TN02-HTT-Supercar PDF

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HTT SUPERCAR CASE...

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HTT SUPERCAR

Liliana Lopez Jimenez wrote this case under the supervision of Professor Derrick Neufeld solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2012, Richard Ivey School of Business Foundation

Version: 2012-04-17

Sébastien Forest laughed out loud: “You want me to invest money in a Canadian supercar? Are you serious?” A few years later, however, Forest was not only a shareholder but the chief executive officer (CEO) of HTT, the first company in Canada to bring a supercar to the international market, and he had become very serious about the price tag of $800,000 per unit. With the design phase now coming to an end and successful receptions from several specialized events, HTT was only three months away from starting production of the Pléthore supercar. Forest was looking at every detail of the business with excitement. He wanted a seamless production process, a tightly focused marketing effort, and superb customer service – and he knew the “right” information technology (IT) system could enable all of these areas and more. INDUSTRY OVERVIEW1

The business of HTT Technologies Inc. sat at the intersection between the automotive industry and the high-luxury market. With the former, it shared environmental, safety and warranty demands coming from both regulatory agencies and the market. With the latter, it shared a passion for quality in every detail, as well as incredibly high prices and extremely low volumes. According to Datamonitor, the global industry of passenger car manufacturing had experienced a compound annual growth rate (CAGR) of 2 per cent between 2006 and 2010. This rate included a sharp 19.7 per cent decline in 2009, explained by the generalized economic crisis, followed by a 22.4 per cent growth in 2010. For the coming five-year period, a CAGR of 4.2 per cent was predicted, which would result in an industry total value of $896.4 billion by 2015. These figures are presented in more detail in Exhibit 1. Asia-Pacific automobile manufacturers represented the largest market segment, accounting for

1

This section was written based on primary and secondary sources. Secondary sources included: Packaged Facts. The Affluent Consumer Market in the U.S. Robert Brown and Ruth Washton. Copyright 2009. Datamonitor. Industry Profile: Global New Cars. Reference Code: 0199-0358. Copyright October 2010. Datamonitor. Industry Profile: Global Car Manufacturing. Reference Code: 0199-2010. Copyright February 2011.

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46 per cent of the industry value, followed by European and the American producers (32.5 per cent and 21.1 per cent, respectively). Large manufacturers in the industry usually benefited from high barriers to entry related to brand reputation and fixed costs associated with car design and mass production. Manufacturing inputs were globally produced and included commodities with relatively volatile prices (e.g., steel and aluminium), as well as outsourced fabricated components for which compliance with safety regulations was a key consideration. Operational efficiencies had always been a key priority, all the more so after General Motors and Chrysler filed for bankruptcy in the United States in 2009. Most large manufacturers sold their products worldwide, through car dealerships operating under exclusive contractual agreements. However, consignment sales and non-exclusivity were also possible, especially in specialized segments. Retail markup ranged from two per cent in the United States to around 10 per cent in China. In some countries (such as the United States), manufacturers were legally prohibited from selling directly to consumers, and so advertising, branding and a substantial amount of online information was developed to influence customers in making selection decisions. In this greatly concentrated industry, most large companies operated in both luxury and budget market segments, and their businesses usually went beyond car manufacturing to include, for example, financial services. The four largest global players, Volkswagen, General Motors, Toyota and Ford, together accounted for two-thirds of global market share. In the budget segment, cars were generally regarded as methods of transport and thus were substitutable by public transport and alternative forms of personal transport. Due to environmental concerns as well as price incentives, consumer preferences in this segment were also shifting toward hybrid vehicles. In the luxury segment, appreciation of cars as status symbols was more deeply held, thus the potential substitutes were qualitatively different than for the budget segment (e.g., substitute status symbols for luxury buyers included things like home décor, luxury holidays and designer clothing). Supercars occupied a somewhat distinct sub-niche within the luxury segment. Not every large manufacturer necessarily competed in this segment, nor was competition restricted to large companies. For example, of the four players mentioned above, only Volkswagen and Toyota were actively producing models referred to by industry experts as “supercars.” Furthermore, some supercar top-of-mind brands belonged to manufacturing companies owned by large automotive groups, such as Lamborghini and Bugatti (both owned by Volkswagen) and Ferrari (owned by Fiat), whereas other key players like Pagani and Koenigsegg were independently owned. Exhibit 2 compares some of the publicly known price and production volume information across several of the mentioned makes. Global competition tended to be more accentuated in the luxury and supercar segments than in the budget segment. There were relatively few consumers who could afford supercars, thus they were targeted by manufacturers on a worldwide scale. Existing market research defined affluent consumers as adults with an income of over $75,000 in one-person households or over $100,000 in households with multiple wageearners. Within this segment, the highest subcategory was super-affluent consumers, i.e., households with income in excess of $250,000. Although super-affluent consumers were less price-sensitive than any other consumers, they were also deeply affected by economic downturns, because, unlike other consumers, their income depended less on salaries and more on less stable sources. As an example, between 2002 and 2008, “the average income of super-affluent households decreased four times and increased three times over the previous year. In contrast… other households on average experienced a steady but modest year-to-year rise in income

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during this period.”2 Consequently, the 2008 financial crisis left super-affluent consumers with a sense of financial insecurity and a generally pessimistic outlook. Some market researchers explained this trend as a “recalibrating” mindset that was affecting purchase intentions. From 2007 to 2008, affluent consumer spending on new vehicles dropped by 37 per cent, while spending on auto maintenance and repairs increased by nine per cent. However, U.S. data also showed that the income of the super-affluent consumer was, on average, 10 times larger than that of the non-affluent consumer. Thus, people in this group still represented a very attractive target for many industries operating in high-luxury markets. Moreover, this segment was more sensitive to brands than any other affluent group, and its members were considerably more concerned with self-image, which they often tied to material goods. Regarding cars, American super-affluent customers in particular rated foreign cars highly, enjoyed driving fast, but were also more likely than other consumers to consider safety issues. OVERVIEW OF THE COMPANY

With over 25 years of experience in designing high-performance luxury cars, and eight of those years working on prototyping the Pléthore, Luc Chartrand was joined by investors Carl Descoteaux (main shareholder) and Sébastien Forest to found HTT in 2007. Since formal production had yet to begin, the company’s financing relied on equity investment and governmental research and development credits. Additional funding came in 2010 when 20 per cent of the company was sold for $1 million to two new private investors. HTT comprised an in-house team of five individuals, including Forest as CEO, Chartrand as Head Designer, and three specialized engineers working as contractors, who oversaw the work of an outsourced development team. Forest had two undergraduate degrees, in Law and International Finance, and he brought to the company over 12 years of business management experience at multinational companies. Although Forest was initially highly skeptical about the viability of a Canadian supercar, his old college buddy, Descoteaux, gradually coaxed him into the business – first as an investor, then by calling to ask for help with legal paperwork and accounting. Forest eventually made the decision to leave his stable corporate job as vice-president of marketing, research and development at a large company in the food industry, and he joined HTT as its CEO in 2008. His deep interest in cars and in the industry in general undoubtedly contributed to this decision. In terms of strategy, HTT sought “to push designing limits of the prestigious sports car, redefine the paradigms of the Supercar and to become the first Canadian manufacturer in this market.”3 Although the Pléthore had not entered its production stage yet, CEO Forest was extremely busy attending to all fronts of the business, from financing, to certifications for road use in different locations, to establishing dealership agreements, to marketing and brand awareness strategies and campaigns, to actual sales. While HTT had an exceptionally skillful technical team, Forest knew most of the business aspects would depend on his own expertise or on his ability to find and engage competent external advisors, such as the international expert on high-luxury goods he had hired to assist with global marketing and branding efforts. The Pléthore LC-750, HTT’s first supercar model, was powered by a seven-litre V8 engine producing 750 horsepower, and it weighed in at approximately 1,250 kilograms (see Exhibit 3). This power-to-weight ratio was equivalent to that of a Formula 1 (F1) race car. The Pléthore was priced at $800,000, with seven 2 3

Packaged Facts 2009. http://www.httsupercar.com/, accessed March 16, 2012.

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units pre-sold. HTT had been raising brand awareness through appearances at specialist events worldwide, such as the Toronto Auto Show, the Top Marques Show in Monte-Carlo, and the SEMA Show in Las Vegas. INFORMATION TECHNOLOGY AT HTT

Manufacturers competing in the automotive industry proactively deployed IT throughout most of their value chain activities. Development activities around design, simulation, manufacturing, quality control and inventory management were all heavily supported by IT. Likewise, distribution, sales and customer services activities were also highly dependent on IT systems. Web technologies (e.g., company websites) and social media were used for advertising, communicating with customers, and tracking consumer interests and preferences. It was publicly known that large manufacturers, such as the Volkswagen Group and General Motors, as well as certain niche players including McLaren, had selected SAP – an integrated enterprise resource planning (ERP) system – as their core IT platform. IT decision-making among other more-direct competitors to HTT was less clear, although it could be inferred that most of them relied on some forms of IT for their engineering work, as well as for marketing. At HTT, the early decision to outsource engineering design work had translated into minimal IT needs internally. To date, the company had relied on laptops with office software suites, one desktop workstation computer for engineering work, an externally built and externally hosted website (www.httsupercar.com), externally hosted e-mail services, an off-the-shelf accounting system (Simply Accounting), and externally contracted hardware maintenance and troubleshooting. With limited time and a small team, Forest had not had any time to think through IT requirements or IT governance. In effect, each employee and contractor was implicitly responsible for their own IT assets and stored data. DEFINING AN OPERATION MODEL

The company planned to move the Pléthore from design to production stage in the summer of 2012, after making key decisions in all areas of future operations, including supply, manufacturing, distribution, sales and customer service. Mirroring practices in the supercar niche, the Pléthore would be a hand-made vehicle, manufactured not on an assembly line but in workstations. The process would start by ensuring all the parts needed to assemble the vehicle were available at the workstation. All parts would be produced externally, and some of them were very expensive (e.g., the six-speed sequential transmission cost $50,000). Given the extraordinarily high inventory holding costs, supply chain reliability and efficiency were critical aspects of the business. Forest described his approach to supplier selection as following a case-by-case basis, favouring suppliers with a proven track of “passion for quality” and on-time delivery. Regarding delivery, Forest was open to accepting early deliveries on expensive parts, as long as the payment terms respected the agreed-upon (later) delivery dates. In other words, storage was not a critical issue; cash flow was. Once the parts were delivered to one of the six to eight assembly workstations, a team of two technicians would work for five weeks to completely assemble the vehicle, except for the engine that would be installed separately by a second specialized team working at the engine workstation. Throughout the process, another specialist would independently verify European and Canadian quality and safety

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compliance; U.S. compliance would be considered later in the business development cycle. High-level time and effort estimates for the manufacturing processes are shown in Exhibit 4. At full production, HTT planned to produce 50 vehicles per year. According to available market research, this number was expected to leave total market demand underserved, as was customary in this niche. Finished vehicles would be distributed in three ways. In the Canadian market, HTT planned to sell the vehicle directly from its facilities in Quebec. In Europe, non-exclusive dealerships were being considered whereby dealers would be required to purchase a first vehicle in order to gain distribution rights, and then would assume maintenance responsibilities of all vehicles they sold thereafter. In China and the Middle East, due to lack of familiarity with the business environment, HTT was planning on having middlemen positioned between the company and the dealers. In total, 12 to 15 dealers were expected worldwide. No negotiations had started yet; before making such decisions, Forest wanted to explore in more depth which dealers seemed to have better access to networks of potential buyers. As with other luxury products, it was important that customers felt they “belonged” to something great, and that they were engaging in more than an ordinary automobile purchase transaction. HTT wanted to invite customers to be involved with the brand, to have experiences associated with it, and to be treated very specially. As part of their premium experience, buyers would receive a complimentary driving lesson by an F1 driver, and they would have a direct line to the company’s CEO. PAVING THE WAY FOR AN IT SOLUTION

Forest believed the operations described above could be successfully facilitated through an IT system. An external management consulting group approached HTT and assisted the company, at no cost, in identifying a preliminary set of high-level functional requirements. The group determined that the system should handle, at a minimum, information about order-taking, work orders, inventory, production, quality control, delivery and customer support. Examples of expected data for each of these processes are shown in Exhibit 5. Even though the team had identified some of the basic functionality of the new system, Forest thought it might be too soon to set fine-grained, detailed requirements. In his former role as a senior manager in a multinational company, he had led the selection and implementation of an ERP system, and from that experience, he remembered that it was incredibly expensive to make changes to requirements after they were set. Therefore, he believed that HTT should wait until the production facility was put in place, and a few units were built and delivered, before making any final decisions. By investing some time in learning and tweaking the operations, there would be more certainty regarding the exact details of the end-to-end processes, and that knowledge would prove invaluable for selecting an appropriate software product. Although production was still a few months away, Forest needed to begin assembling some software options. He knew that no software solution would be able to deliver 100 per cent of the desired functionality, but he felt that 80 to 85 per cent fit should be attainable, out-of-the-box. He also anticipated that requirements would change over time, as the company itself grew and changed, but that a good initial fit would save time and money during implementation and would deliver a reasonable software lifespan of three to five years. Forest also knew that most software companies tried to convince customers to adapt their processes to the software, and he wanted to have a clear position on that aspect of the system before entering into negotiations with any IT vendor. To him, deciding the extent to which HTT should adapt its own processes to the software, or the software to HTT’s needs, would ultimately depend on the IT product’s built-in functionality as well as the price of customization.

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Despite his limited time, Forest had started to do some informal searching to get an idea of what the software marke...