Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview

Justification Are Solved

Agenda
Company Background Situation Analysis Issues Identification Recommendation Financial Justification Key Success Factors Conclusion

Company Situation Issues Strategy Financial Issues Strategy I Strategy II Strategy III KSF Background Analysis Identification Overview Justification Are Solved

Company Background

Divisions & Revenue Break Down

Ashland Changzhou Serve the Casting Market

38% 30% 15% 17%

China -largest producer of castings in the world -strong growth potential Represents $7.65 million in revenue (0.55%
of total specialty chemical sales)

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Situation Analysi
Growth Driver Customer Ashland

Situation Analysis
Automotive Market
Industry Growth

Foundry Industry

Specialty Chemical Industry

2003 Growth
Customer Segments

20.2%
Project Growth:

11.6%

5.8%

Raw Material Condition

180% by 2008

Implication: Growth Potential

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Situation Analysi

Ashland’s Customer Segment Willingness to PayHigh

Situation Analysis
Industry Growth

Nordstroms
Majority of Sales

Customer Segments

Garage Sales
Raw Material Condition Low Low

Walmarts
Quality

Aim to Expand

High

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Situation Analysi
Raw Materials Conditions
Situation Analysis
Industry Growth

Worldwide Shortage China’s booming economy Unmet Quality by Local suppliers

Government receive first access Shortage in Raw Materials Increase raw material price

Customer Segments

Government receiveU.S. access Sourcing from first - Increased material cost - Increased logistics costs (transportation + warehousing)

Raw Material Condition

Unable to pass on increased costs to customers

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Issues @ Hand
GOAL Issues @ Hands
Evaluating Core Target Market

Establish a Profitable, Long term commitment in China and build Foundation for future opportunity in Asia-pacific Expansion

Rising Raw Material Costs

Capitalize on Domestic Growth

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Strategy Overview

Issues
Evaluating Core Target Market Immediate Term

Strategies
Target Market Focus

Strategic Fit

Rising Raw Material Costs

Strategic Alliance

Short-Term

Secure Local Supply

Capitalize on Domestic Growth

Intermediate Capacity Expansion Term Capitalize Market
Potential

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

I. Target Market Focus
Immediate-Term
Estimated Automobile Capacity Expansion in China

Implication: More International Foundry players

International Foundry - Nordstroms

Source: KPMG China’s automotive and Components Market 2004

Company Situation Issues Strategy Financial Issues Strategy I Strategy II Strategy III KSF Strategy I Background Analysis Identification Overview Justification Are Solved

I. Target Market focus
Immediate-Term
To Objective have Nordstroms composition of 60% by 2009 Strategy Ashland’s Core Competency
Price Insensitive Providing high-quality products Target Market Focus

and extensive services

Target Market:
Strategic Alliance

Quality-driven, price insensitive suppliers
Price Sensitive Price Sensitive

Capacity Expansion

Focus on Nordstroms
* Assume the current proportion of 40/60 with Walmart type

Company Situation Issues Strategy Financial Issues Strategy I Strategy II Strategy III KSF Strategy I Background Analysis Identification Overview Justification Are Solved

II. Strategic Alliance
Short-Term Forming Strategic Alliance With Suppliers
Strategy Objective Reduce COGS by 9% over the next 5 years To

Target Market Focus

Quality

+

Shortage

Outsource U.S.

Strategic Alliance

Standardize
Ashland

Minimize

Minimize
Suppliers

Capacity Expansion

Minimize Costs Minimize Costs

Win-Win

•Technology Know-How Situation •Improved Quality for Long-term Benefit

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

III. Capacity Expansio
Immediate-Term Criteria: 1. % of total Foundry 2. Proximity to Sea Port
Implication
• • Strong local market potential Export to international market in the future

Objective Expand Capacity in southern part by 55% within 2007 To

Foundry: 13.2%

Foundry: 34% Location: Guandong Proximity: 2 Ocean Ports 3. Guanzhou 4. Shenzhen Foundry Industry: 22.3% in 2004

Desired Location

Foundry: 22%

Current Plant Top 8 Ports

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Financial Justificatio Strategy Wrap-Up

2005

2006

2007

2008

2009

Target Market Focus Strategic Alliance Selecting Suppliers Initiate system improvement

Capacity Expansion Southern China Construction Commercialization

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Financial Justificatio

Sales Net Income
30,000

CAGR 27.80% 84.61%

Increase 25,000
$ (in thousnds) 20,000 15,000 10,000 5,000 -

Sales from
21,734

26,084 23,339 Sales Net Income

capacity expansion in Changzhou
9,762

NPV = $17.997 million
12,248 13,058

1,211 2004

PBP = 9.5 years 2,213
421 2005 2006 Year 2007 2008

Increase sales from new plant in South 717 China 1,631

2,980 2009

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Financial Justificatio

Estimated Cost Strategic Alliance - Securing members - Operational Efficienies - Quality Improvement Capacity Expansion - Changzhou - South China TOTAL 4,823,177

38,565,676 20,000,000 18,565,676 43,388,853

Finance by internally generated funds from the parent company (Ashland Inc.)

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Key Success Factor

Cost Control

Facility Location

Relationshi p Managemen t

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Issues Are Solved
Issues
Immediate Term

Strategies
Target Market Focus

Objectives
To have Nordstroms Composition of 60% by 2009

Evaluating Core Target Market

Strategic focus

Rising Raw Material Costs

Strategic Alliance

Short-Term

Secure Local Supply

To reduce COGS by 9% over 5 yrs

Capitalize on Domestic Growth

Intermediate Capacity Expansion Term Capitalize Market
Potential

To expand capacity In Southern China by 55% within 2007

Establish a Profitable, Long term commitment in China and build foundation for future opportunity in Asia-pacific Expansion

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

THANK YOU

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Q&A

Presentation Slide
Company Background Situation Analysis -Growth Driver -Customer Segment -Raw Material Issues At Hands Strategy Overview Strategy I: Strategic Alliance Strategy II: Capacity Expansion Strategy III: Matching Core Competency
Financial Justification -Time Line Key Success Factors Issues Are Solved

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Slide Navigator I
realistic is targeting Nordstrom in short-term?

GET MARKET FOCUS

ecting Government target nordstrom?

ATEGIC ALLIANCE not solve inconsistent lead time?

sible Alternatives to reduce transportation costs (consolidation + using single su

g-term alternatives to reducing safety stock (3PL)

tegic alliance details

efits to suppliers from strategic alliances not vertical integrate?

ERS

stry trend and implications

-Pacific Opportunities

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Slide Navigator I
FINANCE Effect of Internal Financing on B/S Strategic Alliance Cost savings Target Market: Price Structure Gross Margin Summary Cost of Debt & Cost of Capital Production Capacity Assumption NPV Effect of the Target Market Refocus

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

How Realistic is Targeting Nordstrom

Strong Entrants from International auto manufacturers High International Casting Companies to supply international manufacturers - strong growth potential for Ashland

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Neglecting Governmen

Target Market Focus VS Government in Walmart Group

ot neglecting Government

ealize mutual benefits

Raw Material Priority owever, in setting strategic direction, must know who our core target market is  Quality-driven, price insensitive customers  rapid entrants followed by automotive growth

Will maintain supply to government but put more focus on International customer

urrent Proportion: 40-60 (Nordstroms-Walmarts)

xpected Proportion: 60-40

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Why Not Why not Change Solve Inconsistent Lead Time? Suppliers?
Underdeveloped IT System

Same with all suppliers

In Short-term, maybe difficult to use suppliers with hi-tech equipment

(characteristics of International 3PLs but still has no presence in China)

Currently dominated by SOEs and Local 3PLs

Underdeveloped Infrastructure
Depends entirely on Chinese Government Ashland has absolutely no control over

IMPROVING QUALITY to minimize international outsourcing through strategic alliances

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Possible Alternatives to Reduce Transportation C

Consolidations
- Consolidate all shipments in Chinese Facilities - Full Truck Load Basis Minimize transportation costs

Focusing on Single Supplier when Possible
-Reduce Ordering Costs -Reduce Transportation Costs

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Possible Long-Term Alternatives to Reducing Safety St

Using International 3PL
Growing Logistical Industry in China Currently, only SOEs in logistical industries Future trend: International 3PL enter Suppliers likely to use these 3PLs Look for ways to integrate upstream and downstream by using single 3PLs Result: Reduce Lead Time Reduce Safety Stocks Better manage cash

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Strategic Alliances Detai

Selecting Suppliers (PLAN)

Making It Work (IMPLEMENT)

Refine and Develop (CONTROL)

•Approaching suppliers •Review & Audit & communicating how the •Give feedbacks will result in mutual benefits Relationship will benefit •Develop new partners  Under quality standard both parties for futures •Agree on styles of relationship •Top management crucial •Initiate System Development Identify suppliers that

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

1. 3.

Strong market presence in the future as Automotive Industry grows Price Insensitive: Willing to pay more for the qualified materials Allow higher possibility for Ashland to pass on the increase in Raw Material cost - “ High-End user”  Higher Margin for us - Best fit for our value proposition  Quality oriented Enable Ashland to develop its own Connection - In case the government changes, “Walmart” has a chance to leave us - To reduce our dependency on government in terms of finding customer

5.

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Why Target Nordstrom
Why Target Nordstrom?
Positioning: provide high quality products and extensive services Cost Structure unsuitable for price competitiveness Ability to transfer increased costs (Raw Materials) to end consumers

Future Trend
China has just joined WTO - means open doors for international competition Co. will be forced to increase quality to stay competitive Will see a shift to group 1

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Benefits to Suppliers in Strategic Allianc Strategic Alliance Details

Why would suppliers want to form alliances? China entering WTO Future Trend: International Competition Local Suppliers will be forced to improve quality to stay competitive By forming strategic alliance with Ashland, suppliers get - technology know-how - improved quality which will eventually benefit them in long term - guaranteed volume sales to Ashland - reduce costs of having to service multiple customers

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Industry Trends &Implication Trends and Implicatio

Recent Industry Trends
Trends
Consolidation

Implications

Less bargaining power for Ashland Industry more competitive - increasing number of suppliers Focused on Nordstrom “avoid competing but decreasing number of customers on price”

Advancement in Favorable for Ashland - customers more attracted to Shift from Garage Sale product and process To Ashland products (hi-tech & high quality) Nordstroms design

No New environmental implications standards

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Why Not Vertical Integrate Why Not Vertical Integrate
To Buy out suppliers - high volume - require knowledge in operations Ashland’s raw materials Majority of ingredients make up 10% of costs Small ingredients make up 80% of costs • Unsuitable for vertical integration (need high volume + high costs) • Requires large amount of control + human capital • If supply of components is greater than that required: Production will have to be reduced (inefficient production) or The surplus will have to be sold to rival firms

More viable to form strategic alliances (consider future trends of international 3PL entering the market)

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Asia-Pacific Opportunitie
Target Market: Thailand Domestic Goal: Detroit of Asia Positioning: Largest Base for One-ton Pickup truck Evidence:
• • . • • Toyota: expects to increase 35% of current capacity, bringing total car production to 550,000 units per year by 2005 GM/Isuzu: plans to increase production capacity by 20% or from 250,000 to 300,000 by 2005 Ford/Mazda: plans to increase their capacity from 135,000 to 200,000 cars per year Nissan: to expand its production capacity to 200,000 units with 130,000 domestic and 70,000 exports.

• The overall car production is expected to reach 1.14M and 1.8M units in 2005 and 2010 • 50% of the total amount is expected to be for export • 70% of the total production would refer to Pickup truck

Source: Toyota (Thailand) , One Asset Management

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Effect of internal financing on Consolidated B/S
Quick Ratio** Before 0.84 After 0.82

** Based on items on 2004 Consolidated Balance Sheet

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Strategic Alliances: Cost Savings
1. 2. 3.
COGS COGS COGS COGS

Assume the proportion of raw material from USA and China Use the proportion to calculate each product’s cost per unit The effect of Strategy is on the proportion of raw material
China US (2x Cost) per unit China per unit USA
2004 70,823.53 70,823.53 50% 50%

33% 67%

1,838,366 3,677,284 51.91 103.84
2005 70,823.53 42,586.70 113,410.23 55% 45% 2006 70,823.53 48,974.70 119,798.23 60% 40% 2007 70,823.53 56,320.91 70,440.36 197,584.80 65% 35% 2008 70,823.53 61,953.00 77,484.40 210,260.92 70% 30% 2009 70,823.53 68,148.30 93,920.48 232,892.31 75% 25%

Unit sold (in Ton) Total unit from Changzhou Total sold unit from new Changzhou Total sold unit from South China Total unit sold Unit purchased from China Estimate Unit purchased from USA Estimate

COGS with Strategic Alliance COGS at 50/50 Us/China Cost Savings Cost Savings as % of COGS Strategic Alli Cost Potential Cost savings Potential Cost Savings %

60,399 68,062 7,663 4,823.18 2,839.72 8.86%

8,538 8,832 294 3%

8,708 9,330 622 7%

13,849 15,388 1,539 10%

14,191 16,375 2,184 13%

15,114 18,137 3,023 17%

14,812 18,390 3,578 19%

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Target Market: Price Structure
1. 2. 3. Assume 20% premium for Nordstroms over “ Walmart” Assume Beginning proportion to be 40/60 for N / W Calculate the price for each by using weighting method to arrive at weighted price
Price Assumption Current Proportion Current Price Avg Price 60% x 108 40% 1.2x ** 0.6x + 0.4*(1.2x) = 108 x = 100 20%

Wallmart (government) Nordstrom

***Premium charged for Nordstrom

Pricing Structure Price Wallmart (government) Nordstrom Average Sales price 100 120 2005 60% 40% 108

Sales Proportion 2006 2007 55% 50% 45% 50% 109 110

2008 45% 55% 111

2009 40% 60% 112

Once we get the average selling price, we time it to the Forecasted unit sales to derive Sales

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Gross Margin Summary
1. Taking Strategic Alliance and Target Market Strategy into account
2004 2005 70,823.53 42,586.70 113,410 108.00 2006 70,823.53 48,974.70 119,798 109.00 2007 70,823.53 56,320.91 70,440.36 197,585 110.00 2008 70,823.53 61,953.00 77,484.40 210,261 111.00 2009 70,823.53 68,148.30 93,920.48 232,892 112.00 (in thousands) Unit sold- Changzhou Unit New Changzhou South China Total Unit sold Weighted Price after Target market propotion

108.00

Total Revenue COGS - China COGS - USA Total COGS Gross Profit

7,650 1,838 3,677 5,516 2,134

12,248 3,238 5,300 8,538 3,711

13,058 3,732 4,976 8,708 4,350

21,734 6,667 7,181 13,849 7,886

23,339 7,641 6,550 14,191 9,148

26,084 9,068 6,046 15,114 10,970

Gross Profit Margin

0.28

0.30

0.33

0.36

0.39

0.42

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Cost of Debt & Cost of Capital
Cost of Debt
Interest rates Amount 2004 (millions) 8.00% 524 8.80% 250 7.83% 229 5.70% 168 6.86% 150 6.63% 150 1471 WdKd 0.0284976 0.0149558 0.0121895 0.0065099 0.0069952 0.0067556 7.59%

WACC Wd (include only interest-bearing debt) Kd 1-t Ws Ks (ROE) WACC ***Premium for Ks over Kd

36.42% 7.59% 67.86% 64% 12.59% 9.88% 5%

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

Production Capacity
PLANT
Initial In 2003 Total Current Capacity Expansion in South China Expansion in Changzhou Value (million) square feet capacity (ton) cost per ton ($) 5.1 50,000 25,800 197.67 8.9 45,024 14 70,824 18.57 93,920 20.00 101,176 Total 265,920
Customer presence 34.10% 22.30% 25.00% 55% Capacity (ton) 2004 2005 2006 70,824 46,316 53,263 61,252 101,176 Total 2007 70,440 75% 93,920 100% 18,565,676

Chinese Foundry Industry
Region Changzhou South China Changzhou - new plant Margin of Safety for South China Incremental Investment ($) Increase in capacity

Background Analysis Identification Overview

1. Proportionally derive what should be the current capacity in South China based on current customer presence 2. Forecast each year increase in capacity based on the sales growth assumption to meet demand 3. We want 25% margin of safety for first year of operation i.e. capacity utilization in 2007 = 75% 4. Derive 100% of the South China plant capacity that we need to construct, which equal 55% of Company Situation Strategy Financial Issues current capacity Issues KSF Strategy I Strategy II Strategy III
Justification

Are Solved

Assumptions
ASSUMPTIONS 2004 2005 2006 10% 15% 15% 15% 15% 51.9 103.8 25.22% 7.59% 32.14% 25.22% 25.22% 32.14% 32.14% 25.22% 32.14% 25.22% 32.14% 2007 15% 15% 2008 10% 10% 2009 10% 10%

Sales growth-Changzhou Sales growth- South China COGS from China per unit COGS from USA per unit Operating Exp Interest Exp Tax rate

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

NPV
NWC
A/R Inventory Other payables EBIT 1-t NWC Increase in NWC Depreciation (assume useful life 20 yrs) Old Plant New Plant in Cheangzhou New Plant (in thousand) Total (total) 336.28 2004 2005 2006 1123.85 1799.38 1918.33 399.01 638.85 681.08 1,186.57 1899.80534 2025.396406 621 67.86% 538.42 202.13 1,057 67.86% 574.01 35.59 2007 3192.95 1133.62 3371.1598 2,404 67.86% 955.41 381.40 2008 2009 3428.68 3831.94 1217.32 1360.49 3,620.05 4045.81759 3,261 67.86% 1,025.95 70.54 4,391 67.86% 1,146.61 120.67 2010 3,911.94 1,388.89 4,130.28 5,100 67.86% 1,170.55 23.94

700 1,000.00 0 1,700.00

700 1,000.00 0 1,700.00

700 1,000.00 928.28 2,628.28

700 1,000.00 928.28 2,628.28

700 1,000.00 928.28 2,628.28

700 1,000.00 928.28 2,628.28

FCF Perpetual CF Total Initial cost outlay **assumed perpetual growth

1,919.33 1,919.33 43,388.85 2%

2,381.49 2,381.49

3,878.00 3,878.00

4,770.68 4,770.68

5,487.28 76,959.77 82,447.05

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

NPV PBP (year)

17,997.11 9.5

Effect of the target market refocus on revenue

Total Revenue without market shift Total Revenue with Target Structure % change

2005 12,250 12,248 -0.01%

2006 12,940 13,058 0.91%

2007 21,342 21,734 1.84%

2008 22,711 23,339 2.76%

2009 24,217 26,084 7.71%

Company Situation Issues Strategy Financial Issues KSF Strategy I Strategy II Strategy III Background Analysis Identification Overview Justification Are Solved

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