Question

Subaru’s Sales Boom Thanks to the Weaker Yen

For the Japanese carmaker Subaru, a sharp fall in the value of the yen against the U.S. dollar has turned a problem—the lack of U.S. production—into an unexpected sales boom. Subaru, which is a niche player in the global auto industry, has long bucked the trend among its Japanese rivals of establishing significant manufacturing facilities in the North American market. Instead, the company has chosen to concentrate most of its manufacturing in Japan in order to achieve economies of scale at its home plants, exporting its production to the United States. Subaru still makes 80 percent of its vehicles at home, compared with 21 percent for Honda.

Back in 2012, this strategy was viewed as something of a liability. In those days, 1 U.S. dollar bought only 80 Japanese yen. The strong yen meant that Subaru cars were being priced out of the U.S. market. Japanese companies like Honda and Toyota, which had substantial production in the United States, gained business at Subaru’s expense. But from 2012 onward, with Japan mired in recession and consumer prices falling, the country’s central bank repeatedly cut interest rates in an attempt to stimulate the economy. As interest rates fell in Japan, investors moved money out of the country, selling yen and buying the U.S. dollar. They used those dollars to invest in U.S. stocks and bonds, where they anticipated a greater return. As a consequence, the price of yen in terms of dollars fell. By December 2015, 1 dollar bought 120 yen, representing a 50 percent fall in the value of the yen against the U.S. dollar since 2012.   

For Subaru, the depreciation in the value of the yen has given it a pricing advantage and driven a sales boom. Demand for Subaru cars in the United States has been so strong that the automaker has been struggling to keep up. The profits of Subaru’s parent company, Fuji Heavy Industries, have surged. In February 2015, Fuji announced that it would earn record operating profits of around ¥410 billion ($3.5 billion U.S.) for the financial year ending March 2015. Subaru’s profit margin has increased to 14.4 percent, compared with 5.6 percent for Honda, a company that is heavily dependent on U.S. production. The good times continued in 2015, with Subaru posting record profits in the quarter ending December 31, 2015.

Despite its current pricing advantage, Subaru is moving to increase its U.S. production. It plans to expand its sole plant in the United States, in Indiana, by March 2017, with a goal of making 310,000 a year, up from 200,000 currently. When asked why it is doing this, Subaru’s management notes that the yen will not stay weak against the dollar forever, and it is wise to expand local production as a hedge against future increases in the value of the yen. Indeed, when the Bank of Japan decided to set a key interest rate below zero in early February 2016, the yen started to appreciate against the U.S. dollar, presumably on expectations that negative interest rates would finally help stimulate Japan’s sluggish economy. By late March 2016, the yen had appreciated against the dollar and was trading at $1 = ¥112.

Question 1: As Subaru expands into different countries, we will face increased foreign currency risk. Discuss different modes of currency risk and how each should be managed.

Question 2: When evaluating which foreign markets to serve, Subaru must consider certain variables that influence the location-specific costs and benefits of serving those markets. Identify several of the most important variables to consider and the implications of each on potential profitability.

Question 3: As Subaru implements it international operations, we will need to consider to what degree we delegate decision making to our foreign subsidiaries. Explain several advantages and disadvantages of centralized versus decentralized decision making.

Question 4: What are some of the most important considerations we should evaluate to best configure our production and supply chain operations. Provide specific details for each consideration.

Question 5: Discuss political, economic and legal criteria to assess the attractiveness of doing business in different country-specific locations.   

Answer 1

ANSWER 1

Currency risks associated with the Subaru's export strategy was that of the appreciation of the Yen against the Dollar. Strong Yen means low sales of the Subaru Car.

Whenever the yen appreciates in term of us dollars the exports of subaru become costly, and it starts outperforming the competitive market because of high pricing, this will further lead to low demand of subaru cars, now in order to keep the car models in the market, to sustain, the profit margins are to be reduced. similarly the vice - versa situation is also possible as we see from 2012 onwards.

ANSWER 2

The benefits associated are the surge in the sales of the car because of the depreciation of the Yen against the US dollar. In 2014 and 2015, Subaru's sales and profit surge because over these two years Yen has depreciated against the US dollar. It is not wise to expand its U.S. production capacity because that would lead to fall in the sales as experienced by the Honda and Toyota.  

ANSWER 3

Centralised decision making Advantages:

• Better anticipating
• Reliable creation
• Lower material expenses
• Progressively powerful utilization of constrained assets
• Progressively neighborhood occupations

On the drawback, the brought together model has a few impediments. From an authoritative point of view, centralization can convey dangers, for example, bottlenecks brought about by expanded layers of endorsements and more slow dynamic.

A huge weakness of brought together creation is the resoluteness to modify. As it follows a more cutout model, when confronted with the need to change an item, the whole framework must be retooled. The assignment to change an item form to modified creation is a very exorbitant and tedious errand.

Another inconvenience of concentrated assembling is the expense of work if the organization's focal plant is in a district or nation where wages are expanding.

Decentralized decision making.Advantages:

• Adaptability
• Closer to clients
• Better and all the more opportune data
• Increasingly spurred directors and representatives
• Lower work costs in various regions

Decentralized assembling additionally has detriments. With regards to costs or concentrated creation, it requires a higher capital speculation for setting up numerous destinations with creation lines where per-unit costs are higher.

In spite of the heftier sticker price, current assembling patterns show more organizations are adhering to or changing over to a decentralized assembling model. They are exploiting inventive innovations, for example, 3D printing, which empowers customization at progressively moderate expenses, and Cloud ERP Solutions programming, which can coordinate various division works all through a decentralized activity into a solitary programming stage.

ANSWER 4 :

• Receive an interest driven arranging and business working model dependent on continuous interest bits of knowledge and request molding.
• Fabricate a versatile and deft gracefully chain with fast arranging and incorporated execution.
• Upgrade item plans and item the board for gracefully, assembling, and maintainability to quicken beneficial advancement.
• Adjust your flexibly chain with business objectives by incorporating deals and tasks arranging with corporate business arranging
• Install supportability into gracefully chain tasks.

ANSWER 5

The International business environment includes various factors like social, political, regulatory, cultural, legal and technological factors that surround a business entity in various sovereign nations. There are exogenous factors relative to the home environment of the organization in the international environment. These factors influence the decision-making process on the use of resources and capabilities. They also make a nation either more or less attractive to an international business firm.

Four major effects of political environment on business organizations

• Impact on Economy
• Changes in Regulation
• Mitigation of Risk
• Political Stability

The Economic Factors

Monetary variables apply a tremendous effect on worldwide business firms. The monetary condition incorporates the components that impact a nation's engaging quality for universal business firms.

Business firms look for unsurprising, hazard free, and stable instruments. Financial frameworks that recognize the overall reliance of nations and their economies are useful for a firm. On the off chance that an economy cultivates development, soundness, and reasonableness for success, it positively affects the development of organizations.

Swelling contributes immensely to a nation's engaging quality. High pace of swelling builds the expense of obtaining and makes the income contract in local cash. It uncovered the universal firms to remote trade dangers.

Supreme buying power equality is likewise a significant thought. The proportion of swapping scale between two specific nations is indistinguishable from the proportion of the value levels. The law of one value expresses that the genuine cost of an item is same over all countries.

Relative buying power equality (PPP) is important for outside firms. It asks how much cash is expected to purchase similar products and enterprises in two specific nations. PPP rates brief global examinations of salary

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