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Bangkok Automotive (A)
Edward Rubesch, PhD Thammasat Business School, Thammasat University, Thailand.
Created Feb 2008 © NEN
Page 1 of 18
In her words. She attended a prestigious US engineering school earning both an undergraduate and Master’s degree in mechanical engineering. But my friend told me something which convinced me to join that company—advice which I have since passed on countless times anytime somebody asks me about working for a small company. things were often a mess and it could be very frustrating at times. if that was what engineering really was. which had cost her shareholders dearly with no foreseeable return in sight. She had been running a number of scenarios on her spreadsheet as she tried to predict future opportunities for her company in the face of a challenging economic and marketing environment. and I would likely have a great career there. “If you have an idea and you take it to Bill [the founder] he’ll listen. He knew I really wanted to work in Asia. “I don’t want to spend the rest of my life getting better and better at designing car tail lights. However my friend pointed out. which made sensors and process control equipment for manufacturing operations.” In seeking more of an adventure. On the other hand. She had already been forced to make a significant strategic change in the direction of the company. An Engineer With Entrepreneurial Leanings Ruby Edwards grew up with strong math skills and a love of technology. He said if I went to work for a multinational I would learn a lot. Consequently.Introduction Ruby Edwards paused and sat back in her chair. few procedures were in place. Ruby began studying Chinese during the two years that she was also working on her Master’s. Ruby’s first job after graduation was in a small high-tech firm where she learned firsthand the challenges and excitement of working in an entrepreneurial environment. at least I wanted to do it somewhere exciting. Ruby found herself doing part of everything. “I ‘officially’ ran the production group. At the company. Every scenario going forward required her ask her shareholders for more money—again. Well. I was often called on to go out to customers’ installations and help troubleshoot systems that were not Created Feb 2008 © NEN Page 2 of 18 . all the systems would be in place. and it was definitely the right decision. She knew she had better have a good argument of why they should invest in another business “opportunity” if she was going to be able to keep her company alive. You’ll never have access to one single leader who calls all the shots at a multinational. but soon learned that many technical careers seemed narrow and limiting. That led to a quick understanding of how each product worked. “I was in an engineering internship program which allowed me to see what it was like working in the real engineering world. and that I was searching for a job at a multinational to further that goal. As she joked with one of her classmates at the time. an experience she would recall repeatedly when she had her own company later on: I interviewed for the job at the high-tech start-up on the recommendation of a friend who was working there. my friend said if I came to work in the small company.” That was enough for me.” Despite her foreign language studies and a desire to do something international. where we made the sensors and controllers.
and three more were Americans living in the UK. and produced a number of well-known brands. Naturally. not mine. I was nagged by this feeling that I had developed a real Created Feb 2008 © NEN Page 3 of 18 . And I had dreams of my own. Ruby renewed her efforts to work in Asia. and six of the first twelve were Americans living in Canada. that put me in a position to suggest new applications. and she worked hard to try to learn the local language and appreciate local customs. and gave lots of experience for somebody straight out of school. I was 26 years old. and his boss. it was still Bill’s dream. A former boyfriend. began searching to fill the position from outside the company.working properly. The Move to Thailand Ruby adjusted quickly to her new life and liked the sense of adventure that the international posting offered her: My boss seemed to carry on a little too much of a Colonial air. Nonetheless. After three years in the high-tech company. and having a driver and two maids. and soon I was spending nearly half my time working with customers. the head of the Asia-Pacific Division. However. It was an exciting job. However. And whenever an order came in from an Asian distributor it made me want to find out how to go out and work for them. now a rising management trainee at the company suggested Ruby for the position and she soon landed the job.” A large US multinational producer of house wares was opening a manufacturing plant in Thailand and. “I learned a lot from Bill. Yet. was French. However. But he was also a nice guy who worked hard at appreciating the company’s employees and Thai culture in general. However. However. I knew from the beginning it was a two-year project. I also felt I was missing something. managing production. and when the time was up the company was very accommodating in helping me find another challenging opportunity in another country that suited my desires and career goals. That was in 1992.” Ruby liked having her fingers in everything that was going on at the company. and even going to trade shows to display and market the products. I don’t know. I soon found out just how insular the company was. Ruby liked the international situation she was entering: her boss in Thailand was British. maybe it was his English attitude. and at the time the company had over USD 4 billion in sales around the world. I was only the thirteenth employee placed as an international expatriate. with her natural out-going personality found it easy to meet people in Thailand. which yielded no candidates willing to move overseas. and I was excited. Two weeks after the interview I was hired to oversee the opening of the new plant in Thailand. working at his company. soon facing another career decision. after an exhaustive internal search. the two-year project passed quickly and Ruby found herself. Ruby. Ruby remembered It was amazing. working with customer applications.
Thailand’s automotive industry was one of the country’s strategic sectors. When an operations position at an American automotive supplier opened up. The new position had many of the same challenges as Ruby’s previous job. ever. and once one of the ships caught on fire off the cost of Taiwan. and assembled them for locally produced cars. Ruby’s new position was also in operations. One supply chain sourced parts in Europe. and Thailand was one of the larger automotive markets in Created Feb 2008 © NEN Page 4 of 18 . Moreover. The activities within the operation that Ruby oversaw were relatively straightforward.appreciation for how things worked here [in Thailand] and that my skills were better than many others who had been here a lot longer. Counting my experience in the high-tech company. extending her stay in Thailand. running the assembly operation for an automotive parts supplier. joining the automotive industry opened up a number of new opportunities. the principles were similar: make sure the basic components arrived on time and at the right specification. tied together by a transportation system that included truck. I was getting pretty good at running an assembly operation. She was certain that she made the right move in staying in Thailand. she took the job. Ruby’s role seemed to provide her all of the challenges she was seeking. Finally. Another sourced parts in Europe. and then sent them back to a US car assembly plant. and send them out. the move to a new company was fairly straightforward. We felt like we were balancing on a knife-edge. ship. supply chains. ship by air. but we never missed a delivery. especially because you couldn’t predict a storm or a rail strike. which meant it delivered just-in-time to an automotive assembly plant in Thailand. brought them to Thailand. assemble them to the established procedure. because we could not shut down an automobile assembly plant. but when combined as part of a larger chain spanning several regions of the globe. I learned a lot about logistics. and never. brought them to Thailand for assembly. and materials management. because the costs were prohibitive. and she felt confident in her ability to get things done in a country whose language and cultural challenges often befuddled foreigners. However. and rail. We had only two goals: always ship on time. the materials management become quite sophisticated. Moving Into the Automotive Industry For somebody who wanted to continue to use the cultural skills that she had developed. and then sent them back to Europe to be installed in automobiles there. we also sourced parts in North America. brought them to Thailand for assembly. Ruby explained: We were part of three global supply chains. Even the sub-assemblies that the company made and shipped to Europe and North American had to arrive on relatively tight schedules continuously week after week. Ruby’s new company was a first-tier automotive supplier. Even though the companies were in three different industries.
even back when I was 15 or 16. meanwhile. She liked having an important role in an important industry: In almost every way I should have been happy with my situation. she had the more modest challenge of getting a small number of employees to join her fledgling Created Feb 2008 © NEN Page 5 of 18 .” he pointed out to Ruby. “Nobody is interested in selling accessories for our vehicles. Many of the people who come to service have something wrong with their car and are unhappy. Do you know anybody who could do that?” Ruby wondered if this was the entrepreneurial opportunity she had dreamed about. I’m sure they’ll be interested in your ideas. Before Ruby could fill an entire office building with people. And the service center is more interested in getting the customers out of the service center as soon as possible. the lucrative accessories business would be in the hands of an organization driven by profit motive. In several subsequent conversations.the world. there was still another long-cherished goal lurking out there. “You can talk to our purchasing people about this. “he wanted to find a way to stimulate sales in that area. I even used to daydream about having a big building with my company’s name on it. developing them for the automobile models sold by the retailer. rather than as a support function to the existing business.” Ruby and the managing director of the automotive joint venture agreed on a plan where the accessories operation would be outsourced to a company which would be responsible for finding new accessories.” For the managing director this was a huge missed opportunity. However.000 was provided by her boss. although I could never figure out what all the people inside such a big building would do. I was trying to sell the managing director on our capabilities as a manufacturer. who took 50% stake in the company. “The managing director told me accessories carry high margins. The service people just want to get them processed and gone again. but parts were not a major concern for him.” For the automaker. Her initial financing of $40. “and this would become the opportunity for me to open my own company. and selling them through kiosks in the retailer’s showrooms. They [service personnel] view our service customers as a disease. Ruby learned about what the managing director considered one of the company’s major problems. but it was revived when I was visiting the local joint venture of an American automobile manufacturer to get them to purchase parts from us. “but what I really need is somebody who can take over our accessories operation to complement our car sales. Ruby opened her company in January 1997.” Ruby recalled. and often are less immune to price wars than new vehicles and service parts. and I was reading about computer entrepreneurs like Bill Gates or Steve Jobs. They certainly aren’t focusing on selling them accessories. however. and the largest in Southeast Asia. It wasn’t something I thought about very often.” Ruby explained. Starting the Company I had long imagined starting and running my own company. “The sales people just want to give them away to help move vehicles.” he said. “The new accessories company would even recruit and train sales people who would be experts in the use and installation of the accessories.
black clouds gathering on the horizon. a quiet place where I knew we could talk. Ruby sat in her “office” on a sofa outside of the automotive joint venture sales manager’s office and started to put together longer-term plans: I had made a business plan in a spreadsheet as I developed the retail accessories idea with the managing director. saw that we were bringing in more money than ever before. At one of the table sat the friends that I was meeting. To my horror. “Even the normally skeptical accountants. such as somebody who could sell. “During the first three months. Car sales were growing. I set up a meeting at a small restaurant I knew. I arrived a little bit late. an assistant. the company had set up retail kiosks in each of the automakers seven showrooms in Bangkok. Our profits in the fourth or fifth month paid back my old boss’s investment. I had pitched the plan to the company’s marketing department so they would be willing to support the move to outsource to me. but on that night I was not ready to face any issues with my boss. and when I walked into the restaurant the restaurant was completely empty except for people sitting at two tables side-by-side. sitting at the other table—directly next to them—was my boss and his wife! Later when I was quitting my job. My idea was to sit with them and give them my ideas and see if some of them would come join me.” Ruby noted. and soon everybody was happy about the idea to outsource. who thought the company was wasting profits by outsourcing to us. and an overall administrator. When it opened for business. Rudy remembered that. But. Ruby’s company had two employees: herself and a salesman from an earlier company.” Even setting up meetings with former employees had unforeseen difficulties. I only needed one or two people to get started. who agreed to come work with her. and so were the sales of accessories. however. they were not ready to give up their job security. and a person to oversee inventory.company. we sold more accessories than the company had sold the previous year. however. Ruby’s company had grown to ten employees with sales people at each of the automotive showrooms. Stock was arranged as nicely as possible on existing tables in the service center. “it proved to be a bigger challenge than I expected. not from my current company. my boss would be very supportive and even provide the initial investment. The first day was modest.” Within the first three months. Created Feb 2008 © NEN Page 6 of 18 . I had even asked an architecture friend to draw a rendering of what the accessories kiosk in the automotive showroom would look like. but from the first company I had worked for in Thailand. It was only a matter of time before the large returns predicted in the business plan began rolling in. The slow start quickly turned to success. I figured all my former staff and co-workers would be itching to join me. Ruby felt that she had made the correct decision to start her company. There were. That first day seemed like a long way from the plan however. as Ruby explained: One night several months before I started my company I invited some former employees to dinner. and began eyeing expansion to showrooms in the provinces. The salesman was learning about products and customers as the day progressed.
Our customer [the automotive joint venture] was technically bankrupt since it could not pay back the loans it used to buy the imported cars. a number of warning signs appeared suggesting the Thai economy had a number of weaknesses that were being overlooked by markets. I worried it was only a matter of time before the banks gave up on getting their money back and just closed the whole thing down. and asking if there was anything they could do. A number of speculators. Now. which maintained its value at around THB 25 per USD. or to worry about whether we were being cheated by a sales guy at some distant retail location. We wanted our operation to be seamless to the final consumer. killing my company along with it. Many companies were effectively bankrupt. once the Baht was allowed to float. No need to get credit card machines. and began selling large amounts of Thai Baht. which had been doubling in sales the last three years.” Created Feb 2008 © NEN Page 7 of 18 . After the Baht devaluation. many companies found the outstanding amounts owed in loans almost doubling in the span of a few months. just so we could cover our payroll. The Thai currency. this seemed like a great idea. On the other hand. and then paid us a single amount at the end of the month. employees from that same company were asking me to take a look at their resumes. The Baht quickly lost value and by August was trading at THB 42 per USD. despite the continual fear of impending doom. I was sitting in the lobby. Finally. using it as an office and I felt like the poor cousin to this company. And I didn’t have to worry about cash collection during the early days of our company. including the joint venture that Ruby’s company had a contract with. Ruby’s company was viewed as being a potential opportunity for employees of the automotive JV. the Thai Baht (THB). “Just six months before. believed the Thai central bank did not have the capital reserves to maintain this peg. netted everything out. With the mistaken belief that the Baht would always be pegged to the US Dollar at a value around THB 25. Ironically. At the end of every month I had to beg our customer to pay us. where the interest rates were much lower than for Asian currencies like the Baht. For many Thai companies. Throughout much of the first half of 1997 the Thai central bank continued to buy Thai Baht until its reserves of dollars ran dangerously low. many Thai companies for years had borrowed money in US Dollars. and touched off economic fears throughout the region (Exhibit 1).While Thailand in 1996 and early 1997 appeared to be booming. however. And every month I thought was our last. The so-called Asia Crisis began. Initially. in July 1997 the Thai government gave up the fight and let the Baht float. was pegged to a basket of currencies heavily weighted to the dollar. As long as the Baht was pegged at a fixed value of US dollars such a loan could be very profitable. led by global hedge funds. the regular business continued and as long as stock held out they could maintain their operations. there were more immediate concerns than the suddenly weakened economy. In our case. The value eventually dropped to THB 52 per USD. However. In some ways things were OK. who bought the car and the accessories to go with it. we had a contract where the joint venture collected all of the money.
Ruby’s customer. These finance companies provided ways for individuals to buy or lease cars with down payments Created Feb 2008 © NEN Page 8 of 18 . except loans that Ruby had provided herself. so she knew who had bought cars. which were the original vehicles that the company sold before the Asia Crisis. Becoming an Automotive Retailer By 2000. and we were probably the only ones who knew the existing owners of the company’s automobiles. This led to the next opportunity for Ruby’s company: Of course the company knew we had worked with them three years before. this meant an escalation of investment and risk. she found out that virtually every automaker owns its own finance company. and with it her company would reach financial success. her company would be able to rise with the growth of the brand.For Ruby. She had the database information of the automaker’s customers. Her company had survived the previous three years with little debt. More important. and passenger cars. outside firms came to Thailand and invested in operations. It required more employees. the same automobile brand that Ruby worked with as a joint-venture company three years earlier was looking to re-enter the market. For Ruby. I was able to enough money from consulting services to keep everything afloat and the bills paid. there were also plans to add a minivan.” Ruby lamented. this time as a fully owned subsidiary of the American corporation. The automotive company provided Ruby with a planned list of products they expected to launch in the market. “I would need to attract much bigger investors. Some companies were looking to have a machine built or modified. mostly money made from consulting projects. in general. she saw an opportunity in being part of the relaunch of a brand that had been selling well before disappearing from the market. And with the weakened Baht. the automotive JV closed its showrooms. just how to get things done. She organized mailings and phone campaigns to inform customers that Ruby’s company had opened its own accessories outlet. sourced. and even then I would be doing it on a shoestring. and a way to finance the vehicles that were on display. Ruby was convinced that by being in on the beginning. In thinking through the opportunity. when they were in Thailand as a joint venture. One of the first steps of this process was to rebuild a Bangkok dealer network. The company suggested that Ruby become a dealer for the company’s vehicles. the Asia Crisis ushered in three years of doing anything to survive. Still. These companies needed expertise on how to get things built. and. In addition to the sports-utility vehicles (SUVs). As Ruby learned more about how the automotive retailing business worked. a much bigger showroom. but Ruby managed to keep the accessories business alive by opening an independent outlet. we knew the company’s vehicles. to save money in order to survive. To become an automobile retailer was a completely different challenge. Ruby also returned to her engineering and manufacturing roots: Opportunities presented themselves in different ways.
and a successful track record. On the strength of relatively clean books. He promised to finance Ruby if the other investor dropped out.000. it had the benefit of having no significant debt. the economy was still recovering and jobs were scarce. He indicated that he was “very interested” in the idea. This combination of factors made it easier to attract employees. and working for an automobile dealership seemed to have more cache than working for an accessories supplier. know-how. Ruby could point to a number of years of working experience in Thailand. Ruby justified her share based on the fact that it was her original company. and thought cars could be fun. and it was relatively easy to secure showroom space. Ruby put together a pro forma financial plan and went to talk to interested friends. The effects of the poor economy were still being felt in Bangkok. However. combined with the Baht 2 million capitalization of her company. Meanwhile. and found an experienced service manager (who had run one of the service outlets in the previous joint-venture) who brought a number of experienced mechanics with him. Ruby found an empty automobile showroom on one of Bangkok’s major roads and negotiated a three-year rental agreement at THB 200.and monthly installments. it provided the necessary impetus and he agreed to put his money in.000). Created Feb 2008 © NEN Page 9 of 18 . She quickly built up a sales team for new cars. With that. or more generally wholesale financing. and thought the additional investors would bring good contacts to the business.000 per month (approximately USD 5. Ruby approached another friend who was also interested in the proposal. and connections that had gotten the business. a three-way deal was struck whereby Ruby would own 80% of the new business.000). this second incarnation started out quickly. however. which was something called retail financing. Next. A friend who was running a successful law firm liked the idea of being involved in a “real” business. However. Ruby’s company was small. Ruby looked for a suitable showroom. she did not have to fight over sales territory with other established dealers of the same brand. Finally. industry expertise. while many of the other companies that were being considered as dealers were awash in loans from failed real estate and other projects during the crisis. capitalized at a total of the equivalent of USD 50. Like the first generation of her business. Moreover. she needed another Baht 2 million from outside. since Ruby was one of the first new dealers appointed in the city. Ruby’s company wasn’t strong. Ruby’s company was granted a credit line for new cars at THB 30 million. was still interested in joining. The second investor. these same finance companies also allowed dealers to finance the cars on display. Ruby believed that she could find Baht 2 million on her own. Ruby now had a number of connections within the Thailand automotive industry. but by comparison it looked like a straight business that could be easily monitored by the finance company’s auditors. if it raised its capitalization to THB 6 million (USD 150. or approximately USD 750. Finally. which was called “floorplan display financing”. Ruby saw some advantages preserving her remaining savings.000 (in devalued Baht terms). Moreover. while the two new investors would each own 10%. When Ruby mentioned this to the first investor. Ruby talked over her company’s situation with the managing director of the automaker’s finance company. however he would not commit.
At the same time. While Ruby’s company still operated on a shoestring. Towards the middle of 2000. if only she could convince the automaker to extend her franchise territory. Ruby was able to negotiate rental terms of THB 50. Still Ruby. which was used to finance additional stock of new vehicles.000 per month (approximately USD 1. Created Feb 2008 © NEN Page 10 of 18 . Ruby’s company had two significant advantages. Second.5 million). Ruby’s company had grown to 50 employees.000) from savings to keep things running. with an up-front payment of THB 1 million (approximately USD 25. Ruby imagined the two locations forming a larger territory that would block future competitors as the brand grew. the showroom was approximately fifteen kilometers from the first. which would help lesson dependence on the one and only brand she currently had a franchise for. and the company’s second location officially opened in September 2000.250). Ruby could hardly go by an empty retail space without imagining how many cars could be sold from such a location. which Ruby readily agreed to.000) while Ruby scraped together THB 2 million (approximately USD 5. Once sells began to grow. or too close. In territory terms this was not too far. Ruby’s mind was constantly turning over ideas about how to grow and expand. To meet these needs. it would be hard to make the showroom stop since the sales were benefiting both Ruby’s company and the automaker. depending on the amount of new car sales on a particular month. Nonetheless. It was easy to move a couple over on a “temporary” basis. believed it was only a matter of time before the long-elusive success was achieved. The first major cash crisis came in August of 2000. The company lurched back and forth between profit and loss. First. The automaker allowed the expansion. To support the expected increased business. Third. the finance arm of the automaker extended the wholesale credit line to THB 70 million (USD 1. Things were very tight. One of Ruby’s investors agreed to inject THB 8 million (approximately USD 20. Ruby felt. Combined. The company finished 2000 with a loss of THB 4 million. or to get their vehicle repaired. While the potential for success seemed clear.000) for the existing equipment at the facility. growing the company was not without challenges. like Ruby had done six months before at her first showroom. pending a number of interior upgrades at the facility. but with Ruby’s optimistic viewpoint she felt certain she could pull it off. the location already had some service revenue and was not starting out at zero. The showroom had a “For Rent” sign out front and was clearly no longer selling new cars. and if she could build sales quickly enough. Ruby thought there would potentially be access to another brand in Mitsubishi. A dealership is a service business. she felt that she could absorb this second location. and what would be the running costs. vehicles continued to come in for service. and monthly expenses were much higher than they had been in the days when the company was just selling accessories. requiring sales and service personnel to be available whenever a customer came to look at a new car. Negotiating with the automaker proved easier than expected. whose showrooms were among the top performers in the brand’s growing network by the end of 2000. Ruby immediately saw several advantages that would strengthen her overall company. Second. Ruby already had access to cars from her existing showroom. First. Ruby and her sales team were consistently one of the top performers for the brand in the overall market. Ruby found a second showroom that was branded as a Mitsubishi dealer at the time.
The automaker’s finance company. The auto brand that Ruby’s company sold was doing well in Thailand. she knew that her company’s financial situation was going to be tight until sales took off. The issue came to a head when the finance organization called on Ruby to cut her inventory in half and pay off outstanding vehicles within 30 days. and it was not impossible that the brand might pull out of the Thai market completely. When she started. an amount that could normally take 3-4 months. these local firms were cheaper than their US counterparts. showrooms were too high. but the short-term would be very difficult. Ruby found herself needing to sell nearly THB 40 million (USD 1 million) within the month. its parent company was teetering on the brink of bankruptcy in the US. which operated in many ways like a bank and had a conservative mindset. There was always long-term hope.Unfortunately. often at substantial discounts. Difficult questions gnawed at her: why did she feel so guilty about not delivering on her promises. she was facing an extended period of losses with the potential of having to close completely. This was one of many strong. More important. but mixed. while other heads were blocking financing and forcing Ruby’s operations to a halt. This touched off a range of corporate policies that put a halt to any expansion plans by the subsidiary in Thailand. collectively they formed a multi-headed beast: some of the heads urged optimism and hope. The automaker’s marketing organization meanwhile claimed everything would be solved and growth would continue. She had the uncomfortable feeling that she had not performed on her promises. which warned that the stock levels of new cars in Ruby’s. and other dealers’. while the finance company—owned by the same parent— was urging caution. Now. Changing Brands Ruby was forced to reconsider her strategy. The Thai subsidiary could not afford to develop the tooling and fixtures necessary to produce new models if US engineering costs had to be amortized. signals that the automotive brand was backing away from the Thai market. and yet she felt the events that occurred were out of her control. and for Ruby’s company. Ruby also needed to justify her actions to her shareholders—friends who had trusted her judgment about the direction the automotive industry was headed. when the automaker seemingly felt no remorse in not delivering on its promises? Was this the nature of business in a competitive environment? What could she have done to avoid the situation? Had the opportunity she had originally identified not really been an opportunity at all? Ruby noted that while no single manager within the automaker had lied. Ruby’s hopes for growth would again be dashed by major events beyond her control. Thailand was a growing automotive market in its own right and had developed a large manufacturing and engineering based of suppliers. Chief among these was the policy that all engineering had to be done by the technical group at the head office in the US. The conflict crossed directly in Ruby’s showrooms. substantial losses. She had taken in extra stock at the urging of the automaker. Created Feb 2008 © NEN Page 11 of 18 . To move vehicles. Unfortunately. Most immediate was the lack of new models for the brand Ruby’s company was selling. The new corporate directives eliminated the option of using local engineering capability. Ruby and her sales team had no option except to cut prices and sell.
This would be a dramatic improvement over the niche SUV models that Ruby’s company currently sold. Although the brand was from Japan. Ruby considered this fact an opportunity. by comparison. thought she had a way out. He was impressed by Ruby’s work in Thailand. at least at one of the showrooms. Ruby’s sensitivity analysis indicated that if the brand were able to grow its market share to even 3 to 4%. the head of the Thailand sales organization was American. as well as the sales performance of Ruby’s company in the past few years. a Japanese carmaker recently closed its Bangkok importer and distributor. Honda. Ruby reasoned. Ruby met with the management team of the brand at its new headquarters in Bangkok. would be profitable immediately. or Isuzu. would give the company a safeguard against the dwindling fortunes of the company’s current automobile products. while the Japanese brand’s market share had declined to 2% in recent years. Ruby was given an investment guide. and once those are covered the business can be very profitable. Ruby had learned from industry friends that the required investment of THB 150 million (nearly USD 4 million) required a 25-year payback. such as Toyota. And if the new brand did reach 5% as the automaker projected.” Ruby felt that switching brands. A new Toyota showroom. With a head office dedicated to selling directly to the market. While the overall product line was not as broad as the market leaders. Moreover. the two models were in segments that comprised two-thirds of the market. However. it had been in Thailand for nearly 50 years and was well known. Actual performance may vary based on market conditions and dealer capabilities. As the managing director told Ruby: “With the product plans we have. Expenses were also forecast in a projected income state. Printed in large font at the top of the form was the company’s disclaimer: “The numbers provided are only for a guide. according to the financial projections in her business plan. The marketing team enthusiastically described the new products that were planned for the Thai market. because of the strong brand recognition. with the plans to enter the market directly. her company would be extremely profitable. suggesting a high potential return. we should be able to get back to a 5% market share in the next few years. While the Japanese brand had always been small in the market. Overall. never gaining more than 5% market share. unless we completely screw up. which forecasted the expected sales for a defined market in north Bangkok around one of Ruby’s current showrooms. Based on positive overall growth in the Thai market and the strong rebound from the Asia Crisis (Exhibit 3). along with the investment requirements. the sales of the brand could grow significantly beyond its current market share. Running an automotive showroom entails a number of fixed costs. its product line-up included a compact car and a pickup truck. which by now included nearly ten years of experience. and the large number of existing Toyotas on the road meant the service center would have ready customers. forever the optimist. annual profits would be over half the total amount of the required new investment. rather than through an importer. That company would need a new Bangkok dealer network.However Ruby. Created Feb 2008 © NEN Page 12 of 18 . in the form of a spreadsheet. Moreover. the plan forecast a return on investment of 33% in the first year.” Ruby felt that she had demonstrated that her team could sell cars.
Honda. Isuzu. more hard work was likely. • Do you agree with Ruby’s logic about investing in another brand? Would you invest your own money with Ruby? Created Feb 2008 © NEN Page 13 of 18 . Ruby told herself that if her company could become one of the first dealers in the new network it could gain profitably if the brand succeeded success. and Ruby had no investment funds of her own. and the opportunity would have its risks: there was no guarantee that brand would be able to grow in such a competitive market with strong brands.Nonetheless. Questions to consider: • Would you characterize Ruby as a success or failure so far? • What are the advantages and disadvantages in being involved in a franchise business. while Ruby had worked hard just to survive to this point. Would Ruby be able to convince her shareholders to put up more money? Ruby knew she had to give her shareholders some compelling reasons to add to their investment. such as Toyota. and Nissan already established. while preserving enough of an equity share to maintain a reasonable return for herself. Moreover. like an automotive dealership? • Is Ruby making the right strategic decision to invest another automotive brand? Are there any other options? Think about all of the potential outcomes for Ruby and her company at the moment. She needed to find a way to convince her shareholders to invest more. to invest in this new brand required an additional THB 10 million. At the same time the irony was not lost on Ruby that this was not the first time she had backed such a strategy and had convinced investors to put money into such a scheme. despite the fact that the original investment might be a total write-off.
41 25.Exhibit 1 Thai Baht/US Dollar exchange rates 1996-1998.33 41.40 35.25 25.25 25.67 24.96 25.16 25.65 39.29 25.29 25.57 24.96 26.12 25.53 30.12 36.30 25.98 45.02 24.66 24.47 25.20 42.46 25.40 38.28 Created Feb 2008 © NEN Page 14 of 18 .30 41.37 39.36 25.13 25.73 25.75 24.54 39.17 25.29 25.26 37.99 41.09 44.31 52.96 25.72 40. (Source: US Federal Reserve) 1/1/95 2/1/95 3/1/95 4/1/95 5/1/95 6/1/95 7/1/95 8/1/95 9/1/95 10/1/95 11/1/95 12/1/95 1/1/96 2/1/96 3/1/96 4/1/96 5/1/96 6/1/96 7/1/96 8/1/96 9/1/96 10/1/96 11/1/96 12/1/96 1/1/97 2/1/97 3/1/97 4/1/97 5/1/97 6/1/97 7/1/97 8/1/97 9/1/97 10/1/97 11/1/97 12/1/97 1/1/98 2/1/98 3/1/98 4/1/98 5/1/98 6/1/98 7/1/98 8/1/98 9/1/98 10/1/98 11/1/98 12/1/98 25.35 25.27 32.53 36.76 24.60 25.76 24.06 25.13 25.
engineering consulting Automotive retailing and service Capital Infusion (THB millions) 2 Profits (THB millions) 2 -2.Exhibit 2 Selected performance metrics of Bangkok Automotive (1997 – 2000) Year Primary Business Activity Accessories Accessories.000s Units) 572 589 363 144 320 374 Created Feb 2008 © NEN Page 15 of 18 . Royal Thai Government) Year 1995 1996 1997 1998 1999 2000 Total Sales (.8 -1 14 -4 No. (Source: EMI Automotive Consultancy. of employees 15 20 25 50 1997 1998 1999 2000 Exhibit 3 Thailand annual automotive sales (1997 – 2000). engineering consulting Accessories.
196. Actual performance may vary based on market conditions and dealer capabilities.763 Cash and Financial Contracts Part and Service Receivables Warranty and Parts Receivables New Vehicle Inventory Used Vehicle Inventory Parts Inventory Pre-paid expenses Total Assets Accounts Payable Accrued Expenses Total Current Liabilities Working Capital Additional Equipment Miscellaneous Dealership Investment Guide Profit Net Profit Return on operating revenue (%) Avg Month Tot Expense 1/2 Avg.000 300.196.000 1.185 1.767.840 33% Created Feb 2008 © NEN Page 16 of 18 . (Second half -.Exhibit 4.150 179.711 1.6 months) Sales and Profit Forecast Factor 1. Investment guide provided to Bangkok Automotive in 2001 (for second automotive brand).375 80% 44 550.139 717.850 2.196.377. Operating Investment Requirement Proposal to Bangkok Automotive Co.185 15% Investment Requirement 1. Month Sales 1/2 Avg.428 4.000 6.050 3 1. Ltd.113.500 300.375 80% 584.500.185 100% 584.185 75% 60% 897..500 467.913 2.614.913 3.185 467.196.442.000 180.000 1 589. Year: 2001 The numbers provided are only for a guide.762.196. Month Sales 100% Floor Plan Inventory (Baht/unit) Avg Month COGS Avg Month Tot Expense Avg Month Tot Expense Avg Month Tot Expense 1.
Gross Margin Parts Expense Service Expense 28% parts margin 4.103.000 New Trucks Used Vehicles New and Used Vehicles Selling Expense Total Vehicle Gross Profit 15.840 2.908.871.Parts Parts -.879.805 30% of Parts Gross 50% of Service Gross Total Parts and Service Center Gross Profit Total Combined Gross Profit Created Feb 2008 © NEN Page 17 of 18 .750 3.374.6 months) Gross per Units unit 51 36.805 Gross per RO 1.534.813.750 2.051.700 123 5 31.893.450 412.000 1.000 50% of New and Used Gross 2.850 2.750 750 1260 Total Parts Total Service COGS -.335 1.990 4.Sales and Profit Forecast Year: 2001 New Cars Retail Fleet Retail Fleet (Second half -.300 1.850 Repair Orders 2.805 2.879.875 2.700 3.000 75.013.
300.Fixed Expenses Rent Fixed operating expenses Dealer Other Salaries Other Expenses Total Fixed Expenses OPERATING PROFIT 1.000 2.840 Created Feb 2008 © NEN Page 18 of 18 .113.000 2.000 100.000 180.780.200.000 1.
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