Analysis Of A New Venture In The Malaysian Automotive Industry

Manufacturing Process and Categories

Business venture are a common parlance in the up-coming days. Before venturing into the business venture, an analysis needs to be undertaken that helps to provide relevant information. The decision to venture must be back up with overview of the local market followed by the SWOT analysis and assumptions. The report is based on the new venture that is the automotive company and for this CAPM and WACC has been computed with the help of hypothetical figure. Moreover, the five year financial statements has been prepared considering the industry of Malaysia and the prospects that are present over there.

The process of manufacturing can be defined as the conversion of the raw materials into the usable goods or finished goods that can be further sold by the retailers or wholesalers in the pervading market. There are many industries in relation to this subject like the pharmaceutical, food & beverages, iron & steel, textile, tobacco, automobiles, aerospace and petrochemicals. Manufacturing is divided in two main categories that are durable and non-durable goods. The durable goods are non-perishable in nature and thus they can be stored and consumed even after a long time. Non-durable goods are perishable in nature and thus they are spoilt in minor interval. The process of manufacturing is very complicated and hence it requires a group of people who have high experience and knowledge about the job. From the top to bottom, employees include company directors and CEOs, accountants, sales and marketing managers, order processors, customer service providers, secretaries, and others who plan, orients, and manage operations.

The automobile industry is a very diverse and huge industry that has taken over the world in very less time and the same effect has been observe in Malaysia. The business of car care services is very likely to earn huge profits in the upcoming years. The indicators of the environment have a shown a lot of faith in relation to the growth of this industry in future. The reason provided for this increase in the profits of automobile industry may be the increase in population that is being experienced by the world. With the increase in population, the need for transport gives rise to the industry. In addition, the increased average of the distance travelled by a commuter is affecting the industry. Thus, many other factors may help to improve the overall performance of the firm thus leading to the improvement in the revenue and the earning potential of the firm.

Market Analysis of the Automobile Industry in Malaysia

As per the mentioned business of car care services, the owner will need to have a hydraulic lift and a pneumatic wash gun for the commencement of the work. In addition, the owner should have the latest technology, which he can provide to its customers so that they may be satisfied, and thus visit again. Proper software that may help them to maintain proper records of the system should also be used as any fault in the recording system may lead to huge losses. The tailor-made software can be used as it will provide the owner the best records of the customers and it gives the reminder when the customer needs to perform the next service by giving an appointment date. In addition, the spare parts that are use the d almost daily may be brought in bulk, which may help the company to improve the time and efficiency utility. This may also help them to generate a few extra bucks. In addition, some extra accessories of the car like the seat covers and perfumes may be showcased in the billing counter to earn few extra pennies. These goods can be used to decorate the exit and waiting area so that the customers may become feasible to buy them.

Strength

1. Evolving industry: The automobile industry is experiencing a very good growth rate. The function of automobiles is to give the people the freedom of transport that was not present for them about a century ago. The necessity of automobile is prevailing upon almost every field in Malaysia. Every trip that is made by use of the automobile is fined with a benefit, whether in the economic manner or satisfaction of human needs.
2. Continuous product innovation and technological advancement: The use and innovation of new techniques every day, is increasing the value of the automobile industry. The new alternate and less harmful fuels like the shell gas, CNG, and electric vehicles have helped to move the automobile industry to the next phase. This use of renewable sources of energy will also help to protect the environment (Merchant, 2012).

1. Bargaining power of consumers: The last few years have been very innovative for the automobile industry. This innovation leads to increase in the number of the variants of vehicles. This led to a major shift in the market from demand to supply. The customers started making their own choice thus decreasing the supply of the cars.
2. Increase in taxes: the growth of the automobile industry is in the hands of government as the government improvises new rules and regulation thus increasing the taxes and other excise duties over the purchase of the vehicles. This led to increasing in the prices and thus leads to dissatisfaction of the consumers.

1. Changes lifestyles of the people: There are many new factors which have started affecting the automobile industry. The amount of customer satisfaction needed has increased in the past years. The customers need to have a high standard of living which forces them to buy expensive products and also to increase their value in the society they buy things which are not in their economy line. The increased safety and regulatory concerns have also made the consumers to buy the better and expensive vehicles. Increase in the nuclear families has led to an increase in the sales of two-wheelers.
2. Market expansion: The new era have forced the automobile industry to grow with huge rates. The markets like the Asian and BRIC nations have made an outright comeback in the automobile segment and with their return; it is believed that there will be a lot more growth seen (Williams, 2016).
3. OEM priorities: The increases in the use of the electronic devices in the vehicles have led the Supplier to deal with traders outside the automobile industry. Thus to improve the market it should be seen that there are collaborations made with other intermediaries which may help the firm to cut the cost and maintain the OEM function (Williams, 2016).

1. Competitive market: The increased growth in the automobile sector has led many new companies to launch in Malaysia. With the increased companies, the market competition also rises. There are many industries thus making it hard for the commencement of sales and making so space for any new user to enter the field (Svejenova et. al, 2010).
2. Volatility in the prices of fuel: the constant increase in the fuel prices of the country and new regulations of taxes have led to an increase in the sales of vehicles (Leo, 2011). In addition, the government has implemented new policies of using shell gas and CNG vehicles, which have also decreased the profit margin. The shell gas also affects the inventories in many ways (Berk & DeMarzo, 2016).
3. The huge costs in the research and development processes: The decrease in the sales and increasing competition has led the industries to spend more of their revenues on the use of better allocation in the research and development tasks. Still, the ROI is needed to be capitalized out of all the decisions (Davies & Crawford, 2012).

Malaysia is one of the most progressive countries has the core ability to change the environment from the completion to the skill perception of the Automobile industry. With the huge advantage of the advancement in the physical parts of the vehicles, the Malaysian government has invested in the R&D thus leading to the increase in the growth potential of the automotive industry. Because of these technological advancements, the international automotive industry is constantly reshaping and restructuring. The Malaysian automotive industry has been divided into four major groups (Petersen & Plenborg, 2012). The major part of employment is in the Automotive Industry constituting 40% of the industry’s employment followed closely by the Component manufactures at 32% and after that the motor vehicle manufacturing and the electric and instrument manufacturing constituting 23% and 5% respectively according to several reports. Implication and benefit of CAPM

It is the best to calculate the accurate forecast of the relationship between the asset risk and the expected return from the market. The two main functions completed by it are:

1. It helps in estimation of the rate of return that is visualised as a benchmark for evaluation of various kinds of investments (Choi & Meek, 2011).
2. It helps to make a guess about the expected return made on the assets that are yet to be sold.

Thus, this tool proves to be very efficient for the people as it helps in the estimation of the future values that can be used by the firm to make a feasible plan and then work according to it. It also seeks to remove risk by the analysis of the future ( Laux, 2014).

Requirements for a Car Care Service Business

The presence of beta is needed when it comes to the computation of CAPM. Suppose the automotive company is having a beta of more than 1 that is 1.2 it means that the stock contains volatility on a high scale and have high movements. The price of the stock will rise and fall in a similar manner as that of the index (Bodie et. al, 2014).

CAPME(R) = RFR + β_stock (R_market – RFR)

Further, it taken into assumption that the risk free rate is 5, the market risk premium is 7% and going by the details, the CAPM is computed.

Hence, CAPM = 0.04 + 1.2(7-5)

= 0.04 + 2.4

= 2.44

Going by the computation, it can be said that the automotive venture will be a volatile stock because the beta of the company ranks more than 1. This stock will be more preferable for the investors who are adventurous in nature (Carmichael & Graham, 2012).

WACC of the company

Weight of equity = Equity/ (Equity + Debt)

= (2,909,866/ 4130896) x 0.024 + [(1,221,030/4130896)*0.0112)*(1-22.6%)

= 0.017 + 0.00074

As it is a new automotive company therefore, the reliance on debt will be more because at the inception more of equity is infused. Suppose the company comprises of 85% of total capital as equity that means the company is not needed to pay fixed interest thereby the profits can be retained for other important practices like capital investment, purchase of asset and other liabilities (Peirson et. al, 2015). The company will be required to pay dividend as a return on the investment that is (suppose $ 4,59,90,00) as compared to total equity of $1,03,400,9200 that is 4.44% that is low as compared to the average cost of capital that stands at 9.45%. this way the company can play a smart move by not attaching to any fixed payments.

A higher WACC can have huge implications on the evaluation process of the management. Higher WACC projects higher risk in tune to the activities of the company (Brigham & Daves, 2012). However, when it comes to the new project, investors try to have more return by assumption of more risk. WACC can be utilized to predict the expected cost for all sources of finance (Berk & DeMarzo, 2016, p. 44-46). Here, in this scenario it can be said that WACC can be used to balance the relative cost of many sources so that a particular expense of capital figure can be generated with ease. A higher WACC is a threat to the company in terms of higher risk and expenses (Ferris et. al, 2010).

NPV computation
SL NO.	PARTICULARS	0	1	2	3	4	5
A	Advertisement	1250	–	–	–	–	–
B	Interest expense every year	–	550	550	550	550	550
C	Machine cost	6500	–	–	–	–	–
D	Revenue for the year	–	2000	2500	3000	3500	4000
E	Revenue incremental	–	550	550	550	550	550
F	Research cost (NOTE)	380.96
G	Depreciation  (NOTE)	–	1180	1180	1180	1180	1180
H	TOTAL (D+E+G-A-B-F-C)	8130.96	3180	3680	4180	4680	5180
I	DISCOUNTING FACTOR	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209
	PV	8130.96	2890.94	3041.15	3140.43	3196.44	3216.26
	NPV						7354.27

Prospects of the Malaysian Automotive Industry

The positive NPV states that the project is viable in nature and can be used for the investment purpose. It is a profitable scenario.

Note 1 – cost of research computation

For the cost of research, it needs to be noted that the expense was done before six months and for the completion, the problem is that the cost that is reflected on the date is needed to be traced.

Particulars
Cost of Research	$400,000
WACC Yearly	10%
WACC for six months	5%
Discounting factor	0.9524
PV after six months	$380,960

IRR COMPUTATION
		(all figures in $’000)
YEAR	CASH FLOW	PRESENT VALUE
0	-8130.96	-8130.96
1	3180	2890.94
2	3680	3041.15
3	4180	3140.43
4	4680	3196.44
5	5180	3216.26
Net Present Value	7354.27
Internal Rate of Return	38%

As per the computation, it can be seen that IRR of the company is strong having a figure of 38%. With NPV, the IRR comes to 38% indicating the viability of the project and even indicates that the project is a sharp indicator of efficiency, quality, and investment generator (Parrino et. al, 2012).

COMPUTATION OF PI
		(all figures in $’000)
YEAR	CASH FLOW	PRESENT VALUE
0	-8130.96	-8130.96
1	3180	2890.94
2	3680	3041.15
3	4180	3140.43
4	4680	3196.44
5	5180	3216.26
Net Present Value	15485.22
Initial Investment	8130
Profitability index= PV of Future Cash Flows/ Initial Investment
Therefore, PI	1.904701107
COMPUTATION OF PI
		(all figures in $’000)
YEAR	CASH FLOW	PRESENT VALUE
0	-8130.96	-8130.96
1	3180	2890.94
2	3680	3041.15
3	4180	3140.43
4	4680	3196.44
5	5180	3216.26
Net Present Value	7354.27
Initial Investment	8130
Profitability index= PV of Future Cash Flows/ Initial Investment
Therefore, PI	0.90

COMPUTATION OF PAYBACK PERIOD
Particulars	0	1	2	3	4	5
INITIAL INVESTMENT	8150	–	–	–	–	–
CASH FLOWS	–	2000	2500	3000	3500	4000
CUMULATIVE CASH FLOWS	-8150	-6150	-3650	-650	2850	6850
The payback period is 3.22 years Decision

Conclusion

As per the computation is done above, it can be commented that the project should be considered as it will bring positive yield in the future. The NPV stands positive and even the profitability index is higher than one indicating that the project should be selected. Further, when the PI is above one it highlights that the project is profitable and must be accepted. In addition, cost of capital is 10% and IRR stands at 30% meaning that the project must be selected. Therefore, in the entire scenario, the project is profitable and should be selected. Going by the analysis and discussion it can be said that the automotive set up in Malaysia will fetch a positive result. The industry is flourishing and even the capital budgeting techniques are providing the same signal.

References

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