- 10 Marks
BMIS – L1 – QC1 – The external environment
Question
The president of a Japanese car manufacturing company, TCM, recently stated that his suit would not expand its production capacity any further at its factory in Nigeria. This factory produces TCM cars for the African market with sales agreed in the local currency of the target market.
The president explained that the reason for this decision was the currency risk. The company was concerned about its competitiveness in the African market. It had a 5% share of the Nigeria cars market, but only a 1% share of the market in the rest of Africa.
Required
Explain what the company president meant by the term ‘currency risk’
Answer
The president probably had two related issues in mind.
(1) Expenditure on cars manufactured in Nigeria is in Nigerian Naira, but cars sold in pan-Africa are priced in other local currencies. If the value of the Naira is high relative to the other African currencies, TCM must charge higher prices in local currencies to cover its costs and make a profit. The relatively low market share of TCM in pan-Africa is probably due partly or largely to the relatively high prices that have to be charged.
(2) TCM is probably also concerned that the Naira might increase still further in value against other African currencies. This would make selling cars in other currencies even less profitable, or prices would have to be increased even more, and market share would be lost.
In view of the fact that the pan-African market for cars is small in comparison with the market in Nigeria, TCM would probably prefer to have a factory in Nigeria rather than another African country.
- Topic: The external environment
- Uploader: Samuel Duah