EY Future Leaders Program Case study April 2016

Start Young - Take the Lead

Introduction

You are sitting at the conference table in the office on the 73rd floor and waiting for

Professor Farnsworth, CEO of "Storm Automotive" company, to join the meeting, which has

now been delayed for five minutes, . Professor comes in, apologizes for being late and

immediately begins to speak. By the tone of his voice, you can be sure that you should

carefully listen to what he has to say:

"In the 19th century, Henry Ford designed and produced the first car that many average

Americans were able to afford. My great-grandfather, Philip Fry, knew Mr. Ford. He took

my grandfather to the factory on several occasions, and years later, my great-grandfather

used to tell me bedtime stories about the Mr. Ford’s 'magical' factory. As a child, I was very

shy, I did not have too many friends. I used to sit in my room for hours and draw cars. Wide

variety of design approaches, most of which would never ended up even as a toy, and let

alone as real car. I loved the cars in those years and I love them more every day. I have

always thought that the car we drive says a lot about us, but I have also known that the era of

Porsche cars which use fifteen liters of fuel per hundred kilometres will not last forever. As

my father used to say, "Son, we may not depend on oil, but our cars do." And that's what

inspired me to change the world in the same way like Henry did, to make the modern car

industry revolution. Today you are here to help me do that. I hope you're ready. "

About the Company

"Storm Automotive" (STORM) was established on 1 January.2000 in the United States, by

Professor Farnsworth, who wanted to prove that electric cars could be better than ordinary

cars with internal combustion engines in every way. With extremely strong working power,

incredible strength and zero harmful gas emissions, STORM's cars were without compromise.

Each new generation was more affordable for average people, helping the company to achieve

its goal: to accelerate the global transition to sustainable transportation. STORM designs,

develops and manufactures electric vehicles and advanced propulsion components for electric

vehicles. The company also has its own departments of sales and service centers, as well as

the station for fast charging („Charge-O-Matic"). Besides its own vehicles, STORM also

designs, develops, manufactures and sells advanced propulsion components to other

manufacturers of electric cars. In the end, STORM has also developed stationary products

for energy storage for usage in homes, commercial and technological institutions.

The state of the automotive industry

Overview of the automotive industry by country

After the economic crisis that hit almost all industries in the world, it seems that the car

industry is slowly getting back on its feet. Having in mind the worldwide production, car

manufacturers have finally managed to restore growth they had in the period before 2009 and

which amounts to 4% globally. Also, experts predict that production will exceed the number

of 100 million vehicles by 2017. Taking into account the countries that are the biggest players

in the global auto -map, we see that the industry growth in China in 2014 was 10% and

estimated growth for 2015 is approximately 8%. However, profit margins are too high, so we

can expect the decline in selling prices.

When we talk about the United States, this country managed to restore the industry to pre-

crisis period, but with a 20% of staff reduction. The growth of industry value in 2014 was 4%,

while in 2015 expected growth is 3%, with 17 million sold vehicles.

The third major player is Japan, where the dominant role is played by domestic manufacturers

with 94% market share.

When it comes to Europe, growth in 2014 was 5%, which is also expected in 2015. Since this

is highly competitive market, manufacturers often resort to cannibalization of its products,

with very low profit margins.

In particular, in France expected growth is 3% in 2015, while in Italy expected sales is 1.3

million vehicles, which represents only half of its value with respect to the pre-crisis period.

Also there is high unused capacity, so the fixed costs of production are very high. As regards

the German market, growth of operating costs continues, and the companies focus on

investments in research and development sector, in order to increase efficiency. Growth in

2014 was 3% and the same amount is expected in 2015. The market in Spain expects a large

growth of 10% in 2015. Also, the same growth is expected in the United Kingdom, with 2.4

million sold vehicles.

When we talk about new players in the market, production in China experienced a growth of

149% in the period 2007 - 2013, and in India 72% in the same period. World production in

the period 2000 - 2015 can be seen in the Appendix (1).

When it comes to the sale of vehicles, 75% of all world sales of vehicles is concentrated in 4

regions, as it can be seen in the graph:

The automotive industry from the perspective of the world's leading

managers

In a study conducted by EY, which included 1,344 leading CEOs in car industry from 68

countries around the world, opinions are mostly agreed - in the coming years, stable, low

growth of industry value is expected, but with great caution. This caution is especially

reflected in the variable costs, as well as the analysis of the current situation in order to reach

more efficient and effective results. Also, another segment in which managers hope to have a

positive impact is the cost of the supply chain segment, where the selection of appropriate

suppliers (in terms of price, quality, and delivery date and payment method) can certainly

affect the reduction of costs. Furthermore, managers believe that logistics decisions are of

great importance - the choice of forwarder and logistics companies, warehouses and storage

layouts and supplies management. Even 44% of managers believe that the world economy

will be better in the coming year, while 79% think that the driver of this development will be

technological innovation.

As the biggest threats that may affect the car industry managers see the cost of energy and raw

materials prices.

Global sales of electric cars

State of the industry of electric vehicles

The emergence of electric vehicles

One third of the gases that affect global warming comes from the vehicles. Numerous studies

show that electric vehicles reduce the pollution to a great extent. In fact, the only pollution

caused by these vehicles comes from the factories which produce electricity to power the

vehicle, which is in any case much less than the pollution made by ordinary vehicles. Most of

the studies show that the electric cars reduce pollution by 25-30%, but when you take into

account that the average emissions of CO2 gas of electric vehicles is 70g/km, it can be

concluded that this is certainly the biggest benefit of driving the electric vehicle.

In addition, since oil is a limited resource on our planet, an alternative source of transportation

fuel is not only a smart investment, but is also inevitable. Also, the transition to electric cars

will increase the need for the existing workplaces and create the need for some new ones. In

addition, the industry of electric vehicles creates additional economic opportunities by

improving quality of life and by reducing energy consumption and dependence on oil

resources. Firstly, owners of electric vehicles will save much money, since the maintenance of

these vehicles is much cheaper in comparison to the conventional vehicles. Secondly, most

countries are not oil producers, so, by spending money on oil, an individual does not

contribute to the growth of local economy. Thirdly, innovative industry such as this one

opens range of jobs for people with different professions.

Table: The percentage of managers who are concerned about the potential threats that affect the

automotive industry

Activity Highly

qualified

Medium

qualified

Low

qualified Job profile

Scientific

research of

batteries X

Chemist,

engineer for

innovative

materials

The design and

development of

automotive

technology

X X

Software

engineers,

industrial

engineers

Production X X

Mechanical

engineers,

production

managers,

technicians

Vehicle

maintenance X X

Technicians,

Service men

Infrastructure

development X X

Urban

planers,

Electricians

Sales and

Customer

Support

X X

Salesmen,

Technical

Support

The emergence of electric batteries

According to rough estimations electric battery today, takes one-third of the entire electric

vehicle costs. In engineering, one must take into account the balance between high endurance

(capacity) and battery power. The most commonly used battery in electric vehicles is a

Lithium ion, which is very expensive in procurement. An average Lithium ion battery which

has the capacity for a drive from 95 to 130 KM costs between 10,000 and 15,000 thousand

dollars. However, with development of technology and increased competition among battery

manufacturers, there is no doubt that the price will go down during the time. Number of

scientists dealing with this problem has tripled in the last decade. Also, another factor

influencing the decrease of batteries’ prices is the increased demand for them (due to

increased sales of electric vehicles around the world), so manufacturers are now able to

achieve economies of scope.

Table: Job profiles in the electric vehicles industry

The emergence of electric stations

Due to the increased use of electric vehicles, several types of electric stations have been

developed, where users of these vehicles can charge their electric capacity. Depending on the

type, distance that can be traveled, voltage, and cost of purchase and installation, these

stations can be private or public.

Type

Distance that can

be traveled for the

same consumption

of time when

charging

Voltage Purchase and

installation costs

1 level 3-8km/hour charging 120 V 360 dollars and more

2 level 16-32km/hour

charging 240 V 490 dollars and more

Quick chargers 95-130km/20 minutes

charging 480 V

19,000 dollars and

more

Assistance of professional electrician is necessary for installing the private stations, while

public installations of high voltage stations require an entire urban plan, different types of

insurance, as well as compliance with certain rules and regulations. In addition, it is still not

determined whether high-voltage stations, which have the potential to quickly charge the

capacity, in any way can have bad affect on the battery itself.

The drivers of conventional cars are used to crossing hundreds of kilometers without having

to fill in the reservoir. However, some electric vehicles are not able to cross more than 100

kilometers without additional recharge. While this is the biggest disadvantage of electric

vehicles in general (together with high price), all competitors in the global market strive to

overcome this problem as quickly and cost-effectively as possible with big investments in

technology. . However, this is not a difficulty in everyday use, when drivers transit the short

distances on a daily basis. .. The table below shows how many miles a day on average cross

the people who live in the city center, in the suburbs and in rural parts of the country.

Table: The different types of chargers for electric vehicles

Overview of electric vehicles industry in the US

The United States are a very tempting market for electric vehicles industry. With a large

potential customers base, large investments in research and development, support from the

government and Congress and changes in shopping habits, it represents (with Japan, China

and South Korea) pioneer of this industry. The table summarizes the key competitive

advantages and disadvantages of this market.

Advantages Disadvantages

The increase in domestic demand Higher labour costs

Investments that affect the increase in the

value of supply chains Less government funding in relation to China

The lead in investments in Research and

Development (laboratories, patents, research

works)

Less experience in manufacturing batteries in

relation to Japan and South Korea

High quality production Copy capability of patents by manufacturers

from China

Highly qualified manpower High cost of raw materials

Table: Average daily journey in kilometers

Table: Advantages and disadvantages of the industry of electric vehicles in the US

Current situation

Under the firm leadership of Professor Farnsworth, STORM sets standards in the production

of electric cars and devices for electrical energy storage (batteries), and dictates the pace of

innovation in these areas by using a revolutionary approach for designing and producing of

batteries. Also, the engine concept which STORM uses in its vehicles is directly based on the

concept from 1882. The company's strategy has always been to emulate the typical life cycle

of technological products and to enter the car market with expensive, premium product

designed for influential buyers. With the company development and customer’s maturity to

accept the revolution, STORM began to turn to more competitive markets and place more

accessible products with lower prices. STORM was unable to penetrate the market with an

electric car that would be available to everyone (mainstream) because it is financially

unprofitable. The company’s guiding idea has always been that profit of one series of cars is

sufficient to design and manufacture the next one, which would be cheaper, as technology

progresses and matures, together with customers’ willingness to opt for electric cars because

of many benefits they bring. A good example of STORM’s current situation is the BCG

matrix, where the company currently holds a position of 'Question mark', because the earnings

and profits are positive, while the cash flow is negative, and the company's strategy is to

aggressively invest in its products.

QUESTION MARK

A small market share and huge market growth

Undefined situation regarding

opportunities for growth and

development, it is necessary to

decide whether they should

invest in the product or not

DOG

Small market share and a small market growth

The product is poorly positioned

in the market and very difficult to

make a profit

MILKING COW

A large share of the market and a small market growth

The product is extremely well

positioned in the market with

limited opportunities for

innovation that has reached

STAR

A large market share and high growth markets

Very good position the product

with many opportunities for

growth and development

Products

Cars

STORM currently offers two models - Firefly and Serenity in several versions, which differ

significantly in price and performances, as you can see in the following table:

Firefly

70 85 85+ 85 Supra

70kWh battery with

drive to all four

wheels

85kWh kWh battery

with back-wheel

drive

85kWh battery with

drive to all four

wheels

85kWh battery with

drive to all four

wheels

Radius of

movement: 390km

Radius of

movement: 430km

Radius of

movement:435km

Radius of

movement: 410km

Acceleration to

100kmh:

5.2 seconds

Acceleration to

100kmh:

5.4 seconds

Acceleration to

100kmh:

4.4 seconds

Acceleration to

100kmh:

3.1 seconds

Horsepower:

329

Horsepower:

362

Horsepower:

422

Horsepower:

691

Maximum speed:

225 kmh

Maximum speed:

225 kmh

Maximum speed:

250 kmh

Maximum speed:

250 kmh

Price: 80.000$ Price: 90.000$ Price: 105.000$ Price: 125.000$

Serenity

It is conceived as a combination of space and functionality provided by a terrain vehicle with

space for seven adults and uncompromising performance of STORM models. In essence, it is

the upgrade of crossover category, and it is made directly on the chassis of the Firefly model,

and is a car that will create a new category. It will be commercially available (read: for a

reservation) in early 2016.

Charge-O-Matic

Fast charging stations are an important contribution to the values STORM provides its users

with, considering that charging STORM's electric cars, as they say, „will always be free for

our loyal customers“as one of the five most important reasons for buying STORM's electric

vehicles, customers specified the existence of such stations for fast charging, which can

recharge the battery car for approximately twenty minutes and allow great autonomy on long

journeys. Detailed map of Charge-O-Matic network stations in the US and Europe can be

found in the appendix (3) and (4).

Batteries

STORM managed to carry out a revolution in the world of electric cars by developing a

completely new generation of batteries, in a cooperation with one world giant and finally

broke the barrier which prevented electric cars from competing with the conventional ones.

Future plans include systems that could keep the solar energy and replace conventional

systems for supplying homes and office buildings with electricity, which would be based on

the technology STORM is currently using in their electric cars. Of course, such systems

already exist, but they can not power the entire facility in the way STORM is planning for its

system, which would also be connected to the Internet so that the users could monitor all the

important system parameters in any moment. You can see production costs in relation to

STORM’s battery performance in comparison to competitors in the Appendix (5).

Competition

The market of electric cars has been present on a global level for a long time, and while none

of the competitors is 'competing' in the same category as STORM, considering this market is

small and unsaturated, conventional rules of competition are basically non-existent, so

STORM must seriously monitor the development of competition and the potential dangers

that come with it. Of course, STORM's products are superior, with several times bigger

autonomy and performances which rival conventional sports cars, but also several times more

expensive than competing products. In addition to the above, STORM has to find a way to

make its products competitive enough to conquer the markets of electric cars and to begin to

win the market of conventional cars with internal combustion engines.

Obstacles that STORM encounters in operations

Demand: Perhaps the most important factor STORM must overcome is the willingness of

customers to accept electric vehicles. In the first eight months of 2014, electric vehicles

accounted for only 0.7% of the 11.2 million sales of light passenger vehicles in the US. Even

competitors who offer cheaper vehicles, realize that their goals in terms of the number of sold

electric cars will be achieved with a delay of at least four to five years.

Marketing: So far demand for the Firefly model has been exceeding available supply. Taking

into account the company's long-term plan to increasingly turn to commercially available

vehicles, it is obvious that STORM will have to develop a serious marketing plan which will

make the average car user to opt for STORM's electric model instead of conventional one

available onthe market and which will target customers who choose cost-effective models that

are drastically different from STORM's current users, who are ready to pay up to 125,000 $

for a high-performance electric car.

* Note: Except STORM, manufacturers of electric cars generally rely on mass production, but

due to market maturity, they are not able to sell all the cars they produce. Unlike them,

STORM has so far produced limited editions of its electric vehicles which can relatively easy

be entirely sold at the global level, but because of that fact, they have a very small market

share.

Production: As STORM is increasingly turning to the market of economical cars with lower

prices, increase of the number of manufactured cars will represent an enormous challenge.

The company has to come from the limited production (up to 20,000 units during the year), to

the mass production, which is several times more extensive than the current STORM’s

production capacities (e.g. Toyota Prius was sold in over 60,000 units in the United States

during the first four months of 2014).

Innovation: STORM has created a strong market position in terms of innovation, but they

face a major challenge in keeping that position, as competitors increasingly spread out,

especially if we take into account the fact that at the end of the last year STORM made

available all of its patents for free use, in order to speed up the development of electric vehicle

industry. The question is whether STORM is able to become a company that is not only a

leader in innovation, but also able to compete with the companies which have been present at

the conventional cars market for almost a hundred years.

Sales and service: With the increasing number of models that STORM manufacturers and

sells year after year, in the near future it will have to develop a strong distribution and service

network that will be able to keep up with the development of markets and companies.

Assignments

1. Determine the strategic directions of the company - analyze and select the countries which

have the greatest potential for sales of electric STORM vehicles

2. Create a marketing plan for the selected countries which will include:

- Defining the target group

- Definition of sales channels

- Define how to promote

3. Based on the previous two tasks and the given data (including the data available elsewhere)

make estimation of sales income of STORM vehicles in 2016.

Appendix

Appendix (1) Global production in millions of vehicles

Appendix (2) Global trends

Table: Global production in million of vehicles

Table: Global trends that will have the greatest impact on the automotive industry according to the

leading managers

Appendix (3): Charge-O-Matic stations for quick charging in the US

Appendix (4): Planned Charge-O-Matic fast charging stations across

Europe by 2016.

Appendix (5): Costs in relation to STORM’s battery performance in

comparison to competitors

competitors

po kWh

(Projections)

Prices of lithium-ion batteries

STORM

Appendix (6): Balance for 2013 and 2014.

Balance Sheet (000 $)

31.12.2014. 31.12.2013.

Assets

Cash and cash equivalents 2.382.141,25 1.057.361,25

Deposits and securities 22.433,75 3.765,00

Trade receivables 283.255,00 61.386,25

Inventory 1.192.397,50 425.443,75

Accrued income and prepaid expenses 118.397,50 34.443,75

Operating leasing of vehicles, net 958.430,00 478.031,25

Property, plant and equipment, net 2.286.583,75 923.117,50

Limited cash 14.217,50 8.043,75

Other assets 54.011,25 29.546,25

IN TOTAL 7.311.563,75 3.021.162,50

Liabilities

Trade payables 972.432,50 379.620,00

Accrued liabilities 336.105,00 135.315,00

Deferred income 604.902,50 341.327,50

Capital lease liabilities 27.248,75 25.721,25

Clients deposits 321.983,75 203.941,25

Convertible securities 3.083.007,50 732.876,25

Bank guarantee 609.848,75 295.373,75

Other long-term liabilities 216.555,00 72.746,25

Additional paid-in capital 2.931.582,50 2.258.271.75

Accumulated loss 1.792.102.50 1.424.030,00

IN TOTAL 7.311.563,75 3.021.162,50