London - A dramatic fall in the euro has created an opportunity for European manufacturers to enjoy cheap production costs at the bases from which they can supply world markets.
But after months of sharp shifts in foreign currencies, many of these companies are simultaneously reworking their strategies in the hope that, by the time of the next sudden tilt, they will be operating in more diverse local markets around the world.
Sweden’s Volvo is one such firm embracing regionalisation. Last month it announced plans to build a $500 million (R6 billion) plant in the US, looking past the dollar’s current strength to build in a longer-term protection.
“We’re eliminating short-term currency fluctuations, which are never good for long-term commitment to customers in different regions, and we’re creating a natural hedge,” Volvo chief executive Hakan Samuelsson said.
“Natural hedges” occur when a business’s structure protects it from exchange rate volatility, such as when suppliers, factories and customers operate in the same currency.
That kind of model is typical for makers of perishable food and drinks that need production bases close to their delivery addresses, but it is less common for manufacturers of more durable goods like cars, electronics or clothing that often prioritise cheap labour and economies of scale – at least until recently.
In recent months their model has been challenged by big moves in the euro and the dollar as the economic outlooks of the EU and the US diverged sharply.
Last October, the US Federal Reserve announced it would halt the massive bond-buying programme launched five years ago to prop up its battered financial system, because an economic recovery was on track. But in January the European Central Bank kicked off its own programme of so-called quantitative easing in an attempt to revitalise the zone’s moribund economy.
As a result the dollar and euro currencies sharply diverged too, and in the last nine months the cost of hedging against future volatility between them has roughly tripled.
While that means far more players in the $5 trillion (R59 trillion) a day market have been actively guarding against swings in currencies, it also shows it is three times more expensive to do so.
Thus, while natural hedging has long been popular in some areas of business, “clearly with more volatility in FX markets it makes even more sense now than ever”, Robert Waldschmidt, a consumer goods equity analyst at Liberum, said.
Sourcing locally has other benefits, especially in emerging markets like Africa, where using local suppliers can fuel economic development – and the buying power – of the communities in which manufacturers operate.
Food and drink makers including Nestlé, SABMiller and Unilever have all worked to develop local suppliers.
Nestlé Russia chief executive Maurizio Patarnello cited local sourcing as part of the reason his business was only minimally affected by last year’s ban on imports of many Western goods in retaliation for sanctions over the crisis in Ukraine.
At Dutch electronics firm Philips, emerging markets account for about 35 percent of revenue but only very little production.
Reuters
