LIVING WITH A LESSER DOLLAR : Higher Import Costs Hurt Firms Dependent Upon Foreign Goods

NEW YORK — Colorocs Corp.’s color copier seemed like a sure winner until the government devalued the dollar to save the economy.

The Norcross, Ga., company had designed a machine that it hoped to sell for $10,000--a price that Colorocs believed was low enough to spur demand among small businesses that haven’t been able to afford such a product. To help keep costs down, Colorocs contracted to have the machine built by one of several Japanese firms with experience in low-cost copier manufacturing.

But as the yen rose about 48% against the dollar over the past 2 1/2 years, Colorocs’ costs went up--and so, inevitably, did the price the new company would have to ask. Colorocs officials now believe that they may have to charge as much as $18,000 when the machine is ready for shipment next spring.

“That’s going to cost us sales to small companies, and that’s going to hurt,” acknowledges Deborah Cox, the company’s investor relations director.

Colorocs’ dilemma illustrates an unhappy consequence of the devaluation strategy that has been so warmly embraced by many U.S. companies. While the dollar’s decline has set off a boom among American exporters, it has brought higher import prices that are straining the growing number of American companies that depend on goods from abroad.

These include not only the bustling industries that import cars, consumer electronics goods and other finished products for resale here, but also a vast assortment of others that need foreign-made components to build their own products. The ranks of such import-dependent companies have swelled in the past decade, as foreign companies have come to dominate many areas of manufacturing and the world’s economies have grown ever more intertwined.

Most worries about the strategy of lowering the dollar have focused on the risk that, by increasing import prices, the devaluation will set off inflation. But analysts say the negative effects of a lower dollar on the import-dependent sector poses risks that should not be minimized.

“The common wisdom is that a falling dollar is an unambiguous blessing for American business, and that’s far from the truth,” said Douglas Cliggott, senior economist with Merrill Lynch Capital Markets.

The German mark, like the yen, has risen about 48% against the dollar, and several other European currencies have risen nearly that much. The Taiwanese dollar has risen about 25% since February, 1985; while the South Korean won has risen only 6%, many analysts believe the Korean government may soon be forced to let its currency rise as well.

The U.S. dependence on imports has been evident in the stubborn persistence of the trade deficit through most of this year. Though the dollar has fallen sharply and exports have begun to edge up, the United States has continued to suck in more than $30 billion of imported goods each month, thus maintaining a trade deficit that was still $14.1 billion in October.

Duplication Hard

Another sign of this dependence is the run-up in the value of durable goods imports over the past decade. Between 1976 and 1986, the value of such imports from Europe and Japan alone grew nearly fivefold to $143.2 billion.

Part of the appeal of the devaluation policy lies in an expectation that, as import prices rise, American companies will be forced to abandon their foreign suppliers in favor of American sources. But the country’s imports include an array of products--from computer chips to manufacturing machinery to scientific instruments--that U.S. companies simply can’t duplicate from American sources.

When Colorocs looked around for a supplier, it found half a dozen Japanese companies, including Canon, Ricoh and Sharp, with experience in building low-cost color copiers. Among U.S. firms, only Xerox builds such a machine--and it builds it in Scotland, said David Artman, analyst with Gartner Securities in Stamford, Conn. “There really wasn’t much choice among domestic suppliers,” he said.

Other high-technology firms would find it similarly difficult to do without their foreign suppliers.

American manufacturers of laser-based computer printers have no choice but to rely on imports, because only the Japanese make laser engines, the key component of such machines.

Officials of printer manufacturer QMS Inc. of Mobile, Ala., said the engines account for 50% of the cost of building laser printers. So far, QMS has avoided raising prices by absorbing part of the added cost and by buying currency futures contracts to hedge against the yen’s rise.

But Philip Cahoon, QMS’ controller, said that if the dollar declines another 10% or so against the yen, “we’ll have to give up some of our less profitable lines.”

And Cahoon said currency hedging is far from a perfect solution to the problem, since it involves costs of its own. In such hedging, a company pays a premium for an option to buy currency at a certain exchange rate in the future.

U.S. electronics manufacturers have been hit by this year’s sharp rise in computer chip prices, which is due in part to the yen’s gains and in part to protective tariffs imposed by the U.S. government.

Many of the chips called random-access memories--used by the scores in computers and other products--have risen one-third in price, industry officials say.

Some Firms Helped

The chips account for only 10% to 20% of the manufacturing costs of such products as personal computers. But they can account for more than 50% of the costs of other electronic goods, such as the add-on boards that computer users install to give their machines more data-storage capacity.

“A lot of electronics companies are helped by what’s happening to the dollar, but a lot are on the other side of the fence, too,” said Michael Murphy, editor of California Technology Stock Letter, an investment newsletter in San Francisco.

Some Japanese manufacturers have held down price increases on some products because they are competing with the Koreans, whose currency has risen only slightly against the dollar. But Murphy said that if the Koreans succumb to U.S. pressure to let their currency drift upward, “you’re going to see more price increases in a lot of areas.”

American textile and tobacco companies have seen increases of nearly 50% in the price of some foreign-made equipment they use to make their products.

As American firms have bailed out of basic manufacturing industries in recent years, only European and Japanese companies have been left to build the high-technology manufacturing machinery used by these two industries. Since the manufacturers have no American competitors, they are able to pass along higher prices as their currencies’ value grows.

The price increases have proven particularly jolting for textile manufacturers, who pay from $100,000 to several million dollars for the custom-built European and Japanese machinery they need to weave fibers into cloth.

The increases forced officials of Fieldcrest Cannon Inc. repeatedly to revise their planned $65-million capital spending program.

“We’ve had to go back time and again over the last six to eight months to redo the numbers,” said W. O. Stone, the Eden, N.C., company’s vice president of research and engineering. The company’s board of directors may now be forced to cancel one of its expansion plans, he added.

Jubilation May Dim

George Wino, economist with the American Textile Manufacturers Institute, said that while the dollar has not yet sunk low enough to give U.S. textile and apparel manufacturers a clear edge over foreign competitors, it has fallen enough to bring hefty increases in the prices of manufacturing equipment they can’t do without. “It’s been a squeeze from both sides,” he said.

Economists say some U.S. manufacturers who have hailed the dollar’s decline may find less reason for jubilation in the future because of the way the devaluation is attracting foreign manufacturers to U.S. shores.

Auto makers such as Toyota, Mazda and Nissan are strengthening their foothold in the U.S. market with new factories. Other foreign manufacturers are taking advantage of the weak dollar to buy U.S. manufacturing subsidiaries, such as the Swedish appliance company Electrolux, which last year bought a U.S. appliance maker, White Consolidated Industries.

“The first reaction of these exporters is positive,” said Robert Z. Lawrence, an economist at the Brookings Institution in Washington. “They may reconsider when they discover that the weak dollar has accelerated the transplant process.”

AM International, an international printing-products company that recently emerged from bankruptcy reorganization, has seen its sales surge because of the currency changes. The company’s backlog is at an all-time high, while revenue for the September quarter was up 10%.

Yet with these benefits, the weaker dollar has apparently brought a threat.

A Japanese printing company, Komori Printing Equipment, disclosed this month that it has amassed a 9.6% stake in AM International. Some analysts believe Komori would like to get its hands on AM International’s global distribution channels and plans to exploit the favorable currency exchange rate to mount a takeover attempt.

“You’d have to say there is a down side to this, too,” said Merl H. Banta, chairman and chief executive of AM International.

While import-dependent manufacturers struggle to adjust to the currency changes, so do distributors and retailers of foreign goods.

The prospect of higher imported clothing prices is among the reasons that the stocks of many specialty and department store retailers were falling even before the stock market’s collapse.

Shares of Gap Inc., owner of the Gap stores, traded as high as $77.875 in the past year but began falling sharply in September. Last week, as Gap reported a 13% quarterly earnings decline, the stock traded at about $18 a share.

The prices of some Asian imports, such as shirts, blouses and sweaters, have already risen about 10% in American stores, and retailers predict that they may have to further increase prices on products they buy this winter for sale next fall and winter.

Economic Effects

Korean suppliers are “already anticipating their currency will rise in the next six months, and they’re building those increases into their prices,” said Gordon Freund, director of international buying for J. C. Penney.

Import businesses have swelled as Americans’ taste for foreign goods has sharpened, and now their contraction will have broad effects on the economy, analysts say.

Dealers in imported automobiles employ about 301,000 people, up from about 122,000 in 1972, according to the American Imported Auto Dealers Assn. Increased auto prices--base prices on some models are already up 25% since 1985--are expected to hasten a shakeout that began in recent years because of the glut of dealers.

“For the dealers that have been on the edge, this won’t help things,” said Robert McElwaine, president of the trade group.

The devaluation will also hurt all businesses to the extent that it increases inflation.

Stephen Marris, economist with the Institute for International Economics in Washington, estimates that the decline in the dollar may add 2 to 3 percentage points to this year’s inflation rate of 5%.

Marris said that, while the dollar’s decline helps many large manufacturers that have struggled through most of the 1980s by stimulating inflation, it will penalize companies that don’t compete with foreign concerns and have generally prospered through most of the decade.

This, he speculates, may reverse the recent growth pattern among the regional economies. “You’ll see the heartland grow as the basic manufacturers do better, while the two coasts, with their economies based heavily on services, will slow down,” he said.