Question

4. Suppose that a decade ago, the Japanese yen stood at 120 Yen/$; Today, 10 years later, the Japanese yen is trading at 100 Yen/$. Consider the case of the heavy earth-moving equipment industry, consisting of essentially two major players globally, US-based Caterpillar and Japan-based Komatsu.

a) What has happened to the Japanese Yen and how does it affect the relative competitive positions of Caterpillar and Komatsu? Explain your answer clearly. (2 points)

b) How should this affect the strategic behavior of the two firms? You may wish to answer this question first from the short-term perspective, and then from the long-term perspective. (3 points)

Answer 1

Yen Decade Ago

1$ =

120 yen

Yen Decade later

1$ =

100 yen

A)

From the above changes in rates of yen clearly indicates that yen has become stronger over the period of time

and dollar has become weaker compared to yen

As mentioned in the question, there are two major players globally- US based Catterpillar and japan based komatsu

For the global trade most likely the companies would be selling or quoting their products in USD

That means that now, after 10 years the product pricing for komatsu have to be increased

this can be indicated through an example

Suppose

Manufacturing Cost of komatsu for product is

120000

Yen

It keeps a profit margin of saty

12000

Yen

Total

132000

So the selling price is dollars would be

132000/120 =

1100

Dollars

once the yen strengthens the rates would effect the selling price

132000/100=

1320

Dollars

So, in the international market caterpillar would be selling at the same prices but komatsu have to

increase the prices to meet up the cost at japan

Caterpillar will have competitive advantage

B)

The two firms would behave differently in such a situation

Short term perspective:

Komatsu:

The company may forgo its profit margins in order to keep the prices competitive

The domestic japenese buyer can also think of buying caterpillar as he would have to pay low

Caterpillar: Caterpillar can play aggressive by just reducing profit margins, they don’t need to forgo their profits entirely

They will try and capture the international market very quickly before komatsu comes up with certain solution

They should try to earn by increasing sales volume

Always remember, when the home currency becomes strong, exporters(they will get less after converting dollars) loose and importer gain

( they will have to pay less )in the present case komatsu is a exporter

Long term perspective:

Komatsu:

Since the home currency is strong now, company should try to reduce its manufactuing costs

It can also opt an option of importing spare parts from other countries ( if this reduces the manufacturing costs)

Caterpillar:

The company should gain the current market advantage, also it should focus on producing every component at home

at lowest possible price. It should avoid imports at large