N.H. companies and the foreign exchange waters
The current environment represents an important opportunity for New Hampshire’s exporters, particularly exporters dealing with countries whose currencies have been down against the U.S. dollar
Despite economic challenges that persist in many countries around the world, New Hampshire continues to be actively engaged in the global economy.
According to the latest information from the International Trade Administration, a part of the U.S. Department of Commerce, more than 2,000 New Hampshire companies are exporters. Nearly 90 percent of these companies are small and medium-sized operations with fewer than 500 employees. In 2011, New Hampshire exported $4.3 billion of merchandise in a number of categories, including computers and electronic products, machinery, electric equipment, and fabricated metal products.
As exports continue to play an important role in the ongoing economic recovery, the current environment represents an important opportunity for New Hampshire’s exporters – particularly exporters dealing with countries whose currencies have been down against the U.S. dollar.
Many U.S exporters assume that dealing in U.S. dollars reduces their foreign exchange risk. In fact, risk is an element of any cross-border transaction. For exporters who insist on payment in U.S. dollars, these risks include:
• Adverse exchange rate moves: When price is negotiated, no one can predict what exchange rates will be when the transaction is settled.
• Hidden costs: When U.S. exporters demand payment in U.S. dollars, their buyers must convert their local currencies. Any intermediary institution involved in the transaction will add its own fee.
• Cash flow disruption: Cross-border trades take longer to complete than domestic deals in part because the exchange process itself can involve many parties. When the buyer is managing the foreign exchange, or FX, the exporter may have little control over how long the process takes, which makes working capital more difficult and unpredictable.
• Competitive handicaps: U.S. exporters who rely on dealing in U.S. dollars are potentially losing sales and handicapping themselves in price negotiations before they even start. If competitors – other exporters or suppliers in the potential buyer’s own country – are willing and able to quote prices in the local currency, they will gain a competitive advantage because the unknown cost of currency conversion is not part of the deal.
To reduce the potential impact of such risks, all exporters – no matter their size – must have a strategy in place before any such deal is considered.
Ideally, exporters should take control of and ‘own’ the deal by managing all aspects of foreign exchange themselves. This approach allows U.S. exporters to build the foreign exchange risk into their pricing to account for the potential of adverse exchange rate moves and the incremental costs of the exchange process itself.
Taking control of the deal can also help exporters:
• Control a variety of costs imposed by intermediary players that drive up prices with fees.
• Help ensure the timing and finality of payment.
• Maintain a competitive advantage versus the local competition.
U.S. businesses that export as well as import in the same country can also take advantage of an opportunity to self-manage their exposure to currency fluctuations. These companies can create foreign currency accounts that will help make the most of surplus currency funds without converting each transaction into U.S. dollars.
For example, a New Hampshire company might fund a bank account in Canadian dollars, use it to fund payables with receivables, and retain the flexibility to repatriate the value back to U.S. dollars or hedge the difference.
Any overseas business transaction includes potential risks and rewards. Successfully navigating the international marketplace can mean new or substantially expanded markets for those New Hampshire companies that are managing the challenges and opportunities of foreign exchange.
Joe Carelli is president of RBS Citizens and Citizens Bank, New Hampshire.