Case Study 4: Caterpillar Tractor
|Bùi Thanh Nam | |Lê Minh Ngân | |Phạm Phương Ngọc | |Đinh Vũ Công Nguyên | |Nguyễn Thu Phương |
In the 1980s a stronger dollar hurt Caterpillar’s competitive position, but in 2008 a stronger dollar did not seem to have the same effect. What had changed? The strong dollar in 2008 had negative impact on Caterpillar’s revenue but it had a favorable effect on Caterpillar’s costs. Caterpillar had dramatically expanded its network of foreign manufacturing operations to protect itself against the exchange rate risk of dollar. In 2008, 102 of 237 manufactories of Caterpillar are located outside of North America. Although the revenues from operating in local currency and from exporting fell when the dollar strengthened, the costs of operating also declined, which helped to reduce the impact on profit margin. In addition, the price Caterpillar paid for inputs from foreign producers also fell. Thus, Caterpillar’s globalization strategy has reduced the impact of fluctuations in the value of the dollar on its profits. Question 2:
How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign exchange risk? What is the downside of its approach?
Caterpillar has been using globalization as a hedging strategy against the fluctuation in the value of the dollar. While still a major exporter, more than half of its manufacturing facilities were now located outside of North America. In case the dollar appreciated, the revenues generated abroad suffer when exchanged back to dollar; the cost of these operations...