Billabong Case Study

1. Explain why exchange rates have been so volatile in recent years/ What are the implications of this volatility for companies like Billabong?

There are a large number of influences at work in the foreign exchange markets. The most obvious are shifts in fundamental demand for a currency that reflects the outlook for the economy. For example, if Australia is exporting more goods and services, foreign buyers will need to buy Australian dollars to pay for them. That will put upward pressure on the value of the currency. All else being equal, countries that run large trade surpluses – meaning that they export more than they import – should see their currencies rise over time. However, the value of the dollar is also driven by speculation as traders seek to profit from the underlying trends of the movement of one currency against another. A significant amount of activity in foreign exchange markets consists of borrowing in currencies where interest rates are low and investing in ones with higher rates.

In periods of low volatility, such as from 2002 to 2006, this method can be very profitable. However, in recent years a higher­-yielding currency is potentially seen as a sign that problems are building up in the economy. In periods of high volatility such as now, speculating directly on currency movements is usually considered too risky for private investors as it can easily lead to large losses. Buying overseas-­listed shares or investing in funds that hold foreign assets is the most obvious way in which it is likely an investor will become exposed to foreign exchange risk. In the case of Billabong as a globally renowned company, this means that much of its overseas demand for its products can be unpredictable to a large degree and hence present challenges for the company in maintaining competitiveness in this environment.

2. What does a falling Australian dollar mean for Billabong’s ability to compete in the global market place? How does your response change when the Australian dollar is rising in value?

For retailers, it will be relatively cheap to shop in local department stores or to visit domestic online websites. Local manufacturers will feel less pressure from foreign competitors. Exporters will benefit because their goods will be cheaper and therefore more attractive to foreign buyers, however they will receive less for the goods they sell, so domestic sectors such as farming and irrigation will face challenges in responding to this. Anyone who relies on imports for their business will see costs rise, causing difficulties in the future. While the obvious impacts of a high Australian dollar is a benefit for importers and a disadvantage for exporters, many local companies can feel the effects both ways. For instance, a local company in this instance may be able to source a particular type of foreign-engineered equipment as part of the production cycle.

3. How would inflation in China affect the competitiveness of its goods in global markets?

It is widely beleived that Chinese inflation is having a large effect on its export competitiveness—that is, contributing to a real adjustment much larger than what’s observed in the nominal exchange rate. From 2009 to early 2011, the yuan appreciated by just 4% in nominal terms, but by 17% in real terms, after accounting for inflation. Such rapid growth raises the prospect of conflicts with other ambitious major world economies, namely the US in trading disputes at a time of significant global uncertainty and broadly declining industrial output. In which case, pressure from these competing parties can potentially include appreciation on their side, however this in turn can adversely affect China’s willingness in cooperation with these parties. Hence, it is important to factor in the prospect of generating appreciation over and above the present rate at an acceptable cost.

4. Discuss the vast contrasts in living standards that exist in India. What challenges do these differences present to the Indian government?

Overall poverty is being reduced. The proportion of the population earning less than US$1 a day declined from 42.1% to 24.3% between 1981 and 2005.

Whilst the Indian economy has grown steadily over the last two decades, its growth has been uneven when comparing different social groups, economic groups, geographic regions, and rural and urban areas. Between 1999 and 2008, the annualised growth rates for Gujarat (8.8%), Haryana (8.7%), or Delhi (7.4%) were much higher than for Bihar (5.1%), Uttar Pradesh (4.4%), or Madhya Pradesh (3.5%). Poverty rates in rural Odisha (43%) and rural Bihar (41%) are higher than in the world’s poorest countries such as Malawi.

Since the early 1950s, successive governments have implemented various schemes, under planning, to alleviate poverty, that have met with partial success. Programmes like Food for work and National Rural Employment Programme have attempted to use the unemployed to generate productive assets and build rural infrastructure. In August 2005, the Indian parliament passed the Rural Employment Guarantee Bill, the largest programme of this type, in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in 200 of India’s 600 districts. In response, the Indian government is planning to bring in more economic reforms, which can help farmers and unskilled labourers transition into industrialized sectors.

Urbanization has been a critical ingredient to economic growth for many countries as it places labor next to capital by attracting people into cities and hence raising the productivity and incomes of workers. More than two thirds of India’s population still lives in rural areas, compared with less than half in China. But India is not under-urbanized compared to other poor countries; if you look at how living standards compare to urbanization among all the world’s countries, India sits right on the best-fit line. Hence, it would be wrong for the government to believe that urbanization will help India’s growth more than it has for other countries.