Economic Analysis Of The Jamaican Economy Economics Essay

Economic growth is a term generally measured by the amount of production in a country or region over a certain period of time. It can also be described as the increase of per capita gross domestic product (GDP) or other measures of aggregate income, typically reported as the annual rate of change in real GDP. Economic growth is primarily driven by improvements in productivity, which involves producing more goods and services with the same inputs of labour, capital, energy and materials. For the purpose of this project we will be concentrating on economic growth in the long run FY 2012-2014.

Jamaica’s economy faces major long-term problems: a significant merchandise trade (imports and exports) deficit, large-scale unemployment and underemployment, and a public debt-to-Gross Domestic Product (GDP) ratio of almost 130 per cent. Jamaica’s onerous public debt burden – the fourth highest per capita is the result of government bailouts to ailing sectors of its economy, most notably the financial sector in the mid-to-late 1990s, and hinders government spending on infrastructure and facilities and social programs as public debt servicing accounts for nearly half of government costs.

Inflation rates rose noticeably in 2008 and have kept on increasing as a result of high prices or pricing for imported food stuffs and oil and gas. High unemployment continues to aggravate the major problem of crime and violence, which includes the gang violence that is fuelled by the drug trade (imports and exports). The Golding led government faces the difficult prospect of having to achieve financial discipline in order to sustain public debt repayments while simultaneously attacking a major and expanding crime problem that is hampering growth of the economy.

The Jamaican Economy has faced many economic challenges over the pass years especially during the recent recession period. The economy is still recovering from the direct hit which the country sustained in 2009 where exports and capital inflows weakened leading to negative growth. A steep depreciation of the nominal exchange rate has raised the cost of servicing variable rate debt, as well as the cost of rolling over existing loans. Amid volatility, macroeconomic policy remained tight despite the downturn. For the Bank of Jamaica (BOJ), defending the currency had to take precedence over inflation targeting and stimulating GDP growth. Such global crisis has also negatively affected the fiscal accounts, with lower revenue and a significantly higher interest bill.

The government implemented a new Debt Management Initiative, the Jamaica Debt Exchange (JDX) on January 14, 2010 to control future economic downturns, which they had experienced in past years (2007 to 2009), which had resulted in a negative growth period for the country. The initiative would see holders of Government of Jamaica (GOJ) bonds returning the high interest earning instruments for bonds with lower yields and longer maturities. The offer was taken up by over 95% of local financial institutions and was deemed a success by the government.

The economic situation of Jamaica has worsened considerably, with the ongoing world financial crisis which has had devastating effects on the economy. The mining sector has been the hardest hit, while tourism and remittances flows have been on the decline. Most foreign exchange comes from remittances, tourism, and bauxite. Remittances account for nearly 20% of GDP – roughly equivalent to tourism revenues. Three of Jamaica’s four bauxite firms suspended operations in 2009 due to falling demand amid the global economic downturn. The country will continue to lose valuable resources from its exports in 2012-2014 while these firms are out of operation. This decline in remittances, and a contraction of consumer demand led to a deep recession with stubbornly high unemployment and underemployment. With such hardship the government of Jamaica had no choice but to turn to the International Monetary Fund (IMF), a multilateral lending agency. The government of Jamaica, with help from multilateral bodies, is resolved to addressing the nation’s challenges more effectively, thereby creating a sustainable growth path for increased foreign investments in the new decade. On the 4th of February 2010 the International Monetary Fund (IMF) approved a US$1.27 billion Stand-By Facility loan agreement for a period of 3 years to underpin structural reforms and help Jamaica to withstand spill-overs of global financial storms that impacted main revenue streams. The IMF noted: “The government has successfully completed a domestic debt exchange operation, which has contributed to a more equitable sharing of the burden of the overall fiscal adjustment. The exchange has also struck an appropriate balance in terms of delivering necessary cash flow savings while taking appropriate account of the need to ensure financial sector stability which should continue for the FY2012-2014.” With such great assistance from the IMF, the government believes “The upgrade sends a significant signal to international and local investors and will help in reinforcing confidence in the market for Jamaica’s debt. This first step in the recovery of Jamaica’s ratings reflects the government’s aggressive policy actions as put forward in the economic programme, and the positive impact and success of the JDX.”

Economic outlook

The launch of the Jamaica Debt Exchange Offer (JDX) in early 2010 has been seen as a positive step in the right direction, and the appreciation of the Jamaican dollar since it hit a low of J$89.73 in February 2010 has been slight but steady.

The government has begun implementing much needed structural reforms, which should improve the fiscal balance by over 5% of GDP in FY 2010-2014 and onwards. Among them, a debt-swapping plan aimed at achieving interest savings of about 3% of GDP and two-thirds reduction in the amount of maturing debt over the next three years has been successfully implemented, with an acceptance level of almost 97% of bondholders.

Governor of the Bank of Jamaica, Wynter B. (2010), stated that “The exceptionally high participation rate in the exchange makes the Jamaica Debt Exchange one of the most successful debt exchanges in the world.” The JDX replaces 350 high priced government domestic bonds with 24 new bonds, priced at a lower (12.5%) interest rate with longer maturities, providing annual savings of J$40bn. The Governor further stated that “Additionally, the magnitude of maturing debt is expected to decline by 65 percent over the next three years, and the significant reduction in the government’s refinancing needs will ease the crowding-out effect of the government debt and the upward pressure that this would have placed on domestic rates.”

Jamaica’s four-year programme for the financial year 2010-2014 focuses on four key objectives:

To strengthen government finances by reforming public enterprises and passing a new fiscal responsibility law.

Reforms of the financial sector to reduce systemic risks and enhance the country’s capacity to better withstand external shocks.

A pro-active debt management strategy to eliminate ‘debt overhang’ and reduce debt servicing costs. Jamaica spends J$182bn (US$2.1bn) on annual interest payments, which in turn, crowd out capital expenditures.

Make the tax structure more efficient, whilst improving tax collection and administration. That would increase resources for targeted social projects.

Despite the launch of the Jamaica Debt Exchange Offer (JDX), this has been seen by analysis’s’ as a positive step in the right direction, and with the marginal appreciation of the Jamaican dollar in February 2010.

The tourism sector, which comprises a sizable chunk of Jamaica’s economy, was badly hit by the global economic crisis, but a marginally more favourable crime rate as well as new marketing strategies being developed by the Jamaica Ministry of Tourism and their counterpart throughout the Caribbean region bodes well for the industry’s slow recovery over next five years. “The IMF however is saying that they don’t foresee Jamaica changing its growth patterns in the near future,” stated Charles Ross. The debt has itself become an obstacle for growth because the country has to allocate so much of government resources into servicing the debt that very little is left for public investment in infrastructure that would facilitate growth.

The island of Jamaica however has proven itself resilient by surviving the steepest contraction in world trade since the 1930s, and its macroeconomic fundamentals are slowly but surely improving. The government of Jamaica, with help from multilateral bodies, is resolved to addressing the nation’s challenges more effectively, thereby creating a sustainable growth path for increased foreign investments in the new decade.

The 2010/11 budget provides for increased social spending while reducing recurrent expenditures.

Fitch, the European rating agency, upgraded Jamaica’s long-term local and foreign currency Issuer Default ratings to B- (with stable outlook). Also, Standard & Poor’s and Moody’s have upgraded Jamaica’s sovereign ratings, reflecting strong commitment to tackling fiscal imbalance and the successful outcome of the Debt Exchange (JDX) programme. The government believes “The upgrade sends a significant signal to international and local investors and will help in reinforcing confidence in the market for Jamaica’s debt. This first step in the recovery of Jamaica’s ratings reflects the government’s aggressive policy actions as put forward in the economic programme, and the positive impact and success of the JDX.”

Economic theory suggests that sustainable increases in real income must be based on increases in productivity. Productivity may be defined as the amount of output produced (in terms of goods or services) per unit input used. Commonly applied measures include labour productivity as output per worker or output per labour-hour, and total productivity as output relative to all inputs used. Both measures have been used in recent years to explore the dynamics of Jamaica’s economic performance.

Jamaica continues to rank favourably on a number of indices of competitiveness and business climate. The 2010 Index of Economic Freedom, published by the Heritage Foundation (US), ranks it the 57th freest market of 179 countries, surpassing established EU members such as Portugal, France, Poland, Greece and Italy. The country has a track record of implementing micro-reforms that help encourage private enterprise and foreign direct investment (FDI).

Reforms of trade regime and tax administration for the upcoming period 2011- 2014 should improve Jamaica’s global ranking in the future business indicators. This reform is aimed at reducing tariffs, import fees and some import/export bans and the latter is geared toward simplifying tax payment procedures. Jamaica’s relatively flexible labour regulations could be further improved to increase job creation and productivity growth in coming years Dr Williams D. (2010) of the University of the West Indies.

The government aims to boost the export sector’s contribution to GDP from its current one-fifth to one-third by 2013 through expanding volumes and higher value addition in priority sectors as well as seeking new markets, thereby reducing over-reliance on North America, which in 2008 accounted for 50% of Jamaica’s exports.

The latest projections by international financial institutions (IFIs) show the economy stabilizing in FY 2010/11 and thereafter (2012-2014). Output is expected to grow at 2%, with inflation abating to 6%. Higher Foreign Direct Investment (FDI) in mining, tourism and other sectors will increase imports. However, continued FDI and gradually rising foreign exchange reserves (forex reserves) should offset the impact of current account deficit on the balance of payments. The IMF envisages the external deficit falling to 5% of GDP over the medium-term. The currency’s depreciation in real effective terms has improved the competitiveness of exports both visible and invisible (i.e. services). The government aims to cut the budget deficit by half by 2014/15, whilst reducing the net public debt to GDP ratio. In short, Jamaica is putting its house in order.

The country’s first long-term development plan ‘Vision 2030 Jamaica’ (launched in 2008) inspires to attain developed country status by focusing on four core areas: a vibrant macro-economy; effective governance; world class education and training (especially science/technology); and greater security and safety. Jamaica has a realistic chance of achieving its national goals by 2030. However for the period 2012-2014 the three industries which are expected to perform well are the financial sector, the tourism industry and the Manufacturing industry.

Industry Analysis

Financial Sector

The financial services industry in Jamaica consists of commercial banks, merchant and trust banks, credit unions, building societies and licensees under the Financial Institutions Act as well as non-deposit taking institutions including insurance companies, development banks and securities dealers. In 2008 there were 129 licensed financial institutions in Jamaica including 7 commercial banks, 46 credit unions, 17 insurance companies and 48 securities dealers, as well as 4 building societies, 3 FIA institutions and 4 development banks. Consistent with the current trend in developing countries, there are also a large number of foreign exchange Cambios, remittance and money transfer companies and bill payment companies that facilitate transactions between the domestic and international markets.

There has been a reduction in the total number of institutions operating in the financial sector over the past decade, from 189 in 1996 to 129 in 2008. The lower numbers reflect closures, mergers and downsizing, with the effect of the most efficient institutions emerging. Commercial banks are the largest sub-group within the financial sector. In 2008, assets of commercial banks accounted for approximately 76.0 per cent of total assets of the financial system, with Building Societies at 19.0 per cent and FIAs at 5.0 per cent.

The Financial Services Commission (FSC) was established in 2001 and there were several substantial amendments to the Bank of Jamaica Act, Banking Act, Money Laundering Act and Financial Institutions Act. The regulatory framework for the supervision of pension funds and credit unions also has been strengthened. The Jamaica Deposit Insurance Corporation (JDIC) was incorporated in August 1998 to provide insurance against the risk of loss of deposits held in insured financial institutions. The JDIC receives premiums from insured financial institutions at a rate of 0.15% of their total insurable deposits and the funds are invested to build the Deposit Insurance Fund.

After such severe restructuring the financial sector regained some buoyancy which has seen its share of GDP climb to 10.8% to GDP in 2008 and the total assets of deposit-taking institutions in the financial sector increase from J$238.9 billion in 1999 to J$715.8 billion in 2008. However, much of this financial activity has been fuelled by the explosion of domestic debt, which also has seen the increased growth of the Jamaican money market as an intermediary between individual holders of capital and the government securities market (approximately half of the dealers’ funds under management are with retail clients). This has reduced the ability of the sector to provide the capital needed by the private sector for productive investments. As the sector restructures and the market becomes more competitive, financial institutions continue to refocus their attention to their core functions, as evidenced by increased loans to the productive sectors.

Jamaica has considerably strengthened financial system oversight following a costly financial crisis in 1996-97. The financial system is deep and well-developed, the regulatory framework has in many respects been brought into line with best international practices, and supervision appears to be implemented in a systematic and professional manner. Remaining regulatory gaps and weaknesses in the financial infrastructure are well recognized by the authorities, who have implemented important reforms. Regulatory capital has also increased in most financial institutions to levels that permit a reasonable degree of resilience against macroeconomic shocks. However, data limitations prevented a full system-wide quantitative analysis of risks.

During 2000-2008 the total stock of loans and advances increased by 587 percent and 308 percent, for commercial banks and FIA institutions, respectively. However, the volume of government debt held by these institutions decreased. The Bank of Jamaica and the Financial Services Commission continued to strengthen their respective regulatory framework in order to maintain stability within the industry and to conform to new developments in international standards. As at 31 March 2009, the seven commercial banks and two merchant banks (at the time) had total assets of J$582,515,204 billion with liabilities of J$516,216,670 billion resulting in total capital of J$35.649 billion.

Manufacturing Sector

The Manufacturing Sector represents a critical component of the economies of many developing countries including Jamaica. Jamaica’s manufacturing sector is diverse and modern. Products encapsulated under this sector’s activities are: beverages, processed foods, chemicals, plastics, cosmetics, pharmaceuticals, nutraceuticals and apparel. The island also produces spices and condiments, canned ackee and callaloo, as well as natural juices, soft drinks, beer, wines, spirits, and liqueurs.

The manufacturing sector accounts for 12.8% of GDP per annum, employs approximately 7% of the labour force and is second in terms of sector contribution to real GDP. Jamaica’s manufacturing sector grew during 2007 and contributed approximately 12.6% to total GDP, with total revenues exceeding US$700mn. Manufactured exports grew by 7.3% in 2007 to US$705.8 million, a reflection of higher export earnings from both non-traditional and traditional manufactured products; and total investment in the manufacturing sector facilitated by Jamaica Trade and Invest amounted to J$3.6 billion during 2007. These investments spanned several sub-sectors including agro-processing, plastics, petrochemicals and cement. The petrochemical sub-sector was positively impacted by the development of an ethanol dehydration facility at Port Esquivel, St. Catherine. Further expansion also took place in the plastics sub-sector and in the cement sub-sector through modernization and upgrading of clinker and cement production facilities. However, this overall picture of growth during 2007 was complemented by the Government’s focus on increasing productivity in order to impact growth. Government implemented programmes that facilitated international competitiveness included worker skills training, technology upgrading, research and development, the Private Sector Development Programme (PSDP) and the Quality Jamaica Project, which includes training in Hazard Analysis Critical Control Point (HACCP). Manufactured exports represent approximately 12.6% of GDP in 2007, while the sector employs about 6.1% of the total labour force. Exports grew by 7.3% in 2007 to US$705.8 million, a reflection of higher export earnings from both non-traditional and traditional manufactured products.

The global economic crisis in the last quarter of 2008, spurred by the financial collapse in the United States emerged, which had implications for the productive sector. Devaluation of the dollar, high interest rates, reduced domestic and export sales, credit crunch, high inflation, soaring oil prices, and skyrocketing input costs of raw material were some of the challenges experienced in the face of the world financial crisis.

For the year 2008, the Jamaican economy contracted by an estimated 0.6%. Real Gross Domestic Product (GDP) for the Goods Producing Sectors contracted by 3.0%, while the Services Sectors grew by 0.3%. The performance of the economy was adversely affected by the sharp rise in commodity prices, the subsequent decrease in commodity prices due to the global financial crisis, decline in external demand for Jamaican goods and services, sharp decline in the availability of capital for fiscal budgetary support and private sector investment as well as the lingering effects of hurricane Dean and tropical storm Gustav.

The sector contributed 8.5% to GDP and the total employed labour force grew by 3.5% to 80,100 persons. For the period, total manufactured exports also increased amounting to US$1,224.75 million, an increase of 37.5%. This was attributable mainly to increased export earnings from Non-traditional Exports of US$1,094.7 million. However, the sector declined by 1.2% due to a challenging environment and the global financial crisis which contracted the performance of the Food, Beverage and Tobacco and Other Manufacturing components of the industry by 2.4% and 0.2%, respectively.

Tourism Industry

Jamaica’s economy relies heavily on tourism, which has become the country’s largest source of foreign exchange. Most tourists remain on the island for several days or weeks, although increasing numbers disembark only briefly from cruise ships at Ocho Rios, Montego Bay and the newly renovated and opened Falmouth Pier. These and other towns on the northern coast, as well as Kingston, are the tourist sector’s main bases of activity. Jamaica is famous for its pleasant climate, fine beaches, and superb scenery, including the waters of Montego Bay and the majestic Blue Mountains.

Industry Performance

The tourism industry has shown strong and sustained growth since Independence. The total number of visitor arrivals to Jamaica has grown from some 271,692 in 1962 and 670,202 visitor arrivals in 1982 to a total of 2,860,544 visitor arrivals in 2008, an annual increase of 5.3% over the 46 year period. The island saw a record 3,016,898 visitors in 2006. The island’s tourism accommodation stock increased from 10,327 rooms in 1982 to

29,794 rooms in 2008, while total receipts from tourists grew from US$337.8 million in 1982 to US$1,975.5 million in 2008. The development of the tourism sector over this period has seen an increase in the relative importance of cruise passenger arrivals which grew from 29% of total visitor arrivals in 1982 to 38 % of total arrivals in 2008. There also has been the emergence of globally competitive Jamaican-owned all inclusive hotel chains such as Sandals, SuperClubs and Couples, and the diversification of tourism markets including growth in arrivals from the United Kingdom, Europe and

the Caribbean in addition to the traditional North American markets.

As one of the best-known island destinations, Jamaica enjoys significant competitive advantages in Tourism and Travel Services. Based on its strong brand image, an appealing natural environment and human and cultural assets, the Jamaican Tourism industry has been identified as one of the key industrial clusters deemed capable of driving sustainable economic growth in the long term. Jamaica has had a long experience as a tourist destination, being a favoured retreat for travelers from Europe since the eighteenth century. The tourism industry, however, started in earnest in the late nineteenth to early twentieth century, with the first systematic efforts by Government to promote the industry, and by private investors to establish large hotels. The emergence of the industry coincided with the rapid economic growth of the United States, which has remained the main source of visitors up to the present.

Jamaica has been one of the best-known resort vacation destinations in the world for decades. Originally known for its stunning physical beauty and as a playground for the rich and famous, the island has since seen its tourism industry experience significant growth and diversification. Jamaica currently boasts one of the most diverse visitor accommodation sectors in the Caribbean, including world-famous all-inclusive resorts, upscale hotels and villas, and a range of distinctive tourist accommodations and attractions.

While the tourism sector is a major earner of foreign exchange there is a relatively high leakage of these benefits through imports of goods and services and payments of interest and investment income to overseas providers of capital. In order to retain more of the value added by the tourism sector linkages between the tourism and the other sectors of the economy, including agriculture, manufacturing and services need to be enhanced.

In-depth analysis of the manufacturing industry

Manufacturing Sector

Economic outlook for the Manufacturing sector

A more economic perspective for the Jamaican manufacturing is to see interest rates trending down, Banks beginning to make loans and sustained stability in the exchange rate. This sector is showing some renewed buoyancy and has shown significant growth over the last two quarters. Despite the tough economic conditions, manufacturing is predicted to contribute positively as this area will be a focal part for the government as this area should harness more growth and development. The government expects to boost this sector to create employment through the money it receives from the International Monetary Fund (IMF). We expect that this will continue, as this is a very important sector representing a large chunk of overall GDP. So whatever happens to manufacturing will have an overall impact on the economy. These are some very good investment opportunities for the manufacturing sector for the coming years.

Agro- processing: Canned vegetables and canned fruit present good opportunities for investment in the food processing sector.

Chemicals and chemical products: Reference is being made particularly to aluminium sulphate, detergents and paints, which showed steady growth in 2007. This is expected to continue as the construction industry is projected to grow by 4.5 percent in 2008 which will be facilitated by the growth in Non-residential and hotel sectors as well as expansion of the sea and airports.

Bio- technology: Jamaica is blessed with a number of indigenous herbs which can be used in the promotion of health and wellness.

Food processing, Beverages and Tobacco: The food processing sector grew by 3.3 per cent in 2007, while growth in the beverages and tobacco sun-sectors stood at 1.8 per cent. These sectors are expected to grow due to the anticipated increase in the food production.

For the Manufacturing Sector in Jamaica the identification of strengths and weaknesses represents the internal assessment of the sector while the consideration of opportunities and threats represents the analysis of the external environment for the sector.

STRENGTHS

Sourcing and Procurement

Current availability of high quality raw Jamaican materials (including agricultural products, limestone, cement)

Strong international supply relationships

Reduction of duties on imported raw materials

Production

Largest contributor to GDP of all goods-producing sectors

World-class enterprises in several manufacturing subsectors and industries (including food processing and beverage industries, paint, plastic containers)

Ability to make high quality products

Numerous small and diverse production facilities allowing for a range of focused niche markets and products

Environment

Availability of some ‘green’ raw materials

Limited use of environmentally friendly/clean production technologies

Finance

Downward trend in deposit interest rates making equity investments in manufacturing relatively more attractive

Human Resources

Large employer of labour

Pool of trainable workforce

Innovativeness of people

Success of pay for performance systems

Limited entrepreneurial spirit

WEAKNESS

Sourcing and Procurement

Poor supply chain management by local manufacturers

Weak procurement networks

Inconsistency in quality and supply of domestic raw materials

Production

Insufficient product development

Lack of support services (e.g. maintenance, environmental services etc.)

Outdated processes, systems and work organization

Low existing productivity

Low existing capacity utilization (e.g. single-shift production)

Limited application of clean technology in production

Finance

Lack of low cost capital to fund expansion

Lack of venture capital and incentives for start-ups and MSMEs

Environment

Lack of use of waste as a resource

Low utilization of Environmental Management Systems (EMSs)

Human Resource

Limited availability of skills necessary to build viable

Low worker motivation

Transport and Logistics

Inadequate supply chain management

Shortages in warehousing

OPPURTUNITIES

Sourcing and Procurement

Expansion potential for local raw materials

Potential introduction of rapid growth trees for soft-wood lumber

Applications of bio-technology to agricultural raw materials

Pooled/joint purchasing by domestic manufacturers

Ease of access to US, European and Far Eastern shipping routes via the Port of Kingston and Panama Canal

Production

Available techniques to increase competitiveness through raising productivity

Available equipment and processes for re-tooling

Transport and Logistics

International delivery providers present in Jamaica

Freight consolidation

Proximity to global shipping routes

Major trans-shipment port with planned expansion

Good primary road network

Environment

Growing demand for environmentally-friendly products

General

Increased integration with other sectors including agriculture, tourism, mining and quarrying and telecom

THREATS

General

Risks to macro-economic stability

Crime and violence

Weaknesses in collaboration between public and private sectors

Lack of a long term plan to increase linkages with other sectors

Potential impact of unfair international trade practices by competitors (dumping, subsidies, non-tariff barriers etc.) on market for local manufactured goods

Environment

Impact of international environmental laws as potential barriers to trade

Potential impact of natural and man-made hazards on sector

Technology

Intense and ongoing international adoption of new technologies by foreign competitors

Transport and Logistics

Inadequate control and monitoring at ports, enabling illegal importation of products into the country

Delays in shipping and across port clearance

Problems with road network in some areas

Production

Uncompetitive energy costs

Emergence of China and other low-cost production centres

Sourcing and Procurement

Increased demand for raw materials in other developing countries (e.g. China) leading to upward pressure on prices and supply shortages

Five forces model used to analyze the Manufacturing industry

In order to have a booming industry, the government must protect the companies in the industry. We will be using the Five forces model to access the manufacturing industries in Jamaica, The model has five forces which are The treat of entry, Threat of rivalry, Threat of buyers, Threat of substitutes and Threat of suppliers.

The threat to entry

There are not much measures put in place to protect the manufacturing industry, with the implementation of the Caribbean single market economy (CSME), we will see the integration of goods and service moving across Caribbean countries with no hassle. This movement opens up greater markets for companies because it allows companies to export their goods to different countries.

The threat of rivalry

Each company in the manufacturing industry has to put measures in place to safe guard them against their competitors. Companies have to make sure that the goods they produce are far superior from their competitors. Two major company in the manufacturing sector in Jamaica are Grace and Lasco, these companies have being able to produce good quality products that are able to compete with other imported products. Wisynco partnering with ocean spray has created an impeccable product called cranberry water which has being doing very well on the market. Rivalry among competitors in this industry has being low because firms have being able to differentiate their products.

The threat of powerful suppliers

A significant portion of Grace profits comes from it agro-processing department and in order for Grace to continue having its dominance in the industry Grace has to ensure that suppliers are always producing quality goods. Not only quality goods but also making sure that they are receiving it at a reasonable price where that they can compete with their competitors.

The threat powerful buyers

If a firm has only one buyer, or a small number of buyers, theses buyers can be very threatening. Companies such as Grace, Lasco, Wisynco have many different customers. They do not rely on one buyer to purchase their products. It is always good for firms to produce quality goods that will keep customers satisfied.

Projections

The manufacturing industry is projected to continue its projected path based on the recent performance of the industry. This industry is a very vital sector in the development of the Jamaican economy. As the major players in the industries continue to develop new ideas and also enhance their product to meet the ever changing consumers. Also, there will be much improvement in this industry because companies are able to access loans much easier. There is real diversity in Jamaica’s manufacturing industry, which is a likely factor that contributes to the very strong year-on-year growth. In 2008/2009, JTI facilitated J$5 billion (US$56.6 million) in capital expenditure in the sector. Companies involved in manufacturing range from the small to the very large; those that produce canned foods to those that deal with the extraction and processing of natural resources and chemicals.

Company Analysis – Berger Paints

Company Overview

Berger International Limited (Berger) is a Singapore-based investment holding and management company. The Company’s subsidiaries are principally involved in the manufacture, sale and distribution of paint and related products. The Company operates in two segments: paints segment, and construction and other services segment. The paints segment includes the manufacture, sale and distribution of paint and its related products. The construction and other services segment comprises painting, repainting and redecoration of buildings, supply of building materials and other general contractor works, and other sundry sales. Its subsidiaries include Berger Paints Singapore Pte Ltd, Berger Building Services (Singapore) Pte Ltd (Singapore) and Lewis Berger (Overseas Holdings) Ltd (United Kingdom).

Berger International Limited, through its subsidiaries, engages in the manufacture, sale, and distribution of paints and related products worldwide. It offers protective coatings for petrochemical or gas plants, oil rigs or offshore platforms, and airport hangars or shipping terminals. The company also provides various architectural and wood finishes, such as topcoats, undercoats, and ancillaries; paints for interiors and exteriors; and water-based and alkyd based products for various substrates like cement, wood, and metal. In addition, it offers emulsions and enamels in various sheen levels. Further, the company provides marine coatings, which are suitable for various types of vessels and crafts, including cargo carriers, crude oil tankers, yachts, ferries, barges, and tugboats. The company was founded in 1760 and is headquartered in Singapore, Singapore. Berger International Limited operates as a subsidiary of Asian Paints (International) Limited.

Risks and Concerns

The paint sector is raw material intensive and effective handling of risk ensures the successful growth of the organization. Many of these raw materials behave as commodities; hence fluctuation in prices, particularly the volatility in crude prices and supply bottlenecks, may affect the performance of the industry. The Company counters this through cautious buying and developing alternate vendors. The demand of decorative coatings is partially dependent on good a downpour and, like most industries; a better performance in the agriculture sector is desirable for the paint industry also.

Foreign-exchange risk and risk management

Exchange rates are volatile and open short or long currency positions can lead to sizeable losses. Capital thus needs to be held to cover such possibilities. When investing in foreign countries Berger Paint Ltd. has to consider the fact that currency exchange rate can change the price of goods needed for production as well as the asset. Foreign-exchange risk applies to all financial instruments that are in a currency other than your domestic currency. The Group transacts business in various currencies, including United States dollars, British pound, Bahraini dinar, Jamaican dollar and United Arab Emirates dirham. The Group has a policy to ensure foreign exchange forward contracts are taken to mitigate the risk of exchange rate fluctuations in respect of obligations denominated in foreign currencies.

Interest rate Risk Management

Berger International Limited is exposed to interest rate price risk for financial instruments with a fixed interest rate and to interest rate or cash flow risk for financial instruments with a floating interest rate that is reset as market rates change. The Group manages its interest rate risk by monitoring the movements in the market interest rate closely.

Credit Risk Management

The Group places its cash and balances with high credit quality financial institutions. The Group performs ongoing credit evaluation of its debtors financial condition and ensures that sale of merchandise is made to customers with an appropriate credit history. The Group has no significant concentration of credit risk as the exposure is spread over a larger number of customers.

Operational Risk Management

Operational risk is inherent in all business activities and has the potential for financial loss and business instability arising from failure of internal controls, operational processes or systems that support them. The objective of operational risk management is to balance risk and returns within the constraints of the risk appetite of the Group and the need for prudent management.

The Group’s investments are subject to risks common to the paint industry. These risks include competition from other paint manufacturers and inventory build up if demand forecasting is not accurate. All major investment proposals are submitted to the Board for approval.

The Group has in place policies, operating manuals and a regular reporting framework which encompasses operational and financial reporting

Compliance & Risk Management

Compliance risk arises from failure or inability to comply with the laws and regulations of the country and the responsibility to ensure compliance with applicable laws and regulations lies with the Chief Executives of the respective subsidiaries. Procedures to report and monitor statutory compliance is in place and compliance is also audited in the course of internal audits.

Human Resource Risk Management

The Group places great emphasis on establishing comprehensive human resource policies for recruitment, compensation and development of its employees. This ensures that the Group’s human resources are nurtured and retained and give the Group a competitive edge

SWOT Analysis

STRENGTHS

Importance of brand image as a barrier to new entrants

For companies like Asian Paints, the brand image is of real importance. This is because the presence of their brand image has made it very difficult for new entrants into the market to get a good hold in the market. This makes the Paint Industry a very oligopolistic market because of the difficult entry of new firms.

Market Leaders

Asian Paints currently enjoys about 37% market share, and the closest competitor which is Goodlass Nerolac (GNPL), has less than half of Asian Paints’ market share.

Comprehensive nation wide coverage of the market

Urban, semi-urban and rural areas all have access to Asian Paints’ products. They have quite a number of brands, covering all segments and filling all gaps. For example, they have brands in different price slots like Utsav for rural lower-end markets and Apcolite for high end-markets.

Asian Paints’ logo ‘Gattu’, an impish boy with the paint tin and brush, is most popular and easily recognized.

Widest product range in terms of products, shades, pack sizes – 40 different decorative, some in 150 shades, 8 different pack sizes.

Good technology backup

A good technology backup helps the industry because the failure of any one of the technical thresholds might be supported by other technological backups which can prevent ay further problems in the future.

High GDP Growth

A high GDP may allow increasing government spending and will therefore benefit the Paint Industry and vice versa.

Reputed Companies

Most of the major companies in this sector are reputed companies and hence the possibility of investments from other foreign companies is good.

The pricing strategy is oriented to middle/lower end consumers

The pricing strategy is such that both the middle and lower end consumers are beneficiaries of this product due to low pricing for some variants of the product. Therefore they can enjoy the product and the good quality offered by it.

Asian Paints is strong in inventory control

Asian Paints’ average inventory level is 28 days sales against 51 days for the industry and it has 45% edge in inventory carrying costs

In-house production, no outsourcing, high reliability in suppliers, superior in quality assurance

Corporate reputation has been a major strength for Asian Paints. The image is that of a successful and well-managed company. They have won many accolades and awards. For example, 1995 Corporate Excellence Award from HBSA and ET, IDBI study rated Asian Paints as one of India’s most excellent companies. Another study rated Asian Paints among top 5 paint manufacturers in the world. They have an enviable track record in breaking the position of MNCs in the Indian paint industry.

WEAKNESS

Scarcity of Raw Materials

There is a major weakness in the availability of raw materials as they are quite scarce. Raw Materials such as Titanium Dioxide, Pthalic Anhydride, Pentaerythritol and other Organic Pigments are really meager in their availability and therefore it becomes difficult in manufacturing in bulk

Requirement of high working capital

There is a constant requirement of a significant amount of working capital for day to day operations of the company and therefore that shows that constant revenue and sales is very important

Widening product mix puts strain on production distribution, accounting and administration

Innovation in developing new products is not adequate

The innovation that goes into the introduction of new products is not enough and therefore that leads to a similar line of products being available all the time with no new excitement for the consumers.

Asian Paints has a major weakness on the technology front in industrial paints. Most paint firms have technology tie-ups with manufacturers abroad. For example, Goodlass Nerolac has a tie-up with Kansai paints, which has provided the company with Cathodic Electro Deposition (CED) technology. Since Kansai is the supplier to Suzuki, Japan, Goodlass with its Kansai connection finds it easy to tap Maruti in India. Asian Paints has not been able to make any significant advances either with Maruti or the auto segment in general. Berger has a technical tie up with Herbets, Germany, for automotive paints, Valspar Corp, USA for heavy-duty coatings and Teodur NV, Holland for powder coatings

Ever expanding product mix throws some strain on inventory management

Rural bias of logo “Gattu”. This is likely to contradict the new positioning for the premium brands meant for urban markets

Seasonal demand and hence in off seasons it can lead to cash flow problems

Paints are produced in batches and companies need to maintain a wide range of shades throughout the year even though sales are concentrated in the second half of the year due to seasonality of demand

OPPORTUNITIES

AP has always encashed on opportunities that have come its way. It has maintained a product profile keeping the market trends in picture. It shifted to a predominance in industrial paints than industrial paints than in decorative paints

Fiscal incentives provided by Government

The Government has constantly given incentives to Asian Paints for their production and distribution networks and that has been an area to capitalize by inducing further incentives and reducing production cost

Commodity to FMCG

Rise in disposable Income

The automobile industry accounted for 50% of the industrial paint market

Boom in Indian housing sector: Increasing urbanization, cheaper housing loans and a shift from semi-permanent to permanent housing structures have been driving growth in Decorative paints segment which constitutes major part of the industry

Heavy infrastructure spending: New projects in roads, ports and industrial segments increases revenues from protective coatings for civil applications and road-marking paints to all parts of the building paints sector, whether interior, exterior, waterproofing or floor coatings.

Rise in Income: Lifestyle based spending by the Indian middle class is helping decorative segment of this industry. Contemporary wood finish formulations are replacing the more traditional lacs and exterior emulsions taken over from cement paints.

THREATS

Foreign Companies entering as sole players and their domination

GNPL and Berger might end up capturing the Industrial Market segment

Competitors have gone in for hi-tech with Instacolour spot mixing. For example, J&N’s Instacolour offers 626 shades

Automated paint blending in retail points already there. ICI’s Touch Colour and Berger’s Colour Bank are indicative of this

Competition is catching up fast, hi-tech facilities gives abundant choices

With the reduction in excise duties, the price advantage of the unorganized sector is being eroded. This has meant the reduction in the market share of the unorganized sector

Outsourcing is likely to show declining trends as new capacities are coming up in the organized sector

Within a few years, manufacturing of paints would not be profitable for most small players and a shakeout appears to be on the cards

With large players targeting the unbranded low value, mass volume segment, the unorganized players would have to make way for large companies. Therefore, growth in decorative paints is likely to come at the expenses of the unorganized sector.

Real Estate in a Depression Phase

The current phase in the real estate sector shows a Depression because due to the current recession, people are not willing to spend more on their houses’ beautification and therefore, there has been a slump in the sales of Asian Paints.

Porter’s 5 Force Analysis

THREAT OF NEW ENTRANTS – LOW

We see that the drivers for success are different in both the segments, that is decorative and industrial. In decorative segment, distribution channel becomes most important for a player to be a success. Thus for a new player to succeed here, entry barriers are huge. That may have been one of the reasons that ICI isn’t such a big player in Indian decorative segment. Although, the growth rate of Indian market is very attractive, in comparison to global markets, APIL, because of its distribution channel, is not all that threatened by new entrants. Even if an international player wishes to enter into this segment, it will take him inordinately long time to establish channels which could threatened APIL. The brands of the existing players could also make it difficult for a potential new entrant, especially if the Pull factor further increases in the industry.

The industrial segment, which gives much more importance to the technology used, and doesn’t require such huge networks, is more prone to new entrants. But the flip side of this segment is the technology. It raises the entry barriers to forbid entry into this segment. Also getting a foothold in the market is very difficult, as the switching cost is high for the customers.

BARGAINING POWER OF BUYER – HIGH

The consumers of paints especially in the decorative paints segment do not have adequate knowledge about the quality, properties and perceived benefits of a particular paint. Hence, there is a strong reliance on intermediaries like painters, contractors and even paint dealers in making an informed decision about the type and even the brand of paint to buy and use, thereby becoming strong influencers. In industrial segment the buyers do have some buying power. There are fewer buyers with huge demands. Loss of one customer would hit the company in quite noticeable way. This can be overcome by raising switching costs. The costs can be increased by giving the customers specialized services, like after sale services etc.

For any industry, the key factor affecting the competitive scenario in the market is the end-users or the buyers, and the paints industry is no exception to that. Paints are sold through direct sales as well through distributors. While architectural paints mainly follow the retail channels, industrial paints are sold directly to end-use companies. It has been observed that these buyers, both direct end-users and retail channel, are becoming increasing powerful with their growing bargaining power. End-users are demanding higher quality paint for the same or a lower cost. Paint manufacturers are continuously being forced to reduce prices, and those who fail to do so are losing out to the closely fought competition. In recent years, it has also been seen that, due to economic recession, end-users have lower purchasing power and this is forcing paint companies to reduce prices in order to keep up their sales volumes.

THREAT OF SUBSTITUTES – MEDIUM

The threat of the substitutes is much greater in the rural markets, where the awareness about paints is still quite low, and it is considered as a luxury good. Either the walls are left as such without any paint on, or substitutes like whitewash are used. This threat is visible in the urban markets also, especially in the exterior paint segment. White cement is one of the most preferred substitutes for the paints for exterior walls. Houses are increasingly made with walls, constructed of bricks in such a way that the bricks act as a natural décor. Stones are also being used in many cases. Most companies have an identical range of products for the decorative-paint market. In the industrial segment, the range of products is more customized and guided by the technology support provided by the collaborators. In the case of decorative products the technology has been mostly indigenously perfected over the years and the products can be divided on the basis of interior and exterior application or in categories like water-based and solvent-based. Moreover, most companies have been advertising their products in the exterior emulsions category, which has expanded the market and triggered a shift from cement paint. While solvent-based enamels are still popular in India, outside India there is a clear shift visible from solvent- to water-based glossy enamels. India will take some time before this change is accepted on account of three hurdles currently faced including cost (water-based is expensive), low level of gloss in water-based enamels and the psychological barrier that water-based coatings cannot be superior to solvent-based coatings for protecting wood or metal surfaces. Companies not working on operational efficiency business models have been losing. Asian Paints and Goodlass Nerolac have been aggressively working on cutting costs/operating expenses. Berger has been managing well with economical yet acceptable formulations and low operating costs.

BARGAINING POWER OF SUPPLIER – LOW

One of the main RM in the manufacture of paints is TiO2. 50% of it is imported primarily because the quality of indigenously prepared compound is not very high. There are very few suppliers of this material. Also the threat of backward integration into making TiO2 is low, as the capital costs are in the tunes of 450 to 500 crores, supplier’s power further increases. In industrial segment, technology is imperative. There are only very few companies which pioneer in the technology, for example Du Pont, thus they command their prices. Price increase is constrained with the presence of the unorganized sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is the major reason why margins are better in the decorative segment comparatively. To aggravate the situation, the cuts in price of product are being accompanied by increase in the raw material prices. Resins prices have been rising in the past few years for almost all kind of paints. Thus, paint companies are getting squeezed from both directions resulting in thinning of their profit margins. Another challenge on the resin front is that the introduction of newer technologies and newer types of resins are pushing out few conventionally used resins. Governmental regulations against paints containing volatile organic compounds (VOC) will be a major factor in throwing out certain kinds of paints from the market. This will definitely affect the resin situation in the market and would require the paint companies to adjust accordingly. Companies have to be proactive and cannot sit back and wait for other companies to act because these will be the companies which will surely lose out in the market in the medium run, if not the short.

RIVARLY AMONG ESTABLISHED FIRMS -HIGH

The overall market for paints in India was valued at around $1.4 Billion in 2003. The per capita paint consumption in India is only around 0.5 kg as compared to over 10kgs in developed countries. Out of the total market, approximately 25-30% is the unorganized sector. Competition is very strong in the Indian paint market. Unlike some other large markets like China, the Indian market is not very fragmented. A few top companies control major stakes in different segments of the market: decorative coatings are dominated by the likes of Asian Paints, Goodlass Nerolac and Berger. Asian Paints alone claims to have over 40% of the architectural coatings market. Goodlass Nerolac is very strong in the industrial segment especially for automotive coatings. With its joint venture with Kansai Paints, it controls over 50% of the OEM coatings market. Not only is the competition high, it is also constantly increasing with companies fighting for a bigger share of the pie. Major companies, like Asian Paints, are investing heavily into activities like brand-building, distribution and marketing strategies. Asian Paints has reportedly set up more than 2500 tinting outlets, which provide customers with more than 1000 shades to choose from. Besides marketing initiatives, companies are also expanding their production facilities to increase their presence in the market. In 2003, Asian Paints announced the construction of a new decorative and automotive coatings plant in Tamil Nadu. Goodlass Nerolac’s growth is also visible in the recent capacity expansions at their Jaipur plant and the setting up of a new Greenfield plant in Haryana. Berger Paints is in the process of setting up a 25,000 MT plant in Jammu which is expected to commence full operation by July 2005. As the market becomes more sophisticated and purchasing power rises, customers are more inclined towards superior quality, branded products and greater choice. As the market matures, players in the unorganized sector are expected to get increasingly squeezed. This process would be catalyzed by the reduction in excise duty, which has considerably shrunk the price differential between the organized and the unorganized sectors. Along with some consolidation expected in the organized sector, the top few players in the industry will gain a stronger hold on this market in the future. At the same time, though demand for sophisticated and niche finishes is growing, most people don’t want to pay too much more for these. The trends towards more choice in shade and effects, and better quality shifts the balance in favour of the larger players, who have the finances to invest in R&D and are also able to exploit economies of scale to deliver affordable options.

Boston Growth-Share Matrix

The Boston Growth Matrix is a portfolio planning model developed based on the observation that a company’s business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor. It serves as a proxy for competitive advantage. The four categories, dogs, question marks, start and cash cows give an idea of the company’s competitive performance within its industry. Dogs have low market share and a low growth rate thus neither generate nor consume large amounts of cash. Question marks are growing rapidly and thus consume large amounts of cash, but owing to the fact that they have low market shares they do not generate much cash. Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. Cash cows are market leaders and showcase a return on assets greater than the market growth rate, naturally generating more cash than they can consume.

Berger Paints Jamaica Ltd. may be classified as “question mark” in the paint manufacturing industry. The company is growing but currently has a low market share value which is soon expected to change. When compared to the other major player in this industry, Sherwin Williams, Berger had a lower EPS and also P/E ratio. Sherwin Williams had values of $0.40 and 20.23 times respectively while Berger Paints had $0.35 and 14.43 times.

Berger Paints’ Trade Activities for 29/03/11 to 8/04/11

Date

LastPrice

ClosePrice

Change ($)

Change (%)

Volume Traded

3/29/2011

3.15

4,960

3/30/2011

-0.15

-4.76

3,639

3/31/2011

7,603

4/1/2011

3.02

0.02

0.67

2,280

4/4/2011

3.02

4/5/2011

3.02

4/6/2011

3.02

4/7/2011

3.03

0.01

0.33

99,000

4/8/2011

3.03

Growth:

Dividend Discount Model (DDM)

g= ROE Ã-

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