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Disadvantages to Nestlé S.A. for Applying International Trade

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Disadvantages to Nestlé S.A. for Applying International Trade Financial Risk Nestlé S.A. is a Swiss multinational (MNC) food and beverage company. Due to the fact that using international trade in its business, any major event occur in the financial markets will affects its liquidities or liabilities such as currency fluctuation, interest rate, derivatives, and/or hedging, pension funding obligations/retirement benefits, banking/commercial credit, cost of capital). Nestlé S.A. is exposed to several financial risks such as interest rate risk, foreign exchange risk Interest rate risk is defined as the risk in changes of the value in financial assets, liabilities and derivatives result from the fluctuations of interest rates. For most of the MNC companies, interest payments may become major cost incurred in their business. For instance, interest cost will increase 10% if an interest rate (5%) increase only 0.5%. Increased in interest cost will directly affect the cash flow and profitability of the particular MNC company. Nestlé S.A. holds a lot of financial assets, liabilities and derivatives which are sensitive to the changes of interest rate. Changes of the interest rates will negatively affect the company’s financial position and also the operation of the whole company. According to Boland (n.d.), every MNC company will receive or make payment in foreign currencies every day. Thus, that company will always bears with the negative implication of exchange rate fluctuation due to some political or economic reasons. Fluctuated exchange rate will affect the value of existing assets or liabilities which denominated in term of foreign currency. Lastly, a business will become less competitive in the competitive market and result in a loss of sales and revenue. Foreign exchange risk is refer to a MNC company exposure to the fluctuated exchange rate and thus the value of investment. It is due to the reason of changes in currency’s exchange rate (Sargeant, n.d.). Foreign exchange markets are volatile and are constantly alter. These alteration will affect every business which has receipts and/or payments in a foreign currency. In the other word, these receipts or payments will alter every day depending on the exchange rate. Fluctuate exchange risk is also the risk for those companies unable to forecast finances accordingly. According to Rahnema (1990), Nestlé S.A. has factories in 86 countries which owns around 430 factories and employs more than 200,000 people around the world. The company is the world largest buyers of cocoa, sugar, cereals and many other commodities. Thus, it is important to ensure the future supply of its inputs and outputs at a predetermined price level. Any changes in the exchange and interest rates will affect the long term supply and demand of firm’s products. Nestlé S.A. is subject to currency fluctuations in terms of its transactions and translation of its financial statements. Nestlé S.A. uses short-term hedging for trading activities. If Guarantor refuses to believe in those actions, Nestlé S.A. will use similar interest cover ratios to alleviate such translation exposure. However, its financial condition will negatively affected if those actions fail or the currency fluctuate. Political Risk Investing in different countries whose political power can be alter over time will lead to occurrence of few risks toward those MNC companies. Governments could discriminatorily change laws, regulations or contracts governing an investment. According to Sargeant (n.d.), Political risk occurs during the time that a country changed its policy unexpectedly and that changes will negatively affect operation of the MNC company. Those policies may include trade barriers which limit international trade. Even though most of the MNC companies had applied free-trade agreements, profits and overall success of a MNC company may also affect by the different laws in different countries. Those companies may experience uncertain revenues. In addition, other groups in host country will also take part in the political and economic decisions which will indirectly affect the operation of MNC companies. They will try to force host country government or MNC companies to conform to their view. For instance, a Beijing-based non-profit Institute of Public and Environment Affairs has generated a name list consisted 70 MNC companies which violated China’s environmental laws. Nestlé S.A. is one of the company stated (Gillespie & Hennessey, 2010). Political decisions can influence Nestlé S.A. for the good and the bad. For instance, those decisions able help to create or reduce demand for particular products and services. If the host country’s government decides to increase taxes, consumption of that particular product and sales will decrease, vice versa. Thus, business decisions are affected by political decisions. Besides, changes of president or prime minister of one country will lead to changes of the nation’s law which will affect the business activities. According to Mulier (2014), Swiss companies need to bind with “fat cat” rules which lead the country become more uncertainty. These rules require binding shareholder votes on the pay of executive and board members. Other than that, the Swiss government also setting some limitations on matter of hiring the staff from foreign countries within the next three years in year 2014. Chief Executive Officer of Nestlé S.A., Paul Bulcke had mentioned that those limitations will negatively affect Nestlé S.A. plans to employ about 350 employees at a new Nespresso coffee-capsule factory in Swiss. The workers works in Nestlé S.A. in Swiss were come from more than 90 countries. Too much restrictions and lengthy waiting time will affect the operation of Nestlé S.A. Besides, board members are required electing annually and a shareholder vote can pick the chairman directly will lead to the happening of some negative consequence. This will increase the power of non-Swiss shareholders who own more than 50% of Nestlé S.A. stock. Transform the power to shareholders will lead to a short term prospective which is obeying Nestlé S.A. objectives. Nestlé Zimbabwe has been operating in Zimbabwe for 55 years through good and bad time. The company target Zimbabwe as a main market in the Southern African region. In 2009, the company shut down its factory in Harare temporarily due to the reason that being interfered and harassed by local authorities (government officials and police) unannounced. This incident was happen after the company rejected to take milk supplies from Gushungo Dairy Estate which was not under contract by the company. This farm was taken over by President Robert Mugabe's family as part of his controversial land reform program. This program had targeted mainly the properties of white farmers. Nestle stopped purchasing milk supplies from Gushungo Dairy Estate after received international criticism because agreed to use the farm as a supplier earlier. This incident had affected the company operation and thus the financial position. Relationship between Nestle and President Robert Mugabe’s government become difficult and affect the company’s business and operation in Zimbabwe. The future of Nestle in Zimbabwe become more uncertain (“Nestle Reopens Zimbabwe Factory,” 2010). In the earlier of 2010, government of Zimbabwe was enacted an indigenization law. According to the indigenization law, any foreign company with assets valued at more than $500,000 (SFr453, 000) must sell 51% of the share to indigenous Zimbabweans. Nestle Zimbabwe was forced to sell 51% of share to the local people. In 2011, Nestlé be deemed by government had not met the legal deadline to sell majority shareholdings to locals. The company will face some serious consequences such as the risk of losing license to operate in Zimbabwe. Despite Nestle claimed that they had discussed with the local authorities, this indigenization policy is still an intimidation for the company. This intimidation needed to be settled to ensure that the company able to operate in Zimbabwe more certain (Ornelas, 2011). References Boland, P. J. (n.d.). Risks Involved in International Trade Finance: A Banker's Perspective. Retrieved February 24, 2015, from http://fita.org/aotm/0399.html Gillespie, K., & Hennessey, D. (2010). Global Marketing (3rd ed.). Boston: Cengage Learning. Mulier, T. (2014). Nestle’s Brabeck Says New Swiss Rules Are Challenge for Business. Retrieved February 22, 2015, from http://www.bloomberg.com/news/articles/2014-04-10/nestle-s-brabeck-says-new-swiss-rules-are-challenge-for-business Nestle Reopens Zimbabwe Factory. (2010). Retrieved February 28, 2015, from http://edition.cnn.com/2010/WORLD/africa/01/05/zimbabwe.nestle.factory/ Ornelas, A. (2011). Zimbabwe Puts Food Giant Nestlé On The Ropes. Retrieved February 28, 2015, from http://www.swissinfo.ch/eng/zimbabwe-puts-food-giant-nestl%C3%A9-on-the-ropes/31283060 Rahnema, A. (1990). An Overview Of Exchange And Interest Rate Risk Management. Retrieved February 28, 2015, from http://www.iese.edu/research/pdfs/DI-0178-E.pdf Sargeant, N. (n.d.). What Risks Do Organizations Face When Engaging In International Finance Activities. Retrieved February 28, 2015, from http://www.investopedia.com/ask/answers/06/internationalfinancerisks.asp
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