Author Article List

The U.S. Dollar Vs. The Euro: What Will Your Customers Prefer?

Published on Monday, April 01, 2002

The U.S. dollar has risen 30%-40% against major world currencies since 1995. As the U.S. economy improves and productivity levels continue to rise, the dollar is likely to climb even higher. However, some analysts predict the euro will gain in value next year and even challenge the dollar for world dominance.

Europeans Want To Do Business in Euros

According to the Conference Board, a research organization, 60% of world trade is currently denominated in dollars. In the unlikely event that the greenback falls from first place, a position it’s held since usurping the British pound after World War I, more global business will be conducted in euros.

But, even if the value of the euro remains weak and the dollar remains strong, more and more European companies will request that their suppliers conduct business in euros. Satisfying this request may give you an edge over the competition. It will also add risk.

If you’re not already dealing in the currency, consider printing your price lists in euros for European customers. This may require adjusting your ledgers, receivables and other financial systems. Additionally, to effectively deal with two currency denominations, you may need to invest in new software, training, consulting, and dual documentation systems. Unfortunately, due to the costs involved, many U.S. companies have not taken the appropriate steps and are unprepared. This could lead to missed trans-Atlantic opportunities.

The Euro Has Been Totally Phased In

The euro has been used for non-cash transactions since January 1999. However, during 1Q02, members of Euroland implemented the final transitional phase that called for the total elimination of their national currencies. Euroland, also known as the Eurozone and the Euro area, is the name given to the bloc of 12 of the 15 European Union (EU) members (see pages 1-2) that have accepted the euro as their official currency. The remaining EU members, the United Kingdom, Sweden, and Denmark (which rejected Euroland membership in a national vote on September 28, 2000), are likely to adopt the single currency at some future time.

The Euro-Dollar Perspective

Since its inception in January 1999, the euro has reached a high of $1.19, fallen to a low of $.82, and closed at approximately $.90 on May 1, 2002. As the value of the euro dips, the cost of U.S. exports to Euroland rise, while Euroland exports to the U.S. become less expensive, increasing U.S. demand. Since every 1% rise in the U.S. dollar’s trade-weighted value boosts the U.S. current account deficit by at least $10 billion, according to Fred Bergsten of the Institute for International Economics, the long-term impact on the U.S. economy could be severe.

On the investment side, U.S. companies interested in purchasing European assets get more for their money. But, U.S. firms already invested in Europe generate smaller profits when converting their euros into dollars.

Currency Volatility: A Constant Risk

Dealing with any foreign currency involves a level of risk. Just since 1995, for example, 13 emerging market currencies declined by more than 40%. The good news: the Argentine peso devaluation has not brought other currencies down with it. To learn more about doing business in euros and to protect yourself against adverse currency fluctuations, contact your banker.

Markets Around the World Are Bouncing Back and Presenting New Opportunities and Risks

Published on Friday, March 01, 2002

On several occasions since World War II, and currently, the U.S. economic locomotive has been instrumental in pulling the rest of the world out of periods of poor economic growth. As this occurs, global markets improve, creating new opportunities for traders and investors. Today, new opportunities are emerging in Europe, Latin America and Asia, as well as risks that may affect your company’s bottom line.

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Shifting World Demographics May Require New Forward-Thinking Marketing Plans

Published on Friday, March 01, 2002

When creating short and long-term global trade and investment strategies, it’s imperative to know where your target consumers will live, the goods and services they will buy, and how much they will be able to spend. Although this task may sound daunting, it isn’t — as long as you keep up on world demographic projections.

By studying world demographic shifts, you’ll learn where tomorrow’s major populations will be, their ages — an important indicator of tastes and needs — and their projected income levels.

Virtually All Population Growth Will Occur in Developing Countries

On January 1, 2002, world population had expanded to 6.2 billion people. It’s expected to reach 7 billion by 2013, and 7.5 billion by 2020, according to the U.S. Census Bureau. Although growth rates are decreasing, world population is predicted to rise by 77 million people in 2002 alone — that’s the population of France and Australia combined. Where will these people live?

According to the U.S. Census Bureau, 99% of world population growth now occurs in developing countries. Sub-Saharan Africa is projected to grow the fastest, followed by the Near East and North Africa, Asia and Oceania, Latin America and the Caribbean, and Eastern Europe. This is forcing many exporters and investors to reassess their global trade and investment strategies.

Can Developing Country Consumers Afford Your Products?

Compared to the United States, average per capita incomes in developing countries are low. For example, U.S. gross domestic product per person is estimated to be $36,566 in 2002. However, it’s projected to reach $985 in China, $517 in India and $2,560 in Brazil, according to the International Monetary Fund. At first glance, U.S. producers are likely to assume that consumers in these countries can’t afford their products. This is a mistake!

When considering the current and projected size of the middle class in developing countries, general per capita income figures are meaningless. For example, India is estimated to have a middle class of about 200 million people with the same purchasing power as the middle class in the United States. Compared to the entire U.S. population of 281 million, many would agree that an additional market of 200 million consumers with substantial buying power is worth pursuing.

The Needs of the Elderly Are Rapidly Increasing

Due to medical breakthroughs and improved diets, the elderly are living longer, healthier lives. As a result, this demographic group is becoming the fastest growing portion of the world’s population. In fact, through 2025, the number of those age 65 and over will more than double.

What does this mean for your business? As world populations shift, older age groups will make up an increasingly larger segment of the global market. As a result, travel and other leisure-related services, and purchases of second homes and furnishings will increase. This is likely to result in greater exports of U.S. products and services designed to satisfy these demands.

Governments Will Provide More Products and Services to the Elderly

In the past, caring for large elderly populations was primarily the concern of the demographically older societies of Europe, Japan and North America. Their governments have provided and subsidized health-related products and services, housing, etc., for vast numbers of people over the age of 80.

But due to spiraling costs, some countries have raised the age of retirement and abolished mandatory retirement ages. According to the Organization For Economic Cooperation and Development, Japan has raised ages of pension entitlement, the U.K. has done so for women, and the U.S. is gradually raising ages, while Italy and Sweden are improving incentives to keep employees working longer.

But by 2020, two-thirds of the world’s elderly will live in developing countries, with the greatest concentration in Asia. Consequently, these governments will need to divert an increasing portion of their social expenses to the elderly and expand government procurement programs.

The Median Age Is Increasing

As the population of the elderly has increased, the world’s child population growth rate has decreased. From 1998 through the year 2025, the number of children under age 15 and age 5 will increase by 6% and 5%, respectively. This is the result of lower fertility rates.

Not surprisingly, the largest increases of the dependent population, those under 15 and over 65 years of age, will live in developing countries. And the global population of those age 15 to 64, referred to as working age, will increase by 48% in developing countries and only 3% in developed countries over the next 20 years.

As children become a smaller proportion of the total population and older age groups become more dominant, the world’s median age — the midpoint that separates the younger half from the older half — also will rise. In 1996, the age was 26 years. By 2020, it will rise to 31. Thus, over the next quarter century, the median population age of every global region will rise.

What Implications Does this Have for Consumer Spending?

According to Harry S. Dent, Jr., author of The Roaring 2000s Investor, on average, Americans enter the workforce at age 19. They get married at age 25.5 (27 for men and 24 for women), bear their first children two years later, and purchase their first homes at age 33 or 34. They trade up to the largest homes they’ll own by 44, and fully furnish them by age 46.5 or 47.

Interestingly, the average American also reaches peak spending at age 46.5 or 47, the same time the kids leave home. Dent observes that empty-nest couples then spend more on vacation homes, travel and leisure. They also become prospects for investment services and products as they approach retirement age.

Since American consumer spending patterns are similar to those of other developed countries, it’s reasonable to assume that as the median age rises in those countries, consumer spending also will rise. Depending on your products or services, closely targeting these consumers may be a sound strategic decision.

Reassess Your Export Strategy

As world population centers shift, exporters and investors must reassess which markets to pursue. For some, this may mean targeting the growing needs of the elderly in developing countries. For others, it may result in providing goods and services to median age consumers in developed countries — where incomes are rapidly increasing.

To achieve your goals, it may be necessary to eliminate, redesign or add new product lines or services. But before acting, consider all your options and the long-term impact of each.

Production Sharing Can Reduce Your Costs and Increase Your Global Competitiveness

Published on Tuesday, January 01, 2002

Sharing different stages of the manufacturing process with producers in different countries has many benefits. For example, it can result in lower manufacturing costs while increasing your level of global competitiveness.

Importantly, this process can help retain jobs that would have been lost due to competition and even grow them in capital-intensive manufacturing, product development, design, and marketing related activities here in the United States. During periods of slow economic growth, these advantages are worth considering.

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