Tyre Manufacturer
Assess the impact of tariff reduction on a monopoly tyre manufacturer in Vietnam.
Case Statement
Your client is a tyre manufacturer in Vietnam. He is the only player in the market. Vietnam had 50% tariff on import of tyres but off lately, they have introduced a policy to gradually reduce tariff y-o-y to take advantage of globalisation. Your client has hired you to assess the situation.
Initial Conversation
Candidate
Okay, just to reiterate my client operates a monopoly of tyre manufacturing in Vietnam. I need to assess the changes that will affect my client if the government gradually reduces tariff on imports.
Interviewer
Yes, that’s right.
Candidate
Is there anything specific that the client wants to observe, say top line or bottom line?
Interviewer
No, he wants you to paint the entire picture for him.
Candidate
Okay sure. I would like to know a little bit about my client to understand the situation better. Where exactly does our client lie in the value chain- does it only manufacture or also performs other functions in the value chain? Secondly, you mentioned it is a monopolistic market, can I safely assume that there are no other smaller players either? Lastly, are there currently any foreign players in the market?
Interviewer
It only manufactures and outsources distribution to third party as well operates own outlets. Yes and No to your last two questions.
Candidate
Sure. And what kind of tyres does it produce? Does it operate in the premium segment?
Interviewer
All kinds. Given it’s a monopoly, it does enjoy a price advantage.
Candidate
Understood. Lastly, who are the target customers- B2B, B2C?
Interviewer
Both. It supplies to businesses via distributors as well as sells tyres through own outlets to end consumers.
Candidate
Okay. Now I'd like to dig deeper into the case since I have the required background information. What is the current rate of tariff and how is the government planning to implement the reduction strategy?
Interviewer
Current rate is 50% and the plan is to reduce tariff by 5% each year. Thus, in 10 years, the tariff will reduce to 0%.
Candidate
Right. I'd like to analyse the situation from two perspectives- internal and external. In internal I'd like to further bifurcate into company specific and customer specific. In external I'd like to analyse the competitive environment. I could consider different timelines-say 0-1 years, 1-5 years and lastly, 5-10 years to understand the changes and the likely effect. Does this sound fair?
Interviewer
Do you think we should analyse by dividing into different time frames when the change is happening every year?
Candidate
Yes got it. I will take each year at a time.
Interviewer
Yes, you may proceed now.
Candidate
As I understand this, tariff of 50% is high and given that the rate is likely to reduce each year, the competitor will enter only when it is able to atleast break-even. Once we know when players will enter, we can analyse how the situation would change in Vietnam. To start with, I'd like to do a cost-benefit analyse of the potential entrants with different tariff rates.
Interviewer
Seems fair!
Candidate
Before proceeding, I'd like to know if we have information about the players who may enter? Specifically, is there information on average cost per unit incurred by other players in the global market who might enter Vietnam? Will the entrant also charge the same price?
Interviewer
The average cost per unit is $34 and for us it is $40. The price will be same.
Candidate
Okay. In year 1, tariff is 50%, hence the cost will be 1.5*34 i.e. 51 which is greater than $40. Hence, they may not want to enter the market. Following the same analysis, the cost will be 49.3, 47.6, 45.9 …. In the following years. When the tariff rate will be 20%, the cost will be 40.8, hence player may want to enter with tariff 15% which is in the year 7th year.
Interviewer
That's right. What would you do next?
Candidate
Next steps would be to analyse how the situation would change within the country- i.e. the internal scenario. Following this, I'd like to propose a few recommendations to our client basis the situation
Interviewer
That’s fine. We can end the case here.
Background Information
Company
Makes tyres for all kind of vehicles. Is a monopoly in Vietnam.
Competitor
No major change in landscape. Company specific issue
Consumer
Individuals and automobile companies
Product
Only one product – tyres. There are different kinds suited for different kind of vehicles.
Context Materials
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Case Recommendations
- 1
For an immediate action, the client should evaluate when and how the competitors would enter the landscape given the change in tariff scenario.
- 2
The client should focus on creating brand loyalty among the existing market to maintain their market share under changed competitive landscape.
- 3
The client can also lobby with the government for relaxation in the tariff regime to ensure growth of in-house companies.
Case Tips
This was a very tricky case. Identifying the exact time when a competitor would enter on the basis of cost-benefit analysis is hard to strike. Always try to look at the case from different dimensions.