The Euro vs. Dollar double gambetto for high tech corporations
In chess, a gambetto – say it with an Italian accent, consists in sacrificing a piece at the beginning of a game to gain a competitive position on the exchequer – for example through the control of the center of the chessboard or one of the long diagonals.
Getting back to business (we’ll get back to the gambetto later), it is very common to say that the state of an economy is reflected by the strength of its currency when the Euro currency is weak – and hence that the economy of the EU are in poor shape. However, when the Euro gets stronger, companies and officials claim that corporations are constrained in their efforts to export goods and services and that the situation should be reversed or the EU will soon enter an economic turmoil.
I think this is all too easy and bullshit.
God Dollar used to be the only viable currency in international trade, until the Euro came out of nowhere in January 2000 (2001 for actual pocket coins and bills). The European Union is the world’s largest consumer market, and a gateway to the Middle East and Africa for American companies. Although the Dollar still dominates international transactions of goods (slightly) and financial transactions (easily), the Euro has emerged as a tangible alternative considering the political stability of the region.
Consequently, the Euro vs. US Dollar exchange rate has kept growing insanely from 1 EUR = USD 0.85 in mid 2000 (1 EUR = 1.19 USD on January 1st 2000) to 1 EURO = USD 1.47 USD today. Althoug I acknowledge the trickiness of the situation for export businesses, high tech or not, I see very few corporations have implemented hedging strategies or make proper use of forward contracts – which is a shame. Still, instead of lamenting, I believe economic decision makers of both the US and the EU should roll up their sleeves and act in such a way (hell yeah I’m even givin’ lessons now, love blogging…):
For US High Tech companies: go for internationalization. Acquiring hardware, software, telco devices, consumer electronics and services labeled in USD has never been cheaper. So why wait? I’m pretty sure any potential buyer would understand this reasoning. A weak USD is a fantastic opportunity for American exporters to thrive abroad, and win strategic, long-term projects. It doesn’t matter whether the profitability of these projects is low: what matters is to build reputation on new markets, or to highlight your competitive advantage against local players. Remember, the gambetto? Be ready to sacrifice a few cents today (anyways, the dollar rates so low that it’s no big loss whatsoever) to be in the real race when that moment comes.
For European high tech ventures: shop for intellectual property and talents in the US since the Euro has never been so strong against the US Dollar – which will make acquiring quality companies cheap, and build production capability in China and India (or go and get cheap but excellent developers in Eastern Europe, before the Euro comes there, or Israel) to reduce the cost of goods sold, enhance their competitiveness and therefore be ready for a shift during harsher economic times or win back market share on their competitors’ behalf. EU corporations, especially the big ones, find it hard to tear the P&L from the balance sheet and should learn to make better investments. Remember when the VCs said that few large European high tech corporations had a real, sound external growth strategy? Even though making the quarter may seem tough because of a strong Euro, acquiring today technologies that will generate tomorrow’s revenues boils down to ‘sacrificing’ a small slice of the pie to weaken the competition, and build a better product offer for tomorrow. Gambetto again.
Now waiting for the Chinese Yuan to offer a third way…
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I must say although I agree with the general idea (buy high tech and software while it’s still time), the euro/dollar analysis would require just a bit more digging.
On a first level analysis, yes, a strong euro may mean a bonanza, everything is cheap abroad, let’s buy. But on the same level, revenues are quite not the same because exporting gets harder, so I suspect “investing massively” could get a “not right now” answer most often than not.
Let’s see this in closer detail. What is a “strong” currency? Contrary to popular belief, it is not a currency that trades at a “high level” (when one thinks about this, it actually doesn’t mean anything), but rather a currency that appreciates steadily against a trade-weigthed basket of other currencies. The situation today is not really that of a strong euro – but that of weak dollar. It may seem a play on words, but it isn’t. The exchange rate today does not reflect the upcoming of the euro as an international currency since its introduction in 1999 (the actual bills and coins in 2002 was actually only a technical matter that didn’t change anything on world trade), but mostly reflects the de-coupling of world growth: the US, for a change, are being left behind emerging countries and the EU. Moreover, this has been exacerbated by the financial crisis of the summer and the Fed’s decision to cut rates.
I was going to write something similar to Emmanuel, but along the line that, like in chess, international business will require more variables to think about, besides the exchange rate (which is still an important consideration).
But since Emmanuel put it so eloquently, I’ll just go “yay, Europe, boo USA!”
Emmanuel, I always thought that US’s growth outperformed the EU…
Not these days…
OK, this may be because I am living in France, one of Europe’s sluggiest countries since forever.
Haha, yes, that may be it. Also bear in mind that “a sluggish economy” may have different meanings across countries. A growth of, say 1.5% of GDP in Switzerland is ok, whereas 1.5% in the US is terrible: in one case you are at potential growth, in the other you are far below it. So if the US and the EU are both at 2% growth, economists may consider that the EU is indeed outperforming the US.
That said, for 2007, the EU should still grow faster in actual figures (economists’ estimates at around 2.4% vs. 1.9%).
Sort of agree with you, Jeremy !
Keep blogging,
_Marc
> Althoug I acknowledge the trickiness of the situation for export businesses, high tech or not, I see very few corporations have implemented hedging strategies or make proper use of forward contracts – which is a shame.
Interestingly enough, currency hedging was the topic of my master’s thesis… =)
But you’re right, very few companies, even though their income might be dependent on foreign currency, apply any proper hedging strategies for their currency positions. One problem is of course lack of awareness of these instruments and the other that currency trading is quite often over-the-counter, which means it may be way too expensive for smaller companies – even though the risks of currency fluctuations might be a significant risk factor for them.