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

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

Purchasing and Supply Chain Management
Purchasing and Supply Chain Management
6th Edition
ISBN:9781285869681
Author:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
Publisher:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
ChapterC: Cases
Section: Chapter Questions
Problem 1.7A: Avion, Inc. Susan Dey and Bill Mifflin, procurement managers at Avion, Inc., sat across from each...
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QUESTIONS:

1. Identify the emerging risks facing LE

2. Set up hedging strategies to mitigate key risks

3. Evaluate the potential for joint ventures

Alpha Consulting (a global risk management and advisory company) has prepared the following summary of the industry and its key risks. Automotive Industry Overview There are significant entry barriers to this industry, including: Heavy capital commitments Cost effective access to raw materials and parts Production processes that seek to optimize the balance between human workers and robotics Long lead times from design to production Ability to anticipate consumer buying preferences These entry barriers have led to a few dominant auto makers in each major auto manufacturing country. With globalization, these large auto makers produce parts and vehicles globally and compete in each other's markets. Production capacity significantly exceeds demand. Industry Key Risks Strategic Risks Many auto companies are exploring one or both of two initiatives: battery-powered vehicles and vehicles with autonomous (self-driving) capabilities. Both of these initiatives require enormous investment and very long lead times from design to production. Customer willingness to change from conventional gasoline or diesel cars, known as Petroleum Combustion Vehicles (PCVs), to Battery Electric Vehicles (BEVs) is currently hindered by higher purchase prices, more limited refueling stations, and generally lower driving ranges per "tankful" for BEVs. • Attracting and retaining key talent in emerging battery and self-driving technologies will be a critical success factor. Profitability and Liquidity Risks BEVs have 80% fewer parts than PCVs (which incluLE gasoline, diesel, and hybrid engines). BEV engines require significantly less maintenance than PCVs. Currently PCV dealers make more money on maintenance than on car sales. Batteries are the most expensive component of an electric vehicle, but battery technology is relatively new. Investments in battery technology and self-driving capabilities will require large upfront investments with lengthy payback periods. PCVs have a well developed, cost effective infrastructure to manufacture and deliver parts and 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 diagnostic systems. Automotive Emission requirements vary by area, with China and the U.S., particularly California, impacting PCV manufacturers the most. Failure in emissions or diagnostics 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 with minimal deterioration as well as the ability to tolerate rapid charging for long distance drives. Regulatory Concerns that PCVS pollute and contribute significantly to global warming have accelerated. There may be significant technical and regulatory requirements unique to the Chinese market. Reduction or elimination of governmental incentives to build or buy electric vehicles could negatively impact demand. TraLE barriers add cost and uncertainty to raw materials, fuel supplies, and parts that cross borders. Litigation Autonomous capabilities may generate legal and reputational risk as accidents occur. If full self driving capabilities come into play, accident responsibility could shift to the manufacturer. Alpha currently has an automotive clients Lunar Energy. Specifics for the company are discussed below.
Transcribed Image Text:Alpha Consulting (a global risk management and advisory company) has prepared the following summary of the industry and its key risks. Automotive Industry Overview There are significant entry barriers to this industry, including: Heavy capital commitments Cost effective access to raw materials and parts Production processes that seek to optimize the balance between human workers and robotics Long lead times from design to production Ability to anticipate consumer buying preferences These entry barriers have led to a few dominant auto makers in each major auto manufacturing country. With globalization, these large auto makers produce parts and vehicles globally and compete in each other's markets. Production capacity significantly exceeds demand. Industry Key Risks Strategic Risks Many auto companies are exploring one or both of two initiatives: battery-powered vehicles and vehicles with autonomous (self-driving) capabilities. Both of these initiatives require enormous investment and very long lead times from design to production. Customer willingness to change from conventional gasoline or diesel cars, known as Petroleum Combustion Vehicles (PCVs), to Battery Electric Vehicles (BEVs) is currently hindered by higher purchase prices, more limited refueling stations, and generally lower driving ranges per "tankful" for BEVs. • Attracting and retaining key talent in emerging battery and self-driving technologies will be a critical success factor. Profitability and Liquidity Risks BEVs have 80% fewer parts than PCVs (which incluLE gasoline, diesel, and hybrid engines). BEV engines require significantly less maintenance than PCVs. Currently PCV dealers make more money on maintenance than on car sales. Batteries are the most expensive component of an electric vehicle, but battery technology is relatively new. Investments in battery technology and self-driving capabilities will require large upfront investments with lengthy payback periods. PCVs have a well developed, cost effective infrastructure to manufacture and deliver parts and 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 diagnostic systems. Automotive Emission requirements vary by area, with China and the U.S., particularly California, impacting PCV manufacturers the most. Failure in emissions or diagnostics 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 with minimal deterioration as well as the ability to tolerate rapid charging for long distance drives. Regulatory Concerns that PCVS pollute and contribute significantly to global warming have accelerated. There may be significant technical and regulatory requirements unique to the Chinese market. Reduction or elimination of governmental incentives to build or buy electric vehicles could negatively impact demand. TraLE barriers add cost and uncertainty to raw materials, fuel supplies, and parts that cross borders. Litigation Autonomous capabilities may generate legal and reputational risk as accidents occur. If full self driving capabilities come into play, accident responsibility could shift to the manufacturer. Alpha currently has an automotive clients Lunar Energy. Specifics for the company are discussed below.
Lunar Energy (LE) Overview Lunar Energy is a new entrant in the automotive world. Its business includes related energy activities in BEVs, solar energy and back-up power generation. LE began its operations in the luxury market, which features more modest vehicle sales but high revenues per sale. It marketed cars and SUVs primarily in the U.S. and Europe. It was the first significant manufacturer of battery-powered vehicles with strong performance and significant driving range (300 miles/475 kilometers). It sold approximately 100,000 vehicles in 2017. Starting in the 3rd quarter of 2018, when it launched a more affordable sedan at the lower end of the luxury market, it sold more vehicles in the U.S. than either of the 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 sells solar power/battery back-up systems to homeowners. The company is not yet a significant player in these markets as resources were first focused on bringing the more affordable sedan to market. ● LE has installed the first large scale solar/battery back-up system in Australia. That system has 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. Other competitors 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 enjoys a large subscriber base. He plays a central role in planning, product design, introduction of new features and timetables. Products / Services LE sells and services its electric cars and SUVs through a network of service centers. LE supplies a large and expanding number of rapid charging stations to facilitate long distance travel. The company provides regular, no-cost updates to its customers' software via the car's existing internet connections. 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, Hawaii and Puerto Rico. Given the global nature of the automobile industry and its plans to enter the mainstream market, LE needs to be able to compete against legacy automakers who have great economies of scale in production and significant financial resources at their disposal. LE has significant outstanding loan balances that are coming due. Margins on new sales are used to repay outstanding loans and invest in new capabilities. LE started in the luxury market segment, where margins are highest. Margins may be squeezed as it moves downmarket. Having hit its production goals for these affordable sedans and posting positive earnings in September 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 China O 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 more affordable sedan, but are again becoming a priority. LE ended a retail marketing partnership to focus on direct-to-consumer sales to reduce marketing costs. The solar tiles were also redesigned to reduce production and installation costs significantly. Lastly, a large solar tile factory was completed, which provides economies of scale. In addition to solar power generation, LE also developed a residential battery storage system. Battery design and management are key components underlying DE's vehicles, residential energy storage, and large-scale solar back-up systems. Current state-of-the-art car batteries are 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, where it has a two-year lead on the competition in terms of higher efficiency and lower dependence on rare elements. It leverages its battery expertise across all of its activities.
Transcribed Image Text:Lunar Energy (LE) Overview Lunar Energy is a new entrant in the automotive world. Its business includes related energy activities in BEVs, solar energy and back-up power generation. LE began its operations in the luxury market, which features more modest vehicle sales but high revenues per sale. It marketed cars and SUVs primarily in the U.S. and Europe. It was the first significant manufacturer of battery-powered vehicles with strong performance and significant driving range (300 miles/475 kilometers). It sold approximately 100,000 vehicles in 2017. Starting in the 3rd quarter of 2018, when it launched a more affordable sedan at the lower end of the luxury market, it sold more vehicles in the U.S. than either of the 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 sells solar power/battery back-up systems to homeowners. The company is not yet a significant player in these markets as resources were first focused on bringing the more affordable sedan to market. ● LE has installed the first large scale solar/battery back-up system in Australia. That system has 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. Other competitors 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 enjoys a large subscriber base. He plays a central role in planning, product design, introduction of new features and timetables. Products / Services LE sells and services its electric cars and SUVs through a network of service centers. LE supplies a large and expanding number of rapid charging stations to facilitate long distance travel. The company provides regular, no-cost updates to its customers' software via the car's existing internet connections. 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, Hawaii and Puerto Rico. Given the global nature of the automobile industry and its plans to enter the mainstream market, LE needs to be able to compete against legacy automakers who have great economies of scale in production and significant financial resources at their disposal. LE has significant outstanding loan balances that are coming due. Margins on new sales are used to repay outstanding loans and invest in new capabilities. LE started in the luxury market segment, where margins are highest. Margins may be squeezed as it moves downmarket. Having hit its production goals for these affordable sedans and posting positive earnings in September 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 China O 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 more affordable sedan, but are again becoming a priority. LE ended a retail marketing partnership to focus on direct-to-consumer sales to reduce marketing costs. The solar tiles were also redesigned to reduce production and installation costs significantly. Lastly, a large solar tile factory was completed, which provides economies of scale. In addition to solar power generation, LE also developed a residential battery storage system. Battery design and management are key components underlying DE's vehicles, residential energy storage, and large-scale solar back-up systems. Current state-of-the-art car batteries are 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, where it has a two-year lead on the competition in terms of higher efficiency and lower dependence on rare elements. It leverages its battery expertise across all of its activities.
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