Hyundai Heavy Industries Co. is one of Korea’s largest industrial producers. Acc
ID: 1251089 • Letter: H
Question
Hyundai Heavy Industries Co. is one of Korea’s largest industrial producers. According to an article in BusinessWeek Online, the company is not only the world’s largest shipbuilder but also manufactures other industrial goods ranging from construction equipment and marine engines to building power points and oil refineries worldwide. Despite being a major industrial force in Korea, several of the company’s divisions are unprofitable, or “bleeding red ink” in the words of the article. Indeed, last year the power plant and oil refineries building division recorded a $105 million loss, or 19% of its sales. Hyundai Heavy Industries recently hired a new CEO who is charged with the mission of bringing the unprofitable divisions back to profitability. According to BusinessWeek, Hyundai’s profit-driven CEO has provided division heads with the following ultimatum: “…hive off money-losing businesses and deliver profits within a year – or else resign.”Suppose you are the head of the marine engine division and that it has been unprofitable for seven of the last 10 years. While you build and sell in the competitive marine engine industry, your primary customer is Hyundai’s profitable ship-building division. This tight relationship is due, in large part, to the technical specifications of building ships around engines. Suppose that in your end-of-year report to the CEO you must disclose that while your division reduced costs
of 10%, it still remains unprofitable. Make an argument to the CEO explaining why your division should not be shut down. What conditions must hold for your argument to withstand the CEO’s criticism?
Explanation / Answer
Case facts:
CEO mandate: to give off all non profitable divisions.
The division is 10 yrs old.
3 out of ten times the division reaped profits
Its main supplier is to the in house buyer Hyundai Ship building.
The division has incurred losses in spite of reducing costs by 10%.
The division is at the verge of shut down as it incurred losses, and as a division head I have to justify for its continuation.
My argument in favor of continuation of the division:
Our division is a relatively new division and it requires some more years to scale up.
And last year we had installed new machinery (technology) which reduced our costs by 10% and this year as our employees are well trained on the new platform we can reduce the costs further in the next financial year.
And the division has incurred losses due to the new investment on fixed capital. i.e though the total costs are higher than the total revenue. The average variable costs are lower than the price of out put.
So the company has every right to stay in business as its AVC is higher than the price
And as the division is new ( for large manufacturing divisions 10yrs is considered relatively new) it has a potential and scope to improve in the near future.
( note: Shut down point: if the AVC is higher than the price than we can shut down the plant)
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