U.S. Seen Emerging as Low-cost Country

Weak dollar is opportunity for European businesses, BrainNet believes; lower labor costs, good infrastructure can tip scale in favor of U.S. market

Bonn, Germany — March 26, 2008 — The continuing weak performance of the U.S. economy is straining economic expectations around the world. However, the weak dollar has another, positive side as the United States becomes an attractive procurement prospect for European companies, according to a German supply chain consulting firm.

Consultancy BrainNet, based in Bonn, notes that the serious implications for European exporters caused by the decline of the U.S. dollar and the looming American recession have been dominating the headlines for weeks. But there is one consolation: the increased use of the NAFTA area as a procurement market.

Head West

Until recently European companies, like their U.S. counterparts, have tended to look to the East in the search for low-cost procurement regions. China, India and Eastern Europe all offer enticingly low prices for products and services, mainly as the result of low labor costs.

However, the continuing low exchange rate for the dollar is encouraging many to look across the Atlantic. This is especially true of industry sectors that are heavily dependent on exports to the dollar area, such as the automotive industry, the aircraft industry and machine construction. A currency-related fall in revenue could be at least partly offset by shifting more procurement to the dollar area, according to BrainNet.

The consultancy suggests that this form of "natural hedging" offers significant cost benefits compared with financial hedging. "The U.S. economic crisis goes too deep for us in Europe to fully absorb the impact through procurement," says Lars Immerthal, an expert in financial supply management at BrainNet. "But that's precisely why businesses need to pull out all the stops in order to stay competitive. The directors of European companies should urge their procurement departments to expand procurement activities into the dollar area."

Pros & Costs

Eurozone companies can now hire an American engineer for 20 percent less than a year ago. In addition, many of the risks associated with doing business in other regions of the world do not apply in this market.

Another advantage compared with traditional low-cost countries such as China or India is the language and culture of the United States, which are well understood by Europeans, according to BrainNet. In many low-cost countries, low labor costs may appear to offer lower primary product costs. But if adjustments or changes are needed, the poor infrastructure coupled with linguistic and cultural barriers can result in considerable additional coordination work and often incalculable follow-on costs.

For example, the U.S. places great emphasis on the protection of intellectual property, which in many parts of the world is a serious problem. This is of vital importance to many companies, which are being forced into ever-closer links with their suppliers in the face of declining vertical integration. Also, the excellent infrastructure in place in the U.S. market presents another attractive prospect for procurement departments. Companies that do business with North America benefit from first-class conditions in terms of communication and mobility.

But the dollar crisis also brings benefits for purchasing transactions in Asia, if contracts are based on the U.S. dollar. "The optimum exploitation of currency differences requires procurement and finance to be dovetailed. Unfortunately in many companies this hasn't been achieved to a sufficient degree," Immerthal comments with respect to the current situation in European firms. "European businesses should give top priority to systematically training procurement staff in finance issues."