Netflix’s New Product in China - the Personal Movie Viewer Device

The Impact of the Foreign Exchange Market & the Impact of the Global Monetary system

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 Netflix’s new product in China - The Personal Movie Viewer Device

Company: Netflix

Home Country: United States

Netflix decides to introduce a new product (Personal Movie Viewer Device) in China. This product comes with hardware configured to stream Chinese movies to comply with the 34% quota for international films. We examine how exchange rate and global monetary system will have impact on Netflix’s Personal Movie Viewer Device sales in China

IMPACT OF THE EXCHANGE RATE

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Looking at the exchange rate of Chinese Yuan to USD over the last one year July 2017 to June 2018, we can see that the all-time low is 6.27 in February and April 2018, and the all-time high was 6.80 as far back as July 2017

Another thing that can be noticed is that since April 2018 the China currency has been losing value to the US (Kroeber, Arthur. 2011).

We believe this is due to China's strategy to front a weaker Yuan to countermeasure the United States trade war. The United States has been fronting trade wars with China since the beginning of Trump government - one of the reasons why the currency is fluctuating (Calvo, G., & Reinhart, C., 2002).

On Monday, April 9, 2018, the Yuan weakened as much as 0.2% to 6.3186 per dollar in offshore trading and it has been further decreased since then.

China sees the government of Trump as a threat. They are ready to protect their economy using “exchange rate game”. At home in the US, many feel that Trump's tariff wars are unnecessary. Some of his anecdotes are already turning against him, and there are growing signs of trouble at the moment.

It is challenging to predict what is going to happen to the value of the Yuan. It may increase or decrease. (Bergen, J. V.,Bez Datuma, 2015)

It may not seem like this an excellent time to introduce a new product into the China market because of the uncertainties.

As of February 7th, 2018, us dollar was worth 6.26 and it was the central bank of China that kept it added value

China's currency power come from export to America such as fashion, mobile phones etc. Trump is fighting them with the tariff, and in a bid for China to protect itself, they will have to use the exchange rate

To manufacture a product in China, Netflix like majority of the American companies outsource to a China manufacturer. Let's say; they decide to pay the Chinese manufacturer 500000 Yuan. In June 2018 when USD/CNY exchange rate is 6.4.  Netflix invoice will be 78125 USD. If in July 2018, the exchange rate moved to 6.5. It means Netflix will need more USD to pay the Chinese manufacturer more money. 

Also when selling the devices, the exchange rate will have a direct impact on the bottom line.  How they issue invoices also matters, issuing invoices in US dollar will have less impact, though it can be a difficult to manage.

To do business in China, Netflix will have to issue invoices in Yuan. The Chinese are generally known to always come up with local substitutes of an idea. With exchange rate fluctuations, Netflix might lose so much market share.

Netflix can hedge this problem using hedging with Currency Swaps and forward contracts (Robert w. Kolb. 2014).