QUESTIONS:1. Identify the emerging risks facing LE2. Set up hedging strategies to mitigate key risks3. Evaluate the potential for joint ventures Alpha Consulting (a global risk management and advisory company) has prepared the followingsummary of the industry and its key risks.Automotive Industry OverviewThere are significant entry barriers to this industry, including:Heavy capital commitmentsCost effective access to raw materials and partsProduction processes that seek to optimize the balance between human workers and roboticsLong lead times from design to productionAbility to anticipate consumer buying preferencesThese entry barriers have led to a few dominant auto makers in each major auto manufacturingcountry. With globalization, these large auto makers produce parts and vehicles globally andcompete in each other's markets. Production capacity significantly exceeds demand.Industry Key RisksStrategic RisksMany auto companies are exploring one or both of two initiatives: battery-poweredvehicles and vehicles with autonomous (self-driving) capabilities. Both of these initiativesrequire enormous investment and very long lead times from design to production.Customer willingness to change from conventional gasoline or diesel cars, known asPetroleum Combustion Vehicles (PCVs), to Battery Electric Vehicles (BEVs) is currentlyhindered by higher purchase prices, more limited refueling stations, and generally lowerdriving ranges per "tankful" for BEVs.• Attracting and retaining key talent in emerging battery and self-driving technologies willbe a critical success factor.Profitability and Liquidity RisksBEVs have 80% fewer parts than PCVs (which incluLE gasoline, diesel, and hybridengines). BEV engines require significantly less maintenance than PCVs. Currently PCVdealers make more money on maintenance than on car sales.Batteries are the most expensive component of an electric vehicle, but battery technologyis relatively new.Investments in battery technology and self-driving capabilities will require large upfrontinvestments with lengthy payback periods.PCVs have a well developed, cost effective infrastructure to manufacture and deliver partsand fuel. However, facilities that operate below their optimal capacities are not profitable.Operational Risk●Production generally relies on "just-in-time" processes from a global supply chain.Compliance● Regulations restrict the amount of automotive emissions and require onboard diagnosticsystems. Automotive Emission requirements vary by area, with China and the U.S.,particularly California, impacting PCV manufacturers the most. Failure in emissions ordiagnostics must be remedied by recalls.●BEVS are not adversely impacted by emissions and fuel economy standards.Technology● Battery technology includes the ability to tolerate multiple charges and discharges withminimal deterioration as well as the ability to tolerate rapid charging for long distancedrives.RegulatoryConcerns that PCVS pollute and contribute significantly to global warming haveaccelerated.There may be significant technical and regulatory requirements unique to the Chinesemarket.Reduction or elimination of governmental incentives to build or buy electric vehicles couldnegatively impact demand.TraLE barriers add cost and uncertainty to raw materials, fuel supplies, and parts that crossborders.LitigationAutonomous capabilities may generate legal and reputational risk as accidents occur. If fullself driving capabilities come into play, accident responsibility could shift to themanufacturer.Alpha currently has an automotive clients Lunar Energy. Specifics for the company are discussedbelow. Lunar Energy (LE)OverviewLunar Energy is a new entrant in the automotive world. Its business includes related energyactivities in BEVs, solar energy and back-up power generation.LE began its operations in the luxury market, which features more modest vehicle sales buthigh revenues per sale. It marketed cars and SUVs primarily in the U.S. and Europe. It wasthe first significant manufacturer of battery-powered vehicles with strong performance andsignificant driving range (300 miles/475 kilometers). It sold approximately 100,000vehicles in 2017. Starting in the 3rd quarter of 2018, when it launched a more affordablesedan at the lower end of the luxury market, it sold more vehicles in the U.S. than either ofthe German luxury car makers. It aspires to become a mainstream manufacturer in the U.S.and China.LE bought a solar panel company and developed its own residential solar roof tiles. It sellssolar power/battery back-up systems to homeowners. The company is not yet a significantplayer in these markets as resources were first focused on bringing the more affordablesedan to market.●LE has installed the first large scale solar/battery back-up system in Australia. That systemhas been proven to reduce back-up power generation by 90%, using renewable, non-polluting energy. This scalable platform can also reduce peak performance requirements,enabling utilities to defer or eliminate building additional power generation stations. Othercompetitors providing this new capability are starting to emerge.These initiatives are led by a brash visionary - Lone Ox, who is active in social media and enjoysa large subscriber base. He plays a central role in planning, product design, introduction of newfeatures and timetables.Products / ServicesLE sells and services its electric cars and SUVs through a network of service centers. LE suppliesa large and expanding number of rapid charging stations to facilitate long distance travel. Thecompany provides regular, no-cost updates to its customers' software via the car's existing internetconnections. At present, other manufacturers can only update vehicle software at dealerships.In the residential market, LE markets and installs solar panels and, beginning in 2019, solar tiles.In the utility market, its solar-powered back up systems have been installed in Australia, Hawaiiand Puerto Rico.Given the global nature of the automobile industry and its plans to enter the mainstreammarket, LE needs to be able to compete against legacy automakers who have greateconomies of scale in production and significant financial resources at their disposal.LE has significant outstanding loan balances that are coming due. Margins on new salesare used to repay outstanding loans and invest in new capabilities. LE started in the luxurymarket segment, where margins are highest. Margins may be squeezed as it movesdownmarket.Having hit its production goals for these affordable sedans and posting positive earnings inSeptember 2018, LE is now turning its attention to the following initiatives:o Expanding its product line to affordable SUVs, pick-up trucks, and tractor trailers.Developing a large production facility in ChinaO As DE's customer base grows, commensurate increases in parts, repair services,and charging options have become necessary.●Residential solar activities took a back burner while LE focused on ramping up its moreaffordable sedan, but are again becoming a priority. LE ended a retail marketingpartnership to focus on direct-to-consumer sales to reduce marketing costs. The solar tileswere also redesigned to reduce production and installation costs significantly. Lastly, alarge solar tile factory was completed, which provides economies of scale. In addition tosolar power generation, LE also developed a residential battery storage system.Battery design and management are key components underlying DE's vehicles, residentialenergy storage, and large-scale solar back-up systems. Current state-of-the-art car batteriesare maLE of lithium, nickel, manganese, cobalt and graphite. Except for manganese, 50%of the supplies originate in one or two countries. Cobalt is sourced primarily in one country,which uses child labor in its mining operations. LE invests heavily in battery design, whereit has a two-year lead on the competition in terms of higher efficiency and lowerdependence on rare elements. It leverages its battery expertise across all of its activities.

INTRODUCTION: Risk management means identifying, assessing, and prioritizing risks before taking…

Answered: 1. Identify the emerging risks facing…

1. Identify the emerging risks facing LE 2. Set up hedging strategies to mitigate key risks 3. Evaluate the potential for joint ventures

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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