Question

The situation: OmniMedical is a $730M manufacturer of medical devices. It has manufacturing operations located in the UK, India, China and Bermuda. It sells domestically and in 14 international markets.

You are the CFO of OmniMedical based in Princeton, NJ. Brexit being emanate, you must assess the impact on your UK subsidiary, Bulldog Medical, and the impact on OmniMedical the British departure from the European Union will have.

Important data: Bulldog Medical sales £ 135M

Foreign Sales Breakdown: France £ 32M, Germany £ 36M, Switzerland £20M, Czech Republic £20M, Turkey £ 27M

Foreign Resources Purchased: US £ 25M, Belgium £ 15M, Germany £ 20M , Israel £ 10M

Revenue transferred to parent: £ 28m

Exchange Rate $ 1.00 = £1.29

Explain the possible exchange, economic and translation effects on Omni and Bulldog. What measures would you take in the short run? Do you have a long term strategy for this situation? You may want to do examine the individual relationships and effects.

I would need the answer before December 3rd. Thank you

Answer 1

UK is a $2.8Trillion Vs Rest of EU $15.9 Trillion economy.

The main benefit of trading in the European Union (EU) is the European single market. It is the largest international single market in the world, which has lead to:

• greater competition in services - which is good for businesses and consumers
• removal of trade barriers
• reduction of business costs
• greater business efficiency
• elimination of anti-competitive practices - such as monopolies and cartels

The EU has taken measures to reform and make it even easier for countries to trade with each other, such as:

• reducing paperwork
• harmonising standards - eg technical and safety standards
• introducing the euro - allowing a single currency to trade with
• enforcing the movement of people - allowing member state citizens to move freely between other countries

Bull Dog Medical and Parent company OmniMedical, both may get impacted on following aspects.

• Exchange rate impact. Dollar is considered to be more volatile. Even if EU agrees to trade in Pound, Euro EU being larger combined economy Euro will dominate the Pound. Weak pound, will led to dearer import of Raw Material. Even in situation when Pound is stronger, UK Products will become costlier and selling would be difficult in a competitive market.
• Trade Tariffs will come into play in both Import and Export from UK. Any trade tariff will impact the cost and sales price of goods and services in UK. It may lose some of its customer in EU.
• Investment Climate: EU investment in UK will get limited and both economies will have their own rules and regulations.
• Labour movement will get restricted due to manpower movement regulations will come into effect.
• Accounting and regulations: Both economies will have their own sets of paperworks and red tapes for cross border movement of goods and services.

All these impacts will have bottomline impact on the subsidiary company and hence impact the royalty remittance to the parent company. How much this is going to be impacted is a matter of study once all formality is accepted by UK Parliament and passed as Bill.   

Short term strategy: Look for alternatives, how to produce at low cost to counter the impact of possible tariffs on cost and sales. Best way to do that is develop indigenous capabilities of procurement and production.

Manpower has to be largely from UK so that wage bills can be in check and there is regular supply of manpower is not interrupted.

Long term strategy: Open offices in various countries and make them independent BU having own production and sales so that cost can be controlled and overall operations can be managed keeping customer service at optimum level.