Blades international expansion in Thailand: inflation and competition effects

Blades Case Study - International Finance Issues

Impact of Higher Inflation in Thailand

If Blades are selling their products in Thailand and the country has a high level of inflation means that the price if goods being sold is increasing. As the firm is selling the goods in the local currency, the Thai Baht, this will impact on the final revenue the company will receive due to the impact of inflation in the exchange rate between the Bhatt and the Dollar. Exchange rate parity theories indicate that where there is inflation at different rates in two countries the exchange rate for the currencies of those two countries will change so that there remains a relative parity between the prices/value. To phrase this in simple terms if the Thailand had inflation 10% higher than the United States one would expect to see a shift in the spot exchange rates to reflect this with Thai Bhatt depreciating 10% against the U.S. Dollar. Therefore, as the Bhatt is worth less due to its depreciation, the firm will receive less revenue per item unless they increase the prices charged in line with inflation. If the firm increases the prices, and inflation is increasing at a rate greater than wages, the market will see a decrease in the level of disposable income and the firm is likely to see a decrease in demand in line with the usual supply and demand relationships.

The company is also purchasing Speedos in Thai Bhatts. Inflation is likely to have increased the price for the goods in Thai Bhatt's. For Blades to purchase the goods which are invoiced in Thai Bhatts the firm will need to purchase a higher level of the currency. The depreciation may help with this, but there is usually a lag and the effect will be to increase prices paid.

Question 2 - Impact of Thai and U.S. Competition

Increased competition gives consumers more choice and may have a negative impact on sales for Blades. In markets where there is a high level of competition there trends to be downward pressure on prices as firms seek to compete with each other. Blades note that there is already U.S. competition in the market, but Blades are preferred as they invoice in Bhatts whereas the competition invoice in dollars. If firms are competing and there is inflation which results in depreciation of the currency, the U.S. supplier prices will effective increase as it will cost more Bhatts to buy the same amount of dollars. Therefore, in these conditions increased competition from the U.S. will have little impact unless they change their practices and charge in Bhatts.

Competition from Thai firms may be more serious as they are also charging the same currency and may offer an alterative product that is acceptable to the consumers. In addition, the firm may not have the same financial pressures if they are managing their entire supply chain in the same currency. Increased competition is likely to result in lower sales.

Question 3 - Decreasing Level of National Income

If Thailand suffers a decrease in the level of national income this means that there will be less money in the economy as a whole, with less being earned. Where the level of money in the economy declines there will be a decline in the aggregate demand. The decline will not be evenly spread across all products; those which are essential will still be purchases, those which are not necessary will suffer a greater decline. As the Blades products are not an essential product there is likely to be a decline in the demand and a reduction in the revenue earned if Thailand suffers a decline in national income.

Question 5 - Financing

A number of agencies exist to help both the government and the private sector with the aim of supporting development. The Asian Development Bank aids private investment, but this is focused on projects, rather than ongoing commercial operations. For firms facing challenges there are a number of organizations that may help in terms of advice and support. For example, the U.S. Commercial Service in Thailand may be useful. This is a U.S. government department that has the remit of promoting U.S. interest aboard. The trade federal promotion and export finance agencies may also be able to provide some aid and support.

There are various parity theories, but this general approach is suitable for this question.