In this fictitious case, you are a financial analyst in the Automotive Strategy staff of One World Automotive, a global manufacturer of automotive vehicles and products. Your responsibilities include evaluating the financial and strategic implications of corporate investment decisions.
There are relevant e-mails and data you have received from your manager, Les Dell. For your meeting with the Ford Finance interviewers:
1. Review the attached material and prepare a one-page executive summary that addresses the alternative strategies outlined in the series of e-mail communications with Les Dett and others.
2. Please include the following items in your summary:
a. Financial analyses for each alternative you consider, as directed by Les in his e-mail
b. Your recommendation for which alternative should be chosen (if any)
c. Additional information that would assist you in your evaluation of the alternatives
| US |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
| Total Industry Volumes (Mils.) |
16 |
16.5 |
16.5 |
16.8 |
16.9 |
17 |
| C-Segment Volumes (Mils.) |
2.6 |
3 |
3.3 |
3.4 |
3.4 |
3.4 |
| Segmentation Percent |
16% |
18% |
20% |
20% |
20% |
20% |
|
|
|
|
|
|
|
| OWA C-Car Volumes (000) |
333 |
386 |
429 |
437 |
439 |
442 |
| Share of Segment |
13% |
13% |
13% |
13% |
13% |
13% |
|
|
|
|
|
|
|
| Available Capacity (000) |
250 |
250 |
250 |
250 |
250 |
250 |
| Surplus/(Shortfall) (000) |
83 |
136 |
179 |
187 |
189 |
192 |
|
|
|
|
|
|
|
| Europe |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
| Total Industry Volumes (Mils.) |
23.5 |
23.5 |
24 |
24 |
24.5 |
25 |
| C-Segment Volumes (Mils.) |
3.8 |
3.8 |
3.8 |
4.1 |
4.4 |
5 |
| Segmentation Percent |
16% |
16% |
16% |
17% |
18% |
20% |
|
|
|
|
|
|
|
| OWA C-Car Volumes (000) |
376 |
376 |
384 |
408 |
441 |
500 |
| Share of Segment |
10% |
10% |
10% |
10% |
10% |
10% |
|
|
|
|
|
|
|
| Available Capacity (000) |
500 |
500 |
500 |
500 |
500 |
500 |
| Surplus/(Shortfall) (000) |
124 |
124 |
116 |
92 |
59 |
|
|
|
|
|
|
|
|
| Asia |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
| Total Industry Volumes (Mils.) |
40 |
42 |
44 |
46 |
48 |
50 |
| C-Segment Volumes (Mils.) |
8 |
8.4 |
8.8 |
9.2 |
9.6 |
10 |
| Segmentation Percent |
20% |
20% |
20% |
20% |
20% |
20% |
|
|
|
|
|
|
|
| OWA C-Car Volumes (000) |
600 |
672 |
704 |
736 |
768 |
800 |
| Share of Segment |
8% |
8% |
8% |
8% |
8% |
8% |
|
|
|
|
|
|
|
| Available Capacity (000) |
550 |
550 |
550 |
550 |
650 |
650 |
| Surplus/(Shortfall) (000) |
50 |
122 |
154 |
186 |
118 |
150 |
|
|
|
|
|
|
|
| Total (including Other) |
|
|
|
|
|
|
| Total OWA C- Car Volumes(000) |
1409 |
1534 |
1617 |
1681 |
1748 |
1842 |
Mail for Analyst
From: Les Den
To: Analyst
Subject: C-Car Capacity Study
Date: June 24.2012
Analyst.
I need your help evaluating a manufacturing dedsbn. If you look at the attached volume schedule, you can see that we do not have sufficient capacity to meet gbbal demand for our small car, the Vision. There are many factors to consider as we think about how to increase our capacity, but as we enter into the discussion, I want to be armed with appropriate financial data. Would you please look at the attached data lye been able to collect and evaluate some alternatives?
Here are three ideas I had. I'm not sure they all make sense, but let me know what you think:
1. We have already closed of our assembly plant in Alabama because the Nomad has gone out of production. Could we reopen that plant to meet the global shortfal?
2. We could take advantage of government incentives in India and build a new facity in Chenna, taking advantage of a growing automotive supply base there.
3. We have excess C-Car capacity in Europe (at our SaarbrUcken plant) for most of the business plan period. Perhaps we could use that excess capacity to meet global demand.
Assume in the cases of at and 02 that the plants In question would have a base capacity of 350,000 units but that we could get an incremental 10% volume in each year at no cost if needed. Ill have Bob Lee in manufacturing provide you with some infontiation on labor costs and investment levels. There's no opportunity to expand the capacity at our plant in Saarbrticken. Germany because it is landlocked.
Please lay out the alternatives so we can understand the impact on the income statement (ncluchng operating margins) and cash flow. Let me know Stich one you'd recommend based on the available data. and please let me know also what other data would be required to enhance your analysis.
Regards.
Les Dell
Controller. Automotive Strategy
E-Mail for Les Deft
From: Bob Lee
To: Les Den
Subject RE: C-Car Capacity Study • Assumptions
Date: June 23 2012
Les.
Here's the data my learn was able to poll together.
By the way. I mentioned this study to Jim in Logistics for his input and he said we don't want to forget about Freight for shipping the units. The Vision has a normal freight cost to dealers of about $450 per unit within the continent where ifs built. but inter-continental ocean shipping for vehicles is significantly more expensive. He said you should assume an incremental $600 per unit cost for shipping between continents.
From a Human Resources perspective. reopening the Alabama plant would mean new Jobs in the U.S. that the unions would support, but were unlikely to gel any concessions on labor costs to make it happen.
If you need any more data from my team, just let me know.
Bob Lee
Manager
Manulacturing Finance
--Original Message
From: Loretta Call
To: Bob Leo
Subject: RE: C-Car Capacity Study - Assumptions
Date: June 23, 2012
Bob.
Per the discussion at our team meeting. we were able to pull together some data for the study.
The Alabama plant is older but it could be retooled from trudr production to buid small cars for about 6475 milkon. This would be all tooling with an expected accounting Me of 5 years. We could have the plant re-tooled for production at the start of 2015. We should assume all the spending takes place in 2014.
Since Chennai 111 is already at maximum capacity, a new facikty would be required and is considerably more expensive than the Alabama re-tool. Atter government incentives, wed need about $250 million to secure the land and facilities and another 6425 million in tooling. Per corporate guidelines, the land and facilities are amortized over 50 years, but the tooling would have the same 5-year life as the Alabama tooling. We could have the plant up and running for January 2016 if we pay for land & facilities In 2014 and tooling in 2015.
The good news is that SaarbrOcken already builds the Vision for Europe and even though there are minor differences between the European version and the Vision sold in North America and Asia, no new tooling would be required and any other fixed costs could be absorbed within the plant's existing budget.
I didn't include the labor rates here because you said Les already had that data, but let me know if you need them. I Just sent the latest rates to Casey for their review so they should be up to date.
Loretta Call
Supervisor
Manutacturing France
E-Mail for Les Deft
From: Casey Bishop
To: Les Den
Subject. Vision Per Units
Date: June 23. 2012
Les,
I got a cal that you needed some data for the Vision. Our present assumptions are shown below and are based on the latest profeclions and volumes. These are global averages per unit, except as noted.
Variable cost per unit is $1 4,000 and includes material, warranty and freight costs to the plant. I think Bob gave you the freight costs from the plant.
Structural Costs are broken out as follows:
• Allocated Fixed Costs - $1.100 per unit
• Labor and Overhead - $1.200 per unit (but vanes on location)
Region Labor and Overhead Cost
North America (Alabama) $1.500
Europe (SaarbrUcken) $2.000
Asia-Pacdic (Chennai ) $500
Marketing Is still carrying a global average price of $18.000 per unit and with fuel pnces the way they are and the new technology being offered on the Vision. we aren't expecting to have to offer any incentives to meet our sales projections.
Casey Bishop
Product Development Controller
From: Corporate Treasurers Office
To: All Global Car Finance Employees
Subject: Corporate Finance Assumptions
Date: June 1. 2012
We want to take this opportunity to remind all Finance employees of the Corporate assumptions. Using these common assumptions in our analysis across the all functions and regions ensures that we provide our operating management with consistent analysis and allow them to make the best decisions for the Company.
Corporate Weighted Average Cost of Capital - 12%
WACC should be used as the standard hurdle rate for most decisions.
Corporate Tax Rate -- 35%
Depreciation
• Tooling & Equipment - vanes based on expected life
• Land. Facilities - 50 years
• Assume straight line depreciation in all cases
Operating Margin
Operating margin is equivalent to Profit Before Tax divided by Total Revenue. Profit Before Tax is calcuated as follows:
Net Revenue
Less Variable Cost
Less Labor & Overhead Less Program Spending Less Other Fixed Cost
Inventory Valuation
Inventory should be valued on a First In, First Out basis