Weak Dollar, Strong ProfitsDavid Greising
On the streets of Tokyo, the word is endaka, or strong yen.
Germans say Dollar schwache, or weak dollar. In the United States, there's no simple name for the trend. But the effect is clear: The dollar's dizzying fall has U.S. companies reassessing their global pricing, marketing, and expansion strategies.
Whatever you call it, the dollar's decline is a clear opportunity for many of America's global companies. U.S. products and services have suddenly become less expensive overseas--just as Europe and Japan are climbing out of recessions. And profits from foreign operations get turbocharged when they're translated back into greenbacks.
There are risks, too, of course. The big one is macroeconomic: If the dollar continues to weaken, embryonic recoveries in Europe and Japan could fizzle, as those countries' exports to the U.S. become ever more expensive. The higher German mark and yen also could raise the price U.S. consumers must pay for German and Japanese goods. A further worry: The weak dollar could force many U.S. companies to cut back on suddenly-more-costly investments in overseas expansion.
For now, though, the dollar's decline should spell opportunity for U.S. companies. With as much as 20% of overall U.S. corporate profits derived overseas, the buck's backtrack could boost third-quarter corporate earnings as much as 5%, figures William E. Dodge, chief investment strategist for Dean Witter Reynolds Inc.
"TAKING A HIT." Another positive effect: Many companies see their best chance in ages to try to expand overseas market shares. For instance, the dollar's tumble has accelerated a software price war in Asia that's being led by U.S.-based technology companies. Lotus Development Corp., Microsoft Corp. and other U.S. software developers have slashed prices by as much as 80% since last May, when Microsoft began discounting prices as part of its launch of Windows 3.1 in Japan. Lotus is now cutting its prices so quickly that "we're actually taking a hit in revenue growth, and the only way to compensate is to push for higher volumes," says Yutaka Sakamoto, the company's comptroller in Japan.
Another company doing its best to benefit from currency chaos is AFLAC Inc., a Columbus (Ga.) insurance company that does 80% of its business in Japan. It has put 22 people to work full-time trying to squeeze every bit of potential profit out of its $125 million per month in cash flow from Japan. It also reinvests as much as 90% of Japanese profits in Japan, to take advantage of the strong yen. "We are trying to outrun the effect of the increasing yen," says Joseph W. Smith Jr., AFLAC's chief investment officer.
What other U.S. companies have a chance to make big gains? Food, beverage, and tobacco companies are boosting their promotional spending overseas to capitalize on the newfound pricing advantage. Caterpillar Inc.'s earthmovers and other made-in-America equipment will benefit, as will Detroit's cars. With the strong yen rendering Japanese-made cars more expensive, "it's going to help our competitive position," notes J. Michael Losh, General Motors Corp.'s chief financial officer.
Multinationals such as DuPont Co., however, often find the weak dollar "a two-edged sword," says John C. Sargent, the company's treasurer. DuPont gains in Japan, where it has major dollar-based export operations. But in Europe, where the company manufactures and sells locally, it's a mixed bag. For Federal Express Corp., the problem is that the cost of oil is rising in opposition to the dollar's decline. Federal Express is striving to balance its costs and expenses, buying fuel in French francs at its Paris hub to offset revenues from Europe. Paying francs for fuel also helps compensate for oil's recent dollar-driven price jumps.
Whatever their business, few companies can afford to write off the dollar's recent drop as a short-term phenomenon. "We talk about it a lot in
our strategy sessions," says Alan B. Graf Jr., chief financial officer of Federal Express. "The current situation can have a dramatic impact." Until the dollar stabilizes, Corporate America will do its best to get the most bang it can from every weak buck.
COPING WITH THE BATTERED BUCK
BALANCING BUSINESS Matching revenues with costs in any given country cuts currency risks but can hurt pricing flexibility.
SLASHING PRICES In Japan, American software companies are waging a spirited price war.
ATTACKING ON THE HOME FRONT Cars, computer gear, and other imports from Japan and Germany are increasingly expensive in the U.S. If Detroit holds prices, it could gain.