Tuesday, May 29, 2007

MaxiTrans: Competitive Strategy & Risk Analysis


MaxiTrans’ main business activity is the manufacture of many kinds of freight trailers, such as the T-liners, flat tops, container skeletons, dry freight, and temperature controlled trailers. They also engage in the sales, rental, and finance (lease or purchase) of new and used trailers. Other business activities include the supply and distribution of parts, service and repair, appraisals (for insurance, trade-ins, and repairs valuations), and the manufacture of urethane foam and body panels. Truck-trailer is an important component of various industries, such as infrastructure, food and agriculture, transport and distribution, and resources (mining).

Industry Life Cycle

The trailer manufacturing industry is currently in the mature growth stage. Analysts predict that road freight activity will continue to grow at 3% annually1 up to the year 2020, so we would expect the trailer industry to grow in the same direction. This represents a slow but steady growth characteristic of mature industries. The mature characteristics of MaxiTrans’ business will be clearer in the analysis of its cash flow statement [See Part D]. Industry growth is also cyclical and its cycles are closely related to the economy as a whole.

Industry Competitive Structure

There are very few major players in the freight trailer industry, including MaxiTrans. Economies of scale dictate that competitive power is concentrated in the hands of a few large manufacturers, and the industry structure can be said to be oligopoly. Other smaller manufacturers concentrate on niche markets and are not a threat to MaxiTrans’ main line of business.

Trailer Industry: Five Forces Analysis

The customers of MaxiTrans are generally price takers. Since each customer only constitutes a small fraction of MaxiTrans’ customer portfolio, they have a relatively low bargaining power. The bargaining power of suppliers is also low. MaxiTrans is such a major player in the industry that it can pressure the suppliers to lower price of supplies and raw materials. The threat of entry to the industry is low. This is caused by high barriers to entry, such as economies of scale leading to cost advantage, a well-established distribution network, and established customer relationships. The intensity of rivalry is moderately low, because there are only few players in the freight industry. There are, however, some incentives to gain market share. Threat of substitutes from other means of transportation is also low, because freight trailer is an indispensable component of the land transport industry. [For an in depth full Five Forces Analysis see below]

MaxiTrans: Competitive Challenges

With the slow pace of growth of the market, MaxiTrans has turned to concentric diversification in order to grow market share and drive revenue growth in the domestic mraket. The company has acquired of several companies within the past four years [see Appendix B]. A key strategic challenge for MaxiTrans will be its ability to find suitable acquisition targets and to integrate these companies into the operations of the group as a whole. The recent underperformances of some acquisitions (e.g. Hamelex White and Colrain) suggest that all is not running smoothly. The challenge facing MaxiTrans will become clearer in the analysis of the income statement and profitability [see Part B, E].
In the short run, MaxiTrans may find its industry in a cyclical downswing being adversely affected by the macroeconomic conditions such as higher fuel prices and the drought, as well as a slowdown in economic growth as the Australian economy reaches full productive capacity.


Threat of Entry

The threat of entry into the trailer industry depends on the existing barriers to entry. Maxitrans is a dominant player in the industry. Economies of scale is present in manufacture, research, marketing, distribution, and service network, leading to a cost-advantage. Maxitrans also has a well-established distribution network, while possessing a large capital. There is some research and development, though it not substantial relative to the total of other operating expenses ($763,000 of $18 million). This implies the newcomer must enter the market big to be competitive. Moreover, Maxitrans has established relationships with major customers, such as Safeway, Reflex Papers, etc. Altogether, the entry barriers to the trailer industry are quite high, thus reducing the threat of entry.

Intensity of Rivalry among Existing Firms

The intensity of rivalry is moderately low. The only other notable player in the freight trailer industry is Barker Trailers. Increasing GDP figures3 ($873,197m in 2003-04, $896,568m in 2004-05, and $922,637m in 2005-06) indicates Australia’s economy is still performing well. Along with Australia’s strong economic performance the industry may be experiencing some growth. Thus, firms theoretically can produce better results by just keeping up with the market. However, the industry is already in maturity stage in terms of the industry life cycle. So there are some incentives to gain market share, especially if the firm possesses the amount of capital needed to acquire another firms.

The two main driving forces behind MaxiTrans’ strong performance are its reputation and distribution network. MaxiTrans attempts to differentiate its trailers than its competitors through brand recognition and research and development. Its distribution network supports this strategy by somewhat selling the trailers as differentiated products. With respect to distribution, MaxiTrans is targeting the domestic market with the exception being China. The Chinese market was penetrated in 1996 through a joint venture with Chinese THT, called MTC.

Threat of Substitutes

There are only three ways to transport commercial goods, by air, by water, or by land. Air-freight is expensive even though it is so much quicker. However this can only be done from airport to airport and still requires truck-trailers to transport the goods to the final destination. Likewise ferry and railway transports can only be done from port to port and station to station respectively. Hence the threat of substitutes is relatively low because an alternative land transport is less feasible. Truck-trailer is an indispensable component of the transportation industry.

Bargaining Power of Buyers

There are only few players in the freight trailer industry. Moreover, Maxitrans have many customers and they do not pose a credible threat of backward integration. Hence, they have a relatively low bargaining power.

Bargaining Power of Suppliers

Suppliers to MaxiTrans include parts manufacturer, equipment manufacturer, raw materials (paint, aluminium, steel, etc.). The bargaining power of these suppliers is relatively low because there are many suppliers and MaxiTrans is such a major player that they can pressure them to lower the price of supplies and raw materials.


International Risk - MaxiTrans operates mainly in Australia and New Zealand. Its operations abroad are confined mainly to its joint venture in China, Yangzhou Maxi-Cube Tong Composites Co., Ltd. The operation has been running since 1996, for more than 10 years, and operates in a non-politically-sensitive industry. Even though there tends to be a lack of systematic legal framework for the business environment and that local policy is often subject to change, we feel that the long track record of joint business and the nature of the industry expose MaxiTrans to relatively low international risk with regards to their operations in China. With regards to exchange rate risk, the Chinese Renminbi is a relatively stable currency that is managed by the Chinese government and we expect a gradual appreciation in this currency with little major fluctuations. Overall, international risk is assessed as low.

Domestic Risk - Domestic risks that MaxiTrans is exposed to mainly refer to the risks in Australia’s economy. Australia has a stable and robust economy that has experienced consistent economic growth for the last 15 years. Because of the global resources boom, we expect this economic growth to continue at a stable pace. Inflation is relatively stable, although lately the economy is seen to be approaching full capacity and this may place an upward pressure on wage inflation and thus labour costs for the company. Interest rates are also relatively stable; the Reserve Bank of Australia does not expect more major upward hikes in the future. We do not expect any major interest rate fluctuations to have a significant impact on MaxiTrans’ debt payments. This is discussed in more detail when discussing credit risk below.

Industry Risk - As mentioned in the analysis of profitability, the trailer manufacturing industry is mature and stable, with relatively low rate of structural change. There are high barriers to entry and a few dominant players, of which MaxiTrans is one. The trailer manufacturing industry is cyclical; this will be factored into the analysis of financial risk later. Other risks related to the industry are that raw material prices may rise materially, and regulation, especially surrounding mergers and acquisitions, may change unfavourably. However, on balance, industry risk is assessed as low.

Firm Specific Risk – The trailer manufacturing industry is currently in a state of consolidation; MaxiTrans has been acquiring related companies in the last few years. The key risk of this corporate strategy is that acquisitions will be unable to integrate smoothly into the company. Furthermore, MaxiTrans has to take on significant amount of debt to finance these acquisitions. This has an impact on the long-term solvency and credit risk of the company, since leverage will increase and interest payments will rise as well. This is discussed more thoroughly below. Management’s ability to manage the acquisitions will play an important role in the success of the company.

Overall, firm specific risk is assessed as medium.

No comments: