Case study carmeron

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FIN 502 Page 1

Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasch, Donna Li

Cameron Auto Parts

Executive Summary

Cameron Auto Parts was founded in 1965 in Canada by the Cameron family to seize opportunities

created by the Auto Pact (APTA) of 1965 between the United States and Canada. The APTA allowed for

tariff-free trade between the Big Three American automakers and parts suppliers and factories in both

countries. The one caveat in the APTA to qualify for the zero-tariff trade was that companies must

maintain assembly facilities on both sides of the border. Cameron Auto Parts specifically manufactured

original equipment parts (OEM) such as small engine parts and accessories based upon design specs

created by the Auto manufacturers and then sold these parts to the auto makers.

Alex Cameron took the reins in 2001 and was immediately faced with a financial crisis. Sales in 2000

had dropped to $48 million and were only $18 million for the first six months of 2001. Cameron lost

$2.5 million in 2000 and the same amount in the first six months of 2001. This decline was primarily

due to declining auto sales of American cars and trucks and the increased presence of Japanese

automakers. Market forces were driving the American firms to find ways to cut costs and modernize

plants. Cameron used $10 million of its $12 million credit line to reinvest back into the firm by

modernizing equipment and computer-assisted design and manufacturing systems. However, Cameron

did not have its own design engineering team and relied on specs from the Big Three automakers for its

products. This left Alex Cameron with an uneasy feeling that expansion into product design was

essential for the long-term survival of the firm. In mid-2001, Cameron took the steps necessary to design

and develop its own parts line. Cameron hired four design engineers and, by 2003, came up with a

flexible coupling idea that would entice international buyers and not just the Big Three automakers.

Cameron was then faced with the dilemma of how to market and sell the product. Projected sales of the

new product in 2004 were between $35 and $40 million which was terrific but they weren’t sure they

had the capacity to handle the production. They needed to decide if it was better to expand current

facilities, buy/ build a new facility, or license the fabrication of the product to outside companies. While

on a vacation trip to Scotland, Alex went to check in on a local customer, McTaggart Supplies, Ltd, who

convinced him that the flexible coupling product was in high demand in the U.K. and that more

production was necessary to keep up with the demand. Alex decided at that meeting that Cameron would

exclusively license the production of the flexible coupling to McTaggart in order to gain a stronger

foothold in the U.K. for relatively little up-front investment.

1. Should Cameron have licensed McTaggart or continued to export?

Cameron Auto Parts should license to McTaggart in the UK. It was one of Cameron’s key goals to

penetrate foreign markets and the licensing agreement with McTaggart would be a swift way to begin

executing this business strategy. McTaggart was in a superior position to penetrate the U.K. market due

to a good cultural understanding and close proximity to potential clients. Once this business arrangement

was proven successful, Cameron Auto Parts would be able to form similar agreements with other

companies and expand to other foreign markets. McTaggart is an excellent licensee, as they are a

reputable company in the U.K. with excellent credit, cost saving manufacturing practices, good market

contacts, and 130 years of service in the business. They are also assuming most of the financial risk by

paying Cameron Auto Parts the startup costs as well as a percentage of sales. Embarking on a licensing

strategy would also eliminate the prohibitive cost of developing and maintaining a sales force in a

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 – Cameron Auto Parts Page 2

Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasch, Donna Li

foreign country that likely wouldn’t perform as well as a local company like McTaggart since customers

had cultural ties and existing relationships with them. Additionally, orders can be filled more quickly as

the product would be made locally reducing shipping costs and travel time. It was also a good decision

for administrative and economic distance reasons. Since the product would be produced in the UK, it

would not be subjected to excess cost of import duty, freight, insurance, or the value added tax. This

would allow for the product to be sold at a more attractive price. Lastly, the value of the dollar fell

during the original five year contract and the percentage of sales in pounds produced a higher dollar

income for Cameron without changing the price of the products sold. The disadvantages of continuing to

export are loss of profits due to shipping costs, currency values, taxes and tariffs. The five year contract

allows Cameron to evaluate the effectiveness of the licensing strategy and determine whether this is a

profitable venture for the company.

2. Was Mc Taggart a good choice for licensee?

Yes, McTaggart was a good choice as a licensee. They have all the tools necessary to successfully

produce and sell the flexible couplings.

 McTaggart was already familiar with the product and had bought over U.S. $4,000 in the first

four months in 2004. They had been able to sell the product as fast as it could be shipped and

built a solid working relationship with Cameron as well as good credit.

 McTaggart has production experience that Cameron may benefit from and substantial room to

increase production capacity.

 They have a solid reputation with great financial standing, excellent credit, and a capable sales

staff to market and sell the product.

 They have manufacturing capacity and are willing to invest and develop the manufacturing

capability to efficiently produce the flexible couplings. In addition, they have established a

client base.

3. Was the royalty rate reasonable?

A royalty rate is the money that must be paid to the owner of products (“the licensor”) from a buyer

(“the licensee”). The amount of royalty fee is considered the fee for acquiring a patent or a copyright. In

most businesses, a royalty fee applies when two or more companies have licensing agreements or sell

the products in foreign countries.

In U.K., the normal rate of the royalty for licensing is around one and

a half cent on each sale. However, Cameron Auto Parts was asking three per cent of sales from

McTaggart. Although it was dropped down to 2 percent with a 5 year contract after negotiations, it is

still higher than the normal rate. This seems reasonable as Mc Taggart will save a considerable amount

of importation expense and will be able to sell the products at a lower rate than they can by importing.

Cameron will have established an ongoing royalty income without incurring the overhead cost of

production and sales expense.

Cameron Auto Parts asks a higher royalty rate than normal rate because the company helps McTaggart

choose equipment and provides training of operation and production. Although McTaggart would like to

pay these services separately, Cameron Auto Parts points out the benefits of getting services to keep

higher royalty rate. With this five-year agreement, the royalty rate of two per cent is ensured in the first

five years, but it will be down to one and a half per cent when the techniques of choosing equipment and

operation have been acquired by McTaggart after five years.

These are good points. You realize

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:

Joint Venture (JV) and foreign direct

investment (FDI) are others to be

considered.

Take a look at the posted answers,

especially, slide # 5 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.

All of your points are good. But they

are one-sided. I am ALWAYS

interested in a “balanced” analysis

detailing not only points that

support your perspective but also

counter perspective. Please see the

posted answers for such a

perspective

There is NO precise way of

determining the royalty rate. Please

see the posted answers for some

guidance

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Cameron Auto Parts Executive Summary Cameron Auto Parts was founded in 1965 in Canada by the Cameron family to seize opportunities created by the Auto Pact (APTA) of 1965 between the United States and Canada. The APTA allowed for tariff-free trade between the Big Three American automakers and parts suppliers and factories in both countries. The one caveat in the APTA to qualify for the zero-tariff trade was that companies must maintain assembly facilities on both sides of the border. Cameron Auto Parts specifically manufactured original equipment parts (OEM) such as small engine parts and accessories based upon design specs created by the Auto manufacturers and then sold these parts to the auto makers. Alex Cameron took the reins in 2001 and was immediately faced with a financial crisis. Sales in 2000 had dropped to $48 million and were only $18 million for the first six months of 2001. Cameron lost $2.5 million in 2000 and the same amount in the first six months of 2001. This decline was primarily due to declining auto sales of American cars and trucks and the increased presence of Japanese automakers. Market forces were driving the American firms to find ways to cut costs and modernize plants. Cameron used $10 million of its $12 million credit line to reinvest back into the firm by modernizing equipment and computer-assisted design and manufacturing systems. However, Cameron did not have its own design engineering team and relied on specs from the Big Three automakers fo ...
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