S.6 CROSS-CIRCULAR PROJECT

Theodore AuAdrian LeungCalvin LiLeslie TsoiAndrew WaiAbie Yau

S.6A x S.6B

Introduction of Gao Feng• Established in 1989 • Manufacturing screws, nails, bottle opener. • More than 80 managers, engineer and technician• Factory plant with a total area of 3500 square meters. • More than 140 Units of machine producing screws, nails, bottle opener and 20 Units of Heat treatment furnace.

Location of Gao Feng• Shenzhen Special Economic Zone (SEZ)• Bao'an District• 公明 Town• 红星村 Industrial Estate

•Located in Shenzhen• Gateway of China• Located on the border with the Hong Kong

SAR

• Special Economic Zone• Close business, trade and social links

with Hong Kong SAR• Convenient Transportation Network

– Train– Air - Shenzhen Bao'an International Airport – Sea - Port of Shenzhen– Road - Road border crossing at Lok Ma Chau in Hong Kong

Why Shenzhen?

Labour• Abundant Supply of Cheap Labour

– Lower Labour Cost than in MDC • Labour Intensive Production

Government Policy• Before

– Supportive Government Policy• Low Tax Rate• Lenient Anti-Pollution Controls• Land Reserved for Industrial Development

• Nowadays– Unfavorable Government Policy

• High Taxes• Strict Pollution Controls• Labour Policy

Difficulties Facing• Unfavorable Government Policy

• Increase in Tax Rate• Strict Pollution Controls• New Labour Policy

• Financial Crisis– Decrease in Order from Overseas Country– More Difficult to Borrow Money from Banks– Reduction of Investment from Shareholders

• 志峰五金制品厂（香港）• 香港写字楼地址：屯门天后路

18号南丰工业城第二座 1410室• 电话： 00852 － 24641306• 传真： 00852 － 24690695

• 志力五金制品厂（深圳）• 地址：深圳市宝安区公明镇红星村工业区• 电话： 86 － 755 －

27182463• 传真： 86 － 755 －

27182558

Actually Gao Feng Company has also opened an office in Hongkong beside their factory in Shenzhen.

Advantages of maintaining an office in Hongkong – Language Skills

• Contact Overseas Buyers– Low Profit Tax Rate– No Sales Tax– Close Link with Mainland China– Free port status– Good infrastructure– Free flow of capital – Stable government and political system – Efficient civil service

Mainly for Overseas Market

• United States of America• Canada• Europe

Manufacturing ActivitiesTo reduce the operating cost and facilitate the

production↓

Firm possesses different types of machinery for different stage of production

Direct Cost?• Raw materials • Manufacturing wages • Royalties • Copyright of the product

Fixed assets of the company• Premises• Different kinds of machinery• Equipment

– Window fan – Motor vehicle

Ways to Expand Gao Feng’s Market

How to Expand? – Horizontal Integration

• Combination of two or more firms producing the same goods or services.

– Vertical Integration• Combination of two or more firms engaging in different

production stages of the same goods or services. – Lateral Integration

• Combinations of two or more firms producing related, but not competitive goods and services.

– Conglomerate Integration • Combination of two or more firms engaging in entirely

different business.

By Horizontal Integration

• Gao Feng combine with another company producing the same goods.

• CompetingCompeting company becomes Business PartnerPartner

• Results– Able to gain a larger market shareAble to gain a larger market share – More customersMore customers

By Vertical IntegrationVertical Backward Integration

• Gao Feng combine with another company producing raw materials– Plastic– Metals

• Steady supply of raw materials is ensured• Ensure a steady quantity of output

• Result– Secure the number of customers Secure the number of customers – Build up customers’ confidenceBuild up customers’ confidence– Attract new customersAttract new customers

• Gao Feng combine with another company providing kitchen ware retail services

• Ensure outlets for their products • Expand their market effectively and efficiently • Easily obtain market information

– Improve the quality of its products

• Results– Attract new customers Attract new customers – Expands the company’s marketExpands the company’s market

By Vertical IntegrationVertical Forward Integration

By Lateral Integration

• Gao Feng combine with another company producing related goods– Toilet ware

• More diverse products

• Results– Customers’ confidence build upCustomers’ confidence build up– Expand using existing goodwillExpand using existing goodwill

By Conglomerate Integration

• Gao Feng Production Ltd. can combine with another company producing entirely unrelated goods – Books

• Diversifying investment risk

• Results– Customers’ confidence build upCustomers’ confidence build up– Expand using existing goodwillExpand using existing goodwill

Ways to reduce the average cost in production• Reduce the average cost by practicing the Economies of Scales

– Technical Economies of Scale Technical Economies of Scale – Financial Economies of Scale Financial Economies of Scale – Purchase Economies of Scale Purchase Economies of Scale – Managerial Economies of Scales Managerial Economies of Scales – Labour Economies of ScalesLabour Economies of Scales

By Technical Economies of ScaleAfter firm increases production

↓Use more machines and capital to produce goods • Machines are working more efficiently

– Average cost can be reduced

By Financial Economies of ScaleAfter firm increases production

↓Needs more fund in many different aspects

• Banks may have more confidence – W illing to lend money – Lend money in lower interest rate

By Purchase Economies of ScaleAfter firm increases production

↓Needs more fund in many different aspects

• Bulk purchase can be done • Larger discount is possible

• Lowers average cost

By Labour Economies of ScalesAfter firm increases production

↓Needs more workers

• Able to Practice Division of Labour • Working efficiency increases

– Lowers average cost

By Managerial Economies of Scales After firm increases production

↓Needs more fund in many different aspects

• Facilitate the communication between departments • Effective management can be reached

The law of diminishing marginal productivity

More and more variable factors are added to some fixed factors↓

Marginal product will eventually decrease. This is an empirical law discovered by economists.

In order to increase labour productivity • Choose a most suitable production method

– A cost-effective one• Practice division of labour

– practice makes perfect

In order to reduce average cost• Choose a cost-effective production method• With a larger output

– Cost of making a contract can be spread over a larger volume– Preparation and trial cost will decrease – Transaction cost per unit of output tends to decrease

Law of comparative advantage?

• WithWith comparative advantage in the production comparative advantage in the production • Can Can produce the good with a lower opportunity cost produce the good with a lower opportunity cost • SSpecializpecializinging in producing the good which has a lower in producing the good which has a lower opportunity costopportunity cost• TTotal output will increaseotal output will increase

To workers • Workers who have talent in designing have comparative advantage over other workers • Opportunity cost for designing is lower

To managers

• Managers have comparative advantage in: – Managing– Leading the firm over workers

To producing utensils • In Gao Feng,

– comparative advantage in producing utensils • Company, and the whole economy will have higher output

End