Sample Complex Licensing Negotiation

New England Bearing & Axel Company, (ìNEBî) is the worldís largest manufacturer of wheelís, axels and bearing subassemblies (collectively ìProductsî) for the automotive, truck and aircraft markets, having a worldwide market share of approximately 19%. The international market for Products is dominated by 3 major manufacturers (including NEB), one of which is European and another of which is Japanese (Asahi Bearing). The Japanese market for Products is the largest in the world (because of the international market share held by Japanese automobile makers) followed closely by the United States and the EC.

NEB wishes to expand into the market for Products in Japan and has been engaged in discussions with Minami Bearing Company (ìMBCî) for the distribution of NEBís products in Japan and the manufacture in Japan of NEBís Products under a technology and know-how license from MBC. MBC is a mid-sized Japanese wheel, bearing and axel manufacturer and distributor which supplies the automotive and aircraft original equipment, replacement and repair and wheel aftermarkets (OEM sales constitute roughly 50% of total sales, replacement and repair sales constitute approximately 20% of total sales, and wheel aftermarket sales constitute approximately 30% of total MBC sales). Approximately 50% of MBCís profits, and 40% of total sales, are generated by sales of precision bearings and wheels for precision machinery applications and, as such, do not compete with NEBís sales of Products.

MBC is the second largest manufacturer in Japan, but has very little international presence (it supplies several Korean automotive manufacturers from its factories in Japan). MBC has a strong distribution and repair network in Japan which has been developed over a 40 year period.

The NEB negotiating team will be traveling to a meeting with MBC in Japan to negotiate a technical know-how license and distribution agreement for automotive subassemblies and automobile and aircraft wheel aftermarket sales.

The President of NEB places great importance on the proposed license and distribution agreement with MBC. He considers penetration of the Japanese market critical to maintaining NEBís leading market position in the world. In particular it is essential that the agreement assure NEB brand products full access to MBC repair and replacement and wheel aftermarket sales networks.

The President of NEB believes that MBCís distribution network could never be duplicated by MBC at any price and its long-term access to the network must be assured. Eventually, NEB would like to acquire this network from MBC, but the President knows this can only be discussed after many years of close cooperation with MBC. The license and distribution agreement is a first step in establishing a close NEB/MBC alliance in Japan. NEB would like to have as long a license and distribution term as possible.

NEB believes that MBCís know-how and patents are five to ten years out of date. However, MBC has the only facilities in Japan for the production of MBC brand products (using NEB know-how) which are suitable and available (Asahi has the only other suitable facilities in Japan) and local production will greatly reduce the cost of NEB products and ensure greater sales in the Japanese market.

NEB is willing to license its world class technology to MBC for the production of NEB brand Products and for inclusion in the production of MBC brand Products. NEB would like a royalty of 5% of Net Sales on NEB brand Products which use the technology but would agree to 3% of Net Sales, if necessary. NEB wishes to obtain a grant-back license for any improvements in know-how and patents developed by MBC using NEBís technology.

On NEB brand products produced by MBC for distribution in Japan, NEB would like 7% of Net Sales but would agree to as little as 5% of Net Sales. In order to make sure that MBC promotes NEB brand products and maintains their quality (NEB Products enjoy strong brand recognition and a quality reputation internationally), NEB wishes to have the right to supply up to 50% of all NEB Products from facilities outside Japan. MBC will also be required to maintain a minimum annual level of sales through its network. NEB minimum and target objectives for the first five years of the NEB/MBC relationship are as follows (based on NEBís market research):

(¥ millions)

	Year 1	Year 2	Year 3	Year 4	Year 5
Minimum Sales	100	400	700	1,000	1,300
Target Sales	500	1,000	2,000	4,500	7,500
ìBest Caseî Sales	800	2,000	4,500	7,500	11,000

NEB wishes to protect its international market sales from competitive sales of MBC produced NEB Products and from MBC produced Products using its and NEBís technology. Under no circumstances can MBC be permitted to export Products made using NEB technology (whether NEB brand or MBC brand Products) to the North America or European markets. NEB would prefer that such Products also not be sold to South and South-East Asia markets where NEB has on-going expansion plans. NEB has no objection to MBC sales to Korea continuing (as currently undertaken by MBC) and would be willing to permit sales to Taiwan, the Philippines and Malaysia if necessary to secure a distribution capacity in Japan. Sales to China might be considered, but NEB strongly wishes to discourage MBCís overseas expansion in this area because of its significant future potential.

The President hopes you can arrange as lucrative a license and distribution agreement as possible without compromising NEBís international objectives or losing sight or NEBís long-term objectives in Japan.

MBC is essentially a family corporation. The Chairman of the Board of MBC is Mr. Tatsu Minami (78) who is also the founder of MBC and MBCís largest shareholder. His son, Mr. Osamu Minami (58) is the President of MBC. The Chairman and the President work together well, but have somewhat different visions of the Companyís future. Both support an alliance with NEB, but for different reasons.

The Chairman supports an alliance with NEB because he sees it as a way of reviving the MBCís historic bearing and wheel business which has been in decline because of international competition, higher capital requirements and MBCís increasingly out-of-date technology. He believes that the NEB relationship will permit NEB to market MBCís products in international markets starting with Asia and eventually including the United States and Europe. He knows, however, that NEBís competitiveness even in the Japanese market will depend on obtaining NEB technology and including it in MBCís industrial (non-precision) Products.

The President has a more pragmatic vision of MBCís future. He believes that MBCís future lies in the higher margin and more specialized portion of MBCís business involving precision bearings and wheel assemblies. The impact of the higher Yen has been little noticed in this area although it has driven down margins in MBCís industrial Products segment. The President feels that even with NEBís technology, MBC will at best only be able to barely maintain its current market share in Japan and will never be competitive internationally. He wishes to direct all of MBCís efforts into the precision machinery area where the Companyís products enjoy (through the support of several Japanese trading companies) a 45% market share. He would like to increase this share to 60% by the year 2000. He sees the alliance with NEB as a way to continue to support (and provide a meaningful livelihood for) the majority of MBCís employees who produce MBCís industrial Products. He would eventually (after his fatherís death and after a suitable transition period) turn over management (and responsibility for) this business to NEB through a production joint venture or disposition of assets. He recognizes, of course, that (because of cultural and business expectations) this transfer of the industrial Products business can only be accomplished over the long term. Eventually, the President would like to position MBC as a lean high-technology cash machine specializing in the bearing, wheel and specialty metals fabrication markets (in particular, as a leading manufacturer of parts for robotics machinery). In the meantime, he recognizes the practical necessity of appearing to pursue his fatherís more traditional vision.

The Chairman and the President have jointly agreed to the following strategy for negotiations with NEB.

1. MBC will pay a royalty of not more than 6% (and preferably 3%) on Net Sales of NEB brand Products produced by MBC.

2. MBC will pay a royalty of not more than 3% (and preferably 1%) on Net Sales of MBC Products incorporating NEB technology.

3. MBC will obtain an undertaking by NEB to sell MBC Products in Taiwan, China, Singapore, Hong Kong, Thailand, Malaysia and the Philippines (and after 3 years throughout Asia) though NEBís distribution network. MBC will obtain a further commitment to negotiate in good faith worldwide sales after 5 years. MBC would like to obtain the following target export sales through NEB over the first 3 years:

(¥ millions)

	Year 1	Year 2	Year 3
Target Sales	50	200	300
ìBest Caseî Sales	100	400	600

4. MBC will be licensed as the exclusive distributor of NEB products in Korea (thus keeping NEB out of Korea).

5. MBC will commit to ìbest effortsî sales of NEB Products in Japan through MBCís distribution network.

6. During the first two years of the alliance MBC will import any NEB Products which it cannot produce using its facilities, but eventually wishes to have all Japanese market sales of NEB Products produced in Japan.

The Chairman and President realize, however, that some compromise with NEB may be necessary with respect to the above targets and goals and intend to maintain flexibility in the negotiations to obtain the best overall package for MBC.