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 Building a natural hedge-0000

Building a natural hedge into your business can help limit the pain inflicted by wild kiwi dollar swings, veteran exporters say.

BY:  Yoke Har Lee

You can’t fight the kiwi’s rising trend but you can certainly evolve your business to take advantage of a strong local currency.  For businesses still banking on the advantage of having a cheap currency, the strength of the kiwi would make it harder to gain market advantage.  But some exporters are foregoing the “we are cheap” business model to focus on gaining a hedge in their cost structure to stay competitive despite a strong currency.

Even the most seasoned business person finds it hard to manage in a volatile foreign exchange environment. Consider the kiwi’s unstoppable rise.  In January, the 21-day average for the kiwi was $0.5495 to the US dollar. In May, it had risen to $0.6008, and in August to $0.6763.  By September, the kiwi was at $0.7384 to the US dollar and, towards the end of November, it was trading around $0.72, from a high of $0.75.

For Roger Latimer, managing director of Teknatool International, the strong kiwi would have affected about 20% in US-dollar based revenues it has to repatriate to New Zealand.

Evolving the business

Over the years, the company has reworked its business so that it can benefit from having a natural hedge in markets that matter.  At the moment, the strong kiwi provides an opportunity for the company to increase its investment appetite. “We will be making further investments overseas — we have plans to expand in the US,” Latimer says.

Teknatool, which has a plant in Qingdao, China, makes woodworking tools and DVR (digital variable reluctance) motors. For this company, the bulk of its manufacturing cost is based on the Chinese yuan (which is linked to the US dollar). Latimer says although the yuan-dollar rate fluctuates, it is nothing like that of the kiwi dollar’s movements.

“It is hard to run a business on these wild swings [in the kiwi]. A year ago, we were $0.76; this fell to $0.60, and then we went back up to $0.75. For us, our international strategy has to be one that provides growth that is not going to be stressed by the kiwi’s swing.”

He says there have been instances when the kiwi has moved between 2% and 5% overnight while the yuan may move about 5% over three months.

Teknatool has been exporting for 20 years. “There was a time when the kiwi was worth more than the US dollar. There was also a time when it was at $0.38. If we are going to be successful, we have to have a long-term strategy where we can take the wild swings out.”Building a natural hedge takeaways-0000

A successful long-term model for the company is one where manufacturing success does not rely on a low exchange rate, he says.

Over the years, the company has been building a natural hedge into its business, by moving its costs into an overseas currency.  “We started importing parts [which were paid for in US dollars] to gain more of a natural hedge.”

However the best decision was manufacturing in China, where the exchange rate is less volatile while the company’s inventory cycle — that of ordering, processing, and manufacturing — has been reduced from four months to between three and four weeks.

This means the company can be more responsive to its customers and has a lot less money wrapped up in products, Latimer adds.

Enhancing value

Bruce Moller, chief executive of Howard Wright, is also thinking of taking advantage of the opportunities presented by the strong kiwi to buy more US dollar-based parts. “It is a good time to be buying.”

He is, however, more in favour of focusing on what he calls “value enhancing” products to soak up the erosion of margins caused by a strong kiwi. This is especially so for companies that cannot benefit from cheaper imports from the strong kiwi.

For Howard Wright, the strong kiwi hasn’t benefited its cost structure as global aluminium prices are driven by supply and demand. At the moment, demand is outstripping supply, so prices have been strong.  Although the steel strips the company buys from its New Zealand supplier are sourced overseas, the demand for steel has also put pressure on prices, affecting the supplier’s ability to supply cheaper products or to pass on savings.

Howard Wright has taken advantage of the stronger domestic currency by buying directly from offshore suppliers where it can. Moller says in some cases, his company quotes to markets in their respective local currencies and, for larger contracts, it takes forward cover.

He adds, however, that for Europe based clients, although the company tries to buy and sell in euros, getting the timing right is tricky. “You can’t exactly buy and sell to exact timing, so we are looking at having a euro account where income can go into.”

Fiddling with price

Premium pet food manufacture ZiwiPeak’s founder, Peter Mitchell, has been withholding any price increases for the past three years.

With the strong kiwi, the company decided it was time to raise the company’s pet food prices by about 10%.

“It is quite a significant price increase. If the kiwi moves up further, above $0.80, we’ll plan another increase. The price increase is our tool to protect margins,” Mitchell says, adding premium products are better placed to command price increases.

His company sources inputs locally so there is no benefit from the strength of the kiwi. It exports 95% of its products, of which 65% goes to North America and the rest is spread across other countries. The company’s US sales are paid in that currency. It manages an offshore US dollar account to help mitigate the impact of extreme currency movements.


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