International Business Finance and Trade - Case Study Example

No. 12345 INTERNATIONAL BUSINESS FINANCE AND TRADE ABC of XYZ Department of LMN 06 May, Table of Contents Contents Page No 1 Reputation and General Credibility of TUI AG 03 2 International Payment Methods 05 2.1 Cash in Advance or Pre-Payment 05 2.2 Letter of Credit 06 2.3 Open Account 07 3 Company Overview 08 3.1 FDI by British Airways in Germany 09 3.2 Macro-Level Theories of FDI 09 3.3 Micro-Level Theories of FDI 09 Bibliography 12 1 Reputation and General Credibility of TUI AG British Airways has planned to make a business partnership with TUI AG to enhance its market structure and area of operations. Touristik Union International abbreviated as TUI AG is a German based company with headquarters in Hanover (http://www.tui.com). By name Preussag AG, the company remained involved in transportation and industrial business for many years. During mid-1990s the company adopted growth corporate strategy and introduced itself as a tourism and shipping company. Preussag AG sold off many of its industrial assets to beneficially purchase several travel and transportation firms. The structure of Preussag was renamed to Hapag Touristik Union (HTU) which in 2000 was transformed into TUI Group. The general credibility of the TUI is quite excellent. Strategically today TUI is the largest and leading tourism and shipping organization of the world, operationally active mainly in Central, Northern and Western Europe while it has the networks across the Europe as well. The inventory of TUI is decorated with hotels, restaurants, retail stores, container ships, travel agencies and airlines. TUI AG Airline, having 7 common brand TUIfly airlines, is the largest holiday fleet in Europe. The company is strongly adhering to persevere with its position as world’s No. 1 tourism organization in all aspects along with a customer oriented vision. TUI as well as its affiliates like Thompson Travels, Portland Direct, Lunn Poly, and Skydeals are accredited as most trusted and professional organizations throughout the Europe. The company approximately consists of 285 hotels with 163,000 beds and 12 hotel brands in 28 countries, 3500 travel agencies, 120 aircraft, 10 cruise liners, 79 tour operators in 18 countries, and 37 incoming agencies in 31 countries in different parts of the world. At present, TUI AG has 43.3% shares in Hapag-Lloyd AG. During the fiscal year 2008, TUI had revenue about €759 million. On 31 December 2008, the company had 70,200 employees. With a turnover of about € 21,866 million in 2007, TUI was the largest integrated tourism group in Europe, lagging far behind its competitors. According to the Annual Report 2008, the Thomas Cook Group is the second largest company in Europe followed by MyTravel, REWE Group and Kuoni in UK, Germany, and Switzerland respectively. UK, France and Germany are heavily populated countries of Europe and TUI is the market leader in these countries. Moreover, TUI stands in top three companies in 09 other European countries and is the leader of the emerging tourism market in Eastern Europe. TUI has significant and variety of contributions to the tourism industry and no other company has such a broad involvement. The widespread structure and strong strategic analysis of the company shows the worth and credibility of the company. The following tables elaborate and confirm it further that TUI AG will be a very beneficial partner of British Airways in near future. TUI Tour Operators Germany 1-2-FLY, Airtours International, Berge & Meer Touristik, Discount Travel, FOX-Tours, Gebeco, LTUR, OFT Reisen, Touropa, TUI Deutschland, Wolters Reisen Austria Gulet Touropa Touristik, TUI Austria Poland TUI Poland Switzerland TUI Suisse Denmark Sportsrejser, StarTour , TEMA Finland Finnmatkat, TEMA United Kingdom Specialist Holidays Group, Gullivers Sports , Your Sporting Challenge , Thomson Holidays , Sovereign , Hayes and Jarvis , First Choice Holidays , Imaginative Traveller , TUI UK Ireland Specialist Holiday Group , JWT Holidays , Falcon Holidays Norway Sportreiser , StarTour ,TEMA Sweden Fritidsresor, Sportresor , TEMA , TUI Nordic France Nouvelles Frontières , TUI France , JV , Touraventure Belgium Jetair , TUI Belgium Netherlands Arke , De Boer & Wendel , Discovery , Group & Incentive Travel , Holland International, Isropa Reizen , KRAS Reizen , Panta Reizen , TUI Nederland Zeetours Cruises India Le Passage to India (Source: Contact TUI Group, 2009) TUI Airlines Country TUI Airline Germany TUIfly Austria TUIfly United Kingdom Thomson Airways Sweden TUIfly Nordic France Corsairfly Belgium Jetairfly Netherlands Arkefly Morocco Jet4You (http://www.tuitravelplc.com) Hotel Brands Atlantica Hotels Jaz Hotels Dorfhotel Soly Mar Gran Resort Hotels Grecotel Grupotel Iberotel MAGIC LIFE RIU Hotels (50%) Robinson Club (Contact TUI Group, 2009) 2 International Payment Methods Several payment methods are in practice in present day corporate world to sell the products abroad. The success of a payment method is highly associated with its reputation of trust by the user. Three basic payment methods with respect to their secure ranking for seller point of view are discussed below. 2.1 Cash in Advance or Pre-Payment Cash in Advance, also known as cash with order (CWO) or prepayment is an international payment method in which an importer pays full payment for a product in advance prior to its reception (Hinkelman, 2005, p.32). it is the best method from the exporter’s perspective. The buyer has to trust that the seller will ship the desired product well in time and in the form of advertised quality. This method of payment is mostly used when a special product is to be purchased and there is no direct contact or relation exists between the buyer and the seller. The buyer’s country imposes legal regulations on the products while the seller does not contain enough liquidity to respond these regulations. Wire transfer, credit card and payment by check are the examples of this method. Advantages No worries in terms of collection of payment, therefore no risk for seller Wire transfer is a fast, efficient and secure payment method No need to verify the creditworthiness of the buyer Disadvantages and Risks Permanent risk for importer that exporter will not send the product of agreed quality Risk involves only for buyers, therefore includes political and economical factors Quite expensive method especially the wire transfer method 2.2 Letter of Credit Several agencies are involved in this method to carry out the payment from buyer to seller. These are the applicant, beneficiary, opening bank, advising bank, confirming bank and paying bank. Before going to discuss the procedure of this method, let us have a look of various types of Letter of Credit. (a) Revocable: Letter of Credit that can be amended or cancelled at any time without any notice, discussion or agreement with the beneficiary (b) Irrevocable: It cannot be amended or cancelled without written agreement by all the parties (c) Confirmed versus Advised: Confirmed Letter of Credit is preferred because Confirming Bank guarantees to pay while on the other hand advised does not give the guarantee of payment through Opening Bank. (d) Straight versus Negotiation: A straight Letter of Credit can only be paid within the Paying Bank while the straight Letter of Credit can be processed through any bank. (e) Sight versus Usance: In sight Letter of Credit the beneficiary is paid just after the ensuring of paying Bank that all documents are in order. Usance is a form of late dealing and generally avoided. Usance time ranges between 30 to 180 days. Advantages This method balances the risk between the buyer and the seller It provides extensive stipulations to the buyer It diminishes the political and commercial risks Foreign exchange risk is eradicated by issuing a letter of credit from importing country The recipient can accelerate the product reception time as the letter of credit accelerates the payments of receivables. Risks Involved in Letter of Credit The risk from the buyer of not shipping the product persists to the last because all the parties involved in letter of credit deal only with documents and not with the real product. It is cheaper than other payment methods such as Open Account or Collection The buyers documents should be in accordance to the terms and conditions of the letter of credit for issuing bank to clear and furnish a payment In case of Usance Letter of Credit, the buyer is exposed to the commercial, political and foreign exchange risks 2.3 Open Account It is another method through which “first the exporter sends the shipments, and then he or she sends bills for the merchandise and related costs” (Weiss, 2007, p.113). It is considered a convenient method of payment provided the buyer keeps a well reputed record or has been meticulously checked for his or her creditworthiness. It is most widely used payment method in the import and export business. Some largest firms of the world do their business payments only on open account. Advantages Payment by open account is inexpensive No risk involve with respect to buyer Risks Involved in Open Account Permanent risk for exporter that the importer will not pay for the product or products. Exporter trusts on the importer completely to pay the cash as per agreement. It involves political and economic risks. It is difficult to peruse legally for claims due to absence of banking channel and documents If legal action is taken, it counts costly for exporter This method encounters slow cash flow as even honest buyer generally takes a long time to pay for purchased product 3 Company Overview British Airways is one of the leading international airlines of the world that operates scheduled air services on global and domestic levels. The company takes the passengers around the globe, cargo freight and mails to their destinations. It is the UK’s sole worldwide network carrier that transports about 36 million passengers in a year to more than 570 destinations of 148 countries located in all six inhabited continents (Smith, 2010). British Airways, headquarters based at Harmondsworth London (www.britishairways.com), mainly operates in Europe and United States as out of 148 worldwide destinations, approximately 71% operate in these areas. The company’s fleet consisted of 245 aircraft and 40,627 employees at the end of 2009 (Datamonitor). The company earned approximately £9 billion in revenue at the end of fiscal year 2009, 2.7% higher than the last year. 87% of this revenue came from passengers’ traffic while 7.5% and 5.4% came from cargo and other activities respectively (British Airways Annual Report, 2008/09, Data-monitor). 3.1 FDI by British Airways in Germany Under its growth oriented strategy, British Airways has established a business partnership with TUI AG to enhance its revenue. The huge infrastructure of British Airways especially in Europe have provided a comparative advantage to it to launch its highly appreciated air services in Germany along with the collaboration with TUI AG. Germany is an attractive place for tourists across the globe and in tourism industry; it is ranked No.7 in the world. Approximately 24.9 million tourists visited the country in 2008. Further Germany is the country that had the highest tourism expenditures in 2008 (UNWTO Tourism Highlights, 2009). The point is at what level the British Airways requires to examine the situation to determine the company’s movement? There are 02 theories to explain this. First one is macro-level theory of foreign direct investment (FDI), and the second one is micro-level theory. 3.2 Macro-Level Theories of FDI According to this, industries of capital-intensive countries invest in capital-poor countries. Hymer (1960) criticized the theory for its very general nature because details of analyzing the situation depend on the bird’s eye view which is definitely not sufficient. Main theories of macro-level are modern portfolio theory of Harry Markowitz (1952), Capital Market Theory, Dynamic Macroeconomic FDI Theory, FDI Theory Based on Exchange Rates, FDI Theory Based on Economic Geography, FDI Theories Based on Institutional Analysis, Gravity Approach To FDI, Life Cycle Theory, and Five Stage Theory of John Dunning. 3.3 Micro-Level Theories of FDI Contrary to macro-level theories which are mainly based on capital-intensive of investing country and poor-capital of invested country, micro-level theories of FDI are firm oriented rather than country-oriented. Micro-level theories include Theory of Internalization and Eclectic FDI Theory. British Airways is going to adopt micro-level theories for its foreign investment in Germany. Internalization is referred to several concepts in economics. "When you place an order to buy or sell a stock, your broker has choices on where to execute your order. Instead of routing your order to a market or market-makers for execution, your broker may fill the order from the firms own inventory -- this is called internalization. In this way, your brokers firm may make money on the "spread" which is the difference between the purchase price and the sale price." (http://www.sec.gov/answers/internalization.htm). Theory of internalization is based on the fact of imperfection of markets. When the external markets fails to provide efficiency to a firm due to its imperfection in terms of supplies, production, or distribution then it can overcome the imperfections of the market by creating its own market internalization (Buckley & Casson, 1976, Hennart 1982, & Casson 1983). This theory describes that by launching its investment across the border, a firm becomes a global icon in a short span of time. Product superiority, cost advantage, technological supremacy, and superior marketing are the main features of this theory. Under these perspectives, like any other multinationals, British Airways will find this theory more applicable and cheaper to expand directly in Germany. The theory of Eclectic Paradigm, also known as OLI Model is the further development of theory of internalization. The theory itself based on transaction cost theory but Dunning (1993) included three more factors to it. (a) Ownership advantages that include trade name, production, and entrepreneurial skills. British Airways has its global recognition in terms of its air services. Further TUI AG is the leading company that offers excellent productions and services in terms of tourism and shipping across the whole world. This combination falls well in ownership advantage category (b) Location advantages include raw material, wages, and tariff and taxes. This second category highlights the local conditions and depicts the economic restrictions and regulations imposed by the government or the global organization (c) Internalization advantages include partner arrangements such as joint venture or licensing. This theory suits best for FDI of Britsih Airways. The analytical framework of Dunning’s Eclectic Paradigm allows both the macro-level location advantages and the micro-level ownership advantages. Actually both have the characteristics of interdependence and they are incomplete if taken isolated. This theory also includes the Coase’s transaction costs that deal the irrational and potentially unfair nature of humans. Internalization and transaction-specific ownership advantages play a key role to the successful MNEs. Bibliography British Airways, (2008/09). Annual Report and Accounts, obtained from http://www.britishairways.com/ British Airways, Company Profile, Datamonitor, 23 October 2009 Buckley, P. and Casson, M. (1976). The Future of the Multinational Enterprise, London, MacMillan Casson, M. (1983). The Growth of International Business, London, Allen and Unwin Dunning, J. H. (1993). Multinational Enterprises and the Global Economy, 2nd Edition. Cheltenham, Edward Elgar Hennart, J. F. (1982). A Theory of the Multinational Enterprise, Ann Arbor, University of Michigan Press Hinkelman, E.G. (2005). Dictionary of International Trade: Handbook of the Global Trade Community, World Trade Press, 6th Edition Hymer, S. H. (1960). The International Operations of National Firms: A Study of Direct Foreign Investment, MIT Press, Cambridge, Mass Markowitz, H.M. (1952). Portfolio Selection, The Journal of Finance, 7 (1), pp. 77–91 Smith, P (10 July 2009). "Ask the Pilot: Welcome to the Six Continent Club!” http://www.salon.com/tech/col/smith/2009/07/10/askthepilot326/index1.html UNWTO Tourism Highlights, (2009 Edition). http://www.unwto.org/facts/menu.html. Retrieved 2009-10-04. Weiss, K.D. (2007). 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