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Outsourcing GPS manufacturing to Indian or China

THE FIRST PART IS THE INFORMATION YOU WILL NEED:
The firm manufactures a global positioning system (GPS) that sells for $2,000 with cost of goods sold (hardware 30% and software 70%) of 55% of sales. Compared to the United States, China offers a 7% cost reduction in electronics manufacturing hardware and a 45% reduction in software programming. India offers a 32% reduction in software programming costs. Thus far, you have been unable to determine if India has the facilities to undertake the hardware manufacturing. The firm has to invest U$300 million. As far as China is concerned, you can send hardware and software manufacturing to China, or either one of the two.

You have been asked to lead a team to study and create a report for the executive team on both countries as business opportunities. As a group, study both China and India to make your calculations and recommendations as follows.

Risk is a significant factor. Identify each of the risk factors for each country (political stability, exposures of transaction, interest rate, operating, and translation); currency exchange rates; currency controls; skilled labor; facilities; infrastructure; each country's track record in using foreign direct investment (FDI), and political corruption and roadblocks to establishing a going concern" business.

Explore the expected GDP growth of each country and the forecasted exchange rates to the U.S. dollar. Based on the forecasted exchange rate with the U.S. dollar in 1 and 2 years, should the US$300 million investments be paid for immediately, hedged, or paid 50% ($150 million) in 1 year and 50% in 2 years? What is the projected savings for the firm? What is the new cost of goods sold percent of sales for each of the countries? What are your recommendations on choice of country? How can your firm arrange the business to be most profitable? Assume the following: Using the current spot rate for the Yuan exchange rate, the 12 -month forward rate is showing a 1.5% weaker US dollar and the 24-month forward rate of exchange is showing a 2.4% weaker US dollar. Using the current spot rate for the rupee exchange rate, the 12 -month forward rate is showing a 1.0% weaker US dollar and the 24-month forward rate of exchange is showing a 2.0% weaker US dollar.

Investigate and back up your decision on the question of whether or not it would be more ethical to invest the money in the U.S.

THIS IS THE PART I NEED:
What is the projected savings for the firm? What is the new cost of goods sold percent of sales for each of the countries?
Conclude the report with final recommendations and provide the reasons why we chose that country.

Solution Preview

Manufacturing in China or India

New Cost of Goods Sold

In US sales is $ 2000 and cost of goods sold is 55% of sale or $ 1100. Cost of goods sold includes both hardware and software cost. Hardware cost is 30% or $ 330 and software cost is 70% or 770. In China there is a cost reduction in both hardware and software. So cost of goods sold for China is calculated as below:

Calculation of cost of goods sold in China:
Cost of goods sold = 1100
Cost of goods sold hardware = 330
Cost of goods sold software = 770

Cost reduction:
In hardware - 7%
In software - 45%
New cost of goods sold for hardware is = [330- (7% * 330)]
=330-23.1 = 306.9
New cost of goods sold for software is = [770- (45% *770)]
= 770-346.5 = 423.5
Total cost of goods sold = 306.9 + 423.5 = 730.4
Cost of goods as a percent of sale = [(730.4/2000)*100] = 36.52%

Cost of goods sold in India:
In India there is a cost reduction in software of 32%, so cost of cost of goods sold is:
New cost of goods sold for software is = [770- (32% *770)]
= 770-246.4 = 523.6

It is not determined in India that it facilitates hardware manufacturing. So cost of goods sold of software as a percent of sales is [(523.6/2000) *100] = 26.18%.
Projected Savings for the Firm

If firm is established in China:
Savings in cost of goods sold (COGS) =
Total COGS in US - Total COGS in China
1100 - 730.4 = 369.6
The total saving in the software cost in China =
770-423.5 = 346.5

If firm is establish in India:
Savings in software's cost of goods sold =
Software's COGS in US - Software's COGS in India
770- 523.6 = 246.4

Cost of goods sold as a percent of sale is less in China in the comparison of India. Projected savings are also higher in China than India. But in India it is not much less that affect the profitability of manufacturing firm. At the same time, there are several factors such as political stability, exposures of transactions, interest rate, operating, translation, currency exchange rate, currency controls, skilled labor, facilities, infrastructure, foreign direct investment (FDI), political corruption, control to establishing a going concern business etc. that should be considered by the manufacturers other than cost of goods sold and savings while making an investment decision in a country. A firm should establish its business in the country that is favorable in terms of all these factors.

Comparison of Business Opportunities in India and China

A lot of business opportunities are found in both India and China. The comparison of business opportunities between India and China is as below:

Political Stability- India has suffered political instability for few years, when there was no single party. Political stability is returned since the general election held in 1999 with strong and healthy coalition of government. Currently, India is known as the most stable country in terms of politics. Political instability in India does not create investment risk for foreign investors as policy framed by past government does not change by any successive government. ...

Solution Summary

Outsourcing GPS manufacturing to Indian or China is examined. The significant risk factors are examined.

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