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The Exchange Rate and Auto Parts Manufacturers

 

Case Study: The Exchange Rate and Auto Parts Manufacturers

Udo Pfeiffer, the CEO of SMS Elotherm, a German manufacturer of machine tools that engineer crankshafts for cars, signed a deal in late November 2004, to supply the US operations of DaimlerChrysler with $1.5 million worth of machines. The equipment would be manufactured in Germany and exported to the United States. When the deal was signed, Pfeiffer calculated that at the agreed price, the machines would yield a profit of $30,000 each. Within three days that profit had declined by $8,000. The dollar had slid precipitously against the euro. SMS would be paid in dollars by DaimlerChrysler, but when translated back into euros, the price had declined. Since the company’s costs were in euros, the falling revenues when expressed in euros were squeezing profit margins.

With the exchange rate standing at £1 = $1.33 in early December 2004, Pfeiffer was deeply worried. He knew that if the dollar declined further to around £1 = $1.50, SMS would be losing money on its sales to America. He could try to raise the dollar price of his products to compensate for the fall in the value of the dollar, but he knew that such a strategy was unlikely to be successful. The market for machine tools was very competitive, and manufacturers were constantly pressuring machine tool companies to lower prices, not to raise them.

Another small German supplier to the US automobile company, Keiper, was faring somewhat better. In 2001 Keiper, which manufactures metal frames for automobile seats, opened a plant in London, Ontario, to supply the US operations of DaimlerChrysler. At the time the investment was made, the exchange rate was £1 = $1. Management at Keiper had agonised over whether the investment made sense. Some in the company felt that it was better to continue exporting from Germany. Others argued that Keiper would benefit from being close to a major customer. Now with the euro appreciating every day, it looked like a smart move. Keiper had a real hedge against the rising value of the euro. But the advantages of being based in Canada were tempered by two factors. First, the US dollar had also depreciated against the Canadian dollar, although not by as much as its depreciation against the euro. Second, Keiper was still importing parts from Germany, and the euro had also appreciated against the Canadian dollar, raising costs at Keiper’s Ontario works.

Case Questions
1.Why was Keiper weathering the rise of the euro better than SMS?

2.Could SMS Elotherm have taken steps to avoid the position it found itself in? What were those steps? Why do you think the company did not take these steps?

3.In retrospect, what might Keiper have done differently to improve the value of its ‘real’ hedge against a rise in the value of the euro?

1. The Individual dissertation assessment
a. 30% of grade
b. 3000 words
c. Deadline: Tuesday, 2nd March, 2015
d. Task: Answer the case questions from one of the term 2 case studies.
e. Marking criteria:
e.i. Focus (20%): i.e. Do the 2 answers answer the question asked?
e.ii. Synthesis (30%): Do the 2 answers summarise the theory needed to answer the questions.
e.iii. Soundness (30%): So the 2 answers reflect an understanding of the topic area:
e.iii.1. Arguments
e.iii.2. Use of research
e.iv. Structure (10%): Organisation and sectioning of dissertation
e.v. Mechanical soundness (10%): Grammar, spelling and referencing.
2. Focus (20%): i.e. Does your dissertation answer the question asked?
a. Your answers should be relevant to what is being asked.
b. When you are asked a question, break it down into the various bits that are asked and attempt to answer each component.
c. Note the keywords / key phrases in each question.
d. Avoid excessively long introductions or backgrounds.
e. Use the tutorial discussions to jot down points on relevant answers to questions.
3. Synthesis (30%): Does your answer to the dissertation summarise the theory needed to answer the questions.
a. What are the key theories or concepts (however simple) or jargon that are needed (i.e. those theories or terminologies that are used in a particular topic. E.g., in politics, the jargon could be “Left”, “Right”, “Labour party”,” Conservative party” . In culture, we have the Hofstede classification of culture which serves as a theoretical framework, etc). A good source of the key concepts to a topic can be found in the related lecture slide of the case study. Make sure you make use of the concepts and describe them.
b. You might come across other keywords or concepts as you research the question, ensure you always describe and apply them in your dissertation.
c. When you answer a question, do ask yourself what are the relevant / related concepts to the question you are answering.
4. Soundness
a. Soundness (30%): Does your answer reflect an understanding of the topic area:
a.i.1. Arguments
a.i.2. Use of research.
Arguments – there should be a flow / logic to your arguments.
Use of research: Literature search
a. Do not restrict your work to only the case study. You need to expand your research.
b. For both dissertations, have a minimum total of 5 references, of which at least 2 are academic. Up to 10 is impressive.
c. Where possible, you can use the case study as a background, and use relevant points from the case study in answering the question – but do not stop there. Expand your research or use the points from the case study and explain or support it in a deeper way (e.g. with data or real world examples, etc).
c.i. Sources of literature: (i) Open access (e.g. Wikipedia) – you might use this as a starting point if you want to get a broad view about a subject; (ii) Media: newsDISSERTATIONs, the Economist; (iii) General internet: Google ; (iv) Academic searches: google scholar, journal articles and textbooks ; (v) Specialist sources – e.g. legal documents, party manifesto’s, etc; institutional sources –e.g. World Bank reports
Use of research – Sources of data: World Bank, general internet searches, ONS, country data sources, UN data sources.
5. Structure
a. Begin with the title of the case study and always state the question before the answer.
b. Generally, dissertations with sections have higher scores for structure than those without sections.
c. Have an introduction or background and conclusion.
d. The in-between section depends on how you wish to organise your answers to the question.
e. An outline of how you plan to answer the question will help you to choose appropriate headings.
f. Where there are many sub-questions, this can also help you to choose appropriate headings.
g. Structure also reflects how organised your write-up is.
h. Do not write an dissertation in an outline form – i.e. keep bullet points to a minimum. It is better to list and explain points, than to simply outline them using bullet points.

 

 

 

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