6 Pages Posted: 2 Jun 2017
Suitable for MBA, EMBA, GEMBA, and executive education programs, this field-based case offers an opportunity to use simulation modeling to evaluate an investment affected by prices, technical success, and yields from raw materials that are all uncertain in a global context. The company produces pitch-based carbon fiber in China. ChinaCarb's supplier in Europe has discontinued its production, leaving ChinaCarb with only enough raw materials for one year. The supplier is willing to sell its production technology and associated patents to ChinaCarb. Several managers (also investors) want to close the company because they think it is too risky to buy the supplier technology and build the production line in China. The chairman of the company, however, wants to invest in the supplier technology. To resolve the dispute and make a decision, the chairman needs to forecast uncertainties and use a financial model to evaluate the new endeavor to produce the raw material in house. The analysis involves developing a forecast of the stream of prices of the compound used to produce the raw material and incorporating into the evaluation a forecast of technical success with the technology. Risk preference analysis would be used to compare alternatives.
Rev. Sept. 16, 2016
During the fall of 2010, Yandong Gong was an exchange student at a graduate school of business a long way from home—nearly 7,000 miles. Back in the Chinese province of Zhejiang, Yandong Gong's good friend Hui Lin, chairman of ChinaCarb Carbon Fibers Company (ChinaCarb), had just spent several hours intensely discussing the firm's business situation with senior executives and investors. The company's raw material supplier of a particular kind of pitch had stopped its production, and ChinaCarb held only enough supply to run its carbon fiber production for another year. Since ChinaCarb's production line was specially designed for this type of pitch, no substitute was available.
Following substantive conversation, ChinaCarb executives had narrowed their strategy down to two options. Unwilling to pay the high cost of hiring technicians from Europe to advise them, they could buy the raw material production technology from their previous supplier and build their own pitch production line in China. Or once the current pitch supply ran out, they could halt production and cash out of the company. Each option had challenges and benefits. As the owner of 40% of ChinaCarb's shares, Hui Lin was in favor of continuing to invest.
Looking for someone to bring a different point of view to the table, Hui Lin contacted Yandong Gong for advice. At the end of their phone call, he asked Yandong Gong for suggestions about how he might persuade others to support a decision to build the pitch plant and attract new investors if the current ones decided to cash out. Yandong Gong set out to look at the facts and combine his thoughts into solid recommendations for his friend.
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Keywords: China, business development, Monte Carlo simulation, price forecasting, random walk, risk preference, expected utility, probability, supply chain, net present value, NPV, Crystal ball.
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