1. automotive and vehicles
2. cars

For Examinations on 27 August and 20 November 2014
PRE-SEEN MATERIAL, PROVIDED IN ADVANCE FOR PREPARATION
AND STUDY FOR THE EXAMINATIONS IN SEPTEMBER AND
NOVEMBER 2014
INSTRUCTIONS FOR POTENTIAL CANDIDATES
This booklet contains the pre-seen case material for the above examinations.
It will provide you with the contextual information that will help you prepare
yourself for the examinations.
The Case Study Assessment Criteria, which your script will be marked
against, is included on page 19.
You may not take this copy of the pre-seen material into the
examination hall. A fresh copy will be provided on the examination day.
Unseen material will be provided on the examination day; this will comprise
further context and the examination question.
The examination will last for three hours. You will be allowed 20 minutes
reading time before the examination begins during which you should read
the question paper and, if you wish, make annotations on the question paper.
However, you will not be allowed, under any circumstances, to either begin
writing or using your computer to produce your answer or to use your
calculator during the reading time.
You will be required to answer ONE question which may contain more than
one element.
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Word and an Excel file. Please ensure that you check that the file names for
these two documents correspond with your candidate number.
Page
Contents of this booklet:
Pre-seen material – EL Car Company
Pre-seen Appendices
G
Case Study Assessment Criteria
© The Chartered Institute of Management Accountants 2014
2 - 12
13 - 18
19
T4 Test of Professional Competence – Part B Case Study Examination
T4 – Part B Case Study Examination
The EL Car Company (EL)
The EL Car Company (EL)
The focus of this case is the EL Car Company (EL) which is involved in the design, development,
manufacture, marketing, and selling of cars. EL’s head office is located in City P of Country X which
lies in Asia.
When it was created in the late 1940’s, EL found itself operating in a war ravaged country. The
economy of Country X was still primarily agricultural and its industrial base was virtually non-existent.
EL’s initial business was based on the purchase, renovation and sale of damaged jeeps and light
trucks abandoned in Country X at the end of World War Two. Parts used by EL in the renovation
process had to be sourced from the second hand market, hand crafted from metallic debris left by
troops during the war or imported at considerable expense. Knowledge of renovation and
manufacture was gained by trial and error and by the use of the most elementary kind of reverse
engineering. In short EL lacked almost every resource except that of cheap labour, abandoned war
vehicles and local ingenuity.
Role of government
Fortunately, EL like other manufacturing firms benefitted from the infant industry status that Country X
gave to selected industries to assist in the country’s industrialisation programme. Under this
programme, the Government of Country X prevented the importation of many manufactured goods
until its domestic firms were sufficiently strong to compete with potential new entrants from foreign
multinationals. It also prevented the acquisition of its fledgling manufacturing companies by foreign
investors but allowed a few joint ventures that enabled companies like EL to gain access to required
technical knowledge. The Government also offered subsidised loans to encourage exports, access to
foreign currency and invested heavily in Country X’s education system to provide engineers and other
workers with the necessary knowledge and skills to build up the Country’s manufacturing industries.
Growth of EL
With the decline in the number of ex-military vehicles available for renovation during the 1950’s, EL
turned its attention to the assembly of cars from imported semi-knock down kits (SKD) supplied by a
major foreign manufacturer. SKD describes a car that is imported in a set of parts that have been
partly put together, and which are then all assembled for sale to customers.
In 1973, under the initiative of Mr A Tan the newly appointed CEO and advice from experienced
international specialists in car production, EL began the manufacture of a car designed and produced
by EL itself. The car was a basic economy model specially developed and priced for first time buyers
in its domestic market. In addition to being modestly priced, the car had the virtue of low running costs
and quickly found favour amongst financially constrained motorists in foreign markets. Under the
guiding hand of the ambitious Mr Tan, EL began the first stage in the internationalisation of its
business by setting up a small number of dealerships in closely adjacent countries.
Success in this venture encouraged EL to expand into other foreign markets and its next move was to
begin the export of its cars to the affluent markets of the USA and Western Europe.
Structure, strategy and leadership
Success followed on success and since the late 1970’s EL has established seven full scale
manufacturing/assembly plants: one in its home Country X along with its head office and divisional
headquarters, two in other parts of Asia, one in North America, one in Eastern Europe, one in
Western Europe and one in South America.
It has also established a network of suppliers, distributors and dealerships in 152 countries to ensure
efficient parts supplies and the distribution, sales and servicing of its cars. Recognising the need for
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innovation, EL has also set up R&D facilities. These have been strategically placed to assist in the
development of new products and processes around the world.
As EL has grown, the structure of the Company has undergone a number of changes. Starting from a
single product structure in its early days it developed a multiple product structure as it added new
models to its portfolio. As it set up operations in more and more countries around the world however,
it found it necessary to adopt a global product structure. This is a structure in which the product
divisions are further broken down into geographic regions such as Asia, North America, and Europe
and, as far as possible, produce models that suit the requirements of consumers within a particular
geographic region. When models produced in one region are demanded in other regions/ countries of
the world, arrangements are made to ship them to these other regions. EL’s organisation chart is
shown at Appendix 1.
This growth and distribution of EL’s divisions across the world is something that EL’s management is
proud of, but managing these facilities at a distance is not without its problems. Communication
becomes less easy and ensuring the right balance between adequate control on the one hand and an
opportunity for participation on the other is a balancing act requiring good leadership.
Such growth also requires highly developed IT systems, not only to provide good communication but
also to ensure efficient delivery of supplies on a Just in Time basis and to coordinate all the activities
involved in the development, design, production, marketing, shipping, selling and distribution of cars
in the various regions of its global operations. Any breakdown in IT systems can result in lost
production and late delivery of cars to customers with consequential damage to the Company’s brand.
Today, EL employs 45,000 people world-wide and is forecast to generate annual revenue of X$ 26
billion in 2014. It has 4% of the world market, and 12% of its own home market. Although not yet
amongst the giants of the car manufacturers, it is catching up fast and looks set to achieve the
distinction of being amongst the top ten players in car production very soon.
EL’s product range encompasses all major segments from small compact to large/mid-sized sedans,
sports utility vehicles (SUV’s) and more recently the premium and luxury segment.
EL’s strategy is perhaps best described as multi-domestic in the sense that it tries to achieve
maximum local responsiveness by customising both its product offering and marketing strategy to
match different conditions in the various markets in which it operates. Production, marketing and R&D
activities have been established in each regional market where business is done. This is in marked
contrast to companies like Ford which, with its ‘One Ford’ strategy has adopted what might be called
a global strategy. This is a strategy which involves building one product for multiple markets rather
than a number of different ones tailored to national or regional tastes. The intention of such a global
strategy is to spread development and other costs over one huge global market and so reduce unit
costs.
The Tan family are the majority shareholders, with 55% of the shares, the remainder being held by
several large institutional investors in Country X.
EL's corporate governance structure includes a nine-member board of directors, a remuneration
committee, an audit committee and an ethics committee.
Like all the major car companies, EL has a stated commitment to operate as a socially responsible
company and continually demonstrates this commitment by producing cars with low emission levels
and by charitable work such as its earthquake relief programmes.
The driving force of EL’s successful expansion over the last 40 years has been Mr A Tan, a
charismatic and now revered CEO whose forceful leadership and sure-footed strategy has proven its
worth. Sadly, during late 2013 Mr A Tan suffered a stroke and this has effectively made him unfit to
continue active oversight of the Company. It appears that while Mr A Tan might have been revered,
he was also feared and even the most senior managers were reluctant to question his judgement.
This authoritarian style of leadership worked well when Mr A Tan was in charge but control from the
centre makes for difficulties in a globally dispersed divisional structure unless it is directed by a gifted
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leader. The legacy of Mr A Tan’s leadership style does not help in this context, as a culture of
authoritarian leadership is difficult to change overnight.
His son, Mr B Tan, who has been groomed for the leadership of EL, is a competent vice president of
manufacturing but it is generally agreed by ‘insiders’ that he does not have the grasp of the business
or the strategic insight that had been possessed by his father and that more generally he is not yet
ready for the top job. Despite the misgivings of some senior personnel, however, Mr B Tan has been
appointed to the post of CEO.
Recognising his own limitations, Mr B Tan is advised by a select group of four executive directors.
This is shown as the Advisory Committee for the CEO in Appendix 1. Mr B Tan has the benefit of
taking up the reins in a successful business. As the Finance Director’s report (Appendix 3) makes
clear, on almost any measure EL is performing well. That said however, Mr B Tan and his advisers
have many concerns. The manufacture and sale of cars takes place in a very competitive
environment and EL faces many problems.
The list of problems is formidable and includes changes in both the competitive and the broader
macroeconomic environments. Before considering these challenges however, it is useful to look
briefly at EL’s operations.
EL’s Operations
Supply
Cars are produced from many different parts; an estimated 20,000 of them. Some of these are
manufactured by the car companies themselves but many parts are bought in from suppliers.
EL has developed something of a reputation for its arms-length approach to its parts suppliers and is
well known as a tough negotiator. Where possible it sources its car parts from low cost Asian
countries but still relies on imported car parts from other sources around the world.
More recently, in an attempt to improve its relationships with its most important suppliers it has
introduced a programme of Guest Engineering in which engineers from its supplier firms work with
EL’s own engineers in joint research projects.
That said however, its attitude to its suppliers is an ambiguous one, sometimes shifting from supplier
to supplier in an attempt to get the lowest price; at other times developing close cooperative
relationships.
Technological innovation
In recent years EL has demonstrated a determination to be among the big investors in R&D even
continuing with an annual investment of 5 per cent of its sales value during recessionary times.
This determination has proved to be worthwhile for EL as measured both by the number of patent
applications accepted in Country X and in terms of the Company’s growing reputation for innovation.
It has also expanded its global R&D network over the years so that by early 2014 the Company was
maintaining six R&D centres and associated proving grounds (test facilities) across its main
geographic regions.
One of the main advantages of these regional R&D facilities is that they are close to customers and
this enables EL to develop and adjust their key technologies and products to local market
preferences.
Another advantage is that it allows EL to share findings across its global regions to the mutual benefit
of all.
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EL is also making a bid to become one of the recognised champions of the environment and is
investing considerable resources into the development of cars which make a minimal addition to
greenhouse gas emissions via its development of electric cars.
Further research is continuing in the Company’s efforts to maximise the fuel efficiency of its internal
combustion engines by downsizing engines and using lighter materials in car assembly.
With the growth of electronic systems becoming ever more important as part of car technology, EL
has found it expedient to form a number of joint-ventures with high tech electronics companies that
specialise in this field.
Overall, because of its late entry into the car manufacturing business, EL still lags behind in some
technologies but is quickly catching up.
New Product Development
Managers in the regional centres do their best to respond rapidly to changing customer preferences
by speedily revamping the product line-up when customer feedback suggests it is demanded.
However sometimes their decisions have been over-ruled by headquarters and this has been known
to cause enormous frustration to the regional managers involved.
In recent years EL has been making efforts to move up market by developing its luxury sedan cars
which are intended to challenge the premium brands of Mercedes, Lexus and BMW.
One notable feature of its product development is the move from a sequential to a cross functional
approach in which members from various departments work simultaneously on a model and so speed
up development and time to market.
EL has also sought out and recruited some of Europe’s top designers as a means of ensuring that EL
has unique designs.
Manufacture
EL was a latecomer to the car manufacturing business but has benefitted from the ingenuity and the
efforts of the pioneers in the business. The first cars were hand-built in late 19th Century Europe by
engineers and craftsmen but it was in the early 20th Century United States that the mass production
of cars got under way. The credit for this goes to Henry Ford who used a modified assembly system
and standard parts to produce the Model T Ford, a car that was affordable to a large number of
American families.
Not surprisingly, Ford’s assembly line system was quickly copied across the world; first adopted in the
industrialised countries of Europe and Japan, and then later on, in the emerging economies of Asia
and other regions of the globe.
EL’s cars are manufactured like all other mass-produced cars, on the assembly line. In this process
the body of the car moves through a series of work stations with parts progressively added by workers
until the car is complete. In other respects however, substantial change has taken place. Many of the
more strenuous and dangerous jobs such as welding and painting have been taken over by robots,
while hydraulic lifts are used to enable the car body to be lifted or tilted at angles to allow easy access
for workers in the fitting of parts.
The efficiency of car production has also been improved following a series of innovations by
Japanese manufacturers. These include the process of continuous improvement (Kaizen), the
development of Just In Time (JIT) that allows the reduction of inventory costs, the use of quality
circles to help in the motivation of the workforce, the implementation of continuous quality control with
a ‘right first time’ culture and more generally, the elimination of waste of all kinds by lean production
methods.
The ability of car companies to meet the varying needs and wants of consumers has also been much
improved by what is known as platform sharing. In technical terms a platform in the car industry refers
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to the under-body and suspension with axles (where the under-body consists of the front floor, underfloor, engine compartment and reinforced frame).
It is important to note that the term, ‘platform-sharing’ also refers to a way of working that tries to
share as many parts as possible among different models in order to maximise economies of scale.
When platform-sharing is combined with advanced and flexible-manufacturing technology, car
producers are able to sharply reduce product development and change-over times. In addition,
modular design and assembly allow the building of a greater variety of models from one basic set of
engineered components.
EL has recently improved the capability of its own production system by reducing its number of
platforms and at the same time increasing the number of different models per platform. Whereas in
2002 it produced 30 models from 23 platform types, in 2013 it produced 42 models from 7 platform
types.
The modern assembly line adopted by all the major players including EL is quite a complex operation
but the main stages are as follows:
The main body panels arrive in the assembly plant from the ‘Press Shop’ where they have been
pressed out into the required shape from sheet steel and/or increasingly from lighter materials like
aluminium alloys.
As the car body moves along the assembly line track, stopping briefly at each work station,
components such as the doors, the trunk lid (boot) and the hood (bonnet) are added to the car body.
This is followed by painting the body with several coats using robotic spraying machines and baking
each coat prior to the application of the next coat.
The ‘general assembly’ stage then follows with the ‘nuts and bolts’ assembly carried out primarily by
workers assisted with the use of power tools. General assembly incorporates carpets, windshields,
door glass, heating/air conditioning systems, pedals, headliners, lighting, instrument panels, steering
columns and seats. EL has adopted the Japanese practice of removing the doors before this
assembly stage commences so as to allow ease of access into the car for the assembly process.
The next important stage is the installation of the power-train; this is comprised of the engine with
transmission, drive shaft and suspension. The whole power-train is then fitted into the car body by use
of hydraulic jacks. The final assembly stage is where the wiring is connected, the fuel tank and
radiator installed with connecting hoses, the fluids added, the wheels installed and the bumpers, grill
and external lights assembled.
The car is then started and tested to check acceleration, transmission function and brakes. The
steering alignment is later done on rollers with the engine spinning the wheels. After final inspection,
the car is then ready for shipping to dealers and customers.
Encouraged by its success to date EL plans to increase its total productive capacity to take advantage
of the opportunities presented by the increasing number of affluent consumers in emerging markets.
EL now has a network of production plants in emerging markets including Eastern Europe where
labour costs are low and where access to markets is relatively easy. This global network is also
advantageous in that it helps minimise EL’s exposure to exchange rate fluctuations.
There is however, an ongoing problem with industrial relations in some of EL’s assembly line plants
which from time to time results in strike action and lost production. One of the reasons for this seems
to have to do with the way that EL manages its front line staff.
While EL’s production-line system is the same in almost every respect to that of most of its
competitors, it does differ significantly in its man-management system from its leading Japanese
competitors. Whereas Japanese car manufacturers have made a significant investment in the training
of their front line assembly line employees, EL has invested instead in the engineering design of the
assembly line system. The result of this is that EL’s assembly line workers have fewer skills and have
less discretion than their Japanese counterparts. Another important difference is that while most of
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the assembly line employees in competitor companies are represented by independent trade unions,
the employees in EL are represented by the Company Union. This form of union representation,
which is organised by the Company rather than a separate organisation, is an ongoing source of
grievance on the part of the more militant members of the workforce.
Marketing and Sales
The late start of EL into the car manufacturing industry has meant that it has a great deal of catching
up to do to establish its brand. In recent years therefore it has spent millions of dollars in high profile
advertising on bill boards, TV commercials and sponsorship of major sporting events. To improve its
social image, EL has also increased its contribution to good causes such as providing relief support to
communities afflicted by natural disasters around the world.
These investments have paid off in the sense that they have enabled EL to move up the world
rankings of the best global brands.
Another associated success for EL has been in the world quality rankings surveys in which EL has
been highly rated, being surpassed only by the likes of Porsche, Cadillac and Lexus.
EL has also enhanced its dealership facilities and services and extended its warranties so as to put
them at the forefront of almost all other car manufacturers in this kind of cover. It has also matched
other leading companies by offering several years of free roadside breakdown assistance on all its
cars.
This has improved the selling experience significantly with the result that EL has been able to
increase its overall market share in the last few years.
Challenges facing EL
As already indicated, EL operates in a fiercely competitive global environment. This presents EL with
a range of challenges. Some of these derive from changes within the industry but others stem from
challenges in the wider macroeconomic environment.
Excess Capacity and Competition
In the competitive environment the most immediate threat comes from its other global competitors.
These are an ever-shrinking group as fierce competition has eliminated some of the weaker
companies and others have been absorbed in a series of mergers and acquisitions. One of the driving
forces behind the ferocity of the competition is that the car industry suffers from excess production
capacity. This has been estimated at 20 million units, or the equivalent of the combined manufacturing
capacity in all of Western Europe.
The reason for the overcapacity has a lot to do with the fact that governments encourage, through use
of subsidies, the building of new car assembly plants so as to create employment, and when demand
drops, political pressure is often exerted to delay closure. Car companies have been aware of this
problem for some time and have attempted to resolve the situation through mergers and alliances. By
such alliances, the partners hope to improve their competitiveness in two main ways, firstly by
combining to increase their scale of operations and in so doing, bring down unit costs and secondly
by benefitting from sharing each other’s core competences and resources.
Many of these alliances have been less than successful however. In some cases the culture of the
alliance partners has proved incompatible, in others there has been a lack of synergy because the
capabilities of the partners turn out not to be complementary. In any event, these mergers have rarely
resulted in any significant reduction in overall capacity. That said, however, some mergers have been
successful and collaboration in research and development has resulted in some outstandingly good
engines that have been installed in a wide range of models.
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Another reason why this excess capacity in the industry is unlikely to disappear is that the emerging
economies such as China and India are gearing up their capacity to meet demand from their domestic
population, and when this is satisfied, the likelihood is that they will use this capacity to export to the
rest of the world.
The main outcome of the overcapacity in the industry is that manufacturers, in their quest to keep
their own capacity utilisation high, produce growing inventories of unsold cars and then seek to solve
the problem of excess inventory by the use of sales incentives, such as discounts, high trade-in
prices, free upgrades, extended warranties and other means to maintain their market share.
Most manufacturers drive their production by long-term sales forecasts, and then hope to sell their
cars from dealer stock. This strategy worked when demand exceeded supply but in the current
situation in which there is excess supply, it is difficult to see how this strategy can be sustained.
Some manufacturers of prestige cars build to order and thus avoid the problem of excess stock. To
date however, the volume producers are either unable to build to order within a reasonable time frame
or are reluctant to do so because of the coordination and scheduling problems involved.
Until now, EL has managed to avoid the more damaging consequences of surplus capacity by virtue
of its superior product offering, but how long it can maintain this competitive edge depends on a wide
range of factors, some of which may be beyond its control.
Competing via Differentiation
In the current situation of over-supply, the ability of car companies to differentiate their products from
those of others is increasingly important.
Differentiation in the car industry tends to be measured in terms of quality, cost/value and speed in
the development of new models. How consumers rate these attributes varies across regional markets.
For example in Europe with its many old winding roads and streets and relatively short driving
distances, manoeuvrability and fuel efficiency are more important than in the North American
continent where roads are straighter, driving distances potentially longer and fuel less expensive. In
emerging economies, where incomes are generally lower, affordability is a key differentiator. These
differences necessarily have implications for demand in terms of car design, size and type of powertrains preferred.
That said, the influence of foreign travel, global television coverage, the internet and other global
media has resulted in a degree of homogeneity in consumer tastes across the world.
In quality terms the most visible means of differentiation, has been and seems likely to continue to be,
car design. In the search for new designs, car manufacturers look to the past as well as to the future.
In this respect they seek to appeal to customers by offering models that include ‘heritage’ styling that
conjures up images of popular models of the past. Currently the rising cost of fuel and the global
recession has meant that small cars are in demand in both advanced and emerging economies. In
recent years, the demand for sports utility models has also become popular.
Another important means of quality differentiation is the building of quality into a car. This can take a
measurably quantitative form or be of a more subjective nature. Objective and quantifiable aspects of
quality include such things as reliability and durability. These have become key elements as have
differences in control, the fit and finish of the vehicle and the amount of noise and vibration when in
motion. Important also are more subjective, experiential differences such as that of ‘ride’ and
‘handling’ of a car.
Other quality differences are those related to safety, such as the ease of braking and electronic
warnings related to the cars’ performance and road handling in external environmental conditions
such as the risk of sliding due to icy conditions. These quality features have been much enhanced by
developments in the field of electronics such as in Antilock Braking Systems (ABS), Electronic
Stability Programmes (ESP) and Electronic Brake Distribution systems (EBD).
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Power-trains also represent a basis for differentiation. Following Japanese pioneers in this field, most
of the big players have developed or are in the process of developing hybrid gasoline/electric powertrains to propel their cars. At the same time, the producers of high quality cars have adopted a
strategy of using supercharging to provide high (500) plus horse power cars for the upper part of their
market range. Though few of these are sold, companies producing them gain publicity and prestige
which helps boost their sales in the rest of their range.
Finally in their attempt to differentiate themselves in terms of quality, some car makers are using
customer handling as their unique selling point. Important in this respect are differences in the length
of warranty offered and offerings like free roadside assistance.
The means of offering the best value for money has become ever more important as a differentiator
because fierce competitor forces have driven selling prices down in real terms. The use of the internet
has made for widespread access to up-to-date accurate information on retail prices, special deals,
trade-in values and financing rates. This has resulted in an increasing number of dealers offering their
cars for sale online.
There is also a trend to reduce service and maintenance costs by designing power-trains so as to
extend the length of time between the services required for the car.
Speed of development is also of great value in that it serves to differentiate the car maker which can
bring a new model to market quicker than others and thus gain first mover advantage. Savings can be
made on the cost of product development because resources are more focused for a shorter time
period. Furthermore, being first to market means that such models require fewer incentives to attract
buyers and so margins are easier to maintain.
Given the importance of competitor information to EL on how it should differentiate its product, it
follows that car producers like EL need to pay particular attention to competitor information and
analysis.
Changes and challenges in the industry supply chain
The design, development, assembly, marketing and sale of the car is the manufacturer’s area of
responsibility but suppliers play a very important part in this industry. In recent years, the car
manufacturing supply chain has undergone significant change and these changes present EL with
both threats and opportunities.
EL’s supply chain copies in most respects the supply chain of the other major players in the industry.
The parts that make up the modern car are purchased from a wide range of suppliers and can
account for as much as 60% of the overall cost of the car.
In the car industry these suppliers are traditionally classified into tiers according to their relative
importance to the manufacturer assembler. A tier one supplier is the most important member of the
supply chain; supplying components directly to the car manufacturer that set up the chain. In a typical
supply chain, tier two companies supply companies in tier one; tier three supplies tier two, and so on.
Tier one companies are generally the largest or the most technically-capable companies in the supply
chain. They have the skills and resources to supply the critical components that the car manufacturer
needs and they have established processes for managing suppliers in the tiers below them. Some of
these suppliers have evolved into global mega-suppliers. Typically they supply complete functions
(systems, sub-assemblies or modules) rather than individual components. A first-tier supplier is
increasingly responsible for the assembly of parts into complete units (dashboards, brake-axlesuspension, seats and so on).
The ‘aftermarket’ is a further important segment of the car value chain and is the market for
replacement parts. Nowadays, there is an international trade in aftermarket products. Firms in this
category compete predominantly on price. Access to cheaper raw materials and process engineering
skills is important. Innovation is not required because designs are copied from the existing
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components, but reverse engineering capability and competence to translate designs into detailed
drawings are important.
The relationship between the manufacturers and their suppliers has been constantly evolving and in
recent years a number of significant changes have taken place which influenced the present
relationship between manufacturers and suppliers.
With the increasing importance of Just In Time production systems and quality assurance, even
simple tasks became more critical for the overall efficiency of the operations. The manufacturer has,
therefore, found it necessary to invest in its relationships with suppliers. In particular, some car
manufacturers have felt it prudent to develop longer-term relationships with fewer suppliers.
The move by manufacturers to new locations as they seek to reduce costs and be closer to
customers also produces problems for both the manufacturers and their suppliers. Ideally the sources
of supply should be geographically close so as to minimise transportation costs and to allow use of
Just In Time delivery as a means of keeping inventory costs down. The problem for both, car
manufacturers and suppliers, is that when manufacturers relocate, their established suppliers will
need to move also, or both parties will be forced to find new partners.
The social relationship between car manufacturers and their suppliers has also varied over the years
between the traditional price-driven transactional form of relationship and the kind of close
relationships practised most successfully by Japanese car companies. Car manufacturers favouring
the traditional price-driven form of relationship have also tended to opt for multiple-sourcing while
those preferring close relationships with suppliers have opted for single-sourcing.
In the past EL has shifted back and forth between the two approaches: sometimes developing close
relationships with its suppliers but at other times adopting a more traditional price-driven relationship
with them.
Relocation of production
The shift of manufacturing plants to low cost locations has been going on for some time. The
established players from the USA, Europe and Japan have for many years located their
manufacturing plants in the low cost areas of emerging economies. As for manufacturers from the
emerging economies, they have less need to seek out low cost labour since they have this in
abundance. What they need is access to US and European technology and to their markets.
The desire to move into these established markets, however, is not as strong as it used to be
because demand for cars in more mature economies seems to be in relative decline. As the
population of the USA, Europe and Japan is ageing and older people are less likely to buy cars than
younger people, demand has moderated in these markets. It is in the emerging economies that
demand is seen to be strongest. As emerging economies industrialise and consumers increase their
earnings, there is a large unsatisfied demand for cars. Consumers in the emerging economies want
what people in the more mature economies have had for years, a car of their own.
The location of production in the car industry is therefore driven mainly by two considerations; the first
is the search for low-cost labour and the second for access to markets.
Regional concentration has also been favoured as a result of a number of other factors. Related
factors driving the shift to regional centres include high exchange rate volatility, rising transport costs
and importantly, the growing influence of regional trading blocs. For example, the North American
Free Trade Agreement (NAFTA), the European Union (EU), the Association of Southeast Asian
Nations (ASEAN) and the Mercado Comun del Cono Sur (MERCOSUR).
The advantage for manufacturers within these trading blocs is that they enable companies to sell their
products without having to pay the tariffs charged to those without the privilege of membership. The
overall effect of such changes is that fewer cars will be imported from outside a trade bloc.
In this context however, it is important to note that through the efforts of the World Trade Organisation
(WTO) there has been significant trade liberalisation across the world. In the case of Country X, for
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T4 Part B Case Study
instance, as for other Asian countries, the WTO has required it to reduce tariffs on its imports so as to
facilitate free trade and thus greater competition in the car market and other markets.
For EL, as for its competitors, these global pressures to seek out low cost locations to be close to
markets and to have the advantage of trading tariff-free within the world’s trading blocs goes a long
way to explaining the current distribution of its manufacturing plants.
This whole relocation process, however, brings new problems for car companies. In the case of EL for
instance, both the growth and the dispersal of its units across the world has been significant. This
means that production, some R&D, marketing and sales may be thousands of miles away from
headquarters but this is not a cause for concern given the advantages of modern internet and telecommunications. Monitoring can be carried on around the clock and video communication means that
all critical functions can be on view all day, every day.
Some things however, are not easily monitored as for example employees’ feelings, beliefs and
attitudes. In recent years there have been a number of companies in which employees have felt
unable to report bad news to their superiors because they feared that to do so would jeopardise their
promotion prospects or even their job. The most prominent cases are where millions of dollars have
been wasted in the cost of recalls of faulty cars because of a lack of participation and communication
by employees about faults that could have been rectified if appropriate forms of management had
been employed. These are only cases that have come to light. It follows that in the nature of things,
there are many other problems left unresolved because of the use of inappropriate forms of
organisational structure, type of leadership and management style.
Industrial Relations
The car industry has in the past, and is sometimes today, notorious for its industrial relations
problems. One of the main reasons for this is that the production line system, developed by Henry
Ford in the early twentieth century, produces an unrelenting pressure for employees to keep up with
the speed of the assembly line.
Because the car under construction must be fitted with parts in sequence as it passes the worker on
the line, it follows that each employee’s task of fitting a particular part must be completed before the
car moves on to allow the next worker on the line to add another component to the car. One of the
problems in the past has been that management, in an attempt to raise production in such plants, has
speeded up the line and this has often produced ‘sweat shop’ conditions in which some workers have
been unable to keep pace.
In the early days of car production, frequent strikes occurred as workers downed tools or even
sabotaged the line because of its excessive speed and the resultant pressure on workers to work ever
faster and harder. In most countries trade unions were organised by worker groups to negotiate
working conditions with management and to take industrial action if necessary to try to enforce their
demands for better working conditions and better wages. As a result, many millions of worker days
were lost in this industry because of industrial relations problems.
Over time however, conditions in car plants have improved, partly as a result of pressure from trade
unions, partly as result of the intervention of government and partly as a result of management
farsightedness in coming to appreciate that good treatment of a workforce can pay dividends in
workforce cooperation and commitment and ultimately in higher productivity. Unfortunately however,
these improvements in working conditions are not universal and industrial conflict continues to surface
in car assembly plants across the world as lessons from the past are forgotten.
A particular problem in a minority of countries is that the principle of freedom of association and the
right to free collective bargaining advocated by the International Labour Organisation (ILO) to promote
workers’ interests have not been adopted. In such countries, the workers are not free to join a trade
union and in others, management of the car companies themselves form workers’ unions to represent
the interests of their workforces. This latter arrangement however, is of only limited value to the
workforce in that a company union is not independent of the company and so unable to truly
represent workers’ interests. Such arrangements may be a source of disagreement between workers
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and management and are in contradiction with the guidelines set out by the ILO and its parent body,
the United Nations.
Studies have shown that labour unrest in the car industry moved from North America in the 1930s and
1940s, to Western Europe in the 1960s and 1970s, and to developing countries in Latin America and
East Asia in the 1990s and beyond. Country X has experienced a number of industrial disputes in its
car manufacturing sector in recent years.
Environmental challenges and consequences
Other challenges facing the car industry that have been evident for some time include environmental
pollution. The damage to the environment caused by emissions from the burning of fossil fuels like oil
has been identified as a major cause of global warming and legislation to reduce emissions from cars
and other vehicles has been passed by several governments to reduce this threat.
The threat to the car industry was highlighted in 2013 when pollution levels in several Chinese cities
reached such dangerous levels that its government announced stringent limits on car and other
vehicle emissions and the value of car company shares around the world fell 5 per cent overnight.
The environmental problems combined with the perception that oil reserves are perceived to be
running low has forced car companies to search for an alternative form of fuel. The main alternative
has been to produce battery powered cars. This technology has been available for some time but has
required huge investment in R&D to produce batteries light and powerful enough to enable cars to
drive a reasonable distance before having to recharge.
Batteries need to be frequently charged and this requires investment in a country’s infrastructure to
ensure charging can take place conveniently and economically. To date, the electrically powered cars
of this kind are not yet seen as competitors to those powered by petrol or diesel. Hybrid cars that
allow the driver to switch from electric power to petrol or diesel power as required are available but
are more expensive to produce, and buy, than those powered only by an oil-based fuel.
An alternative form of power supply is the use of fuel-cell technology but this is yet in the early stages
of development. The problem for car companies is which technology they should invest in for the
future? Should they opt to develop lightweight more efficient petrol or diesel powered engines or
should they put their R&D investment into battery technology or go for some compromise solution
such as the hybrid car? Such choices involve considerable risks since the investment in one or the
other form of technology will be enormously costly if the wrong choice is made.
In addition to the concern about depletion of oil reserves and the threat to the environment from the
burning of fossil fuels, concerns have also been raised about depletion of the earth’s resources and of
potential pollution from waste products produced from the millions of cars scrapped each year.
Several governments have introduced legislation in recent years governing the disposal of hazardous
wastes and in many countries the recycling of cars and vehicles of all kinds is a billion dollar industry.
Financial and economic crisis
The financial crisis beginning in late 2007 marked the onset of the deepest financial and economic
crisis the world has seen since the Great Depression of the 1930s. Economic growth in the traditional
markets of Japan, Europe and the USA ground to a halt and sometimes resulted in negative growth.
The car industry was particularly badly hit at this time and sales of cars fell 20 to 40 per cent
depending on the type of car involved. In the main producing countries of the USA, Europe and
Japan, plants were temporarily closed down and employees laid-off. In the USA, an unprecedented
bail-out of some of its largest car manufacturers was undertaken to prevent them going into
bankruptcy and in Europe a scrappage system was set up using government subsidies to force older
cars off the road and to encourage the purchase of new vehicles.
The impact of the economic crisis was felt less in emerging economies but given that the demand for
cars is a global one, this necessarily had a negative effect on export sales from countries like Country
X to markets in the developed economies.
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T4 Part B Case Study
Appendix 1
EL Organisation Chart
EL Head Office
Board of Directors
Advisory Committee
for CEO
R&D
Finance
Quality
Engineering
Marketing & Sales
Production
HR
IT
Product
Division A:
Sales
Marketing
R&D
Production
(Compact &
mid-sized
sedan
models)
Product
Division B:
Sales
Marketing
R&D
Production
(Sports utility
models)
Product
Division C:
Sales
Marketing
R&D
Production
(Premium &
luxury
models)
Product
Division D:
Sales
Marketing
R&D
Production
(Mid and
large size
sedan
models)
Product
Division E:
Sales
Marketing
R&D
Production
(Premium
models)
Product
Division F:
Sales
Marketing
R&D
Production
(Luxury
models)
Note on organisational structure:
EL has a complex global product structure. In this structure the Product Divisions are further broken
down into geographical regions such as Asia, North America and Europe and, as far as possible,
produce models that suit the requirements of consumers within a particular geographic region. When
models produced in one region are demanded in other regions/countries of the world, arrangements
are made to ship them to these other regions.
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Appendix 2
Summary Financial Overview of EL
Extract from Published Statement of Profit or Loss for EL for the year ended 31 December
2013
2012
X$ million
X$ million
Revenue
23,828
21,285
Cost of sales
18,005
16,331
Gross profit
5,823
4,954
Selling Expenses
2,388
2,193
Administrative expenses
1,152
1,035
Profit from operations
2,283
1,726
77
94
2,206
1,632
551
408
1,655
1,224
Finance costs
Profit before tax
Tax
Profit for the year
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T4 Part B Case Study
Statement of Financial Position of EL as at:
Note
Assets
Non-current assets
Property, plant and equipment
Intangible assets
1
2
31 December 2013
X$ million
4,790
751
31 December 2012
X$ million
4,526
747
5,541
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
3
2,081
1,165
2,572
5,273
2,120
1,286
1,006
5,818
11,359
Total assets
Equity and liabilities
Ordinary share capital issued
Retained earnings
4,412
9,685
1,054
6,082
1,054
4,546
Total equity
7,136
5,600
582.6
Non-current liabilities
Loans and borrowings
4
1,209
Total non-current liabilities
Current liabilities
Trade and other payables
Tax payable
Total current liabilities
Total equity and liabilities
525.0
1,222
1,209
5
2,463
551
3,014
11,359
1,222
2,455
408
412.3
2,863
9,685
Note:
1. Assets are at net values after charging depreciation.
2. Intangibles consist of component development costs and in-house software development.
3. Consists of items held for resale and work in progress.
4. Represents the outstanding balance on bond issues.
5. The corporation tax rate is 25%.
Statement of Changes in Equity
For the year ended 31 December 2013
Share
capital
X$ million
Share
premium
X$ million
Retained
earnings
X$ million
X$ million
1,054
1,054
-
4,546
1,655
(119)
6,082
5,600
1,655
(119)
7,136
Balance at 31 December 2012
Profit for the year
Dividends paid
Balance at 31 December 2013
The share capital consists of 1,054 million shares of X$ 1
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T4 Part B Case Study
Total
Statement of Cash Flows for EL for year ended 31 December 2013
X$ million
X$ million
Cash flows from operating activities
Profit before tax
2,206
Adjustments
Depreciation
Finance costs
370
77
447
Movements in working capital
(Increase)/decrease in inventories
(Increase)/decrease in trade receivables
Increase/(decrease) in trade payables
39
121
8
168
Cash generated from operations
Finance costs (net paid)
Tax paid
2,821
(77)
(408)
Net cash from operating activities
(485)
2,336
Cash flows from investing activities
Purchase of non-current assets
(638)
(638)
Cash flows from financing activities
Dividend paid
Decrease in loans and borrowings
(119)
(13)
(132)
(Decrease)/increase in cash and cash equivalents
1,566
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
1,006
2,572
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T4 Part B Case Study
Appendix 3
Finance Director’s report to the Board for the year ended 31 December 2013
The business has experienced a year of sound results building on the position of previous years.
Revenue has increased by X$ 2,543 million over the previous year to X$ 23,828 million for 2013 a
12% increase on 2012 (X$ 21,285 million)
Direct production costs of X$ 18,005 million represent 75.6% of revenue, an improvement on the
76.7% for 2012 (X$ 16,331 million) which has been achieved by improving throughput volumes in
existing facilities and favourable changes in the product mix.
This has produced a gross profit of X$ 5,823 million, which after selling expenses of X$ 2,388 million
(2012 X$ 2,193 million) and administrative expenses X$ 1,152 million (2012 X$ 1,035 million) resulted
in a profit from operations of X$ 2,283 million an improvement of X$ 557 million over 2012 (X$ 1,726
million). R&D costs are included in selling expenses.
Car sales have increased from a volume of 1,419,000 to 1,537,290, an improvement of 118,290, an
increase of 8.3% at an average selling price of X$ 15,500 which is an increase of X$ 500 per car,
3.3% over the average price for 2012.
Financing costs have reduced by X$ 17 million to X$ 77 million in 2013 as a result of reorganisation of
bond issues, and are expected to be maintained at around this level for the foreseeable future. The
cash position of the company continues to be sound; X$ 2,572 million at the end of the year, and is
considered adequate to fulfil the capital investment requirements of the business going forward.
For 2014 revenue is forecast to increase by X$ 2,172 million, slightly over 9% to X$ 26,000 million as
global economic and market conditions improve. Profit is expected to improve as increased volumes
are produced from existing facilities and sales mix improves. Volumes are forecast to improve to
1,565,834 cars and average selling price per car to improve to X$ 16,605. Forecast profit from
operations is predicted to be 10% of revenue, X$ 2,600 million. A detailed profit forecast is attached
as Appendix 4.
Further performance improvements and the ability to take advantage of demand improvements,
particularly in the home market are dependent on continued investment in new plant and production
techniques.
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Appendix 4
Forecast Statement of Profit or Loss for EL for the year ended 31 December
Forecast 2014
X$ million
26,000
Actual 2013
X$ million
23,828
Cost of sales
19,500
18,005
Gross profit
6,500
5,823
Selling Expenses
2,600
2,388
Administrative expenses
1,300
1,152
Profit from operations
2,600
2,283
80
77
2,520
2,206
630
551
1,890
1,655
Revenue
Finance costs
Profit before tax
Tax
Profit for the year
The above forecast has been prepared using the following volume and price assumptions.
Executive
Range
Mid Range
Compact
Range
Total
313,334
940,000
312,500
1,565,834
Average Price (X$)
30,000
15,000
8,000
Sales Value (X$M)
9,400
14,100
2,500
40
35
10
3,760
4,935
250
8,945
625
1,400
420
2,445
3,135
3,535
(170)
6,500
Units (Cars)
Average Gross Margin (%)
Total Gross Margin (X$M)
Direct Factory Overheads (X$M)
Gross Profit (X$M)
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26,000
T4 Part B Case Study
Assessment Criteria
Your script will be marked against the T4 Part B Case Study Assessment Criteria shown below.
Criterion
Maximum
marks
available
Analysis of issues (25 marks)
Technical
5
Application
15
Diversity
5
Strategic choices (35 marks)
Focus
5
Prioritisation
5
Judgement
20
Ethics
5
Recommendations (40 marks)
Logic
30
Integration
5
Ethics
5
Total
100
End of Pre-seen material
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