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 increased their interest rates by 2.25%, which is the highest level since 2008. The policy is meant to make the higher price of living more manageable for the citizens of the country. They voted to freeze energy bills and to cut taxes. Although these changes sound like a great idea for the citizens, they run the risk of inflation getting out of control and a recession seems to be on the not so distant horizon. Daewoo’s profits are sure to decrease as interest rates increase and a recession is in the future. With higher interest rates, people are less likely to take our loans to pay for a vehicle. I believe the company should keep interest rates in line with inflation. The analysts predict inflation will cap at 11 percent and fall down to 2 percent soon after. Daewoo should put their contingency plan in place and cut costs incase the recession hits earlier than expected.
The British Pound is decreasing in value compared to the U.S. Dollar. The decrease in value tightens Daewoo’s profit margin, because it still costs the same amount to manufacture in the United States, but the value for it decreases overseas. The company should find a way to cut manufacturing costs in the U.S., or increase their prices in England to make up for the difference.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.
My answer would change because Daewoo would not be effected by the foreign exchange rate. They would just manufacture and sell their products with the same currency.