Solution
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
The following structure gives a short overview:
I. Cost analysis
1. Can China cost-effectively serve the local market compared to ChemInt? Why or why not?
Information that can be shared if inquired:
- Feedstock for this chemical is crude oil.
- The process of production is to a high extend automated.
- The newest technology is used in the factories of the Chinese competitors
The interviewee should begin with listing the biggest cost categories. Then he should assess if a Chinese company would have advantages in the identified categories.
Feedstock costs
Used feedstock for the final product is crude oil. As a result, Chinese companies will not be able to get obtain feedstock at lower costs (global market).
Labor costs
There will be no cost-advantage as labor costs are not representing a big part of the total costs.
Distribution costs
The closer location of the Chinese plants to the majority of customers plays a big role that might help them to compete with international plants.
Production costs
As the plants in China will be newer, they can be expected to be more efficient and therefore more cost-effective.
II. Profitability analysis
2. Can China cost-effectively serve the local market compared to ChemInt? Why or why not?
The interviewee can come up with multiple factors that influence the long-term viability of ChemInt’s international plants.
Pricing
The increase of capacity produced by the Chinese manufacturers would lead to pricing pressure.
Therefore getting long-term arrangements will become challenging, especially if the consumers expect significant levels of capacity added by the Chinese players.
Customers
This is a very important part and the interviewer should encourage the interviewee to think about the consumers:
- Is there the possibility to sell the produce to alternative customers in the local or other markets (if demand for ChemInt’s produce in China goes down)?
- Would the increase of capacity in Chinese plants (on the border to Korea, Thailand & Taiwan) threaten the local customer base of ChemInt? It could be that Chinese plants can deliver more cost-effectively to Korea or Thailand than plants within these countries.
Quality
The new Chinese players may not be able to deliver high-quality products.
Supply reliability
On-time delivery is an important factor on which the customers choose their suppliers. If Chinese players become more reliable the impact on ChemInt’s plants could be severe.
Soft factors
Assuming that product quality is similar, Chinese customers could be more comfortable buying from a Chinese company.
3. Which of ChemInt’s international plants will in your opinion have the higher margins? Why?
Table 1 with background information can be shared.
Main conclusions:
The Korean plant seems to have lower margins as it has a significant level of captive use. This is due to the fact that transfer pricing for captive use has typically lower revenues than sales to external customers.
It is difficult to say whether the Taiwan or the Thai plants will have higher margins.
The Thai plant could have lower margins as a big part of the products is export volume. This implies that transportation costs are borne by ChemInt as the price needs to be competitive compared to the local players in the export markets.
If interviewee asks about detailed exports to China Table 2 can be shared. Otherwise, save it for Q5.
III. Options and conclusion
4. What are ChemInt’s strategic options for market participation? Highlight the pros and cons of each.
The interviewee should identify the following options:
- Exit JV
- Divest stake partially
- Retain status quo
If asked for it you can tell information from the table below.
5. How should the company evaluate the strategic options regarding the JVs?
Table 2 depicting the split of exports to China can be shared.
The main problem seems to be the Thai plant as its significant levels of export volume to China are exposed to the capacity increase there.
If the interviewee comes up with the idea that the Korean and Taiwan plant could be at risk from low-cost Chinese companies, the interviewer should shy away from this (only some sales would be threatened depending on the distance of such plants to the point of delivery in Korea and Taiwan).
The interviewee should assess each of the JVs:
Thailand JV
Reduce stake to 50-51%
Completely exiting the JV is feasible, but has the disadvantage that a new competitor is created by this move.
Korean JV
Exit JV completely
Due to the fact that a big part of the volume is for captive use and has therefore a lower margin, ChemInt should exit this JV completely.
(It is assumed that demand for captive use is not relevant after the exit as the plants producing derivatives are also sold)
Taiwan JV
Retain status quo
As the plant has more demand than it can serve and it is in a position where it can possibly command prices.
ChemInt may even try to increase capacity in case that demand is expected to remain at these high levels.
ChemInt could also increase its stake, which is not advisable due to the market uncertainty and the potential price erosion if Chinese companies enter the market.
