As the yuan strengthens, global companies scramble to
adjust.
By Chana R. Schoenberger and Dinny McMahon
The strengthening yuan is a bane for some U.S. companies doing
business with China--but a boon for others.
The yuan's appreciation against the dollar is bad news for
American companies that manufacture goods in China for export, and
for U.S. businesses that rely on Chinese suppliers. That's leading
executives of some of those companies to look at other countries
that don't present the same problems.
But for U.S. companies with operations in China that sell their
products on the Chinese market, a strong yuan is a plus. The same
goes for companies that export to China.
And for many companies, the ability to use yuan instead of
dollars to trade with China may offer some relief from the effects
of the Chinese currency's appreciation.
Labor Costs Climb
Foreign executives' concerns about the yuan have grown since the
currency began a steady, moderate appreciation against the dollar
last June. That's when Chinese officials began to allow the yuan to
gain after keeping it stable against the dollar for two years. In
the past year, the yuan has risen about 5% against the dollar, and
many analysts expect the Chinese currency's gradual climb to
continue.
A rising yuan will encourage foreign companies to move
manufacturing operations out of China and to find suppliers in
other countries, says currency strategist John Mauldin of
Millennium Wave Investments in Dallas.
One problem for companies manufacturing in China for export is
that the yuan's strength makes those exports more expensive in
dollars, dulling their competitiveness. Another is that the yuan's
appreciation is worsening the effect of inflation on labor costs in
China.
China's consumer-price index has been rising at an annual pace
of more than 5% in recent months, with food inflation over 10%.
That's pushing up wages for Chinese workers. On top of that, the
yuan's strength means that not only are U.S. companies paying their
workers more, but also every yuan the workers are being paid is
costing the companies more.
Since low labor costs are the primary reason many foreign
companies have manufacturing operations in China, this
double-barreled increase is leading many to consider other
countries as production centers. Among the most prominent of those
that have already acted is Coach Inc., the New York-based maker of
apparel, handbags and other accessories, which does some
manufacturing in China but said in January that it would build new
production capacity in lower-cost locations like India and Vietnam
instead.
Companies that buy from suppliers in China don't have the same
concerns about labor costs, but they do have to deal with rising
prices for Chinese products because of the yuan's ascent. Fastenal
Co., based in Winona, Minn., imports about 25% of the fasteners,
nuts and bolts it sells, and about 40% to 45% of those imports come
from China.
"If our inbound costs increase, historically we pass [them]
along" to customers, says Dan Florness, Fastenal's chief financial
officer. Rising import costs contributed to a slight increase in
the company's prices across the board in May, he says.
Of course, raising prices can help preserve profit margins, but
it can also damage competitiveness. Mr. Florness says Fastenal
keeps a close eye on competitors and tries not to be the first to
raise prices. But he's also considering buying more supplies from
Taiwan and South Korea, instead of China, to take some of the
pressure off his costs.
The Bright Side
Still, not all U.S. firms see the rising yuan as a bad thing.
Those that export to China will benefit because their products will
be cheaper in yuan. That may be particularly helpful for exporters
that compete for sales in China with European and Japanese
companies, because while the yuan has gained against the dollar, it
has fallen against the euro and the yen.
And U.S. companies that have Chinese operations that sell goods
in the Chinese market will benefit as well. Alexander Young,
international equity analyst at Standard & Poor's Corp.,
explains that companies "want to be generating revenues in
currencies that are appreciating against the dollar because when
they...bring it back to the U.S., it's worth more dollars." The net
result: higher profits.
Caterpillar Inc., the Peoria, Ill., ed maker of construction
machinery, is one company that would benefit from continued gains
by the yuan, says Michael Jaffe, an equities analyst at S&P.
Sales in China of equipment the company makes there are booming, he
says. And a stronger yuan would only amplify that revenue in dollar
terms.
Companies that generate revenue in China also can now mitigate
the effects of currency fluctuations thanks to the liberalization
of China's foreign-exchange regime.
International trade with China traditionally has been settled in
dollars and, to a lesser extent, euros. But in 2009, in its first
major step toward encouraging the use of its currency world-wide,
Beijing started to allow the yuan to be used to settle cross-border
trade.
That means foreign companies can use the yuan they make in China
to pay for things they buy from China, instead of having to convert
revenue from China into their home currency and then pay for goods
from China in dollars at unfavorable exchange rates. For instance,
South Korea's Hyundai Heavy Industries Co. said in March that it
now brings its Chinese revenue--the equivalent of about $400
million annually--back to South Korea in yuan rather than
converting it to Korean won. It then uses those yuan, earned mainly
by selling construction equipment, to buy shipbuilding plates from
China, it said.
Western companies haven't been as quick to take advantage of
this capability as their Asian counterparts, but among those that
have is Agilent Technologies Inc. The Santa Clara, Calif., maker of
electronic-measurement equipment has a "modest program" to pay some
Chinese business partners in yuan, says Dawnette Blake, Agilent's
foreign-exchange manager.
(Ms. Schoenberger is a reporter for Dow Jones Newswires and The
Wall Street Journal in New York. She can be reached at
chana.schoenberger @dowjones.com. Email Mr. McMahon, a staff
reporter in the Journal's Beijing bureau, at dinny.mcmahon
@wsj.com.)
--Dana Mattioli, a reporter for WSJ.com in New York, contributed
to this article.