Theories on exchange rate risks and the closely related theory of Purchasing
Power Parity (PPP) provide the basis for the analysis of the exchange rate
problems the three car producers face while manufacturing in the UK.
1.1 Theories on exchange rate risks
The exchange rate risk represents one of the most important risks for
companies operating in international industries.1 There are three kinds of
exchange risks: transaction risk, translation risk and economic risk. Transaction
exposure is the risk of changes in the value of currency occurring between the
time of the settlement of the transaction and the maturity of it.2 The second and
most important type of exchange risk is economic risk. Economic exposure
occurs when currencies, that are involved in the actual or potential competitive
situation, become over- or undervalued.3 It can heavily affect current and future
cash flows of domestic and foreign operations.4 The third type of risk is called
translation exposure. It refers to the risk that exchange rate fluctuations may
change the value of current assets and liabilities of the balance sheet of a
foreign affiliate in case of consolidation.5 [...]
1 See: Punett, Betty J. / Ricks, David A., 1994, p. 305
2 See: Grosse, Robert / Kujawa, Duane, 1992, p. 447
3 Over- and undervaluation are expressions that will be explained under the point 1.2 "Theory of
Purchasing Power Parity".
4 See: Czinkota, Michael R. / Ronkainen, Ilkka A. / Moffett Michael H., 1992, p.542
5 See: Grosse, Robert / Kujawa, Duane, 1992, p. 447
Table of Contents
1. THEORETICAL BACKGROUND
1.1 Theories on exchange rate risks
1.2 Theory on Purchasing Power Parity
2. EXCHANGE RATES UK VERSUS CONTINENTAL EUROPE
3. IMPACT ON CARMAKERS
3.1 Exchange rate between home- and foreign currency
3.2 Exchange rate between Euro and Pound
4. LONG-TERM SOLUTION
Objectives and Topics
This case study examines the specific exchange rate challenges faced by major automotive manufacturers like Toyota, Nissan, and General Motors due to their production and export operations based in the United Kingdom. It aims to analyze the economic impact of currency fluctuations and the valuation of the Pound Sterling relative to the Euro, subsequently proposing strategic long-term measures for these companies to maintain their competitive edge.
- Exchange rate risks and their classification (transaction, translation, and economic risk)
- The theory of Purchasing Power Parity (PPP) in international business
- Market dynamics and currency valuation trends between the UK and Continental Europe
- Operational impacts on large-scale automotive manufacturing and supply chains
- Strategic management approaches to mitigate economic exposure
Excerpt from the Book
3. Impact on carmakers
The three manufacturers Toyota, Nissan and General Motors (GM) belong to the largest and most internationalised carmakers of the world. They are moreover all using the UK as a production- and export platform because of obvious comparative advantages such as the language, relatively low labour costs and the business friendly legislation.
Toyota, the world's third-largest and Japan's largest car maker, employs approx. 3100 people in its two factories in the UK, building 170,000 cars per annum. As Japan's second largest automobile manufacturer Nissan operates Europe's most productive car factory in the UK where 5000 workers produce annually 330,000 cars. The American company GM, being the world's largest carmaker, actually employs 5000 people in its UK based plant building 170,000 cars a year mainly under the label Vauxhall.
For the three foreign carmakers' UK operations the exchange rate complication has two dimensions:
Exchange rate between home- and foreign currency
Exchange rate between Euro and Pound
Summary of Chapters
1. THEORETICAL BACKGROUND: Outlines the fundamental concepts of exchange rate risks and the theory of Purchasing Power Parity as the analytical framework for the study.
2. EXCHANGE RATES UK VERSUS CONTINENTAL EUROPE: Examines the currency relationship between the UK and the Euro Zone, highlighting the appreciation of the Pound and its impact on trade competitiveness.
3. IMPACT ON CARMAKERS: Analyzes the specific operational situation and financial challenges faced by Toyota, Nissan, and GM due to their reliance on UK production facilities.
4. LONG-TERM SOLUTION: Proposes and evaluates strategic measures, such as sourcing shifts and currency-indexed contracts, to protect these manufacturers from the negative effects of an overvalued Pound.
Keywords
Exchange rate risk, Purchasing Power Parity, Automotive industry, Economic exposure, Transaction risk, UK manufacturing, Pound Sterling, Euro, Operational hedging, Financial hedging, Currency appreciation, Market competitiveness, Export strategy, Foreign direct investment, Supply chain management
Frequently Asked Questions
What is the central focus of this case study?
The study primarily focuses on the exchange rate problems encountered by Toyota, Nissan, and General Motors, which operate manufacturing plants within the United Kingdom.
Which specific risk types are addressed?
The paper discusses transaction risk, translation risk, and economic risk, with a particular emphasis on economic exposure due to its long-term impact on competitive cash flows.
What is the primary objective of the research?
The objective is to analyze how currency valuation discrepancies affect the competitiveness of UK-based automotive plants and to recommend long-term strategic adjustments.
Which economic theories serve as the foundation of the analysis?
The analysis is grounded in the theory of exchange rate risks and the theory of Purchasing Power Parity (PPP).
What solutions are proposed for the manufacturers?
The study suggests a combination of measures including shifting sourcing to the Euro Zone, negotiating supplier contracts in Euros, and linking wage settlements to exchange rate fluctuations.
Which companies are examined in this study?
The case study specifically focuses on Toyota, Nissan, and General Motors (Vauxhall).
How does the overvaluation of the Pound affect the Toyota Avensis specifically?
Industry experts cited in the paper state that the overvalued Pound makes the Toyota Avensis roughly 15% more expensive to produce compared to comparable vehicles made in continental Europe.
What role does the "Luton-case" play in the discussion?
The Luton-case refers to General Motors' decision to reduce capacity at its UK plant, serving as an example of how manufacturers might shift production to countries within the Economic and Monetary Union (EMU) to avoid currency-related disadvantages.
- Quote paper
- Johannes Hartmann (Author), 2002, Describe the exchange rate problems Toyota, Nissan, and GM face while manufacturing in Britain and propose a long-term strategy for these companies., Munich, GRIN Verlag, https://www.grin.com/document/19512
