Exchange-Rate Fluctuations Affect Industry Players

By | February 23, 2004 | Feature

By Roger Rusch

Although exchange rates may be unpredictable, they can have a major impact on satellite companies, launch- services providers and other international businesses. Satellite and aerospace companies are greatly impacted by currency rates because their businesses are inherently global. The challenge is to adapt to changing trade conditions.

Indeed, pressure from currency-rate fluctuations has been growing. During the past decade, the U.S. trade deficit has ballooned due to a strong dollar, with sharp trade deterioration beginning in 1997. At that time, the U.S. trade deficit was $100 billion per year. In 2003, the deficit reached $489 billion.

The accompanying chart shows the trade balances for the years 2002 and 2003 between the United States and 13 major trading partners. Almost 40 percent of the trade deficit is with China and Japan.

The typical adjustment mechanism for a country with large trade deficits is for the value of its currency to weaken. However, politics can influence the relative strength of currencies. We have observed in the United States that Republican administrations generally promote a weak dollar so that there can be more exports. Democrats tend to support a strong dollar to reduce the cost of imported goods and services for the individual. Either way, satellite companies are affected by the outcome.

In the past two years, steps have been taken to restore the balance of trade with Europe and Japan. There have been substantial changes to exchange rates between the euro, yen, and U.S. dollar. In 2000 and 2001, the euro was valued at about $0.90 and sometimes less. The U.S. dollar recently has weakened to $1.30 per euro. Under these circumstances, there are likely to be substantial cost pressures on European satellite manufacturers and on launch service providers.

The dollar is likely to weaken further against other currencies in the future until the trade balances improve.

China Is An Anomaly

In 2003, the United States had a trade deficit of about $125 billion dollars with China alone. It is surprising that the exchange rate between China’s yuan and the U.S. dollar is fixed and has not changed. The effect of large trade deficits is the loss of millions of jobs. At a time when about 10 million Americans are out of work, exporting high- technology jobs is a national issue. Indeed, the ongoing “jobless recovery” could be a hot topic in the United States at election time this November.

The value of the yuan is too weak by at least a factor of two. In the long term, this discrepancy could cause serious economic problems for China, especially if a correction to its valuation is rapid. The implications of what happens to the Chinese currency are large because the country is developing its satellite manufacturing and launching capabilities. China is scheduled to launch 10 satellites in 2004, and it plans to develop a communications-satellite platform to compete with other space-faring nations in the international spacecraft-export market.

Europe Is Most Affected

In recent years, European prime contractors for satellites have been winning a much bigger market share of new orders than in the past. The same situation applies to aircraft. For example, Airbus now builds more airplanes than does Boeing.

Part of the reason for growth in European market share certainly is the rigid export control policy of the United States. However, pricing also is important, and it may have entered into the equation when the U.S. dollar was strong, compared to the euro. Today, the euro is strengthening in relation to the U.S. dollar, and the situation has reversed. Everything from Europe appears to cost about 50-percent more than it did two years ago. In addition, the strong euro is compounded by the extremely weak yuan in China that is locked to the U.S. dollar. As a result, European satellite manufacturers now are faced with rivals from two major economies that are able to offer relatively more attractive prices to prospective customers.

Possible Remedies

A weaker dollar is good news for U.S. satellite manufacturers and launch- service companies. It also is relatively good news for China. Expect the market share to improve for satellite manufacturers and launch service providers in both the United States and China. Suppliers in other aerospace countries must now begin to develop alternative strategies. There are several possible responses for the Europeans. They could:

  • Enhance the value and reliability of their satellites and launch services. They then could try to convince customers to pay higher prices for what could be pitched as the best-quality satellites and launch services available in the marketplace. Under cost-cutting pressure, the temptation exists for buyers to bear risks with reliability. In the case of a satellite that cannot be repaired in orbit, quality is paramount.
  • Hedge against currency rate changes. This means paying large financial institutions for exchange-rate protection. The price can be high if the discrepancy is wide and the duration is long. This approach is suitable for short-term exchange rate anomalies. Governments might be willing to provide exchange rate protection but such a move may raise national policy issues or violate World Trade Organization (WTO) agreements.
  • Write contracts in the national currency of the supplier. That strategy would call for the procuring organization to absorb the exchange-rate risk. This arrangement has not been a traditional contract provision for service providers in the United States.

Free Trade

Despite currency rate risks, free trade certainly is the ideal model for a global economy. It requires the removal of all trade barriers, and the free and flexible exchange of currency. In the long run, everyone benefits. In the short term, the workers and management of certain companies may be displaced. Competition is wonderful for the consumer, but it undoubtedly is a challenge for the competitors themselves.

Roger Rusch is the president of TelAstra Inc. You can contact him at 310/373-1925 or via e-mail at RogerRusch@aol.com.

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