Blades, Inc. Case -- Exposure to International Flow of Funds Ben Holt, chief financial officer (CFO) of

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Blades, Inc. Case -- Exposure to International Flow of Funds

Ben Holt, chief financial officer (CFO) of Blades, Inc., hasdecided to counteract the decreasing demand for Speedos rollerblades by exporting this product to Thailand. Furthermore, due tothe low cost of rubber and plastic in Southeast Asia, Holt hasdecided to import some of the components needed to manufactureSpeedos from Thailand. Holt feels that importing rubber and plasticcomponents from Thailand will provide Blades with a cost advantage(the components imported from Thailand are about 20 percent cheaperthan similar components in the United States). Currently,approximately $20 million, or 10 percent, of Blades' sales arecontributed by its sales in Thailand. Only about 4 percent ofBlades' cost of goods sold is attributable to rubber and plasticimported from Thailand.

Blades faces little competition in Thailand from other U.S.roller blades manufacturers. Those competitors that export rollerblades to Thailand invoice their exports in U.S. dollars.Currently, Blades follows a policy of invoicing in Thai baht(Thailand's currency). Holt felt that this strategy would giveBlades a competitive advantage since Thai importers can plan moreeasily when they do not have to worry about paying differingamounts due to currency fluctuations. Furthermore, Blades' primarycustomer in Thailand (a retail store) has committed itself topurchasing a certain amount of Speedos annually if Blades willinvoice in baht for a period of 3 years. Blades' purchases ofcomponents from Thai exporters are currently invoiced in Thaibaht.

Holt is rather content with current arrangements and believesthe lack of competitors in Thailand, the quality of Blades'products, and its approach to pricing will ensure Blades' positionin the Thai roller blade market in the future. Holt also feels thatThai importers will prefer Blades over its competitors becauseBlades invoices in Thai baht.

You, Blades' financial analyst, have doubts as to Blades'“guaranteed” future success. Although you believe Blades' strategyfor its Thai sales and imports is sound, you are concerned aboutcurrent expectations for the Thai economy. Current forecastsindicate a high level of anticipated inflation, a decreasing levelof national income, and a continued depreciation of the Thai baht.In your opinion, all of these future developments could affectBlades financially given the company's current arrangements withits suppliers and with the Thai importers. Both Thai consumers andfirms might adjust their spending habits should certaindevelopments occur.

In the past, you have had difficulty convincing Holt thatproblems could arise in Thailand. Consequently, you have developeda list of questions for yourself, which you plan to present to thecompany's CFO after you have answered them. Your questions arelisted here:

[1] How could a higher level of inflation in Thailand affectBlades (assume U.S. inflation remains constant)?

[2] How could competition from firms in Thailand and from U.S.firms conducting business in Thailand affect Blades?

[3] How could a decreasing level of national income in Thailandaffect Blades?

[4] How could a continued depreciation of the Thai baht affectBlades? How would it affect Blades’ relative to U.S. exportersinvoicing their roller blades in U.S. dollars?

[5] If Blades increases its business in Thailand and experiencesserious financial problems, are there any international agenciesthat the company could approach for loans or other financialassistance?