How do manufacturers protect their bottom line against currency rate movements?

By Smart Currency March 29th, 2016

The impact of exchange rates on manufacturers

Manufacturers, particularly in the automotive and aviation sectors, are at the mercy of currency rate movements. How do currency markets affect manufacturing businesses in real terms, and how do they protect their margins in a fast moving and competitive marketplace?

Many manufacturers, particularly those in the car and aviation sectors, feel every movement of their currency against its major currency pairings – particularly the US dollar – in their business operating costs and profit margins.

Earlier this month, Canadian car manufacturers were enjoying a currency-led change of fortune, thanks to the decline of the Canadian dollar. In mid-March 2016, the Canadian manufacturing sector had a welcome boost from expiring currency hedges and forward contracts that were taken out at a time when the Canadian dollar was stronger. This has certainly been a long time coming for Canadian manufacturers, as Canadian businesses in many cases created currency hedging strategies or bought forward contracts a matter of months and years ahead in order to protect their bottom line against the declining dollar.

In a recent interview with Reuters, Brad Bourne, CEO of Firan Technology Group, an aviation and aerospace technology company based in Toronto, put this into perspective, “Every penny movement in the dollar adds about 200,000 Canadian dollars (the equivalent of 151,000 US dollars) of profit to my bottom line.” Sales for the company are up 18 percent compared to last year, approximately half of which can be attributed to the decline in strength of the Canadian dollar.

Christopher Whiteside, President of AJW, a global provider of integrated aircraft support services for aircraft and engines, echoes the importance of currency exchange rates to their company’s bottom line, in Insights: Aviation Business: “We have close to 1,000 customers in 115 countries. The US dollar is the international benchmark for the aviation industry – even though our headquarters are based in the UK, where we have our overheads, our income is primarily in US dollars, so we have to rely on currency hedging strategies to optimise our currency conversions from dollars into sterling. The savings we make are then channelled back into growing our business.”

The Canadian export market is doing well, despite a slow economy, which, like many, has been hard hit by the falling price of commodities and has meant redundancies in the energy sector, revised business plans and putting on hold – or putting off altogether – any investments. Canadian exports showed record figures of 46 billion Canadian dollars at the start of 2016, a sizeable jump, just as the Canadian dollar dipped down to twelve year lows. Key players in this growing market, up more than eight percent on 2015, were the automotive sector – both cars and their parts – and consumer goods, which both showed an annual increase of around 40 percent. The Bank of Canada is keeping a close eye on export and other financial markets in the country, keeping interest rates at their current level while these positive signs of economic improvement pan out. These could help ease the burden on the economy left by the ailing energy sector, and it will be interesting to see any knock on effects on other economies and their currencies, either positive or negative.

Elsewhere in the world, manufacturers are also keeping a close eye on currency, import and export markets. Mercedes boss, Horst van Sanden, cited volatile currency exchange rates as a reason to put the Smart Car brand on hold in Australia in a recent interview, stating that he was keeping a close eye on the markets to see what happens before making any further moves.