Finance

Topics: Foreign exchange market, Currency / Pages: 18 (4489 words) / Published: Jul 1st, 2013
CASE I
THE RISING EURO HAMMERS AUTO PARTS MANUFACTURERS

Udo Pfeiffer, the CEO of SMS Elotherm, a German manufacturer of machine tools to engineer crankshafts for cars, signed a deal in late November 2004, to supply the U.S. operations of DaimlerChrysler with $1.5 million worth of machines. The machines would be manufactured in Germany and exported to the United States. When the deal was signed, Pfeiffer calculated that at the agreed price, the machines would yield a profit of €30,000 each. Within three days that profit and declined by €8,000! The dollar had slid precipitously against the euro. SMS would be paid in dollars by Daimler Chrysler, but when translated back into errors, the price had declined. Since the company’s costs were in euros, the declining revenues when expressed in euros were squeezing profit margins.

With the exchange rate standing at €1 = $1.33 in early December 2004, Pfeiffer was deeply worried. He knew that if the dollar declined further to around €1 = $1.50, SMS would be losing money on its sales to America. He could try to raise the dollar price of his products to compensate for the fall in the value of the dollar, but he knew that was unlikely to work. The market for machine tools was very competitive, and manufacturers were constantly pressuring machine tool companies to lower prices, not raise them.

Another small German supplier to U.S. automobile companies, Keiper, was faring somewhat better. In 2001 Keiper, which manufactures metal frames for automobile seats, opened a plant in London, Ontario, to supply the U.S. operations of DaimlerChrysler. At the time the investment was made, the exchange rate was €1=$1. Management at Keiper had agonized over whether the investment made sense. Some in the company felt that it was better to continue exporting from Germany. Others argued that Keiper would benefit from being close to a major customer. Now with the euro appreciating every day, it looked like a smart move.

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