The Program Investment Decision Study Of YS Automotive Components Firm

As rapid development of technology and continually innovation of business model,the automotive industry stepped into an era which is changing dramatically.The four evolution trends which we called electrification,sharing,autonomous driving and intelligent connection are impacting this industry deeply.It also brings a lot of challenges to the OEM and component firms.In order to deal with them,many firms are reshaping their strategy and refreshing existing system.Program investment decision is a key part of corporate management system,it is such a vital activity that more and more firms are focusing on its study.This thesis took YS automotive company as the study objective which the author now is working for.Firstly,it analyzed China automobile and components markets status,and concluded that competition is becoming more and more drastic,the profit rate is decreasing,Chinese brand sales and its local components suppliers is rising.In such situation,as a joint venture between Chinese & U.S firms,its program investment decision is based on U.S shareholder’s historical financial criterial or Chinese executives personal judgement,which is lacking deep theoretical analysis,plus program cash flow estimation variance conducted by financial team,it caused serial issues,the typical example which impact the firm greatly is some critical business loss or the actual operating cases are not the same with previous estimation.Aim at those issues,this thesis did a deep analysis based on YS corporate governance & org-chart,competition environment and serial finance theory which included kinds of traditional financial index inherent meaning,real option theory,portfolio theory,capital cost theory and assets pricing model.Key cash flow influence factors,financial decision criteria comparison,how to calculate weighted average capital cost of a China-U.S joint venture are three important analysis sections.After that,this thesis provided effective continual improvement solutions: to select proper financial decision methods based on YS firm’s business model,to calculate beta and WACC of YS firm,to quantitate data analysis & model for the key cash flow influence factors,to calculate manufacturing cost precisely by using activity based costing method and then validate new financial business case model.Considering the investment and cash flow sensitivity for large firm,to conduct the cash flow sensitive analysis thus to make sure investment decision is robust,for the rapid development and uncertainty of Chinese local brand,to evaluate the decision by introducing real option theory.Consolidate action above,this thesis build up new methods and guidelines.The Chinese automobile and components market are changing frequently and such complicated,it is very critical to keep flexible when evaluating program investment decision for a big firm like YS.According to rigorous analysis and theoretical foundation,this thesis suggested use U.S shareholder’s principle as the IRR hurdle rate for the foreign vehicle brand and luxury cars program investment decision,use WACC based NPV and real option for local brand investment decision,use contribution margin to make decision for strategy program such as stop competitors to enter existing market or expand new business field,adjust the discount rate for innovation,after market or risky programs NPV calculation.After the new method and guidelines were validated,it is also very critical to manage program financial status.Set the target for all functions during product development stage by using target costing theory,to make sure critical financial index are better than baseline.Considering the automobile industry business cycle and commodity price uncertainty,this thesis suggest to reduce raw material price and cash flow fluctuation by using proper hedge solutions.Through above studies,we can see it will be a practical and effective way to solve problems.During this process,it may lack of deep understand for some theories.Looking forward to the future,it hopes to optimize and adjust financial business case model dynamically by further theory study & practice.