Question

BLADES, INC. CASE

Consideration of Direct Foreign Investment

For the last year, Blades, Inc., has been exporting to Thailand in order to supplement its declining U.S. sales. Under the existing arrangement, Blades sells 180,000 pairs of roller blades annually to Entertainment Products, a Thai retailer, for a fixed price denominated in Thai baht. The agreement will last for another 2 years. Furthermore, to diversify internationally and to take advantage of an attractive offer by Jogs, Ltd., a British retailer, Blades has recently begun exporting to the United Kingdom. Under the resulting agreement, Jogs will purchase 200,000 pairs of Speedos, Blades' primary product, annually at a fixed price of £80 per pair.

Blades' suppliers of the needed components for its roller blade production are located primarily in the United States, where Blades incurs the majority of its cost of goods sold. Although prices for inputs needed to manufacture roller blades vary, recent costs have run approximately $70 per pair. Blades also imports components from Thailand because of the relatively low price of rubber and plastic components and because of their high quality. These imports are denominated in Thai baht, and the exact price (in baht) depends on prevailing market prices for these components in Thailand. Currently, inputs sufficient to manufacture a pair of roller blades cost approximately 3,000 Thai baht per pair of roller blades.

Although Thailand had been among the world's fastest growing economies, recent events in Thailand have increased the level of economic uncertainty. Specifically, the Thai baht, which had been pegged to the dollar, is now a freely floating currency and has depreciated substantially in recent months. Furthermore, recent levels of inflation in Thailand have been very high. Hence, future economic conditions in Thailand are highly uncertain.

Ben Holt, Blades' chief financial officer (CFO), is seriously considering DFI in Thailand. He believes that this is a perfect time to either establish a subsidiary or acquire an existing business in Thailand because the uncertain economic conditions and the depreciation of the baht have substantially lowered the initial costs required for DFI. Holt believes the growth potential in Asia will be extremely high once the Thai economy stabilizes.

Although Holt has also considered DFI in the United Kingdom, he would prefer that Blades invest in Thailand as opposed to the United Kingdom. Forecasts indicate that the demand for roller blades in the United Kingdom is similar to that in the United States; since Blades' U.S. sales have recently declined because of the high prices it charges, Holt expects that DFI in the United Kingdom will yield similar results, especially since the components required to manufacture roller blades are more expensive in the United Kingdom than in the United States. Furthermore, both domestic and foreign roller blade manufacturers are relatively well established in the United Kingdom, so the growth potential there is limited. Holt believes the Thai roller blade market offers more growth potential.

Blades can sell its products at a lower price but generate higher profit margins in Thailand than it can in the United States. This is because the Thai customer has committed itself to purchase a fixed number of Blades' products annually only if it can purchase Speedos at a substantial discount from the U.S. price. Nevertheless, since the cost of goods sold incurred in Thailand is substantially below that incurred in the United States, Blades has managed to generate higher profit margins from its Thai exports and imports than in the United States.

As a financial analyst for Blades, Inc., you generally agree with Holt's assessment of the situation. However, you are concerned that Thai consumers have not been affected yet by the unfavorable economic conditions. You believe that they may reduce their spending on leisure products within the next year. Therefore, you think it would be beneficial to wait until next year, when the unfavorable economic conditions in Thailand may subside, to make a decision regarding DFI in Thailand. However, if economic conditions in Thailand improve over the next year, DFI may become more expensive both because target firms will be more expensive and because the baht may appreciate. You are also aware that several of Blades' U.S. competitors are considering expanding into Thailand in the next year.

If Blades acquires an existing business in Thailand or establishes a subsidiary there by the end of next year, it would fulfill its agreement with Entertainment Products for the subsequent year. The Thai retailer has expressed an interest in renewing the contractual agreement with Blades at that time if Blades establishes operations in Thailand. However, Holt believes that Blades could charge a higher price for its products if it establishes its own distribution channels.

Holt has asked you to answer the following questions:

1. Identify and discuss some of the benefits that Blades, Inc., could obtain from DFI.

2. Do you think Blades should wait until next year to undertake DFI in Thailand? What is the trade-off if Blades undertakes the DFI now?

3. Do you think Blades should renew its agreement with the Thai retailer for another 3 years? What is the trade-off if Blades renews the agreement?

4. Assume a high level of unemployment in Thailand and a unique production process employed by Blades, Inc. How do you think the Thai government would view the establishment of a subsidiary in Thailand by firms such as Blades? Do you think the Thai government would be more or less supportive if firms such as Blades acquired existing businesses in Thailand? Why?

Answer 1

ANSWER:

(1).

Blades, Inc. could obtain following possible benefits from DFI;

1. It will be in the position to use maximum possible available reosurce of Thailand.

2. It will be in the position to utilize maximum untapped demand of the market because as it is given that Thailand is a fastest growing economy that is why there is a lot of possibility of consumers’ demand.

3. As resources are aslo unutilized in this country so resouces can be used efficiently that is why overall per unit cost will be much lower in that country.

4. In such country there will be a good supply of efficient workforce at a resonable wages rate hence it will also imrove the profitability.

5. Apart from this as Blades Inc. already exporting goods to the Thailand’s consumers so after FDI it will also help in minimizing costs of transportation between two countries and other associated costs also will be minimized.

6. Risk associated with currecy fluctations also will be minimized.

(2).

Blades should not wait until next year because as per information it is clear that if economic conditions in the Thailand improves then FDI will be very difficult in that country because it will be more expensive. It is also given that competition may be also high in coming time that is why Blades should take decision about FDI just now.

Although it is also true that during this year there may be weak demand but it can be managed through good marketing tools apart from this Blades can resign the agreement with the retailers to maintain the demand in coming years or during weak demand seasons.

(3).

Yes Blades should renew its agreement because if Blades is taking decision about FDI then renew of agreement will help in maintaining a proper level of demand for the Blades in Thailand. Apart from this it is also given that there are some ups & downs in Thailand economy so that is why Blades should have a minimum level of demand all the time to recover its basic costs.

(4).

It is give that there is a very high level of unemployment in Thailand that is why Thailand government will want that firms should generate more and more jobs hence if firm is adopting unique way of production process then definitely it will hammer on the posiibility of more jobs that is why Thailand government may be less supportive. So in case when Blades Inc. is going to acquire existing businesses in the Thailand then Thailand government may be less supportive due to possibility of less jobs because as it is given that new way of production may hammer on the employment. Thus if Blades Inc. give more employment then Thailand government may be more supportive.