Global Business 　 #5May 14, 2012

Dept of Technology Management for Innovation (TMI), Graduate School of Engineering

Professor Kazuyuki Motohashi

工学系研究科 技術経営戦略学専攻教授元橋一之

http://www.mo.t.u-tokyo.ac.jp

Today’s class

• What is complex service system? Why service model?

• Global Infrasctuture business as an example• Business planning: practical guide and

introduction to global business competition• Introduction to next class: case study on

Neemrana Industrial Park

Current issues in global business for emerging economies

• Meta-manufacturing model: fast commoditization of product (catching up Korea, China etc.) -> complex system, service model

• Importance in risk analysis for long-term business (operation and maintenance in infrastructure biz.)

• Relationship with local government (business modeling for PPP)

• Globalization of management style: Genchi-ka, proper balance between control and autonomy of local subsidiaries -> importance in human resources in global business

Development in emerging economiesSuch as China and India

New competitors

New markets

Global Business Strategy• Shift to “good enough market” and improvement in cost

competitiveness• Business model re-organization by service dominant

design

World in not so flat,

understanding distance

Consistency with corporate

strategy

Product architecture and value creation

Size of value added

Level of complexity (difficulty in imitation)

Aircraft(CoPS)

Auto-motives

EV?

Mainframe computer

ModularizationUnbundling, com

petition

PC

IT servicesService

scienceScalability in services?

Difference in product architecture

Integrated architecture Modular architecture

Driving forces

Size of value added

Level of complexity (difficulty in imitation)

Aircraft(CoPS)

Auto-motives

EV?

PC

Scientific approach for innovation (digitalization, modularization..) and

technological catching up

Gro

win

g “G

ood

Eno

ugh

Mar

ket”

Protection of propriety technology (IPR), increasing complexity, strategic

investment in complex system innvation

What is complex service system?

Complex system of products

Operation and Controlling Functions

Value Proposition to the customer

Low cost/ high

performance

Local environment Organizational factors

Complex system case: global infrastructure business

• Infrastructure development needs in Asia until 2020 reaches $8 trillion due to urbanization (METI estimates).

• Public money cannot cover such amount, so that PPP (public private partnership) is needed.

• Analyzing infrastructure business is important

• Risk analysis and simulation• Business modeling with

relevant players

Complexity in Global Infrastructure BusinessProduct Design(Autos, PCs etc)

Social System Design(GIB)

Unit of observations (agents)

Component, technology (such as

IPR)

Firms, government, NGOs etc

Origin of complexity Interdependency of components and

technology

Interactions among different economic

agents

Objectives Balance of quality and cost

Total profit maximization and win-

win solution

Inference approach Deductive Inductive

Why? Natural Science Base Irregularity in organizational decision

making process

Analytical approach Top down from grand theory

Learning by doing ex. Social experimentation,

simulation

Types of PPP

Design Build Operation

• BOT (Build Operate Transfer): concession contract• BOO (Build Own Operate)• Leasing: Public leases out for private, affermarge• Joint Venture• Operations or management contract• Cooperative arrangement: public supports to private

Complex system of PPP project

Project Company

(SPC)

Japanese Government

Host country Government

Equity Investor

LenderCustomer

Contractor

SupplierLocal Partner

Contract

Influence$$$(ODA)

Policy

Agent based modelingDynamic linear programming

NPV Project Evaluation

Cash Flow

)0(

)1(1

NPVrIRR

r

CFNPV

T

tt

t

EPC (Engineering, Procurement and Construction)

O&M (Operation and Management)

Risk analysis of global infra project

• Development of NPV model and monte carlo simulation• Risk management tools: trade insurance, project financing

technique, etc

IPP, Water, Waste Transportation (rail, road)

Political Risk Regulatory framework risk, confiscation risk, contract breach, political violence, feedstock supply risk

+ currency exchange risk

Commercial Risk Project completion risk, operation risk,

+ off taker risk (demand uncertainty)

Natural force majure

『国際インフラ事業の仕組みと資金調達』（加賀隆一著）を著者加工

Analytical aspects by PPP EntityGoal/Contingency Key Variable Major risks

Procurer Value for money/ failure in PPP

project

NPV of projectQuality of public

services

Bid qualification

Sponsor Return on Equity/ financial close

Equity IRR Demand factors and cost factors (OPEX,

CAPEX)

Senior Lender Return on Loan/ delay and default of

interest and principle

Loan life cover ration (LLCR)

Annual debt service cover ratio (ADSCR)

Whole project risks but senior over

equity and junior loan

Example of optimization problem: Too high D/E ratio -> LLCR (ADSCR) shortage -> Require mezzanine loan -> higher financial costs -> Lower equity returnThe degree of procurer’s commitment to demand (electricity, ridership clause) -> lower contingency (like bankruptcy of SPV) -> make NPV of project higher

Business Plan Competition : ASEAN

Adapted from Financial Times

Indonesia

Philippines

MalaysiaSingapore

ThailandCambodia

Myanmar

Laos

Vietnam

Brunei

ASEAN : factory and/or market for Japanese multinationals?

Changing the landscape of AsiaComparative table in 2010

China39%

Japan38%

ASEAN12%

NIES311%

2010

China57%Japan

20%

ASEAN15%

NIES38%

2030

China62%

Japan11%

ASEAN20%

NIES37%

2050

J apan ASEAN10 ChinaGDP 5,809 1,852 5,878 billion US$Population 127 573 1,339 millionGDP capita 45.7 3.2 4.4 K US$Trade 1,458 2,127 2,973 billion US$Land 0.4 4.5 9.6 millon KM2

Diversity in ASEAN countries(GDP per capita, unit: 1000 US$)

Business Plan Items• Executive Summary• What is your company? (Hitachi group? or others? Start-up

company?)• Management Team and Division of Labor• What kind of global business in ASEAN? And why

– Summary of your new business– Business model of your proposal

• Who’s your customer?• Market and competitor analysis

– Risk analysis• Potential risks and contingency plan

• Business execution planning (HOW)– Partnership with local players (with whom? why?)– Local operation – Marketing plan

• Business Plan Evaluation (such as NPV, IRR analysis)

15 min presentation in the last class of this course

Next class: Case study on Neemrana Industrial Park

• Neemrana Industrial Park has been developed by cooperation of Japanese and Indian governments. What are reasons why both side of governments helped to develop this industrial park?

• What are risks associated with investment in production sites in India? What are benefits located in Neemrana Industrial Park, in terms of lowering these risks?

• Hitachi plans to extend “Neemrana Shared Energy Center (N-SEC)” model to other region of India? Do you think whether Hitachi will succeed?

• Do you have any recommendation in new business in India? What kind of business will be successful? You can extend a scope of your industry, not only in manufacturing, but also to trading companies, banks and logistics business.