Who's Afraid Of The Dollar?
It was totally predictable. With the dollar up 7% against the Japanese yen and 9% against the German mark since the start of the year--on top of a steady rise that began in mid-1995--Detroit executives started wailing about the advantages being handed to Japanese rivals. Their proof: Honda Motor Co. and Toyota Motor Corp. racked up record January sales in the U.S. "There's only one cloud on our horizon, and it's the growing undervaluation of the Japanese yen," G. Richard Wagoner Jr., president of General Motors Corp.'s North American Operations declared in early February.
Instead of inspiring a chorus, however, GM's lament is sounding more and more like a solo. Where Corporate America was once quick to band together to beat up Washington about a rising dollar, this time there's no uproar. Years of restructuring and experience in the currency wars have taught U.S. exporters how to cope, even thrive, with a strong dollar. These days, even some Detroit executives acknowledge as much. The dollar "is not as much a concern as five or six years ago, when our competitive situation was worse," says Chrysler Vice-Chairman Robert A. Lutz.
How did U.S. industry insulate itself against a dollar shock? For starters, the U.S. continues to run up impressive productivity gains that make American goods more competitive, blunting the effects of currency fluctuations. On Feb. 11, the Labor Dept. reported that manufacturing productivity rose 3.8% in 1996.
INSULATION. Improved efficiency is just one of the defenses against the effects of the strong dollar. Another: Increasingly, U.S. exports fall into such hot-growth categories as software, services, or entertainment programming. With demand for such output growing around the globe--and the position of U.S. suppliers so strong--the dollar is hardly a factor. "We're blessed with strong growth," says Gregory B. Maffei, treasurer at Microsoft Corp., which draws some 55% of its sales from overseas.
U.S. multinationals are also avoiding the dollar shock by moving more operations offshore. That's the strategy at Lancaster (Pa.)-based Armstrong World Industries Inc., a $2.1 billion maker of floor and ceiling products. It has built a clutch of new plants in Europe and Asia to "insulate ourselves" from currency shifts, says Chief Financial Officer Frank A. Riddick. So he's not complaining about a dollar that has now climbed 54% against the yen and 23% in relation to the German mark from postwar lows in 1995. But he is enjoying the advantage he figures Armstrong has over competitors trying to export from U.S. factories.
Another happy American abroad is United Technologies Corp. Some 83% of the company's $710 million gain in revenue last year came from exports and overseas sales made by foreign-based operations. Its hot businesses include orders for infrastructure goods in Asia and jet engines in Europe.
An even surer way to cut your currency risk is to move into developing markets--especially those with currencies tied to the dollar. Popular destinations include Latin America and Thailand. Mexico is another great place for U.S. exporters: Despite a weak economy, it increased purchases of U.S. goods by about 40% last year.
"BUOYANT." How long can this go on? There's no question that a steadily rising buck will begin to bite at some point. That's one reason U.S. Treasury Secretary Robert E. Rubin stepped out on Feb. 7 to say that the dollar's rise had gone far enough--and lined up the Group of Seven's Finance Ministers to back him two days later.
So far, their declarations haven't had a decisive effect. On Feb. 12, the dollar rose to 1.24 yen and touched 1.69 marks --a 33-month high--before easing back. And the central bankers may find it will take more than talk to counter the forces--in particular, a robust U.S. economy--that are exerting upward pressure on the dollar. At the same time, there's little reason to expect a jump in the yen or mark. German unemployment rose in January to its highest level in 64 years. Japan's economy has been the weakest in the industrialized world for the past five years. "No matter what the G-7 or Rubin says, the dollar is going to remain buoyant," predicts Mark Zandi, chief economist with Regional Financial Associates Inc. in West Chester, Pa.
So U.S. businesses will live with it. That's the agenda for Kris Bhasin, the chief financial officer at Picker International Inc. Although Cleveland-based Picker does half its business in Asia and Europe, Bhasin says the buck hasn't hurt sales of Picker's cat scanners and other X-ray gear. He's predicting a 15% gain in exports this year. "Everybody gets overexcited about" the strong dollar, he says.
Still, there's no way to completely avoid a currency hit. With 60% of its sales overseas, IBM is feeling its bottom line squeezed as foreign sales translate back into dollars. Even though Big Blue has massive manufacturing and marketing operations around the world, it still sacrificed $326 million in earnings in 1996 to currency translation. And analysts are bracing for more: Predicting currency losses of as much as $2.7 billion this year, analysts are cutting IBM earnings estimates, plunging its stock to around 145 on Feb. 12. Even mighty Microsoft is keeping an eye out, says Treasurer Maffei: "It has the potential to be a drag, a negative on earnings."
Despite the gains made by Detroit, carmakers remain the most visibly vulnerable U.S. industry. The Big Three lost three points of market share to the Japanese in January alone, and Detroit executives say the weak yen now gives the Japanese $3,000 to $5,000 in pricing leeway per car that can be used to cut sticker price or boost marketing--or profits.
Japanese auto makers say Detroit protests too much. The real sources of the Big Three's problems, they say, are high costs and a penchant for taking profits rather than protecting share. GM, Ford, and Chrysler, for example, have all raised prices in the U.S. by an average of $470 per vehicle on '97 models, or 2.1%, according to Automotive News. The Japanese held prices steady. "The yen seems like a convenient excuse," says James Press, general manager of Toyota's Lexus Div. "It's difficult for us to understand why they blame something else, rather than fix the problem."
With the rest of American business coping so well with the strong dollar, it's not likely that the carmakers will get a great deal of sympathy. The advice from Picker's Bhasin: Get with the program. "Nothing keeps you immune from the behavior of currency," he says. That may just be the price the U.S.--including auto makers--pays for economic success.