You’d Be Loonie Not to Hedge

Jan. 2, 2008
The U.S. OEM Market Is in a Position Where it Hasn’t Been for Perhaps More Than 30 Years
By Jeremy Pollard, CET, columnist

Joe’s rant in a Molson beer commercial began: “I am Canadian.” The phrase has meant various things over the years. Right now, it means that our buck is worth more than the U.S. buck.

When the Canadian dollar, or loonie, was worth 62 U.S. cents, we Canadians hurt. Prices were high for everything. Imagine paying an extra 50% when you crossed the border or for imported goods.

There were benefits. The services and goods that we provided to the world were hugely undervalued and very inexpensive to those countries and customers. Our OEM business grew, and industry bought locally. Everything was relative.

Now, the shoe is on the other foot. No one wants to buy Canadian products because they’re too expensive. Perception is everything.

The Canadian retail business is in a tailspin in border towns. I live 150 miles from the U.S. border, and people are making the crossing just to buy goods with our inflated loonie. It will be a tough Christmas for most Canadian malls.

I bought a GMC vehicle in New York State this past November. When I researched the costs and benefits, I couldn’t believe my eyes. I figured it would be significant, but I saved $13,000.

What does this mean? It means the U.S. OEM market is in a position where it hasn’t been for perhaps more than 30 years.

With the greenback now worth less than most global currencies, U.S.-based producers can supply products, services and systems to the global market for less money than they could six months ago. That’s less money to the client (the charge to the OEM for the stuff is assumed the same).

It’s a weird thing. I asked a financial guy about this, and he talked about currency hedges. If your business doesn’t try to anticipate these disparity occurrences, you could be caught with your financial pants down.

He explained the strategy of buying futures on the U.S. dollar so you were guaranteeing yourself the global exchange rates you would need to execute your business. When you buy hardware or software from Germany or France you pay in euros. Six months ago, you would have paid about 10% less than now. That will translate to the profit line if you didn’t anticipate this increase in cost or couldn’t pass it along in the machine price.

On the flip side, your service and products cost your customers 10% less if the products you use are U.S.-manufactured, assuming the U.S. costs are equal.

The Canadian government is encouraging our industries to use the strong loonie as a basis for upgrading its collective manufacturing systems. We can get more for our money now if we buy from the United States.

Buying from a European-based market won’t mean as much. Many products come from European-based economies. This just isn’t a good thing for the U.S. market.

I spoke with a U.S.-based vendor that buys much of its product from Europe. The dollar’s slump affects its buying power, but they have to guarantee their own product quotes for a period of time. Should the pricing from the European supplier expire and subsequently worsen, the quote from the vendor to its customer, would have to be honored at the original, stated price. The vendor now is on the hook for the difference. If an OEM used a non-U.S.-manufactured automation package, then its pricing model would be out by a certain amount of U.S. dollars, which means trouble.

The market for U.S.-based OEM products and services is the best it’s been in years. The competitiveness of pricing alone is an advantage that the Canadian OEMs enjoyed for a long time.

Volatility will continue to happen. As a business, hedging your bets can be a good thing. Getting quotes for six months instead of 30 days can create that hedge. Giving your customers a three-month quote allows you some flexibility. Using U.S.-made products can afford you some additional profit. Imagine selling your global solution into Europe in euros, not U.S. dollars.

Take advantage of it now. No one knows what the future holds. 

For a U.S perspective on the economy check our January 2008 story, Foreign Trade, Energy Costs Highlight 2008 Hesitancy.

Jeremy Pollard has been writing about technology and software issues for many years. Publisher of The Software User Online, he has been involved in control system programming and training for more than 25 years.

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