RAIMONDI COLLEGE (2008-2009)
S.6 CROSS-CURRICULAR PROJECT Business Studies – Economics – Geography – Principles of Accounts
Report on operation of Gao Feng Production Ltd.
Group Members: S.6A WAI Sai-kwan Andrew S.6B AU Chin-ching Theodore S.6B LEUNG Ho-lam Adrian S.6B LI Sin-hang Calvin S.6B TSOI Cheuk-leung Leslie S.6B YAU Kwong-wing Abei
Introduction The Gao Feng Production Ltd. was established in 1989 which mainly produce househ old utiliyies such as screws, nails, bottle opener. It has more than 20 Units of Heat treatment furnace and 140 units of machine producing screws, nails, bottle opener. Its products would mainly be exported to countries like USA and Western Europe. Gao Feng‘s factory plant is located in Bao’an District in Shenzhen with a total area of 3500 square meters. It has more than 80 managers, engineer and technician working in it. http://www.zhilicn.com/index.htm 志峰五金制品厂（香港）
Major Focus Topic: Economics Suggest ways to expand the company’s markets Gao Feng Production Ltd. can expand its markets by integration. Integration means that two or more firms combine together and it is regarded as a kind of external growth. Integration can be classified into horizontal integration, vertical integration, lateral integration and conglomerate integration. Horizontal integration refers to the combination of two or more firms producing the same goods or services. Gao Feng Production Ltd. can combine with another company producing the same goods. After horizontal integration, the original competing company becomes business partner to gain a larger market share. With a larger market share, there are more customers. Vertical integration refers to the combination of two or more firms engaging in different production stages of the same goods or services. It can be further classified into vertical backward integration and vertical forward integration. Vertical backward integration means that a firm combines with one engaging in a preceding production stage. Gao Feng Production Ltd. can combine with another company producing raw materials, such as plastic and metal, for kitchenware production. After the integration, a steady supply of raw materials is ensured. In other words, the integration helps ensure a steady quantity of output. A steady quantity of output helps secure the number of customers and build up customers’ confidence in the company. Most importantly, this helps spread the goodwill of the company and therefore helps attract new customers to expand the company’s market. Vertical forward integration means that a firm combines with one engaging in a later production stage. Gao Feng Production Ltd. can combine with another company providing kitchenware retail services. This helps ensure outlets for their products. Gao Feng Production Ltd. can decide where and when to set up retail shops in order to expand their market effectively and efficiently. Besides, the company can easily obtain market information in order to improve the quality of its products. Thus, its products can efficiently meet customers’ needs. This helps attract new customers and in turn expands the company’s market. Lateral integration refers to the combination of two or more firms producing related, but not competitive goods and services. Gao Feng Production Ltd. can combine with 3
another company producing related goods, such as toilet ware. The company’s products can be more diverse. If customers’ confidence with the company’s products has been built up, the company can expand its market by using its existing goodwill after the integration. Conglomerate integration refers to the combination of two or more firms engaging in entirely different business. Gao Feng Production Ltd. can combine with another company producing entirely unrelated goods, such as books. Besides diversifying investment risk by product diversification, if customers’ confidence with the company’s products has been built up, the company can expand its market by using its existing goodwill after the integration. All the above are ways of growing externally. Gao Feng Production Ltd. can also expand its market by internal growth. Internal growth includes horizontal expansion, vertical expansion, lateral expansion and conglomerate expansion. Their principles are generally the same as the above integration methods. However, internal growth only occurs in one firm and does not involve another firm. For example, for horizontal expansion, instead of combining with another kitchenware production company, Gao Feng Production Ltd. can expand by setting up more kitchen manufacturing factories to obtain the same market expansion effect.
What are the conventional ways to reduce the average cost in production? In my opinion, the company can reduce the average cost by economies of scales. Though increasing the production scale, the company can enjoy the follow Economies of Scale.: 1. Technical Economies of Scale: By increasing the production scale, the company can use more machines and capital to produce goods. In addition, they are used in longer hours. This means that the machines are working more efficiently and the average cost can be reduced. For example, a machineâ€™s operation cost per day is $ 100. If it only works 1 hour and produce 5 goods, the average cost is $100/5=$20. But if it works 5 hours and produce 25 goods, the average cost will be $100/25=$4. The cost is much reduced. 2. Financial Economies of Scale: After the firm increases its production scale, the firm needs more fund in many different aspects. However, the banks may have more confidence with the firm and become more willing to lend money to the firm or lend money in a lower interest rate. Therefore, some money is saved and the cost reduced. And also, the average cost will fall 3. Purchase Economies of Scale: After increasing the production scale, it is definitely that the firm needs more raw materials. So bulk purchase can be done. In addition, when bulk purchase is done, a larger discount is possible. Money can be saved and this lowers average cost. 4. Labour Economies of Scales: When the company produces more goods, the firm needs more workers as well. For example, more workers are needed in transportation, production of goods and management. Therefore, as there are more workers, the department that cannot carry out division of labour can now do it too. Thus, the working efficiency increases and the average cost of production decreases. 5. Managerial Economies of Scales: When the company produces more goods, more top managers can be employed. This can facilitate the communication between departments and between, top managers, and the workers. Less waste will be produced and the working efficiency increases, i.e. effective management can be reached. As a result, the average cost of managing and production can be reduced.
With the constraints of law of diminishing marginal returns, how can one reduce cost / increase productivity further? The law of diminishing marginal productivity states that when more and more variable factors are added to some fixed factors, the marginal product will eventually decrease. This is an empirical law discovered by economists. When the law of diminishing marginal productivity sets in, there are some ways to increase labour productivity. Firstly, a change in production method can increase labour productivity. When output is large, more production methods are available for choices. Thus, the use of more cost-effective methods, say division of labour can increase the labour productivity. Secondly, as practice makes perfect, the output will increase and so will the labour productivity. To reduce cost, as stated above, a cost-effective production method can be chosen. Also, when output increases, the degree of division of labour tends to increase. The average cost can be reduced. Moreover, with more output, the transaction cost per unit of output tends to decrease. For example, the cost of making a contract can be spread over a larger volume. Furthermore, preparation and trial cost will decrease on average when a larger output is produced.
Is Law of comparative advantage is manifested in the company? Comparative advantage is when a country has comparative advantage in the production of a good, it meant that she can produce the good with a lower opportunity cost than the other country. The Law of comparative advantage states that if each country specializes in producing the good in which it has a lower opportunity cost, then the total output will increase. This law can be applied to the workers in the company. For example, male workers have comparative advantage in handling large machines over female workers. The opportunity cost for both male and female workers to handle large machines is handling fine handiworks. Obviously, the opportunity cost for male workers is lower. Thus, male workers maneuver the big machines in the factory. On the contrary, female workers have comparative advantage in handling those fines, handiwork over male workers. The opportunity cost for both male and female workers to handle fine handiwork is to maneuver big machines. The opportunity cost for female workers is lower. Thus, female workers do all those packaging, screwing work. There are also other examples. Some workers who have talent in designing have comparative advantage over other workers, as their opportunity cost for designing is lower. This is why these workers will sit in the office in the company, and design new, innovative products. Moreover, managers, owners of the company have comparative advantage in managing, leading the firm over workers. The owners, managers will take up the leadership work. To see the company as a whole, the company can have comparative advantage in producing utensils over other companies. For example, for the factory we visit, the opportunity cost in producing one unit of utensil is three units of toy cars. The other factoriesâ€™ opportunity cost in producing one unit of utensil is four units of toy cars. The factory we visit then have comparative advantage in producing utensils. Thus, the buyers of utensils will choose this factory to reduce their reselling cost. In this way, the company, and the whole economy will have higher output.
Minor Topics: Geography There are few reasons to explain why Gao Feng decided to build their factory plant in Bao’an, Shenzhen. First of all, there is cheap land available when Gao Feng was set up in 1989 as the Chinese Government have to attract foreign investor to invest in Shenzhen, which was once a new Special Economic Zone in China. This can lower the set-up cost for the factory.
Shenzhen is also suitable for Gao Feng to run their factory. The convenient transportation network in Shenzhen helps Gao Feng to distribute their products to other parts of the world quickly. With convenient transportation network such as highways linking Hongkong, a Container Terminals located in Yantian and Bao’an Airport, Gao Feng can easily transport their products abroad. This can shorten the time of transportation to lower Gao Feng’s procurement cost as well as distributing cost. Markets refer to the outlets for good and services. For Gao Feng, their markets are mainly European countries as well as North America. As Gao Feng is specialize in producing screws, nails, bottle openers, their final products are light and small, the average distributing cost for the product is low. Besides establishing a factory in Shenzhen, Gao Feng has also maintained an office in Tuen Mun, Hongkong. There are a few advantages for doing so. First of all, Gao Feng 8
can take advantage of the trading and business skills of Hongkong itself. In addition, Gao Feng can use the city as a base for China trade as well as to establish an Asian regional base here. Trade-related services, transportation services, financial and banking services and professional services were the main components of Hongkongâ€™s export of services. Hong Kong was the worldâ€™s second busiest container port in 2006 in terms of container throughput, the busiest airport in terms of airfreight tonnage handled, and fifth busiest in terms of passengers handled. As a major international financial, trading and communications center, Hongkong has good communications network, geographic location, as well as free port status, infrastructure, free flow of capital, stable government and political system and civil service efficiency. These all attract Gao Feng to set up their office in Hongkong. By setting up their factory in Shenzhen, Gao Feng can enjoy the advantage of having cheap land for starting up their factory. Back in 1989, as the Chinese Government has to attract foreign investor to invest in China, they provide lower tax taste as well as looser environmental regulations to them. This can greatly lower the starting cost of a factory. Furthermore, the labour cost in Mainland is lower than Hongkong, making the operating cost of the factory can be further lower. However, nowadays, with more and more labour and environmental regulations were proposed by the Chinese government, the operating cost is no longer as low as before. Facing the International Financial Crisis, many factories have decided to move away from Guangdong Provence or even shut down from operation as the orders from foreign buyers have decreased greatly.
Business Studies Gao Feng Manufacturing Ltd. is a private limited company. As a private limited company, Gao Feng can enjoy the advantage of bearing only Limited Liability. It can also have more shareholders than partnership. This can wider the source of capital and provide more capital for Gao Feng to operate. Gao Feng is located at one of the industrial estate in Baoâ€™an, Shenzhen. It manufactured a large variety of products mainly screws and household utiliyies such a s bottle openers. Besides using machines to produce the mould of their products, Gao Feng employs a large number of workers to assembly their products. By employing large number of workers and assign them to concentrate on a single process of product, Gao Feng can enjoy the benefit from Division of Labour. As workers concentrate on only one single task, it saves time for them as they do not have to change from job to job. Secondly, capital is saved as Gao Feng no longer has to provide each worker a full set of tools. Also, the quality of products will increase as the workers keep repeating the same work. Finally, as division of labour is practiced, Gao Feng can assign the best worker to do the task. The productivity will hence increase. As to increase the quality of products and efficiency, Gao Feng uses machineries to produce their product. This can ensure the quality of their products as well as making all the outputs homogenous so as to attract foreign buyers to select their products. Recently, Gao Feng and other factories in the Guangdong Provinces face a lot of difficulties during their operation such as power supply, environmental protection as well as the global financial crisis. As the numbers of newly built factory increases greatly in the past few years, the supply of electricity from power station could not meet the demand of the large number of factories. Factories have to close down from operation in certain period. This greatly affects the daily operation of the company, as the factory has to cease operation from time. The output of the company will decrease. From a small village to a metropolis with almost 10 million people living in, the Shenzhen Government has aware the problem of pollution. In the past, as China had a loose pollution control then other More-developed countries like France and West Germany, investors and entrepreneurs tend to invest there money in China to build 10
their factory as a loose pollution control means a lower set up cost. In recent years, the Shenzhen government even wants to force some high-pollution industry to move to other provinces such as the Guangxi Provence by changing regulations and increase profit tax. This discourages investors and entrepreneur to operate their business in Shenzhen. Finally, the Global Economic crisis has creates a difficult environment for business operation. With the banks reduces the amount of loans available for borrowers, factories owners may find it difficult to meet the turn over of the company. Also, many foreign customers of the factories face difficult situation. To survive in the crisis, these customers may decide to cancel their orders bringing a great lost to the factories.
Principles of Accounts In order to reduce the operating cost and facilitate the production, the firm possesses d ifferent types of machinery for different stage of production. Taking the bottle opener as an example, first, workers would pour the hot plastic and metal into the mould in a machine to form the basic outline of the opener. Second, the plastic would be sprayed with colours. Third, it would be put on a hot rail for drying purpose. Lastly, different p ieces of plastic and metals would combined by the workers using their own hand. Eve ry single inlay are made of the workforce of the company using division of labour. Besides Raw materials and manufacturing wages, direct cost also compose of the roya lties and copyright of the product which is essential for producing a branded goods. As to the fixed assets of the company, there are premises, different kinds of machinery, equipment such as window fan and motor vehicle for export. The firm has mainly three department. For the manufacturing department, it is in char ge of the porduction of goods. As to the management department, it act as a middlema n and seek for better working efficiency and manage the workers in different manufac turing department. For the inter- relationship department, it would help contacting the related company such as transportation, retailing and extracting firms ensuring that th ere are sufficient supply and a considerable number of seller.