Hype Tech Co Ltd Business - Case Study Example

Running the Hype Tech Co Ltd (MNC) Introduction Hype Tech Co Ltd is a small electronic company that will engage itself in manufacturing Trendy Bluetooth Earmuffs and export the products to the Chinese market. The exported products will be sold to several distributors who in turn will sell them to retailers at wholesale price or even sell them at retail prices. From a previous research done by a group of experts forms the planning committee, there has been a positive response from the target customers. Many people in the country are prepared to take the prospected product and experience the comfort that it ought to bring in the field. Operations of the MNC For effective operations of the company, the management will have to recruit skilled personnel in the electronic manufacturing industry. The main reason for hiring skilled labor is to produce quality earmuffs that are different from whatever is in existence in the Chinese market. The expenses to be incurred in the operations of the company will all be in Chinese Yuan for smooth operations in the Chinese market. Despite the acceptance in the market, there might be an imbalance in the trade between the two countries (Madura and Fox 25). The factors that may bring the imbalances include technological factors, Exchange rate movements and cost of production. Technological factors Technology is a critical factor that can affect the balance of trade between the US where the company will be situated and China the target market for the products. The two countries have varied levels of technology and introducing an American technology to the Chinese market may lead to an outcrop of other companies that produce the same product but with Chinese technology (Madura and Fox 20). The result of this is unnecessary competition in the market that may affect the balance of trade between the two countries. Changes in the existing technology in the future may lead to the creation of new markets for the company or threaten the existence of the company. The result from the advancement is either an improvement of the trade between the two countries or a collapse of trade in the world market for the company (Midler 30). Technology will change the demand for earmuffs because it changes the lifestyle and the buying patterns of the consumers. Advancements made to the Bluetooth earmuffs may drastically expand the customer base for the product. The expansion of the client base will lead to an increased demand for the product meaning that the corporation ought to supply more to the market (Morrison 40). On the other hand, advancement of technology may lead to the introduction of new and better earmuffs to the market. The result of the new earmuffs will result in the decline in the demand made for the existing earmuffs that our company will be distributing. The new developments may also lead to a reduction in the prices of the existing products in the market, lower prices means more units will be required in the market leading to a rise in the product demand. At worst, advancement in technology may result in the removal of the earmuffs that the company will be supplying if it brings about more advanced earmuffs (Midler 31). Exchange rate movements The exchange rate and change in currency between the U.S and China may also affect the trade balance between the two nations. If the exchange rate of the currencies is not stable, then some costs that are avoidable may pop in and affect the operations of the company (Shapiro and Sarin 32). Strengthening the power of he dollar may discourage investors from moving into the US and make their investments there. The result of his increment will worsen the trade between the two countries and the balance exists between these countries will be affected. Exchange rates will influence the demand for the Bluetooth earmuffs in that, the rates may lead to strengthening or weakening of the Chinese Yuen. If the Yuen is made stronger, then the product will become cheaper making it simpler for most of those in the market to acquire. The result will be increased demand that will benefit the company. If the value of the Yuen will decline, the earmuffs may become very expensive for the locals to acquire thus reducing the demand of the earmuffs in the market. Of these two factors, exchange rates flow is more likely to affect the demand for the earmuffs as technological changes take quite some time to happen (Shapiro and Sarin 15). The Chinese have been producing their earmuffs for quite some time and there have been major exports of the same to the country. Accessing Import Controls According to the existing Chinese import policies, for any company to make imports to the Chinese market, the company involved must acquire authorization from various government bodies, have an importers license and have enough foreign exchange. The company must also obtain an approval from several government agencies before doing carrying out its operations. These trade regulations will affect the operations of the earmuffs company because the process of acquiring the license will take some time and will need renewal after some time (Morrison 15). During the renovation, the activities of the company should be stopped until a new license is acquired. The MNC will use the spot market in its operations. The company will utilize the sports markets due to its ability to make deliveries immediately. The meaning of this is that, if any person wants and is willing to purchase the shares of the company and own them immediately, it will take less time to do so. The person will only need to go to the cash market on which the shares are traded and acquire them immediately. Again, if any buyer wants to buy the earmuffs on the spot market, he or she will go to the coin dealer and exchange cash for earmuffs (Morrison 19). The management of the company is planning to use HSBC bank to change the currency that it obtains from the Chinese market to dollars. The current rate of exchanging the dollar at the bank presently is held at 6.2797109 Yuens. There is an absence of the forward market in the operations of the company (Midler 20). Though, there are several factors that will affect the value of foreign currency over time include among others the interest rates, trade balance and central bank access. Interest Rates The rates charged by the central bank influences the rates that other financial institutions charge their customers during money borrowing. If the central bank lowers the interest rates to make borrowing easy, customer spending will be boosted and this can be used to expand the economy (Midler 23). The spending will then lead to inflation and to solve the problem, the central bank will then raise the benchmark to make borrowing expensive. Trade Balance Trade balance of a country refers to the total value of exports less the total value of the imports done by the company. If after subtraction the number is positive, the trade of balance is said to be favorable, when the number is negative, the country is said to have a trade deficit (Malachowski 39). The balance affects supply and demand for a given currency. With trade surplus, the countrys currency increases the value due to the action of foreign buyers to exchange their currency or even buy its goods. On the other hand, trade deficit increases the supply of the countrys currency leading to a devaluation of the currency. A trade deficit, on the contrary, improving the supply of the currency of the country hence could result in the devaluation in the event where supply significantly exceeds demand (Madura and Fox 32). Central Bank Actions The central bank has the responsibility of dictating the flow of currency in a country. The bank is responsible for setting borrowing rates to the other banks that determine the rate of borrowing in the country. Central bank can also hold cash and fail to supply the other banks to create demand that results in a rise in the currency value (Malachowski 45). The company that will be selling earmuffs into the Chinese market will use currency features to hedge the exchange rate by making sure that there is a constant assumption that the company will supply of the earmuffs to the market (Madura and Fox 45). The company may also reduce the price of its product abroad thereby making the price of the dollar be constant. The use of these hedges will enable the MNC to be stable over time. The MNC will purely operate and all its initial costs will be formulated in terms of the Chinese Yuen. Trying to strengthen the dollar will lead to reducing cash flow in the company. The result of the decrease is getting into the pocket of the founders and injecting some more Yuens into the company for it to operate normally. On the contrary, weakening the dollar will make cash flow in the company to increase. Increasing the cash flow will lead to more savings for the company and acquiring more inputs to be used in the production process. Indirect central bank interventions that will not interfere with the exchange rates will not affect the company in any way (Madura 26). The spot rates from the quotations of the bank where I intend to do my money exchange and the quotation from the Bank of America appear to align at a given point in time. Again, the interest rate parity from the periodicals seems to exist though at minimal margins (Madura 30). The parity in the interest suggests that the forward rate of the Chinese Yuen exhibits some discount when the interest rate of the Yuen is higher than that of the U.S There is a probability that some trends in the value of the foreign currency in the last five week. The mean percentage change for this week is about 5.7 percent. If the trend of the currency continues at that rate for the next few days, the current is bound to appreciate in value in the near future. The exchange rate factors that affect the performance of the MNC are the accessibility of the central bank, the economic growth expectations and the interest rates among others. The central bank affects the exchange rate in that; it controls cash flow within the economy of a given country (Luthans, Doh and Hodgetts 36). The interest rate dictates the rate at which borrowing is done thereby affecting the prices at the stock exchange market. The economic growth expectations affect the exchange rates when the prospected change in the market is not achieved. If the expected change is negative, then the prizes ought to rise and if the rate is positive, the rate of units in the stock exchange reduces. The earmuffs business that I am involving myself in is not subjected to transaction exposure, economic exposure or even translation exposure. The reason it is not subject to any of the above is because it is based on well-researched field and any effects of these factors cannot affect it in any way (Kuiper and Wolschin 45). A forward contract may be used for speculations or hedging. Unlike standard futures contracts, the earmuffs MNC to be started will be in a better position to customize the commodity, the amount to be sold and produced and the date of delivery to the targeted customers in China. The forward contract of the company will be based on the delivery of goods (Luthans, Doh and Hodgetts 70). One of the ways of using currency options to hedge any exposure that may arise will be by using interest payment in a currency swap and not principals. The method will be achieved when the principal that any two parties agree to swap should no be exchanged but should be kept by the two sides (Kuiper and Wolschin 25). The MNC will use the provided principal to calculate the interest payments that the company will give and will be used as the backbone of any currency swap. The possible project that will lead to the expansion of my international business will be that of getting involved in other businesses related to that of selling Bluetooth earmuffs. Selling electronics such as mobile phones that have Bluetooth capability together with the earmuffs will undoubtedly lead to an expansion. The MNC will use the account analysis method in estimating the expenses of the company. The method will involve looking at a given cost and guessing the most likely type of cost behavior. It will require considerable subjective judgment and insight (Kegley 34). To estimate the companys net cash flow, it will look at the period-over-period change in the amount of cash on the balance sheet. The MNC will also total the sum of cash flow from operations, the cash flow from investing and the cash flow from financing. Using this method may result in overestimation thus making the estimations unreliable (Kuiper and Wolschin 30). Some of the financial factors that would expose the business to country risk come from various aspects of the economy. Weakness of the economy, specific markets and demographic groups may cause certain drops in the demand for some particular goods or service. The result of this is leaving the business with some minuscule money than it is anticipated. The negative shifts in demand will cause all the prices to drop across the entire industry. These factors are uncontrollable from within the business and mostly lead to a deficit in the economy of the organization. Some political factors such as changes that may be done in laws concerning tax and industry regulations can actually eat into the small businesses (Kegley 65). The result of the legislation and policies will affect the companys profit margins. Introduction of new laws can push ultimately drive companies out of business too. The company will use debt financing structure in its operations. For the company to make stable changes, the company may use debt more heavily than the other companies. Some of the proportion of equity used in the business may be limited to the formation of the company to keep some privacy for the company. After comparing the rates of the dollars and other currencies, the rates of exchanging Pounds and Euros seem to be higher than that of the U.S dollar (Kegley 78). The company will ensure payment for the products exported by holding on the principle of cash on delivery. The customers are made to understand that the goods are paid after delivery has been done (Cohen 43). The foreign exchange rates are lower to that of U.S interest rates; this then will make it possible to use the currency in offsetting the receivables. After receiving external financing, the management of the MCN will invest it direct to the company by expanding to that side of the world thus making sure no exchanges have been done and hence the rates do not affect my business (Cohen 56). After receiving payments in the form of foreign currency, the management would invest the payments in short-term securities so that I trade for a while before settling my debts. Works Cited Cohen, Stephen D. Multinational Corporations And Foreign Direct Investment. Oxford: Oxford University Press, 2007. Print. Kegley, Charles W. World Politics. Boston, MA: Cengage Learning, 2009. Print. Kuiper, Rolf, and Georg Wolschin. From RHIC to LHC: A Relativistic Diffusion Approach. Braz. J. Phys. 37.2c (2007): 782-784. Web. Luthans, Fred, Jonathan P Doh, and Richard M Hodgetts. International Management. New York: McGraw-Hill, 2012. Print. Madura, Jeff, and Roland Fox. International Financial Management. Australia: Cengage Learning EMEA, 2014. Print. Madura, Jeff. Financial Markets And Institutions. Mason, OH: South-Western, Cengage Learning, 2012. Print. Malachowski, Alan R. Business Ethics. London: Routledge, 2001. Print. Midler, Paul. Poorly Made In China. Hoboken, NJ: Wiley, 2009. Print. Morrison, Janet. The Global Business Environment. Houndmills: Palgrave Macmillan, 2011. Print. Shapiro, Alan C, and Atulya Sarin. Foundations Of Multinational Financial Management. Hoboken, N.J.: John Wiley & Sons, 2009. Print. Read More