The Far East Trading

1. From Stockholm’s perspective, the clearest signs of the company’s problems came from the FETC half- year report.  As such, operating income was down by 26 % in Swedish krona terms and most activities were encountering serious net operating losses.

In terms of operations, there were significant signs of accounting fraud and cost control deficiencies.  Additional, many of the operations seemed to be function at much less than the desired potential.  The Chinese plant is an excellent example: a state of the art production facility was operating at only 70 % of its capacity.  As we can see from these examples, the cause of the company’s misfortunes had only a secondary cause in the Asian Crisis.  The more important one was given by the bad management and organizational practices.  

In terms of the financial situation, the company had contracted several important credits on the international financial market and the subsequent devaluation of most of the South- Eastern Asian currencies did not help very much.  Additionally, there was a high reliance on debt for the company, built up during the 90s.  

As a result, it was obvious that the company’s outlook was rather grim from Stockholm’s perspective.  This financial and operational misfortunes have led to a serious drop in the share price for the company and the management was forced to issue a profit warning.

2. In my opinion, the most important action that needed to be taken referred to the managerial structure and the units’ organization.  The reports of fraud and operational mismatches came from poor management in these companies.  This leads me to believe that the sole country manager appointed from the Swedish office was not enough to cope with the situations created and that the decentralized structure that the company used was not efficient.  

As such, in my opinion, it is probably best that the entire management team should be appointed from the Swedish office and that it should report directly to the top management in Sweden.  All these would be adequate measures to restore some of the authority of the mother company and some of the control that these business units are lacking.

Additionally, something must be done on a short- term basis to cope with the Asian Crisis.  It is probable that some of the company’s reserves will need to be used in order to pay up some of the credits contracted in Asia, because, as we have seen, The Far East Trading Company is no longer credible to its creditors.

3. The short- term implications of the Asian Crisis are all reflected in the financial and operational situation of the company’s activities in the South- East and Far East Asia.  

First of all, we need to take into consideration the currency transaction losses associated with exposures to foreign currencies, usually the US dollars.  This impact can be resumed as follows: the business units were each making revenues on the local markets in local currencies.  However, many debts obligations were acquired on the international financial markets, usually in US dollars.  The first and foremost consequence of the Asian Crisis was that the local currencies all devaluated against the US dollar, in many cases with several tens of percentages (the case of the Thai baht, for example, with 38 %).  This naturally meant that while the Far East Trading Company was still making its revenues in local currencies, it took much more to buy a US dollar and thus be able to pay up the debts.  A numerical example is perhaps relevant here.  Let’s consider that the company was making an annual profit of 100 baht (considered as a unit).  At an exchange rate of 10 baht for a dollar, this meant $10.  However, if the baht devaluated by 38 %, the new exchange rate would have been 13.8 baht for a dollar and 100 baht would have been the equivalent of only $7.  If we multiply all these figures by several millions, as the foreign debts for the company must have been, then we have a real picture of the situation: a devaluation by 38 % would mean losses of several million dollars.

 The second impact that needs to be considered refers to the balance sheet.  Indeed, the devaluation of most of the Asian currency meant that everything on the balance sheet would be itself devaluated.  The example with the dividends is significant: FETC had declared dividends for the Thai business unit in 1996 that surpassed the total income for the period.  This problem could have been counterbalanced had the company created liabilities in local currencies (as these would have devaluated in turn), however, as we have seen in the paragraph above, it chose to borrow from the international financial market in US dollars.