News Column

GLOBALIZATION: Dollars in the Deals

November 2001

By Jonathan J. Higuera , HISPANIC BUSINESS magazine


Top 50 Exporters recognize that a strong dollar hurts their markets overseas, but they focus on marketing strategies to overcome it.

As all exporters will tell you, currency fluctuations play a substantial role in their ability to sell products abroad. It's a simple equation: The weaker the U.S. dollar, the greater the sales, because foreign buyers will get a better bang for their buck.

Not surprisingly, a strong U.S. dollar it's up 25 percent since 1995, and remained virtually unchanged following September's terrorist attacks (see chart) coupled with the domestic economic downturn has occasioned grumbling from trade organizations that maintain the U.S. government has artificially propped up the dollar. Groups ranging from the National Association of Manufacturers to the AFL-CIO have lobbied President George W. Bush to let the dollar fall to "reflect economic reality."

But CEOs on the Top 50 Exporters list take a more pragmatic approach. Although they recognize that a weaker greenback would pump up sales, they accept the fact that currency rates are beyond their control. Instead, they focus on marketing strategies that work in any environment.

"If [the dollar] is weak, we sell to Europe and Asia," says Antonio Gonzalez, CEO of Tire Group International, a Miami-based tire wholesaler. "If it's strong, we buy from Europe and Asia for distribution in the United States, Latin America, and the Caribbean."

For the last 24 months, Tire Group, which had exports of $19 million last year to rank number 13 among the Top 50 Exporters, has been buying heavily in Europe and Asia. "It's one of the advantages we have by working in the countries we do," says Mr. Gonzalez, who claims that fast reaction to currency swings gives him higher gross margins than his competitors. "In 199495, when the peso devalued, we went to Mexico for a few months and bought tires and sold them to Brazil for a 40 percent gross margin. We're very quick to jump on opportunities where currency plays a role."

For The Plaza Group, a Houston-based petroleum products distributor that ranks number 9 on the Top Exporter list, currency isn't an issue, since the global petroleum industry has traded in dollar-denominated transactions for decades. However, the recent terrorist attacks in the United States have dampened an already soft market abroad. "There's a lot of uncertainty," says CEO Randy Velarde. "Instead of being in an opportunistic mode, we'll plan with a lot more pessimism well, maybe not pessimism, but realism."

Even though he doesn't feel currency headaches directly, the strength of the dollar affects Mr. Velarde's business. For example, the company landed a $10 million exclusive marketing arrangement in May with Petroleos de Venezuela. Since Plaza buys from Latin American producers such as Petroleos de Venezuela and then sells to Europe and Asia, both suppliers and customers pay attention to the dollar's fluctuations. "A weaker U.S. dollar would help our non-U.S. friends," says Mr. Velarde. "They could acquire more raw materials."

Exporters use a range of strategies, besides working in the petroleum industry, to limit their currency risks. Electric Machinery Enterprises of Tampa, Florida, performs most of its overseas work for large U.S.-based corporations. The company ranks number 10 on the Top 50 Exporters.

"We never leave the country unless we have a letter of credit to pay us in U.S. dollars," says CEO Jaime Jurado. "We export our materials to use on our own jobs." Last year, about $15 million of its $78 million in revenue came from foreign projects, he adds.

While Top 50 Exporters have found ways to shelter themselves from currency whipsaws, some economists feel that currency plays a relatively minor role in trade stimulation or international balance of payments. In fact, a strong dollar provides an incentive for foreign investors to park their money in the United States, thereby benefiting U.S. exporters through cheaper credit services and low inflation. "Since the 1930s, it's never been a good idea to cheapen U.S. currency, although we momentarily gain the upper hand in exports," says Boris Kozolchyk, president of the National Law Center for Inter-American Free Trade, a group that works to harmonize trade laws and regulations in the Western hemisphere. "We get a lot more total value in exports by facilitating credits and service than by artificially lowering the value of the dollar."

"I cannot recall a customer that has found himself pushed out of a market because of a strong U.S. dollar," says Eric Nielsen, manager of the Tucson, Arizona, export assistance center of the Commerce Department.

"For the small exporter, small variations in the dollar should not be the focus of attention," says John Mathis, professor of international finance at the American Graduate School of International Management. "Much more important is greater economic activity. What is the income of the people in that country? And is that income growing? What is inflation and real income?"

Until recently, those questions provided optimism for many Top 50 Exporters, who sell heavily in Latin America. But evidence now indicates that the economic slowdown has become global. Last year, the Commerce Department reported that U.S. exports jumped 10.2 percent, a figure that has trailed off this year, down to 1.3 percent through the first six months of the year.

A more telling statistic for Hispanic exporters is the fate of Latin American countries. Trade with Mexico, which had grown at a 22 percent clip for the four years since NAFTA began, is expected to flatten this year. Argentina faces a financial crisis after a near-default on $128 billion in debt. If it does default eventually, neighboring Mercosur countries, including Brazil, the continent's largest economy, will feel the effects.

Currency plays a role in Argentina's problems. In 1991, the country linked its peso to the dollar with a one-to-one ratio in a bid to curb hyperinflation. The strategy worked for a while, but when economic turmoil hit East Asia and Latin America in 1997, the country kept the rigid dollar-peso exchange. Then Brazilian devaluation took place in 1999, and many Argentine factories moved there to take advantage of lower labor costs.

"For them to maintain parity with the dollar, they have to bring in enough dollars to back up the value of the peso," says Mr. Kozolchyk. "The only way to do that is through exports. But they have no way of exporting because productivity is low and they have no export credit."

Operating in this environment requires some counterintuitive business skills. Tire Group's Mr. Gonzalez estimates his gross revenues at $25 million this year, down from a high of $34 million in 1996. "The last three or four years we've focused on the bottom line and cut out low-margin business," he said. "Revenues have decreased, but the bottom line has increased." During the 19962001 time period, he has trimmed his work force from 49 to 21 people.

Still, Mr. Gonzalez admits he lost some big money in Argentina and won't do business there again until there are major changes. "We hope the Latin American economies will rebound, but I doubt it will happen in the next six to 12 months," he says.

As a long-term strategy, Mr. Mathis suggests, exporters should begin to consider their method of payment including currency as part of the product they're selling. "International competition is increasingly combining cost and technique of financing with marketing strategy," he reports. "The more effective the financial strategies a company uses, the better able it is to compete."

Source: HISPANIC BUSINESS magazine

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