S.6 CROSSCIRCULAR PROJECT
Theodore Au Adrian Leung Calvin Li Leslie Tsoi Andrew Wai Abie Yau
S.6A x S.6B
Introduction of Gao Feng •
Established in 1989
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Manufacturing screws, nails, bottle opener.
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More than 80 managers, engineer and technician
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Factory plant with a total area of 3500 square meters.
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More than 140 Units of machine producing screws, nails, bottle opener and 20 Units of Heat treatment furnace.
Location of Gao Feng • • • •
Shenzhen Special Economic Zone (SEZ) Bao'an District Town W Industrial Estate
• Located in Shenzhen • Gateway of China • Located on the border with the Hong Kong SAR
Why Shenzhen? • Special Economic Zone • Close business, trade and social links with Hong Kong SAR • Convenient Transportation Network – – – –
Train Air Shenzhen Bao'an International Airport Sea Port of Shenzhen Road Road border crossing at Lok Ma Chau in Hong Kong
Labour • Abundant Supply of Cheap Labour – Lower Labour Cost than in MDC
• Labour Intensive Production
Government Policy • Before – Supportive Government Policy • Low Tax Rate • Lenient AntiPollution Controls • Land Reserved for Industrial Development
• Nowadays – Unfavorable Government Policy • High Taxes • Strict Pollution Controls • Labour Policy
Difficulties Facing • Unfavorable Government Policy • Increase in Tax Rate • Strict Pollution Controls • New Labour Policy
• Financial Crisis – Decrease in Order from Overseas Country – More Difficult to Borrow Money from Banks – Reduction of Investment from Shareholders
Actually Gao Feng Company has also opened an office in Hongkong beside their factory in Shenzhen.
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1410 •% | 00852 @24641306 • M 00852 24690695
L‡• ‡• • ŁP 86 Ł 755 27182463 • @ 86 x 755 ł 27182558
Advantages of maintaining an office in Hongkong – Language Skills • Contact Overseas Buyers
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Low Profit Tax Rate No Sales Tax Close Link with Mainland China Free port status Good infrastructure Free flow of capital Stable government and political system Efficient civil service
Mainly for Overseas Market • United States of America • Canada • Europe
Manufacturing Activities To reduce the operating cost and facilitate the production ↓ Firm possesses different types of machinery for different stage of production
Direct Cost? • • • •
Raw materials Manufacturing wages Royalties Copyright of the product
Fixed assets of the company • Premises • Different kinds of machinery • Equipment – Window fan – Motor vehicle
Ways to Expand Gao Feng’s Market How to Expand? – Horizontal Integration • Combination of two or more firms producing the same goods or services.
– Vertical Integration • Combination of two or more firms engaging in different production stages of the same goods or services.
– Lateral Integration • Combinations of two or more firms producing related, but not competitive goods and services.
– Conglomerate Integration • Combination of two or more firms engaging in entirely different business.
By Horizontal Integration
• Gao Feng combine with another company producing the same goods.
• Competing company becomes Business Partner ompeting • Results – Able to gain a larger market share – More customers
By Vertical Integration
Vertical Backward Integration
• Gao Feng combine with another company producing raw materials – Plastic – Metals
• Steady supply of raw materials is ensured • Ensure a steady quantity of output • Result – – –
Secure the number of customers Build up customers’ confidence Attract new customers
By Vertical Integration
Vertical Forward Integration
• Gao Feng combine with another company providing kitchen ware retail services • Ensure outlets for their products • Expand their market effectively and efficiently • Easily obtain market information – Improve the quality of its products • Results – Attract new customers – Expands the company’s market
By Lateral Integration • Gao Feng combine with another company producing related goods – Toilet ware • More diverse products • Results – Customers’ confidence build up – Expand using existing goodwill
By Conglomerate Integration • Gao Feng Production Ltd. can combine with another company producing entirely unrelated goods – Books
• Diversifying investment risk • Results – Customers’ confidence build up – Expand using existing goodwill
Ways to reduce the average cost in production • Reduce the average cost by practicing the Economies of Scales – Technical Economies of Scale – Financial Economies of Scale – Purchase Economies of Scale – Managerial Economies of Scales – Labour Economies of Scales
By Technical Economies of Scale After firm increases production ↓ Use more machines and capital to produce goods • Machines are working more efficiently – Average cost can be reduced
By Financial Economies of Scale After firm increases production ↓
Needs more fund in many different aspects
• Banks may have more confidence – Willing to lend money – Lend money in lower interest rate
By Purchase Economies of Scale After firm increases production ↓
Needs more fund in many different aspects
• Bulk purchase can be done • Larger discount is possible • Lowers average cost
By Labour Economies of Scales After firm increases production ↓
Needs more workers
• Able to Practice Division of Labour • Working efficiency increases – Lowers average cost
By Managerial Economies of Scales After firm increases production ↓
Needs more fund in many different aspects
• Facilitate the communication between departments • Effective management can be reached
The law of diminishing marginal productivity More and more variable factors are added to some fixed factors ↓ Marginal product will eventually decrease. This is an empirical law discovered by economists.
In order to increase labour productivity • Choose a most suitable production method – A costeffective one
• Practice division of labour – practice makes perfect
In order to reduce average cost • Choose a costeffective production method • With a larger output – Cost of making a contract can be spread over a larger volume – Preparation and trial cost will decrease – Transaction cost per unit of output tends to decrease
Law of comparative advantage? • With comparative advantage in the production • Can produce the good with a lower opportunity cost • Specializing in producing the good which has a lower opportunity cost • Total output will increase
To workers • Workers who have talent in designing have comparative advantage over other workers • Opportunity cost for designing is lower
To managers • Managers have comparative advantage in: – Managing – Leading the firm over workers
To producing utensils • In Gao Feng, – comparative advantage in producing utensils
• Company, and the whole economy will have higher output
End