Tractor Company of Asia: Case Study Reference No 111-010-1

Tractor Company of Asia
Case study
Authorised for educator review use only by Vipin Agrawal, Auro University, Surat. Expiry date 9-Oct-2020
Reference no 111-010-1
Usage permitted only within these parameters otherwise contact info@thecasecentre.org

This case was written by Dr Sundar Venkatesh, ConnectED Learning and
Development. It is intended to be used as the basis for class discussion rather
than to illustrate either effective or ineffective handling of a management
situation. The case was made possible by the co-operation of an organisation
that wishes to remain anonymous.
Educational material supplied by The Case Centre
Copyright encoded A76HM-JUJ9K-PJMN9I
© 2011, ConnectED Learning and Development.

No part of this publication may be copied, stored, transmitted, reproduced
or distributed in any form or medium whatsoever without the permission
of the copyright owner.
Distributed by The Case Centre North America Rest of the world

www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903
case centre All rights reserved f +1 781 239 5885
e info.usa@thecasecentre.org
f +44 (0)1234 751125
e info@thecasecentre.org
111-010-1
This case was written by Dr. Sundar Venkatesh of ConnectED Learning and Development
Inc.
It is intended to be used as the basis of class discussion rather than to illustrate either
the effective or ineffective handling of a management situation.
The case was compiled from published sources and private data disguised to protect
identity of the company.

© Dr. Sundar Venkatesh, ConnectED Learning and Development Inc

No part of this publication may be copied, stored, transmitted, reproduced or
distributed in any form or medium whatsoever without the permission of the copyright
owner.
111-010-1

Tractor Company of Asia

Robert Lin, the head of the tractors division (called Tractor Company of Asia) of the
Automobile Company of Asia (ACA), found himself in a dilemma at the end of the first
quarter of fiscal year 2004 (1/04/03 to 31/03/04). With much pushing and coaxing of his
channel partners he had been able to achieve sales growth in June the last month of the
quarter. In the process his working capital had gone way off budget. The system of
divisional control at ACA had left the tractors division in a very difficult financial
situation despite the sales growth. It now seemed unlikely that his division would meet
the profit target for the first six months of the year. He was looking for advice on what
to do next.

Background:

The Tractor Company of Asia (TCA) is the largest among the 10 odd companies
manufacturing and selling tractors in Asia. TCA has consistently maintained a market
share of over 25% of the tractor market in Asia. Its vision is to be the largest tractor
manufacturer in the world. TCA was operated as a division of the much larger (ACA).

TCA, like most tractor makers, manufactured its tractors in company owned
manufacturing facilities. Manufactured tractors were shipped from a single
manufacturing location to independent distributors who were part of a larger network
of distributors spread deep into the countryside. Farmers usually consulted the
distributors in making their buying decisions. It was not unusual for distributors to
“lend” the tractors to a potential buyer for a short time on a trial basis.

TCA was a home grown, family owned company which took pride in its “localness”. With
its long experience in manufacturing and its fruitful technical tie ups with industry
leaders worldwide, TCA had the benefit of riding the learning curve. Its manufacturing
costs were one of the lowest in the industry and there was a constant effort to improve
even on this.

Marketing Strategy at TCA was a combination of “pull” and “push”. The pull was
through investments in brand building. The theme was of a home grown, rugged and
reliable product made by a company that understood the needs of local farmers.

Despite the investments in branding, TCA relied heavily on its relationships with its
distributors to reach the farmers. Many of the distributors had been selling the
company’s tractors for decades. Few of the distributors, however, worked on an
exclusive basis with the company. Most sold tractors of more than one company.

The industry underwent a radical change that characterizes most industries in non‐
market economies which are in the process of economic liberalization. Significant
foreign investments came into the industry with several global leaders setting up
manufacturing operations in the country. Tractor manufacturing capacity increased over
60% in the 3 years to 31/12/2002. The foreign investments in manufacturing were
111-010-1
intended to supply the domestic market. The global leaders set to work on the “pull”
factor by investing in gaining local recognition for their globally known brands. For
immediate success they worked hard on the “push” factor.

Distributors, in this newly competitive scenario, were spoiled for choice. Apart from the
increased commission on sales, they demanded and got extended credit from the
manufacturers. Often manufacturers were willing to leave inventory with the
distributors. The credit period in such cases started ticking only when the distributor
sold the tractor to the farmer. The industry entered a phase in which companies
distinguished between primary sales (from manufacturer to distributor) and secondary
sales (from distributor to farmer). Primary sales were the basis of revenue recognition
by the manufacturer. Secondary sales were the basis for collection.

The intensified competition, as a result of new entrants in the industry, also increased

the focus on market share. Tractors were once‐in‐10‐years purchase on the average.
Getting a farmer to buy the company’s tractor secured life cycle revenue of parts and
services.

Farmers observing the abundance of inventory at the distributors began to delay their
buying decisions. They chose to run trials with several companies’ models. They also
began to wait out for larger discounts.

The average salesperson’s job at TCA also changed with the change in competitive
landscape. All elements of the equation with the distributor now became negotiable:
commissions, discounts, credit period, and credit‐period‐free‐inventory. Feeding data
from market into production planning and ensuring timely delivery to distributors
continued from the past as the basic elements of the sales person’s job.

The salesperson and the TCA as a whole were caught between this highly competitive
market and the tough budgeting system at ACA.

Budgeting System at ACA:
TCA operated as a completely independent business unit within ACA. TCA had discretion
to make, among others, decisions about its investments and its product markets.
Financial control was exercised by ACA over TCA through a budget and toll to be paid in
cash at the end of each month by TCA to ACA that was referred to “HO Slice”. Each year
TCA produced a budget that was approved by ACA. The budget period was April 1 to
March 31. The budget detailed the expected market size, TCA’s projected market share,
material costs and other overheads. Based on the revenue and cost projections, TCA
projected its profits for each of the 12 months covered by the budget. In addition TCA
also projected a balance sheet at the end of each of the 12 months. The balance sheet
projected, among other things, the level of the current assets and current liabilities at
the end of each of the 12 months. The “HO Slice” was computed as under:

111-010-1

Item Amount
Net Income
Add: Depreciation
Add: Amortization
Add:/(Less): Decrease or (Increase)
in Working Capital *

*Working Capital was defined to include Accounts Receivables, Inventories, and
Accounts Payables.

All the items used in the computation of the “HO Slice” were taken at the budgeted
levels. Thus, if the budgeted profits were higher than the actual profits, other things

being the same, the “HO Slice” would be the higher amount based on the budget than
the one based on the actual. This would have the effect of draining TCA of cash that it
could ill afford. On the plus side the “HO Slice” had the effect of ensuring that TCA
stretched to meet its budget targets. Otherwise it would have to take recourse to costly
loans from the corporate to run its business.

Budget 2004:
In line with its vision, TCA had drawn up an ambitious budget for the year ending March
31, 2004 (henceforth F/04). The budget envisaged a total market size of 260,000
tractors, which represented a growth of about 2.3% in market size over the year F/03.
TCA expected to sell 80000 tractors in F/04. This represented a projected market share
of 30.76%. TCA’s market share in F/03 was 27.7%.

The budgeted net income for and the partial balance sheet at the end of the first six
months of FY/04, is presented in Table 1. The budgeted working capital of TCA was
$20593.83 k at the beginning of the budget period. The actual working capital for TCA at
the beginning of the budget period was $ 23704.92 k. The information in the Tables 1
can be used to estimate the “Ho Slice” at the end of each month of the budget period.
111-010-1

Table 1: Budgets for first six months of FY 04
Amounts in $ k April May June July August September
Net Sales 14085 13671.7 13107.3 13014.5 10578.46 14738.21
Contribution 5400 5156 4000 4000 3000 6000
Net Income 1300 1271 1000 1000 750 1800
Depreciation and 314 300 300 300 300 300
Amortisation
before Net
Income
Accounts 13000 12000 11500 11500 9000 14000
Receivable
Inventories 15000 13000 12500 12000 10000 14000
Accounts Payable 14000 13500 14000 13500 14000 15000

TCA had a presence in 3 of the many categories of tractors sold in Asia. The budget for
F/04 specified the number of tractors to be sold under each of these categories. The
budgeted volumes, sales and material costs for the first quarter, Q/1 of F/04 are
presented in Table 2.

Table 2 Budgeted Volumes, Sales and Material Costs: Q/1 of F/04

Market Size* 65000 no. Amounts in $ k.
Sales Material Costs Contribution
TCA volume: 20000 no. 40864 26309 14556
total
21‐30 H.P. 4705 no. 8305 5787 2519
31‐40 H.P. 11025 no. 21990 14212 7778
41‐50 H.P. 4270 no. 10569 6310 4259
* Based on one quarter of the annual projected volumes.

In TCA, contribution was defined as the difference between the selling prices and
material costs.

Actual Performance in Q/1 of F/04:

TCA’s actual performance, as could be expected, was not exactly as budgeted.
The market for tractors in the first quarter (Q/1) of F/04 was tough. The credit period
had to be enhanced to push sales. In addition Inventories piled up. TCA met this need
for additional current assets by extending the time on payment to suppliers.
Nevertheless, working capital had increased at the end of the quarter to more than
what was budgeted.

111-010-1
Due to a variety of factors such as less than budgeted market size, and a less than
favorable mix, the actual profits at the end of the quarter was also less than budgeted.
Tables 3, 4, and 5 present the actual performance of TCA for Q/1 of F/04.

Table 3: Actual Performance in Q/01 of Y/04
Amounts in $ k April May June
Net Sales 12000 13000 13596
Contribution 4200 4500 4704
Net Income 900 950 1075
Depreciation and 291 291 292
Amortisation
before Net
Income

Accounts 18000 22000 28000
Receivable
Inventories 25000 20000 28000
Accounts Payable 20000 15000 22000

As a division, TCA had no direct access to the capital markets or to the banks. It’s only
source of funds was the corporate office of ACA. The money would come but at
approximately 2.5% per month. The resultant interest cost could further depress TCA’s
profits in the months to follow.

Table 4 Actual volumes, Sales and Material Costs: Q/1 of F/04.

Market 54974 no. Amount in $ k
Size*
Sales Material Costs Contribution
TCA volume: 19372 no. 38596 25192 13404
total
21‐30 H.P. 5813 no. 10290 7175 3115
31‐40 H.P. 10879 no. 21755 14108 7647
41‐50 H.P. 2680 no. 6551 3908 2642

* Figures as per Tractor Manufacturer’s Association

111-010-1

Table 5 Budgeted vs. Actual Net Income: Q/1‐F04 Amounts $ k

Budget: Q/1‐ Actual: Q/1‐ Budget: F/04
F04 F/04
Contribution 14556 13404
Personnel cost
‐ Manufacturing 4500 4517 16435
‐ Marketing 236 257 914
Other Costs‐ Manufacturing
‐ Repairs and Maintenance 591 513 1787
‐ Power and Fuel 366 320 1540
‐ Stores and Tools 428 541 1804
‐ Professional Charges 629 358 2517

‐ Amortisation 131 265
‐ Others 565 523 1502
Other Costs‐ Marketing
‐ Advertising 436 249 914
‐ Sales Promotion 444 494 1571
‐ Freight Outward 816 720 3198

‐ Warranty & Free Service 317 337 1011

‐ Travelling 104 97 389
‐ Others 508 414 617
Depreciation
‐ Manufacturing 905 864 4020
‐ Marketing 9 10
Net Income 3571 2925 24610

111-010-1
Questions for analysis:

1. Compute the “Ho Slice” at the end of each month.

2. How much would the “Ho Slice” have been had the actual figures been taken
instead of the budgeted figures? What is the impact of the difference in the
slices based on budget and actual, on TCA’s financial position?

3. Should TCA borrow? Why?

4. How much of the variance between the budgeted and actual profits for the first
quarter been caused by each of the identifiable factors?

5. Based on your analysis of the variance and “HO Slice” highlight the features of

the strategy that TCA seems to have adopted. What elements of the strategy
would you recommend that TCA change? Why? How?

6. What is your assessment of the “HO Slice” as a Divisional Performance control
system in a changing competitive landscape? What impact is it likely to have on
the tactical choices made by the managers in their business?

Tractor Company of Asia: Case Study Reference No 111-010-1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tractor Company of Asia: Case Study Reference No 111-010-1

Uploaded by

Copyright:

Available Formats

Tractor Company of Asia

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

© 2011, ConnectED Learning and Development.

Distributed by The Case Centre North America Rest of the world

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

‐ Freight Outward 816 720 3198

‐ Warranty & Free Service 317 337 1011

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

You might also like