Asia Motorworks (AMW): The Launch Decision Sergio Canavati de la Torre Platform production is a process innovation that allows firms to derive multiple products from a single core design, saving money on research and development and allowing many of their products to share as many parts and technologies as possible. Platform products enable economies of scale and scope by reducing the number of core designs needed for launching new products that a firm develops to satisfy the needs of different consumers. Platform products are based on a platform design composed of core components, which make up 80 percent of the costs, and peripheral components, which account for 20 percent of the costs. Platform products within a product family share the same core components, but are differentiated through customized peripheral components that address the specific needs of different consumers. For example, the Swedish heavy-duty truck manufacturer Scania AB produce a trailer truck and a bus, which share wheel, suspension, chassis, axles, and transmission, but are differentiated by a different body and a different engine. By using this process innovation, the Scania AB enjoyed a 40 percent reduction in research and development (R&D) expenses, a 10 percent reduction in manufacturing costs, and a 33 percent higher inventory turnover relative to the industry average (Kar, 2012). Anirudh Bhuwalka, a 36-year-old MBA graduate from Babson, founded Asia MotorWorks (AMW) in India in 2002 and rolled out the first truck in 2005. According to Bhuwalka, he had no prior knowledge of the truck manufacturing industry and began operations in a garage in Nashik in Maharashtra. The manufacturing facility came about much later. Our first trucks became available commercially in 2008, said Bhuwalka, who also explained that the factory construction was initiated in 2008 and was not ready until 2010. He financed the US$24 million initial investment with money from his family and the bank (Chakraborty, 2013). Platform production reduced his startup investment by eliminating the need to build a manufacturing plant. When we got into the industry, anyone putting up a truck plant was setting up an engine plant, a gear box plant, an axle plant; basically you had to put in a lot of capital, had a longer gestation period, and profits were based on building economies of scale, Bhuwalka recalled. When we came, we created a new business model, where we partner with a gear box company, an engine company, and an axle company, and do the rest of the manufacturing. So you dont end up making a large investment, keep capex [capital expenditures] low and focus on the integration model, on distribution and aftermarket which is what this business is all about. AMWs revenues grew from US$20 million (1,125 trucks) in 2006 to US$60 million (9,000 trucks) in 2010 at an average rate of 60 percent per year (Mitra, 2011). In 2012, AMW announced that it would launch a new division to manufacture luxury buses. The luxury bus segment currently is of the size of about 3,0003,500 units annually and it is growing. Looking at this demand, we are launching our 57-seater bus, which will be available by the middle of the year, Bhuwalka stated in January 2012 (The Hindu BusinessLine, 2012). Commercial Vehicle Design Solutions and TEAMPro UK and India forecast the cost of development of this new product line at US$1,221,338 (Commercial Vehicle Design Solutions, & TEAMPro UK and India, 2010).1 They also estimated the size of the Indian Bus Market at US$488,535,570 and believed that AMW could capture 10 percent of this market after five years of operations. However, in 2013, AMW put the plans to launch the bus manufacturing division on hold because the firm had second thoughts about the viability of this new venture (Das, 2013). Bhuwalka said, We are waiting for the right time to launch the vehicle this segment is not a priority for us at the moment. We will launch the product as and when we see there is an opportunity. Assess if the current market is the right one to launch the bus division.

Case Questions

1. AMW is a private company and did not disclose financial information. Using information about the industry average cost structure, create financial projections for the bus manufacturing division for five years. Modify the industry averages to account for the fact that you will enjoy the same cost reductions that Scania does.

A. Create an income statement for five years.

i. Assume a straight-line rate of amortization of 5 percent per year over a 20-year period.

ii. Assume that your sales growth rate will be 60 percent, exactly like AMWs.

B. How does platform production affect the bus divisions gross margin?

C. How does platform production affect the bus divisions operating margin?

2. Estimate the new divisions break-even sales.

3. In 2012, during a period of sluggish demand, AMW searched for US$100 million to finance growth. We are a growing company, and we are in the phase of growth capital. We are exploring various options, including selling stake to a PE [private equity] player. If we get a good value we may sell a minor stake, if not, we are open to raising debt as well, said Bhuwalka, who expressed interest in obtaining a combination of debt and equity financing (Thakkar, 2012).

A. Discuss three pros and cons of using equity versus debt financing.

B. Explain why the valuation during this period might be lower than Bhuwalka could expect.

C. Make an argument as to why the firm should be valued higher.

Truck and Bus Manufacturing Industry

Cost Structure, 2011

Sales 100.00%

Cost of sales 54.26%

Gross profit 45.74%

Officers compensation 4.44%

Salary, wages 18.27%

Rent 4.58%

Taxes 2.95%

Advertising 0.45%

Benefits, pension 0.24%

Customer service 0.78%

Bad debts 0.00%

Research & development 7.77%

Amortization & depreciation 0.00%

Interest earned 0.03%

Interest expense 0.96%

Other income 0.01%

Net profit 5.10%

Note 1 As of October 31, 2014, 10 million Indian rupees was equivalent to US$162,845.19 according to http://coinmill.com/INR_USD.html and http://www.xe.com/currency converter/convert/?Amount=1&From=INR&To=USD.