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Bangkok Automotive (A)

Contributed by:

Edward Rubesch, PhD Thammasat Business School, Thammasat University, Thailand.

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Introduction
Ruby Edwards paused and sat back in her chair. She had been running a number of scenarios on her spreadsheet as she tried to predict future opportunities for her company in the face of a challenging economic and marketing environment. Every scenario going forward required her ask her shareholders for more moneyagain. She had already been forced to make a significant strategic change in the direction of the company, which had cost her shareholders dearly with no foreseeable return in sight. She knew she had better have a good argument of why they should invest in another business opportunity if she was going to be able to keep her company alive.

An Engineer With Entrepreneurial Leanings

Ruby Edwards grew up with strong math skills and a love of technology. She attended a prestigious US engineering school earning both an undergraduate and Masters degree in mechanical engineering, but soon learned that many technical careers seemed narrow and limiting. As she joked with one of her classmates at the time, I dont want to spend the rest of my life getting better and better at designing car tail lights. In seeking more of an adventure, Ruby began studying Chinese during the two years that she was also working on her Masters. In her words, I was in an engineering internship program which allowed me to see what it was like working in the real engineering world. Well, if that was what engineering really was, at least I wanted to do it somewhere exciting. Despite her foreign language studies and a desire to do something international, Rubys first job after graduation was in a small high-tech firm where she learned firsthand the challenges and excitement of working in an entrepreneurial environment, an experience she would recall repeatedly when she had her own company later on: I interviewed for the job at the high-tech start-up on the recommendation of a friend who was working there. He knew I really wanted to work in Asia, and that I was searching for a job at a multinational to further that goal. But my friend told me something which convinced me to join that companyadvice which I have since passed on countless times anytime somebody asks me about working for a small company. He said if I went to work for a multinational I would learn a lot, all the systems would be in place, and I would likely have a great career there. On the other hand, my friend said if I came to work in the small company, few procedures were in place, things were often a mess and it could be very frustrating at times. However my friend pointed out, If you have an idea and you take it to Bill [the founder] hell listen. Youll never have access to one single leader who calls all the shots at a multinational. That was enough for me, and it was definitely the right decision. At the company, which made sensors and process control equipment for manufacturing operations, Ruby found herself doing part of everything. I officially ran the production group, where we made the sensors and controllers. That led to a quick understanding of how each product worked. Consequently, I was often called on to go out to customers installations and help troubleshoot systems that were not
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working properly. Naturally, that put me in a position to suggest new applications, and soon I was spending nearly half my time working with customers. Ruby liked having her fingers in everything that was going on at the company, managing production, working with customer applications, and even going to trade shows to display and market the products. It was an exciting job, and gave lots of experience for somebody straight out of school. However, I also felt I was missing something. And whenever an order came in from an Asian distributor it made me want to find out how to go out and work for them. After three years in the high-tech company, Ruby renewed her efforts to work in Asia. I learned a lot from Bill, working at his company. However, it was still Bills dream, not mine. And I had dreams of my own. A large US multinational producer of house wares was opening a manufacturing plant in Thailand and, after an exhaustive internal search, which yielded no candidates willing to move overseas, began searching to fill the position from outside the company. A former boyfriend, now a rising management trainee at the company suggested Ruby for the position and she soon landed the job. Ruby remembered It was amazing. Two weeks after the interview I was hired to oversee the opening of the new plant in Thailand. I was 26 years old, and I was excited. However, I soon found out just how insular the company was. That was in 1992, and at the time the company had over USD 4 billion in sales around the world, and produced a number of well-known brands. Yet, I was only the thirteenth employee placed as an international expatriate, and six of the first twelve were Americans living in Canada, and three more were Americans living in the UK. Nonetheless, Ruby liked the international situation she was entering: her boss in Thailand was British, and his boss, the head of the Asia-Pacific Division, was French.

The Move to Thailand

Ruby adjusted quickly to her new life and liked the sense of adventure that the international posting offered her: My boss seemed to carry on a little too much of a Colonial air. I dont know, maybe it was his English attitude, and having a driver and two maids. But he was also a nice guy who worked hard at appreciating the companys employees and Thai culture in general. Ruby, with her natural out-going personality found it easy to meet people in Thailand, and she worked hard to try to learn the local language and appreciate local customs. However, the two-year project passed quickly and Ruby found herself, soon facing another career decision. I knew from the beginning it was a two-year project, and when the time was up the company was very accommodating in helping me find another challenging opportunity in another country that suited my desires and career goals. However, I was nagged by this feeling that I had developed a real
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appreciation for how things worked here [in Thailand] and that my skills were better than many others who had been here a lot longer. When an operations position at an American automotive supplier opened up, she took the job, extending her stay in Thailand.

Moving Into the Automotive Industry

For somebody who wanted to continue to use the cultural skills that she had developed, the move to a new company was fairly straightforward. Rubys new position was also in operations, running the assembly operation for an automotive parts supplier. The new position had many of the same challenges as Rubys previous job. Counting my experience in the high-tech company, I was getting pretty good at running an assembly operation. Even though the companies were in three different industries, the principles were similar: make sure the basic components arrived on time and at the right specification, assemble them to the established procedure, and send them out. However, joining the automotive industry opened up a number of new opportunities. Rubys new company was a first-tier automotive supplier, which meant it delivered just-in-time to an automotive assembly plant in Thailand. Even the sub-assemblies that the company made and shipped to Europe and North American had to arrive on relatively tight schedules continuously week after week. Ruby explained: We were part of three global supply chains. One supply chain sourced parts in Europe, brought them to Thailand, and assembled them for locally produced cars. Another sourced parts in Europe, brought them to Thailand for assembly, and then sent them back to Europe to be installed in automobiles there. Finally, we also sourced parts in North America, brought them to Thailand for assembly, and then sent them back to a US car assembly plant. The activities within the operation that Ruby oversaw were relatively straightforward, but when combined as part of a larger chain spanning several regions of the globe, tied together by a transportation system that included truck, ship, and rail, the materials management become quite sophisticated. I learned a lot about logistics, supply chains, and materials management. We had only two goals: always ship on time, because we could not shut down an automobile assembly plant, and never, ever, ship by air, because the costs were prohibitive. We felt like we were balancing on a knife-edge, especially because you couldnt predict a storm or a rail strike, and once one of the ships caught on fire off the cost of Taiwan, but we never missed a delivery. Rubys role seemed to provide her all of the challenges she was seeking. She was certain that she made the right move in staying in Thailand, and she felt confident in her ability to get things done in a country whose language and cultural challenges often befuddled foreigners. Moreover, Thailands automotive industry was one of the countrys strategic sectors, and Thailand was one of the larger automotive markets in

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the world, and the largest in Southeast Asia. She liked having an important role in an important industry: In almost every way I should have been happy with my situation. However, there was still another long-cherished goal lurking out there. It wasnt something I thought about very often, but it was revived when I was visiting the local joint venture of an American automobile manufacturer to get them to purchase parts from us. I was trying to sell the managing director on our capabilities as a manufacturer, but parts were not a major concern for him. You can talk to our purchasing people about this. Im sure theyll be interested in your ideas, he said, but what I really need is somebody who can take over our accessories operation to complement our car sales. Do you know anybody who could do that? Ruby wondered if this was the entrepreneurial opportunity she had dreamed about. In several subsequent conversations, Ruby learned about what the managing director considered one of the companys major problems. Nobody is interested in selling accessories for our vehicles, he pointed out to Ruby. The sales people just want to give them away to help move vehicles. And the service center is more interested in getting the customers out of the service center as soon as possible. They [service personnel] view our service customers as a disease. Many of the people who come to service have something wrong with their car and are unhappy. The service people just want to get them processed and gone again. They certainly arent focusing on selling them accessories. For the managing director this was a huge missed opportunity. The managing director told me accessories carry high margins, and often are less immune to price wars than new vehicles and service parts, Ruby recalled, he wanted to find a way to stimulate sales in that area. Ruby and the managing director of the automotive joint venture agreed on a plan where the accessories operation would be outsourced to a company which would be responsible for finding new accessories, developing them for the automobile models sold by the retailer, and selling them through kiosks in the retailers showrooms. The new accessories company would even recruit and train sales people who would be experts in the use and installation of the accessories, Ruby explained, and this would become the opportunity for me to open my own company. For the automaker, meanwhile, the lucrative accessories business would be in the hands of an organization driven by profit motive, rather than as a support function to the existing business. Ruby opened her company in January 1997. Her initial financing of $40,000 was provided by her boss, who took 50% stake in the company.

Starting the Company

I had long imagined starting and running my own company, even back when I was 15 or 16, and I was reading about computer entrepreneurs like Bill Gates or Steve Jobs. I even used to daydream about having a big building with my companys name on it, although I could never figure out what all the people inside such a big building would do. Before Ruby could fill an entire office building with people, however, she had the more modest challenge of getting a small number of employees to join her fledgling
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company. Rudy remembered that, it proved to be a bigger challenge than I expected. I figured all my former staff and co-workers would be itching to join me. But, they were not ready to give up their job security. Even setting up meetings with former employees had unforeseen difficulties, as Ruby explained: One night several months before I started my company I invited some former employees to dinner, not from my current company, but from the first company I had worked for in Thailand. My idea was to sit with them and give them my ideas and see if some of them would come join me. I only needed one or two people to get started, such as somebody who could sell, and an overall administrator. I set up a meeting at a small restaurant I knew, a quiet place where I knew we could talk. I arrived a little bit late, and when I walked into the restaurant the restaurant was completely empty except for people sitting at two tables side-by-side. At one of the table sat the friends that I was meeting. To my horror, sitting at the other tabledirectly next to themwas my boss and his wife! Later when I was quitting my job, my boss would be very supportive and even provide the initial investment, but on that night I was not ready to face any issues with my boss. When it opened for business, Rubys company had two employees: herself and a salesman from an earlier company, who agreed to come work with her. The first day was modest. Stock was arranged as nicely as possible on existing tables in the service center. The salesman was learning about products and customers as the day progressed. Ruby sat in her office on a sofa outside of the automotive joint venture sales managers office and started to put together longer-term plans: I had made a business plan in a spreadsheet as I developed the retail accessories idea with the managing director. I had pitched the plan to the companys marketing department so they would be willing to support the move to outsource to me. I had even asked an architecture friend to draw a rendering of what the accessories kiosk in the automotive showroom would look like. That first day seemed like a long way from the plan however. The slow start quickly turned to success, however, and soon everybody was happy about the idea to outsource. During the first three months, we sold more accessories than the company had sold the previous year, Ruby noted. Even the normally skeptical accountants, who thought the company was wasting profits by outsourcing to us, saw that we were bringing in more money than ever before. Our profits in the fourth or fifth month paid back my old bosss investment. Within the first three months, the company had set up retail kiosks in each of the automakers seven showrooms in Bangkok, and began eyeing expansion to showrooms in the provinces. Rubys company had grown to ten employees with sales people at each of the automotive showrooms, an assistant, and a person to oversee inventory. Car sales were growing, and so were the sales of accessories. Ruby felt that she had made the correct decision to start her company. It was only a matter of time before the large returns predicted in the business plan began rolling in. There were, however, black clouds gathering on the horizon.
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While Thailand in 1996 and early 1997 appeared to be booming, a number of warning signs appeared suggesting the Thai economy had a number of weaknesses that were being overlooked by markets. The Thai currency, the Thai Baht (THB), was pegged to a basket of currencies heavily weighted to the dollar, which maintained its value at around THB 25 per USD. A number of speculators, led by global hedge funds, believed the Thai central bank did not have the capital reserves to maintain this peg, and began selling large amounts of Thai Baht. Throughout much of the first half of 1997 the Thai central bank continued to buy Thai Baht until its reserves of dollars ran dangerously low. Finally, in July 1997 the Thai government gave up the fight and let the Baht float. The Baht quickly lost value and by August was trading at THB 42 per USD. The value eventually dropped to THB 52 per USD, and touched off economic fears throughout the region (Exhibit 1). The so-called Asia Crisis began. For many Thai companies, there were more immediate concerns than the suddenly weakened economy. With the mistaken belief that the Baht would always be pegged to the US Dollar at a value around THB 25, many Thai companies for years had borrowed money in US Dollars, where the interest rates were much lower than for Asian currencies like the Baht. As long as the Baht was pegged at a fixed value of US dollars such a loan could be very profitable. However, once the Baht was allowed to float, many companies found the outstanding amounts owed in loans almost doubling in the span of a few months. Many companies were effectively bankrupt, including the joint venture that Rubys company had a contract with. In some ways things were OK. Our customer [the automotive joint venture] was technically bankrupt since it could not pay back the loans it used to buy the imported cars. On the other hand, the regular business continued and as long as stock held out they could maintain their operations. In our case, we had a contract where the joint venture collected all of the money, netted everything out, and then paid us a single amount at the end of the month. Initially, this seemed like a great idea. We wanted our operation to be seamless to the final consumer, who bought the car and the accessories to go with it. And I didnt have to worry about cash collection during the early days of our company. No need to get credit card machines, or to worry about whether we were being cheated by a sales guy at some distant retail location. After the Baht devaluation, however, I worried it was only a matter of time before the banks gave up on getting their money back and just closed the whole thing down, killing my company along with it. At the end of every month I had to beg our customer to pay us, just so we could cover our payroll. And every month I thought was our last. Ironically, despite the continual fear of impending doom, Rubys company was viewed as being a potential opportunity for employees of the automotive JV. Just six months before, I was sitting in the lobby, using it as an office and I felt like the poor cousin to this company, which had been doubling in sales the last three years. Now, employees from that same company were asking me to take a look at their resumes, and asking if there was anything they could do.

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For Ruby, the Asia Crisis ushered in three years of doing anything to survive. Rubys customer, the automotive JV closed its showrooms, but Ruby managed to keep the accessories business alive by opening an independent outlet. She had the database information of the automakers customers, so she knew who had bought cars. She organized mailings and phone campaigns to inform customers that Rubys company had opened its own accessories outlet. Ruby also returned to her engineering and manufacturing roots: Opportunities presented themselves in different ways. Some companies were looking to have a machine built or modified, to save money in order to survive. And with the weakened Baht, outside firms came to Thailand and invested in operations. These companies needed expertise on how to get things built, sourced, and, in general, just how to get things done. I was able to enough money from consulting services to keep everything afloat and the bills paid.

Becoming an Automotive Retailer

By 2000, the same automobile brand that Ruby worked with as a joint-venture company three years earlier was looking to re-enter the market, this time as a fully owned subsidiary of the American corporation. One of the first steps of this process was to rebuild a Bangkok dealer network. This led to the next opportunity for Rubys company: Of course the company knew we had worked with them three years before, when they were in Thailand as a joint venture. More important, we knew the companys vehicles, and we were probably the only ones who knew the existing owners of the companys automobiles. The automotive company provided Ruby with a planned list of products they expected to launch in the market. In addition to the sports-utility vehicles (SUVs), which were the original vehicles that the company sold before the Asia Crisis, there were also plans to add a minivan, and passenger cars. The company suggested that Ruby become a dealer for the companys vehicles. For Ruby, this meant an escalation of investment and risk. Her company had survived the previous three years with little debt, except loans that Ruby had provided herself, mostly money made from consulting projects. To become an automobile retailer was a completely different challenge. It required more employees, a much bigger showroom, and a way to finance the vehicles that were on display. I would need to attract much bigger investors, and even then I would be doing it on a shoestring, Ruby lamented. Still, she saw an opportunity in being part of the relaunch of a brand that had been selling well before disappearing from the market. In thinking through the opportunity, Ruby was convinced that by being in on the beginning, her company would be able to rise with the growth of the brand, and with it her company would reach financial success. As Ruby learned more about how the automotive retailing business worked, she found out that virtually every automaker owns its own finance company. These finance companies provided ways for individuals to buy or lease cars with down payments
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and monthly installments, which was something called retail financing. However, these same finance companies also allowed dealers to finance the cars on display, which was called floorplan display financing, or more generally wholesale financing. Ruby talked over her companys situation with the managing director of the automakers finance company. Rubys company was small, capitalized at a total of the equivalent of USD 50,000 (in devalued Baht terms). However, it had the benefit of having no significant debt, while many of the other companies that were being considered as dealers were awash in loans from failed real estate and other projects during the crisis. Rubys company wasnt strong, but by comparison it looked like a straight business that could be easily monitored by the finance companys auditors. Moreover, Ruby could point to a number of years of working experience in Thailand. On the strength of relatively clean books, and a successful track record, Rubys company was granted a credit line for new cars at THB 30 million, or approximately USD 750,000, if it raised its capitalization to THB 6 million (USD 150,000). Next, Ruby looked for a suitable showroom. The effects of the poor economy were still being felt in Bangkok, and it was relatively easy to secure showroom space. Moreover, since Ruby was one of the first new dealers appointed in the city, she did not have to fight over sales territory with other established dealers of the same brand. Ruby found an empty automobile showroom on one of Bangkoks major roads and negotiated a three-year rental agreement at THB 200,000 per month (approximately USD 5,000). Finally, Ruby put together a pro forma financial plan and went to talk to interested friends. Ruby believed that she could find Baht 2 million on her own. With that, combined with the Baht 2 million capitalization of her company, she needed another Baht 2 million from outside. A friend who was running a successful law firm liked the idea of being involved in a real business, and thought cars could be fun. He indicated that he was very interested in the idea, however he would not commit. Ruby approached another friend who was also interested in the proposal. He promised to finance Ruby if the other investor dropped out. When Ruby mentioned this to the first investor, it provided the necessary impetus and he agreed to put his money in. The second investor, however, was still interested in joining. Ruby saw some advantages preserving her remaining savings, and thought the additional investors would bring good contacts to the business. Finally, a three-way deal was struck whereby Ruby would own 80% of the new business, while the two new investors would each own 10%. Ruby justified her share based on the fact that it was her original company, know-how, industry expertise, and connections that had gotten the business. Like the first generation of her business, this second incarnation started out quickly. Ruby now had a number of connections within the Thailand automotive industry, and working for an automobile dealership seemed to have more cache than working for an accessories supplier. Meanwhile, the economy was still recovering and jobs were scarce. This combination of factors made it easier to attract employees. She quickly built up a sales team for new cars, and found an experienced service manager (who had run one of the service outlets in the previous joint-venture) who brought a number of experienced mechanics with him.

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At the same time, Rubys mind was constantly turning over ideas about how to grow and expand. Ruby could hardly go by an empty retail space without imagining how many cars could be sold from such a location, and what would be the running costs. Towards the middle of 2000, Ruby found a second showroom that was branded as a Mitsubishi dealer at the time. The showroom had a For Rent sign out front and was clearly no longer selling new cars. Nonetheless, vehicles continued to come in for service. Ruby immediately saw several advantages that would strengthen her overall company. First, the location already had some service revenue and was not starting out at zero, like Ruby had done six months before at her first showroom. Second, the showroom was approximately fifteen kilometers from the first. In territory terms this was not too far, or too close. Combined, Ruby imagined the two locations forming a larger territory that would block future competitors as the brand grew. Third, Ruby thought there would potentially be access to another brand in Mitsubishi, which would help lesson dependence on the one and only brand she currently had a franchise for. Ruby was able to negotiate rental terms of THB 50,000 per month (approximately USD 1,250), with an up-front payment of THB 1 million (approximately USD 25,000) for the existing equipment at the facility. While Rubys company still operated on a shoestring, she felt that she could absorb this second location, if only she could convince the automaker to extend her franchise territory, and if she could build sales quickly enough. Things were very tight, but with Rubys optimistic viewpoint she felt certain she could pull it off. Negotiating with the automaker proved easier than expected. Rubys company had two significant advantages. First, Ruby and her sales team were consistently one of the top performers for the brand in the overall market. Second, Ruby already had access to cars from her existing showroom. It was easy to move a couple over on a temporary basis. Once sells began to grow, Ruby felt, it would be hard to make the showroom stop since the sales were benefiting both Rubys company and the automaker. The automaker allowed the expansion, pending a number of interior upgrades at the facility, which Ruby readily agreed to, and the companys second location officially opened in September 2000. To support the expected increased business, the finance arm of the automaker extended the wholesale credit line to THB 70 million (USD 1.5 million), which was used to finance additional stock of new vehicles. While the potential for success seemed clear, growing the company was not without challenges. A dealership is a service business, requiring sales and service personnel to be available whenever a customer came to look at a new car, or to get their vehicle repaired. To meet these needs, Rubys company had grown to 50 employees, and monthly expenses were much higher than they had been in the days when the company was just selling accessories. The company lurched back and forth between profit and loss, depending on the amount of new car sales on a particular month. The first major cash crisis came in August of 2000. One of Rubys investors agreed to inject THB 8 million (approximately USD 20,000) while Ruby scraped together THB 2 million (approximately USD 5,000) from savings to keep things running. The company finished 2000 with a loss of THB 4 million. Still Ruby, whose showrooms were among the top performers in the brands growing network by the end of 2000, believed it was only a matter of time before the long-elusive success was achieved.
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Unfortunately, Rubys hopes for growth would again be dashed by major events beyond her control. The auto brand that Rubys company sold was doing well in Thailand. Unfortunately, its parent company was teetering on the brink of bankruptcy in the US. This touched off a range of corporate policies that put a halt to any expansion plans by the subsidiary in Thailand. Chief among these was the policy that all engineering had to be done by the technical group at the head office in the US. Thailand was a growing automotive market in its own right and had developed a large manufacturing and engineering based of suppliers. More important, these local firms were cheaper than their US counterparts. The new corporate directives eliminated the option of using local engineering capability. The Thai subsidiary could not afford to develop the tooling and fixtures necessary to produce new models if US engineering costs had to be amortized. This was one of many strong, but mixed, signals that the automotive brand was backing away from the Thai market. The automakers finance company, which operated in many ways like a bank and had a conservative mindset, which warned that the stock levels of new cars in Rubys, and other dealers, showrooms were too high. The automakers marketing organization meanwhile claimed everything would be solved and growth would continue. The conflict crossed directly in Rubys showrooms. She had taken in extra stock at the urging of the automaker, while the finance companyowned by the same parent was urging caution. The issue came to a head when the finance organization called on Ruby to cut her inventory in half and pay off outstanding vehicles within 30 days. Ruby found herself needing to sell nearly THB 40 million (USD 1 million) within the month, an amount that could normally take 3-4 months. To move vehicles, Ruby and her sales team had no option except to cut prices and sell, often at substantial discounts, and for Rubys company, substantial losses.

Changing Brands
Ruby was forced to reconsider her strategy. Most immediate was the lack of new models for the brand Rubys company was selling. There was always long-term hope, but the short-term would be very difficult, and it was not impossible that the brand might pull out of the Thai market completely. Ruby also needed to justify her actions to her shareholdersfriends who had trusted her judgment about the direction the automotive industry was headed. When she started, she knew that her companys financial situation was going to be tight until sales took off. Now, she was facing an extended period of losses with the potential of having to close completely. She had the uncomfortable feeling that she had not performed on her promises, and yet she felt the events that occurred were out of her control. Difficult questions gnawed at her: why did she feel so guilty about not delivering on her promises, when the automaker seemingly felt no remorse in not delivering on its promises? Was this the nature of business in a competitive environment? What could she have done to avoid the situation? Had the opportunity she had originally identified not really been an opportunity at all? Ruby noted that while no single manager within the automaker had lied, collectively they formed a multi-headed beast: some of the heads urged optimism and hope, while other heads were blocking financing and forcing Rubys operations to a halt.
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However Ruby, forever the optimist, thought she had a way out. Based on positive overall growth in the Thai market and the strong rebound from the Asia Crisis (Exhibit 3), a Japanese carmaker recently closed its Bangkok importer and distributor, with the plans to enter the market directly. That company would need a new Bangkok dealer network. Ruby met with the management team of the brand at its new headquarters in Bangkok. Although the brand was from Japan, the head of the Thailand sales organization was American. He was impressed by Rubys work in Thailand, which by now included nearly ten years of experience, as well as the sales performance of Rubys company in the past few years. Ruby was given an investment guide, in the form of a spreadsheet, which forecasted the expected sales for a defined market in north Bangkok around one of Rubys current showrooms. Expenses were also forecast in a projected income state, along with the investment requirements. Overall, the plan forecast a return on investment of 33% in the first year. Printed in large font at the top of the form was the companys disclaimer: The numbers provided are only for a guide. Actual performance may vary based on market conditions and dealer capabilities. Ruby felt that switching brands, at least at one of the showrooms, would give the company a safeguard against the dwindling fortunes of the companys current automobile products. While the Japanese brand had always been small in the market, never gaining more than 5% market share, it had been in Thailand for nearly 50 years and was well known. Moreover, its product line-up included a compact car and a pickup truck. While the overall product line was not as broad as the market leaders, such as Toyota, Honda, or Isuzu, the two models were in segments that comprised two-thirds of the market. This would be a dramatic improvement over the niche SUV models that Rubys company currently sold. Moreover, while the Japanese brands market share had declined to 2% in recent years, Ruby considered this fact an opportunity. With a head office dedicated to selling directly to the market, Ruby reasoned, rather than through an importer, the sales of the brand could grow significantly beyond its current market share. The marketing team enthusiastically described the new products that were planned for the Thai market. As the managing director told Ruby: With the product plans we have, we should be able to get back to a 5% market share in the next few years, unless we completely screw up. Ruby felt that she had demonstrated that her team could sell cars. And if the new brand did reach 5% as the automaker projected, her company would be extremely profitable, according to the financial projections in her business plan. Running an automotive showroom entails a number of fixed costs, and once those are covered the business can be very profitable. Rubys sensitivity analysis indicated that if the brand were able to grow its market share to even 3 to 4%, annual profits would be over half the total amount of the required new investment, suggesting a high potential return. A new Toyota showroom, by comparison, would be profitable immediately, because of the strong brand recognition, and the large number of existing Toyotas on the road meant the service center would have ready customers. However, Ruby had learned from industry friends that the required investment of THB 150 million (nearly USD 4 million) required a 25-year payback.

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Nonetheless, to invest in this new brand required an additional THB 10 million, and the opportunity would have its risks: there was no guarantee that brand would be able to grow in such a competitive market with strong brands, such as Toyota, Isuzu, Honda, and Nissan already established. Ruby told herself that if her company could become one of the first dealers in the new network it could gain profitably if the brand succeeded success. At the same time the irony was not lost on Ruby that this was not the first time she had backed such a strategy and had convinced investors to put money into such a scheme. Would Ruby be able to convince her shareholders to put up more money? Ruby knew she had to give her shareholders some compelling reasons to add to their investment, despite the fact that the original investment might be a total write-off. Moreover, while Ruby had worked hard just to survive to this point, more hard work was likely, and Ruby had no investment funds of her own. She needed to find a way to convince her shareholders to invest more, while preserving enough of an equity share to maintain a reasonable return for herself. Questions to consider: Would you characterize Ruby as a success or failure so far? What are the advantages and disadvantages in being involved in a franchise business, like an automotive dealership? Is Ruby making the right strategic decision to invest another automotive brand? Are there any other options? Think about all of the potential outcomes for Ruby and her company at the moment. Do you agree with Rubys logic about investing in another brand? Would you invest your own money with Ruby?

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Exhibit 1 Thai Baht/US Dollar exchange rates 1996-1998. (Source: US Federal Reserve)
1/1/95 2/1/95 3/1/95 4/1/95 5/1/95 6/1/95 7/1/95 8/1/95 9/1/95 10/1/95 11/1/95 12/1/95 1/1/96 2/1/96 3/1/96 4/1/96 5/1/96 6/1/96 7/1/96 8/1/96 9/1/96 10/1/96 11/1/96 12/1/96 1/1/97 2/1/97 3/1/97 4/1/97 5/1/97 6/1/97 7/1/97 8/1/97 9/1/97 10/1/97 11/1/97 12/1/97 1/1/98 2/1/98 3/1/98 4/1/98 5/1/98 6/1/98 7/1/98 8/1/98 9/1/98 10/1/98 11/1/98 12/1/98 25.13 25.02 24.76 24.57 24.66 24.67 24.76 24.96 25.13 25.12 25.17 25.16 25.30 25.25 25.25 25.29 25.29 25.35 25.36 25.29 25.41 25.47 25.46 25.60 25.73 25.96 25.96 26.06 25.75 24.53 30.27 32.40 35.26 37.54 39.09 44.31 52.98 45.99 41.37 39.65 39.20 42.33 41.30 41.72 40.40 38.12 36.53 36.28

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Exhibit 2 Selected performance metrics of Bangkok Automotive (1997 2000) Year Primary Business Activity Accessories Accessories, engineering consulting Accessories, engineering consulting Automotive retailing and service Capital Infusion (THB millions) 2 Profits (THB millions) 2 -2.8 -1 14 -4 No. of employees 15 20 25 50

1997 1998 1999 2000

Exhibit 3 Thailand annual automotive sales (1997 2000). (Source: EMI Automotive Consultancy, Royal Thai Government) Year 1995 1996 1997 1998 1999 2000 Total Sales (,000s Units) 572 589 363 144 320 374

Created Feb 2008 NEN

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Exhibit 4. Investment guide provided to Bangkok Automotive in 2001 (for second automotive brand).
Operating Investment Requirement Proposal to Bangkok Automotive Co., Ltd. Year: 2001

The numbers provided are only for a guide. Actual performance may vary based on market conditions and dealer capabilities.
(Second half -- 6 months) Sales and Profit Forecast Factor 1,196,185 100% 584,375 80% 584,375 80% 44 550,000 300,000 1 589,050 3 1,196,185 15% Investment Requirement 1,196,185 467,500 467,500 300,000 1,767,150 179,428 4,377,763

Cash and Financial Contracts Part and Service Receivables Warranty and Parts Receivables New Vehicle Inventory Used Vehicle Inventory Parts Inventory Pre-paid expenses Total Assets Accounts Payable Accrued Expenses Total Current Liabilities Working Capital Additional Equipment Miscellaneous Dealership Investment Guide Profit Net Profit Return on operating revenue (%)

Avg Month Tot Expense 1/2 Avg. Month Sales 1/2 Avg. Month Sales 100% Floor Plan Inventory (Baht/unit) Avg Month COGS Avg Month Tot Expense

Avg Month Tot Expense Avg Month Tot Expense

1,196,185 1,196,185

75% 60%

897,139 717,711 1,614,850 2,762,913 3,500,000 180,000 6,442,913 2,113,840 33%

Created Feb 2008 NEN

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Sales and Profit Forecast Year:

2001

New Cars

Retail Fleet Retail Fleet

(Second half -- 6 months) Gross per Units unit 51 36,700 123 5 31,000

1,871,700 3,813,000 75,000

New Trucks

Used Vehicles New and Used Vehicles Selling Expense Total Vehicle Gross Profit

15,000

50% of New and Used Gross

2,879,850 2,879,850 Repair Orders 2,805 2,805 Gross per RO 1,750 750 1260

Total Parts Total Service COGS -- Parts Parts -- Gross Margin Parts Expense Service Expense 28% parts margin

4,908,750 2,103,750 3,534,300 1,374,450 412,335 1,051,875 2,013,990 4,893,840

2,805

30% of Parts Gross 50% of Service Gross

Total Parts and Service Center Gross Profit Total Combined Gross Profit

Created Feb 2008 NEN

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Fixed Expenses Rent Fixed operating expenses Dealer Other Salaries Other Expenses Total Fixed Expenses OPERATING PROFIT

1,200,000 1,300,000 180,000 100,000 2,780,000 2,113,840

Created Feb 2008 NEN

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