LIVING WITH A LESSER DOLLAR : Exports on Rise as Manufacturers Find Competition Easier
While the stock market crash has meant disaster for many of the financiers who push paper and computer buttons on Wall Street, it has inadvertently brought some good news to American workers who actually make things in the industrial heartland.
That’s because the latest plunge in the value of the dollar--brought on largely by Washington’s decision to ease credit in order to avert a recession--has further enhanced the ability of American manufacturers to compete with their Japanese and European rivals in world markets.
Today, in fact, exports, while still no match for imports, are booming for the first time in the 1980s, creating thousands of new factory jobs.
“The one positive thing we’ve been able to come up with since the crash has been that we don’t think manufacturers will be affected by it very much, because we see strong export growth,” said Allen Grommet, an industrial economist with Merrill Lynch Economics in New York.
“Exports will be driving manufacturing over the next few quarters.”
Indeed, exports are already on the rise--they were up 7.7% in the first three quarters of 1987, according to the Commerce Department. Moreover, 108,000 new manufacturing jobs have been created in the last two months, according to the Bureau of Labor Statistics, which gives much of the credit to export growth. Now, economists are forecasting that exports will grow even faster over the next year; Grommet predicts that the fourth quarter of 1987 will show a 16.6% increase over the third period and expects similar growth in 1988.
This export revival has been a long time coming, however.
For two years, the dollar has been tumbling, gradually restoring much of the competitiveness that U.S. industry lost in the early 1980s, by putting upward pressure on import prices and downward pressure on the prices of American goods sold overseas.
Competitors Cut Costs
Still, until recently, economists and industry executives worried that the dollar’s decline would be temporary, and so many businesses delayed making major investment decisions based on the highly volatile exchange rates.
Overseas, their foreign competitors initially responded to the lower dollar by cutting costs and profit margins, hoping to delay price increases and thus hold onto their lucrative American markets. Japanese producers in particular were also aided by the fact that the prices they paid for imported raw materials declined in yen terms, helping them keep a lid on the prices of goods manufactured in Japan.
Additionally, foreign demand for American products remained sluggish as international customers, faced with long lead times when ordering big-ticket products, waited to see how long the dollar would continue to fall.
But the latest plunge--to new postwar lows against the Japanese yen and West German mark--seems to have finally convinced many in the United States and abroad that a cheap dollar is here to stay, at least for a few years. That point was clearly underlined when the Reagan Administration appeared to abandon the multinational effort to stabilize the dollar in the wake of the crash.
So, while others may view the dollar’s subsequent collapse as a sign of the nation’s economic malaise, U.S. industry sees it as an opportunity.
Thus, American companies are now in the process of readjusting their investment patterns on a broad scale; many are bringing a major manufacturing operations back home, while others are cutting down on their purchases of foreign-made components.
Meanwhile, more and more foreign firms have been forced to sharply raise prices, giving their U.S. competitors a breather from tough import competition. Many of those same foreign producers are also rapidly building American factories, creating jobs here, in order to avoid punishing exchange rates.
“I think it is fair to say that people all over the world are looking at their sourcing patterns and are looking to change,” said George Eads, chief economist for General Motors.
At the same time, foreign demand for American-made goods and raw materials has started to surge.
The resulting export revival is now visible in almost every major manufacturing industry--even those, like the auto industry, that still find themselves under enormous pressure from imports.
Late last month, in fact, Ford announced that it will soon begin exporting its U.S.-built Taurus models to Japan for the first time, with other American-made Ford cars to follow. Ford also recently began exporting American cars to Sweden, as well as seven Middle Eastern nations; the company says that its total auto exports should double this year to 22,000 from 11,000 in 1986.
“Today’s more reasonable value of the dollar makes the cost of these products attractive in foreign markets,” Ford Chairman Donald E. Petersen said in a recent Tokyo press conference.
GM has also announced plans to export its most popular Pontiac and Chevrolet mid-size models to Japan and expects to double its auto exports to Europe next year. Honda, meanwhile, has said its U.S. assembly plant--which is now cost-competitive with its facilities in Japan--will begin building cars for export to Japan early next year.
The shift has been just as dramatic in the huge market for automotive parts. The Australian subsidiary of General Motors, for instance, recently decided to import auto engines from a GM plant in the United States instead of from Japan, while Ford said earlier this month that it will consolidate automatic transaxle production in Ohio, dropping Mazda as its Japanese supplier.
A Chance to Compete
Toyota also said this month that it will spend $300 million to build engines and axles in Kentucky in order to supply its assembly plant now under construction there. The new investment will increase the U.S. content of the cars that Toyota will build in Kentucky to 75%, the company said. In addition, dozens of smaller Japanese companies are building parts plants to supply the Japanese “transplant” auto assembly facilities now opening throughout the Midwest.
But other, less visible industries, producing both consumer products and capital goods, are reacting to the new exchange rates as well. In the machine tool industry, for instance, Japanese prices have risen 20% this year, giving American firms a chance to compete both in the United States and overseas.
“We used to export to Europe, but we basically lost that capability,” said Richard Lindgren, president of Cross & Trecker Corp., a major machine tool manufacturer. “Now, with the lower dollar, we’re starting to get it back, and we’re looking at exports again.”
“We are noticing an increase in requests from European companies for us to quote bids on large systems that we don’t make in Europe and only make in the United States,” adds John Redding, a spokesman for Cincinnati Milacron, another major machine tool manufacturer. “When the dollar was stronger, we didn’t even have a chance to quote with them.”
Others are also responding quickly. Caterpillar Tractor, the world’s largest maker of construction equipment, has reduced the foreign content in its U.S.-built tractors and construction machinery to about 12% today from 17% in 1985. And, since Caterpillar’s primary competitor, Komatsu of Japan, has been forced to increase its prices by about 29% over the last two years--while Cat has hiked its prices by only about 5%--Caterpillar’s domestic sales and exports are on the rise. In the third quarter, it posted its highest sales and earnings in six years.
Exports Rise Sharply
General Electric, one of the nation’s biggest manufacturers, has resumed its once-dormant exports of refrigerators and washing machines to the Middle East, while its light bulb exports are up 20% worldwide this year. GE is also winning new orders in areas that it once gave up to the Japanese; it is now selling U.S.-built turbine generators to Southeast Asian electric utilities that previously bought from Japan.
Overall, GE’s orders for exports of capital goods have increased by about 30% in 1987, according to Walter Joelson, GE’s chief economist.
Du Pont Co., the huge petrochemical conglomerate, adds that its exports of textile fibers, industrial chemicals and other products have risen 20% this year, with most of the new shipments going to Europe, South America and Japan.
Meanwhile, the American steel industry, on the verge of collapse until this year, is now enjoying a surprising recovery and a new-found ability to compete, largely because of higher prices on imports brought on by quotas and the falling dollar. As of August, for instance, the average price for imported, cold-rolled sheet steel, widely used to make cars and appliances, had risen more than 18% over last year’s levels. The lower dollar has also given some of the nation’s biggest steel makers a chance to export steel to Japan for the first time in a generation.
“Now we have a cost advantage versus the Europeans and versus the Japanese, and this is going to further enhance that competitive advantage and enhance our ability to export,” said David M. Roderick, chairman of USX Corp., the nation’s largest steel maker.
Steel exports to other markets besides Japan are also surging. Through September, U.S. steel exports were up 18% worldwide and could exceed 1 million tons in 1987 for the first time since 1983.
Steel makers are benefiting from the lower dollar in other ways as well, as more of their domestic manufacturing customers win export business and shift production capacity back to the United States, thus increasing their need for American steel.
“The lower dollar has been generally positive for steel directly but much more positive for our customers who compete with Europe and Japan in products like autos and heavy machinery,” said Bob Wendt, an economist at Bethlehem Steel. “There just seems to be a great deal more optimism now among our customers that they finally have exchange rates, especially in the Japanese yen, German mark and French franc, at which they feel confident they can compete.”
Yet many executives remain puzzled by the fact that the unit volume of imports has not significantly decreased in many key product areas. Indeed, the total value of imports (inflated by their higher prices in dollar terms) was actually up 8.2% in the second quarter, compared to the first quarter, according to the Commerce Department. In autos, for example, import sales have remained fairly steady, despite price hikes of 25% or more on many Japanese models over the last two years.
So while American manufacturers are now finding it easier to compete with foreign competition, they have still made only selective inroads on imports in many important sectors of the economy.
One reason is that the dollar has not declined against many Third World currencies, so imports from Taiwan, Singapore and South Korea are still surging in to fill the void as shipments from Japan begin to slide.
But some economists believe that the trade figures also show just how addicted Americans are to imports and, conversely, how addicted foreign manufacturers are to the American market.
Many Japanese manufacturers, for example, receive the bulk of their worldwide profits from the United States and so have been willing to drastically cut costs and reduce profit margins in order to avoid raising prices by the full amount of the yen’s appreciation against the dollar. At the same time, American consumers, unable to buy equivalent products from U.S. firms, have been willing to pay extra if they must for Japanese cars, cameras and VCRs.
If that trend continues, many economists believe that the dollar may be forced much lower.
“As long as we have such a trade imbalance of enormous proportions, with all the deficits in the United States, you’ve got to say we don’t have currency equilibrium,” GE’s Joelson notes. “In the current climate, and in the absence of protectionism, you must finally come to the conclusion that the only indicator of whether we actually have an equilibrium of exchange rates is when trade is in balance.”
