Business activities in Oristar Situation and recommendations.doc

Business activities in Oristar Situation and recommendations

INTRODUCTION

As being one of the expert agents in Vietnam metal market, Oristar hasachieved 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 uscurious about what they are doing and how every thing is running in every dayworking in the company Why a newcomer in a very sensitive market like metalmarket can be survived and gain a lot of success which might take decades formany existing companies to do that In this report, we will have the answers for allthe above questions.

Because metal market is a special market which is operated in differentregulations to consuming market’s and influenced by many sensitive factors, sobefore going to analyzing Oristar’s business performance, we had better give anover view on metal market That might help viewers to follow easily Analysis onOristar’s business activities should remark its achievements and also remains thatwill be discussed in the last chapter of recommendations Hence, there will bethree 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 onemajor 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 inworld economy and taking a higher contribution to GDP of each country.International trade has been a major driver of global growth and prosperity overthe 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 isaimed at facilitating cross-border deals such as international payment andtransportation After looking at definitions, we will go into the role of supportingservices for facilitating international trade in general and im-export activities inparticular.

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 onecountry from another country in a legitimate fashion, typically for use in trade.

Import goods or services are provided to domestic consumers by foreignproducers.

Exportation is the activity or process of selling goods to other countries.

Export is any good or commodity, transported from one country to anothercountry in a legitimate fashion, typically for use in trade.

Import-Export activity is a key part of international trade in which goods aretransferred between countries This is a complex process, which required a lot ofother supporting activities such as settling balance, shipping cargo, and buyinginsurance policy.

Payment is one of the most vital elements of any sale contract because it isrelated to the primary aim of deals That is benefit Therefore, whether doingbusiness domestically or internationally, buyers and sellers have certain basicobjectives 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 todaywhen international trade are stepping at much higher levels and cash payment hasloss its position in international trade Instead, there are a plenty of different termsof payment used in settling balance between buyers and sellers in internationalsale contracts Letter of credit (LC)1 has been the most popular terms of paymentin the world trade today It is because LC is the safest way for both buyer andseller of receiving cargo and getting back money Besides, other terms such asdocumentary collection, open account and advanced payment have also been key1 A letter of credit is a document issued mostly by a financial institution which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit.

tools of international settlement In brief, payment services provided by banks areplaying 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 tophysical sale contracts, which state that goods must be transferred from onecountry to another It is not a long time ago when international transactions couldnot reach between the dealers at far distances However, a long with thedevelopment of world trade, transportation services has had breakthrough jumps.Today, nearly all human’s innovation in transport has been applied to cargotransportation among countries and it seems that there is no where in the worldthat could not be reached by transporter That is really a big support to boostinginternational trade.

In summary, basic definitions of international trade especially im-exportactivity and other supporting services have been covered briefly Hopefully thebackground 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 lastpart, this part we will explain more about one of factors that help to facilitateinternational trade and it is related directly to the analysis in next chapters That isthe role of an agent Let’s look at definition first, and then we will discuss moreabout 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 agentacts on behalf of another and take no risk for any financial problem with theactivity Because an agent does not take title to the good, he won’t have to bearfinancial risks but can not benefit the differences in price of goods However, anagent is paid a commission for the service he offered to the principle Thecommission is usually a percentage of the value of goods or services These aresome key points of an agent on theory.

Recently, the international trade has been expanding aggressively thank tofree 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 certainactions following his principle’s instructions Agent’s activities not only cut downcost and time in case of two-side deals but also help the seller update the marketinformation For the buyer, he would benefit on the availability of goods orservices that the agent provides on behalf of his principle If there is no agentstanding between the buyer and the seller, the trading process must take more timeand affords for both the buyer and the seller However, once an agent participatesin the process, the problem will be solved easily and international transactionswould flow smoothly In return, the more international trade develops, the greateropportunities it will create to oversea agent activity Hence, we might come to aconclusion that international trade and oversea agent activity have a reciprocalrelationship In following chapters, we will work on the real situation of Oristarand 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 metalmarket in general to get the basic knowledge on how the market is organized andoperated In addition, market characteristics and trends are also among focuses

Metal market has its own rules which are very different from others One ofthe reasons is that metals are special goods, which follows only market supply anddemand There are many factors affecting to metal price The fluctuation in priceof one metal will have widespread influence on the materials, semi-products, andfinished products used the metal as well The movement in metal price ispresented on metal exchanges such as LME (London Metal Exchanges), Comex(Commodity Exchange) 2These markets are the guide line for all suppliers tomake their own price because price of metals, which are inputs for theirproduction, are reflected on such metal exchange markets Hence, if there is asmall change in price of one metal in LME, for example, it will lead to asuccession of changes in price of all materials and products made from the metal

Because metal market is very highly organized and operated on marketsupply and demand through 24-hour transactions, it has been attracting more andmore buyers and sellers to make deals in the market The more deals the metalexchanges carry out, the more exact it reflects on the price of metals regarding tomarket supply and demand Studying the relation of the two giants in the worldmetal market, LME and Comex might explain clearer.

Today, LME and Comex are the two world biggest metal exchanges Eachone covers a large part of the world For example, LME covers EU, Middle Eastand some part of Asia and Africa while Comex covers all America, Australia and2The leading U.S exchange for metals futures and options trading

some where else Even though it seems that the two metal exchanges are fiercelycompeting to each other, they actually are supporting each other It is becausethere is difference in time-belt between New York and London, so working timeof each market is different, which enable suppliers and manufacturers around theworld to expand the opportunities on booking price by using both prices of the twomarkets In particular, they might decide to use LME price during the working dayof LME but once LME close, they turn to use Comex price until this market close.Hence, the quotation period 3will be expanded and it appears more opportunitiesfor dealers in choosing price Moreover, regardless of physical distance, allsuppliers and manufacturers can still use LME or Comex price as a fix cost in theirpricing Later we will go in more detail Although both LME and Comex have biginfluence to metal market in general, LME has still been the leader in metalmarket 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 established130 years ago at the centre of London It is the world’s premier non-ferrous metalsmarket offering futures and options contracts for aluminium, copper, nickel, tin,zinc and lead plus two regional aluminium alloy contracts The Exchange providesa 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 physicalindustry to plan forward in a world subject to often severe and rapid pricemovements Such is the liquidity at the Exchange that the prices ‘discovered’ atthe LME are recognized and relied upon by industry throughout the world Theprices keep moving all the times reflecting supply and demand of materials byindustries

3 Quotation period: period that the seller allows the buyer to book price for the sale contract they has signed

In 2006 LME achieved volumes of 87 million lots, equivalent to $8,100billion annually and between $35-45 billion on an average business day Despiteits location in London, the LME is a global market with an internationalmembership and with more than 95% of its business coming from overseas4 Being a 24-hour market, transactions on the LME are taken place through aninter-office telephone market and LME Select, an electronic trading platform.Each day the LME announces a set of official prices, which are determined fromthe open-outcry trading This trading is highly liquid and trade and industry hasconfidence that they properly reflect the current supply/demand situation Theseprices are used by industry worldwide as the basis for contracts for the movementof physical material throughout the production cycle Normally, suppliers set theirprice based on LME current price + Premium Premium includes all costs such asproduction cost, transportation cost, extra costs and profit The Premium is theonly one that makes different among suppliers and their competitiveness in price.However, quality of material is one of the significant factors to compete in suchsensitive market Materials which are listed on LME must be satisfied standardscreated by LME or equivalent international standards such as JIS (JapaneseInternational Standards), CDA/ASTM (USA), BS (UK), DIN (Germany), ISO(international Standards) Therefore, LME’s role here is not only a guide line forsetting prices but a common standard on evaluating quality of materials

In summary, metal market is a high standardized and liquid market which isdirected by Exchanges such as LME and Comex However, the LME has beenkeeping 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 currentsupply/demand situation and building quality standard control

1.2.2 Metal market in Vietnam

4 http://www.lme.co.uk/

As a part of world metal market, Vietnam market has operated on the sameregulations of the world metal market That means Vietnamese industries dependon LME or Comex prices to decide domestic prices Nevertheless, supply anddemand in Vietnam might not go with the trends in the LME or Comex becausefactors influenced on domestic prices are different to the world market’s

One of the remarkable characteristics of Vietnam market is the isolationamong manufacturers in the same industry Until now, there hasn’t had an officialorganization in Vietnam which gathers all manufacturers in the same industry andoperates on the purpose of protecting domestic industry That’s why markettrends in Vietnam usually move adversely for both the manufacturers and theindustry It is caused by the price wars among manufacturers, which makes metalprices go down much while the world prices still remain or just suffer a smallreduction Such tough and endless competitions have led not only to the failure ofmanufacturer 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 5within first three weeks of October, 07 However, domestic aluminium pricehas been continuously rising in the period The reason is that Vietnamesealuminium manufacturers are stuck in a marsh of price wars, so the domestic pricetrend goes in a contrast way with the world trend The roof of the problem mightcome from the individual behavior of manufacturers which distorted the realsupply and demand on the market and led to the unbalances in price betweenVietnamese aluminium billet market and the world market Hence, it appears anurgent demand of establishing an organization which is responsible for directingand orienting the market and preventing such continual price wars as it is beingthis time in Vietnam.

5 http://www.metalprices.com/

Besides, another reason is that in Vietnam there are hardly any giant inaluminium industry who may have a big influence on the whole market or controlthe market It is a fact that almost all big aluminium manufacturers in Vietnamhave had similar performance and equal impact to the market That’s why thecompetition 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 % ofthese companies which have ever made deals with Oristar6 on aluminium billet.However, from time to time the business relationships have some changes

Oristar has to face with the competition coming from some tradingcompanies at this moment such as Tran Phu electric Company, Van Xuan Co., Ltdand Tuong Thanh trading Company Despite the fact that Oristar still has somecompetitive advantages over its rivals, there are internal problems that they shouldimprove In next chapters we will discuss in more detail.

6 Oristar: which will be discussed in following chapters

Chapter II Oristar’s overall performance and its Business activity on Aluminium Billet

Oristar has two Business departments at the two offices, one Im-Exportdepartment, and one finance department at the head office in Hanoi only Mainbusiness activities of Oristar are carried out in the close coordination of thesedepartments 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 plateand 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 Aluminiumalloy ingot, Sterlite (India) for Copper Cathode Even though importing andreselling activity takes more time and affords, it is the activity of being salerepresentative that brings more money to the company The commodities sold onbehalf of suppliers almost are materials for manufacturing industries Forexample, Aluminium billet is input for extrusion industry, Copper Cathodes isused popularly as input for cable and electronic industry Oristar obtains acommission based on the quantity of the materials it sold and on the agreementbetween Oristar and its suppliers Among all materials Oristar sells on behalf offoreign suppliers in Vietnam, Aluminium Billet is the most strategic one withhighest annual revenue In the next part, we will focus more on Aluminium Billetin 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 inVietnamese metal market especially for Aluminium Billet and Copper Cathodes.Today, there are about 30 % of extruding companies in Vietnam which haveimported aluminium billets through Oristar For other materials such as coppercathodes, primary aluminium alloy ingot and secondary aluminium ingot, Oristarhas also built rather stable networks among oversea suppliers and domesticcompanies, which gives it a position in the market

Oristar’s role in the process is like a broker, who connects the buyers andthe sellers together However, Oristar has bigger liability to both suppliers andcustomers Particularly, it has to follow up each sale contract and if there is anyfailure, Oristar has to co-ordinate in solving problem with both sides Sometimes,Oristar ought to compensate for trivial claims from buyers for maintaining goodbusiness relationships with its suppliers One of the most significant

responsibilities of Oristar as being agent is selling materials as much as possible tolocal customers Each year Oristar has to meet target revenues set by its suppliers,which is a good way for the suppliers to evaluate performance of their agent andalso adjust commission rate to the agent accordingly The strength of Oristar hereis that it knows very well about Vietnamese market, where is rather strange toforeign suppliers to approach For local customers, they can make advantage ofOristar’s expertise knowledge of metal market, which will support much for theirdecisions making about where, when and from whom they should import Inshort, Oristar plays a very importance role in connecting foreign suppliers anddomestic customers and keeping the international transactions between them flowsmoothly and easily.

In general, company profile has given the key information about Oristar, itsorganization, market share and major business activities In the following part, wewill go in more detail Oristar’s business performance through 2003 to 2006.

2.2 Business performance of Oristar from 2003 to 2006

2.2.1 Analysis on revenue during the period of 2003-2006

As mentioned Oristar has been started since 2002, until now it has beenrunning for five years The total revenue through years was increasingdramatically The following is the table of revenue from 2003-2006:

Total revenue between 2003 and 2006 (billion VND)

Source: Data issued by Oristar finance department 2006

The second year after setting up, the revenue increased about 50% incompared with 2003 The revenue broke record in 2005, which was 4 times biggerthan 2004 The increasing trend has still continued in 2006 with a slight rise All inall, Oristar’s revenue has continuously increased through 5 years especially in2005 with nearly 100 billions VND That is a very impressive number to a newestablished company In the total revenue, 40% comes from importing andreselling activity and the rest 60 % is from the commission of being agent Thebelow will explain more the both two main business activities.

2.2.2 Oristar’s main business activities

Importing and reselling activity focuses on finished and semi-finishedproducts such as copper Bus Bar, tube, aluminium plate and sheet, anodizedaluminium coils, metal ceilings, aluminium sandwich panels Copper Bus Bar hasbeen leading in turn over and being the strategic product of Oristar from thebeginning For recent years, Copper Bus Bar has reached the revenue around 12to16 billions VND Aluminium plate and sheet is the second one after copper Busbar with annual revenue around 7 to 10 billions VND This bellow table woulddescribe in detail business activities on these products this year.

Total revenue of three quarters 2007 (billion VND)

ProductCopper busbar

Copper tubeAnodized AlMetalceilings

Source: Data provided by Oristar finance dept-September, 2007

The latest figures about business results of Oristar’s business departmentsare still moving in the increasing trend in annual revenues As mentioned, Copperbus bar has been the leader in revenue since 2003 The number of 9.3 billionsVND in three quarters of 2007 turnover has made it become an uncompetitiverival to others However, the rest three commodities all have kept increasing salescompared with last years.

Business departments (BDs) take responsibility to sell these products todomestic market Basically, BDs have to do market research first and then decidehow much they should import to resell to the local market A report will be sent toImport-Export department for importing the estimated quantity and here theresponsibility has been passed to Im-Export dept (department) The duty of Im-Export dept is working on documents and choosing the supplier who can offer thebest quality at the best price However, in case the imported items can not be soldcompletely in domestic market, it is again Import-Export department who isresponsible to return them to the sellers with 60% lower than import price Financedepartment are supposed to open LC or function other terms of payment as TT, D/A, D/P Normally, L/C and TT are the most popular ones in Oristar’s internationalpayment L/C is usually used for the payment of whole commercial invoice but forpartly payment TT is preferred Therefore, whenever there is an importingrequirement report from Business department, both Im-Export dept and Financedept must be involved in

Business department must set haft-month plans of revenue for each productwhich is under a certain staff’s duty Even though revenue plan is not compulsoryfor everyone to fulfill, it is still the profile of each sale staff and an evidence forthe director to evaluate the efficiency of each individual Usually, there are twomeetings each month to look back the results from business activities of companyon the whole and of each individual in particular One of the most important

purposes of these meetings is to make reasonable adjustments to business plansregarding to market movements This policy seems to be very useful in Oristarbecause it has applied the policy since 2005 and its revenue in 2005 broke recordwhich it has never had before The continuous increase in revenues through lateryears is also a very persuasive proof for the conclusion That’s why Oristar hasintention of setting revenue target for sales on behalf of foreign suppliers as well.

Oristar has two business departments at the north and the south of Vietnamand each department cover a separate market accordingly As special in aluminiumand copper product, Oristar’s customers are mainly in industries such as electricalequipment manufacturing, metal fabrication, and automobile and motorbikeproduction However, one of difficulties to Oristar here is that most of its potentialcustomers are Japanese companies which import materials directly from its mothercompany in Japan at a very low price Therefore, Oristar hardly has anycompetitiveness in such situations except for the case of shortage To overcomethis problem, business departments have strategies to approach Vietnamesecompanies in the same industry to make advantage of market knowledge.Moreover, Vietnamese companies are more independent and easier to work withbecause they have the same language and working style Besides, Oristar has alsosearched for niche markets which big competitors usually ignore For example,small and medium side enterprises which have unusual demand or seasonaldemand In general, business activities of Oristar ought to face many difficultiesbut thank to applying smart strategies Oristar is still become a big rival inVietnamese metal market.

Another key activity of Oristar, which contributes about 60% in annualrevenue, is acting as agent for foreign suppliers in Vietnam Recently there havebeen four strategic materials that Oristar sells on behalf of the suppliers:Aluminium Billet, Primary Aluminium Ingot, Aluminium Alloy Ingot, and Copper

Cathodes As said above, the revenue from these activities is the commission onthe quantity Oristar sold The amount of commission is depended on differentmaterials and suppliers but normally the commission is around 5 to 10% of eachsale contract Aluminium Billet has kept the top turnover during 3 recent years,Copper Cathodes just follows Al Billet a small quatity, but Primary Al ingot andAl alloy ingot do not have a very good performance at this moment The followingtable will describe the contributions of each material in the total revenue throughthree quarters 2007.

Total revenue of first three quarters 2007(billion VND)

MaterialsAl BilletPrimary AlIngot

Al alloy ingot CopperCathodes

Source: Statistics from Oristar’s Im-Export dept September, 2007

As the figures say, Aluminium billet has still kept the leading position inrevenue The second one is belong to Copper Cathodes which is just about 6billions VND lower than Al Billet The rest two materials Primary Al ingot and Alalloy ingot have the revenue about 1/3 of the two top ones In spite of thedifferences among these figures, they all have a common which is the revelation ofimportant role in this business field of Oristar Each year the commission onquantity of materials sold on behalf of suppliers brings about 80 to 100 billionsVND However, these business activities do not require a lot of personnel asimporting and reselling activity carried out by Business departments Therefore,efficiency in this business field is much higher than the other.