Issues to Consider in Philippine Canning Corporation's Expansion

INTERBU

Quiz 2 - Group

There are numerous issues to consider in Philippine Canning Corporation's expansion in the canned corned beef market. One of the major considerations is choosing from what country, Argentina or Australia, to source the beef. The foreign exchange rate is one of the most important factors to take into account in the course of international business. The Argentine peso (ARS) is a weak currency; it is not freely traded in the international market, hence any transaction would be denominated in the U.S. dollar. On the other hand, the Australian dollar is the 7th most tradable currency in the world (http://www.investopedia.com/articles/forex/08/top-8-currencies-to-know.asp) but its quotes are usually about 5-6% higher than the Argentine peso.

One U.S. Dollar is equivalent to ARS 4.03 and PHP 43.26. As such, one Argentine peso is equal to PHP 10.74. In contrast one Australian dollar can be traded for PHP 43.81. The graphs below illustrate the relationship of the ARS with respect to the USD and the PHP in relation to the USD.

Source: Banco Central de la República Argentina (http://www.indexmundi.com/blog/index.php/2009/07/09/argentine-peso-us-dollar-exchange-rate/)

Source: http://www.dollars.com/chart/USD-PHP?period=10y

The ARS started to depreciate in the latter part of 2008 after a period of relative stability. Given the current USD-ARS exchange rate, it is evident that the Argentine peso has not yet recovered. In terms of the USD-PHP exchange rate, the peso significantly depreciated against the USD in the third quarter of 2005 but was able to recover in March 2008. It experienced minor fluctuations from October 2008 to August 2010 but it is currently strengthening against the USD.

The Australian dollar is a fairly stable currency. The graph below demonstrates the relationship of the AUD-PHP exchange rate.

Source: http://www.dollars.com/chart/AUD-PHP?period=10y

The PHP strengthened during the period October 2008 until the end of the same year but weakened against the AUD starting on January 2009 until now.

PCC's expenses are in USD or AUD therefore it needs a stronger peso to save on costs. In view of the graphs above, PCC can save more money by sourcing their beef from Argentina. The PHP is strengthening against the USD while the ARS is depreciating in relation to the USD. If the ARS and PHP continue this movement, PCC will need fewer pesos to buy beef from Argentina. In contrast, the AUD is showing signs of strengthening against the PHP, hence PCC will need more pesos