Europe's exporters squeezed
Rise of euro making their goods more expensive
By Geraldine Baum, Tribune Newspapers: Los Angeles Times; special correspondent Rebecca Ruquist contributed to this report
November 25, 2007
PARIS - At Yves Saint Laurent, the storied French design house that manufactures exclusively in Europe, the plunging value of the U.S. dollar has CEO Valerie Hermann thinking about the number of pockets on a skirt and the price of embroidery on a dress.
Hermann is adamant that YSL must include in its ready-to-wear offerings cocktail dresses that don't cost more than 1,900 euros.
"It's a crucial limit," she said.
Six months ago, that was the equivalent of $2,565. Today, she'd have to sell the same garment for $215 more to make the same profit. But Hermann is reluctant to pass on the increase to the consumer.
So if Hermann can eliminate a pocket on a garment without sacrificing the integrity of its design, she will.
"I have never been as careful as I am now to look at the entry-level price of a product," she said. "Because I know that currently in the U.S., the market is driven by that, and, to a greater extent, by this currency problem."
The euro's rise and dollar's slide are squeezing European exporters' profits or multiplying their losses, prompting layoffs and plant closings. Firms are not only curbing production of goods headed to U.S. buyers, but also rethinking the way they do business. The euro recently passed the record $1.47 mark, gaining 11.5 percent since the beginning of the year against the greenback. A strong British pound, moribund Japanese yen and undervalued Chinese yuan also play roles in this tale of currency chaos, from a European exporter's perspective.
Most emblematic of the problem has been the impact of the euro/dollar relationship on the aeronautics industry -- and particularly on France's Airbus, whose main rival is Chicago-based Boeing.
Fall helps Boeing
With a falling dollar making Boeing's products cheaper outside the United States and Airbus' more expensive, Louis Gallois, chief executive of Airbus parent European Aeronautic Defense and Space Co., recently described the sinking U.S. currency as a "Sword of Damocles" hanging over the company's future. He vowed to cut an additional 1 billion euros in operating costs by 2010 or 2011.
This would mean more layoffs at a company that is already purging 10,000 jobs -- a decision made when one euro equaled $1.35.
"We must react," Gallois told a French radio station earlier this month.
Speaking at the recent Dubai Airshow, Airbus chief Tom Enders further spelled out the problem: "As you know, if the dollar decreases by 10 cents, we are challenged to save another 1 billion euros. Therefore, Airbus is currently undergoing fundamental turnaround of the company. In a nutshell: A 'new Airbus' is under way."
Less dramatic but no less critical is the impact on other European companies that export sophisticated equipment, technology, cosmetics, cars and luxury goods. For firms that make a large portion of their sales in the United States or compete with firms that deal in dollars, survival depends on raising prices, cutting costs or hedging currencies.
Nearly every day, another company announces more lost earnings and job cuts and blames the currency commotion. Last month it was Britain's Rolls Royce declaring that it wants to move 230 jobs and its operations for making industrial turbines from its plant near Liverpool to one in Mount Vernon, Ohio. The company cited high costs and the strength of the pound against the dollar for the decision.
More recently, Infineon, Germany's top semiconductor-maker, with almost 8 billion euros in annual sales and 41,500 employees, announced it lost 150 million euros in the latest quarter because of the weak dollar. Exports generate nearly half of Germany's GDP, and if the dollar hits $1.50 against the euro, German bankers are predicting the whole economy will suffer.
"For a while, European companies had wiggle room for the falling dollars to eat up their profit margins," said Alan Ahearne, an economist at Bruegel, a Brussels-based think tank. "But it's fallen so much it's no longer profitable to sell in the U.S. They can't compete with U.S. or Asian firms in the United States. So they're going to have to reduce European exports, and that implies layoffs and downward pressure to the European economy."
Lifting a taboo
Many companies are simply trying to find new ways to trim their euro-based operations, and in the case of some firms, that involves lifting the taboo against relocating outside of Europe. Armani, Prada and Boss are already "assembling" parts of the second and third lines of their collections (not couture or pret-a-port) in China.
Other companies make bags, coats and household products in Eastern Europe where they may still pay in euros, but salaries and benefits are lower. Recently, Louis Vuitton, always particular about the provenance, decided to open a shoe factory at a 30-acre site near Pondicherry, India, according to reports in the European and Indian press. The shoes that come out of that factory will still carry the "Made in Italy" label because Indian workers will be attaching soles to upper parts made in Italy.
Many brands are protected by hedging strategies of parent companies or senior executives, who act like canny great uncles looking after them. Spokesmen for Germany's Adidas, which manufactures and sells in dollars, and for carmaker Rolls Royce said they relied on financial officers trying to reduce or eliminate exchange-rate risks by buying forward, using financial futures or borrowing in the exposed currency.
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