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Cameron Autoparts Case Report

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Cameron Auto Parts Case Report
Cameron Auto Parts Case Report
October 16th
12

October 16th
12

08
Fall
08
Fall

Problem Statement

Given, the increasingly competitive domestic market and the increases in foreign demand, Alex Cameron is faced with the decision of how to efficiently expand into foreign markets.

Situation Analysis
External Analysis
When Alex first took control of Cameron Autoparts, the company was facing much adversity in the markets as well as economy. Sales in 1991 (Alex’s first year of operation) dropped from 48 million to 18 million in the first six months, this was due the American economy suffering from a recession, as well as foreign companies from japan were beginning to grasp a larger share of the market. Alex quickly realized he would need to come up with a solution to diversify his company from the competition. He used this opportunity to bring in new engineers to develop a product that related to the existing line but also had non-automotive market appeal. The gamble paid off and Cameron’s sales began to rise again.

As the new product became more and more successful Alex began to explore foreign markets and quickly seized a European patent on the flexible coupler. While having the patent provided Cameron with the exclusive rights to the coupler, if Alex did not begin to produce the product in Europe he would lose the money he sunk into the process. After attaining the patent he quickly set up a licensing agreement with McTaggart supplies allowing them to produce the coupler in Scotland and supply the UK with the product. This led to Cameron receiving royalty cheques of 3% on the first million of sales, and 2% on everything after that. It was a good opportunity to penetrate the European market, although Cameron could have also kept shipping orders over seas and potentially made more profit that way.

Internal Analysis

Cameron’s financial position during the economic crisis according to the case, by the end of 1991, left about half of the workers laid off by Alex. Then replaced by few permanent workers and part-timers working longer hours in order to maintain the company’s normal production. This reflected a 1/6 decrease on the direct labor cost that helped Cameron to cast more capital into the innovation part; at the same time, Alex modified his labor force to be more flexible.

Cameron had proven its capabilities in innovative production processes by creating a new product (flexible coupler) market using the technological skills of their R&D group. Due to the company’s commitment to R&D and marketing, the creation of the flexible couplings or other supply chains of industry was stressed on its own character which got rid of the traditional dependence on Big Three and opened a new path for development in the future.

A weakness of Cameron is how hastily deals are created. Alex signed the licensing agreement within a week; he did not take advice from his managers and any legal aid or lawyers, even he was not fully aware of the licensing agreements and royalty rates. Coincidentally, at the end of negotiation years after, Alex also made his final decision with the influence of pressure from Sandy. It might be the weakness of a graduated person who has no relative experience about making strategic negotiations and decisions; meanwhile, it is an underlying threat through management level.

Alternatives

Australian Joint Venture

Alex Cameron has the option of entering into a joint venture with McTaggart. The agreement would consist of shipping components to Australia where they will be finished and assembled into flexible couplings. The Australian location results in Cameron and McTaggart avoiding a 13% import tariff on finished goods. Instead, the joint venture will pay a 5% tariff on the components. The joint venture will be a fast mode of entry into the stable Australian market.

As McTaggart has a division located in Australia, they would provide the joint venture with local market knowledge and experience. They would also supply used equipment, management and £1,200,000 (60% of £2 million). Cameron Auto Parts would supply £800,000 and the coupling technology. They would be a ‘silent partner’ with a 60:40 equity split. McTaggart proposes an unequal equity split because he will supply the joint venture with managers.

The venture is forecasted to make around £400,000 per year after Australian taxes. Profit for Cameron and McTaggart would be in the form of fees rather than as dividends. McTaggart proposes a management fee of 4% on sales while Cameron would have a 2.5% royalty for the technology. Any additional profits will then be declared as dividends.

French Joint Venture
Michelard & Cie., a family owned distributor organization has proposed a joint venture providing Cameron with the opportunity to penetrate France’s market. The components would be shipped to France where they would be finished and assembled into couplings. Cameron would receive a profit for the components equivalent to one quarter of sales at a marginal profit of 40%. When the venture is able to absorb the total production technology, the plant would then independently produce the flexible couplings.

Along with the technology, Cameron would provide the venture with a $4,000,000USD capital investment. Cameron would receive a 4% royalty on all flexible-coupling sales. Combined, the royalty, equity and profit from component shipments would provide Cameron with revenues of £560,000, £1,660,000 and £3,200,000 in 2007, 2008 and 2009 respectively.

Recommendation

In order to best capitalize on Cameron Auto Part’s strengths and opportunities while mitigating their weaknesses and threats, we advise Alex Cameron to pursue the Australian joint venture subject to some conditions. In coming to this decision, we evaluated the two alternatives based on several criteria. Firstly, due to the $10 million plant expansion made by Cameron Auto Parts, Cameron does not have a significant amount of disposable capital and cash. This is shown in their 2004 and 2005 balance sheets. For this reason, we decided Cameron Auto Parts only has the capital to invest in one alternative. Consequentially, Australia is more attractive than France because the Australian capital investment requirement is $1,000,000USD compared to France’s $4,000,000USD requirement. See Figure 1 for currency conversion calculations.

Secondly, due to Cameron Auto Part’s rapid expansion, they do not have the ability to manage any joint venture operations at this time. Therefore, Australia is more attractive because McTaggart’s Australian division has the local market experience and managerial capability to run the venture’s operations. Conversely, Michelard has a lack of manufacturing experience. So, in order for the venture to be successful, Cameron would have to supply U.S. management to oversee operations, at least for the short-term. As they are currently unable to do so, Australia seems like a more feasible alternative.

Related markets and the possibility of expanding into neighbouring countries are other criteria used in evaluating the alternatives. Australia provides the possibility of expanding into New Zealand due to the existence of a free trade agreement between the two countries. Furthermore, McTaggart already has a sales rep located in New Zealand. Conversely, Michelard has access to the European market. There is potential to expand into markets where Michelard currently distributes including France, Belgium, Switzerland, Italy, Germany, and Holland (as indicated by Exhibit 4). However, in the past Michelard’s French sales representatives have admittedly struggled to penetrate German and Dutch markets.

While the decision to enter France may have an impact on Cameron’s future European expansion strategy, entering Australia and New Zealand will not significantly impact Cameron’s future ability to enter the European market as a wholly owned subsidiary. As a far removed and more distant location, the venture’s likelihood of expanding into Cameron Auto Part’s future desired markets is minimal. However, starting a joint venture in France that will penetrate neighbouring markets will limit Cameron Auto Parts’ future ability to enter European markets on their own.

Lastly, the internal strengths and weaknesses of each company were compared. Michelard’s financial statements indicate that the company is short on cash and has unusually high administrative costs. Michelard also indicated that they take their profits in the form of salary rather than in dividends for tax purposes. Coupled with the spending on a lavish hotel, chauffer and multi-course dinner Michelard has shown that they may not manage finances well. Conversely, Cameron has had no issues with collecting money from McTaggart. Furthermore, the two companies already have a profitable, prior working relationship that will be jeopardized by a Cameron-Michelard partnership.

For the above reasons, we advise Cameron to only enter into business with McTaggart in Australia at this time. However, Cameron needs negotiate certain stipulations to protect the company from McTaggart’s threats and emphasis Cameron’s strengths. Ways of doing this will be discussed in the following section.

Implementation

In order to mitigate the threats posed by entering into a McTaggart agreement and to protect Cameron’s greatest asset, the technology, we have devised a joint venture implementation strategy. Firstly, Cameron and his U.S. management team should familiarize themselves with the Australian market so they are not completely dependent on information provided by Sandy McTaggart and his team. Cameron should also retain a technology patent in both Australia and New Zealand. Next Cameron should include a number of non-negotiable clauses in the agreement to mitigate the risk of McTaggart finding a way around the process patents and pulling out of the license. They should stipulate a 5-year non-compete clause in both Australia and New Zealand and should not allow the venture to sell or produce flexible couplings anywhere but those two countries. The venture will only assemble and finish the products and has no rights or access to Cameron’s technology. Any technology flow-back will be the exclusive property of Cameron Auto Parts and they will receive a 4% royalty of gross sales. The equity split can be 60:40 for McTaggart but the management fee will be reduced to 2% of net sales. Management is already being compensated through their salaries and the unequal equity split. They don’t need an additional 4% management fee. To ensure that management’s interests align with that of the venture and not McTaggart, management will be issued stock options as a reward for good performance and overall company profitability.

Cameron should also reserve the right to send management to the joint venture if, in the future, they are able to spare some U.S. managers. To get McTaggart to agree to these terms, Cameron should leverage the current licensing agreement with McTaggart. That agreement was signed in 1994 and was a 5-year contract with another 5-year term renewal if both parties were happy. It is now 2006 so the contract will be up for renewal in 3 years. Cameron should explain that he wants the working relationship to be mutually beneficial and wants to expand to Europe in the future. In order to secure their future working relationship, Cameron has sacrificed the French opportunity (for now) in order to move forward with McTaggart.

Conclusion

After a careful evaluation of several criteria including capital investment and management requirements, manufacturing experience, effects on Cameron’s future market expansion strategy, we advise Cameron Auto Parts to enter into a joint venture with McTaggart in Australia. To mitigate risks, we advise Cameron to carefully prepare for negotiations with McTaggart to ensure that Cameron Auto Parts’ interests and distinctive competencies are well protected.

Appendix

Figure 1. Joint Venture Comparison Table

| Australian Joint Venture | French Joint Venture | Required Capital Investment | $1,000,000USD (£800,000) | $4,000,000USD | Annual Profit | $320,000USD (£400,000) (After Australian taxes) | 2007 - $448,000USD (£560,000) 2008 - $1,328,000USD(£1,660,000) 2009 - $2,560,000 (£3,200,000) | Fees | 2.5% Royalty on Technology | 4% Royalty on Technology | Equity Split | 60:40 for McTaggart | 60:40 for Michelard & Cie. |

NOTE: All currency values stated in US dollars for comparative purposes.
The exchange rate is $1.25USD/£.
This is based on $3.2million = £4million in Exhibit 5 of Cameron Auto Parts (B)

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