The Far East Trading Company Financial Reporting Case Study

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Updated: Jan 3rd, 2024

Introduction

The essence of any company is to engage in business activities that facilitate growth. The realization of goals requires the expansion of foreign markets in a bid to acquire a large market share and attain maximum financial gains. The Far East Trading Company (FETC) presents a suitable case of a business organization that conducts international business in Asia, South America, Africa, and Europe. FETC was incorporated in 1897 in Stockholm, Sweden, and initially, it focused on a trade involving items such as timber, rice, oilseed, and spice.

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The company later spread its scope of operations to other regions in the world, thus subjecting itself to various waves of international trade dynamics, which resulted in implications for its operations and profitability. This report will focus on the FETC’s investment strategies, currency issues, financial aspects, new strategic approaches, and the evaluation of its performance in international trade over the years.

Investment strategies

FETC implemented various functional and regional strategies that had beneficial and detrimental impacts on its operations. In this light, focusing on the functional and regional investment strategies is essential for the assessment of its efficiencies and weaknesses in its internal and external environments.

Functional investment strategies

Functional investment strategies focus on the different measures that FETC has taken in its effort towards the improvement of internal functions and the enhancement of its international trade. Since the incorporation of the company in 1897, FETC has maintained a Swedish management system that seeks to facilitate the continuity of the traditional organizational culture.

The advantage of maintaining the Swedish organizational culture in the company’s top management is that it facilitates the continuity of effective financial strategies in each department, thus fostering the financial foundations of the company over the years. The country’s kingdoms ensured that the company took advantage of any entrepreneurial opportunities available in the foreign markets, thus resulting in increased profitability.

The demerit of maintaining the Swedish culture of management in the various units in the world is that it derailed the efforts of embracing cultural diversity in the organizational structures, thus resulting in ineffective relationships. Consequently, the output levels of its employees would be compromised, which resulted in the losses recorded in 1997.

Regional investment strategies

The regional investment strategies of FETC emerged in 1992 after substantial losses incurred in the previous years due to the management system and international economic waves such as currency fluctuations. A strategic investment in the management of the company was facilitated by the appointment of a new Managing Director and CFO. The new MD, Erickson, sold the European units since he believed that 75% of the company’s earnings could be attained in the Far East.

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This investment strategy implied that the company could concentrate on a market base that was more profitable, thus enhancing its sustainability in its international operations. On the detrimental aspect, the sell-off of the European business units curtailed the organization’s efforts to expand its operations in the European market, thus limiting its financial growth.

The reorganization of the company into two lines that included the FETC Core Businesses and the FETC Businesses was a strategic regional investment plan under the new management. The FETC Core business line focused on consumer products, graphics, and foods as their areas of competencies that were perfected in the Malaysian, Singaporean, and Venezuelan markets, respectively. The merit of this regional investment strategy is that the company would be on the right track towards the attainment of a 70% turnover by 2002.

The strategic moves in the consumer products’ department focused on nutrition and marketing services in China and other Asian countries. The company established a modern dairy plant in China, thus aiming at capitalizing on the dairy market through technological investment strategies. On the other hand, the regional investment plan as fostered by the marketing services meant that FETC could venture into sales, marketing, merchandising, and other product promotion endeavors for reputable companies, thus resulting in increased turnover.

The Food Group unit of the FETC’s Core Businesses was based in Bogota, Columbia, as an investment plan that saw the diversification into the meat and meat products industry in the South American market. The Graphics sector ventured into the Eat Asian market that seeks to fulfill the needs of the arts and graphics industry.

The benefits of the strategy resulted in gaining significant market share and major deals like the one with Eastman Kodak. The strategic investment plans for the FETC Businesses were to facilitate the liquidation of less profitable businesses that focused on timber, wool, and shipping services. The benefit of the strategy implemented by Erickson is that FETC would focus on highly profitable core businesses.

Base currency issues in international trade

Engaging in effective international trade requires the use of a strong currency to curtail the risks of price fluctuations. Selling products to foreign customers subjects the firm and clients to the inherent risks in the exchange rates, thus affecting the value of the sales and outputs, respectively.

In the case of FETC, the 1997 financial half-year results indicated a 12% sales increment in terms of the base currency (Swedish Krona). However, the operating income dropped by 26%, implying that the currency disparities with international currencies such as the USD affected its profitability.

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The FETC Core businesses located in Asia and South America recorded adverse changes in sales due to currency differences that depict a weaker Krona in the international market. In this regard, the half-year results imply that using a stronger currency for international trade facilitates the cost-effectiveness of the Core businesses’ operations.

The negative operating costs recorded in the financial figures were attributed to debts acquired from foreign banks to finance the operations of the units in the Asian continent. Consequently, the parent management based in Sweden had to facilitate the repayment of the loans using the weaker Krona, thus resulting in costly financing mechanisms.

The profit warning for the 1997 financial year necessitated the need for the Asian units to borrow the US Dollar to finance its operations instead of using the Malaysian ringgit, whose interest rates were 4% higher than rates imposed on the US Dollar. However, the US Dollar gained value in 1997, thus resulting in costly debt servicing expenses, which subjected the company to losses. Therefore, trading in a world currency is recommended for international trade since it tends to portray stability even when subjected to currency fluctuations.

FETC’s financial management

The investment strategies implemented by the new management of FETC led by Erickson and Karlsen had implications on the company’s two lines of operations. The Core Businesses and FETC Businesses recorded different results that exhibited the company’s financial management. The management of the company’s finances was mainly focused on the sustainability of its Core Businesses operations in the Asian market.

Financing the Core businesses in Asia emphasized the need for the units to fund its operations and borrow funds from local banks instead of relying on the Swedish capital. Therefore, funding requirements and revenue streams for various FETC businesses needed effective financial management for the sustainability of the units.

The financial management of the Nutrition Group based in Shanghai, China, required massive injections that would facilitate the construction and operation of the state-of-the-art dairy plant. The strategy was a bold move towards the exploration of the Asian dairy industry by embracing technological advancements that had negative implications for the financial structures of the organization. However, the move accounted for part of the -144% operating incomes recorded in the 1997 half-year results.

The results could be due to the capital intensiveness of the project, which was not operating optimally. The Foods Group was another Core business of FETC located in Columbia, South America. The sector portrayed an economical yet profitable financial management system. It was recorded that the sector accounted for 30% of operating profits despite making a 9% sales margin in 1996.

On the other hand, the financial management aspects of the FETC businesses were based on liquidation strategies for less performing businesses in various regions. The liquidation of the shipping businesses that recorded 70% of net sales was strategic since it facilitated the concentration on other activities that resulted in greater sales for the company. Focusing on the timber business that was headquartered in London implied that the units in Brazil, Southeast Asia, and Ghana were under a single procurement system. In this respect, the timber business recorded 26% net sales, which achieved a 122% change in operating results.

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Therefore, both the Core businesses and FETC businesses recorded different results, which indicated the strengths and weaknesses of the company’s financial management. The competent areas such as the Nutrition department through their dairy plant in China did not achieve the targeted results due to their inability to function at full capacity. On the other hand, the Timber business was meant for liquidation, but it recorded positive results due to improved procurement operations from London.

Evaluation of the FETC’s business distribution

The distribution of FETC’s businesses along two lines in various international markets can be assessed to identify its effectiveness. The management’s notion that the Asian region was relevant to the company’s operations in international trade is questionable. In this light, assessing the 1995-1996 turnovers and operating profit margins portrays justifications and criticism of the FETC’s strategic investment moves.

The 1996 sales for the Core businesses rose from 66% in the previous year to 69%, while profits dropped from 52% to 47% in the same period. In this light, the Core businesses depicted a downward trend in its profits, thus necessitating a warning for the 1997 financial year. On the other hand, the FETC businesses recorded a 3% drop in total sales from the 34% recorded in 1995.

In 1996, the businesses depicted an increase in profits from 48% in the previous year to 52%. The records indicate that the company recorded better results in FETC businesses as compared to the Core businesses. Therefore, I do not support the management’s perception that the company’s international operations would only thrive in the Asian continent.

Evaluation of the FETC’s financial results

The 1997 and 1996-1995 financial results portray various factors that contribute to the company’s financial trends. The financial status of the company implied that it was would be subject to the effects of the looming Asian currency crisis. Comparing the 1997and 1996-1995 financial records, it is evident that FETC was financially stable in the 1996-1995 period that recorded a net sales of 16,454 million Krona. Contrary to the figures, the 1997 period only achieved total sales amounting to 8,686 million Krona.

The implication of the drop in sales necessitated the need for capital injections from financial institutions. The strong Asian currency facilitated the borrowing of the US dollar at fair rates. However, strengthening the dollar in June 1997, along with other economic factors, welcomed the Asian currency crisis that was detrimental to the international trade activities of FETC. In this regard, the financial position of FETC was not ready for the looming Asian crisis, and thus its operations were affected significantly.

Impacts of the Asian crisis

The Asian currency crisis in the 1997 period had different implications on the performance of FETC. The company experienced transaction and translation losses that threatened the operating exposure of the firm. In this respect, the financial management strategies were curtailed since the firm had to adjust to translation, investment, and sustainability issues in its operations.

The crisis subjected the company to transaction losses due to the debts acquired in US dollars. This aspect implied that FETC had to service the loans secured at a high costs, thus resulting in high operational costs. Therefore, the devaluation of the Swedish Krona heightened the company’s overheads, thus resulting in lower profits recorded in 1997.

The translation losses resulted in lowering the equities of Asian companies, which hindered their investments. Therefore, neglecting the Malaysian ringgit and the Thai baht at the expense of the US dollar for investment purposes through bank credit facilities translated into ineffective investment strategies that cost FETC due to currency fluctuations attributed to global economic waves. Karlsen’s move towards enhancing the company’s relationships with the bank was strategic as it sought to counter the negative effects of repaying the debts.

FETC’s new strategic approaches

The second profit warning predicted a loss of SKK 300 following the Asian Currency crisis. The management of the company had to formulate and implement new strategies that would alleviate the situation and foster investments, foreign currency management, and debt management. The new strategy that resulted in a dilemma factored the viability of liquidating the company’s non-core businesses.

Erickson suggested the immediate sell-off of the non-core businesses to cater for the debt management aspect of the Asian crisis implications. On the other hand, Karlsen saw the potential of selling the units at a 20% higher rate in the near future. This move factored in the current trends and facilitated profitable investments that would improve the company’s stocks. The two executives portray financial management capabilities that could be implemented by the subsidiaries in rescuing FETC from collapse.

Evaluation of FETC financial management

The financial management of FETC depicts various strengths and weaknesses that have subjected the company to financial difficulties over the years. The company portrays firm financial management and investment strategies, as seen in its move to diversify into various industries in different continents in a bid to maximize profits.

However, weaknesses in its financial management systems facilitated its increased losses and being overwhelmed by the Asian crisis. Weaknesses in financing, foreign currency management, debt management, strategic investments, and lack of a crisis management system subjected the company to various challenges. Therefore, FETC can be categorized as an average international trading company from the financial management perspective.

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IvyPanda. (2024, January 3). The Far East Trading Company Financial Reporting. https://ivypanda.com/essays/the-far-east-trading-company-financial-reporting/

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"The Far East Trading Company Financial Reporting." IvyPanda, 3 Jan. 2024, ivypanda.com/essays/the-far-east-trading-company-financial-reporting/.

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IvyPanda. (2024) 'The Far East Trading Company Financial Reporting'. 3 January.

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IvyPanda. 2024. "The Far East Trading Company Financial Reporting." January 3, 2024. https://ivypanda.com/essays/the-far-east-trading-company-financial-reporting/.

1. IvyPanda. "The Far East Trading Company Financial Reporting." January 3, 2024. https://ivypanda.com/essays/the-far-east-trading-company-financial-reporting/.


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IvyPanda. "The Far East Trading Company Financial Reporting." January 3, 2024. https://ivypanda.com/essays/the-far-east-trading-company-financial-reporting/.

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