HISTORY OF SUBARU

HISTORY OF SUBARU

Response to Question 1

Considering the case scenario of Subaru, the world began experiencing fluctuating exchange rates due to the removal of Bretton Woods in 1971. The initial rate was set at JPY: USD 360:1. This rate moved from its fixed-rate and currently stands at approximately 108:1. Subaru’s decision to export its manufacturing processes from Japan instead of setting up production facilities in the United States, similar to its competitors like Toyota and Honda, was effective in reducing the effects of fluctuating currencies between the two nations. When the Japanese Yen depreciated against the United States dollar, Subaru experienced a boom in its sales while its rivals in Japan, such as Toyota and Honda, were experiencing a decline in revenues. In simple terms, Subaru’s choice to establish its manufacturing facilities in the domestic territory is a wise decision for the company’s objective of maximizing profits and improving its competitive edge.

Response to Question 2

            Currency risks refer to the possible risks of loss resulting from the fluctuation of foreign exchange rates, particularly when investors have exposure to foreign currency investments. The currency risk linked to Subaru is the idea that the company is heavily dependent on the price of the US dollar or other currencies compared to the Yen. Moreover, since its vehicles are mainly produced in Japan, a risk of the likelihood of the Japanese Yen to be stronger than the United States dollar. Therefore, this accounts for the reason why the firm’s vehicles are expensive in other foreign nations.

An illustration of this notion is how, in 2012, the exchange rate or the price of the Japanese Yen compared to the US dollar was Yen 80/US dollar and 120 Yen/US dollar in 2015. This implies that if the company was selling a Subaru WRX valued at three million Japanese Yen to a purchaser in the United States, then it would have cost the buyer nearly USD 37 500 in comparison to USD 25 000 in 2015. Consequently, due to the difference in price between the strong and weak Japanese Yen in both years, it is evident that Subaru made more profits compared to its rivals like Toyota and Honda in 2014 2015.

The potential benefit of Subaru’s export strategy is that due to the weaker Yen, the company has a higher pricing power in contrast to its rivals in the United States. The weaker Yen makes it easier for Subaru to sell its automobiles at discounts, thus expanding its customer base. Moreover, the company also benefits from the weaker Yen since it pays its suppliers and employees at the weaker yen, thereby reducing the labor costs.

Response to Question 3

Currency fluctuations arise when a country’s currency has a higher value compared to that of another country. Whereas some currencies tend to fluctuate spontaneously against each, for instance, the United States dollar and the Japanese Yen, other currencies are usually pegged due to restrictions. In the case study, Subaru’s sales increased in 2014 and 2015 since the Japanese Yen’s value depreciated, thus resulting in the company’s sales. This implies that if the company was selling a Subaru WRX valued at three million Japanese Yen to a purchaser in the United States, then it would have cost the buyer more in 2014 and 2015. This could translate to more sales for the company.

Response to Question 4

From the case study analysis, it is evident that Subaru’s sales have reached remarkable heights. In essence, the company has reached a break-even point in which it has adequate revenues to support future business expansion. Therefore, the company must conduct market research and evaluate the existing investment options, including expanding its operations to other foreign countries. However, a market analysis is essential since potential risks usually accompany investments. For instance, investing in a wrong venture could lead to a loss of capital. As such, the company should consider employing the foreign exchange hedge to minimize losses resulting from fluctuating currencies. Foreign exchange hedges entail financial products that are purchased to hedge against extreme changes in foreign exchange rates that could adversely affect Subaru’s strategy to expand to other countries.