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 to the highest amount its been since 2008 (2.2%) in an attempt to slow down inflation. Their methodology behind this move is that they expect inflation to peak much sooner, but the trade off is that the inflation rates would be much lower than if they hadn’t raised the interest rates. That is est case scenario for them. Worst case scenario would be inflation peaking earlier at a high rate. This is not good for Daewoo and their profits as the exchange rate is much higher with the devaluation of the British pound. The British pound has not been this devalued since as far back as 1985. The U.S dollar actually is worth slightly more than the pound which is a pretty big deal considering how long it’s been since this occurrence. Daewoo has to diversify their market and sell to an oversees market that will be buying cars in the near future.
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 be pretty much the same. The U.S is also dealing with high inflation rates because of covid and the war in Ukraine. I think the biggest difference is that the market and rate at which U.K car buyers will be spending will be pretty low considering how high the interest rate is right now.