Dell Working Capital Case

FIN 855.M001.SPRING16: Financial Management

Professor Hong Wan

E. I. du Pont de Nemours and Co.: Titanium Dioxide

Team 7:

Nikita Jain

Ji Qi

Yuanxin Leng

Gefei Zhang

Yuanfeng Xie

March 7 2016

Background:

E.I. du Pont de Nemours and Co. (Du Pont) was a diversified manufacturer of fibers, plastics. Industrial chemicals and other specialty chemical products. However, rapid pace of technological innovation and the consequent shortening of product life cycles in recent decades had forced it to defend some of its mature products more aggressively. The annual sales of TiO2 were projected to grow more than one million tons by 1985. DuPont introduced the ilmenite chloride technology at its Edge Moor Plant in 1952 and it became the largest TiO2 supplier. Between 1969 and 1972 two major events transformed the domestic TiO2 market. The first is that the rutile ore faced a sudden shortage in 1970 and 1971. The other is that the sulfate process plants were forced to make major capital expenditures to comply with newly enacted environmental protection legislation. Du Pont recognized both the opportunities and the risks inherent in the TiO2 market and took steps to formulate a strategy for coping with the changed environment.

Analysis:

In 1972, DuPont was afforded a dominant position in the TiO2 market. Because the DuPont Company possessed the operation knowledge necessary to make the production of TiO2 economically viable. Du Pont chose the ilmenite chloride process for a large plant at New Johnsonville, Tennessee.  Since this plant was the largest in the industry, Du Pont realized scale economies that lowered its costs slightly below those of its competitors. In the late 1950s and early in 1960, large quantities of easily accessible rutile ore were discovered in the beach sands of eastern Australia. As a result all plants built during the next decade used the rutile chloride technology, including a facility in Antioch, California, built by Du Pont. These capacity expansion plants helped Du Pont capture a great opportunity and gain competitive advantages. Du Pont used ilmenite chloride technology to acquire TiO2.this kind of technology gave DuPont easy access to ilmenite ore. What’s more, there was a sudden shortage of rutile ore, this accident made ore prices went to sky. And the legislation about the environment and the tariff make the TiO2 in domestic was expensive. The technology Do Pont used was now significantly cheaper than other technologies.

The competitive advantage of Du Pont was not permanent. If the macro economic environment changed, such as the appreciation of US dollar, change of the environment legislation or the change of the tariff policy, the advantage may disappear. Therefore, Du Pont should insist on technology innovation and decrease the cost of the technology development to make the cost competitive with other competitors. Keeping a  large market value may make the cost of the company less expensive.

To calculate the free cash flow and NPV of both strategies, we need to figure out the incremental sales and profit first. According to the case, the projected total market volume from the year of 1973 to 1983 is given, so is the DuPont’s market share. Therefore, total market volume multiplied by DuPont market share is the company’s market volume. Subtracting company’s market volume by the existing capacity (1972 production capacity), we have the incremental sales units. So, the incremental sales could be solved by multiplying incremental sales units by the price per ton.