Oceanwide Shipping

Role of N. Gin Neer, Regency

By Maurice Schweitzer

General Information
Four years ago, during a period of growth for Oceanwide Shipping, they decided to purchase 16 new mid-sized
ships. This purchase would substantially expand their fleet from the existing 20 mid-sized ships. After a lengthy
bidding process and substantial deliberation, they signed a $150 million contract with Regency Shipping Engines to
supply these ships with new components and engine systems. Regency agreed to build two types of engine systems
for Oceanwide: an updated D-292 and the new XP-550 engine system. Regency also agreed to provide upgrade kits
for the 20 old ships.

The XP-550 engine system promised to become an engineering marvel. With the new X Turbine, the XP-550 engine
system was projected to have far better fuel efficiency than the D-292 engine system (with the D Turbine).
Originally, Oceanwide and Regency agreed to produce half of each (D-292 & X-550 engine systems), despite the
higher maintenance cost for Oceanwide to maintain both engine types. Also, at the time of the original contract,
Regency conceded to Oceanwide’s demand to provide 20 free upgrade engine kits to improve Oceanwide’s existing
mid-size fleet. The full upgrade kits include the new X turbine, as well as a standard exhaust system, fuel system,
and ignition system.

Unfortunately, the economic environment has become more competitive for Oceanwide, and they made the decision
to reduce their order from 16 ships to 10 ships. As a result, Oceanwide now only requires 10 engine systems from
Regency, as opposed to the original 16 engine systems.

There is a standard renegotiation option to account for changes like this: Oceanwide can renegotiate the contract, but
once Oceanwide gives notice for the renegotiation, the entire contract is open for discussion.

The time frame for delivery remains unchanged for now. According to the original contract, the new products are
scheduled to be completed and sent to Oceanwide in one (1) year.

This week, per Oceanwide’s request, the two companies are meeting to restructure the agreement. Each side has a
lead negotiator. For Regency it is Mana Jer, Managing Partner. Assisting Mana Jer are Dave Velopment, VP of
Product Development, and N. Gin Neer, Head of Commercial Engine Operations. Oceanwide’s lead negotiator is
Lee Der, Chief Engineering Officer. Assisting Lee Der are Mike Kanick, VP of Maintenance, and Fin Nance, VP of
Finance.

The key issues Regency and Oceanwide will look to restructure are:
1. New purchase price.
2. Engine system(s) in the new deal
3. Upgrade kits for the old ships
a. How many?
b. What they will include?
4. Timing of delivery

Prior to the negotiation between Oceanwide and Regency, the two teams should meet to discuss internal concerns,
key issues, and objectives. During the negotiations, the teams are permitted to caucus at any point.

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Confidential Information for N. Gin Neer, Head of Commercial Engine Operations, Regency
You are N. Gin Neer, the Head of Commercial Engine Operations for Regency Shipping Engines. You report
directly to Mana Jer. Your role today is an important one. Oceanwide’s agreement with Regency 4 years ago was a
major deal for both companies. Mana Jer is likely to talk about market conditions and focus on price. Your goal is to
make sure any new agreement makes sense for Regency.

Development costs have far exceeded what you had expected, and though you might feign otherwise, you are not
disappointed to see this contract renegotiated. In your opinion, the best way to get a beneficial deal for Regency is to
be tough with Oceanwide. You could even open with a debate as to whether or not the renegotiation clause is a legal
obligation for Regency. In practice, however, you realize that Regency will be better off with a revised deal.

Built into the original deal were some of the development costs for the new turbine and engine system, which was
particularly helpful for Regency. The new X turbine is over budget and, according to rumors, not even ready. It has
cost over $7.5 million to develop, and you would like to learn more details.

Marketing expected the X Turbine to sell well, but without a clear commitment from Dave Velopment, all you see is
growing financial risk. The D-292’s are your “go to” engine systems; they are ready to go without any development
costs. Without a compelling reason from Dave Velopment, the X Turbine and the XP-550 engine system could get
cut from the deal.

Your confidential worksheet is on the following page.

2 Oceanwide/N. Gin Neer

Increase in Costs to Regency of Revised Contract

A. Loss of Revenue from original contract: $150 million – New Purchase Amount

B. Production Costs:
If the X turbine is included in the deal (for the XP-550 engine system or in the upgrade kit), projected costs of
completing production: __________

The cost of completing the X Turbine will depend on two things: (i) Initial tests. If the initial tests are successful,
Dave Velopment can give you a guarantee that they meet at least 6% fuel efficiency, and (ii) Time. Many of the
production costs are fixed, but it will be less expensive to develop with more time.

With a guarantee of at least 6% fuel efficiency from Dave Velopment, production costs:
1 year: $5M
2 years: $4M
3 years: $3.5M
4 years: $3.2M

Without a guarantee of at least 6% fuel efficiency from Dave Velopment, production costs:
1 year: $23M
2 years: $21M
3 years: $19M
4 years: $18M

(There are no production costs for the D-292 engine system, because this engine is ready to go.)

C. Cost of upgrade kits:

Number of upgrade kits x Total value of each kit: __________

Total cost of each kit component:

Exhaust System: $650,000
X Turbine or D Turbine: $1,200,000
Ignition System: $650,000
Fuel System: $400,000

For example, a deal that includes 12 upgrade kits with the Exhaust System and the Ignition system equals:
(12) x ($650,000 + $650,000) = $15,600,000

D. Savings for Delaying Delivery

The original schedule calls for delivery within 1 year. It will save you $2M for every year delay you can include in
the contract. For example, if delivery is scheduled for 3 years from now, you will save $4M. (Note: the delivery date
will need to match the “time” for production if the X Turbine is included in the deal.) Assume that everything gets
delivered at the same time.

You can only agree to a deal if the total cost of the revised deal is less than $90m:
(A. Loss of Revenue) + (B. Production Costs) + (C. Cost of Upgrade Kits) – (D. Delayed Delivery)

Your goal is to minimize the total cost of the revised deal. The lower the total cost of the revised deal, the better.

You cannot agree to a deal that costs more than $90M, and you would rather Mana Jer reach a No Deal than a deal
that costs Regency more than $90M.

Do not show this page to any other negotiators.

3 Oceanwide/N. Gin Neer

Deal Sheet:

Regency Agreed to the Deal

Mana Jer: ______________________________ □
Dave Velopment: ______________________________ □
N. Gin Neer: ______________________________ □

Oceanwide
Lee Der: ______________________________ □
Mike Kanick: ______________________________ □
Fin Nance: ______________________________ □

Terms
New Purchase Amount:
Engine Types:
Number of Upgrade Kits:
Parts in the Upgrade Kits:
Timing of Delivery:
Other terms:
(E.g., Guarantees regarding
fuel efficiency claims)
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________

4 Oceanwide/N. Gin Neer