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 has decided to increase the interest rates. Eshe Nelson discussed that the reason for increasing the interest rates is to prevent the increasing inflation from being immersed with the economy which would make matters worse (New York Times, Sep 22 2022). Since an increase in interest rates is a sign of a recession in the works, the possibility of a recession is more likely than not. Also consumer rates seemed to be increasing and this is another sign of a recession. The risk of the interest rates increasing would lead to consumers to hold off on purchasing any assets that require borrowing money from the bank. Consumers might not want to have that liability with the bank if the interest rates are at an uncomfortable high rate. Daewoo’s profits might decline with the result of high interest rates and it might take a tole on the company’s monthly revenue. The company should be aware of the issue with the economy and try to save money to be prepared to pay any additional costs. Since the profit coming in will be substantially lower, the company should lower their prices for cars to see if this would help consumers price wise and motivate them to buy a car.
The British Pound is depreciating in value against the U.S. Dollar. Nelson in the New York Times article stated, “The pound has weakened about 17 percent this year against the U.S. currency but has also shown broad weakness against most other major currencies.” With this decrease in the value of a dollar, Daewoo’s profits will show significant decline and might result in the company loosing money. Once the transfer from the British Pound to the American Dollar is complete, Daewoo will be seeing a declining value in the money as a whole. Because of the depreciation of the British Pound, Daewoo needs to be aware of the increase in price for importing its products to the U.K. and with the rise in prices, maybe they should let go of some employees to save money.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.
The answer would change in a positive way. Since the British Pound is depreciating in value, the currency for the U.S. Dollar could potentially be higher and therefore the company could gain profit from this transfer of the currency. Daewoo should also double check the price stability in the U.S. such as the interest rates and bonds. Gathering information regarding the economy in the United States will help Daewoo navigate a successful price range for their product to gain profit in the end. For the Foreign Exchange, Daewoo needs to be aware of the market and find out if the value of the U.S. Dollar is in their favor. With this knowledge, Daewoo can be successful in the U.S. and hopefully continue down this path.