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 been increasing interest rates, the reason for this policy move was to be able to keep high inflation from starting to get embedded in the economy of the nation. The risk of this is that consumer prices had risen 9.9% a year apart from where it was the year prior. This is an issue because at a certain point people will not be able to keep things a float which will lead to a potential recession. This will impact Daewoo’s profits because with the economy looking so steep due to consumer prices rising and them being in the automobile market. The British Pound is also decreasing in value against the U.S Dollar where the USD is $1, and the British pound is $0.86 This means that the companies profits could potentially take a hit due to the difference in the exchange rate, the way the company can still profit is by lowering the prices of their automobiles however with how the British economy is looking, it seems like it will be difficult for people to purchase cars at this time.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.
If Daewoo made cars in the U.K that were to be sold in the U.S market, this would still not be good for the company overall. The reason for this is because since the British pound is still decreased in value to the US Dollar from $1 to $0.86. Daewoo would end up losing profit if they were to start selling their product to the United States due to the exchange rate.