Strengthening Dollar Requires Rethinking Tech Economics
A blessing and a curse, appreciation of the U.S. dollar is good for the economy in the long run but poses challenges to companies in the meantime.
By Diana L. Mirakaj
Are you an American looking for a German luxury car or an Italian leather handbag? There’s no time like the present for a shopping spree. On the other hand, if you’re a German businessperson or an Italian enterprise looking to do some technology spending, this isn’t the time to buy American servers or software.
Microsoft, IBM, and Johnson & Johnson are just a few of the many U.S. blue-chip firms that have already warned about the potential consequences a stronger dollar will have on their sales and profits this year. While a stronger dollar makes goods cheaper at home, it presents an interesting conundrum for U.S. companies and their downstream channel partners.
Foreign trade partners find themselves paying more in local currency to make up for the appreciated dollar when they import from the United States. This increase eventually causes a decline in demand as American-made goods become less attractive for purchase at the consumer and commercial level on an international scale. U.S. exporters are no longer able to compete with lower-priced foreign goods. Ultimately, diminishing demand will translate into thinner profit margins for U.S. manufacturers, thus reducing the potential for expansion into global markets, which has negative implications for long-term growth.
As a result, we find ourselves in a season of earnings guidance. In light of the strong U.S. dollar – and in an effort to manage analyst expectations on Wall Street – many companies are re-adjusting their 2015 forecasts to account for currency fluctuations and expected consequences. The difficulty of predicting earnings accurately can lead to the often painful result of missing quarterly forecasts, derailing executive teams’ strategic plans and compelling those execs to place a disproportionate focus on achieving short-term goals at the expense of value-creating long-term ones.
New York-based Pfizer, the largest U.S. drug maker, is already feeling the effects of the high-value dollar. While the company reported stronger-than-expected quarterly revenue results, it also forecast a setback to 2015 earnings because of patent expirations and the impact of a stronger dollar. Pfizer said the guidance mirrors the anticipated negative impact of $3.5 billion due to product losses, as well as $2.8 billion to “recent adverse changes in essentially all foreign exchange rates relative to the U.S. dollar.”
Guidance from Tiffany & Co. is making investors nervous as well. The upscale jeweler recently reported its fourth-quarter and full-year results for 2014, but management expects first-quarter earnings for 2015 to fall by roughly 30 percent year-over-year and net sales to tumble 10 percent, all because of the strong dollar.
Then there’s Palo Alto, Calif.-based electric-car maker Tesla Motors, which says its fourth-quarter loss widened because of the impact of the strong dollar on its profits from overseas sales and a delay in shipments of its new all-wheel-drive Model S sedan. Sources at Tesla say that unadjusted figures don’t reflect its true performance, though, because accounting rules limit how it records revenue for leases.
For American technology companies, the strong dollar is both a blessing and a curse. Components and raw materials will become more affordable for imports, making U.S.-made and imported goods more affordable, but resold goods in foreign markets will become more expensive. Vendors will need to consider the impact on foreign and international partners as their costs of goods and services increase, making it harder to be profitable as a reseller. They’ll also need guidance on bridging the revenue and profit gap as U.S. goods become more expensive.
When Hewlett-Packard posted its first-quarter earnings in late February, it announced that its revenue declined by 5 percent year-over-year to $26.8 billion. The company delivered $0.73 in GAAP diluted earnings per share, marginally down from the year-ago quarter. The decline in revenue was attributed to appreciation of the U.S. dollar and a challenging economic environment across IT services businesses in EMEA, which contribute nearly 50 percent to HP’s revenue.
Currency trading causes the dollar, euro, yen, and pound to periodically rise and fall. While a strong U.S. dollar is good ultimately for the country, vendors, and partners, the transition to a stronger valuation is often painful. Navigating the market shifts brought on by currency variances requires direction across the value chain so everyone knows how to capitalize on opportunities and counteract negative consequences.