Companies that have overseas plants try as much as they can to reconcile their books of account from the central unit. The parent company has the responsibility of ensuring that everything is in order. Transfer pricing has become one of the unique models for charging prices for the goods and services rendered.
Opportunity for Northwestern Company
Suffolk Ltd’s bid provided an opportunity to Northwestern Paper Company to maintain them with quality products as they are well known. However, the two subsidiaries’ bids for the same tender proved to be a difficult moment in the parent company’s model of doing business. The South Korean plant won the bid due to its pricing and brand. It also won against its sister subsidiary because it had chosen a different business strategy. The American company had not yet approved.
However, the Asian market is growing, and it is becoming an alternative market for the company’s growth. The vice president, Mr. Bill Ewing should consider the matter as urgent and raise them in the upcoming International Directors Meeting. The company should consider setting the transfer prices at the subsidiary level in the low tax jurisdictions. It should also lower the transfer price to enable the affiliates to provide a competitive advantage against their competitors. For instance, the South Korean bid was lower than Indonesia because it was getting its materials from Chile. And yet because the subsidiary is not in charge of the transfer price, it still makes less contribution margin than the Indonesian subsidiary. It is the opportunity that the company can use to change the strategy for long term growth. When the plants maximize on the profits right from the raw material acquisition, they become profit centers.
Transfer Pricing Analysis
The company had directed its subsidiaries and foreign businesses to buy their pulp from the US mills. It charged the overseas subsidiaries the going market rate for the US pulp. At the time of the bids, the rate was $450/ton. The amount contained all the production costs, operating expenses, and a preset percentage markup. Each subsidiary was supposed to finance its working capital from the local sources. The strategy seemed to make the subsidiaries wholly dependent on the parent company. There was no room for creativity. Therefore the Korean and the Indonesian plants could not make and keep their profits for strategy setting at their local level. Despite the availability of the ready market, they were to operate at the US level of operations, and yet the US market was struggling due to stiff competition.
The company should allow the plants to become profit centers with the full mandate to bid freely for tenders. They should also source for the pulp from the nearest and affordable markets within their reach. The transfer prices should be at the local level. Such localized mechanisms enable competitive strategies to come up, and the branches can finance the parent company due to the prevailing circumstances in the US.
The Indonesian Company Memo
Regarding the Australian transaction, the Indonesian plant is in support of the current business regulations. The Northwestern Company is a respected entity that is well known for providing quality products and services. It is as a result of the directives from the head office that the subsidiary plant operates at profitable margins. There are always meetings that help us to share experiences and build capacity. Perhaps the most notable thing to do is to train the plant directors on the importance of the parent company remaining the primary source of information.
Other companies may have things that are working now. However, they are yet to learn the market and a long way to learn from history. They have made decisions based on the competition and not the long term stay in the market.
Although the plant did not win the tender, its processes were respectable. The tender would still earn the company a good percentage of the profit. The branch supports the US mills so that it can withstand the pressure at home to enable the other subsidiaries to develop. If the company leaves the decision-making process to the branch co-coordinators, then there might be the push and pull games that would otherwise derail the critical aims of the enterprise.
Direct involvement in important markets can only lead to ultimate success if the main office is involved. The pricing strategy can offset some of the complexities of foreign currency management. The new aspects of business strategy will continue to emerge from the new sets of intracompany relationships. There will continue to be new patterns of trade approaches from the parent and the offshore units. However, the strategies need to go through scrutiny to establish the veracity of the arguments raised. If the company lowers its dignity because of competitive tenders, it will also bend its rules to accommodate others not so strategic missions. The path can only lead to failure in business in the long run and exit from the market due to the inability to accomplish its vision.