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2- Globalisation case study - Question Sheet

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Bad news for fish finger-loving, crisp munching, Marmite-craving students and teachers. The significant fall in the value of the Pound compared with the Euro and Dollar is starting to create cost pressures on manufacturers who are looking to pass these onto retailers and (possibly) consumers.

This article from the Guardian is packed with A Level Business concepts - how many can you spot?

The business impacts of Brexit (positive and negative) will take time to become apparent. However, the most significant short-term impact has been via a sharp fall in the value of the Pound exchange rate against major currencies such as the Euro and Dollar.

A weaker pound, if sustained, is likely to result in:

Imports becoming more expensive;

Exports becoming cheaper in international markets (i.e. more price competitive)

So whilst UK manufacturers and other businesses trying to sell overseas should benefit from a lower exchange rate, those relying on imported goods and services (or which use inputs priced in overseas currencies) are starting to suffer from rising costs.

Imagine a UK-based manufacturer who buys a key raw ingredient which is priced in US Dollars (as most commodities are).

$10,000 of those raw materials when the exchange rate is £1 = $1.50 costs the manufacturer £6,667

However, if these exchange rate falls (weakens) to, say £1 = $1.25, then the raw material cost increases:

$10,000 of those raw materials when the exchange rate is £1 = $1.25 costs the manufacturer £8,000.

Can these rising costs be passed onto retailers? It comes down to the nature of competition in the market - which is why Porter's Five Forces Model and other concepts such as price elasticity of demand are so relevant here.

The major retailers have already demonstrated that they will fight hard. Much, as always, comes down the relative bargaining power of suppliers v customers.

Might we see retailers look to expand their own-label ranges if branded consumer goods products are rising in price?

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Exchange Rates and Inflation: The Impact of Brexit on Business Costs | tutor2u Business

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Bad news for fish finger-loving, crisp munching, Marmite-craving students and teachers. The significant fall in the value of the Pound compared with the Euro and Dollar is starting to create cost pressures on manufacturers who are looking to pass these onto retailers and (possibly) consumers.

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Exchange Rate and Inflation

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Birds Eye fish fingers and Walkers crisps are asking supermarkets for price rises of up to 12%, in the latest standoff between household brands and retailers over the dramatic fall in the value of the pound.

The brands have joined Typhoo and Unilever, the owner of Marmite, and a number of smaller suppliers in an industry-wide battle over price increases caused by the 14.5% drop in the value of the pound against the euro and 18% against the dollar since the UK voted to leave the European Union.

Birds Eye, which is owned by New-York-listed Nomad Foods, is seeking price rises of as much as 12% as it said many of its raw materials were priced in dollars and so its sterling costs had risen.

Birds Eye is said to be threatening to shrink pack sizes on some products to help offset cost increases, cutting the number of fish fingers in a packet, for example, from 12 to 10 or from 20 to 18.

Wayne Hudson, Birds Eye's UK and Ireland managing director, said: "Increasing costs is not a decision we take lightly, and the last time it was necessary to raise costs was in 2012. As such, we have been in open and collaborative conversations with the retailers for some time now and are working closely with them to minimise any impact on our customers."

He said Birds Eye's costs had risen by an average of 5%. Some product costs increased by more than that, requiring the company to push for a double figure price increase in some cases. The company said it was aiming to absorb a significant proportion of the raw material cost inflation itself.

"Our first priority is always to the people who buy our brands and we are committed to ensuring they get the best quality products that provide value for money."

Leicester-based Walkers, which is owned by PepsiCo, the US conglomerate that also makes Tropicana orange juice, Quaker Oats and Doritos chips, is understood to be seeking price rises of between 5% and 10%, taking a 32g bag of crisps from 50p to 55p.

A Walkers spokesperson said: "Whilst our potatoes are British, we import a number of different ingredients and materials to produce a finished packet of Walkers crisps such as seasonings, oil for frying and key raw materials used in our packaging film.

"Fluctuating foreign exchange rates, supply pressure on key ingredients and the weakened value of the pound are impacting the import cost of some of our materials and affecting the price of material costs based on commodities that are traded in foreign currencies."

Supermarket sources said both companies had kicked off talks shortly after Unilever began discussions with grocers.

But several sources said Birds Eye's position was not as strong as Unilever's because shoppers were more prepared to switch to supermarkets' own label fish fingers and other frozen foods.

One added: "I think Birds Eye has been a bit 'toppy' in what it's asking for."

James Russell, wholesale managing director at AF Blakemore, which runs a string of Spar stores, told the trade publication Retail Newsagent it was a "massively opportunistic" move by PepsiCo: "It impacts the offer we can make for our customers. We have to pass the cost on to them.

"We've been told if we don't accept the terms it won't supply us. The value message is becoming distorted."

Marmite became the unlikely symbol of the fight over who would pick up the tab for rising costs after Tesco ran low on stocks, a situation dubbed Marmageddon, after Unilever halted deliveries as talks between the two businesses got tough.

The smaller supermarket chain Morrisons then fuelled fears about food price hikes by increasing the shelf price of the very British toast-topper by 12.5%. Manufacturers' costs are rising as they are forced to pay more to import goods, ingredients and packaging, and they are trying to pass some of that on to their retail clients.
Topics

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Birds Eye and Walkers ask supermarkets for up to 12% price rises

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Birds Eye fish fingers and Walkers crisps are asking supermarkets for price rises of up to 12%, in the latest standoff between household brands and retailers over the dramatic fall in the value of the pound.

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Prime Minister David Cameron opened a new $100 million JCB factory in Brazil today as the company, based in Staffordshire, strengthened its position in the Latin-American markets.

Mr Cameron, who is undertaking a trade mission to Brazil, spent an hour touring the plant which has 200 employees, he said this was an example of how British industries can capitalise on growth outside of the UK:

The $100 million factory, represents on of the single biggest investments in JCB's 67 year history.

Chairman Sir Anthony Bamford signalled why this is great news for the UK economy:

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prime minister opens new $100 million jcb factory in brazil

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Prime Minister opens new $100 million JCB factory in Brazil

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Prime Minister David Cameron opened a new $100 million JCB factory in Brazil today as the company, based in Staffordshire, strengthened its position in the Latin-American markets.

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ARM Holdings, one of the UK's biggest technology companies, is set to announce it is being bought by Japan's Softbank for £24bn ($32bn).

The board of ARM is expected to recommend shareholders accept the offer - close to a 50% premium on its closing market value of £16.8bn on Friday.

The Cambridge-based firm is arguably the most precious jewel in the crown of British technology.

Its microchip designs are in an array of devices including Apple's iPhone.

Sources close to the deal say the Japanese company considered ARM well placed to exploit the "internet of things" - the embedding of microchips in whole new categories of household and business devices.

The proposed takeover of ARM poses a dilemma for the new government. Along with high executive pay, Prime Minister Theresa May has put foreign takeovers on her radar of business dealings that may be bad for the national interest.

However, the government will be keen to show that the recent Brexit vote has not deterred foreign investment.

The BBC understands that Softbank will commit to doubling the size of ARM's UK workforce over the next five years. Barring government intervention, the final decision will be made by shareholders.

ARM, which was founded in 1990, employs more than 3,000 people.

Much of its success came under Warren East, who was chief executive of ARM from 2001 until 2013. He was made CBE in the 2014 New Year Honours list for services to engineering and technology.

Mr East became chief executive of Rolls-Royce, the engineering giant that makes aircraft engines, in July last year.

Sir John Buchanan, then ARM chairman, said in 2013 that Mr East had "transformed" the firm during his time as chief executive.

Softbank is one of the world's biggest technology companies and is run by its founder, Japanese entrepreneur Masayoshi Son.

It has previously acquired Vodafone's Japanese operations and the US telecoms company Sprint. The $20bn deal was the biggest foreign acquisition by a Japanese firm at the time.

Shares in Softbank have fallen 15% in the past 12 months.

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ARM Holdings, one of the UK's biggest technology companies, is set to announce it is being bought by Japan's Softbank for £24bn ($32bn). The board of ARM is expected to recommend shareholders accept the offer - close to a 50% premium on its closing market value of £16.8bn on Friday.

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A £350m project producing offshore wind turbine blades in Hull is on course to start work two months earlier than planned.

Finbar Dowling, director of the Siemens factory, said it was planning to open the "massive piece of civil and marine engineering" on 1 September 2016.

He said work at Hull's Alexandra Dock was "ahead of schedule".

It could eventually create up to 1,000 jobs with 200 working in construction of the site, he said.

The building work started in January.

The 10 acre (40,000 sq m) blade factory is part of a 133 acre (540,000 sq m) development that includes manufacturing, assembly and servicing factories.

The facility will build 250ft-long (75m) rotor blades designed for 6MW turbines.

Production on the first batch of turbines for an offshore wind farm off the Norfolk coast is scheduled to start early 2017.

Siemens is investing £160m in Green Port Hull at the city's Alexandra Dock. Associated British Ports (ABP), which owns and operates the dock, is investing £150m.

Green Port Hull was first announced in January 2011 and was granted planning permission in May 2012.

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A £350m project producing offshore wind turbine blades in Hull is on course to start work two months earlier than planned. Finbar Dowling, director of the Siemens factory, said it was planning to open the "massive piece of civil and marine engineering" on 1 September 2016.

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Vodafone has agreed to buy Spanish cable operator Ono for 7.2bn euros ($10bn; £6bn), in deal aimed at expanding its interests in Europe.

Ono, which is private equity-owned, offers cable TV and internet services and has 1.9 million customers in Spain.

Vodafone boss Vittorio Colao said the deal was "an attractive value creation opportunity".

The deal comes just six months after Vodafone bought a controlling stake in German cable operator Kabel.

Vodafone has said it plans to spend up to £25bn of the £84bn it generated from the sale of its stake in Verizon Wireless on investment in its core European networks.

Before the Vodafone deal, Ono's private equity owners had been planning to float the company on the Madrid stock exchange.

Jose Maria Castellano Rios, chairman of Ono's board of directors, said the enlarged business would help to "drive innovation in the Spanish telecommunications industry".

Peregrine & Black analyst Markus Huber said the deal would put Vodafone in a better position to compete with rivals such as Telefonica and Orange.

"It follows the strategy they are already pursuing in Germany and in Europe in general, which is to expand their overall offer to their clients by adding cable service to their wireless services," he added.

Mike McCudden, head of derivatives at online broker Interactive Investor, agreed the purchase was a "shrewd strategic move" for Vodafone, noting that the deal would provide it with the fixed-line operation it currently lacked in Spain.

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Vodafone has agreed to buy Spanish cable operator Ono for 7.2bn euros ($10bn; £6bn), in deal aimed at expanding its interests in Europe. Ono, which is private equity-owned, offers cable TV and internet services and has 1.9 million customers in Spain. Vodafone boss Vittorio Colao said the deal was "an attractive value creation opportunity".

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.

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Exchange Rates, Costs and Competitiveness - Making the Link | tutor2u Business

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

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Things are simply not getting better for UK manufacturers. Put simply - there is no "march of the makers". Back in 2011 George Osborne famously heralded the important role of UK manufacturing in leading the UK economy out of recession.

Now Osborne is very quiet about manufacturing - because there is little he can do to revitalise the sector's performance.

The outlook for UK manufacturers has worsened this week as a key survey disclosed they expect their output to fall, the first such prediction in three years.

A gauge of expectations for manufacturing output over the next three months worsened to -6 from +5 in October, according to the Confederation of British Industry (CBI), the first forecast of a fall since November 2012.

Significantly increasing UK factory output is seen as key to re-balancing the UK's economy away from growth which has been dominated by consumer spending and the services sector, but the manufacturing sector has struggled to try to recover following the recession.

Indeed UK manufacturing output is still below its last peak, just before the financial crash in Q1 2008.

What are the key reasons why UK manufacturing is struggling? Leaving aside (for now) the long-term competitiveness of UK manufacturing, essentially there are two short-term issues:

First - a strong pound - which makes the price of UK manufactured products relatively more expensive in overseas markets. Remember the acronym SPICED. Strong Pound: Imports Cheaper, Exports Dearer.

Second: weak demand in previously high-growth export markets, particularly emerging markets like China, Russia, Brazil and India.

Here are two examples of how UK manufacturing is struggling, even by two stars of the UK manufacturing sector - JLR and JCB.

Also in November 2015, construction equipment giant JCB announced further job losses in the UK, representing around 10% of its UK workforce. The firm said in the first six months of 2015, the market in Russia dropped by 70%, in Brazil by 36% and by 47% in China.

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Manufacturing in the Mire | tutor2u Business

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Things are simply not getting better for UK manufacturers. Put simply - there is no "march of the makers". Back in 2011 George Osborne famously heralded the important role of UK manufacturing in leading the UK economy out of recession. Now Osborne is very quiet about manufacturing - because there is little he can do to revitalise the sector's performance.

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The main arguments against protectionism are outlined below:
Market Distortion and loss of Economic Efficiency
Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth:
Higher Prices for Consumers
Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.
Reduction in Market Access for Producers
Export subsidies depress world prices and damage output, profits, investment and jobs in many lower and middle-income developing countries that rely heavily on exporting primary and manufactured goods for their growth.
Extra Costs for Exporters
For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting them. For example, a tariff on imported steel can lead to higher costs and lower profits for car manufacturers and the construction industry.

Adverse Effects on Poverty
Higher prices from tariffs tend to hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income. Tariffs can therefore lead to a rise in relative poverty.
Retaliation & Trade Wars
There is the danger that one country imposing import controls will lead to retaliatory action by another.

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Arguments Against Protectionism | tutor2u Business

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The main arguments against protectionism are outlined below: Market Distortion and loss of Economic Efficiency Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth: Higher Prices for Consumers Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition.

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Main Forms of Protectionism

There are many ways in which country can seek to protect a market. The most common are outlined below.
Tariffs
A tariff a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply. For example, until recently, Mexico imposed a 150% tariff on Brazilian chicken. The United States has an 11% import tariff on imports of bicycles from the UK.
Quotas
Quotas are quantitative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period. For example, until 2014, South Korea maintained strict quotas on imported rice. It has now replaced a quota with import tariffs designed to protect South Korean rice farmers. Quotas do not normally bring in any immediate tax revenue for the government although if they cause domestic production and incomes to expand, there will be a beneficial impact on taxes paid.
Export subsidies
A subsidy is a payment to encourage domestic production by lowering their costs. Soft loans can be used to fund the dumping of products in overseas markets. Well known subsidies include Common Agricultural Policy in the EU, or cotton subsidies for US farmers and farm subsidies introduced by countries such as Russia. In 2012, the US government imposed tariffs on Chinese manufacturers of solar panel cells, judging that they benefited from unfair export subsidies after a review that split the US solar industry.
Domestic subsidies
Domestic subsidies involve government help (state aid) for domestic businesses facing financial problems e.g. subsidies for car manufacturers or loss-making airlines.

More Specialised Kinds of Protectionism

Outlined below are more specialised forms of protectionism, although these can often have significant effects on competition in markets.
Import licensing
In this case, governments grant importers the license to import goods - these can be restricted
Exchange controls
This form of protectionism involves limiting currencies that can move between countries (also known as capital controls)
Financial protectionism
An example of financial protectionsm would be when a national government instructs banks to give priority when making loans at favourable interest rates to domestic businesses
Murky or hidden protectionism
An example of murky or hidden protectionism is government measures that indirectly discriminate against foreign workers, investors and traders. A government subsidy that is paid only when consumers buy locally produced goods and services would count as an example. Deliberate intervention in currency markets e.g. to bring about a currency devaluation might also come under this category.
Voluntary Export Restraint (VER)
This is where two countries make an agreement to limit the volume of their exports to one another over an agreed time period. Sometimes this is enforced by a government for example the USA enforced VER on Japan during the late 1980s

Intellectual property laws e.g. patents and copyright protection protecting domestic ideas and products
Technical barriers to trade
These include product labeling rules and stringent sanitary standards. Technical barriers to trade increase product compliance costs and impose monitoring costs on export agencies. Big vertically integrated transnational businesses can usually cope with these non-tariff barriers but many of the least developed countries do not have the technical sophistication to overcome these non-tariff barriers.
Preferential state procurement policies
This is where a government favour local/domestic producers when finalizing contracts for state spending e.g. infrastructure projects or buying new defence equipment

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What is Protectionism? | tutor2u Business

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Protectionism involves any attempt by a country to to impose restrictions on trade in goods and services. The main aim of protectionism is to cushion domestic businesses and industries from overseas competition and prevent the outcome resulting solely from the interplay of free market forces of supply and demand.