RDT's CEO contributes to WSJ article on Global Economy
Global Economy: European Firms Tackle Dollar Problem
By Alistair MacDonald
11 December 2007
(Copyright (c) 2007, Dow Jones & Company, Inc.)
On a business trip to the U.S. two years ago, British entrepreneur Graham Murphy stopped at a mall to pick up some T-shirts and jeans. While marveling at how inexpensive the weak dollar made everything compared with prices at home, he had an unsettling epiphany.
"It suddenly hit me," says Mr. Murphy, who heads Remote Diagnostic Technologies Ltd., a small maker of medical equipment. "This is not good, because 60% of my company's sales are in dollars."
Mr. Murphy's company is among the growing ranks of European businesses struggling to stay competitive in global markets as the euro and pound hit new highs against the dollar. He is doing everything he can to soften the blow. He is seeking to increase his company's revenue outside the U.S. He is also shifting more of his costs into dollars by raising his purchases from American suppliers and relocating sales jobs to the U.S.
Other businesses are considering the U.S. over Asia or their home markets to manufacture, or have gotten more sophisticated at hedging their risks in currency markets.
The shifts could have wider ramifications for both the U.S. and European economies. In the U.S., new jobs created by European companies and a rise in orders for U.S.-made parts and other supplies could help cushion the nation's economic slowdown.
European companies' efforts to counter the impact of strong currencies have pushed them into new markets and made them leaner and more productive -- which could help them weather tougher times ahead.
Finding ways to counter the effects of a strong currency "is going to become increasingly important, as you get dollar levels that are more extreme, and European companies start to see the effects in their profits," says Nick Nelson, European equity strategist at UBS AG in London.
The euro is hovering around its record high against the dollar, up 11.5% this year to trade at $1.4717 as of late yesterday in New York. The British pound bought $2.0474, up 4.4%.
Robert Johnson, chief executive of Craftsman Tools Ltd., a machine-tool equipment maker based outside Leeds, England, is scouring the U.S. Midwest to buy a new factory.
French based Airbus and its parent European Aeronautic Defence & Space Co., meanwhile, are considering relocating some production to dollar-based economies, including the U.S. El Salvador and Ecuador also use the dollar, while countries such as Saudi Arabia and China peg their currrencies to it either formally or informally.
Last year , German tire maker and auto-parts supplier Continental AG expanded its Mount Vernon,Ill., tire factory, spurred by the weakening dollar.
When Mr. Murphy of Remote Diagnostic Technologies returned from his 2005 trip to the U.S., he quickly called a staff meeting. "I said, the weak dollar is going to be with us for the foreseeable future and we need to look at how we can protect ourselves," he recalls.
One option he pursued was redistributing costs. At the start of 2005, about 25% of the cost of making the company's core product, a portable medical diagnostic device called the Tempus 2000, was in dollars. Now, it is down to about 45%.
European exporters also are looking east, hoping to diversify revenues away from the dollar and tap booming emerging markets. The U.S. share of exports from the euro zone fell to 12.7% this June from 16.1% in January 1999. In the same span, Eastern Europe's share rose to 15% from 10%. A further 7% of exports also now go to Turkey and Russia. Exports to Asia, excluding Japan, have risen to 17.5% from 14.3%.
To be sure, efforts by European companies haven't allowed them to survive currency fluctuations unscathed. The effect of the strong euro was evident in their third-quarter earnings, which delivered the fewest positive surprises since 2005. Currency-sensitive sectors such as information technology, capital goods and pharmaceuticals had worse numbers than their U.S. peers.
Swift currency movements are particularly hard for businesses to handle, says Neville Hill, an economist at Credit Suisse.
The pound's recent surge has been painful for Craftsman, which generates 30% of its sales in the U.S. In its budget, Craftsman planned to convert its dollar revenues into British pounds at a rate of $1.98 per pound. It even partially locked in that rate using forward contracts -- pacts to buy and sell currencies at a set rate in the future.
Even so, the pound's rise has cost the company some $20,000 in the first six months of this year, and that cost is expected to near $60,000 for the year, says Mr. Johnson, the CEO.
A strong global economy has helped ease the pain, boosting demand for European products and making consumers less price-sensitive. Manufacturers in the United Kingdom and euro zone notched up an increase in orders in November, despite expectations of a decline. Craftsman Tools has raised its dollar prices by 5% twice in two years, but demand for its tools from the booming oil industry has kept the orders coming.
In the longer term, though, European companies could benefit most from efforts to lower costs and squeeze more output from each hour worked -- another way to combat the effects of a strong currency.
History suggests a strong currency can be good for productivity: Most experts say the overvalued dollar of the early 1980s set the stage for the economic vitality of the U.S. in the 1990s, as many manufacturing industries were forced to adopt new productivity-boosting technologies to survive.
At Inflight Peripherals, an Isle of Wight manufacturer of components for inflight entertainment systems, productivity has become a priority. After hiring a temporary consultant earlier this year, the company has managed to cut packing and shipping times by 25%, and halved the time it takes to test some products and rework others. In June, soon after the pound hit a 26-year high against the dollar, the company put the consultant on a permanent contract
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Joellen Perry in Frankfurt and Timothy Aeppel in Pittsburgh contributed to this articleENDS
