Problem Definition
Your client, ChemInt, is a global chemicals company that manufactures Ponsulene in some locations around the world.
It has several joint ventures (JV) in Asian markets and in total 5 plants in China, Korea, Thailand and Taiwan, all of which serve the local markets as well as neighbouring markets including China.
Due to the strong demand for Ponsulene and profitable margins in China, a number of new Chinese players are entering the market in China as well as in the neighbouring countries.
ChemInt has called in your company to estimate the influences on their business by these happenings.
Comments
This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview.
The case is split into two parts.
The first part describes more qualitative problems and has more open questions that should make the interviewee think about the problem and its solution.
The second part is more about quantitative problems and calculations. The interviewee should try to make his own calculations and solve the questions.
The questions in the big boxes should be read out and shared with the candidate.
Abbreviations:
kte - kiloton equivalent
Short Solution (Expand)
Detailed Solution
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).
Labour costs
There will be no cost-advantage as labour 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 a 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 boarder 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?
Main conclusions:
The Korean plant seems to have the 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.
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
5. How should the company evaluate the strategic options regarding the JVs?
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 asses 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.
Difficult Questions
As mentioned, more Chinese companies will enter the market in the next years.
Can the entry cause any advantages for ChemInt? What are the risks of entering the Chinese and Indian market, in order to try to take advantage of the rapid growth?
This is a very open question.
Possible answers could be:
- Due to the high competition other competitors might also struggle in the market and eventually have to exit before our client. This would split the demand on fewer competitors and therefore lead to higher sales for our client.
- As a result of the increased production external economies of scale occur. For instance an increase of reparation of mechanical equipment or more acquisitions of machinery leads to more suppliers of such services in the market. Therefore, prices will be reduced.
What other markets could you think of that could take the large volume in question?
Two that the interviewee should come up with are Japan and India.
Japan
It also has higher-cost plants which makes selling lower-cost exports feasible.
India
However, the forecasted demand growth is high and as a result there is potential for long-term supply contracts.
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).
