Ben Holt, chief financial officer (CFO) of Blades, Inc., has decided to counteract the decreasing demand for Speedos roller blades by exporting this product to Thailand. Furthermore, due to the low cost of rubber and plastic in Southeast Asia, Holt has decided to import some of the components needed to manufacture Speedos from Thailand. Holt feels that importing rubber and plastic components from Thailand will provide Blades with a cost advantage ( the components im-ported from Thailand are about 20 percent cheaper than similar components in the United States). Currently, approximately $ 20 million, or 10 percent, of Blades’ sales are contributed by its sales in Thailand. Only about 4 percent of Blades’ cost of goods sold is attributable to rubber and plastic imported from Thailand. Blades faces little competition in Thailand from other U. S. roller blades manufacturers. Those competitors that export roller blades to Thailand invoice their exports in U. S. dollars.
Currently, Blades follows a policy of invoicing in Thai baht ( Thailand’s currency). Ben Holt felt that this strategy would give Blades a competitive advantage since Thai importers can plan more easily when they do not have to worry about paying differing amounts due to currency fluctuations. Furthermore, Blades’ primary customer in Thailand ( a retail store) has committed itself to purchasing a certain amount of Speedos annually if Blades will invoice in baht for a period of 3 years. Blades’ purchases of components from Thai exporters are currently invoiced in Thai baht. Ben Holt is rather content with current arrangements and believes the lack of competitors in Thailand, the quality of Blades’ products, and its approach to pricing will ensure Blades’ position in the Thai roller blade market in the future.
Holt also feels that Thai in the Thai roller blade market in the future. Holt also feels that Thai importers will prefer Blades over its competitors because Blades invoices in Thai baht. You, Blades’ financial analyst, have doubts as to Blades’ “guaranteed” future success. Although you believe Blades’ strategy for its Thai sales and imports are sound, you are concerned about current expectations for the Thai economy. Current forecasts indicate a high level of anticipated inflation, a decreasing level of national income, and a continued depreciation of the Thai baht.
In your opinion, all of these future developments could affect Blades financially given the company’s current arrangements with its suppliers and with the Thai importers. Both Thai consumers and firms might adjust their spending habits should certain developments occur. In the past, you have had difficulty convincing Ben Holt that problems could arise in Thailand. Consequently, you have developed a list of questions for yourself, which you plan to present to the company’s CFO after you have answered them. Your questions are listed here:
1. How could a higher level of inflation in Thailand than that of US affect Blades import and export respectively in the following two scenarios?
a. In the short term, US$ versus THB hold at fixed exchange rate due to a pegged exchange rate policy.
b. In the long run, the Thailand trade deficit causes the pegged exchange
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