This article aims to explain the key outlines of every automotive business case: What information it should contain, how this information is obtained, how it should be communicated and why building an effective business case will take a fair amount of time to be completed.
Furthermore we provide you with a business case template set up bei Magna experts.
TABLE OF CONTENTS:
> What is a business case
> What is required to develop a business case?
> The contents of an automotive business case
> Challenges in regards to a business case
> What comes after developing an effective business case?
In the previous article, we touched upon the most essential cornerstones of every new entrant’s portfolio before taking up the search for investors. And while most of these cornerstones can be generally summarized quite well in a few paragraphs, one of them requires further investigation. Out of all documents and references of a new entrant, the business case is arguably the one that investors will be most interested in.
WHAT IS A BUSINESS CASE?
In essence, a business case is a very comprehensive and detailed answer to one key question of every project: What value does it generate for the respective business partners? By building an effective business case, a new entrant can determines under which conditions their automotive vision can be realized.
In automotive projects, the forecasted economic success is the central driving factor behind every investment. Thus, the investors’ involvement within an automotive project is also primarily guided by the notion on whether the new entrant’s vehicles are profitable.
Now, the important question is: What exactly makes an automotive project profitable? Although new entrants have yet to establish an automotive brand presence, they can increase the credibility of their project and the value of their vision at an early stage:
- By making themselves known to investors beforehand – either by reaching out to them directly or by garnering initial public recognition via a show event, for example
- By working with notable names in the automotive sector, for example, with investors, suppliers, or renowned contract manufacturers such as Magna
- And of course: by showcasing not only the profitability of their vision, but also their own capabilities as a vehicle manufacturer. The business case is one of the key resources to achieve in this regard.
WHAT IS REQUIRED TO DEVELOP AN EFFECTIVE BUSINESS CASE?
As part of the larger business plan of the project, the business case should be outlined and specified as early as possible. As stated before, the business case describes a specific scenario depicting how the new entrant plans to enter the automotive market with a certain set of goals under specific preconditions.
Thus, the first step of defining a business case lies in obtaining information about the target market via a market analysis, including the market size, customer segments, competitors, market potential and current trends. Additionally, the new entrant should already have determined their own status quo, their goals and their brand’s/vehicle’s USP. Lastly, a feasibility study showing whether the project’s targets are compatible with its technical framework is also necessary before developing an effective business case.
THE CONTENTS OF AN AUTOMOTIVE BUSINESS CASE
Developing an effective business case itself can be divided into two segments, both of which are conducted in parallel:
- resource and financial requirements, and
- expected profit.
Resource and financial requirements for a business case
- Choosing the location in which the manufacturing processes will be executed. Relevant factors for this decision include local wage levels, statutory regulations, national funding initiatives and taxes and existing supply base.
- The degree of in-house production. A lower in-house production decreases the initial cost burden on the new entrant; it does however increase the dependency on an external supply network.
- Once the outlines of the in-house manufacturing chain are defined, the next step is to compile the vehicle bill of materials (BOM). The BOM comprises the entirety of material-related expenses of the project. This means that not only all material, assembly, labor and buy-in costs, but also all one-time expenses including tools, supplier development, planning and start-up and investment are added to the BOM.
- Lastly, a business case includes all costs related to the establishment of a reliable after-sales network. Assuring that the end customer is provided with adequate support if any problems with the vehicle come up is as important as acquiring the customer themselves.
Business Case and Expected Profit
After finishing the business case, the new entrant will have a clear idea on whether their project, under the conditions chosen, will produce sufficiently satisfying revenues.
CHALLENGES IN REGARDS TO A BUSINESS CASE
- Production scope
One of the most common challenges is defining the exact production scope the new entrant should target. Upon their first ventures into the automotive market, new entrants naturally lack any standards of comparison in regards to their market performance. As their brand is yet to be established, they cannot estimate with certainty how large their buyership will be.
- Small production volumes
Other factors in terms of production scope also come into play – a particularly small production volume (anything located in the 5-to-low-6-digit range) may also deter suppliers or manufacturing partners from a cooperation with the new entrant. This is due to the fact that they would have to establish a completely new production chain for a comparatively low volume and therefore rather small expected revenue.
- Low revenues
Additionally, the business case may simply produce unsatisfying revenues that will require the project to be adapted.
Increasing the price of the vehicle is one option, however, as mentioned before, this likely impacts a notable portion of the vehicle’s marketing and branding strategy.
The new entrant may also change their manufacturing location to a country with more beneficial funding programs or tax conditions or lower labor costs, provided that the change in location does not negatively impact product quality, local workforce knowhow, transporting or supplier costs.
WHAT COMES AFTER BUILDING AN EFFECTIVE BUSINESS CASE?
It is important that new entrants insist on executing their business case exactly as envisioned. They should stay open for suggestions of experienced partners and be willing to alter their business case if the situation demands so.
Investors will always challenge the validity of a business case’s figures. Therefore, investing the proper amount of time, work and responsibility into developing a business case will provide new entrants a realistic view of the project and bring them in a good starting position for getting investors and partners on board.