Multiquimica Do Brasil Case Study

Multiquimica do Brasil Case Study

One of the most critical factors of managing foreign exchange exposure in the Brazilian business is establishing a market niche. It is this market niche that would ensure the sustainability of their products in the market, draw in more customers and alleviate competitors within the same nation, all done while making profits. The other critical factor was handing foreign policies including the currency exchange rates and the local currency in the local and international transactions of the pharmaceutical products. For instance, Multiquimica do Brasil (or MB’s) profit in dollar terms was affected by more or less continuous change in the value of the real. Management had to ensure that they were able to balance the foreign exchange rates and incur more profits than losses. The exposure of their products had to be following intense marketing strategies and have a competitive advantage over the rest of the pharmaceutical products in Brazil.

The priorities of the parent company in the United States were to establish a strong market presence in Brazil that would lead to sustainability of the company in this location. This was all while it was to have a competitive market strategy that would ensure their products remained at the top. The subsidiary company Multiquimica do Brasil had the same priority as they wanted to prove that the move from the U.S. to Brazil as a subsidiary was a worthy one. It also began manufacturing and selling herbicides in 1993. The parent and subsidiary companies however differed when it came to priorities over the foreign exchange and the use of local currency or dollar one. The parent company wanted transactions using dollars while the subsidiary wanted using the local currency to minimize losses during transaction and especially when converting local currency into dollars.

The venture in Brazil was bound to be a place to market the finished product of Levadol. MB in Brazil was not only a market location but also a manufacturer with the raw materials being shipped from the U.S. The expected results of venturing into the foreign market were not only positive, hence the high price of the drug, but there was not much competition of an aspirin-free drug which made the actual profit much higher than expected. The company started to expand and increase its customer base, especially from grocery stores who continued to increase their stock of Levadol as well as drug-related outlets. This created market sustainability. The new emerging issue was MB’s largest competitor, Hoffman of Switzerland. This company was not importing their raw materials for the aspirin-free medication like was the case of MB. The lack of import duties on the competitors’ part made them reduce their prices compared to that of Levadol and this led to loss of market and customers. It not only lost customers but new issues of decline in market with the great recession led to lowering of prices and reduction in the number of new customers as well as profits. The loss was massive with threats of the market crash; this was a major blow to the operation of the subsidiary company as well as the parent company in the end.

Due to the dollar linkage billing process, where they made invoices payable at the exchange rate in effect on the date of the receipt of goods, MB faced a lot of issues as the real continued to drastically drop.  As MB continued to lose money, they realized that by implementing the management accounting system to benefit the Brazilian subsidiary instead of the parent company, or domestic (U.S.) subsidiary, the foreign exchange loss would show up on the U.S. tax books instead of the Brazilian firm’s real books.  This continuous change in the real, and the Brazilian-friendly payment terms, really affected MBs bottom line.  

The competition in Brazil forced MB to offer the 90-day payment terms that other companies were offering, so this gave the Brazilian real a lot of time to devalue and cause MB to have a translation loss.  At the end of the payment terms, when the invoice was to be paid, the actual amount being paid to MB was significantly lower.  In order to recover from the loss of implementing this management accounting system, MB rolled out the “forward pricing” method.  This allowed MB to increase the sales price for the product based on the expected devaluation of the real.  This new policy did; however, force MB to review and revise their prices monthly.  

If Multiquimica do Brasil conducted the economic research necessary to expand in Brazil, they would have realized the downward trend on the Brazilian currency.  Their currency was replaced and changed about three times between 1990 and 1994, when the real took over.  This information alone, should have alerted the financial team of MB on the instability of the Brazilian currency.  By manipulating the accounting system to benefit the Brazilian subsidiary, MB was hurting their parent company in the United States.  In order to alleviate some of the loss that MB gained, the corporate office, Multichemical, in the US encouraged MB, the Brazilian subsidiary to borrow locally in hopes that they would be able to match assets and liabilities in the local currency.  This would eliminate Multichemical’s risk of reporting large translation losses in the corporate income statements.  This was essentially a good idea, with the exception that it came with a really high cost as Brazil’s interest rates averaged at 28%.

Doing business in Brazil may have been wise in the past but when exchange rates shifted the cost increased.  In 1996 the Brazilian real exchange rate started to climb and increasing each year making the buying power of the US dollar weaker.  This was also affecting the revenue of Multichemical since profits were reported in US dollars.  This caused the MB to have translation loss which got worse as the real increased against the US dollar.  MB was also told to borrow locally to help hedge the translation loss which seemed like it would make an impact.  If we look at the interest rates in Brazil, you can see that that rates were much higher than US rates or even Swiss rates.  The Swiss interest rate is 4.07% compared to Brazilian rate of 28%.   The reason we look at Swiss rates is because their competition Hoffman is a Swiss based company.   Also, due to the lower price point that Hoffman has, MB lost a lot of market share.  Hoffman was not as concerned about short term profits but are more concerned with market share.  We do not think Brazil is a good place to have business presence due to the market volatility.  Multichemical should have focused more on its European markets where much of its market share was already at.  It could have also changed the way it booked profit, instead of using the US dollar, they could have use the Brazilian real.  While doing this, they could have kept the cash offshore and used the already inflated Brazilian dollar profits to make purchases and drive a lower cost product to sell more, which in turn would drive more overall market share.  Lastly Multichemical could have allowed MB to borrow abroad at a lower rate which would have also helped with translation cost.  Borrowing at a lower rate would also allow MB to lower prices to be competitive with Hoffman and generic brands.  All in all, Multichemical should have not invoiced in one currency and reported profits in a different currency. Multichemical needs to mitigate more risk by borrowing at a much lower rate than they were, to help reduce cost overall.  Brazil seemed like a great option but with only a 6% market share and consistently losing profit to translation cost, Multichemical needs to shift focus on more profitable markets.