Dollar’s Decline Starts to Buoy Some U.S. Firms : Cheaper American-Built TVs Among Beneficiaries of a More Expensive Yen
Item: In early January, Matsushita Electric Industrial Co. announces that it will no longer supply General Electric with color television sets. Matsushita blames the strong Japanese yen and weak U.S. dollar for the fact that the two companies can’t come to terms.
Item: In mid-February, GE responds that it has found a source much closer to home for the 500,000 sets it needs--the plant run by its own RCA subsidiary in Bloomington, Ind. Production will begin Monday. “We’re going to take a shot at making it a very cost-efficient plant,” Frank V. McCann, a GE spokesman, said.
Score one for the falling dollar.
The greenback’s two-year slide has yet to reverse a U.S. trade deficit with the rest of the world estimated at a towering $170 billion for 1986. Indeed, there is a growing awareness that the weaker dollar--which tends to make American goods cheaper overseas and foreign goods more expensive here--is not a cure-all for U.S. industries injured by competition from abroad.
But there are new signs that the dollar’s drop relative to certain key currencies is beginning to have a favorable effect on beleaguered American manufacturers. Last Thursday, the government reported a moderate improvement in the U.S. trade balance for the fourth quarter of 1986, with exports growing 13.6%. In addition, industrial production and factory use have both risen in recent months.
“The cumulative drop of the dollar since March, 1985, has improved the attractiveness of U.S. goods in world export markets,” said John Hagens, an economist with Chase Econometrics, adding that “for the last six months, exports have been extremely strong.”
But the lower dollar’s effect can be hard to predict, especially for companies that do business throughout the world. The television sets that Matsushita built for GE, for example, were not made in Japan, but in Vancouver, Wash.
Despite the U.S. manufacturing location, however, yen-related price pressures on Japanese parts and other expenses caused Matsushita’s arrangement with GE to break down.
Importance of Exchange Rates
For such an export-driven industry as Japan’s consumer electronics, relying on exchange rates is “a way of life” said David Lachenbruch, a longtime industry observer and editorial director of the trade magazine Television Digest.
At Fluor Corp., an engineering, construction and natural resources concern based in Orange County, the results of the dollar’s drop have been uneven.
Chairman David S. Tappan Jr. said it has become more economical to employ U.S. engineers overseas and that some mineral prices, such as those of lead and zinc, are more competitive. But, he cautioned: “When we talk about the dollar falling, it is falling relative to the yen and (West German) deutsche mark. It is not falling relative to (all) other currencies.”
According to the Morgan Guaranty Trust, as of Thursday the dollar had dropped 31% against a collection of 15 currencies since its peak in February, 1985. But when currencies are considered individually, the variations become apparent, with little change in the dollar relative to the money of South Korea, Taiwan and some other key trading partners.
Nonetheless, Fluor’s current attempt to win a power plant modification job in Michigan provides striking evidence that the lower dollar can give U.S. companies an edge. In putting together its proposal to oversee the project, Fluor sought a supplier for more than $150 million worth of turbines--big pieces of equipment used in generating power. It invited several American companies to bid, as well as manufacturers from Japan, Britain, West Germany and Switzerland.
Shortly after the invitation, however, the Japanese, Germans and British all dropped out, with the Japanese stating that the new yen-dollar relationship had hurt their ability to compete. “It’s very likely that an American company will have the lowest bid,” Rick Maslin, a Fluor spokesman, observed.
The lower dollar also has helped Hewlett-Packard Corp., where international orders for the quarter ending Jan. 31 were up 24% from a year ago. Treasurer George F. Newman said the high-tech firm’s prices had dropped 40% in Japan and in parts of Europe during the last 20 months. But he pointed out that prices had risen a similar amount during the dollar’s surge a few years ago: “So we’re really back to square one.”
Eastman Kodak Chairman Colby H. Chandler, citing a 1986 worldwide sales increase of 9%, said last week that the dollar’s drop has meant that “the translated value of Kodak sales increased, and the company’s market positions in Europe and Japan improved.”
The Rochester, N.Y.-based company figures that the dollar’s realignment last year resulted in a net earnings boost that was worth 70 cents per share. That compares to a cumulative drop of $2.57 between 1981 and 1985.
Wants Still Greater Drop
Chandler and others argue, however, that the dollar must sink further, possibly another 20% to 30%, to compensate for cheaper labor and productivity gains elsewhere in the world. “Without it, U.S.-made goods simply will not be competitive,” Chandler told the Senate Finance Committee earlier this month.
To be sure, revitalizing U.S. competitiveness is a far more complex proposition than simply relying on the dollar’s ups and downs. While the dollar’s fall is starting to be reflected in improving sales, executives typically are taking a wait-and-see attitude toward basing any long-term investment plans--such as whether to build a factory in the United States or abroad--on its present value.
Corporate officials point out, for instance, that currency values ebb and flow over time. They give greater weight to other factors, such as the advantage of producing goods near local markets and the availability and cost of labor, in determining long-range production strategies. Hewlett-Packard’s Newman said: “It (the lower-valued dollar) clearly is working in our favor, but we don’t make strategic changes in the way we produce goods with each tick of the currency.”
Labor is so much cheaper in South Korea, Taiwan and many other nations than in the United States that it is hard to envision the dollar falling far enough to make American workers competitive in low-skill, high-labor procedures. Henri A. Jarrat, president of VLSI Technology Inc., a high-tech manufacturer based in San Jose, said: “If we’re talking about building a production facility today, Japan will be less attractive than it was a year ago and we’ll probably have to consider areas like South Korea.”
Automation Suggested
Jarrat added that, in light of labor costs, “there’s no way the United States can compete with areas like the Philippines and Korea if it’s a labor-intensive process. The weak dollar will help somewhat, but (to make the United States competitive) we’ll have to push for automation.”
Advanced production technology played such a role in the recent decision by Innovative Controls, a U.S. producer of home-security lighting, to shut down a plant in Taiwan and replace it with one in its home base of Houston. U.S. currency has lost little value compared to that of Taiwan’s.
And according to Ray Flannery, the company’s president, labor costs will be four to five times greater in Texas, where he expects to employ about 300 workers. But, he pointed out, reduced shipping expenses and a new state-of-the-art facility will allow the firm “to offset the increase in labor costs and still employ a lot of people.”
While the lower dollar has hurt some foreign manufacturers, others who had already established production inside the United States have been able to cushion the jolt.
American Honda Motor recently announced plans to invest $450 million to expand its Ohio facilities. The move means that Honda will build all its major U.S. car components in this country by 1990, the first Japanese auto maker to do so.
The announcement comes at a time when it costs Honda about the same amount to build a car in Ohio as in Japan, according to Kurt T. Antonius, a company spokesman. That is a pronounced change; as recently as early 1985, the U.S. cost disadvantage per car was in the $400-to-$500 range.
But Honda, which has led its Japanese competitors in setting up auto assembly in the United States, said the Ohio expansions were part of a strategy to serve the U.S. market under way long before the dollar fell; the currency movements have been serendipitous.
For Japanese auto executives planning U.S. expansions, the wish to head off protectionism and reap the advantages of locating inside the lucrative American market have played a much greater role than concern about exchange rates.
“It is a basic Honda philosophy to build products where we sell them,” Antonius said.
Brutal Competition
In contrast with the automobile industry, where American companies remain powerful, much of the U.S. presence in consumer electronics has been obliterated in recent years. Thus, the unfolding tale of GE and the color television sets is of special interest, as it defies the trend of recent history.
Price competition in television manufacturing is so brutal that--despite inflation and higher quality--consumers are able to buy a typical set today for what it cost 20 years ago, according to the Electronic Industries Assn., a trade group. By the time General Electric shut down its Suffolk, Va., color-television plant last fall and gave the work to Matsushita, only RCA and Zenith survived among traditional U.S. manufacturers.
Major Japanese competitors, including Sony, Matsushita, Sanyo and others, meanwhile, had set up shop within the United States. The U.S. and foreign-based companies all rely heavily on parts from abroad.
Labor Cooperation Assumed
Aware that they are making a big gamble in Indiana, GE officials are counting on labor and management to cooperate to build the sets as efficiently as possible. In addition, they are spending $20 million to modernize the plant, while announcing no plans to expand the 2,200-member work force.
A cold reality looms over the new operation: It may be the workers’ last chance to keep the jobs in America. GE officials made no secret of the fact that they considered finding a South Korean supplier to replace Matsushita.
There are indications that the workers see their new job as highly symbolic at a time when U.S. competitiveness is increasingly questioned. Bill Hacker, local business manager for the International Brotherhood of Electrical Workers in Bloomington, said in a statement that GE’s decision represented “a one-time chance to show the world that American workers can be part of change and make it work right here in the Midwest.”
