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Currency Valuations Become Hot Topic for Vision Companies
by Winn Hardin, Contributing Editor - AIA Posted 01/17/2008
For the first time in 40 years, U.S. manufacturing is seeing broad-based interest from both domestic and non-domestic companies to build manufacturing capabilities closer to the U.S. market to reduce the negative impact of dollar fluctuations and cut distribution and other costs. European manufacturers, and to a lesser extent, some Asian markets, are running out of ways to cover drops in the U.S. dollar through acceptance of lower margins.
Major European brands, like the U.K’s Craftsman tools, are looking to expand production or buy new plants in the U.S. European companies with deep pockets are locking exchange rates now by buying currency futures that guarantee a certain exchange rate, while other companies, such as Airbus, are using the dollar’s decline as justification for selling off non-core manufacturing interests and moving other manufacturing activities to lower cost markets.
Smaller technology companies, however, may feel more trapped by the dollar’s decline. At the recent VISION 2007 show in Stuttgart, Germany, the simmering concerns of Europeans with cross-Atlantic exchange rates were hot topics from the show floor to the press briefing room.
‘‘All the cameras made in Germany right now are at a competitive disadvantage to cameras made in the U.S.,’‘ says Patrick Schwarzkopf of the VDMA (Verband Deutscher Maschinen- und Anlagenbau - German Engineering Federation) and General Secretary of the EMVA (European Machine Vision Association). ‘‘We want to sell in the U.S., but higher exchange rates mean higher prices. If BMW is losing money on a car, they can build a plant in the U.S., but machine vision companies are smaller. A big camera manufacturer may have 200 to 400 employees. They just can’t pick up and make a new manufacturing plant in the U.S. They’re too small.’‘
Changing Global Marketplace
The current global economic era, driven by deficit spending in the U.S., has been described as the ‘‘Great De-leveraging’‘ and a ‘‘rebalancing of the global economy.’‘ In other words, the U.S. is no longer the sole market of last resort.
In 2007, the U.S. share of imports from the euro zone fell 3.4% to 12.7%, while Eastern Europe’s euro zone imports rose 5%, and Asia’s imports increased from 14.3% to 17.5%, according to the Wall Street Journal. During the same time, the euro increased in value against the dollar by 11.5% in 2007, while the British pound rose 4.4%. In a reversal of the last few decades, the International Monetary Fund (IMF) estimates that the U.S. economy will grow by 2% in 2008, or half a percentage point lower than the combined countries that make up the ‘‘euro’‘ zone. Contrast that to comparative economic performance between 1999 and 2006, when the U.S. economy grew at an average of 2.9% per year, while Germany and Japan each limped along at 1.4% growth rates.
The shift in global economic conditions isn’t limited to the U.S. and Europe. Japan’s Yen has also started to appreciate in relation to the dollar in recent months, while more European exports are going to developing countries, such as Brazil, India, and South Africa, up from 28.4% in 1991 to 40.1% in 2007.
Hedging Your Bets
‘‘The exports of small to medium companies to the U.S. have been hammered particularly hard’‘, according to Paul Kellett, AIA Director of Market Analysis. What can these companies do to avoid the 'weak dollar death'?
‘‘The starting point in devising strategies to lessen the impacts of currency devaluations’‘, states Kellett, ‘‘is to reexamine the dynamics of competitive advantage. If export costs stemming from currency exchange go up, other costs must come down. Production costs, for example, might be reduced by re-engineering internal manufacturing processes or by outsourcing machine vision sub-components from lower cost areas. It might also be possible to reduce distribution costs by re-designing direct sales operations, finding efficiencies in channel operations and/or lowering logistics costs. Alternatively, it might be possible to increase competitive advantages by targeting other geographic markets where the local currency does not benefit domestic companies. This, of course, must be weighed against a host of factors, such as the relative size of the addressable markets.’‘
Large European companies, such as aircraft manufacturer Airbus, are reportedly using the dropping dollar as a justification for selling off some component manufacturing to third parties while moving other operations to Eastern Europe and Asia. Some machine vision companies may use a similar strategy, according to Dr. Dietmar Ley, CEO of Basler Vision Technologies (Ahrensburg, Germany). ‘‘The typical reaction of European makers will be to increase the natural hedge through by outsourcing production to partners in the US…or by increasing the international sourcing,’‘ anticipates Dr. Ley.
Other large European companies with deep pockets can limit exchange rate loses by buying currency futures to lock in rates.
In the U.S., small to medium vision vendors are benefiting from a return of manufacturing, thanks to their dedication to domestic markets, but companies with international reach are having to face the currency valuation problem from a different angle.
According to Carmen Conicelli, CFO of Edmund Optics (Barrington, NJ), smart U.S. companies have to position themselves carefully to balance increased revenue from sales with increased costs for manufacturing equipment and raw materials from overseas. ‘‘At Edmund Optics, we carefully manage and watch our FX position to maintain a natural hedge so that the impact of purchases and revenue cancel out, while providing some price insulation.’‘
‘‘Germany, for instance, makes high quality optical manufacturing equipment, and they want to be paid in euros, which we will pay from the our product sales in Europe,’‘ continues Conicelli. ‘‘The declining dollar in Europe has been the front page news in 2007 and the same is starting to happen with the Yen in Japan, although their central bank has done a better job at managing the Yen. A year ago, people were saying the dollar would be worth a 100 Yen by now, and today’s it’s about 115.’‘
Conicelli concedes that a dropping dollar has less of an impact on a piece of equipment that is amortized over a 10 year period, for instance, rather than a product that will go directly into use, but adds that its unlikely that the dollar-to-euro exchange rate will get significantly worse.
‘‘Everything self-corrects over time,’‘ Conicelli says. ‘‘It won’t be four dollars to the pound anytime soon. Also, any time there’s a security situation around the world, the dollar strengthens. The talk about OPEC moving away from the dollar is unlikely in the near term, while China slightly loosening up controls on the Yuan are more likely. China holds some 1.5 trillion in dollars, and they’re not likely to let that investment disappear overnight by allowing the dollar to Yuan to freefall.’‘
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