Reference no: EM131207604

International 5

The firm manufactures a global positioning system (GPS) that sells for $2,000, with cost of goods sold (hardware 30% and software 70%) of 55% of sales. Compared to the United States, China offers a 7% cost reduction in electronics manufacturing hardware and a 45% reduction in software programming. India offers a 32% reduction in software programming costs. So far, you have been unable to determine whether India has the facilities to undertake the hardware manufacturing. The firm has to invest $300 million. As far as China is concerned, you can send hardware and software manufacturing to China or India.

You have been asked to lead a team to study and create a report for the executive team on both countries as business opportunities. As a group, study both China and India to make your calculations and recommendations as follows.

Power Point 8 - 10 Slides

• Risk is a significant factor. Identify each of the risk factors for each country (political stability, exposures of transaction, interest rate, operating, and translation); currency exchange rates; currency controls; skilled labor; facilities; infrastructure; each country's track record in using foreign direct investment (FDI); and any history of political corruption and roadblocks to establishing a going concern business.

• Explore the expected GDP growth of each country and the forecast exchange rates to the U.S. dollar. Based on the forecast exchange rate with the U.S. dollar in 1 and 2 years, should the $300 million investments be paid for immediately, hedged, or paid 50% ($150 million) in 1 year and 50% in 2 years?

• What is the projected savings for the firm?

• What is the new cost of goods sold percent of sales for each of the countries?

• What are your recommendations on choice of country?

• How can your firm arrange the business to be most profitable?

• Assume the following:

• Using the current spot rate for the yuan exchange rate, the 12 -month forward rate is showing a 1.5% weaker U.S. dollar, and the 24-month forward rate of exchange is showing a 2.4% weaker U.S. dollar.

• Using the current spot rate for the rupee exchange rate, the 12 -month forward rate is showing a 1.0% weaker U.S. dollar and the 24-month forward rate of exchange is showing a 2.0% weaker U.S. dollar.

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