High-tech Electronics Operations Management - Example

International Business Plan for High-tech Electronics Email address I. Introduction Tical Manufacturing Inc. is a UK-based designer of semi-conductors and prototypes that are utilized by production manufacturers in order to fabricate other consumer products. The company has developed and patented revolutionary high tech designs and the plan for the company is to create precision manufacturing facilities in Russia for the firm’s clients in the Eurasian region. In expanding the design and manufacturing functions to Russia, Tical Manufacturing Inc. aims to provide its clients in Russia and other Eurasian countries with exceptional quality, fast turnaround, competitive pricing, and unparalleled service. The share of the high-technology electronics sector in the economy of Russia is relatively small and has immense room for growth. As of 2013, the sector generated approximately 4% gross value added of Russia’s total GDP [1]. However, the present role and share of the high-tech electronics sector in the economy is best defined by the industrial and scientific potential concentrated on the enterprises in the sector [2]. Currently, Russia’s high-tech sector is characterised by special requirements aimed at ensuring product quality, technological specifications that require constant development and updates of advanced and cutting edge technology, high research intensity, and necessity of mobile production facilities [3]. It is believed that Tical Manufacturing Inc. is already complying with these requirements in its UK market. Until the early 90s, the high tech electronics sector was totally state controlled and it is only in the last ten years that it has been opened up for foreign companies, which Tical wishes to take advantage of [3]. Currently, the country is facing sanctions that have hit imports of high-tech electronics. However, this ban on such companies is mainly on American companies and, as Tical is a UK company, this is a good opportunity to expand into the country. The company hopes to acquire at least 5% of market share in two years, which should increase to ten% in five years, specifically targeting the industrial and automotive markets that offer significant growth potential for high-tech electronics like semi-conductors. II. Description of the Russian Market A. Major Industries in Russia Currently, the most competitive industries in Russia are exploration of oil and gas, precious metal and stone mining, aerospace production, aircraft building, electric engineering, military and weapons machinery manufacture, agricultural and transport production, and the foodstuffs and light industries [4]. These industries have a high consumption of high-tech electronics, most of which are imported and, therefore, there are huge opportunities for Tical to expand its high-tech electronics design and manufacturing operations into Russia. The fuel and energy industry are critical to the Russian economy as it supplies electricity and fuel to all economic sectors to ensure economic development. In addition, the machinery construction industry is the leading sector that provides all other sectors with machinery and equipment, while the chemical and petrochemical sector also plays a critical role in Russia’s economic development [5]. The metallurgical and agricultural complex industries, which involve metal ore extraction and enrichment and agricultural production respectively, are also vital industries in the country. B. Main Exports and Imports The main exports in Russia are energy that consists of coal, gas, petroleum products, and oil, nonferrous and ferrous minerals and metals, and rolled steel. Crude petroleum accounts for 39% of all exports, while refined petroleum, petroleum gas, coal briquettes, and semi-finished iron account for 15%, 9.1%, 3.0%, and 1.5% of exports respectively [6]. Other leading exports from Russia include fertilizers, timber, armaments, and equipment and machinery. However, as already identified, the biggest portion of exports from Russia is petroleum products, oil, and gas. Russia imports vehicles, equipment and machinery, foodstuffs, consumer goods, industrial consumer goods including high tech electronics, and chemical products. Essentially, the biggest imports are cars, packaged medicaments, vehicle parts, computers, and delivery trucks, which account for 7.3%, 3.4%, 3.2%, 2.2%, and 1.4% of imports respectively [7]. Russia provides former Soviet Republics with most of their needs, including electronics and machinery, which means that expanding to Russia, will also open up this markets to the company. C. Current State of Engagement with High Technology Electronic Products In the past few years, the Russian government has turned its attention to the design and manufacture of high-tech electronics, especially in relation to semi-conductors, with the founding of SEMICON Russia, a premier conference and exhibition that seeks to attract foreign investors and companies [8]. Indeed, semiconductor and related sectors continue to enjoy high levels of government support, specifically because Russia’s major industries require more advanced high-tech electronics to increase efficiency and maintain. As the race for new electronics programmes and innovation in Russia heats up, there are increasing opportunities for foreign players. This can be seen in the government’s sense of urgency in removing bureaucratic and trade barriers, particularly for the high-tech sector, to catch up with Western nations [9]. After years of imports and consumption of high-tech electronics, Russia now wishes to develop a home-grown industry to take advantage of its immense natural resources in rare earth metals, which provides a huge opportunity for Tical. D. Trends in Russia’s GDP According to data from the World Bank, Russia’s GDP has fluctuated almost consistently over the past ten years as seen in the table below [10]. Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 %GDP 6.4 8.2 8.5 5.2 -7.8 4.5 4.3 3.4 1.3 0.6 Historically, between 2005 and 2014, the rate of GDP growth in Russia has grown by 3.4%, reaching its all time low in 2009 of -7.8% and its highest level in 2007 at 8.5% [10]. As the world’s largest country, as well as the seventh largest economy in the world, Russia’s economy is still reliant on commodity trade, which accounts for its fluctuating rate of GDP growth as energy prices continue to rise and fall. This has been behind the Russian government’s attempts to encourage development of other sectors in the economy, including the high-tech electronics sector that continues to receive much attention from the Russian authorities. The biggest downward pressure exerted on GDP growth was from forestry and agriculture, while government spending also declined by 0.7% as market reforms continue to attract foreign and domestic investors [10]. The biggest upward pressure has been from real estate and technology industries. E. Exchange Rates, Domestic Interest Rates, and Inflation Rates The Bank of Russia, in 2005, introduced the dual-currency system as its main operational indicator for policy on exchange rates, specifically to contain the Rouble’s exchange rate volatility in relation to other major world currencies [11]. In the wake of the global financial crisis, the policy shifted towards moderation of depreciation in the Rouble, while between 2009 and 2012, the exchange rate policy was made more flexible and intervention volumes were decreased. However, the value of the Rouble declined dramatically in 2014 as a result of a looming depression, lower energy prices and sanctions but has stabilized in 2015 due to various measures taken by the Russian government and stabilizing energy prices. Below is the historical trend of exchange rates in Russia [11]; Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Exchange Rate 1 RUB Unit=X USD Units 0.0359 0.0368 0.0387 0.0419 0.0309 0.0329 0.0340 0.0312 0.0314 0.0265 The Bank of Russia, in response to the global financial crisis, steadily increased interest rates with the aim of stabilizing the economy and protecting the Rouble from losing value. Between 2005 and 2014, interest rates averaged at 6.75% before reaching an all time high in late 2014 of 17% as another response to the falling value of the Rouble [12]. However, with the stabilization of the Rouble due to improving energy prices, the domestic interest rate was cut to 14%. Below is a historical trend of Russia’s interest rates in the past 10 years [13] Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Average Interest rates 7.2 4.1 3.3 4.9 13.1 3.0 6.4 1.5 3.4 17% The interest rate cut in 2015 to 14% from the previous 17% was mainly attributed to the need for Russia to balance between support for economic growth and declining inflation [14]. Inflation rates for January of 2015 stood at 3.9%, in comparison to a level of 2.6% in late 2014 with the current rate being higher than anticipated by both consensus by economists and forecasts by the Central Bank of Russia [14]. Consumer prices rose because of rising food prices, specifically in the aftermath of agricultural product embargoes implemented by Russia in response to Western sanctions. Below is the historical trend for Russia’s inflation rates [14]; Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Average % Inflation 12.7 9.69 8.99 14.10 11.70 6.86 8.46 5.06 6.77 7.80 F. Current Government Policy towards Import and Export Tariffs The liberalization of Russia’s markets after the Soviet Union and its highly interventionist form of Socialism collapsed gradually made state tariffs the basic regulatory instrument for the state, as well as the tool for protecting the Russian economy [15]. The tariff structure for the Russian government is made up of more than eleven thousand tariff lines, out of which approximately 1,700 are in the combined tariff rate system class. In relation to this combined system tariff lines, the real tariff that is applied by Russian customs involves the maximum of the specific tariff. Average tariffs in Russia increased between 1999 and 2003 from 11.5% to 14.5%, before holding steady for the rest of the decade [15]. This placed tariffs on Russian imports and exports at a slightly higher level than contemporary middle-income states, while also being much higher than other countries in the OECD. The light industry sector is the aggregate industry with the highest export tariff rates, which stood at 23.1% in 2005 before declining to 19.5% [15]. G. Trade Barriers and the Rules and Regulations for Foreign Businesses It is expected that companies in Europe will benefit from Russia’s acceptance into the World Trade organisation, especially as it has led to the gradual removal of trade barriers and regulations that sought to protect home-based companies [16]. Indeed, Russia joining the WTO was one of the most important steps towards solving most of the long-term trade barriers that European countries, especially in technology and light industry, had encountered in Russia’s market since the end of WWII. However, the rate at which Russia has implemented its WTO commitments has been not as fast as most companies wishing to do business in Russia would have wanted. The formation of Eurasian Economic Union, consisting of Russia, Kazakhstan, and Belarus has led to the formation of a new customs union, although this has not led to increased market access barriers. The tax system in Russia has undergone fundamental changes in the past ten years, increasingly coming into line with those of the OECD and simplifying business for foreign companies by preventing double taxation, particularly on transfer prices [17]. III. Micro-political and Micro-financial Risks Micro-risks, also known as firm-specific risks, are risks that will influence Tical Manufacturing Inc’s operations at the corporate or project level. Possibly the most critical micro-political risk has to do with governance risk, specifically due to conflicts in goals and objectives between the Russian government and the company [18]. The Russian government is very responsive to its citizens, while Tical will be responsive to its stakeholders. As a result, the Russian government may impose constraints on private firms like Tical as part of the government’s normal legislative and administrative functioning. Some of these constraints may come about if the Russian government perceives that high-tech electronics companies are infringing on national sovereignty, failure to share control and ownership with local entrepreneurs, control over export markets, and the use of natural resources. In relation to micro-financial risks, partner financial organizations in Russia will be hugely responsible for the company to assess loan applications, particularly since they have the local knowledge, expertise, and experience to perform this role to the highest possible standards [18]. IV. Macro-political and Macro-Political Risks Macro-level risks, on the other hand, involve non-project or non-firm specific risks to foreign companies in Russia. At the macro-political risk level, some of the risks that Tical may face include currency actions by the government, sovereign credit defaults, regulatory changes, war declarations, endemic corruption, and changes in composition of the government [19]. Such events would pose risks to both foreign direct investment and portfolio investment, which can change overall investment suitability for Russia. In addition, such events may also pose critical risks for how foreign organizations like Tical conduct business in Russia, especially where the government eventually decides to confiscate the business’ property. Tical and other businesses operating in Russia also face several macro-financial risks that influence the volatility of portfolios, assets, investments, and the organisation’s intrinsic value over time. Other macro-financial risks that may face organizations in Russia include changes in exchange rates and interest rates, variable monetary policy, unemployment rates, and the price of commodities [19]. V. Mode of Entry into the Russian Market The best mode of entry for Tical Manufacturing Inc. is through a joint venture with a domestic high-tech company in Russia. As a new player in the global high-tech electronics market, Tical may find it too difficult develop in the Russian market during the initial stages of entry. During the initial entry stage, Tical will target industries that have weak high-tech infrastructure, but possess great opportunity for development. Based on the characteristics and features of high-tech electronic products, it was important to first consider the financial, economic, and social conditions of the country [20]. To begin with, because of the network effect and the relationship between high-tech electronic products and information security, it is important that Tical uses a joint venture to account for the micro and macro-political risks noted above. Moreover, the budding high-tech sector with a growing middle class, educated labour force means that there are high-tech companies in Russia that Tical could partner with and get the requisite management pool. Looking at average growth of GDP in Russia, as well as the increase in consumer and industrial spending, the Russian high-tech electronics market is a great opportunity for the company, especially as Russian digital indicators continue to steadily improve [20]. Majority of foreign companies in Russia have established operations, while also demanding similar service and product quality as in other Western markets, which are often more developed than Russia [21]. This has incentivised the local high-tech electronics industry in Russia to improve on their operations, which makes them good partners for foreign high-tech companies seeking to pursue a joint venture in the market. It is also quite remarkable that the high tech electronics industry market share is lower in Russia than in other countries in Western Europe. Given the country’s massive natural resources, especially in minerals required in the high-tech electronics industry, Russia provides a massive opportunity for Russia to become an outsourcing hub for this sector. Using a joint venture will be advantageous to the company given the high literacy rates and management pool in Russia, which will ensure that the joint venture has access to superior manpower at a relatively lower cost than, say, India and China, which still have to import some of the major raw materials for the high-tech electronics industry [21]. Finally, a joint venture will help the company deal with non-standard issues in the Russian market, which can still be volatile given recent tensions with Europe and the US. REFERENCES [1] E. Derunova and A. Sergeevich, Modeling Consumer Behavior in Selecting High-Tech Products Based on the Level of Novelty and Features of Consumers Perception of Products and its Role in Promoting the Development of High-tech Sales and the Market. World Applied Sciences Journal 27(14), 63-68, 2013 [2] F. Elena, Issues of commercialization of intangible property rights in Russia. World Applied Sciences Journal 27(13), 72-76, 2013 [3] R. Mariska J., J. Kraaijenbrink, and A. Groen, Marketing Ignorance and the Validity of Narver and Slaters MKTOR Scale in High‐Tech Russian Firms. Journal of product innovation management 30(3), 545-559, 2013 [4] V. Sizov, Identifying trends of clustering of Russian economy in conditions of the market reforms. 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Robertson, Power and Politics after Financial Crises: Rethinking Foreign Opportunism in Emerging Markets. Basingstoke [England: Palgrave Macmillan, 2014 [20] M. Schorsch, Market Entry Strategies for Russia: A Comprehensive Survey Based on Expert Interviews. Hamburg: Diplom.de, 2014 [21] S. Lovell, Destination in Doubt: Russia since 1989. New York [N.Y.: Zed Books, 2012 Read More