Part A: Description of Your Idea
Describe your business idea
International Construction Materials Ltd. (ICM) specializes in the trade of wood lumber between China and Canada. The company aims to participate in a construction materials trading with China, taking the vast amount of timber available in British Columbia and selling it to China.
ICM aims to be the most reliable Canadian lumber company that distributes to China. The established transportation methods (which will be detailed later) coupled with good business relations and precise market timing, allows ICM to have minimum costs and accurate delivery. As Chinese companies look for the lowest costs and the most reliable service, ICM will be there to deliver both. The company will purchase lumber from mills in Canada, and then deliver it to China.
IWith several members of the management staff being recruited from the Chinese construction industry, ICM believes it has the best knowledge of both countries and knows what Chinese construction companies are looking for in a construction materials provider.
Choose a business name for your idea.
International Construction Materials Ltd.
Part B: Overview of the Industry
Identify which sector your business idea falls into.
The lumber industry.
Provide a brief profile of the industry.
Pat Bell, B.C.’s Jobs, Tourism and Innovation minister and MLA for the forestry-dependent Prince George-Mackenzie riding, said China is demanding B.C. lumber: “China picked up the slack where the U.S. left off, and that means there are people working in our forest industry all over B.C. that would otherwise not be working today” (BC Business, 2012). This is welcome relief in an industry that has depended on U.S. housing starts as its main draw. However, as that economy recovers, ICM could find itself satisfying the lumber needs of both those across the border and across the Pacific Ocean.
With the secured lumber agreement, ICM will load timber from the mill onto a train. The train will then deliver the timber from West Fraser in Williams Lake to the Prince Rupert Port. The lumber is then shipped to the Port of Suzhou for quick delivery to the China State Construction Engineering Corp. and Shanghai Construction Group, both located relatively close to the port in Jiangsu province. The wood is then railed and/or trucked to the respective companies for placement in their warehouses. The company then transports the wood to their desired locations.
The industry experienced some gains in 2011, approximately a 4 per cent increase in the consumption around the world. However, that is down from an approximate 6 per cent increase in the prior year. The industry bottomed out in 2009 during the global recession and a definitive slowdown in the number of housing projects, which helped lead to a decreased demand for the lumber. While there had been steady recovery, it looks like it is slipping because of the European debt crises. There is also a continued slump in the U.S. housing market, though it has experienced modest gains in 2012, (Global, 2011).
In a recent news article in the Globe and Mail, managers at a wood distributors and retail lumber yards said in a meeting that American consumers are back on the market, and they are demanding Canadian lumber. That means that while the overseas demand is already high, the local product is shaping up to be something that many consumers desire. This is because people are once again looking to buy homes and many units are being built, which requires a substantial amount of lumber.
Part C: CSFs
1a. Describe the competencies and capabilities your company must have in order to develop and maintain a critical success factors of your industry.
It is important that the company is able to deliver on its promises and that the buyers are actually willing to pay for the product that they have asked for. This will insure that the company achieves financial health. But in order to do that, ICM has to meet or exceed the customers’ needs, which will be contingent on finding enough product to deliver to China to meet the needs of the buyers. We need to also secure low delivery costs so that we can have low prices and the buyer feels they are getting value for what they are paying for. But throughout the course of business, we also need to be innovative and creative in the way that we conduct ourselves in order to maximise our earnings potential. This will also be done through gaining employee commitment. The harder and more efficient our workers are, the more we will get done.
ICM is in a unique position compared to other start-up companies. Because the staff already has connections on both sides of the Pacific Ocean, ICM has the connections needed to make this a profitable venture for everyone involved. As already mentioned, several members of the management team have connections with China, and two of our members have worked for the companies ICM has been in talks with — China State Construction Engineering Corp. (CSCE) and Shanghai Construction Group (SCG). These are two of the largest construction companies in China. CSCE is the third-largest construction company in the world, while SCG has constructed structures such as the East China Sea Bridge, the world’s first commercial maglev line, China’s first trans-ocean bridge, the Oriental Pearl TV Tower and the Jin Mao Tower, for example. In order to be successful, the company needs to continue to build relations with these key stakeholders. Without this relationship the ability of the company to flourish in China could be tarnished. However, it should be noted that the men in charge of these companies are close friends with us, and we know that they can be trusted when they say that they would be buyers of our product. However, saying they are interested and then actually following up with a business deal are two are separate entities. Without a contract inked, we can’t be certain that we will have these Chinese buyers when we need them, though our confidence is high.
1b. Give a rationale to support your position.
In order for this to work, we need to ensure that all the stakeholders can be trusted to hold up their ends of the bargain. If one of these players is unable to handle the volume that we want to deliver on a regular basis, we are still paying the bills to the other entities. Finding the right companies and building those relationships are key to doing business, because we rely so heavily on the participation of others.
2a. Develop a list of the critical success factors your company must have in order to compete effectively in this industry and be successful year after year.
With the secured lumber agreement, ICM will load timber from the mill onto a train, which will be the best way to meet the demand of the customer and realize the best financial health by delivering on the promises. The train will deliver the timber from West Fraser in Williams Lake to the Prince Rupert Port. The lumber is then shipped to the Port of Suzhou for quick delivery to the China State Construction Engineering Corp. and Shanghai Construction Group, both located relatively close to the port in Jiangsu province. The wood is then railed and/or trucked to the respective companies for placement in their warehouses. The company then transports the wood to their desired locations.
2b. Give a rationale to support your decisions.
While several companies have established a grip on much of the Chinese market, ICM has managed to come to verbal agreements with two of the country’s largest construction companies. But we need to set up deals with rail, port and shipping companies. But by already having relationships with two businesses in China, ICM is well-positioned to overcome the competition and take a stranglehold in this important sector of both the Canadian and Chinese economies. The capital that ICM has already secured will allow the company to explore the best shipping options and it could position the business in front of the competition when it comes to bidding for port times, for example. This could improve distribution times.
Part D: PEST Analysis
1. Complete a political, economic, socio-cultural, and technology (PEST) analysis to look at the external business macro-environment in which your business idea will operate.
The experience that China has with international trade will certainly come in handy when doing business with the nation. There are various components that the government needs to get involved with when it comes to international trade. For example, China and the Association of Southeast Asian Nations has handled the disputes over territorial claims and maritime rights. This means that both of the parties have pledged that they will restrain themselves when it comes to situations that might escalate tensions. When dealing with international trade, the nation is to be diplomatic in its dealings and this was promised between China and the 10 ASEAN members, (Jize, 2012). While this mostly affects the nations in Southeast Asia, this is a sign of the type of agreement China is willing to come to for the sake of international trade.
While China is open for business, many say that it is a long way off before there is a free-trade agreement between China and Canada. In fact, according to ex-prime minister Brian Mulroney, there won’t be a free-trade agreement between the nations for another decade. China has made considerable progress towards a market economy since the former prime minister travelled to China in the 1980s, and now as a lawyer. Even though bilateral trade agreements are very modern and are happening more now than ever, he isn’t convinced the nation is quite ready for such an agreement. Mulroney told the Globe and Mail that there needs to be a rule of law acknowledged and strengthened and that includes the protection of intellectual property. Also, there needs to be an established method for those who are investing in the company, or doing business such as what is being done right now with ICM to find justice in the courts if there is a disagreement, (McCarthy, 2012).
The current prime minister, Stephen Harper, recently signed a foreign-investment promotion and protection agreement. The July signing is to come into effect before 2013. The legislation calls for the non-discriminatory treatment of each country’s investors once those businesspeople are operating in the other nation’s territory, (McCarthy, 2012).
It should be noted that New Zealand is the only developed nation with a bilateral trade agreement with China. The exports to China are mainly agricultural. Also, eight years of negotiations have been ongoing between Australia and China.
The company has already investigated the Chinese market and sees it as having great potential for further growth: As the standard of living in China improves, the number of people looking to open businesses and buy new homes will increase and this is where ICM will find its market. The combination of growing Chinese demand and the slow recovery of the U.S. market make Asian trade an option that speaks for the times. It should be noted that ICM sees potential in other Asian markets, such as India and parts of Southeast Asia. ICM forecasts building relations with these markets in the next three to seven years, after the purchase and delivery of lumber in China approaches its full potential.
China’s GDP grew by 7.4 per cent in the third quarter of 2012, which seems like a lot, but it is actually the slowest rate since early 2009. That is also small in comparison to the 9 to 12 per cent rates that were experienced in 2010. But the 7.4 per cent was actually a relief for many people who have a stake in the Chinese economy. The growth between the second and third quarter encourages those stakeholders who witnessed a nine per cent increase in GDP. According to many experts in the field, the economic slowdown that China had been experiencing has ended. Exports in the latest quarter grew by about 9.9 per cent. In August, the number was only 2.7 per cent. These numbers come as somewhat of a surprise to many people because the Chinese government hasn’t taken much of an interest in providing a stimulus package to bolster the economy. However, according to these numbers, it appears that no such stimulus package was needed. Instead, the government bought securities from banks when money became scarce. That strategy has proven fruitful as infrastructure investment has grown by about 12.6 per cent in the first nine months of this year, (Remembrance, 2012). That means there are many homes set for construction and that will fuel the demand for Canadian lumber.
In the lumber industry outside of Asia there is a considerable amount of energy placed in to silviculture practices. Further attention has been given to these practices because of the need to replant trees that have died to the mountain pine beetle throughout British Columbia. Once a logging company cuts down a tree, it is required to replant the tree so that there is sustainability of the resource. The mountain pine beetle has caused a greater emphasis on replanting the trees because there are less to take their place. In fact, the B.C. timber authorities are looking into developing a scientific approach to ensure the longevity of the availability of lumber in British Columbia. A 60-page report was released by the Special Committee on Timber Supply in September. The report outlines 22 recommendations to help improve the state of the industry. This is the cause of some concern, but the government is taking action to ensure the lumber is there for a long time. The report is a good indication that the government is willing to work hard, alongside stakeholders in the lumber industry, to ensure there is a cohesive effort towards ensuring the industry’s survival and prosperity. The report recommends harvesting the areas which are currently protected, thus opening up new territory to log. There is also a call to increase the processing of beetle-killed wood, and increasing intensive silviculture (replanting trees), (Woolgar, 2012).
The attitudes of Chinese people for foreign products is positive, as there has been much trade between China and the rest of the world for many years. China is used to doing business with foreign countries, which makes it a prime destination for trade. This frequency of doing business with countries from outside of China also makes it have a clean track record when being aware of Corporate Social Responsibility. Because of this, it is anticipated that there would be very infrequent need to settle trade disputes in court.
The Communist party controls the Chinese people’s lives and they have a lot of power when it comes to censoring the people. The culture takes very seriously the worth of a group of people over the worth of an individual. The Communist party has enforced this belief. People are encouraged to do their duty, because if they do not, they are deemed to be dishonourable. This could be a very good thing when it comes to business relations and honouring a person’s word. Hospitality and social ties are also qualities in the Chinese culture that can be very good for business relations. Chinese people celebrate many religious holidays, such as Spring Festival, Tomb-Sweeping Day and Moon Festival. There are also secular festivals such as Chinese New Year. Childbirth is also considered to be a very joyous occasion. The head of the baby boy is shaved and then wrapped in a red cloth. Large funerals feature placing the soul into the afterlife. There is also a substantial amount of folk medicine, (Hitton, 2012) All these social factors contribute to the way in which Chinese people do business. Their strong sense of community is important and makes establishing relationships with Chinese people even more important than establishing those types of relationships with Canadian businesspeople. While Canadians generally do business in a manner that will help realize the most amount of economic benefit, the Chinese take very seriously the relationships that they build and sometimes value them more than prudent business practices.
Technology is making it ever easier to trade internationally. This is because there are so many ways to get the message of the company out to the public. While China is a major part of the global economy, the country has fallen behind in keeping up with information technology. These IT practices have been set in place to improve the ease of doing business. China has been consistently challenged with the business process reengineering and the enterprise resource planning. These technologies help integrate the operations of the company with a central database that helps facilitate sales, HR and finance. This also includes the execution of other functions that relate to high-efficiency deliverance in other departments that are crucial to the company. There is actually a potential relation between the Chinese culture and the way they adapt to changing technologies. A report out of the University of Washington in Fredericksburg, Va., states that changes in IT conflicts with the central Chinese values, which are founded on the Confucian concepts in relation to respect for the hierarchical authority and harmony with the system. This is in contrast to Canadian beliefs, which is all about cutting costs. Technology works wonders for cutting many of the costs of a business, but because of this belief for a respect of the Confucian values, there could be a substantial number of costs associated with doing business that could otherwise be eliminated. The focus in Canada is about bringing in a higher value to the shareholders of the company. The Chinese in the past have handled changes in technology by automating the processing that already exists, but not reengineering those practices. This has led to a failure rate in ERP projects at about three times the rate as what is experienced in Western countries. The way in which a company operates in China needs to be reengineered in order to gain the benefits of an ERP system. This is resulting in a lack of cross-functional cooperation, and this has the potential to make it difficult to do business with people in the country. There is also a reluctance to learn new ways of doing business, which can further frustrate relations. But in addition to there being a general lack of desire to make changes to the ways in which a business operates, there was also a lack of incentives to switch over to new ways of operating. However, competition has forced many of the Chinese businesspeople to learn how to operate modern IT. While it may take a while to teach the business people, they are usually eventually willing to try out new technology, because they fear that if they do not, they could risk losing business to other parties, (Mullich, 2011).
2. Examine each of the PEST factors, their relationship with each other, and their influence on the current and future position of your products, business, and industry.
The political factors in China are a concern because of the questions around policy, taxation and the stability of the political system. However, it is understood that China is open for business and is expanding at a startling rate despite the slowdown in the global economy. This is why it’s important to have people on the team, as ICM does, who can understand the political environment of China, so that the company can do business there. The ethics of marketing in the country need to be understood, even though we already have a company saying they are ready to make a purchase on our wood products. The government’s policy on trade agreements, such as AFTA needs to be known before the full realization of the political climate can be determined.
A volatile interest rate that has been observed in China is a concern for the company, as we are unaware of what the interest rate will be at any given time. While that is common in every country, the fluctuation in China is a greater concern. This could impact the ability of purchasers to buy the product. The purchasing power of the buyers will determine how much ICM can sell the product for, and this will determine whether or not it is in the company’s best interest to deliver to this market.
Inflation is another major concern for the owners at ICM. In an industry as labour intensive as lumber and construction, ICM wants inflation to be as low as possible when selling products to China.
The overall economy in China is picking up, along with the rest of the world. Some of the sectors that are experiencing improvements include the hotels, photo studios and retailers. However, it should be noted that the exporters and manufacturers that were pivotal in driving the boom in the last decade are not recovering with the rest of the businesses, (China’s, 2012).
While it is tempting for ICM to look too far ahead and into other countries as possible consumers, such as India (which will have a larger population than China by 2025), it is prudent that the company master its operations in China, the most logical option given its economy and management’s experience in this market. India and other parts of Asia will be explored, as well as the U.S. However, this should be considered a medium-term vision (3 to 7 years into the future).
The improvement to the Chinese economy in the latest quarter is encouraging and it looks like it is a sign of things to come. If ICM moves into the market now, then the company could position itself in front of other companies that are looking to get a piece of the same pie. In order to be in China in time for the next economic boom, ICM needs to get on with business so that we are up and running by the end of 2013, or it might be too late to take advantage of strong economic times.
Also, while there are two languages spoken in China, and neither of them is English, the staff at ICM are able to communicate fluently in Cantonese. This will help address any language barrier that there would otherwise be when dealing with this social aspect of doing business in China.
While the local culture is quite different than that of Canadian, the two members of staff at ICM that are actually from China and have done extensive business there, makes it a country that is well worth operating in.
The Confucius beliefs are certainly a hindrance when contemplating technology. This is where these two aspects of the PEST analysis collide. Without making the effort to convince the Chinese businesspeople to adapt to technologies that make it easy to do business with them, the speed in which communication can be executed will be greatly hindered, and so too will the sales.
The lack of protection on intellectual property in China, as Brian Mulroney pointed out, is some cause for concern. There needs to be a system where the intellectual property is protected so that information isn’t given to the wrong people without a proper method for recourse.
Also, while the Internet is a great tool for many companies to get their message and product out to the public, it is less of a concern for ICM, as we will only have several clients and we will meet with them personally. However, it is important to establish a website regardless, as this is a point of credibility. Without a website in this day, means that a company might not be considered innovative enough, or technologically savvy enough to do business on a large scale. This means that the development of a website is imperative.
ICM will also take advantage of tele-conference and video-conferencing techniques that are available online. These will make it easier for everyone to be on the same page with what is going on and it will allow for a translator to relay information that is communicated between two people who aren’t aware of how to speak the other’s language.
3. Explain how you think the findings from your PEST analysis will impact your business and strategic plans, influence the value creation opportunities and influence the contingency plans for threats facing your business idea.
ICM is in a unique position in that two of the directors have worked in the market that the company hopes to operate in. This will help address the “socio-cultural” aspect of the PEST analysis when it comes to language barriers and social customs. But in order to get the product to the consumer in a timely fashion, the company needs to understand all of the policies on both sides of the border so that factors such as the maximum amount that can be delivered in a certain time frame is realized. To accomplish this, it is important to know the policies of each government when it comes to the export and import of goods. Another component to be realized is the establishment of close relations with port authorities and government officials. This will provide for a more seamless transfer of goods to China.
Looking ahead, ICM should build ties with officials from other countries so that discussions can begin about exporting there about details regarding the technology available for use. While there are mainly the same technologies available in China as there are in Canada, the relationship should be treated as a learning process in order to become accustomed to ways that may be more efficient than what is practiced in Canada.
The major concern with the economic aspect of the business venture in Canada, is recovering lumber mills. Because the wood that ICM has the best access to is in British Columbia — due to the close proximity of ports with access to China — the recovering pine-beetle ravaged mills could increase the price of their product as these companies become less desperate for buyers. For that reason, ICM has secured a two-year contract – contingent on other agreements – that guarantees a minimum of 5,000 cubic metres of wood per month for the duration of the contract at the current rate. The current price for a cubic metre of lumber is currently close to the 2006 level , which means that it is recovering to pre-recession rates. Now that this lumber is secure, if relations with China prove sour, ICM will attempt to sell to the American market, which is currently experiencing a gain in housing starts, particularly due to Hurricane Sandy.
Part E: Information Technology
1. What technology do you expect to use to communicate both internally and with your customers?
Unlike most companies, there isn’t a need for ICM to communicate with customers through an online medium. Due to the nature of having limited customers, there is no need to go online, at least in the social networking aspect of online marketing. The company will have a website that goes over what the company can offer.
ICM will communicate with its customers in person, on the phone and over e-mail, which will be the same mechanisms used to communicate with internally.
2a. What must be in place in order to get your first sales?
Wood production in Canada is recovering, yet the price for wood is relatively cheap. Already, ICM has secured a purchase agreement with West Fraser Timber. With many mills coiling because of massive financial losses — West Fraser Timber (WFT) lost $16.7 million in the first quarter of 2012, while Canfor Corp. has lost nearly $11 million — the opportunity to distribute their lumber on mass is ever appealing to lumber company management, and ICM has already secured a purchase agreement with WFT for 5,000 cubic metres of timber per month for $175,000. This includes 2,500 cubic metres of pine and 2,500 cubic metres of cedar. The agreement is delayed until ICM can establish its other business relationships, such as that with ports and governments.
Keys to Success
1. Developing an efficient way to transport materials from the manufacturer to the Chinese construction companies.
2. Securing a coastal port that can accommodate the volume of materials to be shipped.
3. Training staff to perform their tasks to company standards.
4. Securing a long-term product pricing agreement.
5. Striking contract agreements with purchasers, rather than just verbal agreements.
6. Becoming sanctioned for trade by the Chinese government.
7. Selling at least 5,000 cubic metres of lumber per month.
8. Becoming the sole Canadian distributer for CSCE SCG.
There also needs to be the factors of production that will help the company to create the goods and services that will be used in the manufacturing of lumber. This will help the company to produce more output, but with the same amount of resources. This would mean that the company would have to find use for all the wood products that are byproducts of the manufacturing project. This includes finding a market for wood chips that are inevitable in the manufacturing process. The company would need to find the best use of its labour to ensure that all staff are being utilized and the company isn’t over paying. All capital that is invested in the company should be put towards making the process and delivery of lumber more efficient.
ICM also needs to have relations build with logging companies, mills, shipping companies, ports and buyers in order to get the product from Canada to Asia. Most importantly, ICM needs to have its first buyer will to take a chance on the company for our first delivery. This buyer will most likely only agree to pay once the lumber has been shipped. This means there could be a significant amount of investment without any return on capital if the lumber doesn’t reach its destination, or if the buyer doesn’t agree to pay. A considerable amount of work will need to be done before any transaction is made.
2b. What will you add when your cash position improves?
With current cash flow at approximately $8 million ($6 million gained through private investors and $2 million from bank loans) ICM is well positioned to cover operating expenses for the next two years. The company’s annual payroll of its nine employees will be $948,487. A two-year lumber agreement costs $4.2 million. Taxes are estimated at 30 per cent of gross profit, or $1.7 million per year. Distribution costs are estimated at approximately $1.1 million per year — It should be noted that the $1.1 million assumes a steady buyout of all 5,000 cubic metres of lumber each month. Additional lumber can be purchased at a premium if the demand requires. Gross revenue is estimated at $5.8 million per year.
ICM anticipates a $2.9-million net profit in the first year of business and a $3.7-million profit in year two. This takes into consideration office purchase, taxes, distribution costs, payroll, lumber purchase and other start-up expenses. The estimate also assumes a steady purchase of all inventory and doesn’t take into account any increase in sales year-over-year. Management considers this a conservative estimate.
This forecast is based on the assumption of steady growth in the industry to 2020, and beyond. This market economy perspective is based on the idea that the economy will recover, and when it does, the amount of lumber that will be consumed will rise at a steady rate. As the economy recovers, the government will have a goal of keeping people on the job. This full employment outlook is what will drive the government to provide incentives for companies such as ICM that will be there for people who are willing to work. These incentives could come in the form of tax write offs or increased logging permits. A cash position would also mean expansion to other markets, particularly the U.S. and India. The U.S. is on the verge of developing on mass, and India’s population is growing at a massive rate.
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