Đề tài Recommendations to improve Oristar’s business results on Al Billet and the company as a whole

INTRODUCTION As being one of the expert agents in Vietnam metal market, Oristar has achieved remarkable success even though they are just five years in this industry. This is not too strange for us to imagine how it really is but it still makes us curious about what they are doing and how every thing is running in every day working in the company. Why a newcomer in a very sensitive market like metal market can be survived and gain a lot of success which might take decades for many existing companies to do that. In this report, we will have the answers for all the above questions. Because metal market is a special market which is operated in different regulations to consuming market’s and influenced by many sensitive factors, so before going to analyzing Oristar’s business performance, we had better give an over view on metal market. That might help viewers to follow easily. Analysis on Oristar’s business activities should remark its achievements and also remains that will be discussed in the last chapter of recommendations. Hence, there will be three major chapters in this report: Chapter I: Literature review and overview of metal market Chapter II: Oristar’s recent performance and its business activity on Aluminium Billet (Al Billet) Chapter III: Recommendations to improve Oristar’s business results on Al Billet and the company as a whole. The report may be limited in scope of study in a way that just focuses on one major branch of Oristar’s business activities that is Aluminium Billet. Therefore, there are still many problems needed to be discussed in further researches. Chapter I: Literature review and Metal market overview 1.1. Background of import and export activity 1.1.1. Definition of international trade and import-export activity International trade is the exchange of goods and services across international boundaries or territories. Nowadays, International trade is playing a more and more important role in world economy and taking a higher contribution to GDP of each country. International trade has been a major driver of global growth and prosperity over the last fifty years. Barriers to trade have fallen significantly over the last half-century thank to a lot of agreements on free trade around the world. Hence, International transactions have been increasing dramatically in recent day. However, besides international trade there are a lot of supporting services which is aimed at facilitating cross-border deals such as international payment and transportation. After looking at definitions, we will go into the role of supporting services for facilitating international trade in general and im-export activities in particular. Importation is the activity or process of bringing things into a country from abroad in order to sell them. Import is any good or commodity, brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. Exportation is the activity or process of selling goods to other countries. Export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Import-Export activity is a key part of international trade in which goods are transferred between countries. This is a complex process, which required a lot of other supporting activities such as settling balance, shipping cargo, and buying insurance policy. Payment is one of the most vital elements of any sale contract because it is related to the primary aim of deals. That is benefit. Therefore, whether doing business domestically or internationally, buyers and sellers have certain basic objectives when they settle upon a mutually acceptable method of payment: Buyers want to receive the goods they order. Sellers want to be paid the agreed upon price in a timely manner. In the past, payment by cash was the most popular in every deal but today when international trade are stepping at much higher levels and cash payment has loss its position in international trade. Instead, there are a plenty of different terms of payment used in settling balance between buyers and sellers in international sale contracts. Letter of credit (LC) has been the most popular terms of payment in the world trade today. It is because LC is the safest way for both buyer and seller of receiving cargo and getting back money. Besides, other terms such as documentary collection, open account and advanced payment have also been key tools of international settlement. In brief, payment services provided by banks are playing a vital role in fulfilling the major duty of payment in any sale contract. Transportation is also an essential part of international trade. It is the movement of goods from one place to another. However, it is just happened to physical sale contracts, which state that goods must be transferred from one country to another. It is not a long time ago when international transactions could not reach between the dealers at far distances. However, a long with the development of world trade, transportation services has had breakthrough jumps. Today, nearly all human’s innovation in transport has been applied to cargo transportation among countries and it seems that there is no where in the world that could not be reached by transporter. That is really a big support to boosting international trade. In summary, basic definitions of international trade especially im-export activity and other supporting services have been covered briefly. Hopefully the background will be helpful for later analysis. 1.1.2. Definition and importance of Agent As we have had a look at the importance of international trade in the last part, this part we will explain more about one of factors that help to facilitate international trade and it is related directly to the analysis in next chapters. That is the role of an agent. Let’s look at definition first, and then we will discuss more about its role in and relation to international trade. Agent is an individual or firm authorized to act on behalf of another (called the principle), such as by executing a transaction or selling and servicing an insurance policy. The agent does not assume any financial risk in the transaction, as a dealer would. According to the above definition, there is an important point that an agent acts on behalf of another and take no risk for any financial problem with the activity. Because an agent does not take title to the good, he won’t have to bear financial risks but can not benefit the differences in price of goods. However, an agent is paid a commission for the service he offered to the principle. The commission is usually a percentage of the value of goods or services. These are some key points of an agent on theory. Recently, the international trade has been expanding aggressively thank to free trade policies of countries, which also facilitates oversea agent activity. Basically, the appearance of agent is to help trade flow smoothly and easily. Particularly, an agent provides a service of representing another on doing certain actions following his principle’s instructions. Agent’s activities not only cut down cost and time in case of two-side deals but also help the seller update the market information. For the buyer, he would benefit on the availability of goods or services that the agent provides on behalf of his principle. If there is no agent standing between the buyer and the seller, the trading process must take more time and affords for both the buyer and the seller. However, once an agent participates in the process, the problem will be solved easily and international transactions would flow smoothly. In return, the more international trade develops, the greater opportunities it will create to oversea agent activity. Hence, we might come to a conclusion that international trade and oversea agent activity have a reciprocal relationship. In following chapters, we will work on the real situation of Oristar and see the relation between them more specific. 1.2. Overview of metal market 1.2.1. World metal market Before going in company analysis, we should have an overview on metal market in general to get the basic knowledge on how the market is organized and operated. In addition, market characteristics and trends are also among focuses. Metal market has its own rules which are very different from others. One of the reasons is that metals are special goods, which follows only market supply and demand. There are many factors affecting to metal price. The fluctuation in price of one metal will have widespread influence on the materials, semi-products, and finished products used the metal as well. The movement in metal price is presented on metal exchanges such as LME (London Metal Exchanges), Comex (Commodity Exchange). These markets are the guide line for all suppliers to make their own price because price of metals, which are inputs for their production, are reflected on such metal exchange markets. Hence, if there is a small change in price of one metal in LME, for example, it will lead to a succession of changes in price of all materials and products made from the metal. Because metal market is very highly organized and operated on market supply and demand through 24-hour transactions, it has been attracting more and more buyers and sellers to make deals in the market. The more deals the metal exchanges carry out, the more exact it reflects on the price of metals regarding to market supply and demand. Studying the relation of the two giants in the world metal market, LME and Comex might explain clearer. Today, LME and Comex are the two world biggest metal exchanges. Each one covers a large part of the world. For example, LME covers EU, Middle East and some part of Asia and Africa while Comex covers all America, Australia and some where else. Even though it seems that the two metal exchanges are fiercely competing to each other, they actually are supporting each other. It is because there is difference in time-belt between New York and London, so working time of each market is different, which enable suppliers and manufacturers around the world to expand the opportunities on booking price by using both prices of the two markets. In particular, they might decide to use LME price during the working day of LME but once LME close, they turn to use Comex price until this market close. Hence, the quotation period will be expanded and it appears more opportunities for dealers in choosing price. Moreover, regardless of physical distance, all suppliers and manufacturers can still use LME or Comex price as a fix cost in their pricing. Later we will go in more detail. Although both LME and Comex have big influence to metal market in general, LME has still been the leader in metal market. In this report, we will focus on analyzing the most typical metal exchange-LME. LME has been the world biggest metal exchange since it was established 130 years ago at the centre of London. It is the world’s premier non-ferrous metals market offering futures and options contracts for aluminium, copper, nickel, tin, zinc and lead plus two regional aluminium alloy contracts. The Exchange provides a transparent forum for all trading activities and as a result helps to ‘discover’ what the price of material will be months and years ahead. This helps the physical industry to plan forward in a world subject to often severe and rapid price movements. Such is the liquidity at the Exchange that the prices ‘discovered’ at the LME are recognized and relied upon by industry throughout the world. The prices keep moving all the times reflecting supply and demand of materials by industries. In 2006 LME achieved volumes of 87 million lots, equivalent to $8,100 billion annually and between $35-45 billion on an average business day. Despite its location in London, the LME is a global market with an international membership and with more than 95% of its business coming from overseas. Being a 24-hour market, transactions on the LME are taken place through an inter-office telephone market and LME Select, an electronic trading platform. Each day the LME announces a set of official prices, which are determined from the open-outcry trading. This trading is highly liquid and trade and industry has confidence that they properly reflect the current supply/demand situation. These prices are used by industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle. Normally, suppliers set their price based on LME current price + Premium. Premium includes all costs such as production cost, transportation cost, extra costs and profit. The Premium is the only one that makes different among suppliers and their competitiveness in price. However, quality of material is one of the significant factors to compete in such sensitive market. Materials which are listed on LME must be satisfied standards created by LME or equivalent international standards such as JIS (Japanese International Standards), CDA/ASTM (USA), BS (UK), DIN (Germany), ISO (international Standards). Therefore, LME’s role here is not only a guide line for setting prices but a common standard on evaluating quality of materials. In summary, metal market is a high standardized and liquid market which is directed by Exchanges such as LME and Comex. However, the LME has been keeping the position of a world leader thank to its long history and high prestige. The two most important roles of LME are providing prices due to the current supply/demand situation and building quality standard control. 1.2.2. Metal market in Vietnam As a part of world metal market, Vietnam market has operated on the same regulations of the world metal market. That means Vietnamese industries depend on LME or Comex prices to decide domestic prices. Nevertheless, supply and demand in Vietnam might not go with the trends in the LME or Comex because factors influenced on domestic prices are different to the world market’s. One of the remarkable characteristics of Vietnam market is the isolation among manufacturers in the same industry. Until now, there hasn’t had an official organization in Vietnam which gathers all manufacturers in the same industry and operates on the purpose of protecting domestic industry. That’s why market trends in Vietnam usually move adversely for both the manufacturers and the industry. It is caused by the price wars among manufacturers, which makes metal prices go down much while the world prices still remain or just suffer a small reduction. Such tough and endless competitions have led not only to the failure of manufacturer individually but also the whole domestic industry. For example, the situation of aluminium billet market in Vietnam. Recently, world aluminium price has been increasing each day from about $2346 to $2567/MT within first three weeks of October, 07. However, domestic aluminium price has been continuously rising in the period. The reason is that Vietnamese aluminium manufacturers are stuck in a marsh of price wars, so the domestic price trend goes in a contrast way with the world trend. The roof of the problem might come from the individual behavior of manufacturers which distorted the real supply and demand on the market and led to the unbalances in price between Vietnamese aluminium billet market and the world market. Hence, it appears an urgent demand of establishing an organization which is responsible for directing and orienting the market and preventing such continual price wars as it is being this time in Vietnam. Besides, another reason is that in Vietnam there are hardly any giant in aluminium industry who may have a big influence on the whole market or control the market. It is a fact that almost all big aluminium manufacturers in Vietnam have had similar performance and equal impact to the market. That’s why the competition in the market has become so tough. Some big aluminium manufacturers in Vietnam are Do Thanh, Dong Anh, Song Hong, Scancom, Quang Binh, Nam Hai, and Dien Bien. There are 60 % of these companies which have ever made deals with Oristar on aluminium billet. However, from time to time the business relationships have some changes. Oristar has to face with the competition coming from some trading companies at this moment such as Tran Phu electric Company, Van Xuan Co., Ltd and Tuong Thanh trading Company. Despite the fact that Oristar still has some competitive advantages over its rivals, there are internal problems that they should improve. In next chapters we will discuss in more detail. Chapter II. Oristar’s overall performance and its Business activity on Aluminium Billet 2.1. Company profile 2.1.1. Foundation and organization Oriental star Import-Export Co., Ltd (shortened form as Oristar.Co. Ltd) was established in 2002 by Mr. Pham Quoc Hung. Oristar has two offices in North and South of Vietnam. Head office is located at No.2, Tran Thanh Tong, Hanoi and another branch at 51/60 Cao Thang, 3 ward, HCM city. The number of employees has increased from 30 to 50 people within 2 years from 2005 to 2007. Oristar has two Business departments at the two offices, one Im-Export department, and one finance department at the head office in Hanoi only. Main business activities of Oristar are carried out in the close coordination of these departments that will be focused later. 2.1.2. Introduction to Oristar’s main business activities Oristar is a trading company special in non-ferrous materials and semi-products. There are two main business activities carried out by Oristar. First, it imports and resells semi-products such as copper Bus Bar, tube, aluminium plate and sheet, anodized aluminium coils and metal ceilings to domestic market. Second, Oristar performs as exclusive sales agent for many suppliers of non-ferrous metals in Vietnam such as Formosa (Malaysia) for Aluminium Billet, Hydro (Norway) for Primary aluminium ingot, MAA (Australia) for Aluminium alloy ingot, Sterlite (India) for Copper Cathode. Even though importing and reselling activity takes more time and affords, it is the activity of being sale representative that brings more money to the company. The commodities sold on behalf of suppliers almost are materials for manufacturing industries. For example, Aluminium billet is input for extrusion industry, Copper Cathodes is used popularly as input for cable and electronic industry. Oristar obtains a commission based on the quantity of the materials it sold and on the agreement between Oristar and its suppliers. Among all materials Oristar sells on behalf of foreign suppliers in Vietnam, Aluminium Billet is the most strategic one with highest annual revenue. In the next part, we will focus more on Aluminium Billet in analyzing Oristar’s business activities. 2.1.3. Oristar’s market share and position in the market Through five years running business, Oristar has created a good prestige in Vietnamese metal market especially for Aluminium Billet and Copper Cathodes. Today, there are about 30 % of extruding companies in Vietnam which have imported aluminium billets through Oristar. For other materials such as copper cathodes, primary aluminium alloy ingot and secondary aluminium ingot, Oristar has also built rather stable networks among oversea suppliers and domestic companies, which gives it a position in the market. Oristar’s role in the process is like a broker, who connects the buyers and the sellers together. However, Oristar has bigger liability to both suppliers and customers. Particularly, it has to follow up each sale contract and if there is any failure, Oristar has to co-ordinate in solving problem with both sides. Sometimes, Oristar ought to compensate for