rss icon

Sunday, 01 March 2015 22:00

Strong U.S. dollar hurts export sales for West Michigan manufacturers

Written by 
Rate this item
(2 votes)

The strength of the U.S. dollar in the global currency market has proven to be a double-edged sword for many West Michigan manufacturers that do business internationally.

On one hand, depreciating international currencies like the yen and euro have made it cheaper for businesses to purchase raw materials and other products abroad. But the rising dollar has resulted in declining revenue for local companies that export their products.

Most often, the strong dollar impacts U.S. companies when sales done in international markets and foreign currencies are converted back to the dollar. Regardless of sales performance, revenues will automatically slide as the value of the dollar increases versus other currencies, sources said. That forces U.S. companies to raise prices to make the same margins on their products based on the value of the currency alone.

RoMan Manufacturing Inc., based in the Grand Rapids suburb of Wyoming, has felt the impact of the dollar both in its international and domestic markets. The manufacturer of electrical transformers for resistance welding applications and large-scale custom automated welding equipment for heavy fabrication sells its products in dollars and has seen its European customers push back on the price difference, President Bob Roth told MiBiz.

“Our foreign buyers are making it clear out of the gate that we have a problem,” he said. “We expect a lot of headwind with exports going forward.”

The value of the dollar has also prompted RoMan’s European competitors to become much more aggressive with imports, potentially threatening the company’s domestic market, Roth said.

Meanwhile, currency devaluation in Japan and Russia has become a challenge for Grand Rapids-based Kindel Furniture Co. LLC. The manufacturer of high-end, luxury furniture could see up to a 10 percent impact to revenue this year based on those currency pressures, said CEO Rob Burch. The company generated approximately $10 million in sales in 2014.

However, Burch’s concern is limited given that the company is shielded from some foreign exchange fluctuations due to its high-end niche market position. Customers who were prepared to spend $60,000 on five pieces of furniture will still generally fulfill the order even with a 20-percent markup from currency changes, Burch said.

“The advantage for Kindel is there are still a lot of luxury (buyers),” he said. “The one advantage that the luxury players have is that the market is not as elastic. … We don’t see it as a long-term issue.”

Currency pressures were also the common headwind that West Michigan-based public companies cited in their recent quarterly financial reports.

For example, uncertainty in the foreign exchange market has caused Rockford-based footwear manufacturer Wolverine World Wide Inc. (NYSE: WWW) to temper its 2015 revenue guidance from the mid-single digits to growth in the range of 2 percent to 4 percent, executives said last month.

Wolverine’s concern stems from the relative weakness of the euro and Canadian dollar, which have fallen 5 percent and 7 percent, respectively, against the dollar, said Senior Vice President and CFO Don Grimes in a conference call with analysts. In 2014, 49 percent of Wolverine’s global unit volume was sold outside of the U.S. market.

“(A) 5 percent increase or decrease in the U.S. dollar versus the currencies that we’re most exposed to — the euro, the Canadian dollar and the pound — has about a $21 million impact on reported revenue,” Grimes told analysts last month.

Because the majority of the world purchases footwear in U.S. dollars, Wolverine expects that the company and its distributors will see increases in the cost of goods sold and retail pricing, particularly in the second half of the year, said Chairman, President and CEO Blake Krueger. To compensate for those price increases, the company plans to work with its distribution partners and supply chain to lower costs.

“(W)e source over 100 million pairs of footwear a year so we have a pretty large pencil, and we’re going to use our sourcing power to re-engineer some footwear and to take some additional costs out of the supply chain as well,” Krueger said.

Wolverine noted its $809 million in fourth quarter revenue was negatively impacted by $6.6 million because of foreign exchange rates, according to the company’s latest earnings report.

Kalamazoo-based medical device manufacturer Stryker Corp. (NYSE: SYK) also saw a 2.6 percent decline in net sales related to instability in foreign currency exchange rates, the company said in January.

Because of that foreign currency volatility, Stryker CEO Kevin Lobo told analysts the company would not offer a full-year outlook for 2015 as it only had enough certainty to provide Wall Street with guidance on a quarter-by-quarter basis.

“It’s not going to be a one-quarter phenomenon when (companies) see they’re losing money every month,” said Brian Petrak, senior vice president and manager of global capital markets at Comerica Bank. “If what used to generate $10 million in revenue every quarter is now generating only $8 million, that just goes right to the bottom line on the earnings.”

Moreover, the currency pressures have started filtering down into smaller middle-market players, especially since the majority of exporters keep transactions in U.S. currency to avoid the hassles of foreign exchanges, Petrak said.

“The same issues that Stryker is seeing are the same issues as you go down the chain a little bit because (middle-market companies) are going to see the same compressions down into their margins,” he said.

HEDGING AGAINST UNCERTAINTY

While large-scale companies have learned to hedge against these currency shifts, smaller middle-market companies can also adopt strategies that will help guard against devaluation, Petrak said.

The best hedge is for companies to work closely with their customers to structure forward exchange contracts that allow for payment in either U.S. dollars or the local currency for the region, he said. That added flexibility allows companies to work with their banks to further hedge against currency fluctuations. Companies also can structure various agreements that allow for price adjustments based on currency movements during a permitted timeframe.

At Kindel Furniture, the company requires a down payment of 50 percent or more in U.S. dollars before taking an order to guard against foreign currency fluctuations, Burch said.

“We manage it, and it’s our responsibility to manage the terms,” Burch said. “If we were uneasy about a client, we may ask for it all down.”

INTERNATIONAL INSTABILITY

The strength of the dollar is also being felt in other ways. Statewide, Michigan’s total exports fell 5 percent from approximately $58.7 billion in 2013 to $55.8 billion in 2014, according to data from the U.S. Department of Commerce.

That decrease was driven partially by the increasing value of the U.S. dollar, sources said.

In part, uncertainty in certain countries is to blame for some of the devaluation of major currencies compared to U.S. dollar, said Brian Long, director of supply chain management at Grand Valley State University.

Markets in Greece, Russia and countries in South America have all shown signs of weakness. In particular, the euro’s devaluation has resulted from the discussions among members of the Eurozone regarding Greece’s sovereign debt and its repayment, Long said.

In late February, the Eurozone granted the country a four-month extension of its financial program, thereby avoiding a potential banking crisis that could have forced the country out of the euro.

However, it’s likely that the extension will do little to quash any of the long-term uncertainty that’s hampering the euro, Long said, noting it will mostly serve to delay the next possible showdown until late June.

“Short term, the euro will probably rally, and may stabilize at this level or even a little higher,” Long said. “Then reality will set in. I’m afraid that this is a ‘kick the can down the road’ kind of agreement.”

Read 3573 times Last modified on Sunday, 01 March 2015 16:28

Breaking News

September 2017
S M T W T F S
27 28 29 30 31 1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30

Follow MiBiz