Investment Garage & Mechanic Automotive

Case prompt: Our client, Garage & Mechanic, is an automotive after-sales services provider, with a 200
workshop network in the US. They plan to buy a new system for their repair workshops and the CEO
engaged us to see whether it’s worth investing in this new technology.
•

••
Question #1: How would you frame your solution for this problem?

Possible clarification questions:

•
• Who is the client? What do they do?
• What exactly is the function of the new system?
• What are their financial objectives? By when do they want to reach breakeven?

Answers in case interviewee asks the questions above:

• The client is an automotive after-market player, which provides services from periodic car
service, which includes yearly engine and mechanics checks, to repair for multiple car brands.
It is a fast-growing national player operating in 45 states in the US.
• The new system is a new generation platform that can automatically change the brake linings,
discs, and some engine parts such as distributor, oil pan, and exhaust manifold.
• They want to reach breakeven within the three years of investment.
•
Answer to question #1:
1. Context (cover the client and the new system in detail qualitatively if not included as part of the
clarifying questions)
2. Benefits
a. What can be the financial benefits of the new system?
1. How can it improve the client’s revenues?
i. Quantity
ii. Price
2. How can it improve the client’s costs?
i. Fixed costs
ii. Variable costs
b. What are the non-financial benefits of the new system?
1. Brand image
2. Capabilities
3. Processes
3. Go/no-go evaluation
a. What is the expected level of profitability vs. our client’s target?
b. Does our client have the resources to fund the investment?
4. Risks: What are the potential risks for the client in case of market entry?
a. Can the client successfully integrate the new system into its existing processes?
b. Is there enough demand in the market to serve with the faster production brought by
the new system?
c. Would the termination of labor contracts cause any issues regarding the brand image?

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Investment Garage & Mechanic Automotive

Question #2: What do you think the potential benefits can be?

•
Answer to question #2:
Some of the potential benefits can be the following:
a. Financial benefits
i. Revenues: The new system may improve customer satisfaction and help the
client attract more customers or justify higher price levels.
ii. Costs: The new system may replace some of the repair workshop labor force
and reduce labor costs.
b. Non-financial benefits
i. The client can advertise its new technology to its customers, which can help
enhance their brand image in the market.
ii. There is a potential to digitalize other departments (e.g., Sales and Finance) in
the future. Should our client adapt to the new system successfully, they can use
this as learning to roll out to other departments.

Interviewer gives additional information about points above

• Revenues: The new system can repair cars 5% faster, resulting in an improved time of delivery.
• Costs: The new system can replace 10% of the repair workshop labor force and reduce labor
costs.

Question #3: Our client now wants us to calculate the financial benefits of the new system, how would
you approach this request?

Answer to question #3:

We can analyze financial benefits in terms of costs and revenues.
• Costs: Elimination of the workforce can reduce fixed costs.
• Revenues: Faster production can increase the quantity sold, thus revenues.

We can build the profitability framework as follows, and investigate the changes in the drivers (e.g.,
energy costs, labor costs, etc.).

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Investment Garage & Mechanic Automotive

Question #4: As mentioned, we know that the client can repair the same number of cars with 10% less
labor with the new system. How would this affect profits?

Answer to question #4:

We can compare the number of employees needed before and after the adoption of the new system
and then calculate the saving as follows:

(# of labor needed before the adoption − # of labor needed after the adoption)
∗
𝑌𝑒𝑎𝑟𝑙𝑦 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑙𝑎𝑏𝑜𝑟

If we know the existing number of employees needed as of now (i.e., before the adoption), we can
estimate the new number of employees needed after the adoption. Also, if we can have the information
on the labor cost, we can estimate the labor cost saving.

Information for the labor cost saving:

• We know that the current number of labors needed before the adoption of the new system is
10,000.
• The yearly average cost per labor: $80K.

Calculation for question #4 continues:

Then, we can proceed with the following calculation.
(10,000 − 9,000) ∗ 80K = $80M

Question #5: As mentioned, we also know that the client can repair 5% more cars at the same time
with the new system. How can this improve the financials?

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Investment Garage & Mechanic Automotive

Answer to question #5:

We can follow the steps below to calculate additional profit due to increased volumes:
• Calculate how many more cars can be repaired in total in a year.
• Calculate revenues generated from the additional cars.
• Multiply additional revenues with the gross margin to calculate the profit impact.

The following scheme can be drawn before the calculation.

Information for the additional revenue calculation:

We know that the client can repair 20 cars in a workshop in an hour. Note that it takes one hour to
repair a car.

Interviewee estimates and asks additional information:

So, given that the new system is 5% more efficient, a workshop can repair 21 cars, 1 additional car, in
an hour. If we have the information on the other cost drivers above, we can estimate the additional
profit gain.

Information for the additional revenue calculation:

• Number of working hours in a day: 12
• Number of working days: 350
• Number of repair workshops: 200
• Revenue per repaired car: $120
• Gross margin: 60%

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Investment Garage & Mechanic Automotive

Calculation for question #5:

(#of hourly additional cars repaired ∗ # 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 ∗ # 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 )
*
Revenue per repaired car * Gross margin (%)
≅
(200 ∗ 12 ∗ 350) * 120 * 60%
≅
~$60M

Question #6: When the client can reach the breakeven?

Answer to question #6:

To calculate the time to breakeven:
• We need the one-off investment cost of the new system. We also need its maintenance costs, if
any.
• Then, we can divide this amount with yearly profit improvement, which is calculated as $140M
o $80M decrease in fixed costs from labor cost-saving.
o $60M increase in gross profit from additional cars served.
By making this estimation, we assume that, with the new system, the client would be able to address
5% higher demand with a 10% smaller labor force.

Information for the breakeven calculation:

• One-off investment cost of the new system: $200M
• No significant maintenance cost exists.

Calculation for question #6:

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑦𝑒𝑎𝑟𝑙𝑦 𝑝𝑟𝑜𝑓𝑖𝑡

200
= ≅ 1.4 𝑦𝑒𝑎𝑟𝑠 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑝𝑒𝑟𝑖𝑜𝑑
140

Question #7: Can our client afford this investment? What information do you need to understand if the
client can afford it?

Answer to question #7:

The client’s financials should be analyzed to see whether they can afford this investment. Their annual
profits (EBITDA) or free cash flow (FCF) could be used as an indicator to understand our client’s
financial capabilities. Do we have any information regarding this?

Interviewer’s response: We have information about the following. How shall we proceed?
• Client’s market share: 3%
• US private automotive aftermarket market size: $75B
• Client’s profit (EBITDA) margin: 20%

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Investment Garage & Mechanic Automotive

Calculation for question #7:

(Market size ∗ Client ! s market share ∗ Client ! s profit margin)
≅
(75𝐵 ∗ 3% ∗ 20%)
≅
$450M

The client’s yearly profit, $450M, is more than double the cost of the new system; thus, the client can
afford this investment.

Question
Answer to#8: What potential
question #8: risks do you see?

We need to evaluate the following risks before making the decision.

• The client may not adapt to the new system successfully, and it may cause deficiencies in its
value chain. To illustrate, the system may not be fully compatible with the client’s ERP system.
There may be a delay in information sharing about the number of engine parts used in repairs.
Thus, that may cause misled orders in procurement.
• Termination of labor contracts may damage the brand image, reduce the motivation of the
workforce, and cause additional compensation costs.
• The client may not attract more customers due to a lack of demand for the services, aggressive
growth of competitors, etc., which may impact our forecast revenue targets

Conclusion:
We recommend that the client buy the new system for the following reasons:
• The breakeven for the new system is 1.4 years, which is significantly lower than the target of 3
years.
• The new system will allow our client to operate at a higher EBITDA margin thanks to $80M of
cost improvement and $60M of topline growth.
• From a risks point of view, as a fast-growing established player, they can address more demand
and tolerate a 10% change in their workforce.

As the next step, the client may want to buy the new system and plan the integration process.

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