it has a higher level of competency with low cost and high end sets. Furthermore, China is the nation at the foundation of many of the parts manufacturing for other countries to begin with -- even those that create for Japanese manufacturers. Even though the average wage in China is increasing, Chinese workers are capable of a level of excellence that is unparalleled elsewhere in the world.

Part of the appeal of investing in China and selecting Chinese acquisition targets is directly connected to the allure of the Chinese work ethic. The Chinese work ethic has long been famed around the world, and the Chinese have long been presented as driven, disciplined, punctual and hard-working people who excel during times of extreme stress and anxiety. One could even go so far as to say that the Chinese work ethic is a fixture in the society and culture. One recent news story which best reflects the strength and dedication of the Chinese work ethic is the story about the street sweeper who had spent decades doing manual labor like farming or truck-driving, received a million dollar boom when the government bought her family-owned land for property development (Moore, 2013). As the millionaire street-sweeper explained, "Work is not just about the salary, it makes one focused. Laziness gives rise to all sorts of bad habits," she said, to the Chinese newspaper. The head of her cleaning team, Fu Guoju, noted that Mrs. Yu had never been late for work and had only asked for three days off in the last 14 years in order to attend the funerals of her mother-in-law and father" (Moore, 2013). This demonstrates without a shadow of a doubt the utter importance that the Chinese culture places on hard work. Hard work is about productivity, but that is not all. Hard work is about establishing one's good character and keeping up one's moral fiber through discipline. All of these elements work together to make China wise investment.

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. Furthermore, at this time, China's political and economic status is stable, even though it might not have been in the past. China's growth rates have slowed, but that's actually a good sign for investment as it indicates maturity and minimization of inflation. Some economists look at the large numbers of poor people in China as a sign that it is still a developing nation, and still others see it as a country with a tremendous capacity to grow, as more and more members will join the middle class soon,

As already discussed, China's currency is an issue which could make one hesitate when considering a potential investment. The Yuan is currently strong, but the value is being held down unnaturally. "The key to controlling China's monetary expansion is to clarify the relationship between currency (the central bank) and finance (the financial sector), thereby preventing the government from assuming the role of a second currency-creating body. According to Pan Gongsheng, a deputy governor of the PBOC, the relationship between the central bank and the financial sector entails both a division of labor and a system of checks and balances. In theory, the financial sector serves as a kind of accountant for the treasury and the government, while the PBOC acts as the government's cashier" (Monan, 2013). Such a move will create a greater amount of stability and growth, as well as a greater amount of confidence by foreign investors like Dorchester. This is precisely the type of balance which needs to occur, even though the connection between currency and finance has always been unclear (Monan, 2013). China has long had a low official government debt as a result of the role of currency in creating quasi-fiscal issues like write-off costs from changing state-owned banks along with the acquisition of banks bad debts through note financing and through buying bonds from asset-management firms (Monan, 2013). These activities are problematic because they ruin the PBOC's balance sheet and warp the overall fiscal policy (Monan, 2013).

China has a great deal of superiority in regards to its proximity to the major markets in Asia, as television sets are fundamentally products sold to any middle class consumer. China also has access to the trade routes across the north Pacific, delivering goods to West Coast harbors in under seven days. With factors like cost, stability and the assessment of robust domestic market, push China towards being the most ideal choice for foreign investment. However, a bulk of Dorchester's success depends on whether they'll be able to find a local partner located in China to work with them, helping to guide them through China's business culture, political and social cultures and traditional cultural norms of behavior and etiquette.

One of the most overwhelming priorities of Dorchester should be focused on the protection of the investment of their time and money in China: part of that protection needs to take the form of adequate risk mitigation strategies. Obviously, as discussed in earlier assignments, Dorchester can sell to China at first, but there needs to be a concrete way to direct profits back for investments elsewhere -- something which is particularly an issue with China's laws about currency exchange, so fundamentally Dorchester will need to have a strategy for capital repatriation as a means of reducing long-term financial risks.

Risk Mitigation

Before one develops a clear strategy to mitigate risks when investing in China, one needs to have a crystal clear view of what the main risks which shape the playing field of doing business in China are. The first risk surrounds the fact that there is an autocratic government, this means that possibly-detrimental rules and regulations can be instated with great speed: "For example, the country's coal industry was rocked when the government mandated that smaller companies increase capacity, sell themselves or shut down, by setting up minimum production levels" (Kuepper, 2013). Conversely, such a type of government means that there's a lower level of regulation, creating a playing field which is ripe for the development of fraud; in fact certain Chinese companies were found to be fabricating revenue, a process which isn't so unheard of in China (Kuepper, 2013). Finally, as alluded to earlier, one of the overwhelming problems is the fact that while China's rapid growth was in fact very positive, it did create a certain amount of inflation, forcing the government to raise interest rates and slow growth (Kuepper, 2013).

Conducting business in China at the fundamental level requires intricate interaction with government agencies: only the Chinese government can approve things like projects, business licensing and the regulatory compliance, so all the opportunities for behavior which creates issues are bountiful (Margolis & Carlson, 2009). Furthermore, in the People's Republic of China, there has long been a tradition of gift-giving and entertainment as a satisfactory means of conducting business; the inter-connected quality of these factors means that in certain respects, China offers a veritable minefield for FCPA violations (Foreign Corrupt Practices Act). Penalties for violating the FCPA hover around millions of dollars. Companies absolutely need to pay attention to these factors and make the assumption that FCPA violations are already occurring in particular acquisition targets (Margolis & Carlson, 2009). Only engaging in due diligence and establishing and following a compliance program can make companies less in violation of the FCPA.

Foremost, Dorchester should engage in risk assessment of Chinese companies that it chooses to do business with, starting with identification. The company needs to "identify all aspects of the business that involve foreign officials and state-owned enterprises, identify those employees who deal with foreign officials, identify all agents and consultants, and analyze any existing internal controls and compliance policies" (Margolis & Carlson, 2009). Essentially, this process helps the company identify the hotspots where Dorchester employees or their associates might get into trouble or being violation of the FCPA. Then, once potential hotbeds of risks have been found, Dorchester can create the necessary compliance program. Whatever program it does create, it will need to have methods for best dealing with foreign officials, foreign sales reps and consultants, and have employee training periods and handouts in Chinese (Margolis & Carlson, 2009). There also needs to be a clear and concrete method for implementing such policies and procedures to ensure accuracy and an established willingness of all employees to follow the polices outlined; a method for reporting violations, and a method for investigating violations also needs to be a part of this program (Margolis & Carlson, 2009).

One thing that Dorchester needs to be fully cognizant of is that when it comes to this act, "there are no materiality thresholds built into the FCPA. That is, there is no minimum transaction size or bribe amount below which the FCPA would not apply. As a practical matter, therefore, even though a local company may have audited financial statements, unless the auditor specifically tests for FCPA compliance, potential violations can easily be missed" (Margolis & Carlson, 2009). Ideally, Dorchester should hire an FCPA compliance monitor and a Chinese cultural guide who can work together to help navigate the actions of the company. This way, these staff members can help to ensure that the actions of the company are both within the regulations of the FCPA and under standard cultural norms.

Another tactic for minimizing risk when investing in China and selecting acquisition targets is the strategy of boosting corporate governance. Corruption can too readily occur with firms in China where the tasks and responsibilities of management and directors are still unclear. "The foreign shareholders usually set up a board of directors at the company's Chinese subsidiary. The board of directors, which must consist of at least three and up to 13 directors, is appointed by the shareholders and must follow their instructions" (Senff, 2012). This way, changes and decisions are made with a greater degree of transparency, and according to a greater set structure, such as the rules stated in the articles of association. The board of directors has a great deal of agency and defines many of the requirements. (Senff, 2012).

Another effective strategy to guarantee more compliance, less corruption and less overall risk is to promotes supervisors (who work to manage the actions of managers and directors) to the level of compliance officer by giving this person more controls and responsibilities (Senff, 2012). China doesn't have any laws about the nationality/residency of the person employed as the supervisor. Establishing the presence of things like the four-eye principle, a limit of access to IT systems, and regulation of the Chinese unit company seals are generally the standard at foreign-invested enterprises (Senff, 2012). "However, whistleblower hotlines are another story. Foreign companies have just started to add whistleblower hotlines to their compliance infrastructure in China. Such hotlines need to be Chinese-language friendly and guarantee anonymity. It remains to be seen whether this tool will be accepted in Chinese business culture" (Senff, 2012). At the very least, it still needs to be introduced.

However, one strategy which has already been introduced are more lucid and more regulated gift policies in order to lower the expectation of business courtesies and gratuities in China. One method which has been used in a practical manner is to create a short list (in Chinese) of all gifts which warrant approval beforehand (Senff, 2012). Such a list can be update from time to time and can be printed on wallet size paper for ease of reference for users and others (Senff, 2012).

Issues with the FCPA aside, it's simply too easy to treat China as if it's simply an advancing country with a booming economy. "On the surface, China appears to be one vast market with a strong central government. But deeper down, China is a conglomerate of disparate markets that vary in their levels of economic and social development -- from modern municipalities like Shanghai and Beijing, where officials are used to dealing with foreign investors, to the less-developed 'Wild West'" (Hoenig, 2006). This means that doing business in China is fundamentally an uneven process, much like the way the wealth is distributed there in an uneven manner. Even though the central government has been taking strong steps to better the overall business operating conditions by making laws stronger, creating a more contemporary financial system, and pushing for a greater level of transparency in business, the growth and implementation of these changes are still uneven all over the country (Hoenig, 2006).

This paper has examined the legal and regulatory risks to some small amount. To be clear, the level of regulatory risk in China is high, despite the fact that many areas of China's economy is very market oriented, the bureaucratic red tape is still extremely high in this country, and the approval process that many companies have to go through can be very unpredictable (Hoenig, 2006). The bureaucratic red tape can be pervasive and intense with regulations varying from area to area and with multiple authorities responsible for approving the same regulations (Hoenig, 2006).

Legally, the best way to avoid penalties is via careful preparation so that penalties are evaded in the first place. "Companies can minimize legal risk by conducting due diligence on the legal and financial background and reputation of key joint venture (JV) partners, acquisitions, senior managers, vendors, and suppliers before entering a formal relationship" (Hoenig, 2006). Dorchester really has an obligation to engage in a truly thorough pre-employment screening of all of their employees and to check on the reputation of local government officials before their take steps to set up shop in a particular region of China (Hoenig, 2006). It would be unfortunate if Dorchester started investing in China as an acquisition target and selected a particular area or city that was known for having invasive and pervasive corruption.

Some other risks which have been lightly discussed or mildly alluded to involve the intensive social and cultural risks that can occur when doing business in China. In part, this is simply as a result of distinct types of culture, and in other ways this is because of differing views on how to effectively do business. There needs to be a clear and unmistakable implementation of western ethics and standards of doing business. For example, in order for ethical breaches to be avoided, concrete ethical training programs need to be implemented and due diligence should be performed on all partners, vendors, and investment targets (Hoenig, 2006). "New senior-level employees and their immediate family members should undergo a thorough background check to determine their overall reputation, potential for conflicts of interest, and to make sure their lifestyle and wealth position are reasonably in line with their current position. In addition, employees who routinely come into contact with intellectual property (IP) or financial information should receive a summary pre-employment screening to verify their resume details" (Hoenig, 2006). This is fundamentally the details of the pre-employment screening which needs to occur and consist of multi-levels of research, such as information gathering from the public domain, along with character verification reference checks (Hoenig, 2006). When it comes to narrowing down on specific targets within China, assessing the corporate culture of a prospective partner is absolutely vital so that Dorchester can determine whether a comprehensive internal control program is a necessary part of the partnership (Hoeing, 2006).

Prospective Acquisition Targets in China

The purchase of an online marketplace within China would be a wise acquisition target, as it would allow Dorchester to sell their candies all over Asia, allowing for massive potential expansion. "In the next five years, Asia is expected to be the fastest-growing region for the company, continuing a trend of the past five years, said Jay Lee, eBay's managing director for the Asia-Pacific region. He said the company expects sales from the region to make up about a third of the company's overall sales" (Kim, 2011). Major online marketplaces like Taobao.com or Trade2cn.com are places where one can make all kinds of purchases of all kinds of goods: it fundamentally brings together all the areas of China for consumption and economic growth. Such online marketplaces are attractive ventures for a company like Dorchester, but still, they're too expensive and too massive for a simple candy company to manage at this time.