Factory #539: China Star Technology Electronics Ltd. (A)

With a cross-disciplinary perspective, this field-based case series uses the purchase of a manufacturing company based in China to set the stage for an analysis of cost accounting, operational effectiveness, and cross-cultural communication. It offers a discussion about the strategy to purchase a Chinese firm to enter a promising business line for the Chinese market and provides an opportunity to introduce basic accounting, management communication, and operational terms that can be explored in following classes. The material includes an overview of a partnership between a Westerner and two Chinese executives, the issues they discovered through due diligence, plans to break into a new market, and their efforts to communicate lean manufacturing principles in another language and culture. If possible, inviting colleagues from accounting, communications, or operations to jointly teach the class enriches the discussion and provides an integrated learning experience.The A case opens with an overview of the capacitor factory in the province of Henan, China that Peer Nielsen, Baocheng Yang, and Zhihong Li are thinking about purchasing. They discovered several issues: workers' wages had gone unpaid for months, payroll taxes were years in arrears, one of the company's most profitable production lines had been “rented out.” Not only were local competitors using its technology, some were producing the same capacitors under the China Star brand. Then there were the production lines that lacked raw materials and the huge unexplained power bill. But the political brass in the region was eager to see new owners purchase the factory with intent to manufacture and would provide the necessary permits and support to get started. Should the group buy it? Excerpt UVA-OM-1473 Rev. Mar. 19, 2013 Factory #539: China Star Technology Electronics Ltd. (A) There was nothing straightforward about transforming a company—a lot of ins, a lot of outs. Over the years, Peer Nielsen, a skilled management and operational improvement consultant, had helped build new businesses and turn around failing ones. He had lived in Beijing and worked all over Asia since 2003. At a breakfast meeting in 2009 with Baocheng Yang, an alumnus from his alma mater, Nielsen was invited to look at a capacitor factory, China Star Technology Electronics Ltd., more than 450 kilometers (280 miles) away in the province of Henan. The factory presented a means of entering the growing capacitor market, which included the new development of supercapacitors. A few days into their due-diligence trip, a clearer picture of the business developed. Aside from issues common to neglected or collapsed companies—not making any money, for one—several not-so-common issues surfaced. Workers' wages had gone unpaid for months, and payroll taxes were years in arrears. One of the company's most profitable production lines had been “rented out.” Not only were local competitors using its technology, some were actually producing the same capacitors under the China Star brand. Then there were the production lines that lacked raw materials and the huge unexplained power bill. But there was a positive note: the political brass in the region was eager to see new owners purchase the factory with intent to manufacture and would provide the necessary permits and support to get started. . . .