Article: ATG looking forward to economies of scale with Yokohama Thursday 14th A

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Article: ATG looking forward to economies of scale with Yokohama Thursday 14th April 2016 Yokohoma is a Japanese rubber tyre manufacturing company Alliance tire group is an Isreali tire company. Although Yokohama Rubber plans to “create a premier global tyre manufacturing company” through its acquisition of Alliance Tire Group (ATG) and resultant synergies in expertise and experience, the Japanese firm confirms it will retain the ATG business model, along with the company’s “culture” and brands. In a statement released this week, ATG also writes that it “will benefit and gain additional expertise from Yokohama” as a result of the acquisition, with Yokohama the “rubber specialist” enabling ATG to “enforce innovation, quality management as well as new product technologies.” ATG also states that “both Yokohama and ATG expect advantages in terms of human resources,” however it does not expound on the implications of this advantage for the two companies’ workforces. “Through access to Yokohama’s resources and capabilities in R&D, marketing, supply chain and procurement, we envisage economies of scale,” comments Yogesh Mahansaria, Alliance Tire Group founder and chief executive officer. “We believe that this move is an excellent step towards our goals of expanding our operations and brand profile internationally. Yokohama has a rich heritage, having been established 99 years ago, with 15 tyre plants globally on three continents and sales and marketing subsidiaries on five. Following this acquisition, our team will be part of a much larger company with extensive resources and a strong commitment to long term growth and success.”

a.Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the accompanying figure. What plant size (1, 2 or 3) will the firm choose in producing (a) 50, (b) 130, (c) 160, and (d) 250 units of output? How do these decisions contribute towards determining the shape of the firm’s long run average total cost curve? (10 marks)

b. Based on the article and economic theory, will acquiring Yokohoma help ATG achieve greater economies of scale? Why? Will this still occur if the acquisition means that many more levels of management need to be hired at ATG to help manage the new acquisition? Why? (10 marks)

Explanation / Answer

a.)

Alliance Tire Group, or ATG, calls itself the industry’s fastest-growing manufacturer of off-highway tyres. To support the expansion the company recently opened a new factory in Dahej, India. The tyre maker says the state-of-the-art 122,000 square metre plant utilises the latest manufacturing technologies and is currently able to produce 90 tonnes per day or 33,000 tonnes of tyres per annum, with capacity expected to rise to 57,000 tonnes a year by the end of 2016.

The 57,000 tonne per annum capacity planned for the end of 2016 represents a daily output of 160 tonnes and is being realised with an investment of circa US$150 million. Initial plant production focused on tyres for tractors, harvesters, implements, sprayers and balers. These agricultural products have now been joined by by tyres for skid steer and backhoe loaders, telescopic handlers, soil compactors and excavators, while tyres for forestry equipment such as loggers, skidders and harvesters, along with tyres for port and mining vehicles, are to follow in the next expansion phase. In addition, the production of all steel radials will commence in the new plant this year; ATG’s aim is to deliver some 50,000 OTR all steel radials per year from the end of 2016 onwards.

b.)

Although Yokohama Rubber plans to “create a premier global tyre manufacturing company” through its acquisition of Alliance Tire Group (ATG) and resultant synergies in expertise and experience, the Japanese firm confirms it will retain the ATG business model, along with the company’s “culture” and brands.

In a statement released this week, ATG also writes that it “will benefit and gain additional expertise from Yokohama” as a result of the acquisition, with Yokohama the “rubber specialist” enabling ATG to “enforce innovation, quality management as well as new product technologies.” ATG also states that “both Yokohama and ATG expect advantages in terms of human resources,” however it does not expound on the implications of this advantage for the two companies’ workforces.

“Through access to Yokohama’s resources and capabilities in R&D, marketing, supply chain and procurement, we envisage economies of scale,” comments Yogesh Mahansaria, Alliance Tire Group founder and chief executive officer. “We believe that this move is an excellent step towards our goals of expanding our operations and brand profile internationally. Yokohama has a rich heritage, having been established 99 years ago, with 15 tyre plants globally on three continents and sales and marketing subsidiaries on five. Following this acquisition, our team will be part of a much larger company with extensive resources and a strong commitment to long term growth and success.”

Speaking about the equipment found in the Dahej plant, ATG founder and chief executive Yogesh Mahansaria states that the latest-generation machinery used in the facility includes “several highly automated steps and control systems which ensure uniform top quality all along the manufacturing process.” The chief executive adds that ATG made high environmental standards and corporate social engagement two key priorities when planning and setting up the site: “With our own effluent and sewage treatment plants and an Electrostatic Precipitator (ESP) in the plant’s boiler, we decided to go for zero discharge. At the same time, we strongly support a local school to assist the next generation on their way towards a good future.”

ATG’s decision to build its third factory close to the port of Dahej means considerably shorter shipping times when delivering products to Europe; ATG says vessels leaving Dahej can reach European ports within 18 to 22 days. All certification relevant for Europe – ATG’s most important market – was obtained in September 2015. These certifications include ISO 9001:2008 QMS, ISO 14001:2004 EMS, and OHSAS 18001:2007, all three by TÜV Rheinland, as well as the Product “E” marking by VCA in the UK.

“Producing innovative and reliable high performance OTR tyres of maximum quality is one of our claims – and taking responsibility for society and environment is another. Both elements are key characteristics of ATG’s business approach,” concludes Mahansaria.

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