The world-wide banking crisis, the turbulent world-wide economies, and the repercussions they have brought have added a new dimension of risk to companies exporting products world-wide.
Most small and mid-sized branded product companies do not have the volume, maturity or staff to have world-wide production. Lacking localized production, these companies ship internationally. Forgetting the duties, customs and other issues and costs – domestic and International fright costs have increased 25% – 40% in some areas. As most are providing product on F.O.B. destination terms, this is a direct drop-to-the-bottom-line cost increase – or margin loss.
Further aggravating the situation is the wild swings in currency exchange rates over the past six months. I found a web site, x-rates.com, which charts currencies and can graphically show the wild swings. Two examples close to home are the U.S. dollar to Korean Won and the U.S. to Australian Dollar. These have swung 40% and 30% this year.
Conventional wisdom employed over a year ago seems reckless. In many instances branded products need to have relative pricing parity across international markets. Of course VAT (taxes), duties, etc. are adjusted, and typically U.S. manufacturers add an additional “fudge” factor or say 15 – 25% on MSRP/cost to accommodate swings.
Let’s look at a real example. Say a U.S. product is sold for $80.00 and the vendor set the Australian price at $100 Australian Dollars (to accommodate a small duty and the fudge factor). At distribution discounts of say 55% the vendor netted $45 AU$. After shipping at $1/unit which increased to $1.40 (U.S.) and a 30% hit on the exchange rate, the vendor’s margin suffers as follows;
January 08 Nov. 08 Net effect
Aus. $ Inv. $45.00 $45.00
Exchange rate 1.13407 1.4748
Net US (excl fees) $39.68 $30.51 < $9.17 >
Freight $1.00 $1.40 < $0.40 >
Margin erosion: $9.57
The $9.57 is 24% of the beginning of the year $39.68 net revenue. Even if the fudge factor provided a $5.00 cushion, there was an additional $4.57 loss. Most companies cannot afford a 12% margin cut let alone a 24% hit.
While the key to limiting losses may be to have a contract which accommodates the currency fluctuations, has annual re-pricing, or is in U.S. currency, it’s still a zero sum game. The vendor, reseller or consumer is going to suffer, and in most cases all suffer due to these uncontrollable factors. Large companies can leverage currency futures, shift costs and margins, or implement other strategies to mitigate some of the risks.
For the smaller companies, move cautiously and consider currency fluctuations when dealing with international business opportunities while making sure you monitor your receivables and don’t count on the full value in your cash flow forecasts. A lot can change in 60 days net terms.