The weak dollar isn’t what it used to be.
Back in the old days,before globalization,the effect of a weak dollar was simple: It boosted sales for U.S. exporters and made imports from other countries more costly.
Today, in the era of global companies and offshore manufacturing, the impact of a weak dollar is more complex.
It still helps Orange County exporters,those that actually make products here and ship them to other countries.
“Their costs haven’t changed and they will be earning more revenue once converted into dollars,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University.
But exporters aren’t the only game in town. Businesses that import, particularly from Europe, are getting squeezed. And accounting for companies with operations abroad has gotten more complex.
The dollar has steadily lost value against major currencies for the past five years amid a growing budget deficit and national debt, and the Bush administration’s lax stance on its value.
The euro has gained more than 70% against the dollar since 2002. It’s even worse compared to Britain’s pound, now worth twice as much.
And Canada’s dollar now trades on par with the greenback for the first time since the 1970s (see chart, page 79).
“It’s a combination of low prospects for economic growth, rising interest rates and inflation that’s really impacting the currency markets,” Adibi said. “Add to that the trade deficit and the budget deficit,if those two do not shrink that would further aggravate the situation.”
Irvine’s Edwards Lifesciences Corp., a maker of heart valves, has benefited as it converts sales in other countries into dollars, said Thomas Abate, chief financial officer.
“Over half of our total sales are international and benefit from a currency movement in this direction,” he said.
Edwards has yearly sales of about $1 billion.
Still, Edwards takes pains to level out big currency swings when it reports results to investors.
“When we report our sales results, we report both our actual and underlying sales growth rate,” Abate said. “The underlying rate excludes the impact of currency movements, which we believe is a better representation of the strength of our business.”
Medical testing gear maker Beckman Coul-ter Inc. of Fullerton also has seen a boost to sales abroad.
“It strengthens our top line because we sell internationally,” said Gary Willenbrecht, vice president of finance. “Some of that falls through to the profit margin.”
But it’s a double-edge sword. Beckman Coulter loses money on products it makes at plants in Ireland and France, Willenbrecht said.
“Since we do some manufacturing in Europe, when we export products for sale in the U.S. that product costs us more,” he said. “It can put a little bit of pressure on the profit margins in the U.S.”
All global companies are in the same boat, Willenbrecht said.
“Currency is just one of the things that you have to take into account when you decide where to produce your product around the world,” he said.
Most companies try to limit their risk by buying currency futures contracts, which lock in an exchange rate over a period of time.
Those hit hardest by the weak dollar: importers of goods from Europe.
“The importers are seeing a hit on their margins, because they are paying more to buy the products they sell here,” Chapman’s Adibi said.
They have little choice but to raise prices to offset the squeeze, he said. But such a move can backfire with lost sales and market share.
“If they raise prices, then they can keep their margins. But they have to worry about competition,” Adibi said. “Overall, this is not a good situation.”
Newport Beach Mercedes-Benz dealer Fletcher Jones Motorcars is getting some help from Germany’s Daimler AG.
“Mercedes-Benz hasn’t raised its prices to us,” said Garth Blumenthal, general manager. “They’ve been absorbing it. The exchange rate (of the dollar) is very weak against the euro and we haven’t yet paid more for our cars.”
That could be because Mercedes faces a challenge from Toyota Motor Corp.’s Lexus. Toyota doesn’t have the same problem,the dollar hasn’t fallen anywhere near as dramatically against the yen as it has against the euro.
Mercedes eats the costs here and likely makes up for it in other markets, according to Blumenthal.
“What that means for the OC consumer is that the Mercedes sold here are under-priced compared to everywhere else in the world,” he said.
Eventually, Mercedes will have to raise prices,possibly in January, Blumenthal said.
“I cannot see this continuing for very long. At some point, someone is going to make an adjustment and the prices will go up,” he said.
Adibi’s outlook for the dollar’s rebound is grim.
“I would say in the long run, the dollar will still be under pressure,” he said.
