What financial risks are the company and the stakeholders exposed to?.
financial risks
AutoEdge is a leading national automotive supply company located in Detroit Michigan. Founded by Jonathan McAlister in 1976 the company specializes in engines and
transmission parts and has been supplying products to the three largest U.S.-based automakers for over 30 years. AutoEdges name is known by customers and leaders in
the automotive industry for quality dependability and reliable products. In fact despite the extra cost that is added to the automobiles consumers appreciate the
AutoEdge brand name and often make purchases because of it.
In 2005 AutoEdges board of directors decided that the company needed to make some drastic changes because of the high cost of labor rigid American regulations and
increased competition from other engine and transmission part suppliers. Their solution was to gradually close all manufacturing operations in Detroit and begin
outsourcing to a well-known factory in South Korea. The board reasoned that this change would allow the company to compete with the growing industry meet the
automotive manufacturing demands and increase company profits. Some board members were skeptical about the move however because AutoEdge had built a reputation for
high-quality detailed craftsmanship and they feared that transitioning the manufacturing operations overseas would cause quality to diminish.
For the next 5 years this strategy proved successful. The company showed signs of financial growth and company profit.
However in 2010 the company was found guilty of supplying products that failed quality tests. As a result millions of automobiles had to be recalled. The recall was
highly publicized and the issue of poor quality products impacted negatively on American automotive companies. AutoEdges $51 per-share stock has fallen to $4 per
share and brand acceptance has come under scrutiny among even its most loyal customers. Although some economists blame these negative effects on the products others
believe that it had to do with the termination of AutoEdges Chief Executive Officer Fred McFadden.
Lester Scholl Chairman of the Board of Directors has called an emergency meeting to discuss AutoEdges short-term and long-term strategies. Among other things they
need to discuss the possibility of continuing production overseas or returning it to the United States. Lester and others on the board are well-known for being
financially conservative and risk-averse. Because the American economy is experiencing high unemployment low interest rates low GDP and low inflation it might be
sensible to make the change. To some extent they believe that these macroeconomic factors can be used to their advantage. They realize the immediate challenges such
as the brand damage the growing competition and the financial challenges the company is facing require immediate action. A new strategy must be formulated quickly to
save the company from bankruptcy.
You have been hired by AutoEdges board of directors as a research analyst. Primarily your job is to list and describe some of the legal cultural financial and
economic factors that AutoEdge needs to consider when deciding to either stay in South Korea or return to the United States. Because Fred McFadden was recently
terminated you will work directly with the board until a new CEO is named.
Assignment:
Production Manager at AutoEdge Sam Busch is new to the company. He asks to meet with you to discuss some questions he has.
Thanks for meeting with me on such short notice he says. Im still getting familiar with the situation here and I could use your help.
Certainly you say. And congratulations on your new position with AutoEdge.
Thanks he says. I am preparing for a presentation to the board in 2 weeks. Ive reviewed the most recent production reports and I see that we are currently
producing an engine part for example in South Korea for $110. This cost is much lower compared to the cost of producing the same part in the United States which is
$320 per unit. The disparity might be attributed to the cost of labor unions overhead and operating costs.
That makes sense you say.
If we return the manufacturing operations to the United States he says what types of short-term and long-term variable and fixed costs should we consider? What
costs should we expect if we stay in South Korea? What financial risks are the company and the stakeholders exposed to?
Those are all good questions you say. Can I give this some thought and get back to you?
Sure he says. Ill be working on my presentation next week. Id like to get your opinion about these questions and the supporting research so I can include it.
What financial risks are the company and the stakeholders exposed to?
