i was tasked to create two sets of presentation, one in english, the other in a native language. both presentations were stored in a thumb drive, and ultimately, only the mandarin one was used. it was ultimately a disaster, to put it nicely. i did give some thought to doing a dry run in front of the mirror, but fatigue got the better of me and i slacked off. might have scored some brownie points with a mediocre delivery, seeing that i was like a slack-jawed daffodil, but comfort came when they said another language is a plus, not a requirement.
interview format involved 2 consultants, each taking up an hour. the first was the principal. after a short introduction in english following the disastrous mandarin powerpoint presentation, we delved into the case interviews.
he spoke of a company from germany facing a rather peculiar situation. the firm sees growth in revenue. the firm does not see increases in operating costs. however, the company does also see a declining gross margin over time. i kind of panicked because prima facie, this is an extremely unlikely scenario, but i calmed my nerves and asked some questions to find a footing.
has the company seen increasing costs of production for the product?
the answer was that costs of production related directly to the product such as direct labour cost, materials cost, etc, have stayed the same.
has the products been selling for a high price level?
no prices have been kept at constant.
these two questions and answers did nothing for me. they only reinforced the difficult situation i was tasked to identify the cause for. so i tried another approach of questioning.
are we talking about a single product? or a variety?
the company sells a variety of products.
great, we are going somewhere, i thought. i labelled up to 3 products a,b and c as proxies. i then inquired about the sale pattern of each product. b was unchanged. a was identified as a premium product and quantity sold has stayed the same. c was identified as a cheap product and 1/3 the cost of a, has seen increasing quantity sold. based on this, i felt that i was ready to come to a conclusion and asked for a moment.
i resolved that increasing demand for product c has resulted in the company looking to meet this demand by increasing factors of production. however, somehow, the company unknowingly incurred diminishing returns by increasing their production, a situation where they did not take into account a substantial increase in marginal cost of production for an additional unit of product. consequently, this translates as an increase in cost of production for product c and hence, the increasing revenue was countered by the increasing cost as well, perhaps more, to result in a declining gross margin over time.
he then said that this was a logical approach to the problem, but in reality, such an issue arise from improper product mix, and basically is a result of portfolio misalignment according to market needs and cost of production.
he moved on to the next problem: what factors do we consider for a company who wants to set up a plant in asia for a product (pneumatic springs) that it has been successfully exporting to asia and has 80% market share of?
i arranged the factors into two large groups, internal and external factors.
external factors: i began with the obvious, labour cost and land cost. land cost is definitely a driver for the plant, china is huge and cheap. i made a strong caveat for labour cost, the product has been assumed to be manufactured and mass produced. i cautioned that the possibility of automative production means headcounts for labour force is low. despite lower wage levels in china, savings from wage levels arbitrage will be insignificant in impact relatively.
then i went on to resource origination. i said that the plant situating in china would mean resource origination would be cheaper, considering the proximity of raw materials such as iron ore for stainless steel springs. herein, i made an error of assuming metal ores can be found in china. he corrected me by saying that china is only rich in coal, and metal ores originate from southern america. i proceeded to salvage the situation by building upon that. "knowing that the ores originate from south america, we should investigate the cost of transporting ores from s.a to china vis a vis transporting ore to a plant in germany then transporting the finished product to china." this was met with grave agreement.
i also mentioned existing companies producing similar products and how developed they are in china. should the companies be mature in their field, a sense of market fragmentation may be present and it would be ideal for the company to come in an cause an acquisition of most of the plants already existing. this brownfield approach is lighter on the balance sheet and defnitely cheaper to execute.
i also mentioned the imitability of the company's technology, juxtaposed with the chinese art of copying. i mentioned that tech should be protected with strong patents. to this he mentioned that the imitability is not an issue, but that the product itself is more reliable than china made springs. i guess we had a communication breakdown here. he did not seem very pleased when i reiterated that it is the technology behind more reliable springs that can be copied and that patents must be present to protect. things do get lost in translation.
lastly, i spoke of timing of the expansion of the company. ideally, the company should strive to seek equity funding in a bullish market to obtain a good valuation of the company and hence, the greatest value driven by giving away equity. alternatively, it could also consider debt funding should they be confident of performance in the chinese market. conversely, equity funding could be seen as a hedge against a lack of performance post expansion. this point was agreed with well.
finally i touched on the internal factors: i only had one lol. i spoke of the health of the company in terms of its cash flow. a strong positive cashflow would mean that it is more able to fund these expansion plans themselves and do not require to seek funding from equity or debt, which would definitely be more expensive.
after the 2 cases, we had a short chat about droege, its business in singapore and what i can expect as a job scope as an analyst there.
following a short toilet break, the senior consultant came in. he was full of energy and i literally fed off his energy and both of us embarked on an extremely jovial and animated exchange for the next our.
we began by discussing droege's business again, and a small focus on the private equity aspect of droege in asia. we also had a short discussion on the characteristics of asian companies, paying great heed to the tendency to see companies as legacies and the general unwillingness to part with equity.
first case from him was a discussion for a sensor producing company. the company would like to know how it ranked against the other companies in its field. i almost shouted out benchmarking, just before realising that doing this i'm just cutting short my speech and not exactly explaining the process.
so i clarified again. sensors production for automated manufacturing covers a wide variety of products, from nanotech to automotives, what exactly are we looking at?
he answered that we are looking at making machinery, fmcg and automotives.
from here on i basically went on a tirade, interjected by his points of information and some questions.
i started by saying identify the competitors for each arm of products that sensors are provided for. then we look at the market share of each product and this will give a clear indication of where the company stands. i also looked at the price levels that the products are selling for. if price levels are similar amongst all participants in the market, the company is performing at benchmark. if the product is priced at a premium, there is the chance that the product as certain characteristic advantage. if there is a price premium on top of significant market share, it is a strong position.
i also mentioned that we should look at the supply chain of each competitor, in terms of resource origination(are we paying the right price or maybe cheaper for raw materials compared to others), manufacturing (are we producing at most efficient levels? related to tech advancement), distribution channels(have we exhausted all distribution channels? if companies are more diverse than us in channels, might we have missed some customer sectors?).
he then added a question:what if the company wants to expand in china? what factors should we consider?
it was quite similar to the question earlier. i rehashed the point on studying the maturity of the industry, whether there are multiple players with almost equal market share, which equates to a fragmented market that should require a consolidation. at this point, he jumped on my point on maturity and elaborated that indeed we need to see the national development of the country and see if the country is in a position to support the import of such production technology. i should also have added that we could look at general education levels and see if people are educated enough as a labour force to support, just for some brownie points.
last case was pretty direct: because i mentioned something about consolidation and acquisition, he asked: one of the methods of expansion is looking for an agent in the regent to sell your products. say you wanna sell your pencils in asia, what do you want in an agent?
i said there were basically two ways about this. you could either play it safe and conservative, go for an agent that is already marketing your product or similar products. i added that you are familiar with that and i shouldn't continue for brevity.
the second way would be to identify agents that are exceeding good at creating demand in a market where the demand did not exist before, and proceeding to gain significant market share for that product. i said that a good example, albeit far fetched, would be to find a salesman who can sell refrigerators to eskimoes in the northpole. if you can locate an agent like that, he would definitely have no issues selling your pencils in asia, where education plays a huge role.
he then asked for how do we assess and determine such agents?
i replied that a good gauge would be a track record. i mentioned a good marketing company known as sutl, and that their marketing covers diverse products, from sports wear to cosmetics to liquer. we could leverage on their marketing expertise to create a demand for a product that may have many substitutes and gain significant market share. he agreed that track record is a good measure.
i further added that the agent must believe in and is passionate about marketing the product, to avoid a slipshod management of the marketing process. this too, he agreed.
following this was the end of the interview. he released me for the weekend and wished me a nice pint of beer.
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