International Finance - Essay Example

International Finance Table of Contents Introduction 3 Look East 3 Safety First Ltd 4 Pricing at Tender 4 Conclusion 6 References 7 Bibliography 8 Introduction There is no denial to the fact that the subprime crisis that erupted in the housing market of the strongest and the most powerful economy of the world, the United States, has rocked the entire world (Reinhart & Rogoff, 2008). The ill effects of subprime crisis resulted in the failure of Too – Big – Too – Fail companies like that of Lehman Brothers and many of the leading banks (both commercial banks as well as investment banks) and insurance companies (AIG, Inc) were to be bailed out. The effects of global meltdown resulted in prolonged financial recession in many of the major economies especially that of western world (Zingales, 2008). Look East With the advent of global meltdown as many of the best performing economies of the western world went in to the grip of financial recession, yet it was observed that few of the emerging economies of Asia have not been affected much. As because today’s world of economics is coupled and linked with each other, therefore such Asian economies (especially that of China and India) were definitely influenced but those never underwent negative growth (Gov of UK, n.d.). In fact, both the economies booked record growths during the period. It is presumed that because of tough financial regulations that the countries have, they could so easily bypass the ill effects of market failure that rocked the western world (The Conference Board, 2009). Safety First Ltd Safety First Ltd manufactures goggles for the United Kingdom market that sales for £ 10 per pair in which the company makes a net profit of £ 3. But due to the financial slowdown, the industries of the United Kingdom have been badly hit and the sales of the company have considerably diminished. The worried management was provided by the report presented by the Director of Sales stating that the Chinese market has considerably improved and also there is great demand of such goggles. The company has been enquired about the product by a steel manufacturing company operating in China about the prices. The Safety First Ltd is also has the information about the upcoming tender for the purpose. Pricing at Tender The most important aspect of a closed tender is that of pricing. As all the prospective suppliers are required to quote their prices, not knowing what the other parties are quoting. The essence of such closed tender is to benefit the purchaser so that they could get the best possible deal. Now to price the goggles for the purpose of tender in the Chinese market, it should be remembered that the purchasing power of the people of China is not same as that of the United Kingdom. The level of prices prevailing in China for the similar goods is much lower than that in the United Kingdom. As the information is provided that in United Kingdom, a piece of the goggles is sold at £ 5 (= 54 Yuan Renminbi, approx) with a net profit of £ 1.5, would not be the case for the market of China (China Currency Calculator, 2009). In China, the average price of the similar safety goggles is within the proximity of US $ 3 to US $ 5 (Alibaba, No Date). Following the doctrine of conservatism, the average price of such goggles is presumed to be US $ 3 (= 20 Yuan Renminbi, approx). The difference of the price level in the markets of United Kingdom and that of China can be easily understood from the above discussion. Now, in such circumstances, if the Safety First Ltd tries to ensure profit of £ 3 per pair of goggles, it would count for almost 16 Yuan Renminbi per piece of goggles. It implies the cost of such goggles has to be brought down to approximately 4 Yuan Renminbi. Such a situation is almost impossible if the goods are manufactured at the United Kingdom and exported from there. But also the company cannot let the opportunity go in hay of selling such a huge volume of goggles. In such a situation, the only feasible solution is that the Safety First Ltd should successfully outsource its production. And coincidentally, China itself is the most preferred destination for outsourcing. Many of the big companies and market leaders have exploited the Chinese labour and cheap resources to enhance their profitability. With outsourcing the entire production activity in China, the company can definitely reduce the price at the desired level and should quote a fairly competitive price at the tender. With its outsourced manufacturing unit in the country, also the company can create a positive impact among the populace of the country and there would be popularity of the goggles produced by the company. The future scenario might be such that the Safety First Ltd can also get certain faction of the retail customers in the country. With its outsourcing unit at China, also the company can think of venturing the other emerging nation of the region, India. Conclusion The price that is to be quoted at the tender largely depends upon the market insight gained by the company as in tenders, in most of the cases it is the lowest bidder who gets the order where as the companies always try to maximize their profits. In this particular case too, the Safety First Ltd at the outset should get hold of the probable data from the competing companies that others are to quote and the company should have a slightly reduced bid. It appears that as the western markets are stagnant and there has arrived a huge opportunity in one of the most emerging economies, the company can forego a slight share of profit now for the long term benefit. References Alibaba, No Date. Workplace Safety Goggles. China. [Online] Available at: http://chinasuppliers.alibaba.com/products/china/300706/Safety_Goggles.html?searchweb=Y [Accessed 27 December 2009]. China Currency Calculator, 2009. China Currency Exchange Rate. Greenwich Mean Time. [Online] Available at: http://wwp.greenwichmeantime.com/time-zone/asia/china/currency.htm [Accessed 27 December 2009]. Gov of UK, No Date. Emerging Economies: Objectives. Investing in our Future. [Online] Available at: http://www.dius.gov.uk/dius_international/science_and_innovation/worldwide/emerging_economies [Accessed 27 December 2009]. Reinhart, C.M. & Rogoff, K. S., 2008. Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison. Harvard University. [Online] Available at: http://www.economics.harvard.edu/files/faculty/51_Is_The_US_Subprime_Crisis_So_Different.pdf [Accessed 27 December 2009]. The Conference Board, 2009. Emerging Economies and the Evolving Economic Landscape: Will they Still be the Engines of Growth? The Conference Board KnowlEdge Series. [Online] Available at: http://www.conference-board.org/knowledge/series/NG_EMVC2009Q2.cfm [Accessed 27 December 2009]. Zingales, L., 2008. Causes and Effects of the Lehman Brothers Bankruptcy. University of Chicago. [Online] Available at: http://faculty.chicagobooth.edu/luigi.zingales/research/papers/zingales_long.pdf [Accessed 27 December 2009]. Bibliography American Bar Association. American Bar Association Guide to Credit and Bankruptcy: Everything You Need to Know About Credit Repair, Getting and Staying Out of Debt, and Personal Bankruptcy. Random House Information Group, 2009. Barclay, L. Foreign Direct Investment in Emerging Economies: Corporate Strategy and Investment Behaviour in the Caribbean. Routledge, 2000. Brunetti, C., Filippo, M., Harris, J., 2009. Effects of Central Bank Intervention on the Interbank Market During the Sub-Prime Crisis. Yale University. [Online] Available at: http://mba.yale.edu/news_events/pdf/financial%20conf-paper%203.pdf [Accessed 27 December 2009]. Fukasaku, K & Melo, L. Fiscal decentralisation in emerging economies: governance issues. OECD Publishing, 1999. Gamlich, E. Subprime mortgages: Americas Latest Boom and Bust. Urban Institute, 2007. Jain, S. Emerging economies and the transformation of international business: Brazil, Russia, India and China (BRICs). Edward Elgar Publishing, 2006. Milgrom, P. Putting Auction Theory to Work. Cambridge University Press, 2004. Ryan, S., 2008. Accounting in and for the Subprime Crisis. New York University. [Online] Available at: http://www.hbs.edu/units/am/pdf/Accounting%20in%20and%20for%20the%20Subprime%20Crisis.pdf [Accessed 27 December 2009]. Wei, Z. & Yuanxu, L., 2008. Can emerging economies continue their "dream growth? The People’s Daily. [Online] Available at: http://english.peopledaily.com.cn/90001/90778/90857/90859/6508515.html [Accessed 27 December 2009]. Read More