1. Should Cameron have licensed McTaggart or continued to export? Cameron Auto Parts has many factors to consider when addressing the future of their company. While Cameron has had their eye on expanding internationally, they must also consider how using licensing, as opposed to say FDI, for international expansion will affect Cameron’s control of the business. Cameron is said to have close relationships with whom they do business with, and the lose of control and possible communication issues that come with allowing McTaggart in could harm Cameron’s relations with their clients. I believe that Andy has reason for concern with licensing out the work directly to McTaggart “on a silver platter.”
However it can be just as risky to stick to exporting and paying off Cameron’s debts. Cameron seems to not have the specific market knowledge needed to expand internationally, or need to continue to run the risks of currency exchange and other exporting risks such as transportation costs. Additionally, the high investment required in expanding the exporting business locally could hurt future endeavors to expand internationally. Although Cameron has the capacity to expand their current plant, that is still a limited resource, whereas international expansion would allow for potential beyond their current space.
While they could invest in a new plant or two-shift system, to have licensed with McTaggart is much easier to implement and greatly reduces Cameron’s risks. While exporting would eventually allow for economies of scale (seen in the estimated 20% reduction of production cost annually), expanding internationally with the flexible coupling will allow for an economies of scope with Cameron’s spread out assets. If profits are expected to increase with the flexible coupling, there is no reason to believe that meeting McTaggart’s demand first and then later investing in a new plant isn’t possible.
2. Was McTaggart a good choice for licensee?
Yes McTaggart was a good choice as a licensee for many reasons. McTaggart is already deeply entrenched into their markets, and seem to have the kind of market knowledge that Cameron does not have. McTaggart also has the capacities to handle such an arrangement, as well as taking on the brunt of the financing themselves. Most importantly McTaggart was having proven success selling Cameron’s equipment, bringing in $4,000 in the first four months alone while not being able to keep up with demand. Additionally, technology flow-back and McTaggart’s excellent credit record were very appealing to Cameron. McTaggart also has a good reach, having several sales representatives outside of the UK. McTaggart holds a boasting reputation that has seen 130 years of business a high caliber sales force with a proven track record.
McTaggart could pose some problems for Cameron as well. Currently McTaggart’s sales reach is limited, and perhaps Cameron could become more of an international player through other means. McTaggart also may have separate ideas from Cameron on how to generate sales, and their partnership is still a bit infantile.
McTaggart’s most notable advantage though remains their excellent credit. Considering 59% of McTaggart’s total assets are tied into equity, their credit will remain very strong. McTaggart was also able to reach a staggering 1.5 million pound profit despite losing 9 million pounds in total sales, perhaps showing that a licensing opportunity with the flexible coupling can bring a surge into expected sales. McTaggart also seems willing to develop and this could call for future collaborations between the two.
3. Was the royalty rate reasonable? Did Cameron leave money on the table?
I believe that Cameron could have gotten more out of the deal, but considering the tradition of 1.5% being a normal rate the deal is reasonable for both parties. McTaggart has already been paying an extreme amount of residual costs through importing, and by Cameron sharing their information they are greatly reducing what McTaggart could charge for their product. McTaggart was also able to help capitalize on a product already highly in demand, as well as getting the training and insight from Cameron’s longtime experience in the industry. In return, Cameron is allowed to gain valuable insight on the UK market and is allowed to dip their feet into international operations.
The real concern for Cameron is the relationship the two will have after the five-year contract is up. Once McTaggart has the necessary information and training from Cameron, will McTaggart still be fine with a deal that is traditionally higher than normal? Despite this future concern, Cameron still comes away with a $100,000 knowledge transfer fee and an initial royalty rate that is double the norm for the first million.
In conclusion nothing will be able to beat the profitability of Cameron continuing to export. However, the knowledge and reduction of risk that comes through licensing is what makes a partnership with McTaggart so enticing. Through licensing Cameron will be able pay lower labor, import, and transportation costs as well as gaining invaluable information from a partner that has been a part of an international scene for a long time. Cameron also has plans to go public by 2007, and while allowing for McTaggart to have so much control could hurt the image of Cameron, it also allows for further brand and image recognition for potential stockholders.
I believe Cameron’s plans for expansion are very ambitious and well found, but could perhaps benefit from more time to develop. McTaggart on the other hand is unable to keep up with demand, and with projected sales from flexible couplings only climbing it may be reasonable to hit the market that is proving to be more in need of the product. I believe that in a couple years Cameron will benefit from their market knowledge obtained from McTaggart and will be more ready to decide between expanding their current plant or tackling a bigger international project such as a JV or FDI.
Cameron Auto Parts was founded in 1965, as consumer’s they haver three biggest car manufacturers. Cameron Auto Parts began having crisis in 2000 due two major problems: the first is about the drop in sales that were stopped at $ 48 million and in 2001 dropped to $ 18 million, and the second one is because the entry of Japanese competition to the market. Because of these losses Alex was in need for modernization, for this I borrowed $ 10 million. In 2001 Alex began the “Operation Survival”, taking the decision of reducing costs, mainly in labor force.
Alex cut its workforce from 720 to 470. At the beginning of 2002 the revenue would raise to $ 45 million and there were small gains. In the midst of “Operation Survival” Alex decides to do something about diversification, bringing to four engineers, designers and instructors. In 2003 Cameron Auto Parts spends $ 2. 5 million in equipment for quality products, faster service delivery, but not Price. In late 2003, the Cameron situation returned to normal, although there was a need to invest in a new plant to separate the line of production of flexible couplings.
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As Cameron was not financially prepared to make that commitment, the options were either to wait a year to generate more profits and financial stability, or license production of the flexible coupling. In the spring of 2004, Alex signed a five-year agreement with licensing Supplies Ltd. McTaggart. McTaggart had to pay $ 100,000 in fees in advance for the help of Cameron to make things right and a royalty of 3% on the first ? 1 million sales and 2% in the second million. McTaggert was forced to give a feedback of technology back to Cameron should get an improvement. Case Problem: In this case we can identify several problems, like in the beginning, that there was no diversification of the product or there was no major sales contracts that with the “Big Three”. Due to the crisis experienced at the beginning of the century, they were forced to improve their production, modernize and diversify it. Throughout the case we can see like Alex Cameron solves the problems of beginning, to the point of starting to recover economically the company.
The situation had changed, and now the problem was that Cameron Parts could not satisfy the demand, they don’t have the production capacity for it. The company’s market position in North America began to improve, and so they began to think about foreign markets. As the problem remained the lack of productive capacity, a bargain with McTaggart Supplies Ltd started, and Cameron Auto Parts give them the license of the production if flexible couplings due to the impact that they might have products in the U. K.
The problem with Cameron Auto Parts was that they willing to deliver their products themselves, make a direct deal with the customer and make strong the brand by their their own, but since that did not have the productivity capacity, it was necessary to license . But McTaggart Supplies Ltd did not have the technology, and feared that they might give bad image to the product and thus could not perform well the production process. ? Problem Solution: To enter the European Union market Cameron Auto Parts needs a large investment, which does not have.
The lack of capacity at its production plant because its market is centralized mainly on the U. S. market, and since they now have to start exporting they need to expand the plant also acquiring new technology to meet the new requirements. The European markets is completely new for they and they didn’t have the necessary information of it, so they need to make a market study and then segment the target market and measure their socioeconomic level, in order to know if their customers have the ability to purchase.
All this operation would generate more costs to the company. Another important point that Cameron must take care is about ithe currency rate risk, they work with the currency U. S. , but they don’t not know how the exchange rate fluctuates in the European Union, for what they have to know how to handle all costs and whether it will be able to make a profit at the end of the operation. Cameron did not know basically what kind of economical barriers exist within the European market and what kinds of regulations must meet in order to enter there.
Which is why as soon as we mentioned above that the solution to these problems must be a graduate with Mc Taggart, which offers a deal for 5 years and once expired can renew it if they like it or not, so Cameron sign this agreement only for 5 years and then no longer renewed, they will know the market without doing a study of it, thanks to the feedback between the firms, and the information gathered during the years. It required a big investment, but what better way to work if it is not only leaving his partner that invests capital with her.
Cameron manages to increase its production capacity because it has money to do so, also manages to get new technology from its partner, allowing you to keep up with competition. Due to the agreement, Cameron no longer has to worry about the exchange rate since Mc Taggart will be in charge, since the utilities have to be good to hand out to them. Which in the 5 years time, Cameron will know how to manage the exchange rate. All the disadvantages that Cameron could have at export time only give results with the help of Mc Taggart. Before becoming an independent company higher profits because they no longer need to partition the same.