Could a company make its own currency?

Well cushioned

Europe is in crisis, the most important market for German exporters remains unpredictable. Medium-sized companies are therefore increasingly looking for opportunities outside the euro zone, as the current study “Going International” by the German Chamber of Commerce and Industry (DIHK) shows. He estimates that exports will increase by six percent in 2013, with Asia and Latin America being named by companies as the most interesting and fastest growing regions.

Who bears the exchange rate risk?

When doing business abroad outside the euro zone, the companies automatically encounter foreign currencies - be it in import or export. When entering into a foreign trade transaction, the choice of the invoicing currency determines which contracting party has to bear the exchange rate risk. For some companies, the first step in the foreign currency business is difficult. This is why lucrative orders are sometimes rejected just because nobody in the company has any experience with currencies or would like to deal with them. The people involved are not always aware that there are also specific security measures to protect themselves against unpleasant developments.

The risks involved in doing business with business partners outside the euro zone can basically be divided into three categories:

Exchange rate fluctuations for payments in foreign currency: The currency risk is one of the company risks that can best be controlled through internal or contractual changes in the course of its own production and procurement strategies. For example, if you receive US dollars from the export of a machine, you can check which goods can be purchased in US dollars. For this reason, some companies buy their raw materials in US dollars instead of in euros, as was previously the case. Because the raw material supplier usually procures the raw materials in US dollars as well. In this way, the exporter can relieve his raw material supplier of an exchange rate risk and in return usually receives a better price.

Conversion of balance sheet items in foreign currency: If an item in the balance sheet or the income statement is affected by a transaction in a foreign currency, a currency conversion is necessary. A foreign currency transaction is a business transaction that requires a foreign currency to be fulfilled or the value of which is specified in a foreign currency. Important cases for this are liabilities or receivables from deliveries and services in a foreign currency or borrowing or lending in a foreign currency. These must then, for example, be valued at the current exchange rate on the balance sheet date. If the exchange rate has changed negatively, losses may be shown. Caution is required in particular if subsidiaries abroad are settled in euros, but their business is carried out locally in the respective local currency. This approach has already brought many companies into economic difficulties.

Worsening of your own competitive situation due to currency fluctuations: There are often hidden currency risks in companies that are only discovered at a later, usually economically unfavorable point in time. Example: A German automotive supplier supplies European automobile manufacturers and bills its products and services in euros. At first glance, there should be no currency risk here. At the automobile manufacturers, however, the number of vehicles sold depends on the exchange rates, because if the euro exchange rate is high, they can sell fewer cars on international markets. An appreciation of the euro will therefore mean that the automobile manufacturer will order fewer orders from its suppliers. In this sense, even the revenues of a company that is fully active in the euro area are dependent on the development of the exchange rate. This is especially true if the supplier is competing with competitors outside the euro zone. In addition, exchange rate fluctuations influence the prices of goods and services in domestic currency, which also affects companies without any foreign trade outside the euro area.

Foreign currency can be better than the euro

The advantage of invoicing in euros is certainly the simple calculation. However, contrary to popular belief, invoicing in the foreign currency may be the better option for transactions outside the euro area. An example: A company bills a customer outside the euro area in euros, but the customer is always late paying without a conclusive explanation. Finally, it turns out that if the exchange rate is unfavorable for him, the customer will wait to pay until it changes again in his favor. Another example: A German company has been purchasing parts from China for several years and invoices in euros. For a few months now, the management has been surprised that their prices are constantly being undercut by a German competitor. By chance it is learned that the competitor pays in the Chinese currency when shopping in China and thus receives ten percent lower prices for the preliminary products. This effect was also confirmed by a survey by Deutsche Bank last year, according to which an average price advantage of around five percent can be achieved when invoicing in the Chinese national currency. Settlement in the foreign currency can have the following advantages over the euro: Better payment behavior on the part of buyers and possibly better margins for exports and cheaper purchases for imports. In addition, invoicing in their currency can be used as an additional argument for new foreign customers in sales negotiations and thus improve their own position.

German foreign trade companies that want to use the opportunities of invoicing in the foreign currency have a locational advantage: The financial infrastructure is better than in many other countries - the German banks are internationally well positioned and have the know-how to help companies with all currency issues to advise. You should use this strategic lead to cushion currency risks and to exploit the potential of modern currency management.

Author: The banker and graduate banking economist Jürgen Wechsler, Roth specializes as a consultant, coach and trainer in the topics of currencies and foreign and capital markets ([email protected]).