Assignment
How significant an impact do foreign exchange gains and losses have on corporate performance at XJP? What is your opinion of how they structure and manage their currency exposures?
Foreign exchange gains and losses play a very significant role in corporate performance at XJP. XJP face both transactional and operational exposure. Transactional exposure is formed in part because XJP (based in China) source their inventory in Belgium and pay in Euro’s something in which Paul Young felt uncomfortable with as he felt the intra company transfer prices are relatively high.
In 2003, XJP’s foreign exchange losses amounted to Rmb 60 million (6 507 592 Euros at a spot price of Rmb 9.22/Euro) (after Rmb 15 million of the Rmb 75 million was pushed into 2004 and absorbed as inventory) fortunately for XJP, they had earned an extraordinary Rmb 70 million profit from a housing fund which mitigated the large losses XJP faced and turned a deficit into a 2003 operating profit of Rmb 10 million (1 084 598 Euros (Rmb 9.22/Euro)).
My suggestion to XJP would be to try and source their raw materials from China to reduce their transactional exposure. All European purchases were priced and invoiced in Euro’s, the Euro had been rising against the Rmb (considering the Rmb was fixed to the dollar and the dollar had been falling against the Euro, the falling Rmb was unavoidable). XJP are constrained with the restrictions Chinese law has put on investment so they are restricted to buying forward contracts for commercial purposes only, corporate policy to hedge a minimum 80% of its anticipated currency exposures and the reluctance of J&J to bear any risk associated with currency exposure leaving XJP vulnerable.
J&J has roughly 200 foreign subsidiaries worldwide. It has always pursued a highly decentralised organisational structure, in which the individual units are responsible for their own performance from the top to bottom line of the income statement. How is this reflected in the situation
Foreign exchange gains and losses play a very significant role in corporate performance at XJP. XJP face both transactional and operational exposure. Transactional exposure is formed in part because XJP (based in China) source their inventory in Belgium and pay in Euro’s something in which Paul Young felt uncomfortable with as he felt the intra company transfer prices are relatively high.
In 2003, XJP’s foreign exchange losses amounted to Rmb 60 million (6 507 592 Euros at a spot price of Rmb 9.22/Euro) (after Rmb 15 million of the Rmb 75 million was pushed into 2004 and absorbed as inventory) fortunately for XJP, they had earned an extraordinary Rmb 70 million profit from a housing fund which mitigated the large losses XJP faced and turned a deficit into a 2003 operating profit of Rmb 10 million (1 084 598 Euros (Rmb 9.22/Euro)).
My suggestion to XJP would be to try and source their raw materials from China to reduce their transactional exposure. All European purchases were priced and invoiced in Euro’s, the Euro had been rising against the Rmb (considering the Rmb was fixed to the dollar and the dollar had been falling against the Euro, the falling Rmb was unavoidable). XJP are constrained with the restrictions Chinese law has put on investment so they are restricted to buying forward contracts for commercial purposes only, corporate policy to hedge a minimum 80% of its anticipated currency exposures and the reluctance of J&J to bear any risk associated with currency exposure leaving XJP vulnerable.
J&J has roughly 200 foreign subsidiaries worldwide. It has always pursued a highly decentralised organisational structure, in which the individual units are responsible for their own performance from the top to bottom line of the income statement. How is this reflected in the situation