None of our client companies operate in a foreign country. They don’t sell into a foreign market. Nor do they manufacture in a foreign market. So we will use a hypothetical manufacturing company, Daewoo, for the assignment.
Daewoo is an American automobile manufacturing company that makes cars in the U.S. and sells in the U.K. market. Assume that a majority of its revenue comes from the U.K. market. Read the attached article, and answer the following questions.
The bank of England raised their interest rates by another half a percentage point to 2.25 percent, the highest level since 2008. Rates in August slowed a little, but they still rose to 9.9 percent as the policy move is aiming to slow the fastest pace of inflation in nearly four decades. These economic worries have weakened the British Pounds strength against the dollar to its worst level since 1985 trading at $1.12. Government policy has hurt the British currency as well as the stock and bond market as investors worry these policies will help grow the economy sustainably. Daewo’s profits could take a hit as Britain’s economy looks glim for citizens spending power especially in the automobile market. Given the dollars strengthening rate against the Pound, Daewo might be able to profit more on vehicles sold, but purchasing power is weak at the moment. A smart step for the company would be to handle this situation like one would a recession in America. A possible tactic for the manufacturing company would be to hone in on focus groups that are more in need of vehicles and to focus on those specific target groups. Finding local suppliers and securing deals with these groups can minimize risk and maximize automotive profits for the business. Given that inflation is expected to peak in the UK at a lower rate, Daewo could take advantage of this by selling to a stronger market overseas.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.
This scenario might be even more dire for Daewo. With the Pound decreasing in value to the dollar, the company would lose profit when selling vehicles to a stronger economy. Daewo would need to monitor the monetary policy even more because if Great Britains’ economy continued to falter, Daewo’s entire profitable pool could vanish in no time. Daewo must tighten spending on materials and production might be more minimal to compensate. Understanding the American economic outlook would also allow Daewo to understand that inflation too is high in the United States as vehicles costs are sky high. Though this remains true, demand for vehicles remains high in the United States and Daewo could capitalize but carefully. Given the Pounds greater worth on a nominal basis than the dollar, the compnay could take advantage of high demand to generate profits especially with higher prices to counter high British inflation. Focusing on new marketing strategies for target groups in the United States could help Daewo further generate income on specific vehicles high in demand.