Profitability and FDI in a large Japanese company
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article is about a very large Japanese electronics manufacturer, Matsushita Electric Industrial Company.
About how Matsushita is reviewing the profitability of its overseas plants including plants in Thailand. Some plants will be closed as a result of this review. Thailand may be affected.
Cheaper competing products from lower cost Asian countries have been hurting the earnings of Japanese electronics manufacturers such as Matsushita and Sony, forcing them to streamline and restructure their manufacturing operations to remain profitable.
A large share of Matsushita's manufacturing operations are located offshore in other parts of the world outside of Japan.
Today's article discusses decisions that large corporations make that can cause Foreign Direct Investment outflows from countries like Thailand.
FDI involves a foreign company more deeply in a developing country than mere stock market investments or purchasing exports from the country since the foreign company purchases land, builds plants, and hires local managers and workers. Often the product or component that the foreign company wishes to manufacture at low cost is so specialised that it is a completely new product for the developing country.
Lower cost production as well as production for local consumption are two reasons that foreign companies make such FDI investments.
Withdrawing FDI from a country is more difficult than pulling money out of the stock market or recalling a loan, but it happens sometimes. It's good to know when and why FDI happens and why it is withdrawn. As opportunities for FDI disappear, new opportunities for FDI will arise.
Some might argue, that if a country can lose FDI, then it is not worth attracting in the first place. One problem with this argument is that countries get a first-mover advantage from attracting FDI before other countries. Along Thailand's Eastern Seaboard there is already a well-developed infrastructure for export manufacturing including container ship facilities and industrial parks. Other countries like Myanmar that have not tried so hard over the years to attract FDI do not have such infrastructure.
In order to find out what finally happens in this developing story, you will need to pay attention to the business news in the future and see whether Matsushita keeps or closes its plants in Thailand and why it acts the way it does. Good luck.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What is Matsushita reviewing in its current major corporate restructuring program?
2. What is the target that Matsushita aiming for? When are they aiming to achieve the target?
3. Is this target a long-term or short-term target?
4. What is an operating profit ratio of a business?
5. Sales of what sort of products have led increased profits at Matsushita in recent years?
6. What kinds of overseas plants are unprofitable and might be closed?
7. Over the next nine years, by how much will Matsushita reduce its manufacturing plants?
8. What are two of the five criteria that will be used to decide on plant closures?
9. Which region of the world has the the most plants?
10. What major event in 2001 led to the current program of cost-cutting?
11. What is one important factor behind Matsushita's recent success?
Article
Matsushita to streamline overseas production
Yuri KageyamaTokyo - Matsushita Electric Industrial Co is reviewing its 170 overseas manufacturing plants to assess their profitability and decide which to close under a major restructuring effort led by its new president, a company spokesman said yesterday.
The Japanese electronics maker of the Panasonic brand is targeting an operating profit ratio of 10% by the fiscal year ending in March 2011 under the leadership of Fumio Ohtsubo, who took office as president in June, spokesman Akira Kadota said.
The ratio is a standard measure of a company's ability to rack up profits and is a ratio of operating profit - the profit resulting from its core business - over sales. Matsushita Electric now has an operating profit ratio of about 5%.
The company has decided to use five criteria to calculate a plant's profitability and is reviewing all its plants, including those in North America, Europe and the rest of Asia, to see whether they should stay open, Kadota said.
Matsushita has embarked on an overhaul of its business over the last several years and has boosted profits, led by the stellar sales of digital electronics products such as plasma display TVs and DVD recorders.
Much of the production of such high-end products is at Japanese plants, and Matsushita is considering closing money-losing overseas plants such as those producing old-style cathode-ray tube TVs.
Japan's top business newspaper, Nihon Keizai Shimbun, reported yesterday that Matsushita would reduce its number of plants by about half in five years. Kadota said a study of the plants was still going on and declined to confirm the report.
The five factors to be used to assess whether a plant should stay open include whether it has lost money for three straight years and whether sales have declined over the three years, Kadota said. The largest number of Matsushita's overseas plants are in Malaysia, Thailand and other Southeast Asian nations, he said.
"We will be taking a serious look at profitability and withdraw if necessary,'' he said.
In fiscal 2001, Matsushita posted its worst loss since its founding 80 years ago. Ohtsubo's predecessor, Kunio Nakamura, who became president in 2000, embarked on a cost-cutting overhaul and concentrated on key profitable products to nurse the company back to health.
The goal for a 10% operating profit ratio was initially set by Nakamura, and Ohtsubo is hoping to keep that turnaround on track and initiated the plant review, Matsushita said.
Cheaper Asian rivals have been hurting the earnings of Japanese electronics makers such as Sony Corp, which also has been struggling to restructure its business. One reason for Matsushita's success is that it was quick in coming out with plasma TVs, in which it commands a leading global market share. AP
Vocabulary (in discussion above)
streamlining, streamline production - to make production more efficient by removing unnecessary parts of it
restructuring, restructure a business - corporate restructuring, reorganizing and eliminating parts of a company to increase efficiency and profit. This often includes selling off parts of the company and reducing the number of employees. (See Wikipedia on restructuring)
offshore - outside of the country, here outside of Japan
assess - evaluate, look at different aspects of something and make a judgement about it
rack up profits - make a lot of profits
an overhaul - a thorough repair, a complete change and improvement
stellar sales - extremely large sales (as high as the stars, 'stellar' is the adjective for 'stars')
cathode-ray tube TVs - the traditional old-style big television with a "cathode ray-tube" inside of it
declined to say - politely refused to say
nurse the company back to health - like a nurse caring for a sick patient, carefully taking steps to bring a company back to profitability
a company turnaround - when a company goes from losing money to making a profit
keep on track - to continue to make progress towards the goal or target
a plasma TV - a flat TV that has a plasma display (See Wikipedia on television display technologies and plasma displays)
market share - the fraction of the market for a certain kind of product or good that a company has
developing news story - a news story that is not yet finished, so the articles you read
are only giving you part of a story, to get the full story you have to follow the story over a period of time, and read relevant articles as new events take place
Answer Key:
1. What is Matsushita reviewing in its current major restructuring program?
Matsushita is reviewing the profitability of its 170 overseas manufacturing plants.
2. What is the target that Matsushita aiming for? When are they aiming to achieve the target?
Matsushita is aiming for an operating profit ratio of 10% by March 2011.
3. Is this target a long-term or short-term target?
It is a long-term target, six years in the future (2011).
4. What is an operating profit ratio of a business?
The operating profit ratio of a business is a standard measure of a company's ability to make a profit. It is defined as the ratio of operating profit (sales revenue less any extraordinary transactions) to sales revenue.
5. Sales of what sort of products have led increased profits at Matsushita in recent years?
"Sales of digital electronics products such as plasma display TVs and DVD recorders."
6. What kinds of overseas plants are unprofitable and might be closed?
Overseas plants that produce old-style cathode-ray tube TVs.
7. Over the next nine years, by how much will Matsushita reduce its manufacturing plants?
By about 50%.
8. What are two of the five criteria that will be used to decide on plant closures?
First, whether the plant has lost money for three straight years, Second, whether sales have declined over the last three years.
9. Which region of the world has the the most plants?
Southeast Asia including Malaysia and Thailand.
10. What major event in 2001 led to the current program of cost-cutting?
Matsushita had its worst loss in the company's history. The company was founded 80 years ago.
11. What is one important factor behind Matsushita's recent success?
Matsushita gained a first-mover's advantage in the plasma TV market. Matsushita's quick introduction of plasma TVs has given them a "leading global market share."
