Starting a Multinational Corporation to Conduct International Business (Value of an MNC)
The strongest multinational corporations are those that focus on a product that is both tangible and oftentimes edible. A great example, and one that will be reviewed for the essence of this new multinational corporation (hereby known as MNC) is identified as Unilever—which is a MNC that does business in the Netherlands and London—and consists of beverages, food products, and home cleaning agents and personal care products. Their annual revenue for 2008 topped 40.5 billion in worldwide consumables. Unilever is the basis for the foundation of our new MNC, to be called Champion Worldwide.
Champion Worldwide will begin as a small firm that focuses on one main product until the exports and revenue reach a substantial point, in which case Champion Worldwide will incorporate and make additional branches that target additional products.
Developing the Idea
The initial product for the main branch of Champion Worldwide will be a nutritious vitamin water that offers 100% of the body’s daily intake while also being low in calories called Champion Vitamin Water. Where most vitamin waters leave off is in taste, in an effort to hit the zero calorie mark, thus, our vitamin water will sacrifice a few calories to improve the taste and sustainability of a new consumable product. The goal will be less than 100 calories and product testers will define the five most popular flavors that consumers would be most willing to buy.
The initial foreign country to be targeted is Japan, as they are one of the leaders in consumable imports and already have an advertising market in place that targets their younger generation.
Initially, the product will be sold through a distributor. If the main sales are to take place in Japan, the goal would be to set up a distributor and manufacturer in or near Japan to cut down on international shipping and exporting costs. From the United States, mail and web based campaigns will commence to start promotion of the product.
The Japanese have always been interested in imports from the United States. While there is a speculative article citing that Japan may have too much vitamin water already, the article does go on to say that Coke’s own Vitamin Water is to be exported to Japan shortly (MyNippon.com). The article is purely opinion and may have little to no weight regarding the actual issue, but it is significant in that it demonstrates Japan’s consumption of vitamin water as a targetable consumable. With that said, “according to the RIRDC report, Japanese families consume 80,000 tones of green tea each year - the second highest consumption in the world behind China” (Ferre, 2009), which leaves ample room for new opportunity and growth in the beverage industry. With this information, it seems a missed opportunity if Japan is not the first country targeted with a new consumable beverage product.
It might be a bit of a risk to target Japan in this manner with a product of this caliber and type, but additional internet research shows that there is always room for a new consumable in Japan—especially if marketed correctly. Marketing is always a key component in the product launch of any new item meant for consumption. Even more, “there has never been a better time for foreign companies to set up a business in Japan than right now” (Melville, 2009, p. vii).
As Marketing in Japan explains, “the world media have been focusing on the problems in the Japanese economy, failures of big banks and brokers, the ongoing recession and so on…instead of shaking their heads about the weaknesses of the economy, Western companies should be looking at the golden opportunities that the recession represents” (Melville, 2009, p. vii). The book goes on to explain that “when the world’s second biggest consumer market stumbles for the first time in a quarter of a century, it’s time for hundreds of Western firms large and small to take advantage of it” (p. vii).
Supplies will be purchased in Japan to lower shipping and manufacturing costs and labor will need to be hired as well. First, a manufacturing plant will be constructed which will form the main base for operations. A few executive offices will be within the plant to ensure product assembly and build times. Essentially, the main branch of Champion Worldwide will begin in Japan, with offshoots for marketing and advertising in the United States. The main focus of the product and its manufacture will be in Japan.
Any expenses incurred from the manufacture and production of the product will be in Japanese yen.
Accessing Country Factors that Will Affect Demand for Champion Vitamin Water
The main factor that will affect the balance of trade between the United States and Japan, in regards to Champion Vitamin Water, will be the influx of new vitamin and energy drinks on the market. An additional factor that might affect trade will be the world economy and trade relations and any influxes or changes. Right now, the world economy is enduring a recession that makes trade and exporting a valuable commodity, but such a commodity can change frequently and quickly if relations between the United States and Japan do not remain stable. With the growing demand for soldiers in Iraq and bordering nations, the relationship between the United States and other main countries grows more tenuous. At any time, China, North or South Korea, Europe, or even Japan could make the decision to remove the United States from its presence and protection of oil in the Iraqi nations which would significantly change the way imports and exports are handled on an international basis, especially for a growing multinational corporation.
Of the factors, the most important in affecting the demand for Champion Vitamin Water will be the literal demand for such a product as a consumable in Japan. There are numerous competitors, and though Champion Vitamin Water intends to offer a significant difference to vitamin water as a product, such demand can be fickle in determining.
Assessing Trade Data
As Japan is essentially a small land-locked country, their nation has great need for imports from other countries. In fact, “recently, manufactured imports have been increasing. This is because the Japanese are buying more foreign goods, whose prices have come down due to the strong yen, and because import-promotion policies have been adopted to correct the trade imbalance” (Japan Tariff Association, 2009). As shown in the table below (adapted from Japan Tariff Association, 2009), the imports to Japan (or, exports from the United States and other countries) far outnumbers the amount of exports from Japan to other countries.
Imports and Exports to Japan, Summary Report on Trade to Japan in 2005
Japan’s Imports by Commodity, 2005 (US$ million)
Raw materials 31,802
Mineral fuels 132,097
Manufactured goods 49,145
Transport equipment 18,713
Japan’s Exports by Commodity, 2005 (US$ million)
Raw material 6,734
Manufactured goods 67,109
Transport equipment 137,882
As the above table shows, one of Japan’s largest imports is foodstuffs, which includes commodities that cannot be farmed or manufactured on Japan’s soil. This represents a tremendous advantage for countries like the United States who have the land for agricultural use that Japan does not.
Assessing Import Controls
According to the Japan External Trade Organization (JETRO), the packaging and distribution of vitamin waters is an exception to many of the trade regulations. As it is neither a literal food consumable (fruit or grain), the only main requirement is correct and easy-to-understand packaging. Article Five of the Food Sanitation Act cites that “food or additives which are used for sales (including delivery other than sales to many and unspecified persons; the same shall apply hereinafter) shall be collected, produced, processed, used, cooked, stored, transported, displayed and delivered in a clean and sanitary manner” (JETRO, 2009). The main trade regulation, then, is to provide and clean and sanitary container for the transport of consumable liquids.
Using the Foreign Exchange Market
The spot market will be useful in the initial run of the distribution of Champion Vitamin Water as it allows buyers to receive their goods upon payment and allows the company immediate payment upon delivery. Eventually, buyers will be extended credit so that they can purchase larger quantities of the product for resale to other markets and buyers.
Everbank (www.everbank.com) will be used for the exchange of foreign currency. The initial investment is 10,000 US dollars and the interest on any currency remaining in balance by monthly close is 4.5%. World Currency Access deposit accounts can be set up to send and receive money with conversions from Japanese yen to the US dollar based upon the current exchange rates, which are detailed on the website and are accurate with other online findings for the exchange rates.
The forward market refers to a future delivery, which will be the focus for the initial investment and manufacturing for Champion Worldwide. Many contracts and buyers can be obtained in this fashion, with an initial return of investment upon delivery of the product.
Monitoring Movements in the Foreign Currency's Value
The recession that Japan is facing (much like the recession the US is pulling out of now) has had a dramatic impact on the value of the Japanese yen in comparison to the US dollar and other foreign currency. Over time, at least in the foreseeable future, the yen will continue to drop in value, making exchange to the US dollar much more profitable than it has been in years past. Had the yen been at an all-time high, like in 2007, exchanging to US dollars would not have been a wise investment as value would have been lost in such an exchange.
Currency futures are used to predict the rise and fall of a currency. Graphing and charting the past performance of the Japanese yen predicts that the currency will continue to fall in value until early 2010. In such a case, a call option could be placed which would allow a ride of a futures contract until the currency began to rise or fall again.
Accessing Futures Quotes.
The prevailing futures and options contract price of the Japanese yen is $12.50 per yen, per contract. Thus, depending on the investment available, the contract for both futures and options can be economically high. The prevailing spot rate is roughly .0109 for the last three months.
Monitoring Central Bank Intervention.
If the federal government attempted to strengthen the US dollar in the foreign exchange market, the value of the dollar to the Japanese yen would change, making the dollar even more valuable in an exchange.
If the federal government decided to weaken the US dollar, exchange rates with the Japanese yen would change in favor of the yen, making exchange of lesser value to the US dollar.
For the most part, the exchange rate is currently in favor of moving Japanese yen to the US dollar. The central bank could intervene at any point, without even making changes to the exchange rates, by either making it more difficult to make an exchange or placing limitations on the amount of the exchange—which could seriously hinder an international business.
Accessing Central Bank Information.
The Bank of Japan (the central bank in Japan) has a monetary policy enforces limited control over the Japanese yen depending on current import and export rates.
Accessing Spot and Forward Rates.
The spot rate of the Japanese yen from Everbank is .0109 yen to the US dollar. Every other online bank has the same spot rate for the Japanese yen though a few cite the spot rate as 1 Japanese yen to .010897 US dollars versus .0109. The spot rates, at this time, are aligned by every bank that offers a currency exchange.
The one-year forward rate for the Japanese yen from Everbank is .0109 yen. Essentially, interest rate parity suggests that in any given exchange of foreign currency, the purchase of a futures contract to convert the money back to original exchange should be equal to the returns from purchasing a futures contract of the original currency. In this case, interest rate parity does exist as an exchange from Japanese yen to US dollars would yield a higher profit, especially when placed in a futures contract than a futures contract of Japanese yen alone.
The Japanese yen typically exhibits a discount or premium when the interest rate is lower than that of the exchange currency. When there are no differences, there is no premium or discount and the exchange is arbitrary.
Currency options operate differently than a futures contract, but with minimum risk. However, knowing the predictors of the currency, the best investment would be to obtain a futures contract to earn the quickest and greatest investment. If the currency predictors were less certain, an options contract would limit the risk but still allow play in the currency market.
Hedging with Forward Contracts
- Forward contracts could be used to hedge the rate of currency and exchange for the Japanese yen. The predictors show that the yen will continue to fall in value until early 2010, which means that a futures contract can be achieved with little risk to the investment.
- Currency options would be significantly less risk than a futures contract, but the futures contract would have the most gain. To limit the exposure in the event that the predictors are wrong and the Japanese yen suddenly sees a rise in value, an option could hedge the risk with the limited investment.
- Today’s spot rate is $12.50 per yen per contract. The premium would depend on how much yen is purchased within the contract, though an investment of between $5,000 and $25,000 US dollars is expected.
Using Futures Quotes.
I would recommend an investment in a futures contract with Japanese yen because the charts and predictors suggest a massive falling in value until early 2010. Until that time, a contract would yield a significant amount of money that could be invested back into the business.
Denominating Receivables in US Dollars.
If the transactions occurred in US dollars instead of Japanese yen, the return on receivables would essentially be the same, unless the money exchanged is converted into Japanese yen at a later point. In either case, because the US dollar holds more value than the Japanese yen, the transaction exposure and economic exposure is virtually limited. If the Japanese yen rose in value to be competitive or more powerful than the US dollar, than performing business in yen would hinder the growth of the business if money were to be exchanged with the US dollar.
Establishing a Subsidiary in a Foreign Country.
- It would be best to have a subsidiary in Japan to limit the shipping and manufacturing costs exporting from the United States would incur. In fact, it would be preferable to have a manufacturing plant in Japan to limit these costs wholesale. It would essentially no longer be considered a direct import, however, the company would be US run and considered an export to Japan.
- The disadvantages to setting up a subsidiary in Japan are limited as well. Labor would cost less, manufacturing would cost less, and any shipping and receiving would cost less. The main disadvantage would be in exchanging the currency, which, at this time, is still a valuable option.
Deriving a Required Rate of Return for an International Project.
Much like Unilever, Champion Worldwide would eventually expand into a multi-consumables business. Vitamin water is only the main project and it would be intended that the company expand into other products intended for sale and export to Japan. The rate of return for the new products would be set by calculating the rate of return for the sale of Champion Vitamin Water.
Estimating Cash Flows of an International Project.
- Depending on whether or not the product would be manufactured and sold from Japan, the product itself would be fairly cost-effective to sell and produce. A bottle supplier would need to be found who could manufacture the bottles and labels for wholesale cost or less and the drink itself would be sold at competitive rates in comparison to other vitamin waters being sold in Japan.
- The expenses would be estimated by calculating the cost of production, the cost of laborers, the cost of testing the product, the cost of testing approved flavors, and the cost of manufacture, advertising and marketing.
- Net cash flows would be estimated in comparison to the cost of manufacture, production, and sales. If the Champion Vitamin Water is set at competitive rates, the vitamin water can also be set at competitive sales. In this case, vitamin waters exported to Japan would be examined as to their rates of sale and their competitive costs to estimate the total net cash flow.
- The net cash flow could be overestimated easily, for, as a new vitamin water in a potentially saturated market, there are no true predictions for how such a product will fare.
Accessing Exposure to Country Risk.
- The financial factors that expose the business to Japan is the economic risk of developing a new business in an economy currently undergoing a recession. However, the most successful businesses strike during a recession to gain a greater foothold when the recession recedes. Especially when entering a foreign market, the chance to grow and expand is greater.
- Japan is fairly strong politically, and a product such as a new vitamin water would have limited impact from any political factors.
Capital Structure Decisions.
- To start with, there would be limited capital structures set in place. While the company may invest in futures and options, the ability to set up equities or hybrid securities would be limited unless there was a significant draw for investors to support Champion Worldwide. Champion Worldwide will be founded upon investors, at least initially, but the return on their investment will be limited to five years after the company has begun manufacturing to limit the overall risk.
- The proportion of equity will be limited due to the nature of the business and the fact that Champion Worldwide will be a fledgling company with a new product in a new international market. For the first five years or so, equity will not necessarily be a significant factor in the business—though it may be desired.
Long-Term Debt-Denomination Decision.
- The company, if there are not enough investors to get the manufacturing plant up and running, will require long-term funding. The loan would be in Japanese yen, as the interest rate is significantly lower than that in the United States.
- The exposure to exchange rate risk would not necessarily be limited by borrowing in Japanese yen due to the nature of the falling yen in comparison to the US dollar. Though the interest rate is significantly lower, so too is the overall value of the currency.
Accessing Long-Term Interest Rates.
The base borrowing rate for Japan is .105% which is much lower than the borrowing rate in the US, which is 12% and fluctuating daily. Borrowing in Japan offers the lower interest rate, even if an MNC has to pay higher than stipulated.
Ensuring Payment for Exports.
While there will be forward contracts in use, the main exports will be paid for before delivery to ensure payment. The business could ensure payment in this manner by not shipping the products until payment had been received. Eventually, payment terms with companies could be achieved to allow a greater ordering capacity for buyers and investors.
Financing in Foreign Currency.
- I would finance in the foreign currency simply because the interest rate is lower, which would significantly offset the risk to exposure to the exchange rates. The interest rate in Japan is always lower than the interest rate in the United States. And, as it would be best to set up a factory in Japan, any financing that would be done would have higher long-term value for investors than it would as a fully exported business.
- Foreign financing would lower the risk to exchange rates and would be offset by the lower interest rate. Eventually, the Japanese yen will rise in value and the exchange rate risk will be even less significant if the funds need not be converted.
Any funds that are received will go back into the business to pay for the manufacture of new products and the payment of employees. If there is a decent return, an investment could be made in futures or options contracts to enhance the cash flow. If there were any short-term debt, it would be best to pay the debt off before investing as many companies, especially international companies, can get into trouble with outstanding debt, no matter how limited it might be. The best case scenario is to pay off any outstanding debts before investing, though investing will be a priority once the company gets off the ground.
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Financial Forecast Center. (2009). Japanese yen to US dollar currency exchange rates forecast. Accessed September 7, 2009 from http://forecasts.org/yen.htm
Ferre, J. (2009). Green tea exports to Japan an emerging opportunity: RIRDC. AFN: Thought for Food Online. Accessed September 7, 2009 from http://www.ausfoodnews.com.au/2009/08/24/green-tea-exports-to-japan-an-emerging-opportunity-rirdc.html
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MyNippon.com. (2009). Vitamin water in Japan. Accessed September 7, 2009 from http://www.mynippon.com/japan/?p=353