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International Business Environment May 3, 2010 Evelyn Furia, Kristen Gunthardt, Ben Kelly, Erica Pilarski, and Amy Schatz Johnson Controls • Milwaukee-based auto parts and commercial building parts manufacturing company Position • Cutting edge lithium battery innovator • Leading producer of electric car batteries FDI Proposal • Secure affordable lithium supply as Johnson Control’s dependence on this raw material is expected to increase • Make a long-term investment to improve vertical integration of operations • $125 MM investment in China’s Tibet Mineral Company for a 50% stake Research Investments • Stimulus grant for lithium research facility in U.S. • Increased presence in China Overview The JV Lithium Market Political Political Issues Issues Costs Costs/ & Currency Risk && Risks Reward Reward 2 Johnson Controls Financial Position • 2009 recession led to net loss of $338 MM • Reduced investment expenditures resulted in higher cash position. • Investment expenditures typically exceed $1B Johnson Controls ($MM) 2009 Assets $ 24,088 Liabilities $ 14,749 Equity $ 9,339 Sales Costs of Goods Gross Profit Other Costs Net Income $ 28,497 $ 24,948 $ 3,549 $ (3,847) $ (338) Investment Cash Flow $ (828) Current Ratio Quick Ratio Cash Ratio Debt Ratio Debt-to-Equity Ratio Interest Coverage 1.13 0.95 0.09 0.16 0.42 (1.33) Overview Tibet Mineral Development Corp • Parent holding company of target lithium subsidiary, Shenzhen ZBY Lithium Trading Company • Holds exclusive mining rights to brine lithium extraction from Zhabuye Salt Lake in Tibet • $954 MM USD market cap Tibet Mineral Development Corp. Shares 275.7 Price/Share (Y) ¥ Market Cap (Y) Exchange Rate (Y/USD) ¥ 6,512.03 ¥ 6.82549 Market Cap (USD) $ 954.08 50% Stake (worst case) $ 477.04 23.62 Lithium Subsidiary Investment Estimate o Based on capital costs of other companies’ lithium projects o Capital costs range from $90MM up to $500MM o Vertical integration of operations into lithium ion manufacturing o Hedging risks of increased demand by securing raw material supply through joint venture. Investment could cost between $125MM and $477MM USD The JV Lithium Market Political Political Issues Issues Costs Costs/ & Currency Risk && Risks Reward Reward 3 Threat of Substitutes (Medium) Supplier Power (Medium) Countries offering the mineral rights Difficult to obtain rights open Abundance of lithium reserves Threat of Entry (High) I Industry Rivalry (Low, but high potential to increase) Three main suppliers and many smaller suppliers Different cost structures in the industry Simple technology Capital requirements are moderate No product differentiation Government legal barriers Economies of scope with other lithium biproducts Overview Other battery types as standards evolve Other power sources Recycled batteries The JV Buyer Power (Low) No standardized market for lithium trading Less visibility in the market and lack of information Many uses, increasing demand Lithium Market Political Political Issues Issues Costs Costs/ & Currency Risk && Risks Reward Reward 4 Timing • First mover advantage to secure dependable lithium supply • Government incentives for green technologies Lithium Reserves in China • 3rd largest supply of brine reserves in the world • Higher processing costs lead to reliance on lithium imports Foreign Direct Investment in China • Johnson Controls has China manufacturing facilities and experience operating in country • FDI would be in form of a Cooperative Joint Venture, which provides limited liability and profits/risks can be established under contract. Risks to Investing in Tibet • Political & PR risks • Geographic challenges Overview The JV Lithium Market Political Issues Costs Costs/ & Currency Risk && Risks Reward Reward 5 Supply and Demand •Demand is predicted to rise • Hybrid electric vehicles • Alloys, pharmaceutical, etc. •Supply is also predicted to rise • Excess capacity • Higher cost capacity coming back online •Relatively stable prices Currency Risk Overview The JV Weighted Aggregate Balance of Payments With Forecast Rincon Production Billions USD •Less risk in changing value of the Yuan – pegged to the dollar •Currency value of major producing country currencies can effect lithium price •Balance of payments weighted by market share • Argentina – above 0 since 2001 • Chile – stable around 0 since 2001 • Australia – deficit continues • Downward pressure on prices due to currency valuations Lithium accounts for only ~3% of total battery costs Lithium Market 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 -16.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Aggregate (Rincon) Political Political Issues Issues Costs & Currency Aggregate (Original) Risk && Risks Reward Reward 6 Invest Risk or Reward Secure supply of raw material X Create low cost incentives for suppliers X Unpredictable future demand for Hybrid and Electric Vehicles X Don’t Invest X Limited supply of lithium isn’t a large risk as the lithium-ion battery market expands X Emerging industry standards and uncertainty that lithium will be the battery input of choice X Proportional cost of raw lithium within overall battery manufacturing process is low (3%) X Limited lithium price fluctuation and production of other minerals from brines may pose risk X Tibet / Chinese political regulations, corruption and instability X Lack of infrastructure in Tibet X At this time, Johnson Controls should not invest in Tibet Mineral Company Overview The JV Lithium Lithium Market Market Political Political Issues Issues Costs Costs/ & Currency Risk & Reward 7