ACC 430 Module7 Assignment Solutions Doc Share

Module 7 Chapter 12 and Chapter 13
Module7 Exercise and Problems Chapter 12 Exercises and Problems 15

Chapter 13 Exercises and Problems Case
Module7 Exercise and Problems Ch12-Pr15
Akku Company imports die-cast parts from its German subsidiary that are used in the production
of children’s toys. Per unit, part 169 costs the German subsidiary $1.00 to produce and $0.20 to
ship to Akku Company. Akku Company uses part 169 to produce a toy airplane that it sells to
U.S. toy stores for $4.50 per unit. The following tax rates apply:
German income tax.....................40%

U.S. income tax............................35%
U.S. import duty...........................10% of invoice price
Required:
a. Determine the total amount of taxes and duties paid to the U.S. and German governments
if part 169 is sold to Akku Company at a price of $1.50 per unit.
b. Determine the total amount of taxes and duties paid to the U.S. and German governments
if part 169 is sold to Akku Company at a price of $1.80 per unit. c. Explain why the results
obtained in parts (a) and (b) differ.
15. Akku Company
a. $1.50 transfer price b. $1.80 transfer price

Germany U.S Total Germany U.S Total
Sales price $1.50 $4.50 $4.50 $1.80 $4.50 $4.50
Production cost 1.00 1.50 1.00 1.00 1.80 1.00
Shipping cost 0.20 0.00 0.20 0.20 0.00 0.20
Import duty 0.00 0.15 0.15 0.00 0.18 0.18
Pre-tax income $0.30 $2.85 $3.15 $0.60 $2.52 $3.12
Tax 0.12 1.00 1.12 0.24 0.88 1.12
Net income $0.18 $1.85 $2.03 $0.36 $1.64 $2.00
Total tax and
import duty $1.27 $1.30
c. The lower transfer price ($1.50 vs. $1.80) results in the smaller amount of total income tax and
import duty because less pre-tax income is reported in Germany, the higher tax country, and a
smaller amount of import duty is paid in the United States.
Module7 Exercise and Problems Ch13 Case 13-2
Lion Nathan Limited We’re in the business of satisfying thirst. We do it very well. We’re also
thirsty ourselves. Thirsty for continued profitable growth. Every gain delivers more for our
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shareholders. We’re thirsty for knowledge. People and their preferences change all the time.
We’re open to ideas from everywhere that will make us better at beverages and brands. We’re
thirsty for a bigger share of the market. It’s a competitive place, but we’re determined to prevail
through the sheer quality of our brands. We’re doing all this with passion, integrity and a “can
do” attitude that enables us to face reality and turn it to our advantage.
1 Lion Nathan Limited, 2001 annual report, p. 1.
Background
Lion Nathan Limited (hereafter, Lion) was formed in 1988 by the merger of two New Zealand
companies: Lion Corporation, a brewer, wine and spirit manufacturer, and hotel operator, and LD
Nathan & Company, a food and general merchandise retailer with consumer goods and soft drink
interests. The company’s strategic direction had been heavily influenced by its longtime leader,
Douglas Myers, who retired from the chairmanship of the company in 2001, which he had held
since 1997 (Exhibit C1). Lion was the leading brewer in the duopolistic New Zealand market.
Realizing the need to transform itself from a small New Zealand–focused company into a strong
Australasian business with an increasingly international outlook, it bought 50 percent of Natbrew
Holdings in Australia in 1990. The company also entered into a franchise arrangement with
PepsiCo Inc. to manufacture, market, and distribute Pepsi products in Australia. In 1992, Lion
acquired the remaining 50 percent of Natbrew and expanded the Pepsi franchise arrangement to
New Zealand. In 1993, the company added Hahn Brewery and South Australian Breweries to the
operation. The company’s Australian breweries now had a 41 percent share of the Australian beer
market and accounted for about 75 percent of Lion’s assets (see Exhibit C2). Lion was the
second-largest brewer in Australasia.
Lion entered the China beer market in April 1995, when it spent NZ$21.6 million to purchase a
60 percent interest in the Taihushui brewery in Wuxi (approximately 120 kilometers west of
Shanghai), with the Mashan District Government as the joint venture partner. Unlike most
foreign joint-venture breweries in China, the Wuxi brewery had been turned from a loss maker to
a profit center before Lion became involved. According to the 50-year agreement with
Taihushui, Lion would have management control of the joint venture, and it was envisaged that
the local management would be retained, supplemented by Lion personnel in special- ist areas
such as production and marketing. In January 1996, ownership of the Taihushui brewery was
increased to 80 percent.
The Taihushui purchase was funded out of Lion’s operating cash flow from its existing brewing
businesses in Australia and New Zealand. Lion’s CEO, Myers, said the Wuxi joint venture gave
Lion a significant foothold from which to build a greater presence in a high-growth area of China
—the Yangtse River Delta. Although beer consumption in China was growing rapidly, with per
capita consumption increasing by 15–20 percent annually since 1990, it was still low by Western
standards.
EXHIBIT C1 Company Chairman Source: Lion Nathan Limited, 2001 annual report.
Douglas Myers, Chairman since 1997, and CEO for 15 years from 1982, retired as
Chairman in 2001. Myers’ formal association with the liquor industry began in 1965. It
was then he became Managing Director of the family company, The Campbell &
Ehrenfried Co. Ltd., continuing the Myers’ already long history in brewing and liquor
retailing. Six years later he founded New Zealand Wines and Spirits and by 1981
headed Lion Breweries. Under his direction and later under his Chairmanship, Lion
Nathan has grown from a small local New Zealand brewer to become one of
Australasia’s largest beverages companies delivering double digit compound annual
growth for shareholders.
EXHIBIT C2 Lion Asset Allocation, 1989 and 1999

New Zealand Australia China
1989 95% 5% 0%
1999 20% 75% 5%
Current annual per capita consumption in the Yangtse River Delta area averaged 14 liters, less
than a fifth of New Zealand’s or Australia’s consumption. Myers said, “The time is right for the
Chinese move.”
Annual GDP growth in the region at the time exceeded 17 percent, and there were already more
than 3,000 joint ventures in Wuxi alone. Around 70 million people lived in the delta (an area
about the size of Tasmania, half the size of New Zealand’s North Island). Along with its
Yangtse River Delta neighbors Shanghai and Suzhou, Wuxi ranked among the five wealthiest
cities in China.
Lion expanded its interests in China with the opening of a new $180 million state-of-the-art
wholly owned brewery at Suzhou in March 1998. The 200-million-liter capacity at the Suzhou
brewery gave the company capacity equivalent to the total New Zealand beer market, and the
group had more employees in China than in New Zealand.
Introducing another twist to Lion’s internationalization strategy, the Kirin Brewery Company of
Japan purchased a 46 percent interest in Lion in April 1998. Although Kirin, as the dominant
shareholder of Lion, affirmed that, like Lion, it saw the relationship as a long-term and enduring
one, there were some concerns about Kirin’s intentions (see Exhibit C3).
In April 1999, Lion announced that it was entering into an agreement with Brauerei Beck &
Company of Germany for a long-term partnership in China for the Beck’s brand. The agreement
would provide for Lion to brew and sell Beck’s beer throughout China. Lion’s managing director
for China, Jim O’Mahony, said that the agreement was a clear indication of both brewers’ long-
term commitment to China.
In June 2000, the company shifted its domicile and primary stock exchange listing to Australia.
Lion’s chairman, Doug Myers, said, “The decision to relocate
EXHIBIT C3 Partnership with Kirin Breweries
Source: Lesley Springall, The Independent, May 30, 2001, p.5.
Lion Seeks Foreign Fizz for Its China Operations
Lion Nathan yesterday quashed rumours that its majority shareholder, Japan’s largest
brewer Kirin Breweries, might take its loss-making Chinese operations off its hands. But
Lion is looking for a buyer—or at least a partner—to help stem losses in China.
Lion’s losses in China were reduced to $A12.9 million during the period compared to the
previous half year loss of $A15.7 million.
Despite five-year prediction to the contrary, the operation has reported only bad news
since Lion entered the market in 1995.
Kirin bought 46 percent of Lion in 1998 for about $1.4 billion. At the time, it said one
of the reasons for its purchase was Lion’s toe-hold in China which accounts for about 5
percent of Lion’s overall business.
Since this “partnership agreement” lapsed last month, speculation has been rife about
Kirin’s long-term plans.
Lockey (Paul Lockey is Lion’s Chief Financial Officer) says Kirin is not interested in
Lion’s Chinese operation and that it was not the key driver to the company’s investment.
“It is supportive of the process we’re going through and has stated it has no intention to
change or operate any differently as a result of the expiry of the partnership principles”.
Lockey denied there was a link between Friday’s resignation of Lion director Mike
Smith, who was instrumental in the setting-up of the Chinese operations and negotiations
with Kirin, and the problems in China. After 30 years with Lion, 15 as director, Smith
said it was simply time to move on. He has been a key contributor to Lion’s progress
from a small New Zealand brewer to a multinational of considerable clout.
the company head office is a sensible business decision which recognizes that our Australian
business, which makes up 70 percent of our assets, is the main growth engine of the
company.” The company would remain listed on the New Zealand Stock Exchange. As a
result, Lion became a New Zealand–based company that earned most of its income overseas
and had an overseas-based con- trolling shareholder.
In 2001, while volume grew 5 percent to 83.7 million liters, revenue increased 8.6 percent with
improved pricing and mix shift. In local currency, the loss of RMB 83.8 million was a 32 percent
improvement on the comparable 12-month period in the prior year. In Australian dollars, the loss
improved by 21 percent. Despite these improvements, the company’s Chinese breweries
continued to run below capacity.
The Market in China

The Chinese beer market was highly fragmented, with a large number of breweries comprising
regional and sub-regional markets. Although it has experienced some consolidation in recent
years, the competitive environment was expected to remain difficult, with most brewers having
real difficulty achieving adequate returns. In early 1998, there were around 860 breweries of any
significant size in China. They included 40 with foreign joint-venture participation by a roll call
of brewing giants: Heineken, Carlsberg, Guinness, Anheuser-Busch, Suntory, Fosters, San
Miguel, Asahi.
Lion was wrestling with a number of problems in the China side of its business. Although the
Lion breweries in the Yangtze River Delta region increased sales volume by 63 percent in the six
months to March 31, 2004, the business remained unprofitable. In the same period, Lion’s
operating loss in China ran to $7 million after a similar loss in the previous half-year. The losses
were due to an economic downturn, declining expected growth rate, intense competition, and an
initial heavy investment strategy. For example, brewers such as Lion who were buying market
share in China faced about 500 local competitors in a market that was divided by regions,
cultures, tastes, and incomes. Further, they experienced intense competition from state-owned
breweries selling cheap beer. According to market research conducted in China, consumers over
45 years old (Baby Boomers), influenced by the Cultural Revolution that took place in China,
were highly sensitive to price and responded negatively to new products and most forms of
marketing. They were a large group of people who had a very strong influence on the consumer
markets of China. Furthermore, poor transportation infrastructure, various regional laws and
regulations, and high import costs did not help. Lion made operating losses of more than $200
million in seven years. Further, initially Lion was spending a lot of money to recruit and train
local executives with little knowledge of Western marketing and management techniques. The
task was not an easy one and, at least in the initial stages, meant a heavy commitment of expa-
triate resources to create a corporate culture. Getting well-educated, well-trained staff was
difficult, and keeping them was worse in a market full of foreign companies desperate for well-
qualified locals. Many Chinese employees didn’t have great loyalty to their company and would
move firms for as little as an extra $20 a month.2
2 Nikki Mandow, “Doing Business in China: Not for the Ethnocentric,” The
Independent, January 28, 1997, p. 18.
The key challenge was to adapt the Chinese guanxi (relationship) way of doing business to
Western minds, particularly those that emphasized selling. Lion’s human resources director in
China, Shane Slipais, said, “Relationship building is vital to all success in China, either
personal or in business Chinese spend more time on and off the job with each other than in
Australia
or New Zealand.......The secret of doing business in China is to be rigid in what you want to
achieve but be flexible in the way you get there.”3 Guanxi worked in both formal and informal
ways. Outright confrontation in the workplace was generally a no-no, and employer/employee
disputes were dealt with through intermediaries.
Compliance with regulations, such as paying taxes and not polluting the environment, was far
less obvious. The pecking order put multinational companies at the top of the compliance list,
Chinese state-owned enterprises at the bottom, and overseas-Chinese-run businesses in the
middle. Corruption was endemic in any system where a form of authority, in this case the
Communist Party, was above the law. It was a day-to-day reality.4 From a Western perspective,
the main problem was the need to understand different business philosophies and practices.
Failure to do so could be expensive. As one commentator stated, “There is a rule of thumb about
China—do your homework before you get here. Take your worst-case scenario for cost and time,
multiply it by two and you have the full cost estimate.”
The desire for short-term profits and/or high rates of return did not bring much success for
foreign investors in China. Chinese partners emphasized long-term relationships with reasonable
returns and mutual benefits. Only half of China’s breweries made money, and the foreigners’
track record so far had not been conspicuously better than the locals’. Both Lion’s Australian
archrival, Foster ’s, whose three loss-making breweries together notched up a deficit of $29
million in 1997, and British brewer Bass decided to quit.
In deciding to get out of China, Lion entered into an unconditional agreement in 2004 to sell for
US$154 million its Chinese beer business to China Resources Breweries Limited (CRB),5 which
was formed in 1994 and was engaged in the production, sales, and marketing of beer and
beverages in China. At the time, Lion’s business in China consisted of three breweries employing
over 1,000 people in the economically developed Yangtze River Delta region close to Shanghai.
The breweries had installed capacity of 5.16 million hectoliters, with sales volume of 2.19
million hectoliters forecast for the year ending September 2004. Lion’s brands included the
mainstream beers Taihushui, Linkman, and Rheineck, which were distributed in the Yangtze
River Delta. In this region, Lion had an estimated market share of 20 percent and leading
positions in and around the cities of Wuxi, Suzhou, Changzhou, and Nanjing.
Required: Write a report identifying the main strategic issues associated with Lion’s China
operation.
3 N. Gibson, “Foreigners Still Find Breaking into China a Delicate Business,” National
Business Review, August 15, 1997, p. 37.
4 Ibid.
5 CRB was the second-largest brewer in China, operating over 30 breweries, and it was a joint
venture owned by SABMiller plc (49%) and China Resources Enterprises Limited (CRE) (51%).
SABMiller, one of the world’s largest brewers, entered the China market in 1994 and was one of
the few profitable foreign brewers operating in the country. In the year ended March 31, 2004,
the group generated US$1, 391 million pre-tax profit from a turnover of US$12,645 million.
Case 13-2 LION NATHAN LIMITED
Lion Nathan is a typical case of a company, which has grown from its humble beginnings to become a
large MNC, one of Australasia’s largest brewery companies. The purpose of this case is to highlight
some of the accounting and related issues faced by companies like Lion that enters into foreign markets
that are different in many ways from those of their own countries. Students are expected to prepare a
report identifying the main strategic issues related to Lion’s Chinese operation.
In this case it is useful to conduct a SWOT analysis regarding Lion Nathan China Brewing Company’s
competitive advantage. The analysis should consider carefully the strengths and weaknesses of the
company, any opportunities presented for future application and threats from other brewing companies.
With this analysis the company’s background, reasons for expanding into China and the appropriateness
of the forecast of managerial decision regarding the company’s future will become clear.
Strengths-
Lion Nathan Brewing Company had five strengths that gave it a competitive advantage over other
premium-style beers sold in China.
First, it was an international brewer in 1999 with three countries: New Zealand, Australia, and China,
which gave them a broad customer base and allowed the company to experiment with new products and
new ideas. This also allowed the company to be more specialized and focus only on premium beer.
Second, the Company also had a portfolio of over fifty brands and owned and operated ten separate
breweries. This allowed them the freedom to cater to many types of customer while focusing on premium
beers, for example a beer that was popular in Australia might not be popular in China.
Third, the manner in which beer was viewed in China was an important strength to the company. The
Chinese government also promoted beer since beer had relatively low alcohol content and it was viewed
as a refreshing beverage which would assist the food digestive system rather than as an alcoholic drink.
Fourth, the company recruited the local Chinese managers who had previous experience in the beverage
or related industries.
Fifth, Lion Nathan was able to provide a consistently quality product at the new facility in Wuxi because
the local breweries did not have the capabilities to do so. Consequently, Lion Nathan could build a good
reputation in China and therefore a strong and loyal customer base.
Weaknesses-
Lion Nathan had five weaknesses in its China operation. First,
it was getting into an already declining market.
Second, premium beer accounted for less than twenty percent of consumption in both Shanghai and the
Yangtze River Delta. This was an extremely low number considering mainstream cheaper beer accounted
for more than sixty percent.
Third, consumers in China, particularly over forty-five years old, influenced by the Cultural Revolution,
responded negatively to new products and most forms of marketing.
Fourth, Lion Nathan had significant trouble developing sales and distribution networks within China.
Fifth, in the Chinese culture, the process of making sales was highly social and time consuming, requiring
continuous communication and relationship building amongst seller and distributor. Lion’s executives
may not have fully understood the cultural differences and the impact of those differences on the behavior
of business people.
Opportunities-
Lion Nathan had three opportunities in China. First, the opportunity to build brand loyalty and promote
good ethical international business relations. Second, the opportunity to promote quality products that
were consistent over time. As a result, other local and state run breweries were forced to adhere to the
same quality of product not to be forced out of the market in China. Third, the opportunity to employ
numerous local Chinese people in both Shanghai and the Yangtze River Delta.
Threats-
Lion Nathan had threats from four competitors in China.
First, Anheuser-Bush, an American based company which was the world’s largest brewer distributing
Budweiser brand beer to over sixty countries around the world and aiming to control twenty percent of
the entire world’s market share. In 1998 Budweiser was the leading premium beer brand with a thirty
percent control over the Chinese market. Anheuser-Bush invested heavily in marketing in order to boost
its brand equity. They also used the world-renowned Budweiser beer to gain an international foothold.
Second, another prominent competitor, namely Beck’s Brewing Company, was positioned as a top quality
premium beer with its brand.
Third, Fosters, another premium brand of Australian beer, had a goal in China to become the largest
brewer with a national network of breweries. Fosters China was based out of Shanghai exactly where
Lion Nathan planned to market. Fosters also spent a large sum of money advertising in Shanghai with
billboards in many frequently trafficked areas.
Fourth, Kirin was another competitor, and was the fourth largest brewing group in the world. In Japan
Kirin had fifteen breweries and captured over forty percent of the market share. They entered into the
Chinese market through a joint venture with a local brewer at Zhuhai in Guangdong province.
Lion Nathan was chased out of the Chinese market by competition for market share and the difficulty of
managing a distribution-based business in China. It struck intense competition, however, from state-
owned breweries selling cheap beer, while China’s splintered retailing networks and poor roads cancelled
out the benefits of having a big efficient brewery. Lion Nathan made operating losses of more than $200
million in seven years and cut the book value of its investment to about $130 million
On the surface at least, the conditions of the Chinese beer market appeared to be excellent as a business
proposition. For example, Wuxi, situated in the Yangtse River Delta area, was one of the wealthiest cities
in China; the region had very high growth rates over several years; the level of beer consumption, while
currently low, was on the increase; Wuxi offered a great opportunity for further expansion within China,
the world’s second largest market. Lion invested over $200 million. However, with all the resources and
expertise in the industry, the Chinese initiative was fraught with problems from the beginning.

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Module 7 Chapter 12 and Chapter 13

Module7 Exercise and Problems Chapter 12 Exercises and Problems 15

German income tax.....................40%

15. Akku Company

a. $1.50 transfer price b. $1.80 transfer price

Module7 Exercise and Problems Ch13 Case 13-2

EXHIBIT C2 Lion Asset Allocation, 1989 and 1999

Lion Seeks Foreign Fizz for Its China Operations

The Market in China

Lion Nathan had five weaknesses in its China operation. First,

it was getting into an already declining market.

Lion Nathan had threats from four competitors in China.

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