1. Global Business #5 May 14, 2012 Dept of Technology Management for Innovation (TMI), Graduate School of Engineering Professor Kazuyuki Motohashi 工学系研究科 技術経営戦略学専攻教授 元橋一之 http://www.mo.t.u-tokyo.ac.jp

2. Today’s class What is complex service system? Why service model? Global Infrasctuture business as an example Business planning: practical guide and introduction to global business competition Introduction to next class: case study on Neemrana Industrial Park

3. Current issues in global business for emerging economies Meta-manufacturing model: fast commoditization of product (catching up Korea, China etc.) -> complex system, service model Importance in risk analysis for long-term business (operation and maintenance in infrastructure biz.) Relationship with local government (business modeling for PPP) Globalization of management style: Genchi-ka, proper balance between control and autonomy of local subsidiaries -> importance in human resources in global business

4. Development in emerging economies Such as China and India New competitors New markets Global Business Strategy Shift to “good enough market” and improvement in cost competitiveness Business model re-organization by service dominant design World in not so flat, understanding distance Consistency with corporate strategy

5. Product architecture and value creation Size of value added Level of complexity (difficulty in imitation) Aircraft (CoPS) Auto- motives EV? Mainframe computer Modularization Unbundling, competition PC IT services Service science Scalability in services?

6. Difference in product architecture Integrated architectureModular architecture

7. Driving forces Size of value added Level of complexity (difficulty in imitation) Aircraft (CoPS) Auto- motives EV? PC Scientific approach for innovation (digitalization, modularization..) and technological catching up Growing “Good Enough Market” Protection of propriety technology (IPR), increasing complexity, strategic investment in complex system innvation

8. What is complex service system? Complex system of products Operation and Controlling Functions Value Proposition to the customer Low cost/ high performanc e Local environment Organizational factors

9. Complex system case: global infrastructure business Infrastructure development needs in Asia until 2020 reaches $8 trillion due to urbanization (METI estimates). Public money cannot cover such amount, so that PPP (public private partnership) is needed. Analyzing infrastructure business is important Risk analysis and simulation Business modeling with relevant players

10. Complexity in Global Infrastructure Business Product Design (Autos, PCs etc) Social System Design (GIB) Unit of observations (agents) Component, technology (such as IPR) Firms, government, NGOs etc Origin of complexityInterdependency of components and technology Interactions among different economic agents ObjectivesBalance of quality and cost Total profit maximization and win- win solution Inference approachDeductiveInductive Why?Natural Science BaseIrregularity in organizational decision making process Analytical approachTop down from grand theory Learning by doing ex. Social experimentation, simulation

11. Types of PPP DesignBuild Operation BOT (Build Operate Transfer): concession contract BOO (Build Own Operate) Leasing: Public leases out for private, affermarge Joint Venture Operations or management contract Cooperative arrangement: public supports to private

12. Complex system of PPP project Project Company (SPC) Japanese Government Host country Government Equity Investor Lender Customer Contractor Supplier Local Partner Contract Influence $$$(ODA) Policy Agent based modeling Dynamic linear programming

13. NPV Project Evaluation Cash Flow EPC (Engineering, Procurement and Construction) O&M (Operation and Management)

14. Risk analysis of global infra project Development of NPV model and monte carlo simulation Risk management tools: trade insurance, project financing technique, etc IPP, Water, WasteTransportation (rail, road) Political RiskRegulatory framework risk, confiscation risk, contract breach, political violence, feedstock supply risk + currency exchange risk Commercial RiskProject completion risk, operation risk, + off taker risk (demand uncertainty) Natural force majure 『国際インフラ事業の仕組みと資金調達』（加賀隆一著）を著者加工

15. Analytical aspects by PPP Entity Goal/ContingencyKey VariableMajor risks ProcurerValue for money/ failure in PPP project NPV of project Quality of public services Bid qualification SponsorReturn on Equity/ financial close Equity IRRDemand factors and cost factors (OPEX, CAPEX) Senior LenderReturn on Loan/ delay and default of interest and principle Loan life cover ration (LLCR) Annual debt service cover ratio (ADSCR) Whole project risks but senior over equity and junior loan Example of optimization problem: Too high D/E ratio -> LLCR (ADSCR) shortage -> Require mezzanine loan -> higher financial costs -> Lower equity return The degree of procurer’s commitment to demand (electricity, ridership clause) -> lower contingency (like bankruptcy of SPV) -> make NPV of project higher

16. Business Plan Competition : ASEAN Adapted from Financial Times Indonesia Philippines Malaysia Singapore Thailand Cambodia Myanmar Laos Vietnam Brunei ASEAN : factory and/or market for Japanese multinationals?

17. Changing the landscape of Asia Comparative table in 2010

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

19. Business Plan Items Executive Summary What is your company? (Hitachi group? or others? Start-up company?) Management Team and Division of Labor What kind of global business in ASEAN? And why – Summary of your new business – Business model of your proposal Who’s your customer? Market and competitor analysis – Risk analysis Potential risks and contingency plan Business execution planning (HOW) – Partnership with local players (with whom? why?) – Local operation – Marketing plan Business Plan Evaluation (such as NPV, IRR analysis) 15 min presentation in the last class of this course

20. Next class: Case study on Neemrana Industrial Park Neemrana Industrial Park has been developed by cooperation of Japanese and Indian governments. What are reasons why both side of governments helped to develop this industrial park? What are risks associated with investment in production sites in India? What are benefits located in Neemrana Industrial Park, in terms of lowering these risks? Hitachi plans to extend “Neemrana Shared Energy Center (N- SEC)” model to other region of India? Do you think whether Hitachi will succeed? Do you have any recommendation in new business in India? What kind of business will be successful? You can extend a scope of your industry, not only in manufacturing, but also to trading companies, banks and logistics business.