As a result the value of per-gallon price which was decided at that time was founded later to be much lower than anticipated. Moreover Novo was not ready to change the price. So, when the price in BRL was converted into US$ Baker found that there is significant lowering in profitability. Furthermore when Baker decided to borrow an amount in BRL from a Brazilian bank it discovered that the interest rate was 26% which was much higher than the rate (8.26%) in US.
Most of the US companies started to shift their unit outside US with the purpose of focusing more on economies of scale and increase the market share. As a result most of the adhesive giants decided to focus on international sourcing and manufacturing capabilities. But unlike these companies Baker was not that involved in international sales and quite obviously company was about to see some significant decline in its sales. The problem of exchange rate was created because of its changing nature. As the exchange rate of US$ and BRL keep changing value of the price of any product would also keep changing. So the value of price per-gallon of Baker adhesives also changed when it was converted into dollar. Again the problem regarding the interest rate charged by the Brazilian bank was much higher than the rate by any US bank. This was because the inflation rate in Brazil was much higher. Higher interest rate was actually set by the government of Brazil in order to control the high inflation rate.
In the adhesives market competition is intense and profit margin is slim. As a result most of the company has focused on the international sourcing and manufacturing capabilities. Baker adhesives also need to focus on the international market in order to stay ahead in the competition. Focusing on international business would enable the company to focus on scale economies. Furthermore flexible production system and good chemist are crucial in the adhesives business. So ...
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