Scenario Us Auto

SCENARIO: USAUTO

COMPANY OVERVIEW

USAuto

A former frontrunner in car manufacturing, USAuto now struggles to maintain a foothold in the industry it helped pioneer. Its old line plant assets are outdated, and labor contracts negotiated in the company's heyday have ensured that inflated labor costs will put a squeeze on profitability for years to come. As if that weren't enough, USAutoÐ'--like many American businessesÐ'--has lost significant market share to foreign auto producers who have built domestic plants to keep pace with U.S. demand. To date, foreign carmakers have not expanded into Central or South America, but given the ease with which they entered the U.S. marketplace, they assume local manufacturersÐ'--such as AutoMexÐ'--would provide little resistance.

In the past 10 years, USAuto has pinned all its hopes and committed most of its available research and development funds to delivery of the hybrid gas-electric engine. Other than that, the company has no strategic advantage, and relies heavily on domestic loyalty to stay afloat.

AutoMex

AutoMex is a major player in the Central and South American auto marketplace. Unlike the U.S. auto industry, which has been led by large manufacturers, AutoMex began as marketer of new and used U.S. autos in the Mexican marketplace.

This experience of marketing products that are manufactured by other firms has both underscored the value of the marketing function, and at the same time created a strong desire at AutoMex to have a "product of its own" to market rather than just sell the products of others. AutoMex satisfied that desire to some extent with manufacturing, but quickly realized that its corporate comparative advantageÐ'--as viewed by other firmsÐ'--was its ability to marshal low-wage, limited-skills workers in assembly locations.

AutoMex has come to believe that low-wage is not really a comparative advantage, because any other competitor can beat it by simply investing in productivity-enhancing equipment. This belief on the part of AutoMex has driven it to seek relationships that create skills-transfer to its workforce. AutoMex concludes that if it can become a leader in manufacturing in a high-technology environment, it will transform itself into a world-class competitor in auto manufacturing and marketing.

THE PLAYERS

Linda Henderson: USAuto's Executive Vice President (EVP), Linda is not a USAuto "insider." She joined the company as VP of Planning four years earlier, and was promoted to EVP just two years ago. Even without her strong analytical background, Linda would have easily deduced that USAuto's high labor cost could sink the company if not drastically reduced. Her plan: Share the hybrid engine technology with AutoMex in exchange for a partnership deal. The hybrid engine would improve everybody's product, and the partnership would decrease overall labor costs and provide stiff competition for foreign dealers entering Central and South America.

Mary Sackrider: USAuto's General Counsel (GC), Mary has filled varied legal and corporate roles at USAuto for the past 10 years. Before that, Mary was an assistant U.S. Attorney working to enforce anti-racketeering statutes; during that time, she developed a knack for negotiating and plea bargaining. While she is not an intellectual property specialist, she is familiar with key elements of patent law.

Luis Alvarado: AutoMex's Chief Executive Officer (CEO), Luis has worked in auto manufacturing in both the U.S. and Mexico for the past 20 years. He signed on as Chief Operating Officer at AutoMex five years ago, but has only held the CEO position for three months. Luis believes AutoMex needs to advance technologically in order to grow, and is committed to that vision.

Juarez Delgado (JD): A sharp attorney with well-honed negotiating skills, JD left a senior partnership at a major law firm to become the AutoMex in-house counsel.

MAY 18, 2004

To: USAuto Officers

From: Linda Henderson, EVP

Re: Our decision to enter into discussions with AutoMex

If the buzzing around the water cooler is any indication, you've no doubt all heard that Mary and I are about to begin preliminary partnership discussions with AutoMex. As the talks progress, we'll be asking many of you for help and input, so I want you to have an understanding of our position.

The cornerstone of our bargaining power is our hybrid engine; we hope that in sharing it, we can convince AutoMex that together, we can build a new generation car for both the North American domestic market and the new Central and South American markets. The benefit to us, of course, is that expanding to the south and employing lower cost Mexican labor will help alleviate some our crippling high labor costs and enable us to remain competitive.

I will admit to being a little apprehensive about these negotiations. The hybrid has been USAuto's baby for a long time, and Mary and I have discussed how careful we need to be about protecting our invention and its patents. At the same time, the engine is all we have to offer, and without this partnership and accompanying expansion, I'm afraid USAuto won't survive the decade.

I'm enclosing three documents to help you get up to speed. First, I'm providing tabular data on the engine cost, which makes it clear that spreading the engine's R&D cost over both a domestic and Latin American market will result in lower overhead. The second document is an analysis of the LAFTA market, which illustrates the potential for sales of the hybrid engine car in Latin America. Finally, I've enclosed a legal summary that Mary has prepared to explain Intellectual Property and legal aspects of our patent and invention concerns.

Let me know if you have any questions. Thanks, guys!

Linda

Attachment A: Table showing (1) per-unit engine cost with/without additional units in Central/South America, and (2) vehicle labor cost with/without lower labor cost in Mexico

If sold in U.S. Domestic Market Only (Note 1) If sold in U.S. and Central/South American Markets (Note 2)

Per-unit engine cost (incremental) (Note 3) $2,512 $1,855

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