Doing Business in Germany - Essay Example

Doing Business in Germany 2 Table of Contents I. Introduction II. Discussion References 2 3 I. Introduction This paper discusses the problems faced by large companies in their attempts to establish and maintain operations in countries outside of their countries of origin, and essentially explores how they dealt, are dealing with those problems. There is no question that different countries and territories present different problems to companies, even those which are very large and which have the resources and the experience culled from decades of successful operations. Political changes, changes in the global economy, fluctuations in the exchange rates, technological changes, and even environmental changes generate ever new problems and challenges which companies must face in order to continue to operate successfully. For instance, changes in the enforcement and interpretation of tax laws in Europe have had an impact on the operations and viability of such companies in the European continent. The problems are tied to the way Europe for instance is pushing for higher tax collections from HP and other American firms, and that these problems in turn affect the profitability and the viability of companies such as HP (Duncan, 2012). Does HP enter at all, and what kind of entry strategy makes sense in light of this problem? When it has entered, does it pull out and miss out on the large and lucrative European market for computing products and services, or does it adapt and shift strategies in order to properly deal with the problem of more persistent and higher tax collection efforts on the part of the European governments? This is one case among many others that this paper discusses, presenting the problems faced by companies such as Siemens, BMW, Airbus, and Mercedes Benz, and also presenting the ways in which these companies solved these problems, using a variety of approaches specific to their circumstances and the problems that they faced, with a focus on the German market (The Economist Newspaper Limited, 2013). 4 II. Discussion In the case of HP and other American companies operating in Europe, the problem has to do with the way European governments have been pushing to collect more taxes from those companies, who in turn have been trying to move the other way via a global practice that sees those firms trying to avoid paying taxes by financial accounting maneuvering so that profits are reported in so-called tax haven territories. This is tied to the problem of HP being able to enter and operate successfully in the continent, and in what manner. In the end the solution seems to be to financially retain the identity of HP as an entity that is able to keep its profits outside of Europe. This is a grave problem because authorities are bent on enforcing continent accounting rules, in order to be able to force HP and other American firms to pay higher taxes. The idea is that European regulators can levy stiff penalties and fines to HP, which can constitute a kind of additional taxation that can hurt the profitability of HP in Europe. On the other hand, what American firms in technology have done, on the other hand, is to essentially resist and to hide behind accounting and financial arrangements that allow them to declare very little to no profits in the European countries where they operate, and in so doing skirt the problem of taxes. This is only a surface and temporary solution to be sure, given the might of the European regulators, who have been moving to shut down loopholes in the accounting rules in order to force American companies such as HP to pay up. In the case of HP in particular, the way they had dealt with this problem in the past is to totally keep their profits outside of the jurisdiction of European countries and even the United States, their home country. In so doing they invoke international law and exploit loopholes regarding the extent of the jurisdiction of individual countries when it comes to being able to collect taxes from profits, even if the profits are really derived from selling products and services in certain geographies, in this case Germany and the rest of Europe (Duncan, 2012). In the case of Airbus, there is a problem with regard to one of its products developed in cooperation with a number of consortium partners, and that product is the military plane A400M. This plane has been slated for delivery to the consortium members for some time, but due to many delays and cost overruns, have become a real problem for Airbus in terms of being able to ramp up sales to recoup financial investments tied to its research and development and production. Moreover, because of the cost overruns, there is a concern that even if the initial committed orders by the consortium members are met, Airbus will not be able to make enough money to cover the initial losses. This requires Airbus to not just be able to sell its planes to member countries in the group, but to other countries as well. That, or it has to be able to generate more orders from current members. The problem is that as it is, some member countries, notably Turkey, are saying that the plane as it is being manufactured does not meet its specifications and its internal criteria for certifying the plane as passing the standards of the Turkish military. This problem is tied to Turkey having a different set of focus points when it comes to what it wants from its military planes, in comparison to other countries. The way Airbus has dealt with this issue is to essentially talk to Turkey and to enforce previous agreements on specifications. Those agreements on the plane specifications were reached way before the planes were put into production, and therefore constitute a kind of binding commitment that Airbus can hold Turkey accountable for. By resorting to these legal maneuvers, Airbus is hoping that it can enforce the purchase contracts and force Turkey to take the planes that they ordered and pay for them. On the side, Airbus is also dealing with the specifications problem by continuing the dialogue with the Turkish government to see how the Turkish specifications can still be accommodated and included into the planes that they ordered. Airbus hopes finally that this two-pronged strategy will allow the firm to move ahead with production for Turkey and for the other members who may present similar problems (Bekdil, 2014). In the case of BMW, the problem was with regard to how its profits were vulnerable to fluctuations in the exchange rates of currencies, in the countries where it operates. Being a global firm, with most of its sales now coming from outside Germany, BMW had problems with profits being subject to fluctuations in the rates of exchange between its home currency and the currencies in its key markets, including China. To offset these problems, BMW is said to have employed two solutions. One is to use a natural hedge, and the other is to use a number of formal hedges in finance. In the natural hedge solution, BMW made use of the money in the countries where the money was generated, in order to negate exchange rate losses. In the formal hedges solution, a number of financial hedge strategies were orchestrated from several regional centers of hedge finance owned by the firm, in the major regions of Asia, North America, and Europe. The general idea is that hedges are to be used so that any losses in foreign exchange rate conversion differentials will not add to BMW’s costs and therefore either increase its prices or reduce its profits. This is also in light of competitors making use of the same hedges to keep its prices down and its profits and sales healthy, as Porsche does for instance (Bin and Ying, 2012). 5 References Bekdil, B. (2014). Turkey, Airbus Clash Over A400M Delivery. Defense News. Retrieved from http://www.defensenews.com/article/20140311/DEFREG01/303110021/Turkey-Airbus-Clash-Over-A400M-Delivery Bin, X. and Ying, L. (2012). The case study: How BMW dealt with exchange rate risk. Financial Times. Retrieved from http://www.ft.com/cms/s/0/f21b3a92-f907-11e1-8d92-00144feabdc0.html#axzz37R78ahel Duncan, Geoff (2012). How Microsoft and HP Avoid Corporate Taxes. Digital Trends. Retrieved from http://www.digitaltrends.com/computing/how-microsoft-and-hp-avoid-corporate-taxe/#!beGyMa The Economist Newspaper Limited. (2013). The price isn’t right: Corporate profit-shifting has become big business. The Economist. Retrieved from http://www.economist.com/news/special-report/21571557-corporate-profit-shifting-has-become-big-business-price-isnt-right Read More