Liebherr-Werk Biberach (LWB) GmbH is a German company founded in 1954 and is one of the largest international manufacturers of tower cranes. LWB has a workforce of about 1,600 at its headquarters in Biberach an der Ri (Bavaria) from where it exports cranes to China. Exports to China are currently 1,000 units per year at the yuan equivalent of 240,000 per crane. The exchange rate between the yuan (CNY) and euro is currently CNY 8.2/. A foreign exchange consultancy in Hong Kong has advised LWB that the yuan is expected to depreciate to CNY 9.2/ by the end of this year after which time the Peoples Bank of China (Chinas central bank) will maintain this exchange rate for the next eight years. LWB accepts the advice given by the consultancy in Hong Kong and faces a pricing decision in view of the impending change in the exchange rate. LWB is considering two pricing decisions: (i) to maintain the same price for each crane in yuan in which case is expects to continue to sell the same volume (1,000 units) in China or (ii) to maintain the same price in euro (and raise the price in yuan) in which case it expects its export volume to drop 10%. The direct costs of production are 75% of the German sales price.

a. What will be the impact under each pricing strategy for LWB next year?

b. Which of the two pricing strategies should LWB choose year?

Assume that all the information given in the previous question about LWB holds. LWB has asked its finance unit to prepare forecasts for its exports to China. The finance unit of LWB forecasts that if LWB maintains the same price in yuan its export volume will increase by 12% per year for eight years. Its patent will expire at the end of eight years at which point LWB will cease to export to China. The cost of production in euros is not expected to change during this time. The finance unit forecasts that if LWB maintains the same price in euros, after the initial 10% decline in the first year, its export volume will increase 1% per year thereafter. Once more the cost of production in euros will remain unchanged and LWB will stop exports to China after year eight. The average cost of capital for LWB is 8%. Given these considerations, what pricing policy should LWB follow?