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EMERGING MARKETS: Jobek Do Brasil's Foreign Exchange Challenges
Jobek do Brasil is an outdoor furniture and hammock manufacturer and exporter based in Brazil. Focusing on European markets, it had to constantly deal with foreign exchange challenges. In 2008, sales went down by more than 60%, thanks to the global financial crisis. The existing business model-based on inhouse manufacturing in Brazil's northeast and an administrative, purchasing, quality assurance and sales unit in Germany-was no longer viable. Fixed costs were substantial and manufacturing inputs had already been purchased. Sitting on debt and running short of working capital, Barny, the owner, shut down Jobek's plant in 2010; outsourced production to Reed Isaac, a former local partner; closed down the German unit; and signed a long term supply contract with Stern GmbFI in Germany. In addition, Jobek temporarily discontinued the already-low sales outside Europe as well as the insignificant domestic sales in Brazil. The measures were necessary to refocus the business and ride down costs.
BRAZILS FOREIGN EXCHANGE POLICY
After more than a decade of high inflation, low growth, debt default, and failed stabilization policies, the Brazilian government introduced a new currency, the real (R$), in 1994. The new currency, valued at R$1 per US$1 in 1994, was pegged to the US dollar and could oscillate within an adjustable band until 1999. At that time, the effects of the Asian and the Russian crises also increased pressures on Brazil that still suffered from repetitive trade deficits and current account deficits. In 1998, Brazil earned only around US$51 billion from exports, corresponding to 6.5% of GDR Then, subject to central bank interventions, the real depreciated rapidly and reached R$2.25 per dollar in January 2002. When it became increasingly likely that Jose Ignacio Lula da Silva would be elected Brazil's new president, hot money quickly left Brazil and the real dropped to R$3.83 per dollar in October 2002. The euro was roughly at parity with the US dollar at that time, and the R$/euro exchange rate was similar (see Figure 7.4). Contrary to initial expectations, Lula's government gained the confidence of international financial markets. Brazil's monetary policy aimed to quickly reduce inflationary pressures by raising real interest rates. During the 2003 crisis, for instance, the central bank's reference nominal interest rates topped 26%. Even at the beginning of 2012, nominal interest rates were around 10% and real interest rates were close to 5%, the highest worldwide. Brazil's conservative fiscal and monetary policy quickly showed positive results. After paying back its last IMF loan in 2005, the country obtained the investment grade rating in 2008. The international financial markets honored that and billions of US dollars poured into the country over the last few years. In addition, higher export sales, partly triggered by record commodity prices, led to a high level of foreign exchange reserves of US$356 billion in March 2012. Flowever, the long expected and wellreceived macroeconomic stabilization came at a cost: the R$ had been appreciating since 2004 and about 2,700 (12%) exporters quit international markets between 2004 and 2011.
Over the last 20 years, Jobek do Brasil built up a strong premium brand, especially in the German market. The branding strategy successfully associated Jobek's products with the Latin American life style. In addition, Jobek managed to link its brand with environmental friendliness by using Forest Stewardship Council (FSC) certified wood for accessories and with social responsibility by treating employees fairly and by sponsoring community projects. In addition, the Jobek brand was associated with high quality. Selling this brand asset to Stern GmbH was a hard decision. Now, Stern Gmbh owned the rights of the Jobek brand for Europe while Barny maintained the rights for the rest of the world. |n exchange, Stern committed to buying all products it sold under the Jobek brand from Barny for the next ten years. In addition, Barny also approached Jobek's account managers at Banco do Brasil, Brazil's largest and partly state-owned bank, and asked them to make an offer for a swap contract over R$1 mu,ion. After sjx Barny still did not receive the contract and grumbled that "here in the northeast of Brazil, they are 20 years back in some areas." Indeed, hedging the exposure to the euro is sometimes a problem in a country where, according to a financial risk consultant, "the US dollar is still a synonym for foreign exchange."
As if the past turbulence was not ye, enough, more dark clouds moved across the horizon and tapped the usually strong sunshine in Brazil's northeast. With the uro in its deepest crisis since its introduction in 2002 many feared that quantitative easing might be used to get rid of the euro zone's mounting debt. Barny recently read one article in Valor Econdmico- "Dilma Roussef [the new Brazilian president] sent a message to Mrs. Merkel [the German chancellor! complain- |ng about 'the monetary tsunami¦ that is threatening o flood Brazil and other emerging economies with cheap money made available by the European Central ank. In fact. Brazil was attracting foreign money as never before and received a record amount of foreign direct investment (FDI) of US$66 billion in 2011. Barny complained, "with the resulting real appreciation our clients are not very happy." He noted: "On November 29. 2011, Stern placed an order based on an ex change rate of R$2.49 per euro. Today, March 2 2012, the euro dropped to R$2.28, that's an appreciation of about 10% in a very short period. The only way we can sell our products is because we have a strong brand name."
The telephone ringing interrupted Barny's thoughts. It was Joao Goncalves, the boss at Reed Isaac, shouting through the handset: "You know, I am very concerned with the high minimum wage increases that Mrs. Dilma Roussef has pushed through congress, not to mention the ever-increasing tax charges. We can hardly survive at such costs and I am sorry but I need to talk to you about a price adjustment." Although disappointed, Barny politely asked Joao if he would like to have lunch together. Then Barny scratched his head on how he would respond to Joao's request over lunch.
Brazilian Real to Euro Exchange Rate
How do you evaluate Jobek's situation from the resource-based and institution-based views Why have resources and institutions hindered Barny to cope with the foreign exchange situation, but simultaneously helped him to turn his company around