Reference no: EM131042400

BLADES, INC. CASE

Assessment of International Trade Financing in Thailand

Blades, Inc., has recently decided to establish a subsidiary in Thailand to produce Speedos, Blades' primary roller blade product. In establishing the subsidiary in Thailand, Blades was motivated by the high growth potential of the Thai roller blade market. Furthermore, Blades has decided to establish a subsidiary, as opposed to acquiring an existing Thai roller blade manufacturer for sale, in order to maintain its flexibility and control over the operations in Thailand. Moreover, Blades has decided to issue yen-denominated notes to partially finance the cost of establishing the subsidiary. Blades has decided to issue notes denominated in yen instead of baht to avoid the high effective interest rates associated with the baht-denominated notes. Currently, Blades plans to sell all roller blades manufactured in Thailand to retailers in Thailand.

Furthermore, Blades plans to purchase all components for roller blades manufactured in Thailand from Thai suppliers. Similarly, all of Blades' roller blades manufactured in the United States will be sold to retailers in the United States and all components needed for Blades' U.S. production will be purchased from suppliers in the United States. Consequently, Blades will have no exports and imports once the plant in Thailand is operational, which is expected to occur early next year. Construction of the plant in Thailand has already begun, and Blades is currently in the process of purchasing the machinery necessary to produce Speedos. Besides these activities, Ben Holt, Blades' chief financial officer, has been actively lining up suppliers of the needed rubber and plastic components in Thailand and identifying Thai customers, which will consist of various sports product retailers in Thailand. Although Holt has been successful in locating both interested suppliers and interested customers, he is discovering that he has neglected certain precautions for operating a subsidiary in Thailand. First, although Blades is relatively well known in the United States, it is not recognized internationally. Consequently, the suppliers Blades would like to use in Thailand are not familiar with the firm and have no information about its reputation. Moreover, Blades' previous activities in Thailand were restricted to the export of a fixed number of Speedos annually to one customer, a Thai retailer called Entertainment Products. Holt has little information about the potential Thai customers that would buy the roller blades produced by the new plant.

He is aware, however, that although letters of credit (L/Cs) and drafts are usually employed for exporting purposes, these instruments are also used for trade within a country between relatively unknown parties. Of the various potential customers Blades has identified in Thailand, four retailers of sports products appear particularly interested. Because Blades is not familiar with these firms and their reputations, it would like to receive payment from them as soon as possible. Ideally, Blades would like its customers to prepay for their purchases, as this would involve the least risk for Blades. Unfortunately, none of the four potential customers has agreed to a prepayment arrangement. In fact, one potential customer, Cool Runnings, Inc., insists on an open account transaction. Payment terms in Thailand for purchases of this type are typically "net 60," indicating that payment for the roller blades would be due approximately 2 months after a purchase was made. Two of the remaining three retailers, Sports Equipment, Inc., and Major Leagues, Inc., have indicated that they would also prefer an open account transaction; however, both of these retailers would have their banks act as intermediaries for a time draft. The fourth retailer, Sports Gear, Inc., is indifferent as to the specific payment method but finds a prepayment arrangement unacceptable. Blades also needs a suitable arrangement with its various potential suppliers of rubber and plastic components in Thailand. Because Blades' financing of the Thai subsidiary involved a U.S. bank, it has virtually no contacts in the Thai banking system. Because Blades is relatively unknown in Thailand, Thai suppliers have indicated that they would prefer prepayment or at least a guarantee from a Thai bank that Blades will be able to make payment within 30 days of purchase. Blades does not currently have accounts receivable in Thailand.

It does, however, have accounts receivable in the United States resulting from its U.S. sales. Holt would like to please Blades' Thai customers and suppliers in order to establish strong business relationships in Thailand. However, he is worried that Blades may be at a disadvantage if it accepts all of the Thai firms' demands. Consequently, he has asked you, a financial analyst for Blades, Inc., to provide him with some guidance regarding international trade financing. Specifically, Holt has asked you to answer the following questions for him

1. Assuming that banks in Thailand issue a time draft on behalf of Sports Equipment, Inc., and Major Leagues, Inc., would Blades receive payment for its roller blades before it delivers them? Do the banks issuing the time drafts guarantee payment on behalf of the Thai retailers if they default on the payment?

2. What payment method should Blades suggest to Sports Gear, Inc.? Substantiate your answer.

3. What organization could Blades contact in order to insure its sales to the Thai retailers? What type of insurance does this organization provide?

4. How could Blades use accounts receivable financing or factoring, considering that it does not currently have accounts receivable in Thailand? If Blades uses a Thai bank to obtain this financing, how do you think the fact that Blades does not have receivables in Thailand would affect the terms of the financing?

5. Assuming that Blades is unable to locate a Thai bank that is willing to issue an L/C on Blades' behalf, can you think of a way Blades could utilize its bank in the United States to effectively obtain an L/C from a Thai bank?

6. What organizations could Blades contact to obtain working capital financing? If Blades is unable to obtain working capital financing from these organizations, what are its other options to finance its working capital needs in Thailand?