The Far East Trading Company

1.Investment Strategy/ Functional – review the company’s investment in a large number of business areas. Comment on the advantages/disadvantages especially from a financial perspective. [See answer below]

2.Investment Strategy/Regional – review the company’s involvement in a number of very different geographic regions. Advantages/disadvantages?

The Far East Trading Company’s (FETC) main business was based on providing a corporate platform for global trading. After a new management team had taken over FETC in the early 1990s, the company was divided into two main lines (Exhibit 1), FETC Core Businesses and FETC Businesses. This change was instituted in order to cut back on losses, focus on the higher grossing geographic areas and centralize control of the global business operations.

FETC Core Businesses had three main segments: consumer products, foods and graphics; and all three were expected to make more than 70% of the company’s turnover. First, the consumer products segment in Kuala Lumpur was divided into marketing services and nutritional products. Marketing services provided sales, distributions and marketing services to the company’s consumers while the nutritional product segment focused on baby nutritional products conducted in a diary plant in China. Second, the food segment in Colombia, which made up 30% of operating profits, provided meat products, manufactured farms, slaughterhouses and distribution networks. Third, the graphics segment containing graphic equipment and services were located in Singapore. FETC Businesses included businesses that were not part of the core businesses, such as wood and timber in London, shipping in Stockholm and Technical and other services located in Malaysia and Stockholm.

Having no real business base and investing in different business lines across the world differentiated FETC from other companies. This has various advantages but also has considerable challenges and drawbacks. One of the main advantages of having a global trading network with multiple business lines is diversity for both products and geographical markets. A company with such diversified portfolio could maximize cash inflows coming from different sources and minimize risk inherit in concentrated businesses (“don't put all your eggs in one basket” type of thinking). It could also boost sales volumes since it is highly unlikely that factories in different parts of the world will face downtimes at the same time. Finally, global businesses enjoy more brand recognition around the world, which leads to higher market value.

On the other hand, business and geographic diversity could put the company in operational and financial risks. The company would be exposed to economic uncertainty since it is trading in various world economies, some are in developing countries that go into wide ranging cycles. Moreover, given the company’s multi-currency involvement, it has a higher chance of facing currency crises similar to the Thailand’s crisis that affected most of the Asian countries. In addition, the company’s management would face difficulties due to long distances and time differences, which will make it hard to fully control and synchronize operations between business units in different countries. All of the drawbacks, if not addressed properly, might cause high control costs, utilization problems, working capital shortfalls and would have a negative effect on cash flows and financial position.

3.Base Currency – what are the special issues involved for a company with a small currency basis (Swedish krona) in a U.S. dollar denominated world, especially given its multi-currency involvement?

Multi-currency involvement presented many unique challenges to FETC. For one, being exposed to numerous foreign currencies opens the company up to the fluctuation of exchange rates. This in turn could affect the company’s cash flows and financial transactions because of the change in value of a given foreign currency. In addition, the company could be exposed to currency crises where a country’s central bank fails to maintain the currency’s fixed exchange rate. This will lead to a huge financial loss due to an unstable economy (or even a recession), which could cause the company’s investments to vanish. Finally, if the U.S. dollar value is on the rise, FETC might suffer from huge foreign exchange and currency transaction losses that will make it difficult for FETC to repay its debts and can quickly plummet its profit margins.

4.Financial Management – review the potential issues involving funding requirements and revenue streams from very different businesses – such as the fixed investments in the meat business in South America and the dairy business in china vs. the trading businesses in Southeast Asia and others.

For funding, the parent company provided all of its businesses with minimum equity. Afterwards, each business unit was responsible for obtaining its additional funds by acquiring debt and retained earnings. As a result, that could increase the subsidiaries’ reliance on debt exceeding the average debt ratios. Also, revenue streams vary from one business line to another. For instance, trading businesses are known for their continuing revenue streams over the year but doesn’t require tangible assets such as equipment and machinery. In contrast, fixed investments require more upfront capital funding to purchase plants and factories to be able to generate revenues, which are usually seasonal. So, if that funding method worked for a specific line it would not necessarily work for another.

5.Business Distribution – evaluate the financial results in 1995-96 (Exhibit 2). Do you agree with the company’s conclusions on Core and FTC Businesses?

Due to the time differences and the distance between business units, it was difficult to maintain operations and to keep all the units linked. Thus, the company had increasing losses in Europe and Asia. In 1992, a new management group took charge and focused on having more control on the company’s global operations across countries. Moreover, the new management focused on fewer business areas to improve management and observation to increase the company’s growth and profits. For instance, 75% of the company’s earnings were from the Far East. So, the company produced more in that area and sold off the company’s business in Europe.

As Exhibit 2 shows, FETC core businesses’ sales had increased from $9,415M in 1995 to $11,349M in 1996. While the company’s core businesses profits had decreased from $332M in 1995 to $278M in 1996. Consumer products generated the highest sales volume of the core businesses with