4. South American currency crisis

[2] Outbreak of the South American currency crisis

DENSO needed to be careful about making investments into heat exchangers, however. Along with requiring large M&E investments for welding furnaces and other equipment, DENSO could not ignore the risks regarding Brazil’s unstable economy. Consequently, DNBR made these investments using direct loans that had to be repaid to DENSO Headquarters in the future, even though financing was provided by DENSO Headquarters itself. Nevertheless, Brazil was unable to withstand the fall in its foreign exchange reserves in the wake of the Asian currency crisis and other factors, and one morning in January 1999, the exchange rate against the dollar plunged by half in one fell swoop. It was the South American currency crisis.
As direct loans from DENSO Headquarters and all imports of knockdown parts, which make up the bulk of accounts payable, were denominated in dollars, DNBR’s outstanding debt doubled in one day. Although DNBR did have the option of entering into exchange contracts in advance, this method was not used, because any risk hedge based on the vulnerable real itself was little more than gambling.
In July 1999, the cash-strapped DNBR submitted a restructuring plan to DENSO Headquarters. Despite asking for financing as soon as possible, DNBR had yet to provide an ingenious proposal suited to its request. After DENSO Headquarters rejected DNBR’s proposal because of the lack of a roadmap for a restructuring plan, DNBR immediately set about revising its restructuring plan, devising cost reduction measures, and reviewing sales prices. DNBR’s plan was ultimately approved the second time around.
In the end, the decision was more about whether to shut down or save the company than an examination of the pros and cons of the measures themselves. After all, Toyota Motor, which had begun producing the Toyota Corolla, also suffered heavy losses due to the collapse of the real. Should DENSO alone just withdraw? Wasn’t being a supplier that could deliver parts globally one of DENSO’s major strengths?
This was not simply a question of just one South American group company. If DENSO felt this way and decided to keep DNBR alive, what would have happened if Toyota Motor did not produce the Corolla?
In either case, DENSO executed a capital increase in November 1999, converted the direct loans to capital in May 2001, and carried out another capital increase in December 2001. Although DNBR had little choice but to lay off hundreds of associates, it managed to weather the financial crisis by steadily implementing its restructuring plan.