Setting up a Factory in a South American Country

Case Study

Setting up a factory in a South American country (Brazil) to supply its expanding North American market is a right decision for Betocowo Plc. The company, however, will inevitably encounter a variety of financial risks while making such a huge investment in a foreign country. Relevant financial risks should be taken into consideration by the financial director in order to develop measures for reducing these risks.

The first possible risk is the credit risk which happens when a borrower defaults the payments. Being a big multi-national company, Betocowo’s investing project in Brazil is a very large and one-off project. Investment risk is always associated with megaprojects of this type and the impact is devastating. Such projects are highly likely to be trapped by debts because of increased budget and plan postponement. Then the costs of servicing these debts become larger and larger, and eventually surpass revenues of the company. At last, it will be unable to make payments of these debts and end up in a serious financial crisis (Flyvbjerg et al, 2003). Betocowo is a UK and Europe based company. The economic environment is completely different from that in Brazil. As a result, miscalculation and underestimation may occur when assessing the budget of building and operating a plant there. Under such a circumstance, the company may need to borrow more money and have difficulty in repayment, being in a credit crisis at last.

Investing a brand new market, potential market risk, of course, should be carefully considered. It consists of four factors, namely, equity risk, interest rate risk, currency risk and commodity risk. Changes in stock prices (stock indexes prices), interest rates, foreign exchange rates and commodity prices will decrease a company’s investment portfolio for trading portfolio (Dorfman, 1997). In this case, the currency rate of Brazilian Real and local material and labour prices are most influencing factors. If these values get higher, the company may have to downsize its investment scale.

Last but not least the company will also encounter a series of risks in the operation process, which can be termed as ‘the operational risk’. Such risks come from various aspects including human resources, operational systems and processes, legal systems as well as external environment (Jobst, 2010). In comparison to western countries, Brazil has different legal and political system and economic environment, which could be obstacles for the company’s business functions there. Ignoring such differences will cause errors and ineffective functions, leading to reduced profits or even losses.

In view of potential risks mentioned above, the financial director of Betocowo should find ways to reduce investment risks in the both globalised and localized market.

On the global front, the company, in a first place,