Operating Exposure

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Xian- Janssen Pharmaceutical (China) and the Euro

Case Questions and Answers
1. How significant an impact do foreign exchange gains and losses have on corporate performance at XJP? What is your opinion of how they structure and manage their currency exposures? During 2003, the dramatic raise in the value of Euro against the dollar resulted in foreign exchange losses of Rmb 75 billion, out of which Rmb 60 billion were charged as 2003 cost of hedging. The year of 2003 proved to be fortunate for the XJP Company, housing fund adjustment and inventory valuation reversal recorded extraordinary gains of Rmb 70 billion. These gains had lessened the negative influence of the foreign exchange losses on the company’s net earnings resulting in a net increase of Rmb 10 billion. In 2004, The Company estimated the Euro to further appreciate relative to the US dollar. Estimated foreign exchange losses were Rmb 75 billion. Since the year 2004 is unlikely to be fortunate like 2003, the appreciation of the Euro is estimated to affect the profitability of the company and result in a reduction of 4.6% in net earnings. I think XPY Company should consider getting raw material and finished products from suppliers, other than J&J, specifically who are based in countries where currencies are pegged to the US dollar. Moreover, the company should negotiate and discuss the possibility of setting lower internal transfer prices and applying centralized hedging practices where the parent company attempt to net transaction exposure of all its subsidiaries.

2. J&J has roughly 200 foreign subsidiaries worldwide. It has always pursued a highly decentralized organizational structure, in which the individual units are responsible for their own performance from the top to the bottom line of the income statement. How is this reflected in the situation XJP finds itself? Examining the case of XJP along with the losses generated from FX movements and...
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