The value of the United States dollar continues to weaken, and fell to even lower levels over the last few weeks. I travel frequently between the U.S. and Asia, and the exchange rates concern me as the dollar continues to fall.
Six months ago, the value of the U.S. dollar was in the 116 to 119 yen range. Last week, it fell below 99 yen representing nearly 20 percent depreciation when converting a yen to the dollar. The weak dollar impacts any Japanese company exporting products to the United States.
If these Japanese companies negotiated contracts in U.S. dollars six months ago, the price they receive now is only 80 percent of value because of the 20 percent decline in the dollar.
This is a serious problem for exporting manufacturers because budgets are now 20 percent lower than expected. It is difficult to squeeze another 20 percent from manufacturing costs.
Previously, importing companies could reduce the cost of their materials which include metals and oils; however, inflation has now increased these costs.
Even if such companies are successful in reducing materials cost, it will still be difficult to off-set any loss in materials cost of goods sold because of the currency issue.
At the moment, American companies feel no pain. However, they will pay more for the same imported products upon renewing future contracts.
Readers are probably asking: “Can American exporters increase sales because of the weak dollar?” Sure this makes sense. Overseas markets can purchase more in the U.S. because their currency is worth more. However, and unfortunately, American manufacturers no longer offer many goods for export since the implementation of the North American Free Trade Agreement (NAFTA).
Meanwhile, most manufacturing in the U.S. has been transferred to other countries. This will result in a reduction in business within the United States.
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During the mid 90’s, I was involved in the exporting business in Japan. Exchange rates hit record lows, and one U.S. dollar was worth just under 80 yen in 1994.
My company experienced a difficult time maintaining profit margins derived from exported products because of currency fluctuations. We desperately tried to reduce costs, plus we asked customers to pay higher prices for the same products.
No one likes price increases. Fortunately, our products were of the highest quality when compared to other manufacturers, and we survived.
Most of the Japanese electronics companies were successful in during the 90s because of the quality and high level of technology within their products.
From the perspective of the manufacturer(s), I am not comfortable with media reports and financial commentators who view the fluctuations in currencies and the exchange rates as some sort of sport or game. Day after day, media /commentators read the ups and downs in the currency markets as if they are presenting the scores of baseball games.
The troubles in the U.S. market may have stemmed from the “sub prime crisis” in the mortgage industry. However, speculators have taken this game global, and the finance trouble in the U.S. has deepened into a worldwide financial issue.
Financial experts who trade commodities; stocks, bonds, and world currencies call this professionally-managing investments, but I view this as a giant casino for the pleasure of such finance companies which trade billions of dollars each day.
With each winner, there is a loser.
The house (institutional investors) always wins, making commissions on each exchange. Currently, the amount of money being traded is in the magnitude of twice the actual trading value of the goods.
Nowadays, currency trading is a priority that must be addressed where business ventures involve imports and exports between countries.
Extreme fluctuations in exchange rates will have no positive effect on actual businesses in the long term, and could have disastrous effects for manufacturing companies.
Unfortunately, these are speed bumps in the capitalistic economies that cannot be avoided. Management teams must step up and overcome the exchange rate issues. Clever, decisive, and innovative ideas can create new ways of doing business.
VentureOutsource.com, March 2008
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