Swire Pacific: The Impact of the Global Economic Environment on its Financial and Human Resources Essay

1. Introduction

Swire Pacific is a company listed on the Hong Kong Stock Exchange. It is “part of the Swire Group which has its beginnings in a modest Liverpool import-export company started in the early years of the 19th century.” (Company History, P1)  John Swire started the business in 1816 in Liverpool, England. Butterfield and Swire opened its’ offices in Hong Kong in 1870 and the company grew steadily over the next century into today’s multi business, globally active corporation.

The company entered diverse businesses and over the years acquired interests in sugar refining, dockyards, paints, air maintenance, air engineering, soft drink bottling, airways, air catering, oil exploration and property development. Most of these businesses grew with time and became profitable while a few like Taikoo Sugar and Taikoo Dockyards closed and were re-invented. Milestones came and went as each fledgling business grew organically, through acquisitions, partnerships and new initiatives. This essay attempts to analyze the growth and success of Swire Pacific in the present and historical context, particularly with regard to its financial performance, its’ location in Hong Kong, the impact of the hospitality and tourism boom on its fortunes, and the changes and threats it has faced in the global and immediate environment.

2. Company and Industry Overview, Growth and Consolidation

  Any dissertation on Swire Pacific will be incomplete without a time tracing of its growth from a trading shop in Liverpool to one of the larger business houses of Hong Kong.

Its’ entry into the airline business came immediately after the war with a 46% acquisition in Cathay Pacific in 1948. The group’s business in this area saw tremendous success with Cathay Pacific going on to becoming one of the world’s largest intercontinental carriers. The Company entered the jet age in 1961 and inducted the Boeing 707 in 1973. Flights to London started in 1980 and the company was floated on the Hong Kong Stock exchange in1986. On the way, it absorbed rival Hong Kong Airways and picked up a chunk of Dragon Air, a 75% stake in the all freight carrier Air Hong Kong and a 10% stake in Air China. It started daily freighter services to Shanghai in 2005. It also entered allied businesses like air catering, formed Securair with Hong Kong security and bought up Vogue Laundry in stages. It has won numerous awards and is the “launch customer for Boeing’s new … B747-400 Special Freighter (converted)from passenger aircraft”.(Company History, Page 1) It has a twenty-year franchise for running Hong Kong International Airport through Hong Kong Airport Services.

Opportunities in airline ground support were focused and exploited by the group. The Air Maintenance Service business, which commenced along with its’ investment in Cathay Pacific in 1947, as Pacific Air Maintenance Services, grew with the formation of Hong Kong Aircraft Engineering Company in partnership with Jardine Matheson. In 1995, HAEC formed the Hong Kong Aero Engine Services with Rolls Royce. Hong Kong Air Terminal Services Ltd was started in 1961, again with Jardine and the Hong Kong Air Cargo Terminal followed in 1976.

Thus along with the success of the airline and airfreight business the group consolidated its position in various ground support services in Hong Kong.

In 1965, the company acquired Bottlers Federal, Coca Cola’s franchisee in Hong Kong. Since then this partnership has prospered with the company obtaining ten Coca Cola franchises in the US and forming a company, Swire Beverages, with Coke in 1994. A number of bottling plants in different locations have been added. The Company also took over the production of Schweppes in Hong Kong and acquired a large stake in Carlsberg Beer. The cola business, currently recording sharp business growth in mainland China, acquired a new dimension with the purchase of Naning BC Foods Company Ltd in 2000. The foray into paints predated its’ entry into beverages by about thirty years with the establishment of Orient Paints, Colour and Varnish Company with Pinchin and Johnson in 1934, which subsequently merged with the Duro Paint Company. Many decades later, in 1989, ICI Swire Paints Ltd was incorporated in Hong Kong. The first Chinese plant started production in Guangzhou in 1994, followed by another in Shanghai.

Some businesses like those of Cathay and Coke bottling grew fast and big. Some grew more sedately. The Property business started in 1975 with development commencing at Taikoo Shing. Taikoo Place, a 50-year landfill management contract and a joint venture to develop Festival Walk, followed. The group entered into large building contracts, a joint venture with Mandarin Oriental to develop a Miami hotel and development of property in townships malls in Hong Kong, China and the US. The Property division is today the largest in the group in terms of sales, contribution to profits and capital deployed. “It employed HK$ 78,092 million of the Company’s total assets employed of HK$ 106,220 million as of end of 2005.” (Annual/Interim Reports, Chairman’s Statement, P2)

The trading business has continued to grow with newer product lines adding regularly to the portfolio.

There have been a number of new initiatives in all its main businesses which over the last twenty years have picked up pace. The group is special because of its’ consistency in delivering value. Areas for entry have been chosen carefully and considering that the group has been operating for two centuries it has not entered and exited from many businesses. Most of these have grown steadily and very few have closed down. Furthermore, the group has expanded substantially with a strong focus on its’ backyard, witness the continuous investment in Hong Kong in all of its businesses, and now in mainland China, where the growth story is presenting it with immense opportunity.

Strategic Management is defined as “the process of specifying an organization’s objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans.” (Strategic Management, 2006)  Furthermore, the “process involves matching the company’s strategic advantages to the business environment the organization faces.” (Strategic Management, 2006)

It is pertinent to note here that the strategic plans of Swire Pacific have always been linked to the progress of Hong Kong and the enormous growth shown by the colony has dictated its strategic management policy to a great extent. Its’ foray, for example, into the construction business was decided by the enormous opportunities Hong Kong presented  in this business area. Construction today has become its biggest business investment.

3.  Global Initiatives, Business Strategy and Alliances

Apart from Cathay Pacific, which by its’ very nature has to be a global operation, the group has restricted international businesses, apart from China, Taiwan and Vietnam to the US. Here its relationship with Coca Cola led to ten franchises, and was followed by investments by the property division. The group does not seem to have any investments anywhere else, be it Japan, Europe, Africa, South America, Australia and New Zealand or the GCC countries. There is a token presence in the UK where the company deals in Lloyd’s insurance products through its’ holding in Swire Fraser Ltd. The picture that emerges is of a conservative company, sticking to its’ traditional brick and mortar businesses, averse to taking risks, growing cautiously and slowly. Cathay Pacific is the only name in the group, which is an international star. It commands universal respect and attention. The other businesses, especially property development are substantial. They are growing and profitable, but essentially local.

There is a conundrum here. Inherently conservative, risk averse companies do not last for more than a hundred years. They are swallowed up by technological developments, their lack of appetite for growth and changes in global environment. “The strength of the American system is that it has always embraced change and creative destruction.” (Shameen, A and Reyes, A, 2000),

 Swire Pacific has, however, grown for nearly 150 years to what it is today. This in itself is rare as many are the businesses, which have been formed, set up and extinguished in this period. It has seen the small colony of Honk Kong growing from an outpost of the British Empire to one of the most affluent cities of the modern world. It has survived two world wars and seen Hong Kong changing hands from the British to the Japanese and back to the British before it finally reverted to China. Apart from the world war it has witnessed years of conflict in Korea and Vietnam, the demolition and rise of Japan, power

changing hands in China, as also its’ Cultural Revolution and its’ current emergence as an economic superpower.

Numerous successful businesses have crashed out in this period because of a number of factors, the most common being obsolescence, an inability to predict and plan for the future and an incomplete understanding of the global economic scenario. The sudden redundancies of the horse driven carriage, the ocean liner and lately the telegraph in the face of new product availability are common knowledge. Most management experts think of obsolescence as a real business danger. “What’s new and different today may be approaching obsolescence tomorrow. Business owners must let go of the old ways of doing things and eagerly pursue new ways to service customers, provide quality products, and creatively inform the public about what makes them the right choice. Change is thinking, feeling and doing differently. In order to make changes, you must be willing to move out of the comfort zone.” (Pilgrim, S, 2006),

In this period, Swire Pacific grew from strength to strength and chose businesses with great thought. The entry into the airline industry coincided with the disappearance of the ocean liner and the shrinking of the world. Over fifty years the airline business grew steadily, opening new routes with care, acquiring competitors, opening  linked businesses in air catering, aircraft and airport maintenance, airfreight and courier.

The Coca Cola franchise in Hong Kong was bought in1965. The Company seized this opportunity to forge links with the soft drink giant and travel to the US. Once there it piggybacked on Coke and took up ten franchises, safe investments where the drink would sell on the Coke brand; a no risk global foray halfway across the world.

The ability of the group to forge strong links with other companies is one of its’ greatest strengths. It is also an indicator of its’ eagerness to learn and absorb new thought and ideas, its’ willingness to go the whole distance with a business associate. The company has entered into partnerships and alliances with ICI, Coke, James Matheson, Mandarin Oriental, DHL, and Reebok mostly through joint venture companies.

Property development and support services for oil exploration are two other areas in which the group thought out and implemented its’ business plans carefully. After the end of the Korean war and the pullout from Vietnam, the strategic location of Hong Kong, proximal to China and Japan, its entrepot economy and its status as the foremost bastion of the free world in the Eastern hemisphere was making it a global metropolis and a commercial hub for trade and travel; a real estate goldmine. Swire Pacific entered the real estate development business in 1975 and worked on shopping plazas, malls, townships, hotels, even long-term land filling contracts. It rode the great Honk Kong boom and during this period built up enormous properties in the island city. It has also completed a big condominium in the US and is now frenetically active in mainland China building up huge multiple use commercial plazas.

The latest business destination for the company, as indeed for most of the world is The People’s Republic. The Chinese growth story is happening in the company’s backyard and for Swire Pacific, which withdrew from China in 1953, it “creates an unprecedented market opportunity – from cars and mobile phones to insurance and mortgages. Andy Xie, economist at Morgan Stanley in Hong Kong, estimates that in China alone, retail sales will grow from US$625 billion this year to US$2 trillion by 2014.” (Ramos, A Pg1) The company has characteristically taken time to enter and ramp up its’ operations in China. In 1994, the group entered China with ICI Swire setting up a pint factory in Guangzhou. This was followed with the setting up of Coke bottling plants, trading forays by Reebok Hong Kong, another paint factory in Shanghai and the picking up of a Samsung Motors distributorship. In 2000, a high speed trucking service, Superlink China Direct, commenced between Hong Kong and Guangzhou airports. Cathay Pacific started flights to Beijing in 2003 after 13 years. Investments in Air Cargo handling and property development are also increasing.

4. Current Position and Financial Analysis for 3 years

Swire Pacific Limited today is one of Hong Kong’s leading listed companies. It has consolidated itself into five operating divisions: Property, Aviation, Beverages, Marine Services and Trading & Industrial. The last two sections have detailed the historical evolution of the group. The company’s operations as we know continue to be predominantly in the Greater China region.

The property division owns, and is involved in the development and management of, a portfolio of large-scale residential and commercial properties in Hong Kong, China and the US. . The principal interests are primarily for long-term investment purposes, although some are developed for sale.

The aviation division includes interests in Cathay Pacific Airways Ltd. and Hong Kong Aircraft Engineering Co. Ltd., both of which are on the HK Stock Exchange. In addition, the division also includes two other HK-based airlines, Hong Kong Dragon Airlines Ltd. and AHK Air Hong Kong Ltd., an all-cargo carrier. Other companies provide aviation-related services.

The industries division’s main activity is the production, marketing and distribution of a wide range of beverages. It includes Coca-Cola operations in Hong Kong, Taiwan, China and the US. The division also holds a range of manufacturing operations and has joint ventures with Browning-Ferris, Crown Cork ; Seal, ICI and Tate ; Lyle. It also has engineering services and electrical and mechanical contracting.

The trading division’s activities include fashion design and marketing in the US, automobile distribution in Taiwan and in Northern and Eastern China, and the export of manufactured goods from countries in the Far East. Trading interests include sports shoe and apparel wholesaling and retailing, as well as pharmaceuticals distribution.

The marine services division provides specialist vessels to the offshore oil industry.

The insurance division comprises underwriting, broking and agency operations in Hong Kong and through Swire Fraser Ltd. in London

The Company has a strong financial base. It seeks long-term sustainable growth, and returns which exceed the cost of capital.

A few charts and tables shown below illustrate some salient figures about the company’s operations in the last three years

A. Divisional Sales of Swire Pacific

Year

Division
2003

Million HK

Dollars
2004

Million HK

Dollars
2005

Million HK

Dollars
Property
7539
7306
6197
Aviation
Nil
Nil
Nil
Beverages
4955
4978
5187
Marine Services
1216
1297
1492
Trading & Industrial
3637
4704
6036
Head Office
40
39
25
Total
17387
18324
18937

B. Sales, Cost of Sales and Profits of Swire Pacific

C. Some key financial figures for the last three years are as below.

Year

Description
2003

Million HK

Dollars
2004

Million HK

Dollars
2005

Million HK

Dollars
Sales
17387
18324
18937
Cost of Sales
9805
10458
10755
Gross Profit
7582
7866
8182
Net Profit before

Dividend
2016
18818
18757
Capital Employed

(At beginning of Year)
81655
77632
92830
Capital Employed

(At end of Year)
77632
92830
106220
Fixed Assets

(Net Assets)
77362
92830
106220
Shareholders Funds
68076
78625
94843
Current Assets
5546
5669
6097
Stocks
861
1236
1334
Current Liabilities
9049
9652
6497
Non Current

Liabilities
7124
16233
17389

While going through these figures it is pertinent to note the following:

i. Since 1996, Cathay Pacific and HAECO have become associated companies and their results are not included in the consolidation.

ii. The group adopted the HKAS 40 and the Hong Kong Financial Reporting Standards in 2005. Changes pursuant to the same have been incorporated, amended, and considered as such. A significant change has occurred in the calculation of Profits as the fair values of investment properties are now to be incorporated in the same, rather than in property valuation reserve. Figures for 2004 have been restated and 2005 computed as per these norms.

The above figures have been used to track a few important ratios. These will be useful for further analysis.

D. Ratio Analysis: The tables in this section contain computations for a number of ratios, useful in ascertaining the operational and financial performance of the company. The tables provide the ratios, the formulae used as well as the required computations.

For ease of analysis, profitability, asset turnover, liquidity and structuring ratios have been shown separately.

Profitability

Ratios
Computation of Ratio
2003
2004
2005
ROCE (Return on

Capital

Employed
Net Profit/

Capital at Start of Year

2016/

81655

=

0.025
18818/

77632

=

0.24
18757/

92830

=

0.20
Asset Turnover

Ratio
Sales/ Capital Employed at

Start of Year
17387/

81655

=

0.21
18324/

77632

=

0.24
18937/

92830

=

0.20
Gross Profit Margin
Gross Profit/ Sales X 100

7582/

17387

X 100

=

43.61 %
7866/

18324

X 100

=

42.97 %
8182/

18937

X 100

=

43.21 %
Net Profit Margin
Net Profit/ Sales X 100

2016/

17387

X 100

=

11.59 %

18818/

18324

X 100

=

102.6%
18757/

18937

X 100

=

99 %

E. Asset Turnover Ratios:

Asset Turnover Ratios
Computation of Ratios
2003
2004
2005
Fixed Asset Turnover
Sales/ Fixed Assets
17387/

65473

=

0.27
18324/

81715

=

0.22
18937/

94403

=

0.20
Stock Turnover
Stocks/ Cost of Sales X 365

861/

9805

X 365

=

32
1236/

10458

X 365

=

43
1334/

10755

X 365

=

45

F. Liquidity Ratios

Liquidity Ratios
Computation of Ratios
2003
2004
2005
Current Ratio
Current Assets/

Creditors Less than One Year

5546/

9049

=

0.61
5669/

9652

=

0.59
6097/

6497

=

0.93
Quick Ratio
Current Assets less Stocks/

 Creditors Less than One Year

4685/

9049

=

0.54
4433/

9652

=

0.46
4763/

6497

=

0.74

G. Capital Structure / Gear / Risk ratios

Capital Structure/

Gear/ Risk Ratios
Computation of Ratios
2003
2004
2005
Gearing Ratio
Total Liability – Current

Liability / Capital Employed

7124/

67426

=

0.11
8389/

84568

=

0.10
6262/

100772

=

0.06
Shareholders Ratio
Shareholder’s Funds /

 Capital Employed
68076/

80431

=

0.84
78625/

100801

=

0.78
94843/

118161

=

0.80
Interest Cover
Net Profit before

Interest and Tax/

Interest

5134/

937

=

5.5
20981/

966

=

21.71
19842/

582

=

34.09

Shareholders Funds do not include Minority interests

H. Investment Ratios

Year

Ratio
2003
2004
2005
Earning per Share*
1.32
12.29
12.25
P E Ratio**
20.27
15.9
Not

Available***

The investment ratios have been taken from the published accounts of Swire Pacific and those available from stock tracking sites in the absence of specific market price availability to the researcher

Earnings per Share (EPS): Net profit / Number of Ordinary Share

 Price / Earnings (P/E) Ratio: Share Price/ EPS

Current P/ E: 6.5

The Charts, Tables and Ratios shown above along with knowledge of the company’s operations and detailed study of the last three years published accounts lead to the following inferences.

The consolidated accounts do not reflect the operations of Cathay Pacific Airways Ltd, Hong Kong Dragon Airlines Ltd, AHK Air Hong Kong Ltd, Hong Kong Aircraft Engineering Co Ltd, and Hong Kong Air Cargo Terminals Ltd. They are associated companies and only the appropriate share of profits is taken into the consolidated picture. The second issue, which distorts the consolidated picture, is the adoption of HKAS 40 and Hong Kong Financial reporting Standards wherein it is mandatory to show the fair property value in the Profit and Loss account rather than in the Property Reserve. There have been very significant revaluations of the group properties, which are held for the long term. These have sharply boosted profits without a corresponding movement in sales. As such, the figures of 2004 and 2005 where Profits are equal to turnover are merely reflections of the profits from the aviation business and property revaluation, affecting profits but not sales. There are many accountants who disagree with this treatment

With Hong Kong having adopted the standard effective in 2005, any changes in the value of the company’s property portfolio will impact the profits of the whole group. In the past decade, annual swings in the value of the company’s investment properties have been as high as HK$9 billion, a figure that would wipe out profits entirely in some years, while doubling them in others. (Wood, J Pg1)

The company faced a very difficult period in 2003 when the SARS outbreak severely contracted economic activity in Hong Kong. Aviation and Property were the most affected by the slowdown and it was only from the second half of the year that revenues started to improve.

While Turnover has increased from 17387 million HK dollars to 18937 million HK dollars during 2003 to 2005, the sharp increase in trading sales, which has nearly doubled in this period, has been set off somewhat by the decline in property turnover. This is no matter for concern because the group as policy prefers to hold property mostly for long-term interest than for sales; the effect of valuation of property on the bottom line being very significant.

A number of ratios have been analyzed for the periods 2003, 2004 and 2005 to gauge the financial performance of the Swire Pacific during the last three years.

Profitability ratios indicate that the company went through a very lean period in 2003 and recovered well in 2004 and 2005. Return on Capital Employed went up practically 10 times from03 to 04 as the economy and performance recovered extensively after the SARS scare. The performance remained stable between 04 and 05 with sales increasing slightly and the Gross Profit Ratio hovering at 43 %. The Net Profit Margin jumps sharply from 11.5 %, again around 10 times to around 100 %. This however is mainly due to a change in accounting policy as mentioned beforehand wherein profits arising out of revaluation in profits impact the net profits while sales remain the same and thus show a significant difference in the year from which the change is recorded in the books of the company, in this case 2004 onwards. This rather odd movement in ratios where the figure jumps by 10 times occurs in both cases where net profit is used, i.e. Return on Capital Employed and Net Profit Margin.

The Current Ratio, an indicator of short-term liquidity has moved up from 0.59 in 2004 to 0.93 in 2005. While purists maintain that a company should keep its Current Ratio at about 1.5 to maintain creditworthiness and avoid payment disruptions, the same rationale does not apply to Swire Pacific, where suppliers must be competing with each other to supply material and the company must be availing of this facility. It is also possible that the Current Ratio had dipped in 2003 and the company is gradually building it up.

Very healthy Capital Structure, Gearing and Risk Ratios reveal the financial soundness of the company. Long-term loans are very low and make up only 6 % of total liabilities. The company is driven by shareholder funds, which are 80% of total funds deployed. Net profits cover interest by nearly 34 times, a huge multiple indeed; if it was not known that a substantial amount of the net profits had arisen because of the change in the method of computation of net profits. Even if the net profits had not been built up by the change in accounting method, the interest cover would have been reasonably high, further strengthened by the fact that the incidence of interest had practically halved in 2005 from what was paid in 2004.

The current P/E of the company moving at around 6.5 is an indication of the undervaluation of the company and is mainly due to environmental reasons affecting markets in Hong Kong.

Apart from the SARS blip, these three years have been very good for the group. Shareholders funds have jumped by about 15000 million HK dollars each year. Return on Capital Employed is a very healthy .20 up from 0.025 in 2003. Earning per Share has moved up

from 1.32 in 2003 to 12.25 in 2005. Asset Turnover at .20 and Net Profit Margin at 99 are misleading and again occur because of non-inclusion of aviation sales and inclusion of fair valuation of property in profits. The ratios, which link up sales and profits or shareholder funds tend to be somewhat skewed and need to be looked at in totality. Martin Cubbon, CFO of Swire Pacific referring to these changes says, “The upshot is confusion.It produces numbers that are not very helpful and I’m struggling to see who is using these numbers and what benefit they get out of them.” (Wild, D, Pg1)

However, individually sales have continued to do well. Beverages continue to grow very robustly in China and the oil exploration support business has been helped by increase in charter rates, higher utilization and the sales of a production rig during the year. The Trading division showed an increase of 34% in profits because of increased sales of sporting apparel in Taiwan and Mainland China.

The financial position of the group is very sound and is reflected in all parameters. Total cash flows were at 11347 million HK dollars and debt fell to less than 15% 0f capital employed. The credit rating for Moody’s remained at A3. Standard and Poor, which had put the

company on negative outlook in 2003 has now moved up the long-term appraisal to A-. The Gearing Ratio has halved from 0.10 to 0.06, the interest cover is a hefty 34 times and shareholders funds make up practically 85% of capital employed. Even the Current Ratio which has gone up to nearly one is more an indication of the creditors ready to give material to the company than a an indicator of financial health.

5. The SARS scare, its effect on Tourism, Travel, Hospitality, and on Swire Pacific

Every couple of years a new development on the global horizon upsets plans and projections. It is only companies who can take this in their stride, even when it directly affects them, make quick, sensible compensatory adjustments and focus on their objectives, which are able to overcome these banana peels and continue to stride. September11, the Iraq conflict, the

Tsunami and SARS are examples of such situations, which develop and blow up suddenly or in very short time frames, affecting businesses in diverse geographical and political environments.

In 2003, SARS, severe acute respiratory syndrome, appeared suddenly out of the sky and proceeded to wreak havoc with the economies of the east, mainly with the entrepot economies of Singapore and Hong Kong. Passenger traffic, travel, hotel usage, tourism, consumption of beverages, industrial activity, property occupation and prices nosedived. The fear of SARS was bigger than the disease itself and frightened reactions caused the economies to shrink. The threat remained for the entire first half of 2003 and resulted in quarantining of many people, closing of

schools and restrictions on travel. Hong Kong and the surrounding region, including many provinces of China and Singapore were under siege. Swire Pacific, active mainly in the Greater China region was hurt. Passenger traffic for Cathay Pacific fell sharply during the first and second quarters. Cathay grounded 22 aircraft in May and June and reduced its’ schedule by 45

%. Exploration activity was depressed, demand for office space was weak, Hong Kong missed Cola sales, and postponement and cancellation of dockings hurt the offshore business.

The SARS outbreak hurt Swire Pacific badly and things turned around because the disease was contained within six months. Economic activity revived, very soon in the airline business and more slowly in the others. The episode also threw up in sharp light the vulnerability of the group because of its lack of geographical diversification and its’ locational concentration of activity. Most of the company’s eggs are in the Hong Kong basket and a prolonged disturbance in the area, like the Iraq war or the effects of the Tsunami would have possibly hurt the organization beyond repair. The strong financial base of the company would have possibly helped the company in such a situation but there are limits to every pocket. This is true of all companies whose businesses are centric to one region. “In spite of all the optimism about the future of Asia, a single force has the potential to wipe it away, and it is out of anyone’s control: a flu pandemic” (Ramos, A, Pg 1) A prolonged disturbance, a Tsunami or a major quake would have caused property prices, the main asset of the company to dip sharply and possibly created a veritable crisis. As Goble, Fields and Cocchiara of IBM state

In today’s marketplace, business disruptions are no longer merely embarrassing or inconvenient. They can be potentially fatal to an enterprise. At the very least, they can lead to lost market opportunities, degraded brand and reputation, lost customers, and declines in shareholder value. At the very worst, they can result in circumstances that lead to the demise of the enterprise. To limit the potential financial impact of stresses to the infrastructure, an enterprise must improve its ability to respond accurately and rapidly to both disturbances and opportunities. While not every business risk can be eliminated, many can be mitigated and managed. To contain business risk within acceptable levels, an enterprise and its value chain partners must ensure that their combined infrastructure is resilient—fortified, recoverable and adaptable. From a business perspective, a resilient infrastructure can protect the ability of the value chain to ‘deliver the goods’ regardless of unexpected events. This manifests itself in security rich, agile, available and recoverable business processes, technologies and organizational constructs. (2002)

6. Human Relations Management in a Global Organization

Human Relations Management is a focus area for Swire Pacific. It employs 63500 people working in five divisions in different countries. Swire is an equal opportunity employer and encourages continuous dialogue with its’ staff. Employees are encouraged to join staff associations to facilitate good industrial relations and effective consultation. Group companies aim to provide competitive employment packages and have sound and independent retirement benefit schemes. There are frequent programs to facilitate the staff to hone their skills and achieve excellence. The company is genuinely concerned about employee welfare. The employees are regularly updated about bird flu, there is a very efficient injury-reporting program, seminars are held on health and safety and staff safety takes precedence over operations. These practices are necessary and show the human side of the organization.

Are they enough for a truly global business organization? Current experts think otherwise and   make the point that the changes in global business environment are often not accompanied by complementary changes in human resource management practices. This leads to situations where failure is caused due to the mismanagement of people rather than to problems of capital or technology. Organizations still have low levels of effectiveness in implementing Strategic Human Resource Management (SHRM) practices and this is particularly the case in the economies of Hong Kong, Singapore, Malaysia and others exposed to the challenges and opportunities of globalization.

HR policies as such are likely to be effective only if they meet the following criteria:

·         Congruency – they derive from broad organizational objectives and are consistent with each other.

·         Compatibility – they aim at a common goal and are mutually compatible

·         Clarity – they are clearly stated  and communicated to employees.

·         Stability – they aim to reduce uncertainty, and instability, but provide for supervisor discretion where appropriate.

·         Flexibility – they allow some degree of discretion, but ensure consistency and equity.

·         Cultural appropriateness – they are appropriate to their organizations strategies, structure and culture

·         Relationships – they help to improve and maintain relationships between HR, line and senior management and employees.

Global business is characterized by the free flow of human and financial resource. Development in this area is opening up new markets rapidly and this accentuates the need to manage human resources effectively to gain competitive advantage. To achieve this, organizations require an understanding of the factors that can determine the effectiveness of various HR practices and approaches.

“Organizations require an understanding of the factors that can determine the effectiveness of various HR practices and approaches. This is because countries differ along a number of dimensions that influence the attractiveness of Direct Foreign Investments in each country. These differences determine the economic viability of building an operation in a foreign country and they have a particularly strong impact on HRM in that operation.”(Bawa, M.A and Ali, Pg 2)

 The factors that affect HRM in global markets are mainly cultural, economical governance, political system and uniqueness of human capital.

A detailed study of literature available on Swire Pacific does not indicate a serious approach to this issue, possibly because their major operations are in Greater China where the management is familiar with these factors.

7. Conclusion and Recommendations

We conclude that the Company is financially very strong and has made a big success of its’ airline business. The other local businesses have grown from strength to strength over the years. However, the SARS episode has shown it up to have a very weak belly arising from its intrinsically localized operations. The need of the hour is for it to use its’ considerable financial and management strengths, take advantage of the enormous growth opportunities in today’s global village and truly internationalize its operations.

Perhaps the company needs to recognize that the biggest sin is inadvertence, of not being fully awake. The future descends equally on everyone, but some notice it faster because they are pushing the frontiers of their effort and knowledge. This becomes difficult for an organization when events are again smooth and profitable, as they are now in the case of Swire Pacific. “Hong Kong is bouyant again and mainland China is offering the corporate world a vast new market to tap.” (Wild, D Pg 1)  This is possibly the weakest chink in the company’s armor.

It is time for Swire Pacific to look beyond the Greater China region at the great opportunities, which have arisen in other areas of the world. The company has strong financial reserves, expertise in its’ business areas and strong alliances with global corporations like Coke and Samsung. The company now needs to leverage its’ many infrastructural strengths and make out a game plan to become a truly global corporation by 2030.

“Recent projections by Goldman Sachs on the so-called BRIC countries – Brazil, Russia, India and China – had come up with “startling results,” (Sarkar, D, Pg 1) Further, “in 2040, BRICS countries will collectively overtake the economies of the what Goldman Sachs calls the G6 nations – Britain, France, Germany, Italy, Japan and the United States.” (Sarkar, D, Pg 1) Apart from BRIC, the Gulf Coordination Council states, South Africa and Nigeria are also witnessing high growth rates. Europe is growing flat and is now under threat from the low cost economies of Asia and Latin America. A number of East Asian Companies like Samsung, LG, Suzuki, Hyundai and Honda moved into India some years back. They have achieved astonishing success in the last two decades. Suzuki is the biggest car manufacturer in the country and makes more than 600,000 cars in a year. Hyundai occupies the second spot and the North American and European manufacturers trail far behind these two. The Gulf States, by way of their strategic location and investor friendly regimes, have become centers for trading and financial services and shown tremendous growth in the real estate, travel and hospitality sectors. A number of new airlines service the region and many of the largest hotel chains, including Swire Pacific’s business partner Mandarin Oriental have established top-end luxury hotels there.

These opportunities are not going to last forever and Swire Pacific needs to take advantage of the window while it remains open. The fact that its’ many business partners like Coke, Samsung and Reebok already have strong business establishments in many of these regions can lead to further alliances and push the door wide.

The Company needs to make out a term based globalisation strategy, which by nature will have to be reasoned and logical yet aggressive. The company has a number of products and processes in which it has considerable expertise. However, there will be gaps in the knowledge of culture, local environment and politics, costs of labor and materials, regulatory laws that will need to be studied in detail and filled. The company also appears to be ill equipped by way of human resource to embark upon a globalisation programme. The current managers are equipped to handle people and businesses in Hong Kong and in other East Asian countries and it will be difficult for them to, for example, start a construction enterprise in Dubai. Any decision to embark upon a globalisation program will necessitate the internationalization of the management pool and radical change in human relations management policies and the company will need to act accordingly.

Appendix

Calculations used for deriving Ratios

1. ROCE: Net Profit/ Capital at Start of Year

Year

Particulars
2003
2004
2005
Net Profit

Million HK

Dollars
2016
18818
18757
Capital at

Start of Year

Million HK

Dollars

81655
77632
92830
ROCE
0.025
0.24
0.20

2. Asset Turnover: Sales/ Capital Employed at Start of Year

Year

Particulars
2003
2004
2005
Sales

Million HK

Dollars
17387
18324
18937
Capital at

Start of Year

Million HK

Dollars

81655
77632
92830
Asset Turnover
0.21
0.24
0.20

3. Gross Profit Margin: Gross Profit/ Sales X 100

Year

Particulars
2003
2004
2005
Gross Profit

Million HK

Dollars

7582
7866
8182
Sales

Million HK

Dollars
17387
18324
18937
Gross Profit

Margin
43.61 %
42.97 %
43.21%

4. Net Profit Margin: Net Profit/ SalesX100

Year

Particulars
2003
2004
2005
Net Profit

Million HK

Dollars

2016
18818
18757
Sales

Million HK

Dollars
17387
18324
18937
Net Profit Margin
11.59 %
102.6 %
99 %

5. Fixed Asset Turnover: Sales/ Fixed Assets

Year

Particulars
2003
2004
2005
Sales

Million HK

Dollars
17387
18324
18937
Fixed Assets

Million HK

Dollars

65473
81715
94403
Fixed Asset

Turnover
0.27
0.22
0.20

Fixed Assets comprise of Property, Plant and Equipment, Investment Properties and Leasehold Land and Land Interests

6. Stock Turnover: Stocks/ Cost of Sales X 365

Year

Particulars
2003
2004
2005
Cost of Sales

Million HK

Dollars
9805
10458
10755
Stocks

Million HK

Dollars

861
1236
1334
Stock Turnover
32
43
45

7. Current Ratio: Current Assets/ Creditors Less than One Year

Year

Particulars
2003
2004
2005
Current

Assets

Million HK

Dollars

5546
5669
6097
Creditors less

Than one Year

Million HK

Dollars

9049
9652
6497
Current Ratio
0.61
0.59
0.93

Creditors less than one year include Trade and other payables, Provisions, Taxation, Derivative financial instruments, Bank overdrafts and short-term loans ? unsecured, Long-term loans and bonds due within one year

8. Quick Ratio: Current Assets less Stocks/ Creditors Less than One Year

Year

Particulars
2003
2004
2005
Current Assets less

Stocks

Million HK

Dollars

4685
4433
4763
Creditors less

Than one Year

Million HK

Dollars

9049
9652
6497
Quick Ratio
0.54
0.46
0.74
9. Gearing Ratio: Total Liability less Current Liability / Capital Employed

2003
2004
2005
Total Liability less

Current Liability*

Million HK

Dollars

7124
8389
6262
Capital Employed

Million HK

Dollars

67426
84568
100772
Gearing Ratio
0.11
0.10
0.o06

*The classification of Non Current Liabilities has been changed from 2005. However, figures for deferred financial instruments have not been considered in non-current liabilities to make the three ratios comparable and stick to the basis adopted by the company for calculating this ratio in the Annual Accounts.

10. Shareholders Ratio: Shareholder’s Funds / Capital Employed

Year

Particulars
2003
2004
2005
Shareholders

Funds*

Million HK

Dollars

68076
78625
94843
Capital Employed**

Million HK

Dollars

80431
100801
118161
Shareholders Ratio
0.84
0.78
0.80

Shareholders Funds do not include Minority interests

Capital Employed includes Shareholders Funds, Minority interests and non current liabilities.

11. Interest Cover: Net Profit before Interest and Tax / Interest

Year

Particulars
2003
2004
2005
Net Profit before

Interest and Tax

Million HK

Dollars

5134
20981
19842
Interest

Million HK

Dollars

937
966
582
Shareholders

Ratio
5.5
21.71
34.09

12. Earnings per Share has been taken from the published annual accounts of the company

13. PE ratios for 2003, 2004 and current PE have been taken from internet sources. PEs for 2005

were not available.

References

Bawa, M.A and Ali, J (1999), The Challenges of Globalization and the Role of Human Resources, Retrieved June 1, 2006 from http://econ.tu.ac.th/iccg/papers/aminu.doc

Company History (2006), Swire Pacific, Retrieved July 1, 2006 from http://www.swirepacific.com/about/history.htm

Goble, G, Fields, H and Cocchiara, R (2002), Resilient Infrastructure: Improving your business resilience, IBM Global Services, Retrieved July 31, 2006 from www.ibm.com/services/us/its/pdf/resilientinfra.pdf

Annual/ Interim Reports (2006), Swire Pacific, Retrieved July 1, 2006 from http://www.swirepacific.com/ir/report.htm

Pilgrim, S (2006), Leaving the Comfort Zone, Pertinent Information Ltd, Retrieved July 31, 2006 from pertinent.com/pertinfo/business/spilgrim22.html

Ramos, A, (2005), Future Tense Macro Trends that are shaping the future of Asian Business, CFO Asia 4 June 2006 from http://www.cfoasia.com/archives/200412-01.htm

Sarkar, D (2005), India should be in expanded G8: Goldman Sachs, Hindustan Times.com, 4 July 2006, Retrieved from http://www.hindustantimes.com/news/7598_1415551,000500020009.htm

Shameen, A and Reyes, A (2000), Creative Destruction City, Asia Week, Retrieved July 31, 2006 from www.pathfinder.com/asiaweek/magazine/2000/0324/cover1.html

Strategic Management, (2006), Wikipedia, Retrieved July 31, 2006 from en.wikipedia.org/wiki/Strategic_management

Wild, D, (2006), Martin Cubbon, CFO of an original Asian Tiger, Accountancy Age, Retrieved July 4, 2006 from http://www.financialdirector.co.uk/accountancyage/features/2139069/angry-china

Wood, J (2004), a fairwell to history, CFO Europe.com July 4, 2006, Retrieved from http://www.cfoeurope.com/displayStory.cfm/3238284

Bibliography

Annual/ Interim Reports (2006), Swire Pacific, Retrieved July 1, 2006 from http://www.swirepacific.com/ir/report.htm

Bawa, M.A and Ali, J (1999), The Challenges of Globalization and the Role of Human Resources, Retrieved June 1, 2006 from http://econ.tu.ac.th/iccg/papers/aminu.doc

Corporate Social Responsibility (2006), Swire Pacific, Retrieved July 1, 2006 from http://www.swirepacific.com/about/community.htm#6

Company History (2006), Swire Pacific, Retrieved July 1, 2006 from http://www.swirepacific.com/about/history.htm

Goble, G, Fields, H and Cocchiara, R (2002), Resilient Infrastructure: Improving your business resilience, IBM Global Services, Retrieved July 31, 2006 from www.ibm.com/services/us/its/pdf/resilientinfra.pdf

Pilgrim, S (2006), Leaving the Comfort Zone, Pertinent Information Ltd, Retrieved July 31, 2006 from pertinent.com/pertinfo/business/spilgrim22.html

Ramos, A, (2005), Future Tense Macro Trends that are shaping the future of Asian Business, CFO Asia 4 June 2006 from http://www.cfoasia.com/archives/200412-01.htm

Sarkar, D (2005), India should be in expanded G8: Goldman Sachs, Hindustan Times.com, 4 July 2006, Retrieved from http://www.hindustantimes.com/news/7598_1415551,000500020009.htm

Shameen, A and Reyes, A (2000), Creative Destruction City, Asia Week, Retrieved July 31, 2006 from www.pathfinder.com/asiaweek/magazine/2000/0324/cover1.html

Strategic Management, (2006), Wikipedia, Retrieved July 31, 2006 from en.wikipedia.org/wiki/Strategic_management

Wild, D, (2006), Martin Cubbon, CFO of an original Asian Tiger, Accountancy Age, Retrieved July 4, 2006 from http://www.financialdirector.co.uk/accountancyage/features/2139069/angry-china

Wood, J (2004), A fairwell to history, CFO Europe.com July 4, 2006, Retrieved from http://www.cfoeurope.com/displayStory.cfm/3238284