The Dollar Hammers Euro Auto Part Manufacturers

1-case, company, issues

1-2-case

the case tell the situation of two german companies who supplied the US automobile company DaimlerChrisler

one made loss, the other mad profits

1-2-companies

- German company SMS Elotherm dealing with the US company DaimlerChrysler

german company Keiper dealing also with DaimlerChrisler

1-3-issues : FOREIGN RISK EXCHANGE

One of these 2 companies has managed to have a successful business, the other one experienced dramatic loss : issue is the exchange rate which has influenced each business in a different way :

• SMS Elotherm (contract in 2004) manufactured its parts in Germany and then exported them to the US, was payed in dollars from DÐ'§C and then translated back in euros : experienced serious losses due to the translation exposure : the currency exchange rate changed and had impact on the benefits of the company. SMS Elotherm could’nt rise its prices to cover its costs, because of market pressures which impose low price : in this case, it would have been not any more competitive

• Keiper (contract signed in 2001) manufactured in London and Ontario to supply in US. At this time, 1€=1$. When the euro had then appreciated against the dollar, this company had a real hedge against the rising of the euro value, but, even if being based in Canada has been good because close to US, the US dollar has also depreciated against the Canadian dollar and secondly, Keiper was still importing from Germany and € has also depreciated against the Canadian dollar which had lead to rise the costs of the Canadian plant

2-Analysis of the companies’ problems

2-1-context : the foreign market risk (currency rates)

• What is the exchange rate between the U.S. dollar and the Canadian dollar and €, what has it been in the past, and what will it look like in the future?

• Look at the published forecasts (found easily through websites, so just tell the main forecasts trends)

Look at the economic fundamentals of Canada, US and Europe that seem to predict long-run exchange rate movements (growth in money supply, inflation rates, nominal interest rates, cf book chapter 10) and with that, make suggestions about what will probably happen to the exchange rate in the future (before we were speaking about the past pb of these two companies, we need to update by adding current pb with currency and also the pb they are gonna have in the future)

• What kind of exchange rate system does Canada, Us et Europe have (fixed, pegged, floating, etc.)?

2-2-what these companies did wrong ?

- SMS Elotherm didn’t took any precautions to prevent this dramatic situation : it has follow