Background

You've been engaged by one of the prominent "big three" automobile manufacturers in Australia. Over the past few years, your client's performance, measured in terms of profitability, has lagged behind competitors. All three companies, including your client, have introduced cars based on Japanese designs in collaboration with smaller Japanese automakers. These cars are sold both in Japan and Australia, with the primary distinction being the place of manufacture and the model names (badges). Your task is to uncover the reasons behind your client's under-performance compared to competitors.

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Key Considerations:

  1. Identifying the Cause of Under-Performance: Investigate the potential factors leading to your client's under-performance. This could encompass product differences, market segments, sales and distribution issues, product quality, high expenses, or production costs.

  2. Analyzing Cost Structure: Examine the cost structure of your client's operations and identify the sources of higher costs compared to other automobile manufacturers. Utilize management accounts, financial reports, data from the American holding company, and reverse engineering to gain insights.

  3. Understanding Design Costs: Recognize that design costs constitute a significant portion of the overall costs. Assess whether your client's design costs differ from competitors and if these costs impact their cost structure.

  4. Investigate Joint Venture Terms: Explore the terms of the joint venture between your client and the Japanese automaker. Determine whether the terms are similar to those of your competitors.

  5. Proportional Design Costs: Investigate how design costs are shared between the joint venture parties. Assess whether the client's share of design costs is significantly larger and the reasons behind this difference.

Final Analysis

To address the under-performance in the Australian automobile industry:

  • Cause Identification: Analyze the potential factors contributing to your client's under-performance. Your examination should lead to the discovery that high production costs are a significant issue.

  • Cost Structure Assessment: Investigate the cost structure of your client's operations relative to competitors. This exploration should reveal the importance of design costs.

  • Design Cost Impact: Recognize that design costs are the key cost driver. Determine that the design costs are not inherently higher for your client; however, the significant Japanese market share of the partner results in proportionally higher design costs allocated to your client.

Your solution lies in revising the terms of the joint venture to address the disproportionate sharing of design costs, thus enhancing your client's competitiveness and profitability.

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