3 page single space paper on a business case

due on 24th March 

have attached the case and instructions for the paper

W16156

CAMERON AUTO PARTS: EARLY INTERNATIONALIZATION

Professor Paul Beamish revised this case (originally prepared by Professor Harold Crookell) solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may
have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2016, Richard Ivey School of Business Foundation Version: 2017-01-05

In the spring of 2013, Alex Cameron had just come back from a trip to Scotland with a signed contract for
collaboration with one of his biggest European customers, McTaggart Supplies Ltd. As he pondered about
the implications of this deal, he started reminiscing about the path that had brought him to this point.

Alex’s first years in business were unusually harsh and turbulent. He graduated from a leading Michigan
business school in 2010 when the American economy was just recovering from the Great Recession
(2007–2009) caused by the subprime mortgage crisis and the collapse of the U.S. housing bubble. It was
not that Alex had difficulty finding a job, however; it was that he took over the reins of the family business.
His father timed his retirement to coincide with Alex’s graduation and left him with the unenviable task of
cutting back the workforce to match the severe sales declines the company was experiencing.

HISTORY

Cameron Auto Parts was founded in 1975 by Alex’s father to seize opportunities created by the earlier
signing of the Auto Pact between Canada and the United States. The Auto Pact permitted the Big Three
automotive manufacturers to ship cars, trucks, and original equipment (OEM) parts between Canada and the
United States tariff-free, as long as they maintained auto assembly facilities on both sides of the border. The
Pact had been very successful with the result that a lot of auto parts firms sprang up in Canada to supply the
Big Three. In 2001, the Auto Pact was abolished, superseded by the North American Free Trade Agreement,
which continued to create favourable conditions for trade between the United States and Canada.

Cameron Auto Parts prospered in this environment until, by 2008, sales had reached $60 million1 with
profits of $1.75 million. The product focus was largely on small engine parts and auto accessories such as
oil and air filters, fan belts and wiper blades, all sold as original equipment.

When Alex took over in 2010, the company’s financial position was precarious. Sales in 2009 had dropped
to $48 million and for the first six months of 2010 to $18 million. Not only were car sales declining in
North America, but the Japanese were taking an increasing share of the market. As a result, the major
North American auto producers were frantically trying to advance their technology and to lower their

1 All currency in U.S. dollars unless specified otherwise.

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Page 2 9B16M043

prices at the same time. It was not a good year to be one of their suppliers. In 2009, Cameron Auto Parts
lost $2.5 million, and had lost the same amount again in the first six months of 2010. Pressure for
modernization and cost reduction had required close to $4 million in new investment in equipment and
computer-assisted design and manufacturing systems. As a result, the company had taken up more than
$10 million of its $12 million line of bank credit at an interest rate which stood at 3.25 per cent (U.S. prime
rate charged by banks) in 2010.

Alex’s first six months in the business were spent in what he later referred to as “operation survival.” There
was not much he could do about working capital management as both inventory and receivables were kept
relatively low via contract arrangements with the Big Three. Marketing costs were negligible. Where costs
had to be cut were in production and, specifically, in people, many of whom had been with the company
for more than 15 years and were personal friends of Alex’s father. Nevertheless, by the end of 2010, the
workforce had been cut from 720 to 470, the losses had been stemmed, and the company had been saved
from almost certain bankruptcy. Having to be the hatchet man, however, left an indelible impression on
Alex. As things began to pick up during 2011 and 2012, he added as few permanent workers as possible,
relying instead on overtime, part-timers, or sub-contracting.

RECOVERY AND DIVERSIFICATION

For Cameron Auto Parts, the year 2010 ended with sales of $38 million and losses of $3.5 million (see
Exhibit 1). Sales began to pick up in 2011, reaching $45 million by year-end with a small profit. By mid-
2012, it was clear that the recovery was well underway. Alex, however, while welcoming the turnaround,
was suspicious of the basis for it. Cameron’s own sales hit $27 million in the first six months of 2012 and
company profits were over $2 million. Cameron was faced with increasingly aggressive competition from
Canadian and offshore parts manufacturers. The short-term future for Cameron, however, seemed
distinctly positive, but the popularity of Japanese cars left Alex feeling vulnerable to continued total
dependence on the volatile automotive industry. Diversification was on his mind as early as 2010. He had
an ambition to take the company public by 2016 and diversification was an important part of that ambition.

Unfortunately, working as an OEM parts supplier to the automotive industry did little to prepare Cameron
to become more innovative. The auto industry tended to standardize its parts requirements to the point that
Cameron’s products were made to precise industry specifications and consequently, did not find a ready
market outside the industry. Without a major product innovation, Cameron’s dependence on the Big Three
was likely to continue. Furthermore, the company had developed no “in-house” design and engineering
strength from which to launch an attempt at new product development. Because product specifications had
always come down in detail from the Big Three, Cameron had never needed to design and develop its own
products and had never hired any design engineers.

In the midst of “operation survival” in 2010, Alex boldly decided to do something about diversification. He
personally brought in a team of four design engineers and instructed them to concentrate on developing
products related to the existing line but with a wider “non-automotive” market appeal. Their first year
together showed little positive progress, and the question of whether to fund the team for another year
(estimated budget $425,000) came to the management group:

Alex: Maybe we just expected too much in the first year. They did come up with the flexible

coupling idea, but you didn’t seem to encourage them, Andy (production manager).

Andy
McIntyre:

That’s right! They had no idea at all how to produce such a thing in our facilities. Just a lot of
ideas about how it could be used. When I told them a Canadian outfit was already producing
them, the team sort of lost interest. Do
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Page 3 9B16M043

John Ellis
(Finance):

We might as well face the fact that we made a mistake and cut it off before we sink any more
money into it. This is hardly the time for unnecessary risks.

Alex: Why don’t we shorten the whole process by getting a production license from the Canadian
firm? We could start out that way and then build up our own technology over time.

Andy: The team looked into that, but it turned out the Canadians already have a subsidiary operating
in United States — not too well from what I can gather — and they are not anxious to license
anyone to compete with it.

Alex: Is the product patented?

Andy: Yes, but apparently it doesn’t have long to run.

At this point a set of ideas began to form in Alex’s mind, and in a matter of months he had lured away a
key engineer from the Canadian firm with an $110,000 salary offer and put him in charge of the product
development team. By mid-2012, the company had developed its own line of flexible couplings with an
advanced design and an efficient production process using the latest in production equipment. Looking
back, Alex commented: “We were very fortunate in the speed with which we got things done. Even then
the project as a whole had cost us close to $1 million in salaries and related costs.”

MARKETING THE NEW PRODUCT

Alex continued:

We then faced a very difficult set of problems, because of uncertainties in the market place. We
knew there was a good market for the flexible type of coupling because of its wide application
across so many different industries. But, we didn’t know how big the market was nor how much of
it we could secure. This meant we weren’t sure what volume to tool up for, what kind or size of
equipment to purchase, or how to go about the marketing job. We were tempted to start small and
grow as our share of market grew, but this could be costly too and could allow too much time for
competitive response. Our Canadian engineer was very helpful here. He had a lot of confidence in
our product and had seen it marketed in both Canada and the United States. At his suggestion we
tooled up for a sales estimate of $30 million — which was pretty daring. In addition, we hired
eight field sales representatives to back up the nation-wide distributor and soon afterwards hired
several Canadian-based sales representatives to cover major markets. We found that our key
Canadian competitor was pricing rather high and had not cultivated very friendly customer
relations. We were surprised how quickly we were able to secure significant penetration into the
Canadian market. It just wasn’t being well-serviced.

During 2012, the company actually spent a total of $2.5 million on equipment for flexible coupling
production. In addition, a fixed commitment of $1.5 million a year in marketing expenditures on flexible
couplings arose from the hiring of sales representatives. A small amount of trade advertising was included
in this sum. The total commitment represented a significant part of the company’s resources and threatened
serious damage to the company’s financial position if the sales failed to materialize.

“It was quite a gamble at the time,” Alex added. “By the end of 2012, it was clear that the gamble was
going to pay off.”

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Page 4 9B16M043

Sales by Market Sector ($ millions)

OEM Parts
Sales

Flexible Couplings
Sales

Total
Sales

After Tax
Profits

2008 60 Nil 60 1.75
2009 48 Nil 48 (2.50)
2010 38 Nil 38 (3.50)
2011 45 Nil 45 0.25
2012 58 10 (six months) 68 5.80

Cameron’s approach to competition in flexible couplings was to stress product quality, service, and speed
of delivery, but not price. Certain sizes of couplings were priced slightly below the competition but others
were not. In the words of one Cameron sales representative:

Our job is really a technical function. Certainly, we help predispose the customer to buy and we’ll
even take orders, but we put them through our distributors. Flexible couplings can be used in almost
all areas of secondary industry, by both large and small firms. This is why we need a large
distributor with wide reach in the market. What we do is give our product the kind of emphasis a
distributor can’t give. We develop relationships with key buyers in most major industries, and we
work with them to keep abreast of new potential uses for our product or of changes in size
requirements or other performance characteristics. Then we feed this kind of information back to
our design group. We meet with the design group quite often to find out what new types of
couplings are being developed and what the intended uses are, etc. Sometimes they help us solve a
customer’s problem. Of course, these ‘solutions’ are usually built around the use of one of our
products.

FINANCING PLANT CAPACITY

When Alex first set his diversification plans in motion in 2010, the company’s plant in suburban Detroit
was operating at 50 per cent capacity. However, by early 2013, sales of auto parts had recovered almost to
pre-crisis levels (before 2007), and the flexible coupling line was squeezed for space. Andy McIntyre put
the problem this way:

I don’t see how we can get sales of more than $85 million out of this plant without going to a
permanent two-shift system, which Alex doesn’t want to do. With two full shifts we could
probably reach sales of $125 million. The problem is that both our product lines are growing very
quickly. Auto parts could easily hit $80 million on their own this year, and flexible couplings!
Well, who would have thought we’d sell $10 million in the first six months? Our salespeople are
looking for $35 million to $40 million during 2013. It’s wild! We just have to have more capacity.

There are two problems pressing us to consider putting flexible couplings under a different roof.
The first is internal: we are making more and more types and sizes, and sales are growing to such a
point that we may be able to produce more efficiently in a separate facility. The second is external:
The Big Three like to tour our plant regularly and tell us how to make auto parts cheaper. Having
these flexible couplings all over the place seems to upset them because they have trouble
determining how much of our costs belong to Auto Parts. If it were left to me, I’d just let them be
upset, but Alex feels differently. He’s afraid of losing orders. Sometimes I wonder if he’s right.
Maybe we should lose a few orders to the Big Three and fill up the plant with our own product
instead of expanding. Do

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Page 5 9B16M043

Flexible couplings were produced on a batch basis, and there were considerable savings involved as batches
got larger. Thus as sales grew, and inventory requirements made large batches possible, unit production
costs decreased, sometimes substantially. McIntyre estimated that unit production costs would decline by
some 20 per cent as annual sales climbed from $20 million to $100 million and by a further 10 per cent at
$250 million. Scale economies beyond sales of $250 million were not expected to be significant.

John Ellis, the company’s financial manager, expressed his own reservations about new plant expansion
from a cash flow perspective:

We really don’t have the balance sheet (see Exhibit 2) ready for major plant expansion yet. I think
we should grow more slowly and safely for two more years and pay off our debts. If we could hold
sales at $75 million for 2013 and $85 million for 2014, we would be able to put ourselves in a
much stronger financial position. The problem is that people only look at the profits. They don’t
realize that every dollar of flexible coupling sales requires an investment in inventory and
receivables of about 30 cents. It’s not like selling to the Big Three. You have to manufacture to
inventory and then wait for payment from a variety of sources.

As it is, Alex wants to invest $10 million in a new plant and equipment right away to allow
flexible coupling sales to grow as fast as the market will allow. We have the space on our existing
site to add a separate plant for flexible couplings. It’s the money I worry about.

FOREIGN MARKETS

As the company’s market position in North America began to improve, Alex began to wonder about
foreign markets. The company had always been a major exporter to Canada, but it had never had to market
there. The Big Three placed their orders often a year or two in advance, and Cameron just supplied them.
As Alex put it:

It was different with the flexible coupling. We had to find our own way into the market. We did,
however, start getting orders from Europe and South America, at first from the subsidiaries of our
U.S. customers and then from a few other firms as word got around. We got $40,000 in orders
during 2012 and the same amount during the first four months of 2013. This was a time when we
were frantically busy and hopelessly understaffed in the management area, so all we did was fill
the orders on a FOB (free-on-board), Detroit basis. The customers had to pay import duties of
approximately 3 per cent into most European countries and a value added tax (VAT) ranging
between 15 per cent (Luxembourg) and 27 per cent (Hungary), with an average of about 21.5 per
cent, on top of the freight and insurance, and still orders came in. The VAT for the United
Kingdom was 20 per cent and France 19.6 per cent.

Seeing the growing potential in Europe, supported by clear signs of recovery from the financial crisis and
the European debt crisis, Alex promptly took a European Patent from the European Patent Office in the
United Kingdom. The cost of the whole process was under $10,000.

A LICENSING OPPORTUNITY

In the spring of 2013, Alex made a vacation trip to Scotland and decided while he was there to drop in on
one of the company’s new foreign customers, McTaggart Supplies Ltd. Cameron Auto Parts had received
unsolicited orders from overseas amounting to $40,000 in the first four months of 2013, and over 10 per Do

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Page 6 9B16M043

cent of these had come from McTaggart. Alex was pleasantly surprised at the reception given to him by
Sandy McTaggart, the 60-year-old head of the company.

Sandy: Come in! Talk of the devil. We were just saying what a shame it is you don’t make those flexible

couplings in this part of the world. There’s a very good market for them. Why my men can even
sell them to the English!

Alex: Well, we’re delighted to supply your needs. I think we’ve always shipped your orders promptly, and
I don’t see why we can’t continue . . .

Sandy: That’s not the point! Those orders are already sold before we place them. The point is we can’t
really build the market here on the basis of shipments from America. There’s a 3 per cent tariff
coming in, freight and insurance cost us another 10 per cent on top of your price, then there’s the
matter of currency values. I get my orders in pounds (£)2 but I have to pay you in dollars. And on
top of all that, I can never be sure how long exactly the goods will take to get here, especially
with the ever-looming risk of strikes. I still remember the 2009 postal strikes. Listen, why don’t
you license us to produce flexible couplings here?

After a lengthy bargaining session, during which Alex secured the information (see Exhibit 3), he came
round to the view that a license agreement with McTaggart might be a good way of achieving swift
penetration of the U.K. market via McTaggart’s sales force. McTaggart’s production skills were not as up-
to-date as Cameron’s, but his plant showed evidence of a lot of original ideas to keep manufacturing costs
down. Furthermore, the firm seemed committed enough to invest in some new equipment and to put a
major effort into developing the U.K. market. At this point the two executives began to discuss specific
terms of the license arrangements:

Alex: Let’s talk about price. I think a figure around 3 per cent of your sales of flexible couplings would

be about right.

Sandy: That’s a bit high for an industrial license of this kind. I think one and a half per cent is more
normal.

Alex: That may be, but we’re going to be providing more than just blueprints. We’ll have to help you
choose equipment and train your operators as well.

Sandy: Aye, so you will. But we’ll pay you for that separately. It’s going to cost us £500,000 in special
equipment as it is, plus, let’s say, a $100,000 fee to you to help set things up. Now you have to
give us a chance to price competitively in the market, or neither of us will benefit. With a royalty
of one and a half per cent, I reckon we could reach sales of £500,000 in our first year and £1
million in our second.

Alex: The equipment will let you produce up to £4 million of annual output. Surely you can sell more
than a million. We’re getting unsolicited orders without even trying.

Sandy: With the right kind of incentive, we might do a lot better. Why don’t we agree to a royalty of two
and a half per cent on the first million in sales and one and a half per cent after that. Now mind
you, we’re to become exclusive agents for the U.K. market. We’ll supply your present customers
from our own plant.

Alex: But just in the United Kingdom! Now 2 per cent is as low as I’m prepared to go. You make those
figures 3 per cent and 2 per cent and you have a deal. But it has to include a free technology flow-

2 £1 was equivalent to US$ 1.54 in 2013 (average in the period between January 1, 2013 and April 30, 2013). Do

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Page 7 9B16M043

back clause in the event you make any improvements or adaptations to our manufacturing process.

Sandy: You drive a hard bargain! But it’s your product, and we do want it. I’ll have our lawyers draw up
a contract accordingly. What do you say to a five-year deal, renewable for another five if we are
both happy?

Alex: Sounds good. Let’s do it.

Alex signed the contract the same week and then headed back to America to break the news. He travelled
with mixed feelings, however. On the one hand, he felt he had got the better of Sandy McTaggart in the
bargaining, while on the other, he felt he had no objective yardstick against which to evaluate the royalty
rate he had agreed on. This was pretty much the way he presented the situation to his executive group
when he got home.

Alex: . . . so I think it’s a good contract, and I have a cheque here for $100,000 to cover our costs

in helping McTaggart get set up.

John: We can certainly use the cash right now. And there doesn’t seem to be any risk (finance)
involved. I like the idea, Alex.

Andy
(production):

Well, I don’t. And Chuck (head of the Cameron design team) won’t either when
(production) he hears about it. I think you’ve sold out the whole U.K. market for a pittance.
I thought you wanted to capture foreign markets directly.

Alex: But Andy, we just don’t have the resources to capture foreign markets ourselves. We might
as well get what we can through licensing, now that we’ve patented our process.

Andy: Well, maybe. But I don’t like it. It’s the thin edge of the wedge if you ask me. Our know-
how on the production of this product is pretty special, and it’s getting better all the time. I
hate to hand it over to old McTaggart on a silver platter. I reckon we’re going to sell over
$20 million in flexible couplings in the United States alone during 2013.

As Alex walked back into his office after this conversation, he wondered whether signing the deal might
have been premature.

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Page 8 9B16M043

EXHIBIT 1: INCOME STATEMENTS
(for years ended December 31 ($000s)

2010 2011 2012

Net Sales $38,150 $45,200

$67,875

Cost of goods sold:
Direct materials 6,750 8,050 12,400
Direct labour 12,900 10,550 12,875
Overheads (including depreciation) 16,450 19,650 27,600

Total 36,100 38,250 52,875
Gross Profit 2,050 6,950 15,000

Expenses:
Selling and administration (includes design team) 3,150 3,800 6,200
Other (includes interest) 2,400 2,900 3,000

Total 5,500 6,700 9,200
Net Profit before Tax (3,500) 250 5,800
Income Tax (500) – 200
Net Profit after Tax $ (3,000) $ 250 $ 5,600

Note: Alex expected total sales to reach $85 million in 2013 with profits before tax of $10 million. Flexible
couplings were expected to contribute sales of $30 million and profits of $5 million on assets of $12 million.

Source: Company files.

EXHIBIT 2: BALANCE SHEETS
(for years ended December 31 ($000s)

2010 2011 2012

Assets
Cash $ 615 $ 430 $ 400
Accounts Receivable 5,850 6,850 10,400
Inventories 4,995 4,920 7,500

Total Current Assets 11,460 12,200 18,300
Property, Plant and Equipment (net) 10,790 11,800 13,000

Total Assets 22,250 24,000 31,300
Liabilities

Accounts Payable 4,850 5,900 9,500
Bank Loan 11,500 12,000 10,000
Accrued Items (including taxes) 450 400 500

Total Current Liabilities 16,800 18,300 20,000
Common Stock (Held by Cameron family) 500 500 500
Retained Earnings 4,950 5,200 10,800

Total Equity 5,450 5,700 11,300
Total Liabilities $22,250 $24,000 $31,300

Source: Company files.
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Page 9 9B16M043

EXHIBIT 3: DATA ON MCTAGGART SUPPLIES LTD.

2012 Sales £35 million (down from £44 million in 2010).

Total Assets £11 million: Equity £6.5 million

Net profit after tax ± £1.5 million

Control McTaggart Family

Market coverage 15 sales representatives in United Kingdom, two in Europe, one in

Australia, one in New Zealand, one in India.

Average factory wage rate £9.00 per hour (which is below the United Kingdom mean of £12.92 due

to the factory being located in a depressed area) (versus $19.54 in
America).

Factory Old and larger than necessary. Some very imaginative manufacturing

know-how in evidence.

Reputation Excellent credit record, business now 130 years old, good market

contacts (high calibre sales force).

Other Company sales took a beating during 2010–2011 as one of the

company’s staple products was badly hurt by a U.S. product of superior
technology. Company filled out its line by distributing products obtained
from other manufacturers. Currently about one-half of company sales are
purchased from others. Company has capacity to increase production
substantially.

Pricing Index

Cameron’s price to McTaggart 100
(same as net price to distributor in America)
+ import duty 3
+ freight and insurance 10
import’s cost 113

+ distributor’s (McTaggart’s) margin (30%) 34
+ VAT (20 % on cost plus margin) 29
= price charged by McTaggart 176
versus price charged by American distributor in the United States 120

Source: Company files.

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Case Write-up Overview

Cameron Auto Parts

SI 471

Introduction

The case write-up assignment on Cameron Auto Parts is designed to give you additional practice analyzing business situations and developing effective plans-of-actions. Although case studies come equipped with “study questions” and exhibits, the process of identifying issues, considering their implications, and developing and implementing a plan-of-action in the real world is the same, and should be an integral part of your business skill-set.

Your effectiveness in completing in this assignment should also provide you with a good benchmark regarding the development of your analytical skills. By this point in the course, you should find your class preparation time reduced (i.e., you’ve become more efficient), and your ability to accurately identify, and comprehensively analyze, the relevant issues increased.

Case Write-up Instructions

Please do the following for this assignment:

a) Answer the 4 assignment questions for class #17, in the syllabus (Cameron Auto Parts) and in writing, and submit your paper in hardcopy form by the beginning of class on 3/25/20.

b) The maximum length of your paper should be 3 pages, single-spaced, including all exhibits.

c) It is recommended you label each page of your paper with only your BU ID #, in an effort to facilitate blind grading. Please do NOT put your name anywhere on your paper.

d) Please note: You do NOT have to submit your answers via e-mail for class on 3/25.

What I want, please…

a) Demonstration of in-depth understanding, and thorough analysis of all relevant issues in the case. Please remember to use the “5-why’s,”and to be rigorous in your discussion of each issue. Also consider how each issue fits vis-à-vis the entire company, its strategy, industry, etc.

b) Realistic plans-of-action for the U.K. market, the rest of Europe, and the company’s coupling business (see syllabus for a list of the study questions).

c) “Backup” for any calculations and/or conclusions. How did you get to your conclusions?

d) To the extent you feel they are necessary, comparisons with:

1. Definition of entrepreneurship, and/or

2. People, opportunity, deal, context “model,” and/or

3. Prior cases, readings or lectures we’ve studied

e) Out of fairness to all students, please restrict your analysis to business issues affecting Cameron (i.e. please do not discuss legal implications, cite cases, code or statutes, or base your analysis on legally determined precedent.)

What I DON’T want, please…

a) Information drawn from outside sources and/or the Internet, etc.

b) Words for the sake of words (i.e. long, B/S type papers). You don’t have to necessarily write a three-page paper in order to effectively complete the assignment.

c) Flashy graphs, diagrams, models and “buzzwords” which add no value.

d) Conversations/collaboration with others (prior/present classmates, Professors, instructors, non-BU people, etc.) Please note this is an individual assignment.

e) Questions to me regarding specific aspects of the case. Out of fairness to all students, I can’t respond to individual inquiries. Any clarifications will be posted to Questrom Tools for the benefit of all.

f) The “right” answer, since it doesn’t exist!

Copyright 2020, Gregory L. Stoller
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