THE CONTEXT - My LIUC



Technological collaborations: the case of C.F.Gomma

Authors:

Vittorio Chiesa

Full Professor, Università degli Studi di Milano-Bicocca, p.zza della Scienza 2, 20126 Milano, Italy

Tel.: +39 02.6448.4518

Fax: +39 02.6448.3565

e-mail: vittorio.chiesa@unimib.it

Federico Frattini

Research Assistant, Università Carlo Cattaneo - LIUC, corso Matteotti 22, 21053 Castellanza (VA), Italy

Tel.: +39 0331.572.294

Fax: +39 0331.572.320

e-mail: frattini@tin.it

Elena Gilardoni (corresponding author)

Ph. D. student, Politecnico di Milano, via G. Colombo 40, 20133 Milano, Italy

Tel.: +39 02.2399.2806

Fax: +39 02.2399.2700

e-mail: elena.gilardoni@polimi.it

Raffaella Manzini

Associate Professor, Università Carlo Cattaneo - LIUC, corso Matteotti 22, 21053 Castellanza (VA), Italy

Tel.: +39 0331.572.294

Fax: +39 0331.572.320

e-mail: rmanzini@liuc.it

Emanuele Pizzurno

Ph. D. student, Università Carlo Cattaneo - LIUC, corso Matteotti 22, 21053 Castellanza (VA), Italy

Tel.: +39 0331.572.233

Fax: +39 0331.572.320

e-mail: epizzurno@liuc.it

Technological collaborations: the case of C.F.Gomma[1]

THE CONTEXT

CF Gomma S.p.A. is an Italian company which offers a broad range of rubber based components for three different markets (corresponding to three business units): Cars, Compounds and Truck & Railway and Industry (T&R&I).

The main products in the car, trucks and railway markets are: suspension systems (anti-vibration components and air springs), fluid transfer systems (brake systems, and low pressure hoses), technical rubber items (torsional dampers, rubber sleeves, hytrel sleeves) and car body seals. For the Compounds market segment they produce a lot of different rubber compounds principally used in the production of oil resistant rings and seals. Finally C.F. Gomma realises dock fenders and expansion joints for the Industry sector. Anyway, C.F. Gomma’s core business is represented by anti-vibration components.

The distribution of the sales by sector is the following:

[pic]

The main clients in the Automotive sector, ordered by importance, are: PSA, Fiat, Wolkswagen, Ford, Daimler Chrysler, Iveco, General Motors and Toyota.

The evolution of the sales over time is the following:

[pic]

while the distribution of the sales by country can be represented as follows

:[pic]

The origin of the company dates back to 1956, when CF Materie Plastiche S.a.s. was established. From then on it has gone through a long history of mergers and acquisitions, which has brought to the change of the original name into C.F. Gomma S.p.A. in 1987, and the acquisition of Pirelli Sistemi Antivibranti in 1993. Nowadays the headquarters of CF Gomma S.p.A. are established in Italy, near Brescia, and the company has 14 plants in many countries (Poland, Argentina, Germany, France, U.S.A. and Italy). The following table represents the distribution of production and logistics activities in the different plants:

| |Products |

| |Antivibration |Air Springs |Fluid Transfer |Technical |Rubber Compounds|Industry |Car Body |

| |Components | | |Mouldings | | |Seals |

|Western Europe |Italy |

|Market-Sales |Maintain share with the main current customers, through long term agreement; |

| |Enlarge European customer portfolio; |

| |Reinforce relationship with partners in growing market (far east market); |

| |Create a network of international relationships. |

|Industrial |Enlarge air spring range |

|(product/process) |Reduction of main factoring cost |

| |Increase of automation capacity |

| |Increase of saturation of saturation of current machinery |

| |Relocation of labor intensive processes in low cost countries |

Asked to point into evidence the T&R&I distinctive competences, the CEO of the business unit, a commercial manager and a production engineer identified the following key elements:

• Capability of producing in-house the different types of rubber, basic raw material for the company’s products;

• Capability of developing highly customized products;

• Capability of offering a high-level service in term of assistance and co-design collaborations;

• Very high systemic competence (capability of offering a highly integrated product).

The air spring production technology represents a critical competence for the T&R&I business unit, but it concerns a mature and quite diffused technology.

Finally it should be underlined that the T&R&I business unit, (as well as the whole company) is not traditionally accustomed to technological collaborations.

C.F. GOMMA AND TIKOKO[2]

In 2002, the T&R&I business unit of C.F. Gomma and Tikoko, one of its most important Japanese clients, started the evaluation of a technological collaboration. The content of the collaboration should have been C.F. Gomma’s know-how in the air spring systems development, testing, prototyping and production technology.

Tikoko is a manufacturing firm which works in the sector of automotive components (wipers, precision parts, brake parts, anti-vibrations) and other non-automotive businesses (civil construction, railroad truck, railway car, industrial machinery, ultrasonic motors and ceramics). Mitsubishi and Nissan Diesel are two of the most important clients of the Japanese firm. The relationship between C.F. Gomma and Tikoko is a very long term one (more than 25 years) and the Japanese company plays a very important role in maintaining the presence of C.F. Gomma in the Far East market. In fact they buy from the Italian company different products (also the air spring systems) and sell them to the most important car and truck producers in Japan.

During these 25 years of commercial exchanges, CFGomma has learned, with some difficulty, that maintaining a good relationship with Tikoko requires some specific competencies. As a matter of fact, Tikoko people need politeness, they don’t like the typical Italian pressure on time, they look at women with some kind of diffidence, they usually consider their client’s desires as imperative orders that cannot be discussed and modified. For all these reasons, selling products to Tikoko usually requires, for CFGomma, ten times the resources (time and people) needed for a European customer. Anyway, Tikoko represents a critical reference point in the Far East market and, for this reason, CFGomma believe that developing the right competences for dealing successfully with Tikoko is a necessary investment.

The relationship between C.F. Gomma and Tikoko has been so far a commercial agreement; it’s four or five years since they started thinking about the possibility of collaborating on various technologies.

Tikoko intended to learn from C.F. Gomma the know-how necessary to realize a testing and prototyping laboratory in Japan, in order to develop by themselves highly customized air spring systems and to offer their clients a very high service level in term of aftermarket assistance, seen this variable seems to be very important to gain a competitive advantage in the automotive market.

In the long term, in fact, the design, development and production of air springs in Italy would have been a disadvantage for Tikoko and would have limited the expansion targets in the far east market of both Tikoko and CFGomma.

In addition, there was a chance that Tikoko would start producing air spring systems by itself, first of all because of the growth possibility of this market in the future.

On the basis of the information you’ve collected so far, discuss the potential advantages, benefits, problems and risks of the technological collaboration for the T&R&I division of C.F. Gomma.

THE PROPOSAL[3]

After the first preliminary hypothesis of collaboration, Tikoko presented to CF Gomma three different proposals for the organizational form of the collaboration.

The first one takes the form of a licensing. In this case, in fact, Tikoko will receive technical assistance from C.F. Gomma in order to learn the air spring production technology. The aim of the agreement is to give Tikoko the know-how necessary to realize a testing and prototyping laboratory in Japan, useful for developing new products which fit the Japanese clients’ needs (Mitsubishi, Nissan Diesel) and give them the necessary technical assistance. This agreement will not give Tikoko the right to produce air spring systems based on CF Gomma’s technology by itself; the Japanese firm will go on buying the product from CF Gomma and selling it to its clients. According to this proposal, Tikoko will pay for the technical assistance an initial fee and a royalty calculated as a percentage of the future sales of air springs imported from C.F. Gomma on the Far East market. In order to describe this first possibility, Tikoko presented the following prospect:

(1 € = 120 ¥ )

|ITEMS | |2002 |2003 |

|The transfer of ownership | |

|The assignment for money consideration |No |Low |No |

|The contributions to a company |No (indirectly) |High |No |

|The joint – venture (selling agreement) |No (indirectly) |High |Yes |

|The transfer of the right of use | |

|Transfer of technology | | | |

|- The licensing of patent |Yes |Low |Yes |

|- Know-how licence |Yes |Low |Yes |

|Copyright licence |Yes |Low |No |

|The joint – venture (licence agreement) |Yes |High |Yes |

Table 1: The differences among different transactions

According to the characteristics of each transaction we have discussed and on the basis of the information you’ve collected so far, answer to the following questions:

1. Which elements should be considered in order to choose the most adequate transaction form? And, more in detail:

a. how can be protected the intellectual property rights?

b. how can be faced the problems relating to the management of the know how during and after the transaction?

c. how can be managed the risk of opportunistic behaviour by Tikoko?

THE VALUATION[7]

Another problem CF Gomma had to face was concerned with the valuation of the know how Tikoko intended to acquire, that is the air springs development, testing, prototyping and production technology. It is worth remembering that the main interest of the Japanese company was, at that moment, to learn how to realize a prototyping and testing laboratory in order to develop by itself highly customized air springs and to offer its clients a very high service level in term of aftermarket assistance. The search for the information needed to support the valuation process involved different CF Gomma’s functions and took quite a long time. The data that were collected can be summarized as follow:

Data provided by Administration and Control

• CF Gomma’s past results on the air spring product line:

| |1998 |1999 |2000 |2001 |2002 |2003 |

|Turnover |1,346,790 |1,545,980 |1,200,340 |1,600,430 |1,785,000 |2,329,000 |

|EBTIDA |242,420 |340,116 |244,062 |304,082 |374,850 |466,200 |

|EBITDA (%) |18.00% |22.00% |20.33% |19.00% |21.00% |20.02% |

|EBIT |220,089 |301,459 |218,430 |280,980 |320,330 |410,340 |

|EBIT (%) |16.34% |19.50% |18.20% |17.56% |17.95% |17.62% |

• CF Gomma’s air spring average unit price (to Tikoko) = 34 €

• CF Gomma’s air spring average unit gross profit = 8 €

• Tikoko’s air spring unit production cost (estimation in case of Tikoko production) = 23 €

• Tikoko’s air spring unit gross profit (estimation in case of Tikoko production) = 10 €

• Tikoko’s air spring average unit price = 37 €

• Tikoko’s cost of capital estimated by CF Gomma = 20%

Data provided by Marketing and Sales

• Tikoko’s air spring sale volumes estimated by CFGomma

| |2003 |2004 |2005 |2006 |2007 |2008 |

|Worst Case |- |44,000 |50,000 |50,000 |52,000 |55,000 |

|Best Case |- |75,000 |105,000 |115,000 |155,000 |175,000 |

• Probability of occurrence estimated by CF Gomma

| |Probability of occurrence |

|Worst Case |80% |

|Best Case |20% |

Data provided by Technical Office

• Estimation of costs necessary for developing and producing one air spring system in Japan:

1) Development labour costs:

| | |Number |cost [euro/year] |Years |cost [euro] |

|Project manager | |1 |55000 |3 |165000 |

|design eng. | |1 |45000 |3 |135000 |

|process eng. | |1 |45000 |3 |135000 |

|Testing operator | |1 |35000 |2 |70000 |

|Process operator | |1 |23000 |2 |46000 |

|Quality operator | |1 |35000 |3 |105000 |

| | | | | | |

| | | | |Tot. |656,000 |

✓ Testing industrial costs:

| | |number |Cost [euro/hour] |years |hours/years |cost [euro] |

|static test | |1 |2 |2 |900 |3600 |

|dynamic test | |1 |2 |2 |900 |3600 |

|Fatigue test (bench) | |4 |2 |2 |5000 |80000 |

| | | | | | | |

| | | | | |Tot. |87.200 |

✓ Process industrial costs:

| | |number |cost [euro/hour] |years |hours/years |Cost [euro] |

|plies cutting | |1 |2 |3600 |2 |900 |

|Plies assembly | |1 |2 |4800 |2 |1200 |

|plies winding | |0 |0 |0 |2 |900 |

|Vulcanisation | |1 |5 |12000 |2 |1200 |

|Assembling | |1 |2 |2400 |2 |600 |

| | | | | | | |

| | | | | |Tot. |22,800 |

✓ Testing and process material costs:

| | | |number of springs/month |spring cost |years |cost [euro] |

|Springs |static test | |20 |30 |2 |14400 |

| |dynamic test | |20 |30 |2 |14400 |

| |fatigue test | |40 |30 |2 |28800 |

| |plies assembly | |90 |15 |2 |32400 |

| |Vulcanisation | |90 |15 |2 |32400 |

| |Assembling | |20 |25 |2 |12000 |

| | | | | | | |

| | | |number/year |Cost |years |cost [euro] |

|Tools |Mandrel | |2 |3000 |2 |12000 |

| |vulcanis mould | |2 |8000 |2 |32000 |

| |crimping mould | |2 |3000 |2 |12000 |

| | | | | | | |

| | | | | |Tot. |190.400 |

✓ Industrial indirect costs:

| | |Annual cost |years |cost [euro] |

|building leasing | |12000 |2 |24000 |

|external services | |8000 |2 |16000 |

|water, warming …. | |8000 |2 |16000 |

|Maintenance | |10000 |2 |20000 |

|Maintenance | |30000 |2 |60000 |

| | | | | |

| | | |Tot. |136.000 |

✓ Estimated process machines costs: 140.000 €

✓ Amortisation = 20 (years)

✓ Estimate market value of process machines = 130% of book value

• Estimated costs for the technical assistance course (6 months) realized by CF Gomma for Fukoku:

|Persons/activity needed |hours/week |cost/year |cost/hour |cost/week |cost for 6 |

| | | | | |months |

|DT |10.0 |80,000.0 |46.0 |463.8 |11,130.4 |

|senior engeneering | |20.0 |50,000.0 |26.0 |579.7 |13,913.0 |

|senior process eng. | |10.0 |40,000.0 |24.0 |231.9 |5,565.2 |

|Senior maintenance eng. | |2.0 |50,000.0 |29.0 |58.0 |1,391.3 |

|quality manager |2.0 |50,000.0 |29.0 |58.0 |1,391.3 |

|translator |30.0 |40,000.0 |23.0 |695.6 |16,695.5 |

|documents translaction |- |- |- |- |10,000.0 |

| | | | | |Tot. |60,086.7 |

Data collected from technical publications and informal contacts

• Data about past technology transactions which involved CF Gomma’s competitor on the air spring technology:

|Transactions |Technology value [€]|V/average seller's annual |V/average ebitda's seller |Geografical area |Assignment (exclusive/non |

|(technology seller) | |turnover (MMi) |(Mmi) | |exclusive) |

|1 |3.050.000 |70% |4,5 |WW |E |

|2 |3.980.000 |65% |5 |WW |E |

|3 |2.926.000 |50% |7,5 |WW |E |

|4 |1.925.000 |48% |6,5 |USA + EU |E |

|5 |2.200.000 |70% |6,2 |USA + EU |N-E |

|6 |4.097.058 |65% |4,3 |USA + EU |E |

|7 |2.800.000 |50% |2,3 |FE |E |

|8 |2.500.000 |42% |1,5 |FE |E |

|9 |3.000.000 |55% |2,5 |FE |E |

|10 |2.700.000 |40% |2,3 |FE |E |

|11 |2.200.000 |25% |2,0 |FE |E |

|12 |2.800.000 |45% |2 |FE |N-E |

On the basis of the information we have just presented, try to answer to the following questions:

1. Which is (are) the best valuation method(s) to be used in this situation?;

2. Are there enough information to implement the method(s) you’ve chosen?

a. If yes, try to use it in order to obtain a reference value for the technical know how Tikoko intended to acquire from CF Gomma;

b. If not, which kinds of data would you’ve tried to collect ad how would you’ve used them in order to define the value of the technology?.

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[1]The case has been written with the essential contribution of many people operating in C.F.Gomma. Among them, in particular, Ing. Cerruti, Dott.ssa Magarò, Ing. Ravasi and Ing. Palagano have greatly helped the authors not only to collect information, but also to understand the sense of all the things that happened.

[2] The real name of the Japanese partner has been blinded for confidentiality reasons.

[3] All the numbers presented in this section do not correspond to the real numbers presented by Tikoko to CFGomma, that remain blinded for confidentiality reasons

[4] For the year 2003 the unit gross profit is calculated as: h=b-d.

[5] For the year 2003 the unit gross profit is calculated as: h=b-d.

[6] This classification mainly corresponds to organisational and managerial criteria, meaning that it is aimed to point into evidence the organisational and managerial characteristics of the different transactions, more than the juridical elements.

[7] All the numbers presented in this section do not correspond to the real numbers used by CFGomma, that remain blinded for confidentiality reasons

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START OF TIKOKO PRODUCTION

AFTER TECHNICAL LICENSE

JV START

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