CASE STUDY 1 Reshaping the automotive industry Electric vehicles and the impact on the automotive supply chain ...

The rise of Electric Vehicles (EVs) poses a particular risk for auto suppliers. Major systems that are essential t vehicles with internal combustion engines are absent from EVs. Makers of exhaust, fuel and transmission systems face the prospect of disruption as EVs become more mainstream. Those lacking financial flexibility and digital wherewithal are likely to struggle the most. Although PwC expects adoption will grow at a modest pace for now, EVs share of the automobile market will likely begin to expand more rapidly in the medium term. OEMs and suppliers alike should start preparing for that future, today

PwC, November, 2019

Siemax Corporation is a listed engineering and technology company operating in the business of performance materials and technologies. They are the Original Equipment Manufacturer (OEM) for the Transmission Control Unit (TCU), a device that controls automotive automatic transmission, for a few international car manufacturers. The development towards battery electric vehicles requires different solution for EV transmission system; Electric Drive Unit (EDU).

Siemax is appraising the feasibility of investing in a new production line for the EDUs. The finance department has gathered the following information involving required investment, projected revenues and expenses, and other information for this project.

a Core machinery assets and production facilities would have to be acquired and installed. These assets are estimated to cost $500 million, and installation cost of $2.5 million for these assets. These would have to be fully paid before commencement of production.

b. The proposed production facility will need to re-claim an entire lower floor of the building, currently being leased out to a data center for data warehousing, at a monthly rental of $100 000.

c The newly acquired assets are expected to have a 10-years useful life, till the next technological disruption. There is a scrap value at the end of assets life of $2 million. Depreciation on the new assets will be at cost over 10 years using straight line method.

d Annual sales in units over the next 10 years are projected to be as follows:

Year

1 to 3

4 to 6 7 to 10

Annual sales (million units) 4 6 9

5. e Production of the EDU would require increase of working capital of $3.6 million to finance operations such as inventory purchases. Current liabilities will also be expected to increase by $1.8 million. This net working capital will be released at the end of the assets life.

6. f Each EDU would sell for $200 per unit.

7. g Monthly fixed expenses is projected (excluding rent) at $10 million. Included in fixed expenses are administration,

selling and depreciation on the assets. Variable costs of production would be $100 per unit.

h Siemaxs board of directors has specified a required rate of return of 15% on this investment. I Siemax pays a corporate tax rate of 18%. Capital gain on asset disposal is charged at corporate tax rate.