Reference no: EM132918630
The Case PharmSave Ltd (PSL) expansion to Japan and Thailand
You have been appointed as an advisor to a leading pharmaceuticals manufacturing company (PharmSave Ltd (PSL) - a hypothetical company) established in Australia. The company owns a number of reputable vitamin product lines which have been protected by international patent rights law.
As an expert in international finance and banking, you are required to assist PSL to expand its current operation into a number of overseas markets.
The company currently engages in export and import activities using a well-linked international network of agents. The company distributes its product in China using its own subsidiary. In addition, they also have a very good presence in the cyber market.
However, the recent global health crisis has a significant effect on both the firm operation and the cash flow positions. Especially, high volatility of the local currency value in the foreign exchange market have undermined the firm's ability to manage its cash flow positions. On this background, the company have decided to revamp its international trade and finance strategy.
The company currently uses AUD as their international trading currency and all suppliers are advised to invoice in AUD. However, the fluctuation of other currency values against the AUD have forced the company to re-think its invoicing policy. Since, most of its foreign suppliers are invoicing their products in United State's dollar (USD), the management of the company expects invoicing its exports USD or the currencies used in trading partners' countries. The company management believe, this change will help them to minimise the adverse effect of foreign currency value changes
PSL are allowed four months to settle their suppliers' invoices.
PSL expects to expand its operations into Indonesia and Thailand by forming two subsidiaries in these two countries. In Thailand, they plan to establish a network of small retail outlets in leading supermarkets. Most products for proposed outlets network in Thailand are expected to be shipped from its current manufacturing facility in Australia.
Currently, the company sources some raw-materials from Indonesia. A feasibility study conducted last year revealed that locating a manufacturing plant in Indonesia would bring a huge cost advantage. Therefore, the company is considering to construct a state of the art manufacturing facility in Indonesia to produce some of its vitamin products using local labour and materials. This new proposed manufacturing facility will be used to satisfy the growing demand in South-East Asia.
PSL's policy is to review the cash flow situation of all its subsidiaries every three months and remit any excess cash balances to the head office in Australia. Currently, excess cash are transferred any time whenever the subsidiary cash balance exceed the allowed limit. Consequently, the parent in Australia transferred cash to the subsidiaries when they are in short in cash.
In light of above background information, you are required to develop a management advisory report addressing the following issues.
Introduction
Read Chapter 1 and study session 1 notes and complete the following
- Identify main objective of PSL and its internationalisation objectives (motive for internationalisation), the strategies used for internationalisation (mode of internationalisation), types of cash flows, types of foreign exchange risk exposures which the MNC is facing.
- Apply internationalisation theories (comparative advantage, product life cycle and imperfect market) to illustrate the possible motives for having it operation in China and expanding to Thailand and Japan.
- Explain possible advantages and disadvantages of PSL's current international trading strategy (subsidiary in China, export & import and online presence).
- Identify operational and financial strategies used by firms in pharmaceuticals industries. Explain how those strategies contributed for the successes of such firms. Link those strategies with PSL. Explain.
- Why do you think establishing a foreign subsidiary is more appropriate than the other available modes of internationalisation? Explain possible advantages PSL can enjoy through a foreign subsidiary.
Country Analysis
Read Chapter 13 and 14 of your text book and complete the following
- Explain how COVID-19 is different from the other previous crises.
- Out of the four countries mention above (China, Indonesia, Malaysia and United States), select two countries and write a report on how COVID-19 has shaped current market condition of those two countries. You are required to critically evaluate the economic and financial environment, and the prospects of your chosen country during and after the COVID-19 (here you can discuss the impact of the COVID on money market, capital market, good and services market and the foreign exchange market, Anticipated GDP growth, inflationary prospects and interest rates, wages and employment conditions, social and political situation and competitiveness). You may use tables and graphical exhibit to present your information).
- Identify the austerity measures introduced by the selected countries to minimise the adverse impact of COVID-19. Evaluate how such measures can affect to the business firms like MPL.
- Dose COVID-19 affect the probable risk on doing business in foreign countries? Should MPL go ahead with the proposed manufacturing facility in Indonesia?. Critically evaluate.
Conclusion/references/reporting format - 10 Points
Based on your discussions make a concluding remark on FX rate risk and country risk faced by the MPL and possible strategies to mitigate their risk exposure.
Useful links
- Bank of Nagara for foreign exchange rates: https://www.bnm.gov.my/exchange-rates
- World Bank for country specific data: https://data.worldbank.org/
- World Bank for country risk analysis: https://www.doingbusiness.org/en/rankings
- OECD for Country risk assessment: https://www.oecd.org/trade/xcred/crc.htm
- S&P Global - Country Risk Assessment Update: https://www.maalot.co.il/Publications/OAC20171123160228.pdf
- Web link for other Central Banks: https://www.centralbanksguide.com/central+banks+list/