Volume 42, Issue 8 - August 2007

European Trip   
The Rising Value of the Euro 
Muddles Machinery Market
by Les Shaver

Mike Willard’s customers probably thought he was trying to pull a fast one on them. In February, they came in seeking quotes on European-made glass processing machinery. And, like any good salesman, he gave them those costs. Then the customers came back a couple of months later ready to buy. The only problem? Prices for the equipment had risen by 6 or 7 percent. 

Was Willard, the executive vice president for Salem Distributing in Winston-Salem, N.C., aggressively pushing prices? While buyers could jump to that conclusion, it wasn’t the case. Instead there were bigger economic forces at play. With the value of the Euro moving up to as much as 33-percent higher than the dollar at press time, lots of American buyers were seeing European equipment get more expensive. 

“It’s really tough to counteract the exchange rate,” Willard says. “It is what it is. It’s tough to sell around that. Someone has to pay for that. We can only cut into our margins so much.”

The exchange rate is affecting companies on both sides of the Atlantic. Some European manufacturers and distributors are cutting into their margins (and enjoying bigger market forces) to keep their products moving in the American market. But in other cases this isn’t working—it seems American firms selling into Europe have not been able to capitalize on the exchange rate as easily.

Exchange Handicap
Though Stewart Walmsley is part of the Besana-Lovati chain as general manager for the Italian manufacturer’s American offices in Winston-Salem, N.C., he is hurt by the exchange rate. Despite being part of Besana-Lovati, Walmsley says his firm buys in Euros and sells in dollars.

“You would think there would be some advantage to working as a subsidiary,” Walmsley says, “but we’re really acting like a distributor.” 

And, Walmsley is a distributor who’s getting burned by the high exchange rate. “It’s more than a 50-percent increase in the cost of the equipment,” he says. “It’s obvious. Customers think we have increased our prices. We’re working on smaller margins and trying to survive. I think this holds true for all of the companies bringing in equipment from Europe.”

Others have reduced margins as well. Distributors of European products will admit they’ve had to lower the costs on the machines in the States to offset the exchange rate. “You’re definitely going to get a lower margin depending on what the situation is,” says Greg Fisher, who handles technical sales for CMS North America, a machinery distributor in Caledonia, Mich.

The only comfort for Walmsley: He isn’t alone. “It has an effect on all of the European suppliers,” he says. “I believe that all of the European suppliers of equipment are suffering from the exchange rate issue. They have to be.” 

Doug Canfield, president for Casso-Solar Corp., a distributor of equipment in Pomona, N.Y., sees the same thing. “We’ve felt it [the effect of the stronger Euro] to some degree because, most of the time, European equipment is more expensive,” he says. “The Europeans have had more difficulty selling.”

Part of the reason for this is American buyers seem oblivious to the exchange rate. And, even if they do know about it, they mainly care about cost. “American buyers don’t care about the exchange rate,” Fisher says. “They buy their machines in U.S. dollars and sell their products in U.S. dollars. They don’t care about it [the exchange rate] or want to hear about it.”

But if the buyers have some relationship to Europe, they may be a little more forgiving. “With a lot of the companies we deal with, the owners came from Europe,” Fisher says. “They’re extremely aware of how this whole thing works. They tend to be more accepting of the fact since they have a division in Europe and know about the situation.”

The tough part is that distributors of European products don’t see the exchange situation improving anytime soon. “They’re not going to change all that quickly,” Canfield says. “The Euro will be strong for quite awhile from what I read and see.”

Fortunately, there is a silver lining for some distributors of European products. They’re seeing the economy as a whole having a larger impact than the exchange rate. Federica Palazzina, a spokeswoman for the Italian machinery industry, says the United States remains in fourth place on the list of countries buying Italian exports.

“Even if damaged by the exchange ratio of the Euro and dollar, for American customers our enterprises are still a privileged supplier, thanks to the reliability of the products but also to the relationships created by Italian companies with their customers during more than 30 years of steady presence in the market,” Palazzina says. 

“Our customer base is good,” Canfield says. “A lot of the glass machinery work that we do changes dramatically from year to year. That’s a growing market. There’s more glass used in construction applications, whether it’s decorative or laminated. So we see that as a growing market.”

Willard sees the same trends. “This year glass machine sales will be slightly above last year’s level,” he says. “It looks optimistic. Our customer base is a fairly loyal group of customers. We do have good, strong customers that are upgrading their facilities. We have customers that are building new plants.”

But, for some, the economy is slowing. “We’ve seen some turndown in the market,” Walmsley says. “You see the stock market and it’s going out of the roof. What is the real economy? Is it based on the stock market or what we’re seeing?”

American Advantage?
So, has the surging Euro and corresponding rise in the cost of European machinery helped American manufacturers in the U.S. market? It depends on whom you ask. 

Willard, for one, thinks it’s helped. “There are some domestic stone machine fabricators that are doing pretty good,” he says. “They certainly use the exchange rate to their advantage.”

Walmsley sees this as well. “The domestic manufacturers that have the reputation and produce good equipment are [using the exchange rate] to their advantage,” he says.

Combine this with a strong “buy America” message, and it’s easy to see how American manufacturers are doing better in this climate. “In some cases, not only do they see a better price, but a lot of American buyers have in their minds that they want to buy American-made machines from American companies,” Fisher says. “They think they will get better service and price.”

Dick Carroll, president of Sommer and Maca, a manufacturer of machinery and distributor of supplies to the glass industry based in Cicero, Ill., hasn’t really noticed a change in his American sales since the exchange rate rose. 

“I can’t say I’ve noticed any advantage,” Carroll says. “They [European products] are more expensive but it’s really an advantage. Sales remain about the same.”

Carroll doesn’t really sell into Europe. But other American manufacturers do. And, those manufacturers can sell at a discount in Europe. You’d think that would help them improve sales across the Atlantic. “Selling into Europe, particularly mainland Europe, our equipment is less expensive than what is being offered by local manufacturers” Canfield says. “There’s an advantage to selling to Europe from the United States.”

John Baxter, a senior vice president in Worcester, England, for Glasstech, an American manufacturer based in Perrysburg, Ohio, sees this as well. “Certainly, our prices look great when converted,” he says. “They certainly look better than they looked a few years ago.”

Baxter also has had trouble with an American product in Europe. “I think it [the exchange rate] has generally had a positive effect,” he says. “However, our competitors are fully aware of the effect of the exchange rate and they are absolutely determined not to let it affect them. The benefit we personally expected as an American company quoting in dollars and seeing those prices converted to Euros by European customers has not been as good as we hoped.”

Baxter sees this most often through the sales process. “When I go out quoting [in Europe], initially there is a beneficial effect,” he says. “We quote in dollars to European customers. They perform the conversion to Euros and look at the price. Often they say it looks good.”

But after some time to shop around, customers often change their minds. “We go to meet and discuss it,” Baxter says. “By the time they get to the meeting they say their competitors have responded. We’re finding that the competitors pull their prices to levels below ours, even though you would expect ours to be very advantageous. European companies don’t want to lose business. They’re lowering it to unhealthy levels.”

The only way Baxter sees that he can rationalize this cost-cutting is the fact that European manufacturers are focused on aftermarket business in Europe. “I suspect they’re taking business with very small margins in the interest of making the sale and creating the aftermarket sale, like spare parts, renovating and overhauls in the future,” he says. “It’s like selling a motor vehicle. When Ford sells a car it can afford to sell with little or no profit in the interest of having a vehicle out there and getting the aftermarket effects.” 


Segment Success
When will American buyers swallow hard and still overlook the exchange rate to buy a European product? Often, it seems they’ll still make a purchase when there’s not another good option or when the value or the quality of the product is just too great to ignore.

For instance, screenprinting is a European-dominated market, regardless of the exchange rate. “There really isn’t a good U.S. manufactured screen printer,” says Doug Canfield, president of Casso-Solar Corp., a distributor of equipment in Pomona, N.Y. “Foreign manufacturers are competing against other foreign manufacturers for the market.”

But with glass cutting and grinding equipment, there’s American competition and the sales climate is more difficult for European manufacturers. “We’re not selling any of their stuff,” Canfield says. “It’s just ridiculous when you compare the cost.”

There are also differences in product quality. Distributors aren’t in agreement over whether the higher exchange rate has hurt the higher or lower levels of the market more.

“It will hurt us at the higher end more,” says Mike Willard, the executive vice president of Salem Distributing in Winston-Salem, N.C. “We’re starting out with a higher-priced piece of equipment, then you have the double hit on the exchange rate. It’s not uncommon for us to be 15- to 20-percent higher. That takes of lot of upselling. The whole exchange rate compounds the selling process.” 

But if Greg Fisher, who handles technical sales for CMS North America, a distributor of products in Caledonia, Mich., can show how more expensive machines can lead to profitability, he still can make a sale. “Price is always an important consideration, but it’s not the only consideration,” he says. “Our equipment makes customers more productive and they’re willing to pay more for it.”

In fact, Fisher says the exchange rate has hurt his standard machines harder. He thinks the possibility of having to pay the exchange rate on three machines influences buyers to purchase the higher-priced piece of equipment that can do more. 

“In some cases, it [the exchange rate] may have reduced the number of machines we sell that are more of the standard type,” Fisher says. “These people will call up and look for a special type machine. If you buy this kind of machine, instead of buying three new machines, you can have one machine that does everything. Buying a machine that does three things is cheaper than buying three machines that do one thing.”



EURO Market
Some Companies Try to Play the Exchange Rate Game
Dealing with the Euro-dollar trade difference isn’t just for manufacturers and distributors of machinery. Glass fabricators have been known to do it as well.

Some buyers will go to a domestic bank and lock in on a Euro exchange rate for the duration of the deal (deposit to expected delivery and through acceptance dates). Others depend on the manufacturer to negotiate in dollars. Then there are those who will gamble on the dollar value going up and purchase in Euros. “If you do that, you’re gambling,” says Bob Lawrence, owner of Craftsman Fabricated Glass in Houston. “It’s just like the stock market. Anytime anyone buys in Euros, unless you lock an exchange price in Euros, you’re subject to whatever ups and downs the market takes the Euro.”

Instead, Lawrence suggests just letting your supplier worry about the exchange rate.

“It’s best for Americans to get a price in dollars and let the manufacturer worry about whether they want to lock in now or later because they’re locked in on a quote to you,” he says. “Then they have to worry about whether or not to play the hedge game.”

Many distributors, and even branches of manufacturers, will also try to gamble with the exchange rate. “The only thing you can really do is hedge the exchange rate,” says Stewart Walmsley, general manager at Besana-Lovati’s offices in Winston-Salem. “Then you’re committed to a contract. If you don’t have funds to fulfill it, then you suffer the consequences. When you’re talking about large amounts of money, then it’s a risk.” 

In fact, Walmsley likes the stock market analogy to hedging as well. “It’s like any commodity purchase,” he says. “Playing the stock market, you don’t [know] whether it’s up or down.”


USG
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