International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CASE STUDY 3.1

Will the Euro-Zone Shutter? Plant Location and Exchange Rates for Hyundai

This case study accompanies Chapter 3 of International Corporate Finance.

Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough.

Mario Draghi, President of the European Central Bank

Min-Soo—senior analyst at Hyundai, the South Korean automotive company—was reviewing the country reports prepared by Hyundai's economic research department and putting finishing touches to a strategic review of where the South Korean multinational should locate its power-train factory within the European Union. The factory planned to export to sister affiliates that assembled the Hyundai Sonata. Labor costs (as much as 25 to 30 percent of the total cost of manufacturing a car) played a critical role in the location decision. Should Hyundai favor one of the lower-cost Eastern European countries such as Poland or Hungary, or should it locate within the euro-zone itself where regional governments in France and Spain offered significant incentives in terms of tax holidays and concessionary financing?

The municipality of Tarragona in the Spanish province of Catalonia had vigorously lobbied Hyundai, promising a five-year corporate tax exemption on profits. Concessionary financing was guaranteed at an annual rate of 2 percent for up to 40 percent of capital expenditures for the first three years. With a rate of unemployment exceeding 25 percent, Spain ...