Volvo of Sweden’s XC90 Export Pricing Analysis.

Volvo Sweden, a leading auto manufacturer in Sweden, was scheduled to launch a new variant of the XC90 SUV in 2013 and was in the midst of generating a complete pricing analysis of the car for sales in Sweden and export. The new variant of the XC90 would be initially priced at Swedish kronor 619,900 in Sweden, and if exported to Australia, the price would be A$92,985 in Australian dollars at the current spot rate of kr6.65 = A$1.00. Volvo intends to raise the price domestically with the rate of Swedish inflation over time, but is worried about how that compares to the export price given Australian dollar inflation and the future exchange rate. Use the following data table to answer the pricing analysis questions.

a. If the domestic price of the XC90 increases with the rate of inflation, what would be its price over the 2013–2018 period?

b. Assuming the forecasts of Australian and Swedish inflation prove accurate, what would the value of the Swedish krona be over the coming years if its value versus the Australian dollar followed purchasing power parity?

c. If the export price of the XC90 were set using the purchasing power parity forecast of the Swedish krona-Australian dollar exchange rate, what would the export price be over the 2013–2018 period?

d. How would the XC90’s export price evolve over time if it followed Swedish inflation and the exchange rate of the Swedish krona versus the Australian dollar remained relatively constant over this period of time?

e. Stefan, one of the newly hired pricing strategists, believes that prices of automobiles in both domestic and export markets will increase with the rate of inflation, and that the Swedish krona/
Australian dollar exchange rate will remain fixed.
What would this imply or forecast for the future export price of the XC90?

f. If you were Volvo, what would you hope to happen to the Swedish krona’s value versus the Australian dollar over time given your desire to export the XC90? Now if you combined that “hope” with some assumptions about the competition – other automobile sales prices in Australian dollar markets over time – how might your strategy evolve?
g. What did the Swedish krona end up doing over the 2013–2018 period?

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Calendar Year 2013 2014 2015 2016 2017 2018 XC90 Price (Swedish krona) 619,900 Swedish inflation (forecast) 0.28% 0.88% 1.64% 3.45% 0.90% Australian inflation 2.51% 1.51% 1.25% 1.97% 1.96% (forecast) Exchange rate (kr - A$1.00) 6.65