Suda Electric Vehicle Company: Private Equity Investment In China Case Solution & Answer

Suda Electric Vehicle Company: Private Equity Investment In China Case Solution

Case Brief

In 2013, the industrialist Michael D. Ding-man was considering to make private investment in in Suda Electric Vehicle Company. Michael D belongs to a family office, i.e. Ships-ton Group. Suda is the fastest growing producer of electric bicycles in PRC (People’ Republic of China). Ships-ton has been investing in the People’s Republic of China-since 2005, and most of his investments are based on continuous expansion of the Chinese middles class sectors (Chaplinsky & Hoang, 2017). The Chinese market has a surplus of individuals, as people are shifting from rural areas to urban areas, in search of better employment opportunities, due to which the cities are becoming populated and represent a greater distance between the employer and workforce. Such urbanization along with industrialization, has resulted in crowded transportation system, making the-cities densely populated. The emergence of e-bikes proved to be successful as the bike are affordable and energy efficient. Ships-ton has been evaluating the investment in Suda with due care, and he has come up with a plan of investing 37.8 RMBs ($6million) in exchange for a 10% share in the company’s equity.

Investment Hypothesis

Shipston Group is interested in investing 37.8 RMBs ($6million) in exchange for a 10% share in the equity of Suda Electric Vehicle Company. As no other company has invested in the bicycle sector as of yet; all of the players are looking for the emerging markets to put their funds in. Now Wang wants to be sure of his decision related to the investment-whether the investment is capable of generating returns greater than the required rate of return of 20% or not. What are risks and benefits associated with the investment and what exits’ options are available for the company.

Industry Overview

Suda belongs to the People’s Republic of China’s e-bike market. China’s e-bike is one of the largest industry, with approximately 200 million bikes on the road. The demand for E-bike has-increased due to different reasons, including: high fuel costs and population growth in China. E-bikes have also covered the challenges faced by the country, including: high demand for oil, better transportation modes and high environmental pollution. E-bikes are becoming famous due to their affordability and reliability features and also as a popular mean of personal transportation. E-bikes are specially designed to reduce the oil shortages faced by the economy and the e-bikes are estimated to reduce around 188 million barrels of oil demand, each year. Additionally, the government is also facing the environmental pollution issue in the economy, and e-bikes are emission efficient, as they emit a very small proportion of carbon dioxide as compared to other vehicles.

Moreover, the demands for e-bikes are also resulted because of the high urbanization rates, as the workforce from the rural areas of the country has shifted to the urban areas, and has made the city densely populated, which is serving as an accelerating force for the increase in the demands for e-bikes, as personal and a much better mode of transportation. As the public transportation is not properly developed, it also-increases the demand for e-bikes, which is foretasted to reach to CNY99 billion by 2015 from CNY 31 billion in 2006. (See Appendix 1). The prominent reason for such an increase in sales growth of e-bikes is an increase in the per capita income, and it is expected to grow by 8-9% annually.Lastly, the demand for e-bikes has grown with the increasing number of workforce within the industry, as the work locations are very distant from the residential areas,leading to the growth in the e-bikes’ demands.

Risks Inherent in Industry – Affecting Investment

Despite of a growing demand of e-bikes; there is an existence of several risks in PRC market, which have the potential to affect the investment of the Family Office. The risks are explained as follows:

·High Fragmentation

The e-bike industry is highly fragmented,as it is a market with different segments, whereby each segment refers to different needs and wants of the customers, and to meet such diverse demand,can translate to a risk for Wang’s company. In order to operate in such a diverse demand; the company is required to create its differentiation point in order to remain competitive and profitable.

·High Threat of New Entrants

The e-bikes industry has a very high threat of entrants as the entry barriers are very low. It is very easy to assemble the motors or bikes,even after the fact that it requires high financial resources and management expertise for running the operations. These low entry barriers are mainly due to attracting the new entrants into the market to promote the e-bikes industry and to achieve growth. This high threat of entrants poses a threat to the investment by Wang, as there is an expectancy of more investors in the industry, ultimately tending to snatch the market share from the existing players of the PRC industry……………..

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