Business management requires knowledge of the environment and a keen interest in the trading activities. International markets are very complex. The management has to watch the interest rates across the borders, the currency exchange rates and fluctuations. The strategic vision has to involve complex solutions. The Far East Trading Company has had its financial challenges from trading in foreign nations.
Local Currency Exposures
FETC was a global trading company. It did not have a real domestic base. Although it traded in many Asian and European markets, its management was mainly composed of the Swedish origin. It maintained its corporate charter in Stockholm. It had the loose collection of independent country units. The individual state based operating units were mostly entrepreneurial. They entered any trade that would produce profit for the company. And hence it had the diverse set of businesses.
FETC’s core business was in three categories. The consumer products company operated from Kuala Lumpur, Malaysia. The Foods group was in Columbia and graphics in Singapore. The FETC businesses were also in three segments: Timber/wool trading in London, Shipping in Stockholm, and Technical was in Malaysia and Stockholm.
The countries had their currencies which exchanged with the US dollar on the international forum. The group chose to operate with the local currencies of the countries it traded in to ensure stability. However, it was not the best way to trade since the U.S. $ is the primary currency for international trade. Whenever they made sales, they had to convert the money into the dollar before embarking on the Swedish Kroner. It was not easy to reconcile the financial reports in different currencies. During the volatile market, the company lost a lot of money due to losses during the conversion of the local currency into the dollar.
Not all the Asian currencies were attractive to the market on the international scene. Whenever the organization had a debt from the global market, its value deduced due to the exchange rate and charges. The debts became expensive to service. On the other hand, the company’s units were able to access debts from local banks at fair lending rates. The strengthening of the dollar led to increased losses due to exchange rates. The company declared profit warnings several times due to the fluctuations in trade and the U.S. $. The change from exporters to net importers significantly affected the Far East nations because their currency weakened against the dollar.
Reliance on the U.S. $ Debt
The U.S. $ is the most basic currency to use in tradeoffs on the international market. It unifies all currencies in the world from the East to the West. FETC had to use the U.S. $ to debt to finance its operations. It was the most needful thing to do because of the challenges in the volatile market. It would reduce the cost of exchanging the currency from one country to another. All its markets would stabilize because it would no longer have to deal with trade problems.
The currency ensured that the company got the loans it needed with lower financing costs and fewer charges. It increased sales and costs at the same time. The company could access cash from financial institutions for offshore operations. The strengthening of the dollar was relatively good for the enterprise when it operated in the same currency.
The Asian Crisis
At the start of the 1990s, the economics of the Asian countries began to change. Countries that had heavily exported in previous years were not able to export as much as they imported. The imports increased, and thus the foreign currency subdued the local currency. They needed significant cash inflows to support their currencies.
They needed a lot of capital from outside to finance their infrastructure, manufacturing plants, and real estate speculations. However, the lack of such support led to a financial crisis. Thailand found it easier to seek for capital from outside sources to support its growth. Its firms and banks had to borrow from offshore using the U.S. dollar currency which was cheap at the time. However, there were issues on how the country could repay the debts it was taking from outside. The Thai government tried to intervene in the matter to prevent the company from losing money. The strategy involved the using up of the hard currency reserves. However, it did not work since everything came to a halt. The nation lost the battle through the currency losses. Its baht fell against the major foreign currencies.
Other Asian nations came under speculative attack by currency traders and capital markets. The company’s investments in Malaysia, Hong Kong, Philippines, and Indonesia were at risk of collapse. They started making losses upon losses. There was no longer the need to make more investments in the region.
The primary consideration was now to sell its non-core business units and invest more in its core business. The management decided to let them go on for a while because of the dependence on the small cash flows to maintain their core business.
The new CFO Jan Karl Karlsen decided to amalgamate all the loose links into one central control. The company also had to rely on the U.S. dollar as the primary currency for its business across all units. However, it had lost a lot of money from the local Asian currencies’ exchange. It developed three core business competence areas: Consumer Products, Food, and Graphics.