Lessons from the UNSW Fiasco

As if criticism from its students, Singaporeans and its peers in Australian education weren't enough, UNSW Asia has now received bad words from the Chinese Government. In news just out, the Chinese government has warned its student against private educational institutions, and this issue is seen to be a serious setback to Singapore's drive to become an education hub.

"In a recent advisory to students, China's Education Ministry noted the unexpected closure of the UNSW Asia campus, located in Singapore.

It criticised UNSW Asia for its 'exaggerated' and 'false' claims about being rated among the world's top 50 universities.

The ministry said students should do their research before enrolling in schools set up by foreign institutions in another country.

It noted that there is a growing number of such schools which it said have 'varying standards'.

'In choosing a school or courses run by a foreign school in a third country, students should try to avoid schools which are unstable or have dubious quality.'

When asked, Mr Bai Yan Lei, second secretary (education) at the Chinese embassy in Singapore, said no complaints have been received from the five or so Chinese students at UNSW Asia.

But the UNSW Asia issue, coupled with the closures of private schools like AIT Unicampus and Ritz Everton Academy, would inadvertently dim Singapore's allure as a study destination for Chinese students, he said." (Straits Times, Jun 11)

But, the Chinese government's criticism notwithstanding, I think there is a bigger underlying problem with these sort of education initiatives in Singapore, and that is that what should primarily be a private-sector driven endeavour has had its reigns taken over by bureaucrats, politicians and administrators who have little practical business acumen.

Operations like this, first and foremost, have to be commercially viable to survive. If you can't pay the fees of academics and you can't pay the rent, and you can't afford the computers and facilities to run an educational institution, you simply can't run a university. In other words, the initiative has to be business and market centric. But how can you expect the venture to be business centric when the initiative is led by a bunch of academics and government scholars who have PhDs and 1st class Honours degrees, but lack business acumen? It's only natural for such an initiative to fail.

The fact is, people who have spent the majority of their careers writing academic papers and in secure, government administrative jobs simply don't have the experience and business sense to successfully execute ventures like this. Such ventures have to be led to the private sector. Indeed, when you compare a venture such as Raffles Education Corp, to the abysmal performance of the UNSW-EDB joint project, you will get exactly what I mean.

The same arguments apply to many other initiatives and grand plans that the government has: unless they are spearheaded by experienced businessmen and entrepreneurs, many economic projects that Singapore tries in the future will face similar consequences to the EDB-UNSW fiasco.

Telstra: a Political Operation, or a Free-Market Business?

Phil Burgess, head of public policy at Telstra, has been on the record as having made the following comments:

"We've been aggressive because there is a move under way to confiscate something that is owned by 1.6million mum-and-dad investors and give it to a Singapore company," Dr Burgess told The Australian.

"We're talking about turning over Australia's only nationwide telecommunications network to a consortia run by the Singapore Government. That's a government that executes people, number one, and doesn't allow competition in its own country. It's unbelievable.

"We've had a national broadband plan since August 2005. It's been vetoed twice by the (Australian Competition and Consumer Commission). When people say we're threatening not to do broadband, it just isn't true. We need to have our costs accepted by the ACCC. We are not going to build it if we can't get a commercial return on our investment."

If you scrutinise this statement carefully, what Phil Burgess is saying is the following:

a. Telecommunications business in Australia should be given to Telstra because Telstra's shareholders are mum-and-pop shareholders.

b. Telecommunications business in Australia should be given to Telstra because it is an Australian company and Australia does not execute its people.

c. If Telstra cannot competitively operate a national broadband infrastructure, no other company should be allowed to do so.

Well, how's that for a competitive company?

The last time I checked, business should be conducted based on the ability of a company to offer its customers the best services and the best value, not some call to political arguments or human rights issues.

In my view, these statements are just shameful and show that Telstra does not compete on the basis of economic competitiveness but on the basis of slimy political maneuvering. And it just goes to show that business simply cannot be separated from its political environment.

SGX's Competitive Strategy

Today in the Business Times was an interview of SGX's head of listings, Laurence Wong:

'The smart way in dealing with competition is not only to make ourselves better but to really differentiate ourselves so that we deliver things that are difficult for other people to,' Mr Wong told BT.

In view of the competitive market environment, is this the correct strategy for SGX?

China is currently pushing for Shanghai to be its main financial centre, many of the top-tier Chinese companies have listed their shares on the Shanghai bourse. With this natural competitive advantage of the hinterland, Shanghai's stock market is well positioned for growth by concentrating on fund raising of the major companies in China. The combination of geographical proximity and political will gives Shanghai a natural advantage that is very difficult for a player like SGX to assail, so SGX naturally should not aim to bring the large Chinese companies to list on its trading board.

The Hong Kong Exchange also shares the advantage of close proximity to the mainland, as well as the advantage of being a very well developed capital market. As such, the major Chinese companies have also dual-listed on the HK Ex as part of the capital raising. In combination with the entrepreneurial culture of Hong Kongers which have created many local businesses, HK also has a natural advantage compared to Singapore when it comes to securing big business.

Where does that leave SGX? Well, it sounds like SGX is left with the scraps. But that doesn't have to be the case. With Mainland and HK investment bankers going for the big guns, Singapore's investment banking and brokerage community can focus on its comparative advantage by pursuing a differentiation strategy which involves focusing on specific niches. And from the looks of it, SGX has done this. By expanding its REIT market and pursuing second-tier companies in the smaller cities around China, SGX makes itself an attractive destination for companies which may not be able to attract the attention of investors and bankers in Shanghai and Hong Kong. So, as far as this area is concerned, I think SGX has got it right.

An interesting idea would be for SGX to pursue an acquisition of a bourse in China that has a similar competitive position to it, if and when regulations allow and the opportunity presents itself. The Shenzhen stock exchange seems like an interesting option. Of course, if the acquisition opportunity does not materialise, joint venture and cooperative agreements can be seeked. The Shenzhen stock exchange is a second-tier exchange that has lagged its bigger brothers in Shanghai and Hongkong, and has a similar market positioning to SGX in the sense that it seeks smaller companies to list. With this convergence of strategic interests, the Shenzhen bourse would make a very interesting partner for SGX to work with.

DBS ends talks to buy S Korea's KEB

News just out - DBS has decided not to buy S Korea's KEB.

SINGAPORE - Singapore's DBS Group Holdings, Southeast Asia's largest bank, said on Monday that it has ended talks with Lone Star about buying a stake in South Korean lender Korea Exchange Bank (KEB) .

The statement came after Korea's Yonhap news agency on Sunday quoted Lone Star chairman John Grayken as saying that the US investment firm had stopped talks with DBS.

Mr Grayken didn't say why the talks ended, but said that the Dallas-based fund would keep looking for a buyer for KEB, despite a legal battle over the 2003 purchase of the bank.

'We notified Lone Star that we would not be going forward due to the uncertainties in the market surrounding the local issues that have been going on for over a year,' DBS said in a statement. -- REUTERS

Acquisitions are a major source of growth in the banking industry. However, it is not exactly clear why DBS should be seeking an acquisition in South Korea. South Korea is a well developed economy with a highly developed banking market so the growth and revenue enhancement opportunities of entering the South Korean market via an acquisition are not clear. Furthermore, it is not immediately clear where the synergies are between the South Korean banking market and DBS' main operations in Southeast Asia and its fledgling operations in China, which just opened earlier this year.

In order to justify the acquisition, there would need to be significant value-enhancing opportunities that the KEB acquisition would bring to DBS' international banking services, such as investment banking or trade finance. But given that there is rather small amount of international trade between Singapore and South Korea and the main opportunity in this deal for international finance is between China and South Korea, DBS should focus much more on its organic growth in the mainland rather than seeking an acquisition in a market that is non-core to its operations. Southeast Asian companies are unlikely to list on the South Korean stock market, and similarly South Korean companies are unlikely to list their shares on the SGX. M&A activity between the two regions is also unlikely.

Furthermore, given the Singaporean origins of DBS and its predominantly Chinese culture, there would probably be several integration issues when it comes to merging the corporate cultures of KEB and DBS, the least of which being the different languages being used.

All in all this is probably good news for DBS shareholders that Jackson Tai has pulled away from the deal as any prospective deal would likely be risky and involve the winner's curse - destruction of shareholder value.

Think Markets Are Efficient? Think Again.

I was just reading about inflation targeting in the conduct of monetary policy, and I came across statement:

"My view of markets is that virtually all participants have access to the same information - however, they hold different views on the structural framework within which economies and markets move and thus interpret the same data quite differently. This is the only way that some investors will buy while otheres are selling and that prices can change dramatically in the absence of new data. It also explains the puzzle where analysts switch direction like reef fish."

A very insightful and well articulated paragraph on why even though in the absence of asymmetrical information markets can exhibit inefficiencies, and why astute investor who possesses a superior structural framework with which to analyse markets and economies can derive superior profit!

MaxiTrans: Competitive Strategy & Risk Analysis

STRATEGIC OVERVIEW

MaxiTrans’ main business activity is the manufacture of many kinds of freight trailers, such as the T-liners, flat tops, container skeletons, dry freight, and temperature controlled trailers. They also engage in the sales, rental, and finance (lease or purchase) of new and used trailers. Other business activities include the supply and distribution of parts, service and repair, appraisals (for insurance, trade-ins, and repairs valuations), and the manufacture of urethane foam and body panels. Truck-trailer is an important component of various industries, such as infrastructure, food and agriculture, transport and distribution, and resources (mining).

Industry Life Cycle

The trailer manufacturing industry is currently in the mature growth stage. Analysts predict that road freight activity will continue to grow at 3% annually1 up to the year 2020, so we would expect the trailer industry to grow in the same direction. This represents a slow but steady growth characteristic of mature industries. The mature characteristics of MaxiTrans’ business will be clearer in the analysis of its cash flow statement [See Part D]. Industry growth is also cyclical and its cycles are closely related to the economy as a whole.

Industry Competitive Structure

There are very few major players in the freight trailer industry, including MaxiTrans. Economies of scale dictate that competitive power is concentrated in the hands of a few large manufacturers, and the industry structure can be said to be oligopoly. Other smaller manufacturers concentrate on niche markets and are not a threat to MaxiTrans’ main line of business.

Trailer Industry: Five Forces Analysis

The customers of MaxiTrans are generally price takers. Since each customer only constitutes a small fraction of MaxiTrans’ customer portfolio, they have a relatively low bargaining power. The bargaining power of suppliers is also low. MaxiTrans is such a major player in the industry that it can pressure the suppliers to lower price of supplies and raw materials. The threat of entry to the industry is low. This is caused by high barriers to entry, such as economies of scale leading to cost advantage, a well-established distribution network, and established customer relationships. The intensity of rivalry is moderately low, because there are only few players in the freight industry. There are, however, some incentives to gain market share. Threat of substitutes from other means of transportation is also low, because freight trailer is an indispensable component of the land transport industry. [For an in depth full Five Forces Analysis see below]

MaxiTrans: Competitive Challenges

With the slow pace of growth of the market, MaxiTrans has turned to concentric diversification in order to grow market share and drive revenue growth in the domestic mraket. The company has acquired of several companies within the past four years [see Appendix B]. A key strategic challenge for MaxiTrans will be its ability to find suitable acquisition targets and to integrate these companies into the operations of the group as a whole. The recent underperformances of some acquisitions (e.g. Hamelex White and Colrain) suggest that all is not running smoothly. The challenge facing MaxiTrans will become clearer in the analysis of the income statement and profitability [see Part B, E].
In the short run, MaxiTrans may find its industry in a cyclical downswing being adversely affected by the macroeconomic conditions such as higher fuel prices and the drought, as well as a slowdown in economic growth as the Australian economy reaches full productive capacity.

FIVE FORCES STRATEGIC ANALYSIS OF TRAILER INDUSTRY

Threat of Entry

The threat of entry into the trailer industry depends on the existing barriers to entry. Maxitrans is a dominant player in the industry. Economies of scale is present in manufacture, research, marketing, distribution, and service network, leading to a cost-advantage. Maxitrans also has a well-established distribution network, while possessing a large capital. There is some research and development, though it not substantial relative to the total of other operating expenses ($763,000 of $18 million). This implies the newcomer must enter the market big to be competitive. Moreover, Maxitrans has established relationships with major customers, such as Safeway, Reflex Papers, etc. Altogether, the entry barriers to the trailer industry are quite high, thus reducing the threat of entry.

Intensity of Rivalry among Existing Firms

The intensity of rivalry is moderately low. The only other notable player in the freight trailer industry is Barker Trailers. Increasing GDP figures3 ($873,197m in 2003-04, $896,568m in 2004-05, and $922,637m in 2005-06) indicates Australia’s economy is still performing well. Along with Australia’s strong economic performance the industry may be experiencing some growth. Thus, firms theoretically can produce better results by just keeping up with the market. However, the industry is already in maturity stage in terms of the industry life cycle. So there are some incentives to gain market share, especially if the firm possesses the amount of capital needed to acquire another firms.

The two main driving forces behind MaxiTrans’ strong performance are its reputation and distribution network. MaxiTrans attempts to differentiate its trailers than its competitors through brand recognition and research and development. Its distribution network supports this strategy by somewhat selling the trailers as differentiated products. With respect to distribution, MaxiTrans is targeting the domestic market with the exception being China. The Chinese market was penetrated in 1996 through a joint venture with Chinese THT, called MTC.

Threat of Substitutes

There are only three ways to transport commercial goods, by air, by water, or by land. Air-freight is expensive even though it is so much quicker. However this can only be done from airport to airport and still requires truck-trailers to transport the goods to the final destination. Likewise ferry and railway transports can only be done from port to port and station to station respectively. Hence the threat of substitutes is relatively low because an alternative land transport is less feasible. Truck-trailer is an indispensable component of the transportation industry.

Bargaining Power of Buyers

There are only few players in the freight trailer industry. Moreover, Maxitrans have many customers and they do not pose a credible threat of backward integration. Hence, they have a relatively low bargaining power.

Bargaining Power of Suppliers

Suppliers to MaxiTrans include parts manufacturer, equipment manufacturer, raw materials (paint, aluminium, steel, etc.). The bargaining power of these suppliers is relatively low because there are many suppliers and MaxiTrans is such a major player that they can pressure them to lower the price of supplies and raw materials.

SOURCES OF RISK

International Risk - MaxiTrans operates mainly in Australia and New Zealand. Its operations abroad are confined mainly to its joint venture in China, Yangzhou Maxi-Cube Tong Composites Co., Ltd. The operation has been running since 1996, for more than 10 years, and operates in a non-politically-sensitive industry. Even though there tends to be a lack of systematic legal framework for the business environment and that local policy is often subject to change, we feel that the long track record of joint business and the nature of the industry expose MaxiTrans to relatively low international risk with regards to their operations in China. With regards to exchange rate risk, the Chinese Renminbi is a relatively stable currency that is managed by the Chinese government and we expect a gradual appreciation in this currency with little major fluctuations. Overall, international risk is assessed as low.

Domestic Risk - Domestic risks that MaxiTrans is exposed to mainly refer to the risks in Australia’s economy. Australia has a stable and robust economy that has experienced consistent economic growth for the last 15 years. Because of the global resources boom, we expect this economic growth to continue at a stable pace. Inflation is relatively stable, although lately the economy is seen to be approaching full capacity and this may place an upward pressure on wage inflation and thus labour costs for the company. Interest rates are also relatively stable; the Reserve Bank of Australia does not expect more major upward hikes in the future. We do not expect any major interest rate fluctuations to have a significant impact on MaxiTrans’ debt payments. This is discussed in more detail when discussing credit risk below.

Industry Risk - As mentioned in the analysis of profitability, the trailer manufacturing industry is mature and stable, with relatively low rate of structural change. There are high barriers to entry and a few dominant players, of which MaxiTrans is one. The trailer manufacturing industry is cyclical; this will be factored into the analysis of financial risk later. Other risks related to the industry are that raw material prices may rise materially, and regulation, especially surrounding mergers and acquisitions, may change unfavourably. However, on balance, industry risk is assessed as low.

Firm Specific Risk – The trailer manufacturing industry is currently in a state of consolidation; MaxiTrans has been acquiring related companies in the last few years. The key risk of this corporate strategy is that acquisitions will be unable to integrate smoothly into the company. Furthermore, MaxiTrans has to take on significant amount of debt to finance these acquisitions. This has an impact on the long-term solvency and credit risk of the company, since leverage will increase and interest payments will rise as well. This is discussed more thoroughly below. Management’s ability to manage the acquisitions will play an important role in the success of the company.

Overall, firm specific risk is assessed as medium.

Coates Hire - Powering Ahead

1.1 Company Overview

Coates Hire supplies a large number of industries: building construction, engineering and maintenance, mining and resources, manufacturing, government and events. The majority of its revenues (80%+) come from operations in Australia.

Coates also operates overseas in the United Kingdom, with Coates Offshore providing specialised equipment to offshore oil and gas operations, and in Indonesia, operating on the mining and resource sector. Today, Coates Hire corners about 20% of the equipment hire market. It is clear and away the market leader in what is a highly fragmented industry that consists mainly of small companies.

1.2 Industry Overview

Equipment hire industry involves the business of purchasing and leasing out of equipment to industries such as building and construction, engineering, civil construction, building construction and maintenance, mining and resources, manufacturing, government, industrial maintenance shutdowns, and events.

Because the construction industry is highly cyclical (DITR, 2006), and accounts for a large percentage (6 per cent) of GDP, the equipment hire industry tends to follow the peaks and troughs of the construction industry and be cyclical as well. The equipment hire industry also tends to expand according to the growth in construction activity, which tends to follow economic activity.

For industry revenue forecasts, see Appendix A1.

1.3 Key Competitive Forces

Barriers to Entry: Barriers to entry for the equipment hire industry are relatively low. This is because anyone can purchase equipment and start leasing it out to customers with a relatively modest amount of capital, as long as the equipment meets basic standards of quality and safety. As a result, there are a large number of players in a highly fragmented industry. A key emphasis is thus placed on a company’s ability to differentiate itself from other competitors via economies of scale, customer relationships, range of services, and asset management.

Buyers’ Bargaining Power: The construction and resources industries are highly fragmented. This puts a cap on buyers’ negotiating power, which is generally weak. Equipment hire companies which are able to differentiate themselves and provide quality services can increase customers’ willingness to pay. The key threat is for construction companies to purchase their own equipment, rather than rent it. However, except for the largest construction companies, it is generally cheaper to lease equipment from equipment hire specialists.

Suppliers’ Bargaining Power: the industry presents an important number of suppliers, which means that the power is diluted between them. The competition in this industry for suppliers is important, so they have to be efficient.

Internal Rivalry: The industry is highly fragmented, with multiple small companies. Coates is the largest with about 20% market share. Other main competitors include Tutt Bryant Group, Boral, and Boom Logistics (check revenues). The most competitive firms tend to be large. This enables them to achieve economies of scale and provide a larger range of services. It also enables them to supply larger, more expensive pieces of equipment that earn higher margins.

Coates vis-à-vis the Broader Industry: Coates hire is the market leader, and with its size, scale, strong customer relationships and established business practices, it has been able to create sustainable competitive advantages in what is a highly competitive industry.

1.4 Coates’ Strategy

Coates purpose is to provide the best hire solutions on the market. The management defined its vision as “to become a $1 billion company by 2010 of first choice for customers, employees, shareholders and suppliers” (2005-2006 Full Year Results, p.3).

Coates’ strategy focuses on four dimensions:

Superior Customer Value Coates is committed to deliver the best value to its customers. The management believes that apart from delivering reliable equipment Coates should also provide customers with efficient support services and solutions options. The strategy is supported by consolidation of qualified HR and effective IT infrastructure - Coates Hire Enterprise Resource Planning (CHERP) and sales system “Coates@Work.”

The company also provides diverse range of services for its customers, via its multiple subsidiaries (Coates Hire, Coates Prestige, Coates Shorco, Coates Conrent, Coates Offshore). This allows the firm to provide value that other firms are unable to replicate.

This superior customer support service allows Coates to differentiate itself by providing value-added services in an otherwise undifferentiated market. By continuously innovating and upgrading its solutions options, Coates is able to sustain this competitive advantage.

Personnel and Human Resource Development Coates aims to attract and retain the best employees. It offers attractive salary and annual leave packages, provides a range of educational opportunities. In order to strengthen the skills of its management Coates launched two training programs for the management staff, Leadership Development and Frontline Management. Another area of primary focus is safety of employees. By hiring the best talent and giving them superior training, Coates is able to develop a sustainable competitive advantage in its human capital vis-a-vis its competitors.

Fleet management Coates claims (2006) that as a market leader it achieved significant ‘economies of scale’ in fleet management. The quality control is supported by a program “Silver Service”. As a part of financing activities, Coates heavily conducts reinvestments into its fleet. Coates has also developed superior fleet management technology in maintenance and storage. This allows it to depreciate equipment less quickly than its competitors and allows it to achieve lower costs and higher quality.

Business Growth via Acquisitions Coates plans further business expansion. It aims to achieve a sustainable growth by diversification and acquisition. Coates has executed this strategy successfully over the past decade by making multiple acquisitions and integrating them well. For example, (add example) This strategy of acquisition allows the company to consolidate a fragmented industry and build further its economies of scale, as well as derive other synergies from the diversification strategy.

In view of the above, diversity of business and revenue streams, both geographical, market and product, is the main strength of Coates Hire. The main weakness Coates identifies in limited capacity (2005-2006 Full Year Results, 2006).

Strategic Summary

Overall, Coates is a well established firm with a sound strategy and strong track record of executing its strategy successfully. It should continue to expand its market share in Australia as the industry continues to consolidate, and is in a good position to capitalise on opportunities overseas.