Download Johnson Controls

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