BlogSeptember 30, 2020Continue Reading March 30, 2020Continue Reading
Author Archives: admin
As discussed in previous blog posts, exporters face risks with fixed or floating exchange rates. In fact, even if you denominate all trade in dollars, the exchange rate can still play a major role in determining demand for your product or service. So, the bottom line is that you can mitigate, not eliminate, exchange rate risk. Here are some strategies to consider:
- You should do a sensitivity analysis for all of your major markets when you are doing your business forecasts. First, look at the range of the exchange rate fluctuations over the previous years, and then decide a reasonable plus or minus range around the current exchange rate. Recalculate your bottom line for each market using the high and low calculation. This will give you an indication of your company’s exposure to exchange rate changes in a given market. If there is a major impact on your bottom line, you may want to consider one of the following hedging strategies. For major currencies, the organized currency markets can provide a variety of responses.
- You can purchase currency on the futures market to align with your expected collection date. With this you can be assured of the price, but at a cost.
- You can also purchase an option to buy at a certain price if the exchange rate exceeds a certain level. This is similar to a “put” in the stock market and is less expensive than a forward contract. It does, however, expose you to market fluctuations until you reach the strike price.
- For currencies that are not freely traded, you can request the payment in dollars (or at the local currency equivalent on the spot market on the day the contract closes). This may minimize your risk but it also shifts the risk to your buyer. This could cost you sales if your competitors do have a similar requirement. A dollar denominated sales strategy does lessen risk, but it also limits your opportunities to expand markets.
- If there is a significant market risk, you may also want to keep the pipeline short to minimize your exposure in a particular market. If you have a local operation (warehouse or subsidiary), you can keep inventory to the bare minimum. You can also limit the term of your price quotes (for example, instead of 90 days, you could quote the day of the sale and require pre-payment).
As an exporter, there is an implicit exchange rate risk with every transaction. Most risks are small and you can build in the margin to cover those risks. (If you can’t build in the margin, you might want to reconsider the sale.) The trick is identifying when there are larger risks and taking the appropriate steps to protect your business.
CIVIC 180 Launches Hispanic Entrepreneur Ecosystem Program to Empower Entrepreneurs in Orange County
Hispanics represent one in three residents of Orange County, California but account for only 12% of Orange County businesses. A CB Insights Report cites that less than one percent of venture-backed startups in the nation were founded by Hispanics and are still underrepresented among the ranks of high-tech entrepreneurs. In response to this challenge, the Community Vitalization Council 180 (“CiViC 180”), a non-profit organization, is launching a Hispanic Entrepreneur Ecosystem to assist Orange County and surrounding cities to empower high-tech entrepreneurs. The program is designed to foster a new generation of Hispanic entrepreneurs and small business owners by providing access to resources and support that will enable them to build and grow their startup or small business.
One of the key roles that local government and chambers of commerce to perform is to facilitate and influence business and investment opportunities in an effort to retain and create jobs and enhance its tax base. California cities have one of the highest unemployment rates of any state in the nation of which no city has escaped either in terms of losses in employment or to its tax base. Thus, a Hispanic Entrepreneur Ecosystem is a valuable program in the support of economic development activities and has become even more valuable since the 2008 recession.
“Cities are central to innovation and new technology,” said Chris Lynch, president of Civic 180. “They need to act as giant petri dishes, where creative types and entrepreneurs can rub up against each other as well as mentors who are a great resource to assist them from idea to an emerging growth company – combining and recombining to spark new ideas, new inventions, new businesses and new industries.”
The Hispanic Entrepreneur Ecosystem Program is consistent with the mission of CiViC 180 which is to promote community level economic vitality and jobs by bringing and implementing best practices in creating and supporting the growth of new businesses. CiViC 180 works in collaboration with cities, economic development agencies, chambers of commerce and other non-profit organizations – with the aim to provide services to poor or underserved communities by developing stable funding streams for community-based programs using grants, donations, and corporate sponsorships.
“If Orange County cities want to remain a vibrant community, then cities and chambers of commerce must do everything it can to foster a Hispanic Entrepreneur Ecosystem and create a pipeline of jobs for working families,” commented Lynch. The CiViC 180 Hispanic Entrepreneur Ecosystem is a mentorship-driven program that provides “hands-on” education, business resources, infrastructure, capital, and guidance for promising startup companies led by Hispanics, moving them on to a fast track to success. The CiViC 180 Hispanic Entrepreneur Ecosystem will assist Hispanic entrepreneurs with the following benefits:
- Mentorship – Participants receive frequent one-on-one time with the most influential entrepreneurs in the community to provide guidance, share progress, and receive crucial feedback.
- Workshops/Seminars – Facilitated by CiViC 180 “hands-on” mentors, participants will learn how to build a scalable business model, attract and maintain customers, and generate revenue for their startups.
- Pitch Presentations – Workshops on preparing pitch presentations will be conducted by industry leaders and venture capitalists, in partnership with SBA and other organizations. These pitch presentation workshops are designed for entrepreneurs to roll up their sleeves to learn about startup business strategies and tactics that will deliver successful results.
- Training – CiViC 180 will provide training on practical skills and knowledge to Hispanic entrepreneurs and small business owners regarding the specific competencies that will improve their capabilities and performance. This training will allow participants to continue to maintain, upgrade and update their skill sets throughout their business lives.
- Demo Day – In cooperation with K-5 Accelerator, each startup will participate in a pitch competition and pitch to investors in an interactive setting. Our shared goal is to help participants exit the program on a fast, upward trajectory toward their company’s specific growth objectives.
- Access to Resources – CiViC 180 will also provide additional resources that will enable Hispanic entrepreneurs to build and grow their startup or small companies.
- Promotion – create buzz and awareness in launching new Hispanic companies and products or services. It is vital in gathering customers, investors and achieving success.
All Hispanic startups and small businesses are expected to achieve certain milestones and graduate with a lean startup team
According to a McKinsey & Company study, more than half the world’s inhabitants – 3.6 billion people – live in cities. The proportion is the highest in mankind’s history, and it is growing fast. The ways in which cities develop and cope with such rapid urbanization are of huge importance to its citizens. Cities are the main sources of economic growth and productivity. With that said, to make the most of the available resources, both human and financial, effective city leaders need to rigorously assess and manage expenses, explore private partnerships, introduce investment accountability, and embrace technology.
The formidable task of managing growing cities in ways that support and drive economic growth will help the public, social, and private sectors in making informed decisions about city and community development strategies, and to help build the skills to implement those strategies. This need for community revitalization is a primary reason we formed CiViC 180 as a non-profit – to help communities and cities grow their local business community, embrace technology and viral marketing, connect globally, build entrepreneurship and sustainable funding to drive business acquisition and retention.
This growth in city inhabitants begs the question – “How do you make a city great?”
Through analysis, case studies, and interviews, we all seek to learn what cities and their leaders do to make their cities great, their communities better places in which to live, work and establish a business. Our findings, as I am sure you have found, make it clear there is no single method. Research suggests that successful cities find a balance between three primary areas. Cities need to achieve smart growth, which means securing the best growth opportunities to ensure prosperity. They need to do more with less. And, they need to win support for change by delivering results swiftly. It is a simple process, but sometimes difficult to execute:
1. Make Planning an Inclusive Process – city and community audit
2. Improve existing infrastructure
3. Innovation – develop opportunities for all
4. Achieve smart growth – nurture the best opportunities
5. Do more with less – make the most of available resources and community partners
6. Embrace technology and viral marketing
7. Win support for change – craft a personal vision for the city
City and community leaders need to understand their tenure will be limited. When long-term plans are articulated – and gain popular support because of short-term success – leaders can start a virtuous cycle that sustains and encourages a great city environment. As I mentioned earlier, for a leader to make important strides in improving their cities must do three things really well:
1. They must achieve smart growth. Smart growth identifies and nurtures the very best opportunities for growth in the community, develops a plan to cope with its demands, integrate innovative thinking, and ensures all citizens enjoy a prosperous city. An important element is to think about regional growth because as a metropolis expands, you will need the cooperation of surrounding municipalities and regional service providers. Integrating a business environment into economic decision making is vital to smart growth: cities must invest in developing infrastructure to grow and attract emerging growth companies in building high-density communities.
2. You need to do more with less. To be a great city, you need to secure all revenues due, explore investment partnerships, embrace technology, make organizational changes that eliminate overlapping roles, and manage expenses. Successful leaders realize their weaknesses and bring talented consultants who can achieve immediate results. Smart leaders bring in consultants to help them understand, if they design and executed well, they can deliver on private-public partnerships that will be an essential element of smart growth, delivering lower-cost, and higher-quality economic infrastructure.
3. Winning support for change is essential. Every city needs to change, it scares the team and the board, which can slow the momentum and even attract opposition. It creates fear, uncertainty and doubt. Successful cities will build a high-performing team of civil servants and talented consultants, to create a working environment where everyone is accountable for their actions, and take every opportunity to forge a consensus with the local population and business community. Building consensus with the local population and the business community through transparency and two-way communications is key to defining the city’s vision. The first step is to recruit and retain top talent, emphasize collaboration, and train civil servants in the advantages of using technology.
Every city has different priorities. Those priorities will be shaped by their own passions and vision, and by their city’s needs. City leaders will find themselves at different starting points in their quest to make their cities great, so each will have a different mandate. Many will find a strong consulting group to complement their team to get results quickly in kick-starting economic growth and delivering results. CiViC 180 has stepped in and assisted communities in making a difference. Everything CiViC 180 does is driven by the deepest and most profound understanding of how businesses’ need to interact with the community.
A city willing to take these steps will achieve smart growth, do more with less, and win support for change – the three hallmarks of any journey on the road to greatness. It is a journey to our future that needs to begin today.
Managed currencies, those where governments set or maintain a currency level, present opportunities and challenges for exporters. Exporters need to understand the type of exchange rate regime that a country has and the risks that a country may not be able to maintain that regime.
Many developing countries have fixed exchange rates. The government (usually the central bank) manages all foreign trade transactions and dictates the exchange rate against a currency (if it is the dollar, you may hear it referred to as “pegged” against the dollar).
The fixed exchange rate regime works in theory if it reflects a level that the clears the market (supply = demand). In reality, that is usually hard to manage and maintain on a long term basis. If there is a current account deficit, the central bank has to draw down on international currency reserves. If there is a surplus (as has happened in China), the extra money enters the domestic money supply, creating inflationary pressures. If there is a parallel currency black market (which there almost always is), there will be a divergence between the official and black market rate. Inevitably, market pressures will force a change in currency peg.
Recognizing these market forces, many central banks adopt tools to gradually manage the exchange rate. There is a tool called a crawling peg in which the central bank changes the exchange rate along a pre-announced path. Another tool is a managed float. The Central Bank announces a desired exchange rate with a band around the rate (for example +/- 2%). If the market results in an exchange rate that is above or below the band, the Central Bank intervenes.
So what does a managed currency mean to an exporter? Remember as I noted in last month’s column, you don’t have to be selling goods or services in the currency for an exchange rate change to affect your competitiveness in the market.
- A fixed rate may give some short term certainty to the exporter. As you look into the future, there is increasing risk that a change (devaluation or revaluation) will occur.
- A float or crawling peg may result in short-term fluctuations in the currency. My experience is that generally the countries can adapt more readily to changing market conditions with a managed float.
- In the event of a major political or economic event, the exchange rate can shift suddenly and radically, with major impacts for the exporter.
One real life example: I was loaned out to Caterpillar Financial Services for one year and I helped them set up operations in Mexico just following the entry into force of the NAFTA. Mexico had a fixed exchange rate regime at the time and the Mexican government swore that it would not devalue, despite a growing current account deficit. Those of you who are familiar with Mexican history know that there is six year boom-bust cycle associated with the presidential elections. In this case, Salinas was leaving office as Zedillo took over. I asked Caterpillar’s advisers on Wall Street who believed that there would be no devaluation. I went to Mexico and asked wealthy businessmen what they were doing with their money. All said they were sending their money to the US until after the devaluation. I told Caterpillar to wait until after the devaluation. The devaluation came after the inauguration but was much larger than expected. As a result, Caterpillar was able to set up a subsidiary for less than half of the amount that was originally planned.
Exchange rates are the determinants for profitability for exporters, yet they are poorly understood because of the complexities and uncertainties of the markets. But it is a crucial consideration, even though exporters have no control over this variable. Have you thought what would happen to your sales if the dollar appreciated against the currency of your export market?
Many small exporters say “I don’t worry about exchange rates because my sales are all in dollars.” That begs the question. The exchange rate determines the price competitiveness of your product versus domestic products and imports. In other words, how are your priced versus your competitors? Let’s take an example:
- The dollar ($) is currently worth 0.75 Euro (€). Let’s say you are exporting California Merlot that is $100/case. That is the equivalent of €75.
- If the dollar appreciates (becomes stronger against the Euro), the price becomes higher in Euro terms. Thus if it reached parity ($1 = €1), the price in Euros would be €100.
- If the dollar depreciates (becomes weaker against the Euro), the price is less in Euros. If the dollar dropped to $2/€1, the price in Euros would be €50.
Thus in the example, nothing has changed from the exporters standpoint – he still is charging $100 per case. There is no exchange rate risk but there is market risk. The price competitiveness of the California Merlot has shifted against French Bordeaux or Argentine Malbec. Under the stronger currency model, US products are less competitive. I always wonder why our politicians are so fond of arguing that the US needs a strong currency.
The Dollar versus Other Reserve Currencies
The world of exchange rates can be loosely divided into reserve currencies (Dollar, Euro, Yen and English Pounds) and all others. The reserve currencies are the currencies that are kept by Central Banks as the backing for other currencies (much as gold used to be) and are the most widely traded. The reserve currencies have no restrictions on trading and are market determined. Others, for example Chilean pesos, have restrictions on trading and the rate is (partially) set by the central government.
In International Economics classes, you will hear the professors (me included) talk about how exchange rates are determined by supply and demand. One component of supply is the current account – is more or less money flowing into/ out of the country due to trade. A component of demand is monetary policy – is the government creating too much money and artificially stimulating demand?
The cold truth is that for the reserve currencies the key determinant is interest rate differentials. Pay less attention to trade deficits or political strains. In the $4 trillion daily foreign exchange market, less than 10% is related to trade. The rest is due to the global virtual floating crap game called foreign exchange markets. Money fund managers shift around money tens of billions each night to take advantage of slight interest rate differentials between London, Tokyo and New York.
Thus for the major currencies the key factor you should keep your eye on is interest rate policies. For example, if Chairman Bernanke announces an end the Quantitative Easing program, the markets will react by assuming that US interest rates will rise and the money managers will put their funds into dollars. That will lead to an appreciation of the dollar and bad news for US exporters to the Eurozone.
by Christopher Lynch
“If I could only sell one light bulb to every consumer in China…” I heard a Westinghouse executive tell me that in the early 1980’s before China opened to trade and while there still was a Westinghouse. We all dream about the Grand Slam homerun in the big market. But you have to be careful what you wish for. How much money will you spend to get to the market? If you have to advertise, can you afford the costs of a national exposure campaign? Could you supply the potential orders?
For small exporters, I’ve always been the fan of small markets. In those economies, personal connections are more important, making market research and entry easier. I’ve found that there is frequently less competition because the mega-multinationals are focused on the big markets.
Here are a few examples to illustrate the point:
Central American countries (+ the Dominican Republic) have a Free Trade Agreement (CAFTA/DR) with the US. That gives US exporters duty free access plus a level playing field. The US exports more than $20 billion annually to the region, but that fact rarely shows up in the press. One US electronics reseller has a warehouse in El Salvador that then reships to the Central American region, which has no internal trade barriers. Internet commerce works well in Central America and this provides the electronics reseller a profitable base of operations.
Persian Gulf Coast (GCC) countries represent a small but highly profitable market. With high per-capita incomes, this region is a favorite with Southern California nutritional and herbal supplement exporters. I met one nutritional supplement company that exporting to the region with an internet based strategy.
Central Asian countries are growing rapidly as world commodity prices, especially oil, have remained high. One Southern California exporter is representing various pharmaceutical and medical products in the region – the cost for the major companies is too great to justify a local presence. For the exporter, this is a lucrative market that is the backbone of his company.
Pacific Islands are a natural for Southern California with many residents having family ties to the region. Transportation is a major cost but that keeps out the larger companies. The bonus is that once you get in this market, there is tremendous personal and brand loyalty.
So think “small markets.” There is a lot to be said about being the big fish in the small pond. Think about these and other smaller markets when you are making your expansion plans.
by Christopher Lynch
Exporters have to be customer centric. But, in addition to customers, exporters need to be aware of economic, political or social trends that could affect demand for the products or services. A change in the exchange rate from political decisions by a populist government can wipe out a market. A decision to begin negotiations on a free trade agreement can signal new market opportunities.
The exporter doesn’t have time to be the political analyst or economist – but there are some great online resources that I recommend for their accuracy and timeliness:
- The Economist Intelligence Unit: The EIU, a subsidiary of The Economist magazine, compiles economic and political data on every country around the globe. Because it is data driven, it is able to produce up-to-date analyses of what is going on in a market – macroeconomic data, key demographic and social trends and political outlook. I usually refer to the monthly reports for the best information, although the annual ones cover the country in much greater detail. I met regularly with the EIU country analysts when I was an international economist at various US Embassies and the analysts are competent and highly professional. My only caveat is that, being based in London, they view the world through British eyes. There is a fairly hefty annual fee to subscribe to the EIU – if you have a significant international operation, it is worth it. However, if you are a small or occasional exporter, your local public or university/community college library will let you have access at no cost.
- Country Commercial Guide: The Country Commercial Guide is produced by the US Commercial Service and is available at no cost to the public through www.export.gov. Updated annually, the Guides give an overview of the political and economic environment, tips on doing business in the country, trade regulations and investment climate in more than 150 countries and areas. The sections on trade regulations and investment climate can alert you to any impending changes in rules of commerce. Produced at US embassies and consulates around the world, the CCG also draws on the knowledge of the local employees of the Embassy, so the tips on doing business are generally right on. You should download and keep in your online library a PDF copy of the most recent CCG for every country that you to which you are currently or planning to ship.
- Country Fact Sheets: The US Department of State produces and regularly updates a Fact Sheet on each country. It outlines the positives (and sometimes the negatives) on every country or area around the world. Want to know what the official line is – check it out at www.state.gov.
We all know exporting is profitable – you can keep it so by keeping abreast of that latest in your overseas markets with a fifteen-minute read of these online resources!