The following case analysis discusses the macro and micro elements that influence Luotang Power. When viewed as a company among dozens of others in the same firm, Luotang does not have a great impact to the industry in China. Although Luotang Power has been claimed to be successful and grew rapidly when it was first opened for business, the 20-year Build Operate Transfer (“BOT”) contract with the government is due very soon; the plant will be given to the Hubei Provincial Government after 2 centuries of operation at no cost to the government.
Ever since the power plant has begun operating, there were already political restrictions put into use and some even before the plant opened. In addition to Luotang Power ultimately becoming the property of the Hubei Provincial Government, this plant is strictly foreign owned and the conditions were that only Chinese manufactured equipment will be used within and around the plant.
This shows how political factors have already taken a great toll on Luotang plant before anything has happened; this also sets a limit of 20 years for the current rightful owner to try to make as much profit as possible before the contract ends (the microanalysis will elaborate on how this can harm the company). Economically, Luotang was one of many power plants that were in operation in China but only one of the few around the provincial area.
Around the time Luotang Power began operations, this opened up opportunities for many other small businesses to form around the plant. The case provided information about how Luotang experienced rapid growth when it had first opened; many other power plants around the country were also growing quickly and many power plants at the time were growing rapidly due to smaller businesses that formed around the electrical power industry.
More recently, the parent company China Hua Tong Company (“HT”) has been considering the idea of a large expansion of the Luotang Power plant; this requires not only for the plant to have performed well over the past years but also some reliable information that the plant will be performing well in the future.
Future performance of Luotang Power must be at a level where an expansion will be quickly paid off with profits and therefore worth the time and money. Compared to other companies of similar output, Luotang Power appeared close to the average.
The following is the corrected text:
The following case analysis discusses the macro and micro elements that influence Luotang Power. When viewed as a company among dozens of others in the same industry, Luotang does not have a great impact on the industry in China.
Although Luotang Power has been claimed to be successful and grew rapidly when it was first opened for business, the 20-year Build Operate Transfer (“BOT”) contract with the government is due very soon, and the plant will be given to the Hubei Provincial Government after 2 decades of operation at no cost to the government.
Ever since the power plant began operating, there were already political restrictions put into use, and some even before the plant opened. In addition to Luotang Power ultimately becoming the property of the Hubei Provincial Government, this plant is strictly foreign-owned, and the conditions were that only Chinese-manufactured equipment would be used within and around the plant.
This shows how political factors have already taken a great toll on Luotang plant before anything has happened; this also sets a limit of 20 years for the current rightful owner to try to make as much profit as possible before the contract ends (the microanalysis will elaborate on how this can harm the company). Economically, Luotang was one of many power plants that were in operation in China but only one of the few around the provincial area.
Around the time Luotang Power began operations, this opened up opportunities for many other small businesses to form around the plant. The case provided information about how Luotang experienced rapid growth when it had first opened; many other power plants around the country were also growing quickly (refer to Appendix A for more information about the companies), and many power plants at the time were growing rapidly due to smaller businesses that formed around the electrical power industry.
More recently, the parent company China Hua Tong Company (“HT”) has been considering the idea of a large expansion of the Luotang Power plant; this requires not only the plant to have performed well over the past years but also some reliable information that the plant will be performing well in the future.
Future performance of Luotang Power must be at a level where an expansion will be quickly paid off with profits and therefore worth the time and money. Compared to other companies of similar output, Luotang Power appeared close to the average.
As mentioned later in the case, HPPC has been negotiating with more pressure in 2010, which allowed Luotang Power to receive more revenue but at the same time lose potential revenue if they had made sales to another customer or to HPPC in the next fiscal year. HPPC is more than able to produce its own power, but since the contract is such an advantage, HPPC can just purchase much more from Luotang Power at a discount instead of spending more cash on their own production.
The case also only mentioned one supplier for Luotang Power, and that supplier is Pingdingshan. They are a large and successful supplier of coal to various customers (see Appendix C for detailed information). The case stated, however, that this sole coal supplier sometimes supplies low-quality coal that has a significant amount of moisture, which does not allow all coal to be immediately put to use.
The price for the qualities of coal is calculated and varies, but other non-cash expenses, such as storage room and production delay, can be some negative factors resulting from bad quality coal.
Unfortunately, it appears that regarding both customers and suppliers, Luotang Power does not have control over price and quality and must abide by whatever terms the other parties follow. The high debt that Luotang Power owes since the construction of the plant is becoming more significant due to declining revenues over the last few years. A substantial amount of construction costs was and still is being financed by debts, and meanwhile, the company is not generating enough cash to pay off the debts.
Another factor worth noting is that the 20-year contract with the provincial government is almost finished. The lack of some parts of the company may be due to employees having their self-interest. Since the contract is almost finished, some employees may focus on investing in their short-term goals rather than the company’s long-term goals. Appendix D discusses this issue known as the horizon problem.
SWOT Analysis Based upon the information about Luotang Power given in the case, the company does not seem to have much strength at all. There are a few weaknesses, however, such as the fact that Luotang Power has no control over its customers or suppliers. As mentioned already, it seems that Luotang Power must cooperate with the terms that other parties create to keep surviving as a company. If the customer or supplier wanted to change the terms, Luotang Power would most likely have to agree to keep a source of income and supplies.
Opportunities for Luotang Power are definitely limited. The company has not expanded yet, and they have even admitted that HPPC was expected to be their only major customer. This situation causes Luotang Power to depend heavily on their main customer, meaning that they are forced to be flexible based on HPPC’s desires.
The only major threat is, in fact, not other companies but the demands of the customer, HPPC. According to the case, HPPC had negotiated much harder in 2010 than previous years. Luotang Power can lose a lot of potential revenue because of the terms of the contract, and this loss of revenue would be considered the greatest threat at that point in time.
Overall, Luotang Power seems to have made some mistakes when beginning operations by not securing enough customers and suppliers. Now, in the future, they are very dependent on HPPC and Pingdingshan, and they still cannot make enough revenue to pay back debt due to the lack of customers.
