FIN 502 Page 1

Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasc, !onna Li
Cameron Auto Parts
Executive Summary
"a#eron $uto Parts %as &ounded in '()5 in "anada *+ te "a#eron &a#il+ to seize opportunities
created *+ te $uto Pact ,$PT$- o& '()5 *et%een te .nited /tates and "anada0 Te $PT$ allo%ed
&or tari&&-&ree trade *et%een te 1ig Tree $#erican auto#a2ers and parts suppliers and &actories in
*ot countries0 Te one ca3eat in te $PT$ to 4uali&+ &or te zero-tari&& trade %as tat co#panies #ust
#aintain asse#*l+ &acilities on *ot sides o& te *order0 "a#eron $uto Parts speci&icall+ #anu&actured
original e4uip#ent parts ,56M- suc as s#all engine parts and accessories *ased upon design specs
created *+ te $uto #anu&acturers and ten sold tese parts to te auto #a2ers0
$le7 "a#eron too2 te reins in 200' and %as i##ediatel+ &aced %it a &inancial crisis0 /ales in 2000
ad dropped to 89: #illion and %ere onl+ 8': #illion &or te &irst si7 #onts o& 200'0 "a#eron lost
8205 #illion in 2000 and te sa#e a#ount in te &irst si7 #onts o& 200'0 Tis decline %as pri#aril+
due to declining auto sales o& $#erican cars and truc2s and te increased presence o& Japanese
auto#a2ers0 Mar2et &orces %ere dri3ing te $#erican &ir#s to &ind %a+s to cut costs and #odernize
plants0 "a#eron used 8'0 #illion o& its 8'2 #illion credit line to rein3est *ac2 into te &ir# *+
#odernizing e4uip#ent and co#puter-assisted design and #anu&acturing s+ste#s0 ;o%e3er, "a#eron
did not a3e its o%n design engineering tea# and relied on specs &ro# te 1ig Tree auto#a2ers &or its
products0 Tis le&t $le7 "a#eron %it an uneas+ &eeling tat e7pansion into product design %as
essential &or te long-ter# sur3i3al o& te &ir#0 In #id-200', "a#eron too2 te steps necessar+ to design
and de3elop its o%n parts line0 "a#eron ired &our design engineers and, *+ 200<, ca#e up %it a
&le7i*le coupling idea tat %ould entice international *u+ers and not =ust te 1ig Tree auto#a2ers0
"a#eron %as ten &aced %it te dile##a o& o% to #ar2et and sell te product0 Pro=ected sales o& te
ne% product in 2009 %ere *et%een 8<5 and 890 #illion %ic %as terri&ic *ut te+ %eren>t sure te+
ad te capacit+ to andle te production0 Te+ needed to decide i& it %as *etter to e7pand current
&acilities, *u+? *uild a ne% &acilit+, or license te &a*rication o& te product to outside co#panies0 @ile
on a 3acation trip to /cotland, $le7 %ent to cec2 in on a local custo#er, McTaggart /upplies, Ltd, %o
con3inced i# tat te &le7i*le coupling product %as in ig de#and in te .0A0 and tat #ore
production %as necessar+ to 2eep up %it te de#and0 $le7 decided at tat #eeting tat "a#eron
%ould e7clusi3el+ license te production o& te &le7i*le coupling to McTaggart in order to gain a
stronger &ootold in te .0A0 &or relati3el+ little up-&ront in3est#ent0
1. Should Cameron have licensed McTaggart or continued to export?
"a#eron $uto Parts sould license to McTaggart in te .A0 It %as one o& "a#eron>s 2e+ goals to
penetrate &oreign #ar2ets and te licensing agree#ent %it McTaggart %ould *e a s%i&t %a+ to *egin
e7ecuting tis *usiness strateg+0 McTaggart %as in a superior position to penetrate te .0A0 #ar2et due
to a good cultural understanding and close pro7i#it+ to potential clients0 5nce tis *usiness arrange#ent
%as pro3en success&ul, "a#eron $uto Parts %ould *e a*le to &or# si#ilar agree#ents %it oter
co#panies and e7pand to oter &oreign #ar2ets0 McTaggart is an e7cellent licensee, as te+ are a
reputa*le co#pan+ in te .0A0 %it e7cellent credit, cost sa3ing #anu&acturing practices, good #ar2et
contacts, and '<0 +ears o& ser3ice in te *usiness0 Te+ are also assu#ing #ost o& te &inancial ris2 *+
pa+ing "a#eron $uto Parts te startup costs as %ell as a percentage o& sales0 6#*ar2ing on a licensing
It is best NOT to start with a
recommendation. I would first discuss
the pros and cons of the issue on hand
Cameron can simply do what it has
been doing: Exporting. It is important
that you should show licensing would
be superior to exporting in order to
advocate licensing
FIN 502 B "a#eron $uto Parts Page 2
Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasc, !onna Li
strateg+ %ould also eli#inate te proi*iti3e cost o& de3eloping and #aintaining a sales &orce in a
&oreign countr+ tat li2el+ %ouldn>t per&or# as %ell as a local co#pan+ li2e McTaggart since custo#ers
ad cultural ties and e7isting relationsips %it te#0 $dditionall+, orders can *e &illed #ore 4uic2l+ as
te product %ould *e #ade locall+ reducing sipping costs and tra3el ti#e0 It %as also a good decision
&or ad#inistrati3e and econo#ic distance reasons0 /ince te product %ould *e produced in te .A, it
%ould not *e su*=ected to e7cess cost o& i#port dut+, &reigt, insurance, or te 3alue added ta70 Tis
%ould allo% &or te product to *e sold at a #ore attracti3e price0 Lastl+, te 3alue o& te dollar &ell
during te original &i3e +ear contract and te percentage o& sales in pounds produced a iger dollar
inco#e &or "a#eron %itout canging te price o& te products sold0 Te disad3antages o& continuing to
e7port are loss o& pro&its due to sipping costs, currenc+ 3alues, ta7es and tari&&s0 Te &i3e +ear contract
allo%s "a#eron to e3aluate te e&&ecti3eness o& te licensing strateg+ and deter#ine %eter tis is a
pro&ita*le 3enture &or te co#pan+0
2. as Mc Taggart a good choice !or licensee?
Ces, McTaggart %as a good coice as a licensee0 Te+ a3e all te tools necessar+ to success&ull+
produce and sell te &le7i*le couplings0
McTaggart %as alread+ &a#iliar %it te product and ad *ougt o3er .0/0 89,000 in te &irst
&our #onts in 20090 Te+ ad *een a*le to sell te product as &ast as it could *e sipped and
*uilt a solid %or2ing relationsip %it "a#eron as %ell as good credit0
McTaggart as production e7perience tat "a#eron #a+ *ene&it &ro# and su*stantial roo# to
increase production capacit+0
Te+ a3e a solid reputation %it great &inancial standing, e7cellent credit, and a capa*le sales
sta&& to #ar2et and sell te product0
Te+ a3e #anu&acturing capacit+ and are %illing to in3est and de3elop te #anu&acturing
capa*ilit+ to e&&icientl+ produce te &le7i*le couplings0 In addition, te+ a3e esta*lised a
client *ase0
". as the royalty rate reasona#le?
$ ro+alt+ rate is te #one+ tat #ust *e paid to te o%ner o& products ,Dte licensorE- &ro# a *u+er
,Dte licenseeE-0 Te a#ount o& ro+alt+ &ee is considered te &ee &or ac4uiring a patent or a cop+rigt0 In
#ost *usinesses, a ro+alt+ &ee applies %en t%o or #ore co#panies a3e licensing agree#ents or sell
te products in &oreign countries0
i
In .0A0, te nor#al rate o& te ro+alt+ &or licensing is around one and
a al& cent on eac sale0 ;o%e3er, "a#eron $uto Parts %as as2ing tree per cent o& sales &ro#
McTaggart0 $ltoug it %as dropped do%n to 2 percent %it a 5 +ear contract a&ter negotiations, it is
still iger tan te nor#al rate0 Tis see#s reasona*le as Mc Taggart %ill sa3e a considera*le a#ount
o& i#portation e7pense and %ill *e a*le to sell te products at a lo%er rate tan te+ can *+ i#porting0
"a#eron %ill a3e esta*lised an ongoing ro+alt+ inco#e %itout incurring te o3eread cost o&
production and sales e7pense0
"a#eron $uto Parts as2s a iger ro+alt+ rate tan nor#al rate *ecause te co#pan+ elps McTaggart
coose e4uip#ent and pro3ides training o& operation and production0 $ltoug McTaggart %ould li2e to
pa+ tese ser3ices separatel+, "a#eron $uto Parts points out te *ene&its o& getting ser3ices to 2eep
iger ro+alt+ rate0 @it tis &i3e-+ear agree#ent, te ro+alt+ rate o& t%o per cent is ensured in te &irst
&i3e +ears, *ut it %ill *e do%n to one and a al& per cent %en te tecni4ues o& coosing e4uip#ent and
operation a3e *een ac4uired *+ McTaggart a&ter &i3e +ears0
These are good points. ou reali!e the
resources and capabilities of Cameron
are limited.
That is also a good point but that
point supports the "exporting# option.
There are other options as well: $oint
%enture &$%' and foreign direct
investment &()I' are others to be
considered.
Ta*e a loo* at the posted answers+
especially+ slide , - where a table lists
pros and cons of each option in terms
of various resource based factors. I
must indicate my preference for such
tabular presentations. They are
simple+ neat and to the point.
.ll of your points are good. /ut they
are one0sided. I am .12.3
interested in a "balanced# analysis
detailing not only points that support
your perspective but also counter
perspective. 4lease see the posted
answers for such a perspective
There is NO precise way of
determining the royalty rate. 4lease
see the posted answers for some
guidance
FIN 502 B "a#eron $uto Parts Page <
Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasc, !onna Li
In conclusion, te ro+alt+ rate is reasona*le &or *ot parties in3ol3ed0 "a#eron $uto Parts %as a*le to
enter te .0A0 #ar2et e7peditiousl+ troug McTaggart>s sales &orce, cut do%n on lead-ti#es, sa3e on
duties, &reigt, and insurance and not *e su*=ect to currenc+ &luctuations0 McTaggart %as a*le to sell a
product alread+ in de#and, o*tain training, &ocus on increasing sales and gain 3alua*le insigt into
"a#eron>s #anu&acturing process0 1ot co#panies %ould *ene&it &ro# te sared 2no%ledge te+
could pro3ide eac oter, tus #a2e te licensing agree#ent 3alua*le &or e3er+one in3ol3ed0
$. hat a#out the alternatives to licensing?
Te alternati3e to licensing %ould *e to continue production and sell directl+ to McTaggart and oter
custo#ers0 Tis %ould in3ol3e dedicating a certain a#ount o& production &loor space to a #ar2et tat is
culturall+ and geograpicall+ distant and unpredicta*le0 Tere is ris2 in3ol3ed as te production space
ties up cas &lo% and is not certain to produce pro&it0 Tra3el e7pense %ould *e incurred as co#pan+
representati3es %ould a3e to tra3el o&ten to te .0A0 in order to resol3e issues or sell products0
Te sales side e7pense %ould *e iger as %ell0 More sales people %ould a3e to *e e#plo+ed to ser3e
tat region0 Te+ %ould eiter a3e to tra3el o&ten or *e *ased tere and paid in pounds, %ic are
currentl+ stronger tan te dollar0 Instead o& recei3ing a cec2 &ro# one contact tat represents all sales
&or te %ole area, "a#eron %ould a3e to #aintain relationsips %it 3arious custo#ers, %ic
re4uires personalized attention to eac and e7poses i# to a3ing to per&or# collections and %rite o&&
*ad de*t0
/ince unit production costs %ere esti#ated to decline 20F as annual sales cli#*ed &ro# 820 #illion to
8'00 #illion and $nd+ &elt tat te 820 #illion #ar2 %as easil+ o*taina*le in te co#ing +ear, te
continued 3alue o& e7porting to 6urope %ould a3e gro%n along %it te 6uropean #ar2et0 Loo2ing at
te pricing inde7, %e can see tat i#porting to 6urope results in a cost o& ''< to te i#porter0 /ince
"a#eron $uto Parts sell te &le7i*le couplings at te sa#e price to do#estic and &oreign distri*utors,
licensing is an e&&ecti3e strateg+ to penetrate te 6uropean #ar2et %ile eli#inating i#port and oter
logistical costs0
"a#eron $uto Parts %ould *ene&it #ost &ro# a licensing agree#ent %it McTaggart /upplies Ltd0
5ter options e7ist *esides e7porting or licensing suc as a =oint 3enture ? %oll+-o%ned su*sidiar+,
selling troug an agent, or selling troug a distri*utor0 1ene&its to tese strategies include reduced
#anu&acturing cost, iger sales 3olu#e, and *etter #ar2et penetration and in so#e cases sared ris20
Te dra%*ac2s to tese #etods include loss o& price control, unpredicta*le sales 3olu#e, and loss o&
pro&its0
ii
Case %pdate
"a#eron $uto Parts en=o+ed rapid gro%t during te 2009-20050 In 2009, te co#pan+ undertoo2 a
#a=or plant e7pansion &or 8'0 #illion, adding 200,000 s4uare &eet to te co#pan+>s production
capacit+0 Go+alties &ro# McTaggart during te &irst +ear o& te licensing agree#ent %ere H20,000I tis
gre% to and H'00,000 te &ollo%ing +ear0 ;ig o3erall pro&ita*ilit+ le&t "a#eron in a strong &inancial
position in 200)0
In 200), "a#eron %as presented %it an opportunit+ to purcase a 90 percent interest in Micelard J
"ie0, a &a#il+-o%ned distri*utor organization in France, %ic %ould allo% "a#eron to *rea2 into te
continental 6uropean countries0 "a#eron agreed to te deal &or 89 #illion and a ro+alt+ o& 9 percent on
sales o& all &le7i*le couplings0
4lease ta*e a loo* at the posted slides
for this 5uestion.
Not sure I understand this last point.
Cameron is an Exporter. 2hy would
they worry about import costs6
FIN 502 B "a#eron $uto Parts Page 9
Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasc, !onna Li
Te deal enraged McTaggart, %o ad *een selling &le7i*le couplings in 6urope and %ould no% *e
co#peting %it Micelard0 Partl+ to appease McTaggart, "a#eron agreed to a proposed =oint 3enture in
$ustralia0 McTaggart %ould o%n )0 percent o& te plant and *e responsi*le &or #anaging te 3enture0
$ccording to McTaggart, local asse#*l+ in $ustralia could triple 3olu#e o& current sales to around H'0
#illion0 $n in3est#ent o& H2 #illion could #a2e around H900,000 a +ear a&ter $ustralian ta7es %ile
a3oiding tari&&s i#posed on sipping &inised products0 Tis agree#ent %ould also position te &ir#s to
*ene&it &ro# $ustralia>s &ree trade agree#ent %it Ne% Kealand0
iii
"a#eron $uto Parts is 3er+ li2el+ a pseudon+# &or Fernco, Inc0, a &le7i*le coupling #anu&acturer *ased
outside o& !etroit %it a 3er+ si#ilar istor+ to tat o& "a#eron $uto Parts0 Fernco, Inc0 is lead *+ "ris
"ooper %o, li2e $le7 "a#eron, too2 o3er te co#pan+ &ro# is &ater a&ter graduating &ro# Micigan
*usiness scool0 In addition to #anu&acturing &acilities in "anada, te .0A0, $ustralia and Ger#an+,
Fernco as e7panded distri*ution to te 60., Ne% Kealand, Me7ico, Puerto Gico, and "ina0
i3
7ood update.
There are 8 things I suggest to
improve your analysis: 9. 4rovide a
balanced perspective. Nothing in this
class is a clear pro or con. Every issue
has both pros and cons. /oth need to
be studied carefully. 8. Incorporate
other assigned readings into your
analysis to provide evidence of
learning. 3ome of the assigned
readings could have easily been cited
to support your viewpoint.
i
DLaluation GesourceEGo+alt+ Gates and License Fees0E Getrie3ed June 2(, 20'' &ro# M ttp:??%%%0crucial-
s+ste#s0co#?d#*r?MecanicalNGo+altiesO
DMecanical Go+alties0E Ti#e0 05 !ece#*er 20090 Getrie3ed June 2(, 20'' &ro# M ttp:??%%%0crucial-
s+ste#s0co#?d#*r?MecanicalNGo+altiesO
ii
D.se Tese Top Fi3e /trategies &or /elling in International Mar2ets0E Getrie3ed Jul+ ', 20'' &ro#
Mttp:??%%%0&ita0org?io#a?strategies0t#lO
iii
/eamish+ 4aul and Croo*ell+ :arold. "Cameron .uto 4arts &/' 0 ;evised.# ;ichard Ivey 3chool of /usiness.
<niversity of 2estern Ontario. $an 9=+ 8==>.
iv
(erno Company 2ebsite. ;etrieved $uly 9+ 8=99 from ?http:@@www.fernco.com@A.