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Presentations this week

• Navigant Consulting
• Wednesday (Sept 28)
• 630pm-8pm
• Surdna North (Tisch 3rd Floor)
• Deloitte NYU Day
• Thursday (Sept 29)
• 630pm-830pm
• Location to be determined

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Revaluation of the Yuan Boom or Bust For US
Companies Doing Business with China?
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Agenda

• Highlights of the revaluation
• Concerns of US Companies (Buyers and sellers
  perspective)
• Recommendations
• Lets play a game

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You are a Consultant

• The recent Yuan revaluation has sparked off
  concerns among US companies that conduct business
  with China. They are curious in learning how they
  might be affected by this revaluation and the
  appropriate steps they should take. What is your
  analysis and recommendation for these companies?

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Do you know that in China

• An apple at a fruit stand takes 6 cents out of
  your wallet.
• A ride on the Beijing subway costs 25 cents.
• A shirt at the flea market can cost under 1.
• A bootleg DVD of the latest movie Flight Plan"
  costs 88 cents.

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Case Background

• Revaluation of the Yuan happened on July 21 2005.
• Pressure from the US known for exporting
  deflation
• Increase trade deficit between US-China
• Yuan was pegged to the US dollar. With the
  revaluation, the Yuan is now pegged to a basket
  of currencies.
• Yuan appreciated by 2.1. Up from 8.28 to 8.11.

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Yuans movement in past 3 months
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Some views on the revaluation

• Hopefully the US can accept this goodwill
  gesture... The Chinese currency cannot move too
  much too soon because it's still a relatively
  undeveloped country
• - Andy Xie, Morgan Stanley economist
• It does not mean that the adjustment of the
  Yuan by 2 percent serves as an initial step, with
  further adjustments to come later
• - China Central Bank

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What are companies thinking?

• Buyers (of Chinese goods) perspective Higher
  costs of imports from China.
• Sellers (of goods to China) perspective
  Appreciation of Yuan is positive as it leads to
  an increase in Chinese domestic consumption.

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My costs will increase!

• The Yuan revaluation will increase the costs of
  my purchase of Chinese goods and my overall
  operational costs. What should I do?

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Buyers Recommendation Overview

• Stay on course and continue to pursue the China
  purchase plan.
• Re-do the cost-benefit analyses.
• Consider risk mitigation alternatives.

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Buyers Recommendation 1

• Stay on course and continue to pursue the China
  purchase plan
• Derived substantial savings from China purchase
  program.
• Small increase in price will not diminish
  economic merit.

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Buyers Recommendation 2

• Re-do the cost-benefit analyses
• Analysis should go beyond comparison of labor and
  material cost.
• Switching Cost
• Total acquisition cost approach
• Total cost Shipping Inventory holding
  Product quality Workers training

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Buyers Recommendation 3

• Consider risk mitigation alternatives
• Negotiate bigger/longer term contract in exchange
  for short term price increase cap.
• Consider various currency hedging tools.

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Celebrating too fast too soon?

• The Yuan revaluation will encourage the demand
  in the Chinese consumption of my goods. What
  issues, however, must I examine before I can
  conclude with confidence that the revaluation has
  created a positive impact?

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Sellers Recommendations Overview

• Revaluation should indeed be seen as positive
• However companies should
• Localize production processes
• Continue to improve upon the price elasticity of
  their target customers.

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Sellers Recommendation 1

• Localize your production processes
• Any products/services wholly or partially made
  outside China will have an unfavorable cost
  structure when compared with their 100 locally
  produced cousins.
• Incredible success of General Motors China.

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Sellers Recommendation 2

• Understand and improve upon the price elasticity
  of your target customers
• Know your product. Luxury goods? Cheap everyday
  items? In betweens?
• Intensify marketing strategy and improve product
  value
• Brand differentiation is key

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Strategic position for sellers to be in
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Quick recap of recommendations
Pursue the China purchase plan
Cost Increase?
Re-do the cost-benefit analyses
(Buyers)
Consider risk mitigation alternatives
Localize production processes
Reason to Celebrate?
Improve price elasticity of product
(Sellers)
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Some concluding thoughts

• The revaluation has more of a perception
  impact than an actual impact. It's not going to
  impact the actual trade a lot."
• Daryl and Chengze
• Relax, you can still hold on to your dollar for
  now

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Questions

• ?

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Lets Play A Game!!
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Diapers and China???

• What is the size of the market for disposable
  diapers in China? (Assume 1 billion people in
  China).