Josef Trischler is in good spirits. The executive board member of the VDMA German engineering association expects that most of its 3,100 members, whose sales amounted to €206 billion or $267 billion in 2013, feel less inclined to cover their export business with costly forward contracts. This so-called hedging is done by companies when there is the danger, for example, of the U.S. dollar depreciating against the euro, reducing the profits the company had originally calculated at the time the order was placed.
Since the European Central Bank (ECB) is aiming to keeping the euro as weak as possible, this fear has been increasingly subsiding for German companies. Because the lower the euro is against the dollar, the more euros the machine manufacturers are able to keep through the exchange of the foreign currencies they earn through the sale of their textile, printing or packaging equipment. Although, on the other hand, firms have to pay more in euros for raw materials and other imports priced in U.S. dollars. But the bottom line is still likely to be better than before. “The value of the purchases from the U.S. dollar zone is clearly lower than the sales,” said Mr. Trischler.
Without a doubt, the weakening of the euro, primarily through increasingly lower interest rates, is a real economic stimulus plan for the German export-oriented companies, which include the 30 companies on the German stock index (DAX) and the 100 fastest growing mid-sized world market leaders. Indeed, if the Japanese yen remains, as before, relatively weak, according to Mr. Trischler, it would limit the harm done to the German machine tool manufacturers in competition with their strong Japanese rivals. But when it comes to the pricing competition with American suppliers, which are profiting from the low energy prices and low wages in their country, then the euro is heading in the right direction.
How much the descent of the euro will help depends, however, on the respective companies. “The stronger dollar tends to help us as an exporting company,” stated the machine tool manufacturer Trumpf, which is based in Ditzingen near Stuttgart. But this factor is not a decisive influence on the business, according to the company.
For one, the euro zone accounts for 50 percent of sales, making it by far the largest market for the company, according to Trumpf. In addition, the export of high-tech machine tools such as lasers and medical technology from Germany to non-E.U. countries is “safeguarded by long-term hedging against short-term exchange rate fluctuations.” The company has also started up production plants outside of Europe, including in the United States. Two factories are producing goods for U.S. customers. The finance chiefs call it “natural hedging.” If a majority of costs and income accrue in dollars, then Trumpf does not have to worry about turbulent exchange rates. And if the euro falls against the dollar, that increases the U.S. profits in euros.
And even the former model company Heidelberg Druckmachinen, which reported a consolidated net loss of €34 million in the first quarter of this business year, was able to “profit in all regions because of the current weakness of the euro,” according to the company’s information. The printing machine maker has 80 percent of its sales – which amounted to €2.4 billion in 2013-14 – abroad. Hedging instruments against currency risks are now becoming less important “because the company can now offer its products at a lower cost outside the euro zone due to the currency rate.”
The month of July showed what effects the weak euro can have on the German balance of trade. German companies registered record exports of €101 billion. Because imports shrank at the same time by 1.8 percent, the German trade surplus reached a record €23.4 billion.
The weak euro should spruce up the profit and loss statements of many German companies. For example, in the second quarter, the relatively strong euro cost the chemical giant BASF €684 million in sales over the previous year. If the euro gets weaker, it won’t only drive the sales. For every cent that the U.S. dollar goes up and the euro correspondingly goes down, the company’s yields improve by about €50 million.
Things are similar for the chemical and pharmaceutical company Bayer. Each devaluation of the euro against the dollar of a single percent raises the company’s earnings by €84 million – and that without having to sell another bottle of aspirin. With earnings before interest, taxes and amortization, the advantage is still €24 million. The biggest portions of the windfall profits come from the pharmaceuticals division and agricultural business.
Matthias Zachert, the new head of the Cologne-based chemical company Lanxess, is downright joyful over the sinking euro exchange rate. For the company “changes in the euro-dollar exchange play the largest role, because the buying and selling of chemical products are often invoiced in dollars, and the pricelists for products are made in dollars,” according to Lanxess. That’s why despite strong sales, the strong euro in the first half of the year contributed to the decrease in turnover by 4.1 percent to €4.1 billion. “In comparison with the considerably stronger euro in the beginning of the year, an exchange rate on the current level or even lower would be advantageous to Lanxess,” the company stated.