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Hong Kong Foreign Owned Export Business Analysis Report
Lance Hattendorf
Hong Kong Foreign Owned Export BusinessAnalysis Report
BC 303 - Statistics
Lance Hattendorf
SID# 20110202
January 11, 2011
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Introduction
Situated at the edge of the Asian Pacific, between China and Oceana, since
modern trade, the deep water port of Hong Kong has always been an important part of
linking Asian trade with the rest of the world. With English colonization and the
development of Chinas One country, two systems doctrine, Hong Kong has been
positioned as an economic engine propelling Asia toward modernization and
globalization. Several distinct advantages attract foreign companies to do business with
Hong Kong. These advantages include a competitive tax rate, flexible and educated labor
market, a high standard of rule of law, and the freest economy in the world (The Heritage
Foundation, 2010).
For foreign owned companies wishing to organize and develop in Hong Kong,
three distinct business structures exist, a subsidiary company (market subsidiary),
distributor office (distributorship), or representative office (agency). No matter which
structure the foreign company decides to establish, Hong Kong does not restrict or
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require local participation in ownership or management, differentiating itself from many
other Asian trade ports (Russ Thai Consulting, 1998).
Although there are a few business structures available to the foreign enterprise,
just like Western nations, there exist many different types of companies, depending on
the product, revenues, market viability, etc. The purpose of this analysis is to determine
which wholly owned foreign enterprise (WOFE) exporter type, operating in Hong Kong,
is the most lucrative. Therefore, for the purpose of this analysis, the exact business
structure is not important, as much as the form of the foreign exporting structures
operating in Hong Kong, agencies, distributorships or subsidiary companies. The
following is designed to define the research question, discuss analysis procedure, define
the subjects and document the viability between these three distinct structures.
Research Goal
Working as a project manager and management consultant off and on in Hong
Kong for the past two and a half years, Ive had business dealings with many types of
businesses with many different formations. Not so much as by pattern as much as by
identifying a niche to operate in, I became interested in foreign companies operating in
Hong Kong, particularly exporting through this bustling Asian port to the mainland
Chinese market.
At the beginning of the quarter, when a research question was posed, it struck me
that having insight into which WOFE exporting type was the most successful would be
valuable to know, not to mention the information gleaned from the research process. The
research question, therefore, I propose is as follows:
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Concerning the different forms of exporting structures, agency, distributorship, market
subsidiaries (subsidiary) in Hong Kong, which are the most lucrative for sales?
Through the course of my research, my research question has evolved
substantially without entirely invalidating the original viability of the research. The
success of Hong Kong as a port has created many problem in establishing statistical
tracers, among these are population tracking and therefore, sample tracking. Several
determinate factors has caused this evolution, among these are: a lack of ability to
identify exact company form due to market freedoms in Hong Kong, little amount of
available research on companies that went out of business, with so many exporting
companies operating in Hong Kong it is difficult to determine which are foreign or
domestic, and population/sample identification difficulties because companies can use
either English or Cantonese in their names and documents.
Research Collection and Methodology
A major challenge has been to identify and gather enough information for
preliminary analysis and inference between the different types of exporters. The sources
of information on the different companies have come from the Inland Revenue
Department of the Hong Kong SAR, Hong Kong General Chamber of Commerce, Hong
Kong Trade Development Council, Hong Kong Exporters Association and the Hong
Kong stock exchange Hong Kong Exchanges and Clearing Limited (HKEx).
By narrowing the focus to three distinct groups, agencies, distributorships or
subsidiaries, and the opening up of the population to both foreign and domestic, each
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distinct group can be represented with stratified random sampling, thereby forming them
into three distinct strata. This also solves the problem of an unknown population and the
unknown sample size. By sampling an even number of units in each strata, indeterminate
figures such as population size become null.
By identifying a sample of companies financial statements, examining the
profitability components of the companies, the profit margin, return on assets, and return
on equity, comparing the profitability attributes of each sample within the strata, and
finally determining the mean of each attribute of each strata, we can infer the success
level of each type of business. Although it is possible that the sampling attributes will
conflict, I believe the nature of financial reports will show a coherent trend for each
strata.
Exporter Defined
Foreign companies have several different ways of breaking into foreign markets
depending on a variety of factors. Chief among these factors is whether the subject
company is considered a willing or unwilling participant in globalization.
An unwilling firm considers exporting a difficult, expensive nuisance and prefers
to focus on domestic sales. For the unwilling exporter, the various ways to handle their
foreign market sales include the use of an export trading company (ETC), using an export
management corporation (EMC), and piggybacking. The use of an ETC is a very simple
solution for the unwilling firm as the ETC is an intermediary company that will purchase
the firms products and then resell them to a customer in a foreign country. An EMC is
another type of intermediary that acts as an agent for the exporter that while it does not
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take title to the firms products, it does gain a commission on the sale of the products to
customers in the foreign country. Piggybacking is a choice for an unwilling export firm
that involves a supplier setting up manufacturing in the foreign country and the exporting
then piggybacks their products through the suppliers manufacturing facility (Pierre &
Stewart, 2008).
Like the unwilling exporter, several options present themselves for the willing
exporter, or a firm actively seeking foreign markets in which to become involved. These
exporting options include agency, distributorship, and subsidiary. It is these willing
exports that this analysis will focus on.
Agency
The use of an agent by an exporter in a foreign import market is usually a
strategic one. The agent is normally a small firm already physically located in the foreign
market that simply acts as a representative of the exporter. An agent will not take title to
the firms products but will receive a commission for the sales in the foreign market.
Several factors for the use of an agent for foreign market expansion are considered by the
exporter:
1) For potentially small sales with moderate or no growth potential (no more than 5
to 10 percent of domestic sales)
2) When the product has been specifically designed to meet the needs of a particular
customer, not a stock item
3) Expensive items such as high end or operating machinery
4) Items with short product life cycles
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5) Items that do not need much after-sale servicing
6) The exporter is not likely to develop into a dominating presence in the market, but
will continue to be a niche provider
7) When the exporting firm is equipped to deal with export sales
8) When the company does not demand a premium pricing strategy due to a top tier
market strategy
9) When the firm wishes to exert control over its foreign pricing, marketing and
delivery strategy.
Distributorship
The distributor, like the agent is located in the foreign market. Unlike the agent,
however, it will purchase the products from the exporting firm, therefore take title to the
goods, and resell them for a profit. Characteristics of a distributor is that there are two
sets of invoices, on e an international invoice between the exporter and distributor, and
one from the distributor and final customer. Because the distributor takes title to the
goods, it may decide to carry complementary as well as competitive products. A firm
using a distributor will make this decision based on several factors:
1) For a potentially substantial market share of growth potential (20 to 25 percent of
domestic sales)
2) When exporting a stock item of commodity
3) When exporting a moderately priced product
4) For products with a fairly long product life cycle
5) If the product requires frequent maintenance or servicing
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6) When the firm estimates it will not be more than a minor market presence
7) When the exporting firm wishes to deal in export sales with a single customer
8) If the customer does not require direct control over its foreign pricing, marketing
or delivery strategies.
Subsidiary
Finally, a market subsidiary is an option available to a firm that feels comfortable
in developing its own subsidiary in a foreign country to produce, market, and/or sell its
goods in the foreign market. A characteristic of a market subsidiary is that it is
incorporated by the exporting firm and the export invoice is generated by two legal
entities that are part of the same corporation. A market subsidiary is a good choice for
firms with the following options:
1) For potentially considerable sales and market growth (more than 25 percent of
domestic sales)
2) For technologically driven products with intellectual property considerations
3) For complicated goods to produce or sell
4) For firms that expect a long relationship in the foreign market with the
introduction of additional product lines or goods in the future
5) If the product needs sophisticated maintenance or after sales service
6) If the exporting firm expects to develop into a substantial competitive presence in
the foreign market
7) For products or services that demand premium prices
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8) When the company wishes to retain control of its foreign pricing, marketing, and
delivery strategies (Pierre & Stewart, 2008).
The previous definitions were provided to display the inherent risks in associating
similar properties to each group of samples. Those definitions as outlined, for example,
show that because of the characteristics of the different business entities, subsidiaries will
tend to have a higher revenue than either agencies or distributorships. It becomes
necessary, then to analyze other properties within the sample groups (strata). For example
as seen in the chart below, the mean revenue in and of itself will not give the full detail of
success of each of the strata. For this reason, we have also included profit margin, return
on assets (ROA), and return on equity (ROE). With the combination of the financial data
with stratified random sampling, we should be able to identify trends to aid in the goal of
this research.
$298,791
$1,778,787
$5,599,667
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
Agency Distributorship Subsidiary
Mean Revenue of Business Structure (2009)
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Company X Y X-X Y-Y (X-X)(Y-Y)
Zhongpin, Inc. $829,700 50,740 136987.46 42994.83 5889752820.37Golden Dragon Holdings,Inc. $12,605 -312 -680107.54 -8057.17 5479739836.85
Ocean Sky International Ltd. $54,068 1,409 -638644.54 -6336.17 4046558274.36
First Pacific $4,280,000 427,400 3587287.46 419654.83 1505422519279.92
Multi Chem $504,000 -423,000 -188712.54 -430745.17 81287016408.81SiS Technology $552,360 13,400 -140352.54 5654.83 -793670246.74
Compellant Technologies $1,368 26 -691344.54 -7719.37 5336742031.57
EMC Corporation $155 15 -692557.24 -7730.27 5353652181.49
Ace Limited $157 29 -692555.94 -7716.37 5344015604.51
Total $6,234,413 $69,707 1612022310586.62
Mean $692,713 $7,745
sx, sy $3,905,169 $603,172
The scatter chart below shows the correlation between revenue and profit for the samples
with the calculations for the coefficient of correlation and coefficient of determination.
Correlation Between Revenue and Profit
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
200,000
300,000
400,000
500,000
$ 0 $5 00, 00
0
$1,000,0
00
$1,500,0
00
$2,000,0
00
$2,500,0
00
$3,000,0
00
$3,500,0
00
$4,000,0
00
$4,500,0
00
Coefficient of Correlation 0.09Coefficient ofDetermination 0.00732
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Summary
As we can see, even though there is a positive association between the revenue
and profit of the subject companies, the association is very weak. This weak relationship
indicates that independently, there can be no determinant factor of success based on
export business structure in Hong Kong.
Resources
Hong Kong Exchanges and Clearing. (2010). Retrieved September 5, 2010, from
http://www.hkex.com.hk
Pierre, D. & Stewart, R. (2008).International Logistics, The management of
International Trade Operations. Cengage Learning: Singapoe
Russ Thai Consulting, LTD. (1998). Retrieved August 6, 2010, from
http://home.swipnet.se/~w-10652/Hong_Kong_business_FAQ_1.html
The Heritage Foundation. (2010). 2010 index of economic freedom. Retrieved August 6,
2010, from http://www.heritage.org/index/country/hongkong
Yahoo Finance. (2010). Retrieved September 5, 2010, from http://finance.yahoo.com/
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http://www.hkex.com.hk/http://home.swipnet.se/~w-10652/Hong_Kong_business_FAQ_1.htmlhttp://www.heritage.org/index/country/hongkonghttp://finance.yahoo.com/http://www.hkex.com.hk/http://home.swipnet.se/~w-10652/Hong_Kong_business_FAQ_1.htmlhttp://www.heritage.org/index/country/hongkonghttp://finance.yahoo.com/