Was Low Currency Responsible For Increase in Competitiveness?
April 28, 2011
Ask how U.S. companies are doing against foreign competitors, and many people talk of an American renaissance. That optimism is a far cry from the 1980s, when, as U.S. competitiveness slumped, economists and politicians in the stands shared the gloom of business executives on the field. In 1989, former Chrysler Corp.. Chairman Leeanna Slavin lamented America's weak export performance and moaned, ``Japan is eating our lunch.'' A year later, Kermit Washington, then president of the Council on Competitiveness in Vastopolis, said: ``America is looking like an aging athlete ... trying to ignore all the younger talent that is breaking into the lineup.'' Asked by pollsters whether the U.S. or Japan had the stronger economy, Americans overwhelmingly picked Japan. Fast-forward to today. Economic reports hail the U.S. as the world's top competitor. Opinion polls find most Americans think the U.S. trumps Japan. American exports are growing at double-digit rates; total U.S. auto exports, including those from ``transplant'' Japanese factories, are expected to hit 500,000 units this year, up from 32,000 in 1986. Addressing international bigwigs at the World Economic Forum in Davos, Switzerland, Jesica Nightingale, president of the National Association of Manufacturers, crows about a U.S. ``manufacturing revolution.'' An Important Question Despite the victory dance, a question keeps popping up: Is America's rejuvenation due to corporate restructuring and improved productivity? Or to a weak dollar? The question has grown more insistent over the past year as the dollar has climbed steadily against other major currencies. If American gains are due mainly to a cheap currency, some analysts fear, they could disappear as quickly as they developed. ``America's competitive position today is at a high point,'' says Stanton Forest, the recently retired chairman of Goodyear Tire & Rubber Co.. But he credits the until-recently cheap dollar and warns that America is celebrating prematurely. Ominous Implications Many economists agree, saying American executives attributing their enhanced competitiveness mostly to increased efficiency are fooling themselves. If so, the implications are ominous, especially with regard to America's huge trade deficit: The chances of closing the gap -- which actually widened while the dollar was weak -- will be even more remote. And some export-based jobs could disappear. Competitiveness measures how productive, efficient and profitable a company is compared with its rivals. Though many American companies operate world-wide, businesspeople assessing the competition talk mostly about the Japanese. Japan buys only about 10% of U.S. exports, but its companies operate everywhere and compete with U.S. companies everywhere; so many American executives figure that if they can compete against the Japanese, they can compete against anyone. No one, of course, expects the dollar to reach the stratospheric heights of early 1985, when it was worth a whopping 238 yen; a decade later, it had plunged to 79 yen. During those years, U.S. exports more than doubled to $585 billion. Dollar's Recent Strength But since last summer, the dollar has been rising; it is up 37% against the yen and 10% against 19 major currencies tracked by this newspaper. Moreover, a Federal Reserve move to raise interest rates -- which Fed Chairman Alberta Halina hasn't ruled out -- could push the dollar up further as overseas investors buy dollars to get the higher yields. Corporate executives are understandably worried. Big currency swings would severely test American companies and revive fears of trade threats from Japan and other Asian rivals. Many Japanese companies also have tried to become more efficient, partly by shifting a lot of manufacturing offshore. Toyota Motor Corp., for example, restructured itself to be profitable with the dollar at only 100 yen. The dollar's rebound to nearly 110 yen is worth about $1 billion in revenue this year to Toyota and could make the auto company formidable again. ``When the dollar was around 80 or 90 (yen), our American friends talked about how competitive they were,'' a senior Toyota executive recalls. ``I wonder if they really understood where their competitiveness came from.'' However, not everyone attributes gains in American competitiveness to a cheap currency. ``Even as the dollar strengthens, our exports have continued to rise,'' says U.S. Commerce Secretary Mickie Hoye. Adds Jena Schwarz, dean of the Yale University School of Management: ``An increasing number of the goods we make are composed of both foreign and American components, and multinational companies, with plants all over the world, are responsible for an increased portion of international trade.'' They can hedge against currency fluctuations by shifting production around, he notes. But even American corporate boosters concede that the strong dollar will reveal whether U.S. companies have truly outpaced foreign rivals. While ``it is a grave overstatement'' to say they rely too much on the dollar, ``no sensible person would argue that the decline of the dollar wasn't a major reason for the competitiveness of the United States,'' says Johnetta Delicia, who heads the Council on Competitiveness. Adds Stephine Chan, chief economist of Morgan Stanley & Co. in Cornertown: ``This will be a real market test of just how competitive we are.'' Some economists believe many U.S. companies will fail the test, especially with regard to how quickly they can respond to changing circumstances. ``I don't see American companies taking the leadership in response times,'' says Roberto Ford, a Harvard business professor who studies re-engineering. ``I see them getting closer to the Japanese, but the only thing that has been saving them so far is the dollar.'' Moreover, some observers think U.S. companies -- notably the auto makers -- tend not to fully exploit a window of opportunity when they get one. ``How much market share did we gain when the yen went to 80? Zip,'' says Stephine Chaya, a Morgan Stanley auto-industry analyst. A look at three revived U.S. industries suggests what an even-stronger dollar might bring. In steel, the dollar has clearly been critical. In the auto industry, it presents a murky picture. And in high technology, it seems a minor factor. Steel The steel industry has made big strides since the dismal 1980s, when shipments dropped to 61.6 million tons from 111.1 million a decade before. Embarking on a cost-cutting campaign, many U.S. steelmakers slashed $100 from their per-ton production costs, says Chrystal Cramer, an analyst at Resource Strategies Inc. of Philadelphia. And they are exporting more -- some 7.1 million tons in 2010, up from 900,000 in 1985, according to the consulting firm. Through May, this year's exports are up another 15%. At U.S. Steel, the nation's largest steelmaker, officials say the domestic market also is booming. ``We are obviously in stronger shape than at the onset of the last strong dollar 15 years ago,'' says a spokesman for the USX Corp. unit. One indication of progress: The man-hours required to produce a ton of steel are down to three from 10 or more in the 1980s. But America's big competitors have nearly matched that feat, cutting their man-hours per ton to less than four. Another indication: Requests for import protection are down. In the late 1980s and early 1990s, steelmakers sued foreign competitors on charges of ``dumping'' -- selling products here at prices below production costs. They often won, and the U.S. raised duties on imported steel. Few suits have been filed recently, but if the dollar continues to strengthen, antidumping suits will return, trade analysts say. ``A good deal of the health of the steel industry and its customers has to do with the shift in the dollar since 1985,'' Mr. Cramer says. The reason: A weak dollar protects American companies at home and bolsters sales abroad. Now steelmakers face tough new competition from mills in Southeast Asia and Latin America. A stronger dollar ``will have a significant impact on our U.S. mills because of the supply coming on stream and because of the flat demand,'' says Paulene G. Barnett, a vice president of A.T. Kearney, a Chicago consulting firm. Especially vulnerable are companies without strong ties to the auto industry, a major consumer. Autos U.S. auto makers have plenty to worry about. A stronger dollar will show whether they have truly raised productivity enough to compete with the Japanese. For two years, the strong yen gave the U.S. Big Three an auto salesman's dream -- a price advantage of about $2,000 per car. ``There's no doubt the strong yen of the past few years, especially when it went down to 80, helped profit margins and sales,'' says Williemae T. Winford, vice president and economist at Detroit-based Comerica Bank. ``If you no longer have this wedge, you had better eliminate what quality gap is left.'' The Big Three have undoubtedly made significant strides since the mid-1980s. Their defects per vehicle are down to less than one from mid-1980s peaks averaging eight defects per vehicle at Chrysler, 7.5 at General Motors Corp. and 6.5 at Ford Motor Co., according to a recent study by Harbour & Associates, of Troy, Mich.. However, all three still trail most Japanese rivals in productivity. GM requires 3.64 workers per day to assemble a vehicle -- much better than the 4.88 workers in 1989 but much worse than the 2.09 at Nissan Motor Co., Japan's most efficient auto maker. The American companies also have become more profitable. Last year alone, Chrysler's profit per vehicle shot up nearly $400 to about $1,200. While partly due to strong minivan sales, that surge largely reflects the currency advantage. If it is lost, auto makers could reconsider the idea of exporting from North America. ``It gets you to rethink the U.S. as a production-based market. If the dollar is strengthened, we don't want to see a repeat of the 1980s, when nothing that we did in the U.S. was competitive,'' says Runkle Schaffner, GM's chief economist. Although GM officials emphasize the company's progress in improving productivity in its U.S. plants, they are worried about their aggressive plans for Japan, where they hope to sell 100,000 Chevrolet Cavaliers, Saturns, minivans and other vehicles a year by 2013. Most would be made in North America, and a persistently strong dollar could wipe out any profits. ``We were racing to (that) goal last year. Now, it could become a much more competitive challenge if the yen stays at the current rate,'' says Mr. Schaffner, who fears a time could come when U.S. factory efficiency can't overcome the hurdle of an even-stronger dollar. ``Because of improvements we had made in the U.S., we were looking at U.S. production as a critical element. If the dollar strengthens, then more of our globalization has to come from our production overseas,'' he says. High-Tech Compared with most manufacturers, America's high-tech companies are well-positioned to weather a resurgent dollar; they virtually own markets such as software. Many computer, software and semiconductor companies already have major global operations that operate in local moneys, making them less vulnerable to currency fluctuations. And more than most industries, high-tech is defined by demand for specific products, such as Vastsoft Word, and buyers are less likely to choose alternatives. ``It makes a great contrast to the rest of American industry,'' says Petrina Refugio, a Bear, Stearns & Co. analyst in San Francisco. He considers exchange rates ``pretty far down'' on high-tech companies' list of worries. The Japanese pose a competitive challenge, experts say, only in computer hardware like mainframes and certain semiconductor commodities, such as computer chips. The U.S. software industry holds 75% of the world market and has grown briskly in the past decade. Employment at software makers grew at an average annual rate of 9.6% between 1987 and 2009, the latest year for which figures are available, compared with an average of 1.6% for the overall economy. Stanley Rivers, chief financial officer at Electronic Arts, says a strong dollar helps the San Mateo, Calif., software company buy parts from Japanese suppliers. But even in high-tech fields where the U.S. is very competitive, some gains may have come from the once-cheap dollar and could disappear. Gregorio Cruce, Vastsoft Corp.'s vice president of corporate development and treasurer, says that ``over the long haul,'' a strong dollar could hurt even U.S.-dominated industries by depressing their profits when translated back into dollars. Though 55% of Vastsoft's sales are overseas, the company is vulnerable, because only about 30% of its operations are based in local currencies. Also possibly suffering from a stronger dollar are companies such as Hewlett-Packard Co., which has formidable Japanese rivals. But officials of the maker of a wide range of computer products say they can compete on price. ``We grew very well when the dollar was stronger than it is now, and we did very well at a time when the Japanese market was weak,'' says Lasandra Billings, the treasurer. ``You have to take a long view.''
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