Orkhan Hajizada

Case Study: Midwest Electronics Asian Expansion.

1. Which country would you recommend as the location for the companys first
Asian plant?
Lets compare first approximate costs of building/leasing new location in Asia,
given the necessity for 200,000 sq. f. and with the length of lease of 10 years
(if leased):
China

India

Singapore

$24,400,000

$16,200,000

$74,500,000

Property Prices

$8,000,000

$7,600,000

$28,000,000

Leasing Costs

$11,600,000

$13,600,000

$36,460,000

Property NewBuild prices

Secondary Market

The costs for equipment of $135,000,000 are irrelevant, because these

costs are almost identical across different locations. From the above-pictured
table, it is clear that the most cost effective location for new manufacturing
factory is India. Moreover, the annual wages in India are almost 8 times lower
than in Singapore ($4413 versus $36244). All these facts point on the
attractiveness of India.
However, we also need to take into account disadvantages of India,
such as high bureaucracy, possibilities for the corruption, lack of skilled
employees. The inferior quality of existing facilities demands the construction
of new plant instead of acquisition of the secondary one. But that, in turn,
raises the concern about the corruption. Therefore, if entering in India,
Midwest has to build instead of buying plant: $15,500,000.
Lets look at Singapore case. 76% of Singapores population is Chinese
(!). The legal system and protection of intellectual rights are of a high level.
Moreover, the index of corruption is much lower comparing to India and
China, 5th ranking against 95th and 75th respectively. Furthermore, this location
opens for the Midwest Electronics access to highly skilled local workforce.
The acquisition of existing facility in Singapore ($28,000,000) might be the
less-expensive option. The only concern about this location are, mentioned

before, high labor costs. But, in my opinion, the availability of high skilled
labor force speaking both Chinese and English and proximity to other
countries of this emerging region, may make Singapore as a good first step for
the company in this region.
2. To build a new manufacturing facility or purchase an existing one? How to
finance the project: using cash from one of the regions, borrowing in the
capital markets, or leasing?
As mentioned in the previous section, the acquisition of existing
facility would be less expensive than building a new facility, $28,130,000
versus $75,450,000. The total cost of acquisition of a facility and equipment
would be $163,130,000.
Midwest Electronics might partially finance the Asia Project by
corporate borrowing. This option is quite attractive, given decreasing debt-tocapital ratio, a low A rating, the companys CoE of 10% and the possible risk
associated with full financing through accumulated cash. The other part should
be financed through the generated cash on European market.