Shell Political Risk
Shell Political Risk
1. Political risk and country risk are challenges that must be strategically considered by multinational firms. What is one real-world firm that deals with political and country risk? Answer: Temasek Holdings company
In what nation does the risk occur and in what ways?
Answer: In South East Asia, Thailand Temasek face Political Risk in Thailand
When Singapore’s state-run investment arm Temasek Holdings bought Thailand’s Shin Corp telecommunications conglomerate in 2006, its 73 billion baht (US$2.2 billion) acquisition of Shin Satellite was a strategic afterthought. Temasek was known to have purchased Shin Corp from company founder and then Thai premier Thaksin Shinawatra for its exposure to Thailand’s fast-growing mobile telecom market.
The politically charged transaction came just months before Thaksin was ousted in a military coup. After Temasek’s purchase, a military appointed government de facto nationalized Shin Corp’s iTV on charges the television subsidiary had violated its state operating concession. Now, Shin Satellite is indirectly embroiled in a closely watched court case that threatens to seizepermanently US$2.3 billion of the now exiled Thaksin’s frozen assets on corruption charges.
The charges include allegations that Thaksin’s government illegally granted Shin Satellite a preferential eight-year tax holiday on its foreign operations, a policy that prosecutors have claimed cost the state over 16 billion baht in lost revenues. The decision in the case is due on February 26, and according to analysts it’s unclear what legal implications a guilty verdict would have on the Temasek-owned company’s finances and state concession agreement.
Once Thaksin was toppled from power, Temasek Holdings’ investments in Thailand started to look less attractive to the company.Now, the findings of a committee appointed under Section 22 of the Joint Public/Private Venture Act 1992 could shake up Temasek’s investments still further. The committee recommended that state-owned TOT sue Advanced Info Services (AIS), its mobile phone concessionaire, for over 70 billion baht in damages caused by amendments to its concession contract during the time Thaksin was in power.Singapore telecoms giant Singtel and Temasek Holdings stand to be affected, as they are the major shareholders in Shin Corp and AIS.If TOT sues AIS and wins, AIS may find it hard to survive, as it would have to pay a huge sum in damages.
How might the firm mitigate the risks associated with its operations in this nation?
Justify your position through a thoughtful discussion that draws upon the readings and lectures for this week. In addition, you should seek out a timely and relevant external information source, such as an article from a reputable news provider like The Wall Street Journal or The Financial Times.
Answer: The firm should mitigate the risk by
A. Map the politics Does the current process identify country-by-country operations, relative exposure or potential exposure in each jurisdiction, a portfolio cross-country view of risk, and political risk factors that can affect business operations?
B. Evaluate the risks Is there a structured approach to translate the business risks that may arise from potential political change and analyze their potential business impact?
C. Assess controls and plans Is the quality of controls and risk mitigation plans sufficient relative to those business risks?
D. Determine the acceptability of residual risk How are decisions made about the risk that remains after mitigation steps have been taken, relative to management’s risk tolerance or other possible responses to those risks?
This case demonstrates that the lack of a transparent, rule-based investment regime and of a clearly articulated policy of progressive Controls of Foreign Direct Investment liberalization might have contributed to illegal actions, uncertainty, ineffective implementation of existing investment laws and regulations, discouragement of good Controls of Foreign Direct Investment, and harmful effects to the host economy.
The way of assessing the effectiveness of Temasek’s political risk management strategies would be to evaluate gains and losses that may be associated with the political risks which were taken.
Temasek investment portfolio and approach expose it to higher political risk. Then Temasek should avoid investments in ‘iconic’ overseas companies, go for minority stakes in future investments, and seek local partners in making acquisitions.
Temasek should start to give press interviews. This can be interpreted as part of a targeted public relations campaign that operates on two levels: on a broader, strategic level, to dispel suspicions and rumors on Singapore and on a specific, tactical level, to clarify public doubts on individual investments.
Temasek should following the path by many multinationals to win over local communities by building a more visible corporate citizen image like Temasek Foundation which has focus areas including the promotion of exchange programs among different languages/religions/cultures, and support for disaster emergency relief and recovery in Asia
And Thai government should improve standard legal and institutional framework, enhancement of good governance and transparency, capacity building, ensuring fair competition, balanced liberalization and sustainable development, full participation of the host economy and local people, and standardization of labor laws and practices.
2. Real exchange rate risk can be managed in time (short versus long term), as well as through different corporation processes (such as marketing and production). What is one example of a real-world corporation that has to manage its real exchange rate risk?
Answer: BMW Group
Despite rising sales revenues, BMW was conscious that its profits were often severely eroded by changes in exchange rates. The company’s own calculations in its annual reports suggest that the negative effect of exchange rates totalled €2.4bn between 2005 and 2009.
BMW did not want to pass on its exchange rate costs to consumers through price increases. Its rival Porsche had done this at the end of the 1980s in the US and sales had plunged.
What strategies does this corporation currently employ?
Answer: BMW took a two-pronged approach to managing its foreign exchange exposure. One strategy was to use a “natural hedge” – meaning it would develop ways to spend money in the same currency as where sales were taking place, meaning revenues would also be in the local currency. However, not all exposure could be offset in this way, so BMW decided it would also use formal financial hedges. To achieve this, BMW set up regional treasury centres in the US, the UK and Singapore.
The natural hedge strategy was implemented in two ways. The first involved establishing factories in the markets where it sold its products; the second involved making more purchases denominated in the currencies of its main markets.
By moving production to foreign markets the company not only reduces its foreign exchange exposure but also benefits from being close to its customers.
In addition, sourcing parts overseas, and therefore closer to its foreign markets, also helps to diversify supply chain risks.
What strategies do you think the corporation could use to better manage its risk? Justify your position through a thoughtful discussion that draws upon the readings and lectures for this week. In addition, you should seek out a timely and relevant external information source, such as an article from a reputable news provider like The Wall Street Journal or The Financial Times.
Answer: BMW with international supply chains and international markets will face not only exchange rate risk from the financial accounting perspective, but also risks to their competitive positions and cost-revenue dynamics as a result of steep and large declines in the dollar’s value. Financial hedging strategies are suitable for mitigating small and short-term currency fluctuations. But to avoid the effects of huge, long-term shifts in a currency’s value, the likes of BMW are however advised to adopt operational hedging strategies. These provide the flexibility to dynamically manage supply chains and markets, thereby allowing some degree of difference and efficient management of the cost-revenue equation as international macro-economic forces influence the global marketplace.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 19 October 2016
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