A manufacturer of tires in Laos has had a monopoly in the market for years due to high tariff on imports. If foreign producers wanted to import tires, they would have to pay a high import tariff which makes up 40% of the total cost to produce and ship to Laos. The Laotian government has now decided to lower the tariffs by 4% each year for the next ten years to open up the market to foreign companies and achieve lower consumer prices.
Our client is concerned this move will affect their market position and hired us to investigate the effects and help them decide what to do.
This is a interviewer-led case so the interviewer should guide the candidate in the big picture approach. Based on this high-level approach, the candidate can tackle the case and receive information & data where required.
Kurzlösung (Ausklappen) (Einklappen)
1. How would you approach this case?
High-level approach can be shared with candidate:
- Understand the current cost structure of Laos Tire and foreign competitors.
- Calculate impact of import tariff reduction over the next ten years.
- Recommend steps Laos Tire can take to safeguard its position.
I. Cost structure
2. We have some data on performance. Take a look. What insights can you draw from this?
- Candidate should note that labor costs are very high in Laos compared to foreign manufacturers.
3. What could be potential causes for such differences in unit cost?
- This is caused by a lot of manual labor and lack of sophisticated machinery to reduce the impact of labor on its unit cost.
- This means that Laos still has some technological development to implement to be able to compete with foreign producers without import tariffs.
II. Competitive position
4. The client wants to understand the effects of the tariff reduction. How would you approach this?
- Candidate should now calculate the effects of the import tariff reduction to see when producers would decide to enter the market.
- Candidate should calculate the unit cost of the foreign producer based on the lower tariff each year to see the effects.
5. Can you take us through the future scenario to see the impact of possible entry by foreign producers?
Currently the unit cost if foreign producers imported would be: $35*1.40=$49
If we calculate the unit cost for each year, we get the following table:
Candidate should note that client has only 3 years before foreign players can enter the market with a competitive price.
6. What solutions can the client push through to protect himself?
- Laos Tire needs to quickly implement new technologies to reduce its unit cost and operate at the same level as foreign players.
- Labor costs should go down to 25% similar to foreign producers.
- Laos Tire should think about marketing-initiatives to retain customers and ensure customer loyalty.
- Is there a possibility that foreign players can enter the market sooner than 3 years?
- What type of marketing/sales/distribution structures should Laos Tire implement to ensure customer loyalty?