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The Declining Dollar

How companies are coping.

For Compact Power, a small manufacturer of landscaping and construction equipment based in South Carolina, the falling dollar has meant a rapid rise in the company’s overseas sales. The $100 million company began selling internationally two years ago, has doubled its international sales in the past year, and plans to double them again in 2008. “We’ve absolutely accelerated our international growth because of the exchange rate,” says CFO Norman Boling. “The falling dollar has made us competitive in markets where we’re up against established competition.”

Compact Power quickly developed two diesel units to distribute in England this year, and has entered into a distribution agreement with an Italian manufacturer to sell that company’s product — tractors — in the United States. To address currency fluctuations, the two companies agreed on a rate in their contract, a strategy Compact Power plans to continue with other partners going forward. While the manufacturer does not do financial hedging, “by locking down the exchange rate at which we purchase, we can take out some of the risk,” says Boling. Trade partners have been willing to agree on rates in their contracts because the practice removes uncertainty for them as well. “We might feel a pinch here if the dollar goes back the other way,” says chief operating officer Michael Edwards. “We’re developing sources out of Europe and other regions so that we can play the other side when that happens.”

U.S. companies are also seeing a boost from the dollar’s weakness at home, as tourists from overseas flock to stateside shopping centers. Stephen Sterrett, finance chief at Simon Property Group, the largest shopping-mall owner in the United States, says foreign travelers have provided a big boost to the company’s malls and outlet centers in the past year. “We have seen a disproportionate impact on sales in centers where there are a significant number of international tourists,” says Sterrett. “The foreign tourist’s purchasing power is greater than it has ever been before.” While European tourists have packed Simon’s East Coast locations, the company’s shopping centers in Houston have welcomed an influx of travelers from Mexico and South America. Shoppers from Canada have bolstered sales at malls on the northern border as the Canadian dollar has reached near-parity with its U.S. counterpart.

Like UTC, Simon is largely operationally hedged. Although most of its business is in the United States, it operates 50 properties in Europe, where it reinvests profits in its local operations. “Our leases are in local currency, we borrow in local currency, and we’re using our profits to reinvest locally,” says Sterrett. “We have a natural hedge.”

Making Adjustments

For companies that have significant costs outside the United States but recognize much of their revenue in dollars, the picture is not as rosy. In a striking change, many are considering moving manufacturing operations to the United States to reduce costs. European carmakers like Fiat, BMW, and Volkswagen are looking to establish or expand their stateside production to strengthen ties to U.S. consumers and reduce their euro exposure. BMW executives have said that they plan to increase U.S. production by more than 70 percent in response to the dollar’s decline. The French manufacturer Alstom announced plans last December to build a $200 million facility in Tennessee, in part to mitigate the impact of the weak dollar on its margins. And in perhaps the highest-profile rumored defection from the eurozone, the CEO of EADS, the parent company of Airbus, has said the airplane manufacturer will consider moving some production to the States, much to the dismay of French government officials.

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