U-right
News Commentary Worksheet
Suggested Solution
A. News Summary
Prepare the news summary with the help of the following guiding questions.
B. Economic Analysis：Where should U-right go?
1. Which type of business ownership does U-right belong to?
Public Limited Company/Listed Company.
2. One of the U-right’s creditors, Deutsche Bank, has applied to wind-up the company. From the viewpoint of the shareholders of the company, what are the advantages of the type of business ownership mentioned in Q1?
(1) Limited Liability: Shareholders of a public limited company can enjoy limited liability. Even though U-right owed banks about HK$1.2 billion, the shareholders’ losses are confined to the amount they have invested in it. They need not use their personal properties to pay off debts.
(2) Freely transfer of shares: Shares of a public company can be bought and sold easily without restriction. Thus, U-right can approach potential buyers to take over/invest in the business, instead of being liquidated.
(3) Legal Entity: A public limited company is a legal person. It can take legal actions and be sued as a person could. Shareholders are able to quarantine themselves from any possible contingent liabilities as well as litigations arising from the bank loans in relation to U-right.
3. According to the news, what are the possible factors accounting for the liquidation of U-right? Please explain in terms of economic concepts.
Possible Answers:
(i) Financial Diseconomies of scale: As the scale of the business is enlarged, firm needs more capital for expansion. However, the cost of obtaining extra capital will increase. Banks may regard the risk of making additional loan very high, and will charge a higher rate of interest. As the ongoing global financial tsunami, creditors are less lenient on the loan repayment. Besides, U-right has already owed HK$12b, banks will concern the high risk involved, and would not easily lend money to U-right.
(ii) High rent: U-right sells low-priced causal wear. However, U-rights has continuously opened outlets in the prime districts e.g. Central, Tsim Sha Tsui etc. in recent years, this increases the cost of rental payment. U-right earns little but pays high rents for the shop. As the ongoing global financial tsunami, if sales revenue of U-right can’t cover the high rent, it will increase the risk of liquidation.
4. U-right is now waiting for the potential buyers. In your opinion, what kind of companies will be interested in taking over U-right? Which type of integrations do they belong to? What are the possible motives and concerns?
Possible Answers:
² Other casual wears company (horizontal integration)
² Garment factory (vertical forward integration)
² Other types of clothing factory (lateral integration)
² Other business sector (conglomerate integration)
Illustration:
Other casual wears firm, e.g. Giordano, maybe interested in taking over U-right.
Possible Motives：
(i) Increasing Market Share: After integration, Giordano can enlarge its scale of production and increase its market share.
(ii) Share the result of research and development: U-right Garments is at the forefront of utilizing TEXCOTE processing technology. If Giordano takes over U-right, it can share its advanced technology in developing NANOECO collection.
(iii) Economies of scale: As the size of the combined firm will become bigger, Giordano can the benefits of economies of scale. This helps raise efficiency and lower the unit cost of production. For instance, Giordano can make use of U-right’s outlets.
Concerns：
(i) Increasing debts/ Liabilities: After integration, all the debts owed by U-right will transfer to Giordano, thus, the liability of Giordano will increase. However, during economic recession, the huge amount of liabilities does not only affect the confidence of shareholders, but also affect the liquidity of the cash flow.
(ii) When Giordano takes over U-right, its market shares in the casual wears sector increases. However, during economic recession, people will spend less on clothing when their income decreases. This will have a negative impact on Giordano.
Remarks:
The above example, Giordano, is only for illustration. Students are encouraged to study/raise different types of integration. Besides, students are also required to search for some information about U-right, e.g. company background, types of product they produced. Students are strongly requested to prepare a precise and realistic analysis. Also, in order to make a more comprehensive decision, students are encouraged to address the drawbacks/concerns of the type of integration they raised.
C. Issue Inquiry
5. If you were a general manager, and your company has already taken over U-right. Can you think of some economical strategies which can turn U-right to become more profitable?
Possible Answers:
² Decreasing the scale of expansion: Reducing the amount of loan and number of outlets, this can help reduce the cost of running the business.
² Increasing sales：Through market and product diversification, risks are reduced because more products will provide more sources of income. Also, providing different types of clothing can stimulate consumers’ demand on U-right products:
(i) Product diversification: U-right can provide different types of clothes, e.g. Business suit. Also, U-right can also make use of its advanced Nano technology to develop anti-cold apparel, which reduces the average cost.
(ii) Market diversification: It can try to explore other possible markets for clothing. E.g., Hong Kong people are willing to spend more money on babies’ wear. U-right can explore a baby brand which can stimulate its sales.
² Providing high quality products: U-right can maintain the sales volume if it insists on
producing high quality products.
6. According to the article, more and more businesses are likely to face liquidation during the ongoing global financial tsunami. What sectors will be seriously affected during the economic downturn? Give one example with explanation.
² Chinese Restaurant: Food served in Chinese restaurants may be regarded as superior
goods. If consumers’ income increases, their demand for food in Chinese restaurants increases. However, during economic downturn, consumers’ income drops, they won’t visit Chinese restaurant as frequently as before, many Chinese restaurants will suffer losses and wind-up eventually.
² Real Estate Agency: During prosperity, people have high incentive to invest in stock and
property market which rely commission as the major income source. Many of them try to expand the scales by establishing new branches. However, during economic downturn, people are pessimistic about the future and discouraged to invest. Faced with a shrinking residential property market, many property agencies in Hong Kong have to downsize their businesses and lay off workers to survive. For example, Centaline Group decided to cut 10 percent of staff of its property agencies in Hong Kong, around 4000 staff would be involved.
7. What are the crucial factors that investors need to concern if they decide to start a business during recession? What kinds of businesses are likely to succeed in economic downturn? Please explain.
Possible Answers:
Factors:
² Low Cost: It is profitable to run a business involves low cost (e.g. fishball stall). This business only needs a small space (imply low rental payment) and a few workers. The cost of running this business is relative low. The sales revenue can cover the cost easily and thus it is possible to gain profit during economic downturn.
² Selling Inferior goods: Consumers’ income drops during economic downturn. It is profitable to sell inferior goods (e.g. fishball, bread) as the demand for inferior goods will increase when the consumers’ income drops. .
Possible Business:
$10 shop: Running a $10 shop involves relatively low cost but the stock turnover rate is high. $10 shop normally sells necessities (e.g. stationery, cooking utilities etc.) made in developing countries (e.g. China, Indonesia, Thailand etc.) in which the cost of production is relatively low. Moreover, the low prices can attract lots of consumers during economic downturn.
More information: Jusco $10 Plaza (http://www.jusco.com.hk/eng/10_plaza/index_shop.htm)
Remarks：
1. The design of this worksheet is based on the following graphic organizer (1). Teachers can make use of the graphic organizer to:
² consolidate students’ understanding when they have finished the worksheet.
² analyze the focus points mentioned in the graphic organizer (1) by themselves after they have read the news.
If students are capable enough, teachers can ask students to finish concept map (2) or prepare other types of concept maps once they have read the news.
2. After the closure of U-right, there were other companies/firms (e.g. Tai Lin Radio Service Limited and some beauty saloons) going bankrupt. You may ask students to collect information about those cases and to compare and contrast between these cases with that of U-right.
Graphic Organizer (1)：
Graphic Organizer (2)：
Where should U-right go? /News Commentary worksheet/ 08-09 Page 2