(Tiểu luận) case 1 subaru’s sales boom thanks to the weakeryen

Subaru still makes 80 percent of its vehicles at home, compared with 21 percent for Honda.. Subaru's profit margin has increased to 14.4 percent, compared with 5.6 percent for Honda, a c

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CASE STUDY MÔN HỌC : INTERNATIONAL BUSINESS

LỚP : PSU IB 351 BIS

GVHD : PHẠM MINH VÂN ANH NHÓM SV : Lương Thị Ngọc Bích

Nguyễn Nhật Cương

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PSU (Dành Cho Đồ Án Cá Nhân/ Đồ Án Nhóm)

MÔN: International Business

MÃ MÔN: PSU IB 351

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CASE 1: SUBARU’S SALES BOOM THANKS TO THE WEAKER

YEN

For the Japanese carmaker Subaru, a sharp fall in the value of yen against the U.S dollar has turned a problem—the lack of U.S production—into an unexpected sales boom Subaru, which is a niche player in the global auto industry, has long bucked the trend among its Japanese rivals of establishing significant manufacturing facilities

in the North American market Instead, the company has chosen to concentrate most

of its manufacturing in Japan in order to achieve economies of scale at its home plants, exporting its production to the United States Subaru still makes 80 percent of its vehicles at home, compared with 21 percent for Honda

Back in 2012, this strategy was viewed as something of a liability In those days, one U.S dollar bought only 80 Japanese yen The strong yen meant that Subaru cars were being priced out of the U.S market Japanese companies like Honda and Toyota, which had substantial production in the United States, gained business at Subaru's expense But from 2012 onward, with Japan mired in recession and consumer prices falling, the country's central bank repeatedly cut interest rates in an attempt to stimulate the economy As interest rates fell in Japan, investors moved money out of the country, selling yen and buying the U.S dollar They used those dollars to invest in U.S stocks and bonds where they anticipated a greater return As a consequence, the price of yen in terms of dollars fell By December 2015, one dollar bought 120 yen, representing a 50 percent fall in the value of the yen against the U.S dollar since

2012

For Subaru, the depreciation in the value of the yen has given it a pricing advantage and driven a sales boom Demand for Subaru cars in the United States has been so strong that the automaker has been struggling to keep up The profits of Subaru's parent company, Fuji Heavy Industries, have surged In February 2015, Fuji announced that it would earn record operating profits of around ¥410 billion ($3.5 billion) for the financial year ending March 2015 Subaru's profit margin has increased

to 14.4 percent, compared with 5.6 percent for Honda, a company that is heavily dependent on U.S production The good times continued in 2015, with Subaru posting record profits in the quarter ending December 31, 2015

Despite its current pricing advantage, Subaru is moving to increase its U.S production It plans to expand its sole plant in the United States, in Indiana, by March

2017, with a goal of making 310,000 a year, up from 200,000 currently When asked why it is doing this, Subaru's management notes that the yen will not stay weak against the dollar forever, and it is wise to expand local production as a hedge against future increases in the value of the yen Indeed, when the Bank of Japan decided to set

a key interest rate below zero in early February 2016, the yen started to appreciate against the U.S dollar, presumably on expectations that negative interest rates would

finally help stimulate Japan’s sluggish economy By late March 2016, the yen had appreciated against the dollar and was trading at $1=112 yen

Sources: Chang-Ran Kim, “Subaru-Maker, Fuji Heavy Lifts Profit View on Rosy US Sales, Weak Yen,” Reuters, February 3, 2015; Yoko Kubota, “Why Subaru's Profit Is Surging,” The Wall Street Journal, November 14, 2014; Doron Levin, “Subaru Profit Soaring on Weaker Yen,” Market Watch, November 15, 2014; Y Kubato, “Weaker Yen Drives Subaru Maker’s Profit Higher,” The Wall Street Journal, February 4, 2016 Page 294

ANSWER

1 Why do you think that historically, Subaru chose to export production from Japan, rather than set up manufacturing facilities in the United States like its Japanese rivals?

- To achieve economies of scale at its home plants

- To achieve special care for quality

- To achieve lower cost

2 What are the currency risks associated with Subaru's export strategy? What are the potential benefits?

 Currency risk:

 Fluctuating foreign exchange rates

 Unpredictable gains or losses

 If Yen appreciates against the dollar -> Subaru’s cars become more expensive and less competitive in U.S market compared to other rivals -> reduce sales and profit

 Potential benefits:

 High pricing power

 Discount

 Exchange rate of JPY and USD

 Lower manufacturing costs

3 Why did Subaru's sales and profits surge in 2014 and 2015? Is Subaru wise to expand its U.S production capacity?

- Because the yen depreciated -> price advantage

- Subaru is wise to expand its U.S production capacity:

 As a hedge against future increases in value of the yen

 Meet the growing demand for its cars in the U.S market

 Reduce transportation costs and tariffs

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mại Quốc… 100% (8)

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ÔN TẬP GK THƯƠNG MẠI QUỐC TẾ đã… Thương

mại Quốc… 100% (4)

10

BÀI-GIẢNG-tay - học

và làm việc

Thương

mại Quốc… 100% (2)

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Trắc nghiệm môn Thương mại quốc tế Thương

mại Quốc… 100% (2)

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4 What other strategies could the company use to hedge against adverse

changes in exchange rates? What are the pros and cons of the different

hedging strategies Subaru might adopt?

Advantages Disadvantages Forward exchange rates - Inexpensive to

maintain

- Lock in the current

exchange rate for a future purchase

- Reduce downside rsk

exposure

- Possibility of default

- Require typing up

capital

Currency swaps - Enable Subaru to

exploit comparative advantages

- Flexible

- High degree of

liquidity

- Possibility of default

- Breakage cost

Spot exchange rate - Easy to operate

- Limit order and stop

losses

- Lower capital

requirements

- High risk

- Not time flexible

IS Thương mại Quốc… 79% (14)

212

Bài giảng Thương mại quốc tế Thương mại Quốc… 100% (2)

55

CASE 2: VENEZUELA UNDER HUGO CHÁVEZ AND BEYOND

On March 5, 2013, Hugo Chávez, the president of Venezuela, died after losing a battle against cancer Chávez had been president of Venezuela since 1999 A former military officer who was once jailed for engineering a failed coup attempt, Chávez was a self-styled democratic socialist who won the presidential election by campaigning against corruption, economic mismanagement, and the “harsh realities” of global capitalism When he took office in February 1999, Chávez claimed he had inherited the worst economic situation in the country’s recent history He wasn’t far off the mark A collapse in the price of oil, which accounted for 70 percent of the country’s exports, left Venezuela with a large budget deficit and forced the economy into a deep recession

Soon after taking office, Chávez worked to consolidate his hold over the apparatus of government By 2012, Freedom House, which annually assesses political and civil liberties worldwide, concluded Venezuela was only “partly free” and that freedoms were being progressively curtailed In 2006, for example, Parliament, which was dominated by his supporters, gave him the power to legislate by decree for 18 months

In late 2010, Chávez yet again persuaded the National Assembly to grant him the power to rule by decree for another 18 months

On the economic front, the economy shrank in the early 2000s, while unemployment remained persistently high (at 15 to 17 percent) and the poverty rate rose to more than

50 percent of the population A 2003 study by the World Bank concluded Venezuela was one of the most regulated economies in the world and that state controls over business activities gave public officials ample opportunities to enrich themselves by demanding bribes in return for permission to expand operations or enter new lines of business Despite Chávez’s anticorruption rhetoric, Transparency International, which ranks the world’s nations according to the extent of public corruption, noted that corruption increased under Chávez In 2012, Transparency International ranked Venezuela 165th out of 174 nations in terms of level of corruption

Consistent with his socialist rhetoric, Chávez progressively took various enterprises into state ownership and required that other enterprises be restructured as “workers’ cooperatives” in return for government loans In addition, the government took over large rural farms and ranches that Chávez claimed were not sufficiently productive and turned them into state-owned cooperatives

In mid-2000, the world oil market bailed Chávez out of mounting economic difficulties Oil prices started to surge from the low $20s in 2003, reaching $150 a barrel by mid-2008 Venezuela, the world’s fifth-largest producer, reaped a bonanza

On the back of surging oil exports, the economy grew at a robust rate Chávez used the oil revenues to boost government spending on social programs, many of them

modeled after programs in Cuba These included ultra-cheap gasoline and free housing for the poor

In 2006, he announced plans to reduce the stakes held by foreign companies in oil projects in the Orinoco regions, to increase the royalties they had to pay to the Venezuelan government, and to give the state-run oil company a majority position Simultaneously, he replaced professional managers at the state-owned oil company with his supporters, many of whom knew little about the oil business They extracted profits to support Chávez’s social programs but at the cost of low investments in the oil company, and over time its output started to fall

Notwithstanding his ability to consolidate political power, on the economic front, Venezuela’s performance under Chávez was mixed His main achievements were to reduce poverty, which fell from 50 percent to 28 percent by 2012, and to bring down unemployment from 14.5 percent at the start of his rule to 7.6 percent in February

2013 Profits from oil helped Chávez achieve both these goals However, despite strong global demand and massive reserves, oil production in Venezuela fell by a third between 2000 and 2012 as foreign oil companies exited the country and the state-run oil company failed to make up the difference Inflation surged and was running at around 28 percent per annum between 2008 and 2012, one of the highest rates in the world To com- pound matters, the budget deficit expanded to 17 percent of GDP in

2012 as the government spent heavily to support its social programs and various subsidies

Following Chávez’s death, his handpicked successor, Nicolas Maduro, took over the presidency Maduro continued the policies introduced by Chávez Things did not go well By 2014, the country was in a recession The economy contracted by 4 percent, while inflation surged to around 65 percent The situation continued to deteriorate in

2015 Exacerbated by a sharp fall in oil prices and hence government revenues, the economy shrunk by 10 percent, the worst decline in the world By 2015, widespread shortages of basic goods had emerged Unemployment was rising Inflation increased

to 275 percent (the highest in the world) The poverty rate was back up over 30 percent To cap this litany of disaster, the value of the Venezuelan currency, the bolivar, fell from 64 per U.S dollar in 2014 to 960 per dollar by early 2016 The economy looked to be on the brink of total collapse

Parliamentary elections held in December 2015 resulted in large losses for the ruling United Socialist Party For the first time since 1999, the opposition gained a majority

of seats in Parliament, although Maduro still holds the presidency As yet, he shows no sign of changing course

Sources: D Luhnow and P Millard, “Chávez Plans to Take More Control of Oil away from Foreign Firms,” The Wall Street Journal, April 24, 2006, p A1;R Gallego,

“Chávez’s Agenda Takes Shape,” The Wall Street Journal, December 27, 2005, p A12; “The Sickly Stench of Corruption: Venezuela,” The Economist, April 1, 2006, p 50; “Chávez Squeezes the Oil Firms,” The Economist, November 12, 2005, p 61;

“Glimpsing the Bottom of the Barrel: Venezuela,” The Economist, February 3, 2007,

p 51; “The Wind Goes Out of the Revolution—Defeat for Hugo Chávez,” The Economist, December 8, 2007, pp 30–32; “Oil Leak,” The Economist, February 26,

2011, p 43; “Medieval Policies,” The Economist, August 8, 2011, p 38; “Now for the Reckoning,” The Economist, May 5, 2013 “Heading For a Crash,” The Economist, January 23, 2016;

ANSWER

1 Under Chávez’s leadership, what kind of economic system was put in place in Venezuela? How would you characterize the political system?

Under Hugo Chavez’s presidency, the economic system in Venezuela can be classified as a command economy During his term, there were various enterprises, rural farms, and ranches which the government claimed to take over and turned them into state-owned cooperatives which implies that the economy is planned, organized, and controlled by the government The political system under Chavez’s regime is quite mixed but can be described as authoritarianism A massive concentration of power and blatant contempt for basic human rights protections were trademarks of his administration He won because he campaigned against corruption, economic mismanagement, and harsh realities of global capitalism, but ended up committing

to it too

2 How do you think that Chávez’s unilateral changes to contracts with foreign oil companies will affect future investment by foreigners in Venezuela?

When Chavez announced plans to reduce the stakes help by foreign companies in oil sales just to increase royalties sales, it is clear that by making it, its become more challenging for future international investors to conduct business in Venezuela Chavez is endangering future economic growth because investors extracted profits to support Chavez social programs And despite of having a strong demand, it causes oil production in Venezuela decreased every quarter between 2006 and 2008

3 How will the high level of public corruption in Venezuela affect future growth rates?

Because of corruption, instead of the people benefiting, it is only the corrupt official who hold positions of power get the money instead of the public as a whole As a result, a nation's problems will worsen which will have an impact on Venezuela's future growth rate Instead, the money they embezzle may be utilized