Dollar hits yet another low to the Euro
By: Administrative Account | Source: International Herald Tribune
December 2, 2004 6:13AM EST

European small fry are feeling euro pain

By Mark Landler The New York Times Thursday, December 2, 2004

FRANKFURT To get a sense of how fast the falling dollar can ruin a European businessman's day, talk to Udo Pfeiffer, the chief executive of a small German machinery maker in the industrial Ruhr Valley.

Pfeiffer's company, SMS Elotherm, builds machines that forge crankshafts for cars. He exports many to the United States and Mexico, selling for dollars to companies like DaimlerChrysler.

In recent weeks, the euro rose so rapidly against the dollar that Pfeiffer lost $10,000 in profit in the three days between shaking hands on a $1.5 million deal for a machine and signing the final contract. The profit margin on these machines, he said, is no more than $30,000.

As the euro climbs into uncharted territory - it hit a record of slightly more than $1.33 Wednesday- European exporters are voicing more and more fears about how it will affect business.

For every household name like Mercedes-Benz or Louis Vuitton, there are scores of much smaller outfits - making everything from crankshafts to concert pianos - which are being buffeted by a currency realignment that makes their products more expensive in the American market.

Some are even more dependent on the United States, and other dollar-dominated markets, than Mercedes of Germany or LVMH (Moët Hennessy Louis Vuitton) of France. And they do not have the financial resources of these very large companies to engage in complex currency hedging.

The distress in European industry is raising pressure on the European Central Bank to respond, either by intervening in the currency market to curb the rise of the euro, or by lowering interest rates.

The bank's governing board meets here on Thursday, but it is expected to do neither.

"The dramatic fall of the last couple of months has really set off alarm bells," said Karl Kadar, a vice president at Standard Federal Bank in Troy, Michigan, who advises German automotive suppliers in the American market. "A lot of these are smaller, family-owned, private companies."

Auto parts suppliers already had it rough.

The price of steel - their basic raw material - has soared, thanks to skyrocketing demand in China. And their primary customers, the car-makers, have been squeezing them mercilessly for price cuts, as they struggle with their own poor sales.



"Volkswagen, DaimlerChrysler, and BMW are having big trouble selling cars in the U.S.," Pfeiffer said. "Their financial situation has worsened dramatically, so they put extra pressure on us."

SMS Elotherm, with 280 workers and sales of less than €50 million, or $66 million, has little margin to absorb the shocks.

It emerged from bankruptcy only 18 months ago. If the euro rises to $1.40 or $1.50 next year, which Pfeiffer said he expects it will, the company will have to cut its costs drastically, perhaps by moving jobs to Eastern Europe or China.



Many European exporters, even small ones, have built factories in the United States, mainly to be near their customers.

These plants can serve as a natural hedge against the effects of a rising euro.

But in some cases, the American operations are proving to be a burden.



Keiper, a maker of metal frames for automobile seats, built a plant in London, Canada, in 2001 to supply Chrysler. At the time, the company, which is based in the southwestern German city of Kaiserslautern, figured that the euro would trade at roughly parity against the dollar.

Now, Keiper has had to arrange hedges - transactions that are essentially bets on the future movements of exchange rates - to insulate it from the effects of a euro that trades at $1.33. Keiper was able to fix a rate of $1.25, which still means it is losing money at the current exchange rate.

"These companies have become very well-informed about influences and trends in the dollar-euro world," said Max Dietzsch-Doertenbach, a banker who advises the "mittelstand," or small and midsize, family-owned companies that are the bedrock of the German economy.

While Keiper assembles its seat frames in Canada, it still uses components that are exported from Germany. Like SMS Elotherm, it is being pressed by its customers to cut prices, even as its cost rise.

"It has had a severe impact on earnings," said Guido Schön, the head of foreign operations for Keiper, declining to give figures for the company, which is family-owned. "It is not easy to manage all the bad factors in the world," he added.

That sentiment would probably resonate with the 18 governors of the European Central Bank. They gather on Thursday to deliberate on interest rates.

Exports, which have fueled Europe's fragile recovery to date, are losing steam, according to a survey by Reuters of purchasing managers. The index for new orders in the 12-nation "euro zone," a key measure of export strength, fell below 50 for the first time since July 2003.

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