same for U.S. product,” which eats into margins, Bebenek says.
Manufacturers are benefiting from fatter profit margins there, but the distributors in Canada say that their U.S. suppliers should adjust prices to reflect the new exchange rate reality.
“We’re urging manufacturers to be transparent in any changes they make to price,” he says. Bebenek says his group is proposing suppliers and distributors work together in mitigating losses on either side by pegging the dollar to a band -for example between 95 cents and 1.05. If the Canadian dollar goes above that, suppliers should rollback prices, and if below, price increases would be implemented.
In September, the latest month for manufacturing statistics, the Canadian dollar appreciated 3.1 percent compared with August. Manufacturing sales in Canada fell 0.9 percent in September, continuing a weakening trend from the past half year, according to Statistics Canada. Sales were at the lowest level since October 2006 -third quarter sales overall were down 1.8 percent from the second quarter.
Excluding motor vehicle and parts sales, revenues were down 2.7 percent in September. On an industry-by-industry basis, 15 of 21 Canadian manufacturing sectors decreased, representing two-thirds of sales. New orders dropped  ; 2.5 percent in September after an even sharper  ; 5.4-percent plunge in August.
Proving Value Outside Price
Fluctuations in currency markets are having an impact on bottom lines in every sector of manufacturing and distribution -some more noticeably than others. Those companies that are hurting are using this time as an opportunity to develop the value they add to customers. They understand that it is more important than ever to prove your worth to survive.
For Equipment Controls’ Bell, an alternative to the import of natural gas regulators from The Netherlands is not an option. The regulators complement the products the distributor sources domestically and serve as a competitive advantage in the U.S. market. The company recognizes that though the dollar’s value has fallen, the value the distributor provides customers does not have to follow suit.
“We are working very hard on the back-end, trying to maximize the value of our ERP system, for example, in our customer relationships,” Bell says. “We are also increasing the level of education we provide our staff, including inside sales and product training.
“We want to make sure that when we walk in to see a customer, and say we provide value, that we can back that up.” ago, and 5.1 percent 40 years ago, the U.S. Department of Commerce reports.
The largest export markets for U.S. goods were Canada ($183.2B, up 5.9%YTD), Mexico ($101.9B, up 2.1%), China ($46.8B, up 16.6%)  ; and Japan ($46.7B, up 5.8%)  ; in September.
Currency Exchange Policies
Though exports are growing at a rapid clip, the trade deficit with one of the country’s largest trading partners, China, continues to grow. The value of the Chinese currency, the yuan, is one reason for that.
“Currencies have gone far out of line more than they ever have before,” says Ernie Preeg, a senior fellow in trade and productivity with the Manufacturers Alliance/MAPI. The U.S. deficit started to balloon in 2000-2001. At this time, “it was clear the U.S. dollar was overvalued,” Preeg says.
He says Chinese and other Asian currencies are below market rate, resulting in a “huge trade surplus” for that continent and a trade deficit for the U.S. But the Chinese have been slow to change their exchange rate policies; the low value of the yuan has resulted in strong profits for its exporters and fueled domestic growth. Other Asian nations are loathe to allow their currencies to appreciate significantly; they see China as a chief competitor and want to maintain an even playing field in that region.
In 2005, China announced it would let the yuan float against a basket of currencies. While that has allowed the yuan to appreciate about 10 percent, Preeg says, at the same time the euro has appreciated 30 percent and the Canadian dollar 40 percent. “So, overall, the Chinese yuan is down on a basket basis,”” he says.
Other countries have started to push for the Chinese to allow the appreciation of the yuan, however, and Preeg thinks China may take action in the next few months. “How much will they budge?” he asks. “Any move made in Asia to allow currencies to appreciate will ease the pressure in the exchange between the dollar and the euro and other currencies.”
Preeg says that ultimately, to balance out a market-based rate, China needs to go up 50 percent or more. The extent to which the yuan needs to appreciate is hotly debated however, with some saying up to 50 percent and others going up to 100 percent or more. But all agree that something needs to change.
Preeg says companies doing business in China should create a business strategy based on two scenarios, the first of which is that prices remain the same. The second: based on the assumption that the yuan will go up 50 percent or more. Also factor in the current rate of inflation for China. The inflation and exchange rate have a larger impact on labor-intensive businesses.
Reverse in Canada
The U.S. is promoting a stronger dollar, but many Canadians -especially in the manufacturing sector -are bemoaning their dollar’s rise. The Canadian dollar hit a high of $1.10 to the U.S. dollar last month, and is now nearly at parity with the greenback -an uncommon occurrence in the history of the neighboring countries.
The shift has made it more difficult for Canadian manufacturers to compete with U.S. manufacturers across the border. “Business is flying out of the country,” says Scott Bebenek of Independent Distributors Inc., Toronto, Ontario. IDI is a purchasing cooperative of industrial distributors.
When the dollar is down, he says, manufacturers rely on business from U.S. companies. But the cost of Canadian products, he estimates, has gone up 30 percent to 35 percent over the past two years, and business to distributors is dropping off as manufacturers in Canada slow production.
The other issue: Suppliers that produce in the U.S. or overseas and ship to Canada have not adjusted prices to reflect the appreciated Canadian dollar. “Now that the dollar is even, Canadian distributors are continuing to pay theU.S. companies doing business overseas. But not all manufacturers and distributors are benefiting. For those distributors who import from the euro-zone, for example, costs have suddenly spiked, forcing them to reexamine the way they define value in this marketplace. This article examines the impact of the dollar decline on three groups:
- U.S. importers,
- manufacturers who export to the European Union, and
- Canadian distributors who buy from U.S.-based manufacturers.
Recently, Equipment Controls Co., Norcross, GA, has started to factor the value of the U.S. dollar into its business planning. The gas measurement and control equipment distributor sources most of its product from domestic suppliers. But one of its suppliers -a manufacturer of natural gas regulators -is in The Netherlands.
The Netherlands is a part of the euro-zone, which means as the value of the euro to the dollar goes up, the prices of these products also go up for the U.S. distributor. Nearly every day now the exchange rate of the euro to the dollar is a record,” says Jeb Bell, Equipment Controls president, who said he finds himself watching world markets much more closely than he used to.
The dollar’s value has fallen nearly 30 percent since its peak in 2002; at the same time the euro and the Canadian dollar have strengthened.
As of Friday, Dec. 7, the euro was worth US$1.46. “On top of my everyday competitive pressures, I have to come into the market with my costs 50 percent higher than the competition,” Bell says. He expects it to remain that way for the next year or two.
“You just have to suck it up,” Bell says. “We have to eat the margin to stay competitive and pray you find enough customers that believe in value over lowest price.
Exporters in Good Shape
While importers like Equipment Controls are working to offset losses from the decline of the dollar, manufacturers and distributors who do business in both Europe and the U.S. are seeing stronger sales overseas, offsetting any slowdown they may be seeing in the U.S.
North American Tool Corporation (NATCO), Sterling Heights, MI, a manufacturer of specialty cutting tools, sells in 54 countries. In the past three months, the company has seen a spike in quoting activity and orders from Europe. The manufacturer sells only through distributors. In particular, sales to a master distributor in Belgium have increased to a rapid clip, says Bernie Bowerstock, senior vice president for sales and marketing.
“When suddenly distributors there can buy my product for half the price it sells in the UK or on the European mainland, my delivery time doesn’t matter,” Bowerstock says. In addition, the value of the dollar more than compensates for rising freight costs.
“We have anywhere from a 47 percent to a 100 percent price advantage right now in the European market. Freight is incidental,” he says.
Bowerstock says U.S. manufacturers should look to do business both overseas and domestically. “When things are slow in the U.S., they are not necessarily slow overseas,” he says. NATCO has been actively exporting for 12 years. “if you’re not exporting, you’re missing some great opportunities.” (Check out www.export.gov for more information.)
Exports, cheaper on the world market because of the weaker dollar, have helped keep the economy humming along nicely in the past couple quarters, partly offsetting the downturn in the housing sector. In September 2007, the latest month available, U.S. exports of goods and services grew by 11.8 percent year-to-date, according to the U.S. Department of Commerce.
Exports comprised 12 percent of U.S. GDP in the third quarter 2007. That’s a significant increase: Exports were just 9.7 percent of GDP five years