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Explain how the rise in the value of the Korean currency, the won, against the dollar affects the competitiveness of Hyundai and Kia exports to the United States.
The rise of the Korean won against the US dollar adversely affects the competitiveness of the goods produced in Korea and exported to the USA. Such a rise means that the cost of production of cars in Korea stays (approximately) the same, but US citizens will have to use more dollars to pay for each one used in production. Thus, the sum of US dollars required to cover the production costs of a car will rise, meaning that Hyundai and Kia will either have to raise the price of a car, decreasing the demand severely (for the absolute value of the price elasticity of demand for cars is usually rather high), or that they will have to keep the price of a car the same in US dollars, decreasing the number of dollars they make on each car.
Hyundai and Kia are both expanding their presence in the United States. How does this hedge against adverse currency movements? What other reasons might these companies have for investing in the United States? What are the drawbacks of such a strategy?
If the won becomes stronger, Hyundai and Kia will not have to convert the wons involved in production into dollars and will not need more dollars to cover the production costs; thus, the percentage of the price of cars required to cover the production costs stays the same if the cars are produced in the US. Other reasons for expansion into the US and building factories there might include lower transportation expenses, better knowledge of the US market by the local experts and thus the ability to adapt the product better or to react faster to changing trends and market demands, the possibility of the resources involved in production being cheaper in the US, etc. The drawbacks of opening plants in Korea may include the fact that if the Korean won becomes weaker, it might be more profitable to export cars from Korea; the need to invest much time and money; the need to comply with the local legal peculiarities, etc.
If Hyundai expects the value of the won to strengthen appreciably against the US dollar over the next decade, should it still expand its presence in the United States?
If the won is expected to strengthen against the US dollars, Hyundai should estimate how much it will strengthen and calculate the profits they might gain from the expansion. If the won increases slightly, the expansion should be profitable; however, if it rises considerably, then, at some point, the profit from selling a car, after being converted from dollars into wons, will yield too few wons. For instance, if 1,000 wons = 0.8 USD, then $100 will yield 125,000 wons; on the other hand, if the won rises and, for example, 1,000 wons = 1.2 USD, then $100 will be converted into ≈83,333 wons. Therefore, it might, e.g., take too much time to cover the costs invested in building a new factory in the USA. On the other hand, if Hyundai wishes the low prices, it might eventually become unprofitable to export cars in the USA; therefore, Hyundai will either be forced to change their pricing policy, or build factories in the USA, or possibly even withdraw from the American market. So, if they wish to preserve their pricing policy, it might still be profitable to expand.
In 2008 the Korean won depreciated 28 percent against the US dollar. Does this imply that Hyundai and Kia were wrong to invest in the United States? How does this explain the relative strength of car sales from Hyundai and Kia in the US market during early 2009?
It does not imply that the expansion was wrong. If we again consider the example above, where 1,000 wons = 0.8 USD, so that $100 yields 125,000 wons, and take that1,000 wons = 0.58 USD, then for $100 we will get ≈172,414 wons. Besides, Hyundai and Kia will still save on transport, possibly on resources, and will be able to react to the trends and changes in the American market better. The sales of Hyundai and Kia in the US improved in 2009 (Hill 410); there are a few possibilities to explain that. For instance, the companies were able to decrease the selling price of cars because they needed fewer dollars to compensate for wons used in production in Korea and transportation; or they could sell the cars cheaply because they needed fewer dollars to compensate for the new factory built in the USA.
Works Cited
Hill, Charles W. L. International Business: Competing in the Global Marketplace, New York, NY: McGraw-Hill/Irwin, 2010. Print.
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