1.0 Introduction
Rubberex corporation was established the production of household gloves on 1987. In 1993, it relocated its operations and started produced the industrial products. Moreover, Rubberex Corporation (M) Berhad had ever been a private limited company on 4 January 1996. Subsequently, the company was change to a public limited company on 19 March 1996. After that, the company was firstly listed on the Second Board of Bursa Malaysia on 16 April 1997 and again it promoted to the main board in year 2005. The company is a Malaysia-based investment holding company. Through its subsidiaries, the principal activities of the company involved in the manufacture and sale of nature rubber, synthetic rubber and vinyl gloves for household, industrial, professional and food usage applications.
In fact, the company has two production facilities. The China plant is located in Buluo, Huizhou City, Guangdong in 140,000 sq. m land area year 2005. Its China plant is mainly for manufacture of reusable synthetic gloves and disposable vinyl gloves. The other plant is located at Ipoh, Malaysia in 70,000 sq. m land area where also is headquarter. It offers industrial gloves, consumer gloves, and disposable gloves. It also engages in producing trading gloves, household items, kitchen items, and personal protective products (Rubberex).
The two different production facilities of Rubberex used to manufacture and cater multiple needs of customers. Their objective is achieving their reliability of business and sales to over hundred countries to reach global markets. Rubberex is using wholly own subsidiary as their entry mode into foreign market. By the way, the company has employed over three thousand of employees to run its business. There are many senior staffs in the company and many of them have work with company more than ten years.
Rubberex has own research and development department to keeps their manufacturing processes together with advance technology. In general, their technical team consults with internationally-renowned testing centres like SATRA (United Kingdom), TUV (Germany) and ISEGA (Germany) to verify and ensure the gloves meet to exacting product specifications. Rubberex is also a member of SATRA Testing House of United Kingdom. They are also work cooperate with overseas research institutes and specialists clinics in Europe and United State America.
Rubberex has manufacture industrial products in category of latex, nitrile, neoprene and knitted. The household products consist of latex, nitrile and blended; the disposable vinyl products also have different categories. They are in good quality manufacture process proven by ISO 9001 certificates since 1992. Their gloves all produced fulfil to medical, food and personal protection requirements by the international standards. Besides that, the company also committed to the ISO 14001 Environmental Management Systems and Standards accreditation.
2.0 Current Business Strategy
Rubberex had taken few strategies as below in order for them to consolidate their position and grow on the business market.
2.1 Wholly Own Subsidiary
Rubberex has a production plant in China which is the host country. It locates in Buluo, Huizhou City, Guangdong. Malaysia plant which is the home country is located in Ipoh ("About Us Company Profile", 2011-2012). Rubberex is using wholly owned subsidiary for its China manufacturing plant. The China plant is fully started and owned by Rubberex. The advantage of this mode of entry is it reduces the risk of losing control of China plant. Besides, Rubberex will have tight control over the operations. Furthermore, a location and experience curve economies can be achieved by wholly owned subsidiary. It specializes in manufacturing of specific product line and achieves economies of scale. However, this strategy is facing high costs and risks. It has to bear heavy capital and risk of setting up from scratch in overseas.
In terms of economic, Rubberex made plans to manufacture PVC gloves on a 39-acre site in China in 1997. The wholly owned subsidiary strategy proved to be successful. China is Malaysia's fourth largest trading partner, trading amounting to US$53 last year (Choong Khuat Hock, 2009). In China, the plant produced 20 million pairs of industrial glove and 3.5 billion pieces of PVC gloves per annum. There is high demand from global market, the global market size of PVC gloves estimated at 80 billion pieces per annum due to higher usage for food handling as a result of legislation and hygiene awareness. In year 2008, 2009, PVC glove division in China was the highest contributor to Rubberex revenue. Despite of economic downturn, the first nine month of 2009, China plant achieved 19.5% increase in revenue to RM233.7 million. China plant also increase its glove production capacity from 2.4 billion pieces in 2008 to 3.5 billion in 2009 through economic of scales despite of global condition.
In terms of political, when Rubberex decided to enter China market in 1997, there are challenges to set up the wholly own subsidiary. According to Yadong Luo, in China the concept of 'guanxi' and 'face' is very important to Chinese. They would deal with a head office rather than a sales representative. Getting the Chinese government approval for a wholly owned subsidiary is time consuming and expensive. The Chinese government encourages joint venture because it allows China to absorb technology and gain more earning from export. China did not have regulations and experience in wholly owned subsidiary therefore being used as a reason to companies not to use this mode of entry. When Rubberex moved to China, they face initial operational problems in labour and legal problem. The construction of factory delayed due to cumbersome building regulations. However, Rubberex had learnt to deal with China's authorities and labor. Subsequently, Rubberex was able to gain profit from plentiful labours and cheap raw materials.
2.2 Exporting
In order for Rubberex to start up their business globally, rubberex had involve themselves becoming the exporter. They had export their products through out the world. Exporting is which a good is produced locally and then sold to another country.
During year 2004, Rubberex had start up the Rubberex Marketing (M) sdn bhd which is mainly handling on the exporting of the glove. In order to serving the export markets, Rubberex need to done product modification and confirm on the quality of the glove had surpasses the international requirement. In order for Rubberex to keep themselves up to date with the latest regulation, user expectation and product performance, Rubberex had working hand in hand with the consultants in the North America and Europe. Now the export had occupied as high as 98% out of its production and it had become the top 3 exporter in Malaysia. The main export markets of Rubberex are Eastern Europe, North America, South America, Southeast Asia, Africa, Oceania, Mid East, Eastern Asia, Western Europe and so on.
By export the product to foreign market can avoid the cost of establishing manufacturing operation in the host country. In addition, through exporting it enable Rubberex to widen their market into global. It would also lead to the increase of sales and profit. Ultimately, the cost per unit can be lower down and hence achieve the economics of scale. It is because the production of Rubberex will be increase in order to meet foreign demand.
Moreover, exporters of Malaysia are enjoying the Free Trade Agreement at a comparatively lower or zero tariff from the countries without the Free Trade Agreements (A quarterly publication of the Malaysia rubber export promotion council, 2011). Besides that, the manufacture of Malaysia also can enjoy saving cost from reduction or elimination of custom duties on imported machinery or material used in the manufacture of rubber products (A quarterly publication of the Malaysia rubber export promotion council, 2011). Rubberex had obtained several advantages through exporting.
2.3 Acquisition
Apart from the above, Rubberex had implemented acquisition as one of the growth strategy for them to expand their current business. Acquisition is the action of one company takes over the ownership stakes of the target company. It noticeable from the action at the year 2009, Rubberex had acquire additional 40% equity on several companies which are Pioneer Vantage Limited, LPL(Hui Zhou) Glove Co. Limited, Lifestyle Safety Product (Hui Zhou)Co. Limited, Lifestyle Investment (Hong Kong) Limited and additional 20% Rubberex (Hong Kong) Limited (Rubberex Corporation (M) Bhd, n.d). Rubberex still attempt to purchase more share in order to become the parent for those company mention.
There are few advantages Rubberex gain by using this strategies. As an example through acquired Lifestyle Safety Products (Hui Zhou) Co. Limited which is operated in the same industry it had result in higher performance than those in different industry. Hence, it had helped Rubberex to eliminate competitors, it also increased their market power. It does bring about improvement in production capabilities and broaden the product line. Through this acquisition, Rubberex had growth their business more rapidly throughout the world. Another example is by acquired Rubberex (Hong Kong) Limited which is a trading company, it had enable Rubberex to use it as a medium to distribute sale of its product (Company Overview of Rubberex (Hong Kong) Limited, n.d). Therefore Rubberex can maintain the control over the distribution and pricing of their products and strengthen its' position. It also helps Rubberex to eliminate or reduce the transportation cost of exporting.
By adopted acquisition as their strategic, it does help Rubberex to overcome the entry barrier by acquiring an existing company. Through this way it had help Rubberex to decrease the risk of competitive reaction. Besides that, acquisition also lowering the risk of failure compared to establishing up a brand new company. So by adopting acquisition it does bring a lot of benefit toward Rubberex. Although they were facing some barriers when they are carrying out those strategies, they had been successfully overcome it. Hence, the practicing of current strategic had successfully make Rubberex grow internationally.
3.0 Future Expansion Strategy
Now we will discuss on the startegy that shall adopt by Rubberex to enhance on their business.
3.1 Backward integration
According to Bursa Malaysia Market News, 2011, the outlook of Rubberex corporation (M) Bhd has been revised by RAM Rating Services Bhd from stable to negative. It is because of the operating environment for the glove maker is expected to remain challenging since the prices for raw material rose while there are limitation for them to be able to pass on the cost to customers.
In the case of that, backward integration is a way to help company to have a control on its inputs. It is a type of vertical integration where a company supplies the raw materials for its own use, or sets up its own facilities to achieve the effective supply of inputs in term of cost and quality. By doing own rubber plantation, processing latex, owning own latex concentrate factory, it provides economies of scale for the company, helps to decrease the cost per unit because the initial investment of capital is shared among the increased number of the output, thus, the extra cost of producing a good is less than the average total cost per unit.
Besides that, company competitiveness can be improved through this strategy as it has a direct impact on the product input cost, reducing the product input cost, and therefore, the company can provide its product to the market with a lower price compare to its competitors. In addition, backward integration helps company to avoid or reduce the threat of influential suppliers. Company can provide the needed materials by themselves, do not need to depend on the suppliers and reduce their bargaining power over Rubberex Corporation (M) Bhd.
At 11 Nov 2010, Starbucks decided to purchase a coffee farm in China. This backward integration guarantees the quality of the coffee bean supply at a reasonable price for Starbuck. The revenue for Starbuck in 2010 had jumped to $10.7 million, which growth about 9.5% compare to year 2009.
However, the conduct of a detailed survey was desperate as the production of natural rubber will be greatly depends on the weather. For example, the production of rubber-rich Southern region of Thailand has been affected by rains and flash floods, rainy day interrupting the tapping in Malaysia and so on (Rubber Asia: The complete Magazine on Rubber, n.d.). Since Rubberex has no experience on rubber plantation, late mover strategy will suit them better in terms of market entry timing. It is because, not all late mover will be suppressed by first mover of the industry but may gained the advantage of able to capitalise on the pitfalls uncovered through pioneering firms and surpass them at the end. Invalid source specified.
As according to Datuk Dr Salmiah Ahmad, the dynamic and graceful Director of the Malaysia Rubber Board (MRB) during an interview, she had pointed out the challenges of rubber plantation industry in Malaysia. The shortage of labour forces for rubber processing in Malaysia forces us to be greatly depending on foreign workers. Recently, the over flood of foreign workers in Malaysia had brought up serious political and economical issues where it leads to most of the company layoffs the locals and hired foreign workers due to lower labour cost. The situation grabbed the attention of government, where the continuous layoff of locals may lead to a sinks in economic recession until they come out with a principle of foreign workers first out (FWFO), Invalid source specified.. Therefore, the expansion using backward integration leads Rubberex to the same problem when dealing with foreign workers, where Malaysia Foreign Labour Policy may change from time to time according to Malaysia economic conditions.
3.2 Joint Venture
As recommended, backward integration might be a great way for cost reduction. However, Rubberex (M) Corporation is too new to plantation and there are many to taking into considerations before it could really work out. On the way figuring out best way to start up backward integration strategy, joint venture may lend a big help for it.
Joint venture is the contract agreement joining together between two or more parties for specific purpose like research and development, innovation, and sharing technology advantages that can benefit both parties and share the revenue and loss as well. (InvestorWords.com, n.d.). A joint venture is a good way for business expansion because it gathers both parties strength to gain competitive advantage.
In 2009, Wal-Mart entered in to Indian market. Yet, the Indian Wal-Mart is not the typical Wal-Mart retail superstores. The Indian Wal-Mart formed a joint venture in 2006 with Bharti Enterprises, Inc., which is one of India's leading business groups. The Indian Government set up strict restriction for foreign business investment and this make the Wal-Mart can't compete with domestic retailers. Thus, the new Indian Wal-Mart is a wholesale business catering to the specific needs and operating under the name BestPrice Modern Wholesale. By getting the right partner, Wal-Mart success it joint venture as a result from effort being put in looking for best partner, with high reputation for quality and service. Besides that, to success a joint venture, company must stay open to business paradigm changes. Company may need to change its business format for joint venture success.
For Rubberex case, it might bring them to another peak of success if they are able to enter a joint venture contract with Sime Darby, which having great experience on rubber plantation, open up an easier way for Rubberex to further pursue its backward integration strategy. The reason where Sime Darby was chosen is that, as stated in Sime Darby Plantation in Malaysia, n.d., Sime Darby's rubber plantation has been certified Well-Managed Plantation by the Forest Stewardship Council since 2002. Thus, it was confidence that Sime Darby able to serve as a better guide for Rubberex future expansion. Become a good partner with Sime Darby will solve the supply problem in long term and can produce more gloves with lower cost to gain competitive advantages.
On the other hand, Rubberex also can considered expand their business by using strategic alliances or joint venteres with other rubber related product manufacturing company since Rubberex have the thought of doing backward integration. By this way, Rubberex able to manage the weakenesses and strengths of its plantation and manufacturing business complementary. In the sense of that, joint ventures with other manufacturing company could be the primary vehicle for them to enter different type of product manufacturing company, as an ongoing strategic arrangement for maintaining or strengthening competitiveness. For example, entered into contract with Silverstone Bhd as main material for producing tire is rubber and it was an opportunity for Rubberex to come out a new product or act as a supplier to Silverstone. Rubberex should produce different products so can create a new product life cycle to avoid the sales decrease when the glove reach maturity time. Although produce tire can be said too late for Rubberex (late mover) but we believe that the Rubberex still can earn a market share in Malaysia since the material cost is low and then export to the Asia countries.
Rubber products industry had covered up a wide range such as moutings, beltings, hoses, tublings , seals, machinery and equipment and construction industries in domestic market (MIDA: Malaysian Investment Development Authority, n.d.). However, rubber products industry will need further diversification, emphasising on high value-added and high technology rubber products. According to MIDA: Malaysian Investment Development Authority, n.d., a contuniuous effort needed to be done for product quality improvement to maintain competitiveness in export market. Therefore, it may worked best if Rubberex willing to spend money, enter into a joint venture contract, invest more for R&D improvement in order to keep competent. It is better to have a partner rather than an enemy, so joint venture is a good strategy suitable for Rubberex.
3.3 Unrelated Diversification
According to the "Market Watch 2012" done by the Malaysian-German Chamber of Commerce and Industry [AHK Malaysia] (2012), the world's largest exporter of rubber gloves is Malaysia with an average annual GDP of RM6 billion. There has recorded an increase in rubber gloves export since 2000 and the rubber gloves industry has been generally recession-proof. Rubber gloves industry was the industry that used most natural rubber as compared to others industry such as tyres and tubes industry. The statistics showed that rubber gloves industry has consumed 68.3% of natural rubber while tyres and tubes industries had consume 10.5% and 8.3% respectively (Malaysian-German Chamber of Commerce and Industry [AHK Malaysia], 2012).
There was study stated that the demand of natural rubber is exceeding the supply of the natural rubber. The production of natural rubber in Thailand, Indonesia, and Malaysia has fallen from its peak of 80.5% in 1969 to 65.6% in 2001 before recovering to 71.4% in 2007 (The Rubber Economist Ltd, 2008). To minimize and spread over risk of lost rubber supply and high raw material cost that being faced by Rubberex (M) Corporation, it is recommended to diversify its business, being involved in several business sectors before the corporation have been really affected by the pitfall in rubber industry.
Diversification is an alternative for growth. Divest business structure into an unrelated industry can help company to have greater financial gain and spread business risk over variety of industries (IE Business School: Diversification Strategy, 2007). It is useful to minimize the losses they might face, keep corporation competitive and survive. One of the famous examples of unrelated diversified company is General Electric (GE). In early century, GE was a producer of light bulb in United State. Throughout the years, GE has been get involved in several industries such as aircraft engines, kitchen and laundry equipments, and plastic and so on (IE Business School: Diversification Strategy, 2007).
Our formal Prime Minister, Tun Abdullah Ahmad Badawi highlighted agricultural is an important sector to the country's economic development. Abdullah strongly believe that agricultural industry can help country to gain more wealth and reduce poverty especially among those rural areas. Based on statistics, about 12% of the national gross domestic product (GDP) is comes from agriculture industry and there was also a decrease in unemployment rate in Malaysia (Malaysia Business Online, 2011). According to Malaysia Investment Development Authority (MIDA), government has provided a lot of incentive in agricultural development. The main incentives for agricultural sector include pioneer status, investment tax allowance, and incentives for food production. In addition, agriculture is one of the key economic areas that going developed by the government which has been stated in the Tenth Malaysia Plan (2011-2015).
Thus, we suggest that Rubberex (M) Corporation to divert its business into agricultural industry. Rubberex may divert its business into agricultural industry through internal start-up method. This diversification do not need to implement immediately as the supply of rubber is still enough in current stage and rubber gloves industry is still in good condition. Rubberex can take a considerable time frame to design a start-up plan for itself to gain advantages from the agricultural industry. Internal start-up is usually less costly than purchasing an existing firm because Rubberex do not need to pay for the costs and time to investigate the problems in the purchased company and find ways to solve the problems.
Although Rubberex may be lack of in-house skilled workers in the agricultural industry, but it is not a core problem for a Malaysian company. It is because the Malaysia government is aggressively developing the agricultural industry recently. Rubberex may get advice from related authority in term of technical and financial supports. The most advisable sector for Rubberex to venture in agricultural industry is palm oil manufacturing and export.
Malaysia is a strategic location to plant oil palm. Malaysia can gain advantages from its palm oil with abundance of biomass, biofuel, and methane. Malaysia government has implemented Clean Development Mechanism (CDM) projects which including renewable energy-related. The Malaysian Renewable Energy Act is also anticipated soon (Ng, Yew, Basiron, Kalyana,S., 2011). Renewable Energy Act would help drive the green technology initiative amongst the palm oil industry in Malaysia. In addition to the above, the palm oil industry has also been identified by the Malaysian Government's Economic Transformation Programme (ETP) as one of the major economic pillars that would spearhead the economic growth by 2020. The ETP roadmap has identified that the palm oil industry will raise its Gross National Income (GNI) contribution from the current RM52.7 billion to RM178 billion by 2020 and this will be succeed through the implementation of eight core entry point projects (EPP) (Ng, et al., 2011).
According to the Rubberex, the prices for raw materials are expected to remain high due to the increases in the crude oil prices. The inflationary pressures in China still remain high. Rubberex is facing challenges in term of the increases of the worker's minimum wage, energy costs, and other input material prices in China. The company future prospect aims cost saving measures through automation and energy savings can help to lowering the product costs. Thus, it is advisable for Rubberex to divest its business into oil palm industry. The Company can gain first mover advantages to utilize the renewable energy from oil palm in their manufacture to reduce the cost of production.
4.0 Conclusion
Rubberex corporation was established the production of household gloves on 1987. In 1993, it relocated its operations and started produced the industrial products. The company has two production facilities, which in Malaysian and in China. Lately, the company has transformed to become a Malaysia-based investment holding company. Through its subsidiaries, the principal activities of the company involved in the manufacture and sale of natural rubber, synthetic rubber and vinyl gloves for household, industrial, professional and food handling applications.
At present, Rubberex had practising three strategies which are wholly own subsidiary, exporting and acquisition. Through this three strategies Rubberex had successfully expand their business globally. By having wholly own subsidiary it allow Rubberex to have tight control over it and experience curve economies. Through exporting, Rubberex can have enjoy economic of scale and widen their market. Acquisition had help lowering the failure risk of start up new firm.
In this project, we are suggesting Rubberex Corporation to have backward integration, joint venture, and unrelated diversification. Through these strategies, Rubberex can go into different field at the lowest risk. By using joint venture, technology and skill can be shared among those parties involved. Diversification helps Rubberex to diverse its risk so that when one of its businesses goes down, it still can survive in other business that it invested. Backward integration can help Rubberex to stable down its raw materials costs and to ensure that there is enough resources are available for it to continue operation.
In summary, Rubberex may need to employ more talented management to help it to design and implement all those strategies in order to make the company more success. Rubberex may also need to put more effort to search for skilful workers to ensure the company to succeed in the field that it never invested before.
