Du Pont Case Study

1. In TiO2 market, Du Pont’s advantages are concluded as follows:

1. Du Pont has ilmenite technology and the operational knowledge to make the production economically viable, this is a very defensible advantage among all its competitors as most of them have been relying largely on the sulfate process which produces a lot of waste. This technological superiority will always make Du Pont a dominant position in the industry unless big competitors like National lead start to copy the ilmenite technology and build the plant which will take them at least 3 years.
2. Du Pont has primarily access to ilmenite. This is not a very defensible as other companies can also get access to the ilmenite ore if they decide to transfer to the low-grade chloride technology.
3. Du Pont has significant cost advantage over the other two process due to the new legislation and increasing price of rutile ore. New legislation is a very defensible advantage as it raises largely the cost of sulfate, increasing rutile ore-may decrease in the future though.
4. Du Pont has more capacity for debt financing (with D/A = 9%) compared with its biggest competitor NL who already have 35% of debt in total capital. This is very defensible.

In order to retain its competitive advantages in the future, Du Pont needs to have strategies to keep (or further expand) its economies of scale of the ilmenite process, slowly move its sulfate process productivity to the chloride process, restrict the licensing of the ilmenite chloride process, attain more market shares and pricing power ofTiO2.

1. To calculate the incremental cash flow for each strategy, we assumed the base case’s capacity is 325,000, which is the 1972’s estimation, and remain constant throughout 1985. Also, we assumed the price level for the base case is the same as the maintain strategy’s. Since capital expenditure for maintenance and replacement cancelled out the depreciation allowances over time, we did not include these two items into free cash flow calculations. We used WACC as discount rate for all the NPV calculations, which is calculated as below:

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Based on the assumptions, we conducted the free cash flow calculation and got the NPV of $72.59 million and $243.10 million for the maintain strategy and the growth strategy respectively. Details are shown in exhibit A and exhibit B. For sensitivity concern, we provided two NPV profiles analysis for both cases in exhibit C and exhibit D. The growth strategy is more attractive with a higher NPV. However, there are some risks associated with the forecasted future cash flows:

1. Risk concerning ITC

The length that ITC works for is uncertain, if it got suspended before 1985, free cash flow would be less than estimated. The lowest NPV would be the point where ITC never existed and the future cash flows under this circumstances are provided also in exhibit B.

1. Risk concerning incremental net income

Whether Du Pont can aggressively expand its capacity through 1985, gain more market share and have the pricing power of TiO2 as expected (in the growth strategy) as well as restrict the licensing of the ilmenite process can all have impact on the incremental net income.