THE DOLLAR’S FREE FALL : American Firms Have Learned to Cope : Trade: In fact, companies that rely on exports, such as Sun Microsystems, can benefit from a weaker dollar.
As vice president of finance for Sun Microsystems’ European operations in the 1980s, Richard Barker never saw the dollar plunge so precipitously as it has in recent days.
“But I certainly experienced quite traumatic strengthenings of the dollar,” recalled Barker, now the company’s vice president and corporate treasurer.
When the dollar was especially robust in the mid-1980s, Barker noted Wednesday, higher prices for U.S. companies’ goods made them a tougher sell overseas. And that spelled trouble for companies like Sun, a maker of high-performance workstations that today garners half its $5 billion or so in annual sales overseas.
Give these exporters a weaker dollar any day.
“For a company with a large export base, weakness of the dollar makes us more competitive in overseas markets,” Barker said.
Like many other Silicon Valley companies, Mountain View-based Sun has had plenty of experience hedging against the vagaries of foreign currency markets and managing the delicate balancing act required to operate successfully in the global economy. As a result, the dramatic plunge in the dollar’s value against the Japanese yen and the German mark is less a cause for panic than it might have been years ago.
Over the last four years, for example, Sun has created cross-functional teams--with representatives from its engineering, legal, treasury and other departments--to keep constant tabs on each of the core commodities on which the company’s production depends. These include disk drives, monitors, power supplies and DRAMs, a type of memory chip. All told, Sun spends about $3 billion a year on such components.
The idea, said Mel Friedman, vice president of supplier management, is to develop a strategy for each commodity that will protect the company against the difficulties that can result not only from currency fluctuations, but also from natural disasters, political upheaval or trade issues.
Sun’s manufacturing, sales operations and 12,500 employees--as well as its suppliers--are scattered widely across the globe.
In negotiations with its 40 chief suppliers in Japan, South Korea, the United States and Europe, the company seeks one- or two-year agreements. Typically, the supplier agrees not to exceed a certain price in any given quarter and not to sell its components to anyone else for less than it charges Sun. Known in the trade as “not-to-exceed” and “most-favored” pricing, these clauses protect Sun from market volatility and help ensure that a rival won’t get a leg up.
In some cases, the parties also agree to return to the negotiating table if the yen fluctuates too much one way or the other.
“It has to be a win-win situation or the relationship doesn’t work,” Friedman said.
Like other global companies, Sun also hedges against currency fluctuations.
“We will be somewhat creative with our treasury department in negotiating which currencies to use,” Friedman said. Two years ago, for instance--as Sun executives nervously watched the yen gathering strength--the company shifted more of its contracts to dollars.
“It has worked in our favor because the yen has gotten so much stronger,” he said. “Otherwise, we’d be taking a bigger hit.” If the company has a dollar-based agreement with a supplier that includes a clause saying it won’t pay above a certain price, it is fairly well protected against any movement of the yen.
As another way to counter volatility, Sun prods its suppliers to diversify their own production locales.
At Sun’s urging, Sony--which supplies Sun with monitors--started production two years ago at a former television plant in San Diego. In turn, Friedman said, Sun has been able to avoid the effects of some of the rising labor costs in Japan.
As a result of such strategies, said Barker, the corporate treasurer, “in most companies this (dollar plunge) should not be an immediate panic situation.”
