Finance Fundamentals : Market Entry Case Study

1. Market Entry Case Study (Introduction): Ll everyone. Let's start with market entry business cases. Market entry business cases are critical tools for organizations looking to expand into new territories. Let's assume that you have a business and you are only operating in Asia and you are planning to enter to Europe market through a country in the beginning, then expand your operations within that continent. This is an example of market entry. Financial evaluation of these cases helps us to evaluate the viability, challenges, potential opportunities of entering a market. And this helps us to provide a structured approach to strategic decision making and risk mitigation. However, you need to always remember that if the case is market entry, there is always risk based on the required cost because it is not cheap to enter different markets in the beginning. You need to make some investment and you need to evaluate in which conditions you can get your investment paid back to you in which time period. And while you are making the assumptions, you need to use the past trend data if you have previously expanded into new markets. But let's start to our calculations and case study to understand it better. 2. Framework of Business Case Development: Everyone. Before we start to calculations, we need to understand the key rules while building a financial business case. So let's define the framework and we will apply these key rules while we are building a financial evaluation for different kind of exercises or different kind of situations such as market entry or MNA or increasing profitability, et cetera. Let's start. So the first one that you need to know is every business decision has upsides and downsides, revenue and cost related to every action and decision. Second one, you need to try to start from the big picture, then narrow it down. You will also remember this from our previous class, which is planning and budgeting. You need to start from the big picture, which is the market size, then you need to put into market share of the company, then you need to put that through which strategy or which products, et cetera, you will reach up to that market share. Third one is, don't forget to associate the costs related to your decisions. If you are planning to run a heavy marketing campaign, you need to add that cost into your calculation. Or if you are planning to open up a new factory to accelerate your production, you need to corporate that cost while you are making your calculations. Fourth one, make assumptions based on available past trends and data. Because regardless of what you are evaluating, you need to make some assumptions. And if you make your assumptions based on the facts, based on the past trends and data, this will increase the probability of your business case closer to the actual scenario. One, mention sensitivity because your analysis rely on assumptions, as we mentioned. Yes, you will try to make your assumptions based on calculations or past trends, data, et cetera. However, things might be different in future compared to past. Always, there are risks that your assumptions may fail. The results significantly will be changing based on the change assumptions. So mention that if this assumption changes to this level, my end result or financial evaluation will be impacted in this way, et cetera, and we call this sensitivity. Thanks so much. If you are ready, let's start. 3. Exercise : Market Enry Business Case : Hello, everyone. Now we are going to have our market entry business case. Let's see what is the situation. So we have a client, which is a European electric vehicle manufacturer, and their objective is entering Southeast Asian market, focusing on Thailand as the initial entry point. So we will evaluate if they start their expansion in new market entry in Thailand, what will be the outcome of this in terms of their profit? Some assumptions that we are going to use is Thailand is a growing EV market with government incentives for EV adoption. EV penetration in Thailand expected to be three X over five years, and company plans to launch one EV model initially and targeting mid range pricing. For the simplicity, we will not use the net present value calculations because as you know, the future money that this company is going to make, we need to discount it based on the discount rate. You will remember from our previous classes. However, in this case study, we will assume that discount rate is zero and we will not discount it to find out today's value. However, in reality, you need to apply the discount rate for the future cash flows or future profits to see that what is the present value? So let's start. It is requested to build a five years financial business case and ignoring the net present value calculation, assuming discount rate is zero. So we need to make some key assumptions because as of now, we don't know what is the market of EV in Thailand. We don't know the market size. And as we mentioned in our key rules, we need to start from the market size, and we need to apply our expected market share to find out how many cars we are planning to sell. The key assumptions that we are going to make, I recommend to use Internet for exact values, but let's imagine there is no Internet or urine interview. So in that kind of a case, what kind of thought flow you can follow to find out how many electrical vehicle cars in Thailand. So let's start. Thailand population is around 70 million people. Let's say that average people who lives in one household is four. So if you divide 70 million to four, you will find 17.5 million households. So what we have done, we started from the bigger picture. We started from the population. Then we find out the households. Then we will assume that 50% of the households will have a car, and this will make us roughly 9 million car ownership in the total country. Let's assume that ownership of same car is ten years. If you buy a car as of today, then you will use that car for ten years. This may depending on that market. It might be five years, three years, ten years, 15 years, et cetera. But for now, we're assuming ten years for this market, which means that 10% change per year. So assuming that 10% of this population will be changing their car on yearly basis. If we multiply this 10% change rate to total car ownership, we will reach out to 875 car sales. And we need to assume that what is the EV penetration as of today? What is the total market that we are talking about? For now we're assuming 10% and we're reaching out to 87,000 electric vehicle car owners. And we will assume that there will be a stable car market for next five years. However, this can be dropping depending on Thailand's economy, household debts, rejection on the loans, et cetera, and we will try to double the penetration on EV to be 174 because we need to assume some amount of growth in total EV car ownership. So we will assume that it starts at 87,000 and it's expected to go up to 174,000. So if you are ready, let's go to Exle and evaluate there. So now we are with Exl. What we have said is in the year one in Thailand, total EV ownership is 87,000 and we are expecting it to be doubled in five years to become 174,000. To calculate this one, we didn't use any information on the Internet. And if you are making a detailed evaluation for a company, you can check this info on Internet. I just wanted to show you how can be a tot flow applied to find out even if there is no information available, you can assume some kind of steps, starting from the big picture to find out the small picture. We started from the population, household ownership, car ownership, and after that, we applied some percentage for EV car ownership. Then we applied a change rate to see how many people are buying EV car on yearly basis, which is 87 in the first year. And this will become to 174. So total expected increase is 174 to 87. It is 87,000 and there will be four years in between. So each year, this will be increasing by 21,750. So if you apply this, this will give us the 174, as you can see if this plus this already make 174, which is there as the year five. And what is the expected market share in the end of first year? So we're expecting it. These are our assumptions for a bull case. Bull case means that an optimistic business case. If we assume that we will have the 5% of the market share in the first year and then it will increase by 2% every year, so we will find out how many cars we will be selling. So total sales will be in total EV market sales multiplied by my market share. I will be selling this amount and we can continue for the following years. Car price. In the beginning, we can check what is the available car prices in Thailand market for EV cars. And let's assume that we find out it is $20,000. And this $20,000 will be our initial price for our car, targeting mid class people, and this will be increasing by 10% on yearly basis because there is inflation and several factors. So we are increasing it by 10% and finding out what will be our car price in following years. Cost per unit. So let's assume that 50% of the price is our production cost. Let's assume that 10,000 will be our cost in the first year, and this will be increasing by 10% as well. Let's apply the formula, and let's see what is our total cost. Initial cost of marketing and setup. As I mentioned, market entry is a costly exercise for companies because you need to make some initial investment to the market that you are getting in. And for our case, we will assume 50 million as the entry cost. Annual operational cost, we will assume 20 million as our annual operational cost, and we are expecting it to be increased by 10% on yearly basis. So it will become 22 in the second year, and it will continue to increase. So what is my total revenue? I know the price that I'm going to sell my car, and I have the total sales amount. So I can multiply these and I can find out how much money that we are going to make as total revenue. Then we need to calculate the total production cost. So my per production cost is 10,000, and my total sales will be this amount. So my production cost will be calculated as sales multiplied with the production. Initial cost of marketing. So marketing and setup is 50 million that we have assumed. I'm keeping that and total operational cost, we can keep this as we calculated in the past. And now we can calculate our profit as total revenue minus some of the total cost we are investing to the business. So first year, it will be a negative business case because you are investing 50 million as initial cost. Let's see in the second year it became positive, positive, positive. So while calculating the upcoming year's total profit, you may need to discount it to see how much money that I'm going to make as of today. However, in our case, it was mentioned that discount rate is zero and we will not get into net present value calculations. So for now, we can assume that our total expected profit that we are going to make is 651 million levels in the end of five years. So let's go back to presentation and see that. So now we're at the presentation. Based on above assumptions, which we have built on Exl, company should enter to new market because we assume that our market share will increase from 5% to 13%, which is zero at the moment of start. And the amount of the sales with the price of the car and assumed production costs, we will be getting into positive profit, starting from the second year, and we will maintain this. However, there is always risk, especially if a company can't get the estimated market shares, which we were assuming yearly 2% growth. Or if company have higher production cost, which we assume 10%, but it might be higher as well. Or if a company has higher initial investment cost, which we assume 50 million, but this can be 100 million, or annual operational cost will be increasing higher than we assumed, which we assume 10%, however, this might be higher. So you may need to do another case, which is a pessimistic one to see how much money we can make or lose if the things go wrong. So let's start to do that on our Ex. Now we are back to Excel. So what we are going to calculate now is the pessimistic scenario. However, we are not going to change the total EV market. We will use the same on yearly basis how many EV cars will be sold. However, we will change our market share as company. First year we will assume 2% and we will only increase it by 1% for following years. So our market share will stay at 6% instead of 13%. Let's calculate the total sales, so this will be multiplied with our market share. Car price, we will keep it as 20,000 because this is our strategy, and we will assume that we will be increasing by 10% for the following years. Cost per unit, we assumed 10,000 will be the cost of production, and we increase it by 10%. However, this may increase by 20% because we don't know that market yet. Maybe the cost in the following years will be increasing a lot because they have higher inflation or manufacturers, we work together over there is asking higher cost or expected to ask higher cost in the following years, so we need to multiply it with 20% on yearly basis. So my cost is increasing higher than the previous case. Initial setup cost, we assumed 50 million in our previous one. Now we will assume 100 million. So our initial entry cost will be higher than our bull case, which was the optimistic one, and now we're building a bear case which is a pessimistic one. Annual operational cost. So this will be 20 million in the beginning. However, we will change the expected increase on a yearly basis because we will assume 25% will increase on yearly basis instead of 10%. Now let's calculate the total revenue. So my total sales multiplied with the car price this will be my total revenue on a yearly basis and total production. So we have the cost per production, and we have the total sales. So we'll continue to apply that formula for the upcoming years as well. Initial setup cost will be 100 million and operational costs will start from 20, however, it will increase up to 50 million levels. Now let's calculate the total revenue minus my total cost, including production, setup, and operational cost, it will be negative. Then second year, it becomes positive, third year positive, 40 or positive, 50 or positive. However, if I sum this up, including my initial year, I'm reaching up to negative valuation. And even if we are assuming the discount rate is zero, which you see that I'm not discounting these values and using their real value as of their net present value equal to these amounts, reaching out to 2.6 million negative. So a case can change from 600 million to negative 2 million. Why? Because this all depends on our assumptions. While you are making your assumptions, you need to check some previous similar exercises. We don't know that having 5% market share in the beginning and increasing it by 2% yearly basis is doable or not. Our market share will stay at 2% and only increase by 1%. Is it so pessimistic or not? How much will be my entry cost? This is very important assumption. If you have other cases that you have entered to different markets, you need to use the actual amounts as a guide while you are building a financial case here. So let's go back to PPT and find out these kind of recommendations. So now we're back to presentation. This was our bull case, which was an optimistic case, and we were making a lot of money by the end of fifth year. Then we have built the pessimistic case, starting from 2% share going up to only 6%, having 20% increase in cost of production, having higher initial cost and having increased our operational cost by 25% per year. And this was reaching up to negative 2.6 million by the end of year five. Which one we should take as our case. So what we need to do now? We need to check if we are in that company's shoes. We need to check economy in Thailand. Total car market may not stay stable, may not have a big EV market in following years. What we have assumed, it will be doubled in both of the cases, maybe it will not be doubled. Maybe government will stop giving incentives for the EV ownership past other market entries and market share gains. So market share gains we assumed in one of the cases starting from 5%, increasing 2% per year, on the other one, starting from 2%, increasing 1% per year, as the pessimistic scenario. However, we don't know which one is close to the actuals. If this company entered to another market in the past, we need to check the actual market share gain of the company in those markets. Also, we need to check how much is the operational cost and initial cost to set up this company in a new market. Competition situation in Thailand. We need to check gaining these amount of market shares is doable or not. How is the situation of the competition over there? Is there anything that government push their own companies or local companies to incentivize them or make them gain more shares in their own local market? This needs to be understand. The other one is supply chain risks, operational cost, previous setup cost, as we mentioned, this is a new market. You don't know the manufacturers. If you want to enter properly, you need to understand and evaluate in advance. How much will be your operational cost to maintain the operations over there? Also, demand and price sensivity of customers are important because we assume 20,000 car price per year, and it will increase by 10% yearly basis, but is this realistic? You need to check in that market in Thailand, what is the car price over the past five years? Is it really increasing for same model of the cars? The new model will be increasing by 10% or not. We need to understand this and apply a similar rate not. And you see that if we have lower market share, higher cost or higher entry investment, this can go to negative. So while you are calculating your business case, you need to try to find out as much as realistic data as you can find. So we will have our summary session in the following one, but this is important in terms of understanding how you will build the case. The data and assumptions may differ based on the situation, company and the country that they are planning to get in. You need to understand the overall logic and how you will apply or evaluate this kind of situation. 4. Summary: Everyone. Welcome to our summary session for market entry, financial evaluation and business case study. You saw that how small assumption change can impact the case results. So main recommendation is defining assumptions based on past realities and calculations as much as possible. In our example, we didn't know that if there is any similar market entry case by this electric vehicle company in the past. So we used some assumptions by our side, and these assumptions change results significantly. While you are applying this, it's better to get the data from the company if you're evaluating on behalf of them. From business case development perspective, the step one is find the available market data through research. We didn't do this step because I wanted to show you how you can assume with a thought process starting from the big picture to find out what can be the electric vehicle car sales amount. However, if you check on the Internet, maybe you can find out on yearly basis how many EV cars are sold in Thailand's market. Second one is defining objective of company from market share perspective. In our case, we have done two different market share assumptions, starting from 5% or 2% and increasing by 1% a year or 2% a year. However, this needs to be defined by company, and if there is similar previous cases that the company entered two different markets, this past data can be utilized in our assumptions as well. Third one is get the price and cost structure. We assume that 20,000 will be the price of the car, and the cost will be 10,000. However, we don't know if this price will be available to make enough sales in Thailand market. Is it expensive? Is it cheap, et cetera? So you need to find out what is the current pricing of the EV cars in Thailand market, and what is your cost structure to manufacture that car, to find out, is it a profitable thing to make a decision and build that car or not enter to that market? The fourth one is check past examples of the company from market entry perspective to decide initial and operational costs. We assumed initial cost as 100 million in one of the options and 50 million in the other, and we assumed some increasing operational costs starting from 20 million in the beginning. However, is it realistic? Is it enough to make that operation in the country of Thailand? You need to check your past examples if you enter the different markets. If not, you need to find out if there is any other EV company operating in Thailand from a different country basis than their operational costs and their initial setup costs can give you an understanding. So always checking if there is an example by you or by someone else will help you to make calculated decisions better in your life. The fifth one is evaluating over the time period. Company is planning to see the results for five years in our example. It is better to build for five years, at least, it can go up to ten years, et cetera, but it is better to get the payback or at least start to get payback of your initial investments within five years. Also, you need to review from below perspectives, regardless of the details of the case. What is the competitive landscape in Thailand from EV product perspective? You need to evaluate the key competitors market share, barriers to enter the market to understand the competition. The second one is regulatory environment. This is a new market. You don't know the rules of the game in Thailand. Need to understand the local laws, tax policies, industry specific regulations or incentives to ensure compliance. It is also important if there is any incentive for yourself or any of your competitors while you are entering on that specific vertical of the business. The third one is operational feasibility. Need to assess supply chain reliability, infrastructure, and workforce availability for seamless operations. Because if you're going into a new market, probably you will use the local workforce, and while using them, you need to understand what will be your cost structure. Do you have capable people to manufacture these products over there while you are entering to that market? Lastly, go to market strategy. You need to define an entry mode. Are you going to make a direct investment in our example? Or are you going to make maybe a partnership with an existing player in the market, and only you will provide some of the portion or maybe you will use their distribution web and you will only manufacture your product and enter that market with less investment. So you need to define your pricing and branding strategies as well because the estimated cost might be very much different than the reality when you are entering to that market. Thanks so much. Hopefully, this will help you in terms of the framework of building a market entry business case. And the key message is assumptions are very important. And while you are making your assumptions, please try to check the past available data either from yourself or from your competitors or any available data in the market. See you in the next class. Bye.