Global Appliance Industry

As a result of mergers and acquisitions in the past three decades, the home appliance industry in 2015 has fewer than ten companies that together control about 50 percent of the global market. Some of the global players in the industry include Electrolux (Sweden), General Electric (U.S.), Maytag (U.S.), Whirlpool (U.S.), Matsushita (Japan), and Bosch-Siemens (Germany). The remaining 50 percent of the market is in the hands of country focused competitors. The overall industry has grown at a very slow pace, making competition among players very fierce. Growth for a particular company has come mainly from acquisitions or from stealing a competitors market share.

There are significant economies of scale in the manufacturing of components, such as compressors and motors that form a critical part of home appliances. Improvements in component design are essential in enhancing the functionality of home appliances in areas such as energy efficiency, noise control, and water consumption. The three major segments in the home appliance industry are the low-price segment (where several eastern European and Chinese companies, and private label suppliers, compete), a mid-price segment (where Electrolux competes), and a high-price segment (where Bosch-Siemens, Whirlpools KitchenAid subsidiary, and Maytag have positioned several products). The distributors of home appliances in the U.S. consist of major retailers (Sears, JC Penney, etc.), appliance stores, discounters (Sams Club, Costco Wholesale, BJs Wholesale Club, etc.), and builder channels (Home Depot, Lowes, etc.). The retailers large size enables them to exert tremendous influence over the suppliers of home appliances in terms of prices, delivery, and credit terms.

Regent and Its Subsidiaries in Denmark and Japan

Regent, a publicly held U.S. company, is a global player in the home appliance industry with a wide range of products, including refrigerators, kitchen appliances, and laundry machines (washers and dryers). Regents 2015 sales were $1.1 billion. Regents overall strategy has been to participate in all three (low-price, mid-price, and high-price) segments of the appliance industry.

Regent has several subsidiaries in the U.S. and abroad. The foreign subsidiaries resulted mainly from Regents acquiring a majority interest in appliance companies during the mid-

1990s. These acquisitions were made in countries where Regent expected a significant growth in disposable income and in the proportion of two-income families in the population. These subsidiaries design, produce, market, and distribute appliances in the respective countries.

They also incur all their costs and generate all their revenues in currencies of their respective countries. The Danish and Japanese subsidiaries are, however, different in the nature of their operations, as described below.

The Danish subsidiary was established in 1997 as a marketing unit and has exclusive rights to market Regents kitchen appliances in Denmark. Denmark had an attractive base of customers who could afford high-priced kitchen appliances, who desired feature-filled cooking ranges, and who preferred foreign-made products. Demand has not been great enough, however, for Regent to justify putting up a scale-efficient manufacturing operation in Denmark. Moreover, a U.S. subsidiary of Regent that holds a proprietary technology to produce high-quality kitchen appliances has been experiencing excess capacity. Regents corporate management seized the opportunity by asking the Danish subsidiary to source its products primarily from Regents U.S. subsidiary, as long as the latter is able to supply the quantities needed. The transfer price (inclusive of transportation costs) is denominated in U.S. dollars and is negotiated between the two subsidiary managers; the price for each quarter is to be decided at the beginning of the quarter. There are no local suppliers of comparable kitchen appliances in Denmark. Most other businesses in the kitchen appliances market in Denmark are small private companies, producing and selling their products in Denmark only. The high-end U.S. product gives the Danish subsidiary a distinct advantage over local competitors.

The Japanese subsidiary was established in 2000 as a production unit. Using the excellence of Japanese engineers in component design and low-cost manufacture, the subsidiary produces low- cost laundry machines (washers and dryers) in Japan and sells them in the U.S. with sales prices (inclusive of transportation costs) denominated in U.S. dollars. The Japanese subsidiary has exclusive rights from Regent to sell laundry machines to discounters and builder channels in the

U.S. under store brands that cater to the low end of the market. Manufacture of laundry machines in Japan is largely in the hands of domestic manufacturers that produce energy- efficient and compact machines for sale in Japan. Other private label suppliers of laundry machines to U.S. discounters and builder channels consist of local (U.S.) companies known for producing domestically, using lean manufacturing techniques.

Budgeted and Actual Profitability of Regents Foreign Subsidiaries

In consultation with the subsidiary officers, and taking into account the expected changes in market conditions in the forthcoming year, Regents headquarters set budgets for subsidiaries at year-end. For the foreign subsidiaries, budgets are communicated in local currency (LC) as well as U.S. dollars, using the exchange rate at the end of the previous year.

QUESTIONS:

1. (a) Which type of responsibility center (revenue, cost, or profit center) should the Danish and Japanese subsidiary each be treated as? Why?

2. Should Regent evaluate the performance of its foreign subsidiaries in local currency or U.S. dollars? Why?
3. Under the current performance evaluation system (PES) at Regent, how would you assess financial performance of the division managers in Denmark and Japan? Which manager has performed better?

2. If U.S.$ ROI were used as the performance measure, would the performance ranking of the two subsidiaries be different? Describe the advantages and limitations of using ROI as a performance indicator. Which metricROI or Regents current metricis superior? Why?

3. As a subsidiary manager, would you consider Regents use of the beginning-of-the-year exchange rate for budget setting and average-of-the-year rate for budget tracking appropriate? Why? What changes in the budgeting process can Regent make to prepare foreign subsidiary managers to better respond to the effects of inflation and exchange rate changes?

4. Assume that for each of the past five years, the Japanese subsidiary has reported lower than- budgeted U.S. Dollar profits and ROI in dollar terms. If adjustments are made for the real exchange-rate changes, however, then its performance in each of those five years turns out to be better than the revised budget. Would you recommend closing the Japanese subsidiary? Why or why not?

5. Describe the strengths and weaknesses of the current PES for foreign subsidiaries at Regent. What changes in the PES would you recommend?