Forex Boost

Weaker Euro Means Stronger Profits If German Exporters Deliver the Goods

The export train is about to get longer. Source: DPA
The export train is about to get longer.
  • Why it matters

    Why it matters

    The falling euro is serving as a stimulus plan for German export-oriented companies that have little production the U.S. dollar zone.

  • Facts


    • Some German companies have hedged against currency fluctuations so they won’t see much benefit of the weaker euro this year.
    • BASF gains €50 million in profits for each cent the euro depreciates.
    • Airbus has €100 million more in revenue when the euro costs a cent less.
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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.

The exchange rate policies of the ECB rarely have radical effects on corporate strategies.

And where there is no euphoria over the ECB’s desired weak euro, then calmness largely prevails. “The currency risk only occurs when a company operating internationally does business in countries with different currencies,” according to the pharmaceutical company Merck. In order not to be taken completely by surprise by currency fluctuations, the Darmstadt-based company safeguards its business with financial derivatives. The company, which produces Nasivin and Erbitux, concentrates on the dollar and adjusts the scope of its hedging since 2011 in a three-year timeframe.

The exchange rate policies of the ECB rarely have radical effects on corporate strategies. Carmaker BMW, for example, has decided to always go more with production to the areas where the most future buyers are expected. As a result, the company will have spent about $1 billion by 2016 on the construction of a factory in Spartanburg, in the U.S. state of South Carolina, which would increase the annual production capacity from about 300,000 to 450,000 cars.

BMW could also produce these cars in Europe, of course, and export them to the United States, thereby pocketing extra revenue when there is a weaker euro. But the company doesn’t let itself be led by short-term currency fluctuations. Investments, like those made in Spartanburg, are “long-term strategic decisions,” said a company spokesman.

Instead, the Munich-based carmaker is focusing on hedging and, according to company information, is “largely safeguarded in 2014 in the main currencies.” In that way, the Bavarian-based company uses instruments that offer a fixed exchange rate. Another alternative are options with which the company acquires the right in the event of a rising dollar to exchange a dollar amount at the old, cheaper exchange rate. A premium would be due on that. If the dollar fell contrary to expectations, the company would not have to decrease the dollar amount, but would only lose the premium.

BMW’s competitor Daimler is currently experiencing how the roller coaster of changes to the euro exchange rate can cause a company to tumble. In the first half of the year, changes to the exchange rate placed strains on the company. “These should be partially made up for again due to the most recent depreciation of the euro against the dollar,” according to the company. It is too bad for the Stuttgart-based company that they have hedged so much until the end of the year that the ECB’s gift will hardly affect them. “Since we are almost completely hedged for this year, we will only profit a little from a stronger dollar,” the company told WirschaftsWoche.

Airbus Chief Executive Tom Enders has offered a true understatement about the current weakening of the euro. The German-French aerospace and defense company, with most of its production facilities in Europe, pays most of its suppliers and employees in euros. But the airplanes are usually billed for in dollars. If its value increases, then Mr. Enders can offer the planes for cheaper, without suffering losses of income in euros. Or he collects more euros for the same price. “We welcome the development and see further movement in this direction as being positive,” the company stated.

The fact is that the Airbus factories are being run at capacity for the next eight to nine years, thanks to 5,900 airplanes already ordered. The company gets about €100 million more for every cent that the euro loses against the dollar. That is as much as Mr. Enders earns with the sale of one of his A321 neo passenger jets at list price.

This article originally appeared in WirtschaftsWoche. It was translated by Mary Beth Warner. To contact the author:

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