Based on the article, ‘Staying on Top of The Game’
written by Yvonne Tan in The Star newspaper, Top Glove Corp Bhd. is confident
to expand its business to the Asian markets. Tan Sri Lim Wee Chai, chairman of
Top Glove Corp Bhd. shares his strategies and opinion with us.
It is known that raw
materials are known as scarcity resources. Converting raw materials such as
palm oil, rubber and cocoa to a finish product involve all factors of
production. Recent news states that insufficient supply of rubber has become a
major concern to local rubber companies. However, Top Glove is not afraid but
ready to face this matter. Once rubber becomes scarce, the amount available to
the market is limited but the demand is still there. When the quantity demanded
exceeds quantity supplied, shortages occur. Thus, price of rubber, in another
word, latex increases. Top Glove plans to reduce the risk of high price latex
which accounts for up to 60% of its production costs by buying its own land to
plant rubber trees and thereby getting its own latex supply. Nevertheless, the
company incurs an opportunity cost of production. In my opinion, it could have
sold or rented out the land to another firm to earn more revenue.
In recent years, all
Malaysian glove maker firms have been increasing their production capacities
especially for nitrile gloves because rubber gloves are getting expensive to
produce due to uptrend of latex prices. This has sparked concerns about the
issue of oversupply of nitrile gloves. However, Top Glove owner, Tan Sri Lim Wee
Chai says “It’s a normal situation, there will be oversupply, then the supply
will reduce, the demand will increase…there is always a cycle, so we are not worried.”
I agree with his statement. This is because in market equilibrium, when
quantity demanded equals quantity supplied, the equilibrium price is achieved.
At one point where quantity supplied exceeds quantity demanded, there will be
an oversupply. However, some producers unable to sell their goods as planned
will reduce the prices; resulting in price falls till equilibrium. The falling
price increases quantity demanded and decreases quantity supplied. When
quantity demanded exceeds the quantity supplied, shortage occurs. Producers
will set to increase the price and output, thus pushing the price up until its
equilibrium. The rising price reduces shortage as it decreases the quantity
demanded and increases the quantity supplied. Eventually, surplus and shortage
will occur again due to price affecting the plans of buyers and sellers.
-Supply and Demand Curve-
In addition, Top Glove targets
one new customer per week which equivalent to 52 customers per year. However,
to make that possible, the company has to hire more people in tandem with
growth in demand for both rubber and nitrile gloves. Their productions consist
of 80% of rubber gloves and hoping to have a more balanced mix of rubber and
nitrile gloves. In order to produce more of nitrile gloves, production of
rubber gloves will be lower. In economic terms, the opportunity cost of nitrile
gloves is the lower production of rubber gloves and trade off comes along with
every choice made. In this case, the company trade off rubber gloves for
nitrile gloves. Production efficiency is achieved when more nitrile goods are
produced with the sacrifice of rubber gloves at the lowest possible cost. Let’s
take a look at the PPF (Production Possibilities Frontier). PPF shows the
boundary between those combinations of goods and services that can be produced
and those that cannot. The goods involved now are nitrile and rubber gloves.
-PPF and Opportunity cost-
When all the points fall on the
Production Possibilities Frontier (PPF), production efficiency is achieved. It
is impossible to attain points outside the PPF because resources are scarce yet
any points inside the frontier will be consider inefficient, either resources
are misallocated of unemployed. Furthermore, the slope of the PPF shows
marginal cost of a good. At an instance, the marginal cost of nitrile gloves is
the opportunity cost of producing one more unit of it. An additional unit of
nitrile glove produced will reduce the production of rubber glove. Due to
difference in resources productivity, the shape of PPF bows outwards. This
shows that with the increase of nitrile gloves production, its opportunity cost
increases too.
Top Glove decides that the
production of both gloves will be based on demand. In my opinion, this is a
smart move. Over the years, the quantity demanded for nitrile gloves rises due
to expensive rubber gloves. According to ‘The Law of Demand’, the higher the
price of a good, the smaller the quantity demanded provided other factors remaining
the same. Consumers will seek substitute once the price of rubber gloves
increases. For example, the price of a rubber gloves is equivalent to two
nitrile gloves. Therefore, consumers will go for the nitrile gloves. In this
way, Top Glove can re-allocate their resources and plan on the productivity of
both gloves.
Since nitrile gloves are a close
substitute for rubber gloves, the demand for rubber gloves is said to be
elastic. If the percentage change in quantity demanded exceeds the percentage
change in price, the good is said to have an elastic demand with price
elasticity greater than 1. As I mentioned earlier, the increasing price of
latex is causing difficulty to produce rubber gloves. Thus, Top Glove seek
alternative by producing nitrile gloves using the factors of production used
for producing the rubber gloves. As a result, the elasticity of supply for
nitrile gloves is elastic.
Business in rubber gloves
industry is set to be challenging. Top Glove is facing market constraints while
competing with rivals. “When a company has grown to a certain size, continuous
growth will be more challenging, so this is our idea for now. Obviously, there
is a plan to achieve this,” says Tan Sri Lim Wee Chai. Top Glove is determined
to grow their market share to 30% and achieve an increase in sales and net
profit by between 10% and 20% per year. Another constraint face by Top Glove is
hiring the right people. According to Tan Sri Lim Wee Chai, expanding company
requires good people and teamwork from all departments. Currently, the staff
strength in Top Glove is approximately 11,000 with 23 manufacturing facilities
spread across Malaysia, Thailand and China. Top Glove is determined to remain
efficient, improve technology, meet all of the customers’ requirements and have
reasonable pricing in their product to cope with economic problem.
Author: Student ID: 0312558
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