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 werent 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

It is
Cameron
best NOT orstart
continued
can simply
to do
with
what atoitexport?
has
Cameron Auto Parts should license to McTaggart
recommendation.
been in the
doing: Exporting. UK.
It isfirst one of Camerons key goals to
I would It was
penetrate foreign markets and theimportant
licensing agreement
discuss thethatprosyou with
consMcTaggart
andshould ofshow
the would be a swift way to begin
executing this business strategy. McTaggart
issue on hand
licensing was in a superior
would be superior to position to penetrate the U.K. market due
to a good cultural understanding and close proximity
exporting in order toto advocate
potential clients. Once this business arrangement
was proven successful, Cameron licensing
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
FIN 502 Cameron Auto Parts Page 2
Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasch, Donna Li
foreign country that likely wouldntThese
That perform
isare as
alsogoodwell
a good as a local
points.
point You company
butrealize
that like McTaggart since customers
had cultural ties and existing relationships
the resources
point with them.
supports and Additionally,
thecapabilities
exporting of orders can be filled more quickly as
the product would be made locally reducing shipping
Cameron are limited.
option. 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 There
cost ofare other
import options
duty, as insurance,
freight, well: or the value added tax. This
would allow for the product to beJointsold Venture
at a more(JV)attractive price. Lastly,
and foreign direct the value of the dollar fell
during the original five year contract
investment (FDI) are others to bepounds produced a higher dollar
and the percentage of sales in
income for Cameron without changing the price of the products sold. The disadvantages of continuing to
considered.
export are loss of profits due to shipping costs, currency values, taxes and tariffs. The five year contract
Take a look at
allows Cameron to evaluate the effectiveness of the posted answers,
the licensing strategy and determine whether this is a
profitable venture for the company. especially, slide # 5 where a table
lists pros and cons of each option in
2. Was Mc Taggart a good choice terms of various resource based
for licensee?
Yes, McTaggart was a good choice factors. I must indicate
as a licensee. They have myall the tools necessary to successfully
preference for such tabular
produce and sell the flexible couplings.
presentations.
McTaggart was already familiar with the They
productareand
simple, neat over U.S. $4,000 in the first
had bought
four months in 2004. They and hadtobeen
the point.
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 manufacturingAll capacity
of yourand are willing
points are good.to invest and develop the manufacturing
But they
capability to efficiently produce the flexible
are one-sided. I amcouplings.
ALWAYS In addition, they have established a
client base. interested in a balanced analysis
detailing not only points that
3. Was the royalty rate reasonable? support your perspective but also
A royalty rate is the money that must
counterbe paid to the owner
perspective. of products
Please see the (the licensor) from a buyer
(the licensee). The amount of royalty
postedfee is considered
answers for such thea fee for acquiring a patent or a copyright. In
most businesses, a royalty fee applies when
perspective two or more companies have licensing agreements or sell
i
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 higherThere

royalty
is rate than normal
NO precise way rate
of because the company helps McTaggart
choose equipment and provides training of operation
determining and production.
the royalty Although McTaggart would like to
rate. Please
pay these services separately, Cameron Auto Parts points out the
see the posted answers for some 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
guidance
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.
FIN 502 Cameron Auto Parts Page 3
Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasch, Donna Li
In conclusion, the royalty rate is reasonable for both parties involved. Cameron Auto Parts was able to
enter the U.K. market expeditiously through McTaggarts sales force, cut down on lead-times, save on
duties, freight, and insurance and not be subject to currency fluctuations. McTaggart was able to sell a
product already in demand, obtain training, focus on increasing sales and gain valuable insight into
Camerons manufacturing process. Both companies would benefit from the shared knowledge they
could provide each other, thus make the licensing agreement valuable for everyone involved.

4. What about the alternatives to licensing?

The alternative to licensing would be to continue production and sell directly to McTaggart and other
customers. This would involve dedicating a certain amount of production floor space to a market that is
culturally and geographically distant and unpredictable. There is risk involved as the production space
ties up cash flow and is not certain to produce profit. Travel expense would be incurred as company
representatives would have to travel often to the U.K. in order to resolve issues or sell products.
The sales side expense would be higher as well. More sales people would have to be employed to serve
that region. They would either have to travel often or be based there and paid in pounds, which are
currently stronger than the dollar. Instead of receiving a check from one contact that represents all sales
for the whole area, Cameron would have to maintain relationships with various customers, which
requires personalized attention to each and exposes him to having to perform collections and write off
bad debt.

Since unit production costs were Notestimated

sure Itounderstand
decline 20% as last
this annual sales climbed from $20 million to
$100 million and Andy felt that the $20 Cameron
point. million mark was
is an easily obtainable
Exporter. Why in the coming year, the
continued value of exporting to Europe would have grown along
would they worry about import with the European market. Looking at
the pricing index, we can see thatcosts?
importing to Europe results in a cost of 113 to the importer. Since
Cameron Auto Parts sell the flexible couplings at the same price to domestic and foreign distributors,
licensing is an effective strategy to penetrate the European market while eliminating import and other
logistical costs.

Cameron Auto Parts would benefit most take

Please from aa look
licensing
at theagreement
posted with McTaggart Supplies Ltd.
Other options exist besides exporting
slides for this question. joint venture / wholly-owned subsidiary,
or licensing such as a
selling through an agent, or selling through a distributor. Benefits to these strategies include reduced
manufacturing cost, higher sales volume, and better market penetration and in some cases shared risk.
The drawbacks to these methods include loss of price control, unpredictable sales volume, and loss of
profits. ii

Case Update
Cameron Auto Parts enjoyed rapid growth during the 2004-2005. In 2004, the company undertook a
major plant expansion for $10 million, adding 200,000 square feet to the companys production capacity.
Royalties from McTaggart during the first year of the licensing agreement were 20,000; this grew to
and 100,000 the following year. High overall profitability left Cameron in a strong financial position in
2006.

In 2006, Cameron was presented with an opportunity to purchase a 40 percent interest in Michelard &
Cie., a family-owned distributor organization in France, which would allow Cameron to break into the
continental European countries. Cameron agreed to the deal for $4 million and a royalty of 4 percent on
sales of all flexible couplings.
FIN 502 Cameron Auto Parts Page 4
Group 2: Patricia Fassler-Mize, Jesse Galindo, Maggie Jones, Ted Lasch, Donna Li

The deal enraged McTaggart, whoGood had been selling flexible couplings in Europe and would now be
update.
competing with Michelard. Partly to appease McTaggart, Cameron agreed to a proposed joint venture in
Australia. McTaggart would own There are 2ofthings
60 percent I suggest
the plant and betoresponsible for managing the venture.
improveinyour
According to McTaggart, local assembly analysis:
Australia could1.triple
Provide a of current sales to around 10
volume
balanced
million. An investment of 2 million could perspective.
make around Nothing
400,000ina year after Australian taxes while
avoiding tariffs imposed on shipping
this finished
class is aproducts.
clear proThis agreement
or con. Every would also position the firms to
iii
benefit from Australias free tradeissue
agreement with New Zealand.
has both pros and cons. Both
need to be studied carefully. 2.
Cameron Auto Parts is very likelyIncorporate
a pseudonym for Fernco,
other assigned Inc., a flexible coupling manufacturer based
outside of Detroit with a very similar history
readings to your
into that ofanalysis
Cameron toAuto Parts. Fernco, Inc. is lead by Chris
Cooper who, like Alex Cameron, provide
took overevidence
the company from
of learning. hisSomefather after graduating from Michigan
business school. In addition to manufacturing
of the assigned facilities in Canada,
readings could have the U.K., Australia and Germany,
iv
Fernco has expanded distributioneasily
to the been
E.U, New
cited to support your Puerto Rico, and China.
Zealand, Mexico,
viewpoint.
i
Valuation ResourceRoyalty Rates and License Fees. Retrieved June 29, 2011 from < http://www.crucial-
systems.com/dmbr/Mechanical_Royalties>
Mechanical Royalties. Time. 05 December 2004. Retrieved June 29, 2011 from < http://www.crucial-
systems.com/dmbr/Mechanical_Royalties>
ii
Use These Top Five Strategies for Selling in International Markets. Retrieved July 1, 2011 from
<http://www.fita.org/ioma/strategies.html>
iii
Beamish, Paul and Crookell, Harold. Cameron Auto Parts (B) - Revised. Richard Ivey School of Business.
University of Western Ontario. Jan 10, 2006.
iv
Ferno Company Website. Retrieved July 1, 2011 from <http://www.fernco.com/>.