Risk Proposal for Investment
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Your corporation has an opportunity to make a major investment in China of $100 million to develop an offshore manufacturing facility. When this plant is fully developed and becomes operational in two years the corporation can close down its current manufacturing facility in the United States and shift operations to China. At present, the expected annual savings in labor and benefit cost is expected to be $20 million. You are asked to develop a proposal to identify the potential risk of this proposal and 'advantages' and 'problems' of this opportunity. Explain how you would proceed.
A. What are the inherent risks in this opportunity?
B. What economic data would you need for your analysis? Why (How would you use them)?
C. What potential factors affect exchange rates between China and the US ? How would you protect against that risk?
D. What other strategies do you recommend before your corporation implements this proposal?
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The inherent risks in this opportunity are there could be poor process and quality standards in China. Also, there could be a security breach and vital trade secrets could be leaked to competitors. In China there could be infrastructure breakdown and that could cripple the factory. Political unrest could stop or slow down operations. There could be increased labor rate causing high cost of manufacture. The increase can be blamed on economic factors like inflation, higher cost of living, or simply unfavorable exchange rate. Change in Chinese laws and regulations can make it difficult for the facility to function. There might be very low level of control over the Chinese operations because of partnership with local business.
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