02 Jul don’t change the currency, change strategy
The Chinese yuan is under fire from the United States and its allied world economists.
Brilliant men and women with doctorates have decided that China’s trade imbalance will get so large that the only way to control it is to let the yuan become stronger. The logic works like this:
For example, if 10 yuan equals $1, and we force the yuan to strengthen (for example, eight yuan would equal $1). Thus, an American’s dollars will purchase less yuan. A Chinese-made DVD that may cost 200 yuan could have been bought with $20. But at eight yuan to the dollar, the cost is $25.
This supposedly would make Chinese goods more expensive in the U.S. market, and give U.S. firms a chance to compete.
The converse is also true. In this model, it now only takes eight yuan to buy a dollar. So if a U.S. apple costs $1, it used to take 10 Yuan to purchase it, but now would take only eight.
This logic is flawed in so many ways.
People may remember that the same scheme was tried with Japan in the 1980s. At 260 yen to the dollar, the world pushed Japan to revalue the currency, to get close to about 100 Yen to each dollar. This made Japanese goods far more expensive in the United States.
Guess what happened? The trade deficit with Japan increased. American consumers wanted Japanese products. And if they had to pay more for them, so be it.
If U.S. drivers were sold on buying a Honda, then they still wanted that Honda. If it was $1,500 more expensive, they paid it. Interestingly, many
U.S. firms were sourcing their production to Japan. “American” products such as RCA TVs went up in price as well. And since almost all of the U.S.-made autos were half-Japanese (due to parts), those costs went up.
The converse happened, but not as the economists predicted. While American-grown apples and other consumer goods were suddenly cheaper in
Japan, the Japanese didn’t buy more of them. Japanese consumers saw the drop in U.S.-priced goods as a lowering of quality. The trade deficit with Japan got larger, not smaller.
Incidentally, Japanese consumers and businesses are notorious in their desire to have high Japanese content in their product. Didn’t anyone understand the market?
If everyone bought everything on price alone, we would all be driving Yugos. BMW wouldn’t be able to sell a single car. There would be no imported wine, Saks Fifth Avenue and Nordstrom would close, and Motel 6 would be the only acceptable place to spend a night.
There are exceptions, of course. If one is in the blind commodity businesses — such as oil, yarn, grain, cotton or salt — then price sensitivity is key, as these items are purchased by the shipload. Differences in pennies per kilo can make or break a business.
Notice how beef and other meat products aren’t on the above list? That’s because it’s easier to add value to beef and meat products.
And to a large degree, we can differentiate corn, soybeans and other common commodities by financing options, inventory control, customer service, better delivery, a more well-connected sales force, more streamlined operations and local investment in markets, to name a few.
The average CEO can prepare for currency fluctuations, and hedge their business strategies so they’re not consumed by those changes.
When buying from overseas, savvy purchasers need to hedge on long-term buys.
Buyers can establish local offshore bank accounts to protect against short-term currency risks. They can execute long-term purchasing agreements with set pricing.
International marketers should not rely on selling to just one country.
When offshoring production, it doesn’t make sense to do manufacturing at just one site. If political or financial problems develop, you’re out of business.
Planners have to be ready for China, India, Poland, Thailand and Greece. More connect points lessens the risk of any one country damaging you.
Strong relationships with factories as well as clients are essential. If the yuan, yen or bhatt changes, this should be seen as a shared problem, with solutions to come from both sides.
Of course in international marketing, CEOs really needed to learn to market their products abroad. Using price sensitivity as the sole qualifier of success is simply incorrect. Only a true understanding of the customer’s needs and motivations will lead us to the truth.
A strong investment in the relationship will pay dividends when the price has to change.