1/6/19 FINS3070 International Financial Management Week 1 Introduction Bohui Zhang Education: NTU, Singapore, Ph.D. Finance, 2008 HKUST, M.Sc. Economics, 2004 Tsinghua, B.Eng. Engineering Mechanics, 2003 Academic experience: CUHK-Shenzhen, Presidential chair professor (2017-now) UNSW Sydney, Professor of Finance (2008-2018) Fudan University, Honoured Professor (2016-2019) Tsinghua University, Visiting Professor (2014-2015) Uni. of Wisconsin, Milwaukee, Visiting Professor (2011-2012) Research interests: Role of information intermediaries on capital markets, Chinese and foreign capital markets, Fintech Website: http://sme.cuhk.edu.cn/en/content/4321 Phone: 2351 8868 Office: Teaching A Building 605, CUHK-Shenzhen Email: bohuizhang@cuhk.edu.cn Teaching: weeks 1-7 1 1/6/19 Recent news 1. 2. Recent news 3. China–United States trade war The US claims, with characteristic communist party directed planned economy, Chinese state-owned enterprises and crony capitalism princelings gain the most benefits in most activities including the Belt and Road Initiative and Made in China 2025. 2 1/6/19 The objective of this course • This course is concerned corporations (MNCs) with multinational • It takes the perspective of a financial manager in a multinational corporation • It develops framework for evaluating the opportunities, costs, and risks of operating in the world’s markets for goods, services, and financial assets Top ten MNCs in Fortune Global 500 (2018) Rank Brand Name 1 Walmart, general merchandiser, the U.S. 2 State Grid, utilities, China 3 Sinopec Group, petroleum refining, China 4 China National Petroleum, petroleum refining, China 5 Royal Dutch Shell, petroleum refining, Netherlands 6 Toyota Motor, motor vehicles, Japan 7 Volkswagen, motor vehicles, Germany 8 BP, petroleum refining, U.K 9 Exxon Mobil, petroleum refining, the U.S. 10 Berkshire Hathaway, the U.S. 3 1/6/19 Top 10 Chinese firms in Fortune Global 500 (2018) Rank Name Industry Revenue 2 State Grid Energy $348.9bn 3 Sinopec Group Petroleum $327.0bn 4 China National Petroleum Petroleum $326.0bn 23 China State Construction Construction $156.1bn 26 ICBC Financial $153.0bn 29 Ping An Insurance Financial $144.2bn 31 CBC Financial $138.6bn 36 SAIC Motor Automobile $128.8bn 40 ABC Financial $122.4bn 42 China Life Insurance Financial $120.2bn Three phases of business Three broad phases in the evolution of a firm • Domestic phase: operations are confined within the boundaries of one country • International trade phase: the firm imports materials or export its product or both Trade • Multinational phase: the firm establishes operations overseas 4 1/6/19 • Huawei Technologies Co. Ltd. is a Chinese multinational information and communications technology (ICT) solutions provider headquartered in Shenzhen, Guangdong. • Huawei was founded in 1987 by Zhengfei Ren, a former engineer in the People's Liberation Army. • By the end of 2017, Huawei has over 180,000 employees around 80,000 of whom are engaged in research and development (R&D) #72 in Fortune Global 500 (2018) Growth path of Huawei At the beginning of its establishment, Huawei focused on manufacturing phone switches: Huawei has since expanded its business to include: building telecommunications networks; providing operational and consulting services and equipment to enterprises inside and outside of China; and manufacturing communications devices for the consumer market 5 1/6/19 International business of Huawei Its ICT solutions, products, and services are used in more than 170 countries and regions, serving over one-third of the world's population. “Huawei is the only Chinese company – out of the 91 mainland Chinese companies listed on the Fortune Global 500 list – earning more revenue abroad than in China.” --Cremer and Tao, Harvard Business Review, 2015 The revenue of Huawei Million RMB 6 1/6/19 The definition of MNCs A multinational corporation consists of a parent company in the firm’s originating country and the operating subsidiaries, branches, and affiliates it controls both at home and abroad. • Subsidiary: the parent owns 50% (or more) of the entity and controls the entity • Affiliate: the parent owns less than 50% of the entity or does not control the entity • Branch: a part of the parent and is opened to perform the same business operations as performed by the parent company Huawei’s subsidiaries 7 1/6/19 Theoretical support for multinational operations Theory of comparative advantage: a country should produce and export goods if it can produce with relative efficiency and import goods from other nations which can produce more efficiently. David Ricardo (1772–1823) a British political economist Ricardo was in favour of industry specialisation and free trade, and suggested that industry specialization combined with free international trade always produces positive results. Richardo’s famous example 1 A world economy consists of two countries, Portugal and England, which produce two goods of identical quality. In Portugal, it is possible to produce wine (cloth) with less (more) labor than it would take to produce the same quantities in England. Each country spends 3,600 labor hours to produce a mixture of wine and cloth. What would be the optimal solution for the two countries? Example 1: Hours of work necessary to produce one unit Produce Cloth Wine England 60 120 Portugal 90 80 Country 8 1/6/19 Richardo’s famous example 2 A world economy consists of two countries, Portugal and England, which produce two goods of identical quality. In Portugal, it is possible to produce wine and cloth with less labor than it would take to produce the same quantities in England. Each country spends 3,600 labor hours to produce a mixture of wine and cloth. What would be the optimal solution for the two countries? Example 2: Hours of work necessary to produce one unit Produce Cloth Wine England 100 120 Portugal 90 80 Country https://www.visualcapitalist.com/giant-map-top-export-every-country/ 2018 For example: • Australia/Canada: mining and agricultural industries • India: outsourcing services • Japan/Germany: manufacturing • Saudi Arabia/Brunei: oil-based industries 9 1/6/19 The textiles and clothing industries supply chain The textiles and clothing industries supply chain 2014 10 1/6/19 How do MNCs enter foreign markets? Five methods • Licensing: gives local firms right to manufacture their products in exchange for fees Brand A local supermarket in India Profits (10%) • Franchising: provides specialized sales or service strategies in exchange for fees Brand+rules Profits (20%) A local supermarket in India • Joint venture: jointly invest and operate a business with a foreign company Investment Ownership (40%) A new supermarket in India • Greenfield investment: starts a company from scratch Investment Ownership (100%) A new supermarket in India How do MNCs enter foreign markets? • M&As (Brownfield investment): acquire or merge with foreign companies Investment Ownership (60%) An existing supermarket in India 11 1/6/19 Structure of a multinational corporation Board of directors Managers Shareholders Assets Debt Equity The goal of a multinational corporation • Goal of a MNC • Maximize shareholder wealth (US, UK, Aus., Can.) • Maximize stakeholder wealth (Europe and Asia) • Conflict of interest between shareholders managers • Independent board of directors • Concentrated ownership • Executive compensation • Shareholder activism and litigation • Hostile takeovers and 12 Risk Factors All risk factors listed in this Annual Report, particularly system. Major risk factors refer to events that could those covered in this section, refer to key future significantly impact the company’s competitiveness, uncertainties that could influence the company’s reputation, financial position, operating results, and business objectives. These are risk factors that have long-term prospects over the coming 18 months. The been identified to exist in Huawei’s strategic plans, major risk factors faced by Huawei are outlined below. business models, external environment, and financial Huawei’s Risk Management System Based on the COSO framework, and with reference ■ Business managers: As primary risk management to ISO 31000 risk management standards, Huawei owners in their respective business domains, has developed an Enterprise Risk Management business managers proactively identify and (ERM) system for its organizational structure manage risks to keep them at an acceptable level. and operating model, released ERM policies and processes, continuously refined its ERM organizations At Huawei, risk management factors are incorporated and operating mechanisms, and promoted risk into strategic planning and business planning management assessments. Huawei’s ERM system processes: Each business domain and region plays the following major roles: systematically identifies and assesses risks during strategic planning, lists out countermeasures in ■ Finance Committee (FC): With the authorization annual business plans, and monitors and reports of the Board of Directors (BOD), the FC acts as the on high-agenda risks during routine operations. decision-maker for risk management, coordinates Huawei ensures uninterrupted business operations company-wide risk management activities, and by identifying major risk factors in strategic decision- makes decisions on major corporate-level risks. making and planning, coupled with measures to control risks in business planning and execution. ■ Risk Management Committee under the FC: With the authorization of the FC, this committee fulfills risk management responsibilities and manages the company’s routine risks. Strategic Risks From a technology perspective, we will have entered an is uncertain, remain focused on our goals, and make intelligent world within two or three decades. The world concentrated investments along multiple paths in around us will undergo a seismic shift, the depth and multiple waves. At the same time, we will strive to stay breadth of which we can hardly imagine. But one thing ahead of industry trends, and identify, understand, and is very clear: The transformation of the ICT industry will satisfy the diverse requirements of our customers. To introduce greater uncertainty to technology, business, maintain and increase our competitive strengths and and transaction models. continuously improve our operating performance, we Looking to the future, we will remain dedicated to ICT infrastructure and intelligent devices, and to building a technical architecture that achieves synergy between devices, networks, and the cloud in the intelligent world. We will invest more heavily in research into technology and business models where development 104 Huawei Investment & Holding Co., Ltd. will continue to launch better products and services while reducing the total cost of ownership for our customers. Going forward, we will continue to invest in the future, developing advantages in technologies and the industry ecosystem and striving to become a strategic partner trusted by our customers. External Risks Macro environment: Black swan events occur Natural disasters: Earthquakes, floods, epidemics, and frequently around the globe, and many countries other natural disasters could impact certain portions around the world face deep-seated economic strife. of Huawei’s business operations. Supporting stable Financial and geopolitical risks are on the rise. network operations is our mission and primary social Therefore, Huawei also has an increased likelihood of responsibility. We have a robust set of mechanisms to facing additional risks, both internally and externally. respond to natural disasters and continue to improve We will continue to focus on the impact that ever- our capabilities in this regard. This has helped us evolving risks have on our business and promptly ensure business continuity, and has also helped adjust our strategies accordingly. effectively support network stability and business operations of our customers. Legal risks: Adherence to business ethics, respect for international conventions, and observance of local Country-specific risks: Huawei currently operates laws and regulations are the foundations of Huawei’s in more than 170 countries and regions worldwide. global operations. They are also a core set of principles The complex international economic and political followed by Huawei’s management team. The legal landscape could expose Huawei to particular risks in environment in some regions where Huawei operates certain countries and regions. These risks include civil is complex. We strive to fully comply with all local laws unrest, economic and political instability, exchange and regulations; but negative impacts might still occur. rate fluctuations, foreign exchange controls, sovereign Huawei will continue as always to proactively assess debt crises, regulations on local business operations, risks and take preventative measures to address them. and labor issues. In particular, tensions between The certainty of legal compliance is our best bulwark regions, civil wars, sanctions, or local unrest could against the uncertainties of international politics. greatly hinder Huawei’s business operations and development. To address these risks, Huawei must Trade risks: The global trade environment and possess exceptional risk management and response international economic and trade relations are capabilities. We must closely monitor possible risks becoming increasingly complex and challenging. and changes in the environment, and employ prompt Protectionism has been a growing trend in world countermeasures to minimize any potential business trade in recent years. As a global company, Huawei impacts. supports global trade rules and pledges to place trade compliance above its own commercial interests. 2017 Annual Report 105 Operational Risks Business continuity: With today’s highly globalized have multiple manufacturing sites. In terms of product division of labor, Huawei must rely on third parties design, we prepare alternative solutions for key (including companies and agencies) for manufacturing, components, in order to minimize impact on product logistics, and services. Therefore, third party business supply and delivery if a supplier suspends delivery or discontinuity could directly or indirectly compromise provides substandard products. We will continue to Huawei’s operations and business performance. regularly assess and review our suppliers, assess and identify material supply risks as early as possible, and To ensure business continuity, Huawei has established take preventative measures to minimize supply risks a business continuity management system in and ensure supply continuity. Preventative measures procurement, manufacturing, supply, global technical include component substitutions, solution redesigns, services, and other domains. This system covers maintaining reserve inventory, and expanding end-to-end processes from suppliers to Huawei and production capacity. on to our customers. As part of this system, we have developed and established effective measures to Information security and IPR: While Huawei has ensure business continuity, including management adopted stringent information security measures organizations, emergency response and business to protect its IPR, it is impossible to completely continuity plans, training, drills, employee awareness prevent other companies from improperly using our efforts, and improvements to emergency response information, patents, and licenses. Even when we are capabilities. able to resort to litigation to protect our IPR, we may still suffer losses from improper usage. We also strive to avoid procuring from a single supplier and aim to select suppliers of key components that Financial Risks For further information on financial risks, see “Financial Risk Management” on pages 60 to 61 of this Annual Report. 106 Huawei Investment & Holding Co., Ltd. 1/6/19 Potential risks faced by MNCs • Political risk • The risk that a host government will change the “rules of the game” under which business is conducted. • Due to unexpected political changes within a host country or to the host’s relationship with other governments. • Financial risk • Foreign exchange risk: the risk of an unexpected change in the value of the firm due to an unexpected change in exchange rates • Financial crises • Cultural risk is the risk of dealing with an unfamiliar culture Examples of risks • Political risk U.S.-China Trade War • Financial risk Jan. 2014 1US$=6.05 RMB Jan. 2016 1US$=6.58 RMB Jan. 2019 1US$=6.87 RMB • Culture risk 13 1/6/19 International partners of MNCs • International Banks e.g. BOC, ICBC, CCB, BGI, Citibank, ANZ, and Commonwealth • International Institutions --The International Monetary Fund (IMF) --The World Bank --Regional development banks e.g. The Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB) --The World Trade Organization (WTO) --The Organization for Economic Cooperation and Development (OECD) --The Bank for International Settlements (BIS) --The European Union (EU) • Governments • Individual and Institutional Investors e.g. hedge funds, private equity firms, and sovereign wealth funds Globalization • Definition: increasing connectivity and integration of countries and corporations and the people within them in terms of their economic, political, and social activities • Implication: • Integration of the markets for goods and services • Integration of international financial markets 14 1/6/19 Textbook and Reference Ø Textbook: • Bekaert, Geert, and Robert Hodrick, 2017, International Financial Management, 3rd or 2nd ed., Pearson Ø Reference: • Butler, Kirt, 2016, Multinational Finance: Evaluating Opportunities, Costs, and Risks of Operations, 6th ed., Wiley Coverage Week Topic Readings Prof. Bohui Zhang 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Introduction Exchange Rate Systems The Foreign Exchange Market Transaction Exchange Risk and Forward Contracts Transaction Exchange Risk and International Trade Risk International Debt Financing and Interest Rate Parity Mid-session exam Prof. Dan Li International Equity Financing International Capital Market Equilibrium Country and Political Risk International Capital Budgeting Additional Topics in International Capital Budgeting Foreign Currency Futures and Options Review Ch. 1 Ch. 5 Ch. 2 Ch. 3 & 17 Ch. 6 & 18 Ch. 6 & 11 Ch. 12 Ch. 13 Ch. 14 Ch. 15 Ch. 16 Ch. 20 15 1/6/19 Assessment • Group Discussion and Participation (at most 4 in a group) 10% - Attendance 5% - Participation 5% • Two assignments 10% • Mid session - Week 7 - Coverage: Week 1 to 6 30% • Group project 20% • Final examination - Formal exam period - Coverage: Week 8-14 30% • Total 100% Mid-session Exam ØIt includes 50 multiple choice questions ØThree essay questions ØClosed ØOne book and a half hours 16 1/6/19 Study Tools • Stock exchanges: SHSE (http://www.sse.com.cn/) NYSE (https://www.nyse.com/index) • Central banks: PBC (http://www.pbc.gov.cn/) FRB(http://www.federalreserve.gov/) • World map Google (http://maps.google.com/) • Economic and financial news: Bloomberg.com (http://www.bloomberg.com/news/) Economist.com (http://www.economist.com/) • Research data: WRDS (http://wrds-web.wharton.upenn.edu/wrds/) Fama-French factors (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french /data_library.html) NBSPRC (http://www.stats.gov.cn/) World Bank (http://data.worldbank.org/ ) • Journals: Economics: QJE, AER, JPE, RES, and Econometrica Finance: JF, JFE, RFS Accounting: JAR, JAE, and TAR 17
