Company Introduction
Supermax Corporation Berhad is a world leading manufacturer, distributor, marketer of high quality medical gloves (Supermax Corporation Berhad. 2012, p.2). It produces two types of medical gloves, natural rubber glove and nitrile rubber glove. The main raw material for natural rubber glove is latex (obtained from natural rubber tree), and the main raw material for nitrile rubber glove is nitrile (processed material). In layman's terms, Nitrile rubber is also known as synthetic/artificial/faked rubber. Supermax exports nearly all its products to more than 155 countries. It also has many distribution centers in key markets, such as USA, Brazil, and Europe. Established in 1987 and started manufacturing in 1989, it is the second largest manufacture of medical gloves in Malaysia, with annual capacity of 17.8 billion pieces or 11% of the world's supply of rubber gloves. The company has won many local and international awards. It is a well recognized brand name for high quality products and services.
Medical glove is a generic product produced in the whole world, no one or a group of companies can control the price, i.e. the market sets the product price. One of the main objectives of public listed company is to maximize profit for its shareholders, as such, the ability to control unit cost of production is key to the company's profitability. There are also two key factors not within its control that affect its probability, they are the exchange rate between Ringgit and US dollar – because its products are quoted and sold in US dollar-, and the cost of the main raw materials, latex and nitrile. Others factors that affect its profitability are as follows:
1. Capacity utilization rate, higher means less wastage of resources including capital.
2. Current demand and forecast demand growth, higher is better.
3. Current supply and forecast supply growth, lower is better.
4. Favorable products mix, produce and sell high profit margin product is better.
5. Cost of distribution such as transport/shipping cost, lower is better.
6. Factory automation, higher automation will reduce labor/operating cost in long run.
7. Government tax incentive, such as capital reinvestment tax allowance, more is better.
8. Government subsidies reduction in gas and electricity, this will increase unit cost of production, and to maintain profitability, need to increase price which may result in lower demand.
A. The Law of Demand
The Law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded (Sloman and Wride et al., 2012, p. 32).
Nitrile rubber glove and natural rubber glove is a near perfect substitute of each other. There are people who are allergic to latex, they can only use nitrile rubber. Market will determine the equilibrium price for both the gloves. Supermax on its own cannot try to increase the price without expecting a decrease in quantity demanded, as per the Law of Demand, due to the substitution effect. In other words, if Supermax insists of selling its product at higher price, buyers can either by the substitute product at lower price or purchase the product at lower price from other sellers.
B. Other Determinants of Demand
Other determinants of demand, such as the prices of related goods, expected future prices, income, expected future income and credit, population, preferences, disease outbreak, and healthcare policy expansion (Sloman and Wride et al., 2012, p. 34).
A change in any of the determinants listed below will shift the demand curve rightward if there is an increase in demand, and leftward if there is a decrease in demand.
1. The prices of related goods
When the price of substitute for the good increase, as expected purchasers will buy less, the demand of the good will decrease and vice versa. Nitrile rubber glove and natural rubber glove is a near perfect substitute of each other. If natural rubber glove is more expensive than nitrile rubber glove, buyers will choice nitrile rubber glove.
2. Population
Increase in population will increase the demand of the goods. Glove demand to stay resilient. We expect the annual demand for rubber gloves to remain steady at 10% growth over the next few years (The Research Team, 2013, p. 3). Due to natural growth in the world population. Supermax also expand its market by selling into new countries, this will simulate increase in “population”/demand.
3. Preferences
There is a change in preference of nitrile rubber glove over natural rubber glove in USA and Europe markets. Solid nitrile glove growth continues. Overall global glove demand is still growing at a robust rate, underpinned by the persistently strong demand for nitrile gloves while demand for latex gloves has reached a plateau. Demand for nitrile gloves continues to grow strongly despite a slightly higher ASP for nitrile gloves, for the demand from the developed markets (particularly US, Europe) is less price sensitive (Yen Ling, 2013, p. 2). This change in preference has increase the demand of nitrile rubber glove.
3. Current supply and forecast supply growth, lower is better.
4. Favorable products mix, produce and sell high profit margin product is better.
5. Cost of distribution such as transport/shipping cost, lower is better.
6. Factory automation, higher automation will reduce labor/operating cost in long run.
7. Government tax incentive, such as capital reinvestment tax allowance, more is better.
8. Government subsidies reduction in gas and electricity, this will increase unit cost of production, and to maintain profitability, need to increase price which may result in lower demand.
A. The Law of Demand
The Law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded (Sloman and Wride et al., 2012, p. 32).
Nitrile rubber glove and natural rubber glove is a near perfect substitute of each other. There are people who are allergic to latex, they can only use nitrile rubber. Market will determine the equilibrium price for both the gloves. Supermax on its own cannot try to increase the price without expecting a decrease in quantity demanded, as per the Law of Demand, due to the substitution effect. In other words, if Supermax insists of selling its product at higher price, buyers can either by the substitute product at lower price or purchase the product at lower price from other sellers.
B. Other Determinants of Demand
Other determinants of demand, such as the prices of related goods, expected future prices, income, expected future income and credit, population, preferences, disease outbreak, and healthcare policy expansion (Sloman and Wride et al., 2012, p. 34).
A change in any of the determinants listed below will shift the demand curve rightward if there is an increase in demand, and leftward if there is a decrease in demand.
1. The prices of related goods
When the price of substitute for the good increase, as expected purchasers will buy less, the demand of the good will decrease and vice versa. Nitrile rubber glove and natural rubber glove is a near perfect substitute of each other. If natural rubber glove is more expensive than nitrile rubber glove, buyers will choice nitrile rubber glove.
2. Population
Increase in population will increase the demand of the goods. Glove demand to stay resilient. We expect the annual demand for rubber gloves to remain steady at 10% growth over the next few years (The Research Team, 2013, p. 3). Due to natural growth in the world population. Supermax also expand its market by selling into new countries, this will simulate increase in “population”/demand.
3. Preferences
There is a change in preference of nitrile rubber glove over natural rubber glove in USA and Europe markets. Solid nitrile glove growth continues. Overall global glove demand is still growing at a robust rate, underpinned by the persistently strong demand for nitrile gloves while demand for latex gloves has reached a plateau. Demand for nitrile gloves continues to grow strongly despite a slightly higher ASP for nitrile gloves, for the demand from the developed markets (particularly US, Europe) is less price sensitive (Yen Ling, 2013, p. 2). This change in preference has increase the demand of nitrile rubber glove.
C. The Law of Supply
Law of supply stats that a company faced with constant demand will be able to raise prices inversely to shrinking available supply; conversely, the company may lower prices inversely to increased supply. (BusinessDictionary, 2013).
Reverse of the law of demand, the producers will be willing to produce more as the price of the goods move higher. Company primary objective is to maximize profit, therefore, it is only logical to expect that it will only product good that minimally cover its cost, else it will incur loss. Buyers prefer nitrile rubber gloves over natural rubber gloves, they are willing to pay a slightly higher premium in price.
D. Other Determinants of Supply
Other determinants of supply are the prices of factors of production, the prices of related goods produced, expected future prices, the number of suppliers, technology, and state of nature (Sloman and Wride et al., 2012, p. 40). A change in any of the determinants listed below will shift the supply curve rightward if there is an increase in supply, and leftward if there is a decrease in supply.
1. Technology
Supermax is increasing its investment in more factory automation throughout its manufacturing process. This will significantly increase its supply, increase its productivity level, reduce its unit cost of production in a long run due to economies of scale. According to the Supermax 2012 Annual Report, it had budgeted Ringgit 65.8 million for its 2013 automation programme.
2. State of Nature
If natural disasters such as major flood affected its factories productions or supply of raw materials, for example latex, its supply of the end products will be significantly reduced. Flooding is a common occurrence in Malaysia and Thailand, both are major producers of latex. Major flood occurs once in a few years which will severely affect the supply of latex. When this occurs there will be a shortage of latex supply which will affect the supply of nature rubber gloves.
E. Market Failures
In a competitive market, market failures which cause production distortion of efficient use of resources could come from government actions such as new regulations and subsidies.
1. Regulation
For a competitive market such as glove industry which is in market equilibrium, the implementation of minimum wage this year, 2013, by Malaysian government has created a “tidal wave” across the industry, the price equilibrium has been adjusted upward due to increase in cost of production. Supermax has escalated the implementation of factory automation to contain the increase in unit cost of production. This has resulted in lower hiring of new local and foreign employees even though new factories were built in 2012 and 2013. Supermax is expected to implement job cuts for both local and foreign employees after the completion of factory automation programme. Below diagram shows the effect of implementation of minimum wage – unemployment.
2. Removal of Subsidies
Malaysia government has the intention to reduce the natural gas subsidy gradually for the next few years. Every time when the gas subsidy is reduced, the unit cost of production will increase. During the time the market adjusting to a new market equilibrium price, the industry will experience under production. During this period, resources will not be optimally/efficiently used.
F. Primary company objective
Companies are in the market to make money, unless it is a non-profit organization, for its shareholders, i.e. one of the main objectives is to maximize profit. Failing to make profit, the company will either close down or takeover by another profitable company.
Rubber glove industry is very challenging and competitive, the industry has underwent many acquisitions and mergers in the past few years, many small manufactures were bought up by larger competitors. The most recent acquisition is Medi-Flex (a company listed in Singapore Stock Exchange), it is being acquired by Top Glove, another large public listed company in Bursa Malaysia.
G. The long run theory of production
In production theory, all inputs/resources can be adjusted in a long run. As more inputs are used to generate more outputs, a firm is experiencing an increasing returns to scale when per unit cost of production is decreasing. This means that the company is producing its products in economies of scale stage.
Supermax has been responding to the changing demands of the market, such as the change in preference for nitrile rubber over natural rubber, and mitigating raise in input costs such as increase in minimum wage and reduce in gas subsidy. Supermax has taken three drastic actions with major increase in capital expenditures in the last two years. Firstly, it reconfigures many machines to produce nitrile rubber gloves instead of natural rubber gloves. Secondly, it refurbishes many old machines to increase production of nitrile gloves. Lastly, it increases its production capacity by building many new factories to produce nitrile rubber gloves. Doing all these with the intention to achieve higher production level and reducing per unit cost of production through higher economies of scale.
Reference
BusinessDictionary.com. 2013. What is law of supply? definition and meaning. [online] Available at: http://www.businessdictionary.com/definition/law-of-supply.html [Accessed: 24 Oct 2013].
BusinessDictionary.com. 2013. What is law of supply? definition and meaning. [online] Available at: http://www.businessdictionary.com/definition/law-of-supply.html [Accessed: 24 Oct 2013].
Sloman, J., Wride, A. and Garrat, D. 2012. Economics. 8th ed. Rotolito Lombarda, Italy: Pearson.
Supermax Corporation Berhad. 2012. Supermax-Anual Report 2012. [report] Kuala Lumpur: Supermax Corporation Berhad, p. 2.
The Research Team. 2013. Heathcare Products - Rubber Gloves. [report] Kuala Lumpur: RHB Bank, p.3.
Yen Ling, L. 2013. Rubber Gloves Sector Update. [report] Kuala Lumpur: Maybank IB, p. 2.
