Strategic Analysis Presentation of Hyflux

Presented by: Goh Chuwen

John Teo

Chan Zhe Ying

Nicholas Lee

1

Introduction

2

Introduction Q1 Q2 Q3 Q4 Conclusion

Introduction

Company Milestones

3


1989

Founded as Hydrochem

1994

Entered China

1999

Manufacture of proprietary membranes

2001

Listed on SGX

Introduction

Company Milestones

4


2003

Singapore’s first SWRO

plant

2004

Entered Middle East

2006

Entered India

2007

Hyflux Water Trust

established

Source: http://hyflux.com/abt_milestones.html

http://hyflux.com/abt_milestones.html

Introduction

Latest News

5


Source: The Straits Times, 8 March 2011

Source: ST, 26 Feb 2011

Question 1a

Assess the attractiveness of the water processing/treatment industry in which Hyflux operates.

6


Question 1a 7


Porter’s Five Forces

Competitive Rivalry

Threat of new

entrants

Threat of substitute products

Bargaining power of suppliers

Bargaining power of buyers

HIGH

LOW LOW

LOW

MEDIUM

Question 1a 8


Rivalry among competitors (High)

Numerous international and local competitors

Many of the world’s international water treatment firms were waiting to move into the Singapore market. [pg9]

Faced considerable opposition from two entrenched conglomerates, Keppel & Sembcorp, each possessing extensive expertise. [pg9]

High industry growth

Question 1a 9


Threat of new entrants (Low)

Barriers to entry

Capital requirements

Substantial resource investments required (E.g. equipment, R&D costs)

High knowledge requirements

Cost disadvantages

Proprietary product technology

Credibility Government support

and grants

Question 1a 10


Bargaining power of buyers (Medium)

Generally large number of firms

Tendering process

Mitigated by product customization

Expertise to meet the needs of buyers

Decrease price sensitivity

Question 1a 11


Bargaining power of suppliers (Low)

Industry firms are a significant customer group for suppliers

Backward integration

Threat of substitute product (Low)

Conventional water systems less cost-effective

Required more space and used more energy [pg3]

Not in demand

Question 1a 12


Porter’s Five Forces

OVERALL,

HIGH attractiveness for current big players to remain in the industry

LOW attractiveness for startup firms

Competitive Rivalry

Threat of new

entrants

Threat of substitute products

Bargaining power of suppliers

Bargaining power of

buyers

HIGH

LOW LOW

LOW

MEDIUM

Question 1b

Critically evaluate how threats and opportunities in the general environment may influence the attractiveness of the water processing/treatment industry from Hyflux’s perspective.

13


Question 1b THREATS: RISK MATRIX

14


High

Medium

Low

Low Medium High

Like

liho

od

Impact

Technology

Economic

Political

Legal

Question 1b

THREATS

Technological

Membrane technology may become obsolete if Hyflux is unable to keep up with R&D

Huge companies willing to invest in membrane technology (E.g. GE, Canada’s Pure)

15


Likelihood (High)

Impact (High)

Question 1b

THREATS

Economic

The impact of the 2008 global recession… affected Hyflux’s membrane sales to the various industries. [pg19]

BUT business will not be drastically affected Demand for water and government support

16


Likelihood (Medium)

Impact (Medium)

Question 1b 17


THREATS

Political

Exposure to political red tapes or instability (E.g. Libya unrest)

Mitigated by well-diversified portfolio

Legal

Threat of imitation of proprietary membrane technology

Mitigated by constant innovation

Likelihood (Low)

Impact (High)

Likelihood (Medium)

Impact (Low)

Question 1b

OPPORTUNITIES

Global, Economic, Demographics

Increasing pace of economic and population growth

18


Source: United Nations Population Division, World Population Prospects, The 2008 Revision.

Question 1b

OPPORTUNITIES

Global, Physical environment

Water scarcity due to uneven distribution of fresh water around the world

A crisis & an opportunity

Create water markets for Hyflux

19


Question 1b

OPPORTUNITIES

Political

Singapore government was ready to embrace new forms of water technologies, set aside millions of dollars for water purifying technologies [pg8]

In municipal sector, governments are pump-priming the infrastructure sector to stimulate growth [pg4]

20


Question 1b

OPPORTUNITIES

Technological

Competitors were still behind in technology using conventional water systems

Demand for water membrane technology

21


Question 2

Discuss the motives for Hyflux’s international expansion.

22


Question 2

Hyflux’s Motives for International Expansion

23


Demand from

Overseas

Economies of Scale

Secure Resources

Diversifying of Risk

Question 2

Global Demand

Singapore market was too small with competition from many large multinational firms [pg6]

Open another market

Rapid global industrialisation and population growth

e.g. China’s huge municipal water market & water-stressed regions in the Middle East & North Africa

24


Question 2

Global Demand

In municipal sector, governments spending in the infrastructure sector will fuel its growth and support its operations [pg4]

Seeking Economies of Scale

High R&D expenses Increase output to lower fixed cost per unit

Singapore market is too small

25


Question 2

Secure Resources

Ready pool of low-cost talent e.g. China [pg13]

Collaborations with foreign academia and research institutes to complement and strengthen membrane research [pg14]

Strategic alliances may bring forth new innovation

(e.g. Dutch CEPAration B.V., Zurich-based ABB) [pg15]

Signed MOU with Japan Bank (JBIC) for financing its projects

26


Question 2

Diversifying Risk

Business portfolio

Different countries with different industries

Less susceptible to changes in the respective markets

27


China: Pharmaceutical, Desalination, Industrial wastewater…

S.E.A: River water, Brine Regenerant Recover, Sewage Treatment…

Europe: Food & Beverage, Dairy & Milk, Chemical Industry,…

MENA: Seawater Desalination, Textile Wastewater… Source: Hyflux Ltd. Annual Report 2008

Question 2

Diversifying Risk

Delay in Libya due to political unrest

Did not cripple Hyflux entirely

Hyflux reported an 18% increase in net profit for FYE Dec 31, 2010 *

Source: http://www.reuters.com/article/2011/02/23/hyflux-idUSL3E7DN0UI20110223?feedType=RSS&feedName=utilitiesSector&rpc=43)

28


http://www.reuters.com/article/2011/02/23/hyflux-idUSL3E7DN0UI20110223?feedType=RSS&feedName=utilitiesSector&rpc=43



Question 3

Is Hyflux’s international expansion considered a success or failure? Why?

29


Question 3

Hyflux’s International Expansion

30


Increased market size

Return on Investment

Economies of Scale & Learning

Location Advantages

Question 3


31





Location Advantages

Question 3 32



Success in the Singapore municipal market enabled Hyflux to quickly secure China’s huge municipal water market [pg3]

Source: http://hyflux.com/abt_presence.html

http://hyflux.com/abt_presence.html

Question 3


Success of Singapore desalination project allowed Hyflux to seize opportunities for similar projects in water-stressed regions [pg3]

Clinched water treatment projects in new markets such as China, Middle East and North Africa [pg4]

Emerged as the largest desalinated water supplier in Algeria providing more than 30% of the country’s total capacity [pg6]

33


Question 3


Hyflux membrane products and systems installed in more than 400 locations across the globe

Source: http://hyflux.com/abt_presence.html

34


http://hyflux.com/abt_presence.html

Question 3


35





Location Advantages

Question 3


36





Location Advantages

Question 3

Return on Investment [+ve]

Revenue increased over 30 times since 2000 [ER 2010]

As of 2009: at least 15 contracts generating revenue for 20-30 years [pg3]

37


Question 3

Return on Investment [-ve]

Increased debt covenants (high gearing)

Increased risk of default [pg18]

38


Question 3


39





Location Advantages

Successful, but need to be mindful of debt-equity ratio

Question 3


40





Location Advantages

Question 3

Location Advantages

Ready pool of low-cost engineering talent in China [pg13]

Regulations in China requiring foreign firms to install water facilities [pg12]

Access to new markets entrance into the oil recycling industry in Saudi Arabia

Global demand for water [pg12]

41


Algeria: Biggest sea water desalination plaint in the world

Question 3

Location Advantages

42


Global demand for water remains unquestioned!

Question 3

Location Disadvantages

Political unrest in the Middle East 4th wave of democratization?

43


Question 3


Political unrest in the Middle East How did it begin?

Tunisia 17 Dec 2010

44


Mr. Mohammad Bouazizi

• 26 years old • Typical Tunisian • Sole breadwinner by selling

fruits

Question 3


Political unrest in the Middle East

45


17 Dec 2010: Tunisia 5 Jan 2011: Algeria 14 Jan 2011: Jordon

22 Jan 2011: Yemen 30 Jan 2011: Sudan 25 Jan 2011: Egypt

Question 3



46


13 Feb 2011: Bahrain 14 Jan 2011: Iran

18 Feb 2011: Djibouti 20 Feb 2011: Morocco

15 Feb 2011: Lybia

Question 3



Why should Hyflux be concerned?

MENA constitute to 60% of group revenue

Presence in Algeria, Lybia, Nigeria, Saudi Arabia, etc

Share price fall 15.5% since start of the year

Putting most of its eggs in one basket?

47


Source: FY2010 Financial Results

Question 3


48





Location Advantages

Relative Success, need to expect volatility

Question 3


49





Location Advantages

Question 3


R&D expenses kept low over revenue generated [pg31]

50


Question 3


Unique HR management ensures knowledge transfer among staff [pg17]

Sending staff overseas for seminars

Sending Shanghai staff to Singapore

51


Question 3


Strategic Alliances with overseas research firms & facilities [pg15]

Dutch CEPAration B.V. to develop InoCepTM membrane

Zurich ABB to research efficient technologies

Collaboration with NTU, Dutch Universities

52


Question 3


53





Location Advantages

Hugely Successful. Key success factor

Question 3


54





Location Advantages

Hugely Successful

Relative Success

Successful Relative Success

Question 4

Based on the information in the case, critically evaluate the choice of a joint venture with SEDCO and LUBREC in 2007 to invest $45 million in a used oil recycling plant in Jeddah, Saudia Arabia

55


Question 4

Hyflux’s Core Business

56


Question 4

Reason for entering into the oil recycling business

Diversification

Opportunity to develop on existing competencies

Opportunity to enter into a new field

Build on competitive advantage

57


Question 4

Choice of Saudi Arabia as a location

Abundance of oil (accounted for 75% of state revenues)

Market for oil recycling exists

Political situation in 2007 was relatively stable

Currently, number of minor incidents as compare to other surrounding nations

58


Question 4

Factors for Entry Modes

Income maximization

Control over resources

Risk & Cost

Localization

59


Question 4

60


Choices of Entry Mode

Exporting

Licensing

Strategic Alliances

Acquisition

Wholly Owned

Subsidiary

Commitment of Resources

Question 4 61



Exporting •Hyflux does not export its water treatment technology •Instead, Hyflux secures projects from other countries and builds plants •Involves customization to meet its clients’ expectations

Licensing •Exposed to the risk of product imitation •No control over the resources •Knowledge exchange is not feasible •Limits their future development

Question 4 62



Acquisition •Quick access to new market •Greater control •Involves International negotiation Complicated •Non-realisation of synergy because of cultural differences •High costs despite the lower risk as compared to wholly owned subsidiary

Question 4 63



•Highest risk •Highest cost of establishment •Full control •Potential of high returns •Unfamiliar with the new environment •Start from scratch (E.g. Build networks and infrastructure)

Question 4 64


Wholly Owned

Subsidiary


Joint venture – two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

Question 4 65


Strategic Alliances


Question 4 66


Strategic Alliances


Pros

• Gain further access to the Middle East oil recycling market

• Gain expertise of used-oil recycling from other parties in the joint venture

• Transfer of tacit knowledge because tacit knowledge cannot be codified must be learnt through experiences

• Share risk & resources to enter international markets

• Benefit of knowledge of competitive advantage, legal and social norms

• Improves the firm’s advantage to compete in uncertain environment

Question 4 67


Strategic Alliances


Cons

• Incompatible partners Saudi’s cultural and organisational differences

• Trust is critical because of sharing of resources

“This JV is the first Hyflux joint venture in Saudi Arabia which will benefit from Hyflux’s membrane-based technology. The selection of the partners of JV is consistent with the Company’s philosophy that our used-oil recycling partner must exhibit strong used oil collection channels.”

Question 4 68


Strategic Alliances


Question 4 69


Cost

Benefits

Question 4 70


Understand the motives for international diversification

•Porter’s Five Forces Model

•General Environment Analysis

Measure outcome to determine the success of the diversification

Identify different possible modes of entry

Presented by

Goh Chuwen | John Teo | Chan Zhe Ying | Nicholas Lee

71

Documents

Strategic Analysis Presentation of Hyflux