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23 Mar 2019

Background:

You are the owner of a manufacturing firm (a C-Corporation), with the following characteristics:

a) You manufacture “things”, at production facilities in several locations in the U.S. You also directly own production facilities in China and the Netherlands, and you use outside contract manufacturing facilities in Thailand.

b) You purchase the raw materials and parts to manufacture “things” from a variety of vendors and sources, both in the U.S. and in the EU. You also purchase parts from a subdivision of your company, located in Thailand.

c) You sell globally, through a combination of directly employed sales representatives in the U.S., independent sales representatives in the EU, and Export Management Companies.

Given the above facts, and your imagination, answer the following questions:

1) What are some of the issues and risks in currency exchange rates that you face, in terms of your sales revenues, your Costs of Goods, your debt service obligations (and sources of capital), and your interest earnings on your left-side of balance sheet securities portfolio? Discuss the risks you face, and some of the measures you can take to mitigate those risks.

2) The list price of your “thing” is $100 in USD. Under the terms of the Law of One Price and the discussion in the book on relative PPP (and using current exchange rates as quoted today in the WSJ), what should the price of a “thing” be in England? In the EU? Discuss some reasons and factors why the price might actually be different than it should be under the theory of PPP?

3) Explain the concept of ‘comparative advantage’. How would this apply to your company and its production of “things”? Under what conditions could you argue that your company has a comparative advantage over companies in other countries? Use your imagination in defining what your “thing” is. What factors can change a nation’s comparative advantage over time? For example, explain why some industries are ‘re-shoring’, returning from Asia back to the U.S.

4) Discuss the process of “globalization”. What are the steps and levels of a firm, including yours, as they progress from strictly domestic production and sales towards a multinational level? What are the reasons that any firm would consider globalizing, and what are some of the risks? How can those risks be mitigated?

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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 Makers Profit Higher, The Wall Street Journal, February 4, 2016. Page 294

Case Discussion Questions:

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?

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

What are the potential benefits? Why did Subaru's sales and profits surge in 2014 and 2015? Is Subaru wise to expand its U.S. production capacity?

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?

Background When you look at news reports of any kind, there can be a tendency to take them at face value, accepting what they tell us as the truth. This is usually a grave mistake. News typically moves quickly, with tight deadlines to get information and there is almost always a bias at play. Numbers are an easy way to manipulate the truth--and truth itself can be pretty flexible when it comes to human relationships. The value of the truth can also be flexible depending on your point of view. For example, in the second quarter of 2015, the U.S. dollar is strong--meaning it has a high value against foreign currency. Is this a good thing or a bad thing? If you're a consumer, it's generally a good thing in the short-term. It means items imported to the U.S. cost us less to buy. Go us! If you are a growing business that exports, it's a bad thing because your costs make it difficult to compete with locally produced goods in foreign markets. If you're traveling out of the country, it's good because the dollar goes farther. If you have a business that benefits from foreign tourism, it's bad because visitors have less money and may chose to go to other places where their money gives them more buying power.

find an article (you might try MSN Money or CNN Money or something similar) and then write at least 600 words. how strong the position the article takes is. Questions to consider include: What are the weaknesses to the article? How are numbers used effectively? What's missing? How are the numbers being used to disguise something?

ARTIcle

President Obama slapped a stiff 35% tariff on Chinese tires in 2009 after American companies complained about unfair competition. They said China was flooding America with tires at low prices making it tough for U.S. companies to compete. The tire tariff gradually waned, and finally ended in 2012. The tariff saved 1,200 U.S. tire jobs, which had been in sharp decline. And U.S. tire production rose after a major decline. "Over a thousand Americans are working today because we stopped a surge in Chinese tires," Obama said in his 2012 State of the Union address. But a study from the Peterson Institute of International Economics found that the tariffs cost Americans in many other ways. Americans paid more for tires. Some Chinese-made tires cost as much as 26% more -- rising on average to $39 per tire, from about $31. And U.S. tire makers, facing less competition from China, also raised prices on American-made tires 3.2%. According to Peterson's model, higher prices from the tire tariff cost Americans an extra $1.1 billion, which translated to an estimated 3,731 retail jobs lost. Plus, China fought back by imposing penalties on U.S. shipments of chicken parts. The Peterson study estimates that China's retaliation cost American chicken producers $1 billion in sales. "Tire safeguards did not change Chinese policies in a helpful way, nor did they boost U.S. employment," wrote Gary Hufbauer, a trade expert at Peterson, who authored the report. Indeed, the tariffs didn't bring the tire-making jobs back to previous levels -- a similar trend that's played out for the rest of U.S. manufacturing. But they did help to stem the job losses. In 2008, there were about 60,000 American workers making tires. Now, there are about 55,000. That's better than the low point reached in 2010 but not back to pre-tariff levels. Related: Trump's 35% tariff on companies: Easier said than done An Obama administration official, who requested anonymity, disputed some of the calculations and assumptions in the Peterson study. For instance, the official claimed tire prices did not go up by as much as the study claims. Hufbauer said no one until now had contested any of his analysis in the four years since it was published. He noted that the administration official didn't provide an alternative estimate for price changes. Republican presidential nominee Mitt Romney criticized Obama for the tariffs in his 2010 book "No Apology." "President Obama's action to defend American tire companies from foreign competition may make good politics by repaying unions for their support of his campaign, but it is decidedly bad for the nation and our workers," Romney said. U.S. tire makers still applaud Obama's tariffs. Morry Taylor, CEO of Titan International, a U.S.-based tire company, is one of them. "He did what he should have done and he should have done more of it," says Taylor, who voted for Trump. His company has plants in Ohio, Wisconsin and Illinois (they also have operations in Brazil and Russia). Related: 3 ways Trump can go after China and Mexico Taylor argues that if the tariffs weren't put in place he might not have any business today to speak of. By 2012, Taylor still had 1,800 tire-making workers, about the same amount as before the tariffs. Today, however, his firm only has a little more than 900 workers. His problem today is what he describes as unfair competition from India, where firms make cheap tires and sell in the U.S. at prices he can't afford to sell at. He hopes Trump considers higher tariffs on tires, saying it would save jobs. To be clear, Obama wasn't trying to "bring back jobs" so much as protect the ones already in America, which he accomplished. Trump wants to bring manufacturing jobs back from other countries. Some trade experts believe that would be difficult task, since many of jobs overseas are low-skill positions and many U.S. manufacturing firms now want highly skilled employees. In any case, U.S. tire production recovered but didn't surge. Instead, U.S. tire imports from all other countries excluding China rose dramatically, Hufbauer found. In other words, the Chinese tire jobs didn't come to the U.S. -- they went to the next cheapest countries. In the end, Hufbauer argues the tariffs didn't make a difference. "The best thing about the tire tariffs is that they expire," Hufbauer wrote in 2012. CNNMoney (New York) First published January 3, 2017: 3:41 PM ET

Background

Clothing sales have risen dramatically in recent years, thanks to several trends that appear likely to continue. It was reported that the global demand for clothing looks set to increase significantly over the coming decade as millions of people in developing countries enter the middle class and spend more on apparel. It also seems the demand for fast fashion will only continue to grow (Remy et al. 2016). This is further supported by a new research from Kurt Salmon, part of Accenture Strategy, one in eight younger consumers (18 to 24 year olds) shopping every week and buying a fashion item at least once a fortnight (Accenture 2017). Clothing production doubled from 2000 to 2014, and the number of garments purchased each year by the average consumer increased by 60 percent. Fast fashion has been a particularly hot segment and a source of enviable growth for some clothing companies (Remy et al. 2016). The process of making a piece of clothing involves multiple suppliers across the supply chain in the following processes including: farmers who grow the raw materials; ginners receive cotton from multiple growers and sell to the global market through traders; spinners use cotton from a variety of origins to produce yarn and fabric mills produce cloth. The manufacturing process begins which involves cutting, sewing, trimming, embroidery, orienting, and washing. Next, the manufacturers ship the garments wholesale to the brand that placed the orders who distributes garments globally to retail and online stores (Human Rights Watch 2017). At the end of its life, the apparel/garments may either be recycled or discarded and go to landfill. The manufacturing usually involves multiple suppliers in a very complex supply chain, which reduces transparency and visibility along the complex value chain. Brands therefore are not aware of what happen at their suppliers’ business along the supply chain. Brands also do not typically deal directly with all those suppliers, and many do not bother to dig deep into their supply chains (Gunther 2016). On the other hand, consumers are, attracted by the low cost and constantly update product ranges with new styles and designs. Consumers are buying these clothes much more often and in greater quantities, but often wearing them only a handful of times before discarding them. This fast-fashion industry and ecosystem consumes large amounts of natural resources in the production, which ultimately accelerating carbon emissions and global warming. The industry has also been linked to a number of cases of worker abuses in countries producing the garments. The workers were underpaid and exposed to unsafe and poor workplace conditions, particularly when handling materials like cotton and leather that require extensive processing (Remy et al. 2016). One example is the disaster at Rana Plaza, which is one of the deadliest accidents in the fashion industry happened on 24th April 2013. (The Economist 4th May 2013). Over 1,130 people were killed and 2,500 more were injured when the Rana Plaza factory complex collapsed in Dhaka, Bangladesh. It was reported that people crushed under those eight floors were working for dozens of familiar multinational brands and retailers. It is ‘one of the many negligent accidents that plague the garment industry’ (Fashion Revolution CIC 2015, p.4).

Assignment Tasks

Assume you are a newly appointed accountant in a local fashion company -RTXM Clothing Company (RTXM) - based in Melbourne, Australia. This is a private family business with 20 shareholders. Currently, the company has seven different departments, include Accounting and Finance, R&D (product design and development), Salesand Marketing, Human Resources, Information Technology, Distribution and Logistics, and Merchandising, with a total of 130 employees. Managers in each department are given the authority regarding operational decisions and their performance is measured based on the company’s profit, and all the other employees receive the fixed salary package. The company pays taxes to Australia Taxation Office (ATO) on a regular basis. Originally, the business offered only t-shirts and jeans. As the business was trying to join the growing fast fashion industry, it expanded its product lines to include dress, trousers, shorts, hoodies & sweats, socks, shoes, and bags. The objective was to provide a wide selection of product lines in order to reach more fashion conscious consumers. A characteristic of them market is consumers are mainly attracted by low price, and frequent new styles and designs, so the company also seeks to find the suppliers with low prices. The business has retail stores in the major city across Australia and online store. Since the company expanded its product line, managers from different departments found the number of complaints received from customers have tripled. Most complaints are related to the product quality (products are either defective or damaged), items consistently out of stock, online shopping experience (delivery of wrong items and long response time to emails), and in-store experience (lack of attention from sales representatives), and some customers have posted complaints on RTXM social media. In order to enhance the overall performance, the company is considering using a range of key performance indicators in managing its performance. This is to ensure that the company keeps track of its performance and to achieve the objectives they set for the identified issues. In addition, the CEO and senior management decide to find new suppliers to improve the product quality, however, they encountered a dilemma. On the one hand, they found a supplier in Bangladesh, Super Cheap who can provide a large range of products to fit in their business expansion plan with a competitive price and all products can be supplied in a short time frame. However, after a careful investigation into this company’s background, they found this supplier has a major issue with labor conditions throughout their supply chains, including the use of child labor, low wages, and health and safety hazards, and long working hours. In terms of the environmental aspect, Super Cheap consumes a few thousand litres of water to produce a cotton t-shirt and over ten-thousand litres to produce a pair of jeans, and wastewater discharge into the local river, and it did not take any action to solve this issue. The polluted water is no longer fit for drinking or laundry, fishes no longer exist in this river, and local residences complain that their homes are flooded by dirty water. On the other hand, RTXM has another potential supplier, called Green Fashion, who only provides limited product range with a higher price, and products can be supplied in a reasonable time frame. However, Green Fashion takes account of sustainability and makes it as part of their business, and their sustainability agenda has been presented on its website, including fashion designs that is kind to the environment, they also ethically source materials and labour, promote work-life balance of the employee in the retail business, and provide incentives to their local and outsourcing partners and their employees if their targets are met. The CEO and management of RTXM learnt that Green Fashion has very similar values and sustainability agenda. RTXM considers sustainability as part of the business. It is reported on their websites that the company wants to rethink fashion designs so that they are kind to the environment, to ethically source materials and labour, promote work-life balance of the employee in the retail business, and provide incentives to their local and outsourcing partners and their employees if their targets are met.

Required:

1. As an accountant of the company, you would like to have a better understanding of how the sustainability of the company will impact on the stakeholders. You believe the most efficient way is to identify important stakeholders. Refer to the case and identify five relevant stakeholder groups and discuss how different accounts could be used to satisfy each group’s information requirements.

2. In order to enhance company’s performance, the CEO thinks it might be insufficient to use profit as the only performance indicator, and is considering using a range of key performance indicators to manage the business. You believe the Balanced Scorecard is a useful performance measure framework that can be used, as it gives management an overall picture of company’s performance. You have been asked to develop a Balanced Scorecard to assist RTXM in managing its overall company’s performance and demonstrate how it works to the management and staff in next company meeting. You need consider ONE of the most important metrics that could be used for each of the four perspectives of performance and explain the reason why it has been selected and how it can be used to improve company’s performance.

3. The CEO believes the company was attractive because of its previous low price strategy but has also noticed unprecedented awareness from customers on the company’s social responsibilities. The CEO approaches you to discuss the selection of supplier, which supplier is better for company’s strategic development. Provide an explanation to the CEO with reference to the potential costs and benefits of working with both Super Cheap and Green Fashion.

4. After your analysis above, the CEO starts realizing the importance of working with social and environmental friendly suppliers, however, still does not have a comprehensive understanding to the positive and negative impact his company’s products might have both socially and environmentally. You decide to use the Life Cycle Analysis (LCA) for a product that the company offers to enhance their understanding. Draw the LCA, and select one or two stages of the LCA, identifying a total of four possible social and environment impacts. If the impact is detrimental either socially or environmentally, give suggestions to minimize the impact. If the impact is positive, give suggestions as to maximize the benefit. You are required to undertake some research to answer this question.

5. Subsequently the company decides to contract with the Green Fashion. Some important shareholders attempted to block this proposal. Their belief, as the owners of this company, is that the company should aim to maximize the value of their shares, however, the new business plan could significantly increase the costs and therefore reduce the profit. You are required to identify an organisation, business or industry and explain whether and how it could potentially increase the value of its shares in the long term by being accountable to its major stakeholders. You are required to undertake some research to answer this question.

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