US.Co China (an American multinational) is considering entering a new category in China that it did not

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Question:

US.Co China (an American multinational) is considering entering a new category in China that it did not play in the past. You are the Financial Analyst of the company and you are assigned to do a financial assessment for the entry decision. The minimum success criteria for any of the new product launch of the company are that a) new product gross margin in launch year should be +5% higher vs. market average; b) project Net Present Value (NPV) should be larger than $10 Million (over 5 YR project life ). With the given information, you are required to answer the below 3 questions.

Cost is identified as one of the key considerations for the decision. Meanwhile, the decision of “make” vs. “buy” for bottle (package) has the biggest impact on cost. Can you assess the two options and come up with your recommendation (for 5 YR project life), ie. Which option is better? (Hint: the lead option becomes your basis for the financial assessment and assume we stick to the decision for 5 years)

What is your final recommendation for this new market entry based on below suggested considerations and the success criteria? (<500 words)

If you are the General Manager, what are the top 3 priorities you will focus in the coming 5 years after we launched the product? (<200 words)

Key Areas of Consideration:

Category / Market Size

Year	2001	2002	2003	2004	2005
Market Size (1000 pcs)	10,000	11,000	12,100	13.310	14,641
Target Share (%)	5.0	10.0	15.0	17.50	20.0

* Assume target share is not impacted by the pricing decision for simplicity.

Cost

The key component of the cost is package (bottle) and the operation cost (ie. total product cost=material + operation). We have two options (in-house making vs. buying from supplier) as followed: (Capital investment for each option is the same, $9.0 Million in Y1)

(USD/pc)	Y1	Y2	Y3	Y4	Y5
Make
-- operation cost	4.0	4.0	4.0	3.5	3.0
-- material cost	4.0	3.5	3.0	3.0	3.0
Buy
-- operation cost	3.0	3.0	3.0	2.5	2.0
-- material cost	4.5	4.5	4.5	4.5	4.5

Competition

Year 2000	Competitor A	Competitor B	Competitor C	Competitor D	Others
Volume Share (%)	25.0	18.0	12.0	15.0	30.0
Pricing (USD/pc)	9.0	8.0	10.1	10.0	12.0
Gross Margin (%)	30.0	25.0	20.0	20.0	8.7

* Gross Margin = Revenue-Product Cost (excl. marketing and other operation expenses)

Communication (TV Commercial)

Marketing colleague is considering two spending model: a) Sustain model, Y1 $400 Thousand; b) Heavy Up model, Y1 double sustain model spending. This generates +1% volume share on top of target share year on year. (Assume same TVC spending % of revenue across years).

Others Assumptions

Other Operating Expense (people cost etc): 10% of revenue;

Cash-flow: For simplicity, only consider capital investment depreciation add-back (5 YR asset life), do not count any working capital impact;

Income Tax: 15%

Discount rate: 8% (Country Cost of Capital)