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 But after months of sharp shifts in foreign currencies, many of
these companies are simultaneously reworking strategy 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 Cars is one such firm embracing regionalization. Last
month it announced plans to build a $500 million plant in the United
States, 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," explained Volvo Chief Executive
Hakan Samuelsson.
"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's less common for manufacturers of more durable goods like
automobiles, electronics or clothing that often prioritize cheap
labor 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 European Union and the United States'
economic outlooks diverged sharply. Last October the U.S. Federal
Reserve announced it would halt the massive bond-buying program
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 program of so-called
quantitative easing in an attempt to revitalize 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 a day market have been actively
guarding against swings in currencies, it also shows it is three
times more expensive to do so.
"When an exchange rate is particularly volatile it can become too
expensive to hedge financially," said Brandon Leigh, chief financial
officer of soap manufacturer PZ Cussons <PZC.L>. Cussons' biggest
market is Nigeria, where the naira has lost 18 percent of its value
over the past nine months as a result of a plunge in crude oil
prices that hammered Africa's biggest oil producer.
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," said Robert Waldschmidt, a consumer goods
equity analyst at Liberum.
"HOLY GRAIL"
British online fashion retailer Asos <ASOS.L>, which has been hurt
by the strong pound, said this month it had decided to start
sourcing garments for the euro zone in euros and those for the
United States in dollars.
"Our ultimate aim here is to capture the maximum natural hedge
available to the business," said Asos Chief Operating Officer Nick
Beighton. "Our panacea would be to match currency receipts, currency
outflows, hold product in that currency and price in that currency."
[to top of second column] |
Sourcing locally has other benefits, especially in emerging markets
like Africa, where using local suppliers can fuel economic
development - and buying power - of the communities in which
manufacturers operate.
Food and drink makers including Nestle, SABMiller and Unilever have
all worked to develop local suppliers, which also helps to secure
supply and make products more affordable.
Nestle Russia CEO Maurizio Patarnello cited local sourcing as part
of the reason his business was only minimally impacted by last
year's ban on imports of many Western goods in retaliation for
sanctions over the crisis in Ukraine.
"Of course there are certain things that we will never be able to
localize, like coffee or cocoa," Patarnello told reporters last
month. "For the rest, there is a continuous effort to develop new
suppliers."
Local sourcing may be driven by operational concerns but its
additional advantage of helping firms to circumvent foreign exchange
rates makes company treasuries "the happy beneficiaries from a risk
management perspective," said SABMiller's head of risk and
funding, Philip Learoyd.
He added that SABMiller, the world's second-largest brewer, would
keep looking for opportunities to offset exposure to currency
volatility. The company already also protects against swings in raw
material costs with financial hedges and keeps its debt denominated
in currencies broadly proportionate to operations to avoid swings
between amounts received and owed.
Over at Dutch electronics firm Philips, emerging markets account for
some 35 percent of revenue but only very little production.
As a result the company's profit margins were squeezed last year by
adverse swings in various emerging market currencies, most notably
the Russian ruble and the Argentinean peso.
"A natural hedge is of course the holy grail because then you're
less exposed," said Philips Chief Executive Frans van Houten.
(Additional reporting by Emma Thomasson in Berlin, Toby Sterling in
Amsterdam, Laurence Frost in Paris, Maria Kiselyova in Moscow,
Ludwig Burger in Frankfurt and Patrick Graham, Tom Pfeiffer and Tom
Bergin in London; Editing by Sophie Walker)
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