Think the Money Way?

In July 2019, Rahat, marketing vice president of Motorregal Company, was

contemplating over the discussion he had had the previous day with Gomez, a buyer
from Imperix. Imperix has been operating for almost 7 years now. Imperix has a goal to
double overall market share in the next 5 years. It has already successfully positioned itself
as a customer friendly and eco-friendly company. Imperix’s after sales service has
contributed tremendously in building this image in customer’s minds. Since its target
market is middle-income people, the price of their products is comparatively lower than
those of competitors. Imperix’s sales volume had grown to the extent (Reached 3%
market share) that it was beginning to add “private label” motorcycles to the motor
vehicles of several of its units. Gomez, Imperix’s buyer of sports bikes, had approached
Mr. Rahat about the possibility of Motorregal’s producing bikes for Imperix. The bikes
would bear the name “Bolt”, which Imperix planned to use for all of its house-brand
sporting vehicles.

Motorregal had been making bikes for almost 24 years. In 2019, the company’s line
included models, ranging from 120 TX, Achiever, Ambition and Duet models to Deluxe,
X-treme and Splendor models. Sales were currently at an annual rate of about ৳ 8,250
million. The company’s 2018 financial statements appear in Exhibit 1. Most of Motorregal’s
sales were through independently owned retailers and bike shops. Motorregal had never
before distributed its motorcycles through any type of companies like Imperix as privately
labeled vehicles. Mr. Rahat felt that Motorregal’s bikes had the image of being above
average in quality and price, but not always “top of the line” product. Currently, the
market share of Motorregal is 15%.

Imperix’s proposal to Motorregal had features that made it quite different from
Motorregal’s normal way of doing business. First, it was very important to Imperix to have
ready access to a large inventory of bikes, because Imperix have had great difficulty in
predicting bike sales, both by store and by month. Imperix wanted to carry these
inventories in its regional warehouses, but did not want title on a bike to pass from
Motorregal to Imperix until the bike was shipped from one of its regional warehouses to a

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specific Imperix store. At that point, Imperix would regard the bike as having been
purchased from Motorregal, and would pay for it within 50 days. However, Imperix would
agree to take title to any bike that had been in one of its warehouses for 10 months,
again paying for it within 50 days. Mr. Gomez estimated that on average, a bike would
remain in an Imperix regional warehouse for 8 months.

Second, Imperix wanted to sell its Bolt bikes at lower prices than the name-brand bikes it
carried, and yet still earn approximately the same taka gross margin on each bike sold –
the rationale being that Bolt bike sales would take away from the sales of the name-
brand bikes. Thus, Imperix wanted to purchase bikes from Motorregal at lower prices than
the wholesale prices of comparable bikes sold through Motorregal’s usual channels.

Finally, Imperix wanted the Bolt bike to be somewhat different in appearance from
Motorregal’s other bikes. While the frame and mechanical components could be the
same as used on current Motorregal models, the seats, handlebars and the fenders
would need to be somewhat different, and the tires would have to have the name “Bolt”
molded into their sidewalls. Also, the bikes would have to be packed in boxes printed
with the Imperix and Bolt names. These requirements were expected by Mr. Rahat to
increase Motorregal’s purchasing, inventorying, and production costs over and above
the added costs that would be incurred for a comparable increase in volume for
Motorregal’s regular products.

EXHIBIT 1
Financial Statements
Motorregal Company
Balance Sheet (Amount in Millions of BDT)
As of December 31, 2018

Assets Liabilities and Owners Equity

Cash………………………… ৳ 1,326 Accounts payable………... ৳ 1,798
Accounts receivables....... 9,060 Accrued expenses………... 2,436
Inventories…………………. 10,644 Short-term bank loans……. 10,507
Plant and equipment….... 20,370 Long-term Note payable... 8,401
Total liabilities………………. 23,142
Owner’s equity…………….. 18,258
Total ৳ 41,400 Total ৳ 41,400

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 Income Statement (Amount in Millions of BDT)
For the Year Ended December 31, 2018

Sales revenues……………………………. ৳ 8,250

Cost of Goods Sold………………………. 5,917
Gross profit…………………………………. 2,333
Selling and Administrative expenses…. 1,120
Income before taxes……………………. 1,213
Income tax expense…………………….. 171
Net income………………………………… ৳ 1,042

On the contrary, Mr. Rahat, was acutely aware that the “Motorcycle boom” will not be
flattening out anytime soon, and this plus a growing economy might cause Motorregal’s
sales volume to rise in the coming years. (In the motorcycle industry of Bangladesh, from 2006
through 2009 sales average about 1.9 Lakh units a year. By 2012, the total sales was up to a record
3.3 Lakh units. By 2014, volume was back down to 2.8 Lakh units. By 2018, volume was back up to
4 Lakh units. But operators now predict that the total sales of bikes might exceed 8 Lakh by 2021
because of rising incomes, steady growth of economy, ride-sharing services and favorable policy
and tariff structure that encourages assembling, leading to the eventual manufacturing. This is
expected to gradually end import of completely built bikes into the country .) Motorregal

currently is operating its plant at about 70 percent of one-shift capacity. If agreement

could be reached on prices, Imperix would sign a contract guaranteeing to Motorregal
that Imperix would buy its house-brand bikes only from Motorregal for a three-year period.
The contract would then be automatically extended on a year-to-year basis, unless one
party gave the other at least three-month notice that it did not wish to extend the
contract.

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 EXHIBIT 2
Data Pertinent to Imperix Proposal

Estimated first year costs of producing Bolt motorcycles (average unit costs, assuming a
constant mix of models):

Materials ৳ 61,993 The materials’ costs include bikes specific to models for Imperix,

Labor 15,480 not used in Motorregal’s standard models. Additionally,

Total ৳ 77,473 according to the accountant, about 46% of total production

(25,000 motorbikes) overhead cost is variable; Per unit variable
overhead cost (excluding Labor) is ৳ 13,479. The one-time added costs of preparing
drawings and arranging sources for fenders, seats, handlebars, tires, and shipping boxes
that differ from those used in Motorregal’s standard models is approximately ৳ 31,00,000.

Unit price and annual volume: Imperix estimates it will need 25,000 motorbikes a year and
proposes to pay Motorregal (based on the assumed mix of models) an average of
৳119,990 per motorbike for the first year. Contract to contain an inflation escalation
clause such that price will increase in proportion to inflation-caused increases in costs
shown above. Thus, the ৳119,990 and ৳77,473 figures are, in fact, “constant-taka”
amounts. Gomez intimated that there was very little, if any, negotiating leeway in the
৳119,990 proposed initial price.

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Mr. Rahat, along with three of this colleagues from Motorregal Company, Sifatullah Imran
(Project Development Head, Motorregal Company), Kaiser Haque (Chief Financial
Analyst, Motorregal Company) and Zafor Chowdhury (Operational Manager, Regional
Branch) will sit together to figure out the core issues of the prevalent situation and take a
cumulative decision that will be best for the company.

Currently, the sales revenue of Motorregal Company is over ৳8 thousand million

per year whereas gross profit from the sale of product is around ৳2 thousand
milion. Determine the expected profit/loss in context to the tender provided by
Imperix for the Bolt Bikes’ line in the first year.

Some customers compare shops for motorcycles and many of them are likely to
recognize a Bolt bike as a good value when compared with a similar bike (either
Motorregal’s or a competitor’s) at a higher price in a retail shop or authorized store.
There is also a possibility that a few of Motorregal’s current dealers might drop their
line when they find out that they are making bikes for Imperix. Based on your
decision, what marketing strategy do you think would be the most suitable and
appropriate (if the deal is accepted)? Help Mr. Rahat to come to a logical
conclusion backed up by valid proofs.

In the strategic deal between Motorregal and Imperix, there are some risks and
rewards available to both the parties. Is the Bolt deal a good strategic fit for
Motorregal Company?

Seal the deal? Derive your decision.

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