Cameron Auto Parts Case Study

Cameron Auto Parts was founded in 1965 and provided auto parts to three biggest car manufacturers. Cameron Auto Parts faced crisis in 2000 due to two main reasons: first, the fast drop of sales, and second the Japanese competition. As mentioned in the case, due to the losses in 2000 and during the first six months of 2001, and due to the need for modernization, the company took over $10 million dollars of credit with interest rate of 7.0%. When Alex took over in 2001, he started the "operation survival" by cutting the production costs. Alex mainly did that by controlling the work force and employing part time labours.

By the end of 2003, the situation at Cameron was back to normal, and there was a need to invest in a new production plant in order to separate the flexible couplings production line. Moreover, Cameron was not financially ready to make such a commitment, and was left with the options to wait for a year in order to generate more profits and financial stability, or to license the production of the flexible coupling. In the spring of 2004, Alex signed a five years licensing agreement with McTaggart Supplies Ltd., McTaggart had to pay $100,000 fee in advance for the help of Cameron to set things up and a royalty of 3% on the first £1 million of sales and 2% on the second million. McTaggart obliged to give a free technology flow-back to Cameron in case they reached any improvements.

The case provides enough information about the financial problems that Cameron faced and what Alex did to rescue the company from a bankruptcy by reducing costs and introducing diversity of products. Alex signed the licensing agreement within a week and he did not take advice from his managers Andy and Chuck.

Questions

Q1. (a) Was Alex's decision to grant McTaggart a license justified?

Ans: As the cost of expansion were too high, and may have absorbed many of company's resources, therefore Alex decision to grant license was justified. Also, as per Exhibit 1 and Exhibit 2 it is evident that Cameron lacked finances to go for expansion. It is mentioned in the case that every dollar of flexible coupling sales requires an investment in inventory and receivables of about 30 cents and this could have depleted the potential profits of Cameron. Furthermore, in the flexible coupling industries you have to manufacture to inventory, as a result you do not see revenue right away. However, there was potential in the Europe market and opportunity to penetrate the European market was offered to him in his visit to Scotland. Giving license to McTaggert was a good opportunity and Alex ensured returns without much investment. The license partnership will allow Cameron Auto entry into the United Kingdom market and give the company a first experience with global expansion.

(b) If yes, were the royalties appropriate?

Ans: