CASE STUDY 2020 (1)

Impact of Economic Fluctuations on the International Flow of Funds

Ben Holt, chief forex strategist of Aerobics, Inc., based in U.S.A. has decided to counteract the decreasing demand for Speedos a leather based aerobic sport shoe by increase the export of this product to Thailand. Furthermore, due to the low cost of rubber and leather in Southeast Asia, Holt has decided to import 15% of the rubber and leather needed to manufacture shoes from Thailand ( as the cost is 20% cheaper in Thailand compared to other countries). This would give Aerobics Inc. a cost advantage.

Currently, approximately. $20 million, or 10 percent, of Speedos sales are contributed by its sales in Thailand. Aerobics Inc. faces little competition in Thailand from other U.S. shoe manufacturers. Those competitors (NIKE , ADIDAS and others) that export shoes to Thailand invoice (bills) their exports in U.S. dollars. Currently, Aerobics Inc., follows a policy of invoicing in Thai baht (Thailands currency). Ben Holt felt that this strategy would give, Aerobics Inc., a competitive advantage. Furthermore, the primary customer in Thailand and the biggest retailor has committed itself to purchasing a certain quantity of Speedos shoes annually if Aerobics will invoice (the bill) in baht for a period of three years. Ben Holt is rather content with current arrangements and believes the lack of competitors in Thailand, the quality of Aerobics products, and its approach to pricing will ensure Aerobics position in the Thai shoe market and will bring guaranteed success in the future.

Assume you are in the Aerobic Inc.s forex analytics department , have doubts or not convinced as to the guaranteed future success. Although you believe Aerobics strategy for its Thai sales and imports is sound, you are concerned about current expectations for the Thai economy. Your research and reports on economy forecasts indicate a high level of anticipated inflation, a decreasing level of national income, and a continued depreciation of the Thai baht in the near future. In your opinion, all of these future developments could affect Aerobics financially given the companys current arrangements with its suppliers and with the Thai importers.

You have developed a list of questions and answers for yourselves, for your discussions with the chief forex strategist.

1. What is your opinion on the Aerobics Inc.s current policy of invoicing their exports and imports in Thai baht (Thailands currency)? Will this strategy give Aerobics Inc., a competitive advantage compared to other exporters?

2. How could a higher level of inflation in Thailand affect Aerobic Inc.s export and import business (assume U.S. inflation remains constant)?

3. What will be the impact of a continued depreciation of the Thai baht on Aerobic Inc.s export and import with Thailand? Do you recommend a change in current invoice strategy in this case?

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