Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Agenda Company Background Situation Analysis Issues Identification Recommendation Financial Justification Key Success Factors Conclusion
Company Situation Issues Strategy Financial Issues Strategy I Strategy II Strategy III KSF Background Analysis Identification Overview Justification Are Solved
Company Background
Divisions & Revenue Break Down
Ashland Changzhou Serve the Casting Market China
38% 30%
15%
-largest producer of
17%
castings in the world -strong growth potential Represents $7.65 million in revenue (0.55% of total specialty chemical sales)
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Situation Analysi Growth Driver
Customer
Ashland
Situation Analysis Automotive Market
Foundry Industry
Specialty Chemical Industry
11.6%
5.8%
Industry Growth
2003 Growth
20.2%
Customer Segments
Project Growth: Raw Material Condition
180% by 2008
Implication: Growth Potential
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Situation Analysi
Situation Analysis Industry Growth
Customer Segments
Willingness to PayHigh
Ashland’s Customer Segment
Nordstroms Majority of Sales
Raw Material Condition
Walmarts
Aim to Expand
Low
Garage Sales Low
Quality
High
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Situation Analysi Raw Materials Conditions Situation Analysis Industry Growth
Customer Segments
Raw Material Condition
Worldwide Shortage China’s booming economy Unmet Quality by Local suppliers
Government first access Shortage inreceive Raw Materials Increase raw material price
Government receive first access Sourcing from U.S. - Increased material cost - Increased logistics costs (transportation + warehousing)
Unable to pass on increased costs to customers
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Issues @ Hand GOAL Issues @ Hands Evaluating Core Target Market
Establish a Profitable, Long term commitment in China and build Foundation for future opportunity in Asia-pacific Expansion
Rising Raw Material Costs
Capitalize on Domestic Growth
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Strategy Overview
Issues Evaluating Core Target Market
Rising Raw Material Costs
Capitalize on Domestic Growth
Strategies Immediate Term
Target Market Focus
Strategic Fit
Strategic Alliance
Short-Term
Secure Local Supply
Intermediate Capacity Expansion Term Capitalize Market Potential
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
I. Target Market Focus Immediate-Term Estimated Automobile Capacity Expansion in China
Implication: More International Foundry players
International Foundry - Nordstroms
Source: KPMG China’s automotive and Components Market 2004
Company Situation Issues Strategy Financial Issues Strategy KSF Strategy II Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
I. Target Market focus Immediate-Term To have Nordstroms composition of 60% by 2009 Objective Strategy Ashland’s Core Competency Price Insensitive-Providing high-quality products Target Market Focus
and extensive services
Target Market: Strategic Alliance
Capacity Expansion
Quality-driven, price insensitive suppliers Price Sensitive
Price Sensitive
Focus on Nordstroms * Assume the current proportion of 40/60 with Walmart type
Company Situation Issues Strategy Financial Issues Strategy KSF Strategy II Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
II. Strategic Alliance Short-Term Forming Strategic Alliance With Suppliers Strategy
Target Market Focus
Strategic Alliance
ObjectiveTo Reduce COGS by 9% over the next 5 years
Quality
+
Standardize
Shortage
Outsource U.S.
Minimize
Minimize Suppliers
Ashland Capacity Expansion
Minimize Costs Costs Minimize
Win-Win
•Technology Know-How Situation •Improved Quality for Long-term Benefit
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
III. Capacity Expansio Immediate-Term
Objective To Expand Capacity in southern part by 55% within 2007
Criteria: 1. % of total Foundry 2. Proximity to Sea Port Implication • •
Strong local market potential Export to international market in the future
Foundry: 13.2%
Foundry: 34% Location: Guandong Proximity: 2 Ocean Ports 3. Guanzhou 4. Shenzhen Foundry Industry: 22.3% in 2004
Desired Location
Foundry: 22%
Current Plant Top 8 Ports
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Financial Justificatio Strategy Wrap-Up
2005
2006
2007
2008
2009
Target Market Focus Strategic Alliance Selecting Suppliers Initiate system improvement
Capacity Expansion Southern China Construction Commercialization
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Financial Justificatio
CAGR 27.80% 84.61%
Sales Net Income 30,000
$ (in thousnds)
Increase 25,000
26,084
Sales from
capacity expansion in Changzhou
NPV = $17.997 million
20,000 15,000 10,000
12,248 9,762
5,000 -
21,734
23,339
1,211 2004
13,058
Net Income
Increase sales from new plant in South 717 China 1,631
PBP = 9.5 years 2,213 421
2005
Sales
2006
2007
2008
2,980 2009
Year
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Financial Justificatio
Estimated Cost Strategic Alliance - Securing members - Operational Efficienies - Quality Improvement Capacity Expansion - Changzhou - South China TOTAL
4,823,177
38,565,676 20,000,000 18,565,676 43,388,853
Finance by internally generated funds from the parent company (Ashland Inc.)
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Key Success Factor
Cost Control
Facility Location
Relationshi p Managemen t
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Issues Are Solved Issues
Evaluating Core Target Market
Rising Raw Material Costs
Capitalize on Domestic Growth
Strategies Immediate Term
Target Market Focus
Strategic focus
Objectives To have Nordstroms Composition of 60% by 2009
Strategic Alliance
Short-Term
Secure Local Supply
Intermediate Capacity Expansion Term Capitalize Market Potential
To reduce COGS by 9% over 5 yrs
To expand capacity In Southern China by 55% within 2007
Establish a Profitable, Long term commitment in China and build foundation for future opportunity in Asia-pacific Expansion
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
THANK YOU
Q&A
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Presentation Slide Company Background Situation Analysis -Growth Driver -Customer Segment -Raw Material Issues At Hands Strategy Overview Strategy I: Strategic Alliance Strategy II: Capacity Expansion Strategy III: Matching Core Competency Financial Justification -Time Line Key Success Factors Issues Are Solved
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Slide Navigator I
GET MARKET FOCUS realistic is targeting Nordstrom in short-term?
ecting Government target nordstrom?
ATEGIC ALLIANCE not solve inconsistent lead time?
sible Alternatives to reduce transportation costs (consolidation + using single su
g-term alternatives to reducing safety stock (3PL)
tegic alliance details
efits to suppliers from strategic alliances not vertical integrate?
ERS
stry trend and implications
-Pacific Opportunities
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Slide Navigator I FINANCE Effect of Internal Financing on B/S Strategic Alliance Cost savings Target Market: Price Structure Gross Margin Summary Cost of Debt & Cost of Capital Production Capacity Assumption NPV Effect of the Target Market Refocus
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
How Realistic is Targeting Nordstrom
Strong Entrants from International auto manufacturers High International Casting Companies to supply international manufacturers - strong growth potential for Ashland
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Neglecting Governmen
Target Market Focus VS Government in Walmart Group
ot neglecting Government
ealize mutual benefits
Raw Material Priority owever, in setting strategic direction, must know who our core target market is Quality-driven, price insensitive customers
Will maintain supply to government but put more focus on International customer rapid entrants followed by automotive growth
urrent Proportion: 40-60 (Nordstroms-Walmarts)
xpected Proportion: 60-40
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Why Not Why Solvenot Inconsistent Change Lead Time? Suppliers? Underdeveloped IT System
Same with all suppliers
In Short-term, maybe difficult to use suppliers with hi-tech equipment
(characteristics of International 3PLs but still has no presence in China)
Currently dominated by SOEs and Local 3PLs
Underdeveloped Infrastructure Depends entirely on Chinese Government Ashland has absolutely no control over
IMPROVING QUALITY to minimize international outsourcing through strategic alliances
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Possible Alternatives to Reduce Transportation C
Consolidations - Consolidate all shipments in Chinese Facilities - Full Truck Load Basis Minimize transportation costs
Focusing on Single Supplier when Possible -Reduce Ordering Costs -Reduce Transportation Costs
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Possible Long-Term Alternatives to Reducing Safety St
Using International 3PL Growing Logistical Industry in China Currently, only SOEs in logistical industries Future trend: International 3PL enter Suppliers likely to use these 3PLs Look for ways to integrate upstream and downstream by using single 3PLs Result:
Reduce Lead Time Reduce Safety Stocks Better manage cash
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Strategic Alliances Detai
Selecting Suppliers (PLAN)
Making It Work (IMPLEMENT)
Refine and Develop (CONTROL)
•Approaching suppliers •Review & Audit & communicating how the •Give feedbacks will result in mutual benefits Relationship will benefit •Develop new partners Under quality standard both parties for futures •Agree on styles of relationship •Top management crucial •Initiate System Development Identify suppliers that
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
1.
Strong market presence in the future as Automotive Industry grows
3.
Price Insensitive: Willing to pay more for the qualified materials Allow higher possibility for Ashland to pass on the increase in Raw Material cost - “ High-End user” Higher Margin for us - Best fit for our value proposition Quality oriented
5.
Enable Ashland to develop its own Connection - In case the government changes, “Walmart” has a chance to leave us - To reduce our dependency on government in terms of finding customer
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Why Target Nordstrom Why Target Nordstrom? Positioning: provide high quality products and extensive services Cost Structure unsuitable for price competitiveness Ability to transfer increased costs (Raw Materials) to end consumers
Future Trend China has just joined WTO - means open doors for international competition Co. will be forced to increase quality to stay competitive Will see a shift to group 1
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Benefits to Suppliers in Strategic Allianc Strategic Alliance Details
Why would suppliers want to form alliances? China entering WTO Future Trend: International Competition Local Suppliers will be forced to improve quality to stay competitive By forming strategic alliance with Ashland, suppliers get - technology know-how - improved quality which will eventually benefit them in long term - guaranteed volume sales to Ashland - reduce costs of having to service multiple customers
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Industry Trends Implicatio Trends and&Implication
Recent Industry Trends Trends Consolidation
Implications
Less bargaining power for Ashland Industry more competitive - increasing number of suppliers Focused on Nordstrom “avoid competing but decreasing number of customers on price”
Advancement in Favorable for Ashland - customers more attracted to Shift from Garage Sale product and process To Nordstroms Ashland products (hi-tech & high quality) design
No implications New environmental standards
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Why Not Not Vertical Vertical Integrate Integrate Why To Buy out suppliers - high volume - require knowledge in operations Ashland’s raw materials Majority of ingredients make up 10% of costs Small ingredients make up 80% of costs • Unsuitable for vertical integration (need high volume + high costs) • Requires large amount of control + human capital • If supply of components is greater than that required: Production will have to be reduced (inefficient production) or The surplus will have to be sold to rival firms
More viable to form strategic alliances (consider future trends of international 3PL entering the market)
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Asia-Pacific Opportunitie Target Market: Thailand Domestic Goal: Detroit of Asia Positioning: Largest Base for One-ton Pickup truck Evidence: •
Toyota: expects to increase 35% of current capacity, bringing total car production to 550,000 units per year by 2005
•
GM/Isuzu: plans to increase production capacity by 20% or from 250,000 to 300,000 by 2005
. • •
Ford/Mazda: plans to increase their capacity from 135,000 to 200,000 cars per year Nissan: to expand its production capacity to 200,000 units with 130,000 domestic and 70,000 exports.
• The overall car production is expected to reach 1.14M and 1.8M units in 2005 and 2010 • 50% of the total amount is expected to be for export • 70% of the total production would refer to Pickup truck
Source: Toyota (Thailand) , One Asset Management
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Effect of internal financing on Consolidated B/S Quick Ratio**
Before 0.84
After 0.82
** Based on items on 2004 Consolidated Balance Sheet
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Strategic Alliances: Cost Savings 1. 2. 3. COGS COGS COGS COGS
Assume the proportion of raw material from USA and China Use the proportion to calculate each product’s cost per unit The effect of Strategy is on the proportion of raw material China US (2x Cost) per unit China per unit USA
33% 67%
Unit sold (in Ton) Total unit from Changzhou Total sold unit from new Changzhou Total sold unit from South China Total unit sold Unit purchased from China Estimate Unit purchased from USA Estimate
2004 70,823.53 70,823.53 50% 50%
COGS with Strategic Alliance COGS at 50/50 Us/China Cost Savings Cost Savings as % of COGS Strategic Alli Cost Potential Cost savings
60,399 68,062 7,663
Potential Cost Savings %
1,838,366 3,677,284 51.91 103.84 2005 70,823.53 42,586.70 113,410.23 55% 45%
8,538 8,832 294 3%
2006 70,823.53 48,974.70 119,798.23 60% 40%
8,708 9,330 622 7%
2007 70,823.53 56,320.91 70,440.36 197,584.80 65% 35%
13,849 15,388 1,539 10%
2008 70,823.53 61,953.00 77,484.40 210,260.92 70% 30%
14,191 16,375 2,184 13%
2009 70,823.53 68,148.30 93,920.48 232,892.31 75% 25%
15,114 18,137 3,023 17%
14,812 18,390 3,578 19%
4,823.18 2,839.72 8.86%
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Target Market: Price Structure 1. 2. 3.
Assume 20% premium for Nordstroms over “ Walmart” Assume Beginning proportion to be 40/60 for N / W Calculate the price for each by using weighting method to arrive at weighted price
Wallmart (government) Nordstrom
***Premium charged for Nordstrom
Price Assumption Current Proportion Current Price Avg Price 60% x 108 40% 1.2x ** 0.6x + 0.4*(1.2x) = 108 x = 100 20%
Pricing Structure Price Wallmart (government) Nordstrom Average Sales price
100 120
2005 60% 40% 108
Sales Proportion 2006 2007 55% 50% 45% 50% 109 110
2008 45% 55% 111
2009 40% 60% 112
Once we get the average selling price, we time it to the Forecasted unit sales to derive Sales
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Gross Margin Summary 1.
Taking Strategic Alliance and Target Market Strategy into account
(in thousands) Unit sold- Changzhou Unit New Changzhou South China Total Unit sold Weighted Price after Target market propotion
2004
108.00
2005 70,823.53 42,586.70 113,410 108.00
2006 70,823.53 48,974.70 119,798 109.00
2007 70,823.53 56,320.91 70,440.36 197,585 110.00
2008 70,823.53 61,953.00 77,484.40 210,261 111.00
2009 70,823.53 68,148.30 93,920.48 232,892 112.00
Total Revenue COGS - China COGS - USA Total COGS Gross Profit
7,650 1,838 3,677 5,516 2,134
12,248 3,238 5,300 8,538 3,711
13,058 3,732 4,976 8,708 4,350
21,734 6,667 7,181 13,849 7,886
23,339 7,641 6,550 14,191 9,148
26,084 9,068 6,046 15,114 10,970
Gross Profit Margin
0.28
0.30
0.33
0.36
0.39
0.42
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Cost of Debt & Cost of Capital Cost of Debt Interest rates Amount 2004 (millions) 8.00% 524 8.80% 250 7.83% 229 5.70% 168 6.86% 150 6.63% 150 1471
WACC Wd (include only interest-bearing debt) Kd 1-t Ws Ks (ROE) WACC ***Premium for Ks over Kd
WdKd 0.0284976 0.0149558 0.0121895 0.0065099 0.0069952 0.0067556 7.59%
36.42% 7.59% 67.86% 64% 12.59% 9.88% 5%
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Production Capacity PLANT Initial In 2003 Total Current Capacity Expansion in South China Expansion in Changzhou
Value (million) square feet capacity (ton) cost per ton ($) 5.1 50,000 25,800 197.67 8.9 45,024 14 70,824 18.57 93,920 20.00 101,176 Total 265,920
Chinese Foundry Industry Region Changzhou South China Changzhou - new plant Margin of Safety for South China Incremental Investment ($) Increase in capacity
Customer presence 34.10% 22.30%
Capacity (ton) 2004 2005 2006 70,824 46,316 53,263 61,252 101,176
25.00%
Total 2007 70,440
93,920
75%
100% 18,565,676
55%
1. Proportionally derive what should be the current capacity in South China based on current customer presence 2. Forecast each year increase in capacity based on the sales growth assumption to meet demand 3. We want 25% margin of safety for first year of operation i.e. capacity utilization in 2007 = 75% 4. Derive 100% of the South China plant capacity that we need to construct, which equal 55% of Company Situation Strategy Financial Issues current capacity Issues KSF Strategy I Strategy II Strategy III
Background Analysis Identification Overview
Justification
Are Solved
Assumptions
Sales growth-Changzhou Sales growth- South China COGS from China per unit COGS from USA per unit Operating Exp Interest Exp Tax rate
ASSUMPTIONS 2004 2005 2006 10% 15% 15% 15% 15%
2007 15% 15%
2008 10% 10%
2009 10% 10%
25.22% 25.22%
25.22%
25.22%
32.14% 32.14%
32.14%
32.14%
51.9 103.8 25.22% 7.59% 32.14%
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
NPV NWC 2004 2005 2006 1123.85 1799.38 1918.33 399.01 638.85 681.08 1,186.57 1899.80534 2025.396406
A/R Inventory Other payables EBIT 1-t NWC Increase in NWC
336.28
Depreciation (assume useful life 20 yrs) Old Plant New Plant in Cheangzhou New Plant (in thousand) Total (total)
FCF Perpetual CF Total Initial cost outlay **assumed perpetual growth
NPV PBP (year)
2007 3192.95 1133.62 3371.1598
2008 2009 3428.68 3831.94 1217.32 1360.49 3,620.05 4045.81759
2010 3,911.94 1,388.89 4,130.28
621 67.86%
1,057 67.86%
2,404 67.86%
3,261 67.86%
4,391 67.86%
5,100 67.86%
538.42 202.13
574.01 35.59
955.41 381.40
1,025.95 70.54
1,146.61 120.67
1,170.55 23.94
700 1,000.00 0 1,700.00
700 1,000.00 0 1,700.00
700 1,000.00 928.28 2,628.28
700 1,000.00 928.28 2,628.28
700 1,000.00 928.28 2,628.28
700 1,000.00 928.28 2,628.28
1,919.33
2,381.49
3,878.00
4,770.68
1,919.33
2,381.49
3,878.00
4,770.68
5,487.28 76,959.77 82,447.05
43,388.85 2%
17,997.11 9.5
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved
Effect of the target market refocus on revenue
Total Revenue without market shift Total Revenue with Target Structure % change
2005 12,250 12,248 -0.01%
2006 12,940 13,058 0.91%
2007 21,342 21,734 1.84%
2008 22,711 23,339 2.76%
2009 24,217 26,084 7.71%
Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved