County Executives Encouraged by Vote on European Treaty : Trade: Some caution, however, that ratification by France does not rule out more currency instability ahead.
Executives in boardrooms across Orange County breathed a collective sigh of relief Monday, saying they hope that France’s ratification of a wide-ranging treaty on European economic and political unity will make international business prospects less shaky for now.
But they warned that Sunday’s narrow passage of a treaty signed in December by the 12 European Community nations to adopt a single currency by 1992 could be a harbinger of the same kind of turmoil that has racked the Continent for the past week.
“I don’t know if I would use the term tricky business climate ,” said Jay Steffenhagen, investor relations manager for Beckman Instruments Inc. in Brea. “But this does indicate to me that there will be some more surprises along the road to (European) unification.”
As European finance ministers on Monday weighed the implications of the French vote and emphasized that terms of the controversial Maastricht Treaty should not be renegotiated, business executives in Orange County sought to understand the short- and long-term effects on their bottom lines.
The implications were not always clear.
“Things are happening so fast that I want to see the dust settle before I can see what the impact is,” said Patrick Wong, an international marketing executive for Newport Corp., which sells medical research equipment. The company has a French subsidiary.
“I don’t think anybody has a real good feel at this point,” Wong said. “It certainly is complicated.”
Orange County business executives agree on one thing: The French vote at least for the time being will restore equilibrium in the European currency market, which was buffeted by uncertainty over the future of the European Community, the strength of the German deutsche mark and the near collapse of the European Monetary System.
There is also general agreement that a more unified Europe, as called for in the Maastricht Treaty, will help U.S. businesses cut paperwork, bureaucracy and expensive exchange-rate translations.
In the short term, whether a U.S. company is a winner or a loser in the European marketplace depends on what the company is and how it does business, executives and economists say. Some companies should take a decidedly cautious approach to further business endeavors; others should jump on an export bandwagon, taking advantage of the weak dollar, experts say.
Companies that manufacture products in the United States and export them directly to European consumers stand to gain the most from a weak dollar, for instance.
The dollar was weakened in international currency markets largely because of German interest rates, which were kept high in large part to stave off inflation during the reunification of East and West Germany. That led speculators and arbitrage traders to shift to the German mark, bringing down demand of the dollar and thus lowering its value.
As the dollar has fallen against other foreign currencies such as the mark, U.S.-made products have become cheaper, therefore making the company more competitive.
Domestic companies with European manufacturing subsidiaries, on the other hand, could find themselves on the losing end of an exchange-rate gap if they are selling products to neighboring countries whose currencies are falling.
For many companies, the effect of the economic crisis in Europe will be minimal.
“It all depends on where you’re buying and selling,” said Phillipe Jorion, an associate professor of finance at UC Irvine.
Gotcha International LP, an Irvine-based men’s sportswear manufacturer with roots in the surfing market, said the financial turmoil in the European Community has churned up an unexpected bonanza. Because of the stubbornly weak dollar in Europe, Gotcha’s German, French and Italian licensees, who manufacture clothing in Europe under the Gotcha brand name, are negotiating to have the Irvine sportswear company make all the clothing in Orange County and export it to them.
Partly as a result of the rise of the European currency against the U.S. dollar, the European licensees have told Gotcha that such an arrangement would be cheaper and “less of a headache for them,” said Mark Price, Gotcha’s vice president of marketing.
“This is definitely an opportunity for us to make money out of the manufacturing process as well as in licensing our products there,” Price said. “For us, this is also a way to keep the look of Gotcha products in Europe consistent with the direction of the label in the American market.”
Robert Wallace, president of Export International Division in Irvine, said clothing manufacturing is not the only industry that can benefit from the weak dollar.
He said any company that can manufacture products that have a “slice of Americana” will sell well in Europe.
Wallace, who just returned from a business trip in Denmark and Germany, said the closeness of the French vote does not accurately reflect the bullishness of European business owners, many of whom see a single currency and the lowering of borders within the EC as good for everyone.
The controversy over unification “is just a snapshot of politics,” Wallace said. “I know a lot of people (in the business community) who see this unification thing as a good idea.”
In a unified Europe, not only would a single currency save transaction costs, but harmonized regulations would help save money.
“This will certainly improve our productivity rate by cutting expenses and increase revenue,” said Frank Kirchhoff, vice president in charge of Western Digital Corp.’s European operations.
Sir Eldon Griffiths, president of the Irvine-based World Affairs Council of Orange County, said the financial upheaval in the European Community is no cause for concern among U.S. exporters.
“All the stuff about the disintegration and collapse of the union is rubbish,” said Griffiths, who is a former member of the British Parliament’s House of Commons.
“The economic life in Europe continues,” he said. “All that has changed is the pace toward a single currency and some kind of political union. Now, all that will take place in the middle to late 1990s.”
Griffiths said companies such as Beckman Instruments, which has a long-term European growth strategy and whose European sales account for more than 40% of its total revenue, will discover that it is business as usual in Europe.
“The bottom line to me is don’t panic,” Griffiths said. “Your products will still sell on price, performance and after-delivery service.”
Companies such as Allergan Inc. in Irvine and Satellite Technology Management Inc. in Costa Mesa say they have had few problems relating to the near-collapse of the Exchange Rate Mechanism because they deal only in dollars.
“We have a natural hedge built in,” said Allergan’s Jeff D’Eliscu, whose company owns a pharmaceuticals plant in Ireland.
Satellite Technology, a manufacturer of satellite ground stations and related software, does not make its products in Europe, but benefits from the exchange-rate gap between most European currencies and the dollar.
“We don’t see this as having a significant impact on our sales in Europe,” said Stephen A. Strohman, senior vice president in charge of sales marketing at Satellite Technology.
Still, if the troubles that beset the European Monetary System continue, his company would become more reluctant to do business in Europe.
“We would have to put additional emphasis on sales in other parts of the global market, such as the Asian and the Middle Eastern countries,” Strohman said.
For transportation companies, such as Burlington Air Express Inc., the unification process that some say is paving the way to a federal Europe would mean less paperwork and lower operating costs.
Burlington, with annual sales of $876 million, is the largest transportation company based in Orange County. A significant portion of its European business is conducted through the United Kingdom.
“We think that Europe’s unity is very important to the growth and stability in the air freight business,” said David Marshall, the company’s chief executive. “So all the changes that are bringing the European community closer to fruition are positive for the industry.”
But companies that use European currency rather than the U.S. dollar have experienced a hair-pulling week. One of them is Alton Industries Inc., a Tustin trading company that imports Italian furniture and housewares.
“Because we deal in the (Italian) lira, our problem is between the period we purchased the goods and the time the Italian companies plan to ship them,” said Mornay Tsai, vice president of merchandising for Alton.
