With marketplaces expanding across the globe, importing and
exporting have become important parts of business on almost every
level. Leaders are looking at markets they
might be missing overseas as well as how
they can source product there in order to
add to their margin with the same quality
of product made in the U.S.
“Exporting can bring increased revenues, growth of the business and diversification of customers,” says Dan
Flanigan, vice president and senior foreign exchange adviser at Fifth Third Bank
in Cincinnati.
Smart Business spoke with Flanigan
about successful strategies for importing
and exporting, how to manage your foreign exchange and business risks, and
what Single Euro Payments Area (SEPA)
means in today’s global marketplace.
What are some strategies you can use when
importing and exporting?
For companies just entering the global
market, finding a good partner or distribution source is key. It’s hard to access
those markets without doing your
research and finding partners, whether
it’s a joint venture or an entity that you
can lean on a bit to get into those areas.
Think about ways to evaluate the export
potential of your products and services in
an overseas market. The easiest approach
is to look at the success of your products
in the U.S. There’s a good chance they will
be successful in markets abroad, at least
where there are similar needs and conditions as in the U.S. Examine the unique or
important features of your product. If
those features are hard to duplicate, it’s
likely those products are going to add
value outside of the U.S.
Is now a good time to export your goods?
It’s good to look at alternatives. Clearly,
the challenges we have here are being felt
globally. You have companies that are
pulling back and not looking outside the
U.S., trying to focus on their core business. The numbers for exporting have
certainly gone up over the past decade.
The trend in foreign exchange markets,
up until recently, has been a weak dollar,
so the revenue generated outside of the
U.S. has been more tangible for U.S.-based companies in U.S. dollar terms, and
their foreign exchange gains have been
significant. The euro hit an all-time high
of 1.6038 on July 15, 2008. It has lost more
than 20 percent of its value since then.
How do you manage foreign exchange and
business risks?
The volatility in the current foreign
exchange market is unprecedented. In
order to manage these risks, you first
need to look at how you want to do it.
Based on the business that you’re doing,
if you are exporting and have revenue
outside the U.S., you are going to be in
receipt of foreign currency. As a U.S.-based company, you’re going to need to
come up with a policy where you’re more
disciplined in converting that currency
into U.S. dollars. The most successful
exporters are those that are disciplined in
their hedging programs. Establish a foreign exchange hedging policy and come up with strategy that you want to execute
to manage that risk.
There are three main products in foreign exchange. First are cash or ‘spot’
trades. These are the most risky as you
have left yourself completely open to
market fluctuations. The second is a forward contract, which is simply that ‘spot’
rate and an adjustment to that rate in the
way of positive or negative forward
points. Forward points are simply interest rate differential between the two
countries of the currency pair (i.e.
USD/CAD). These contracts, not to be
confused with rigid futures contracts,
eliminate all downside risk as well as all
upside. They are very conservative. The
last product set are options, which give
you the right, but not the obligation, to
buy or sell a currency for specific settlement date and amount. Options take on a
variety of different looks and can be as
conservative or aggressive as you want
them to be.
What is SEPA and how does it affect businesses?
SEPA is an effort to hook all 27 countries that make up the European
Economic Union into one standardized
payment system across all of those countries. It harmonizes millions of everyday
retail payments in euro all over Europe.
SEPA defines the specific rules, practices
and standards or schemes for SEPA credit transfers and SEPA direct deposits. The
project will impact electronic payments
and card payments, changing and reshaping the role of the automated clearing-house in the Euro Zone, and providing
common standards, enabling true cross-border electronic and card payments in
the Euro Zone. The SEPA pay instruments are credit transfers, direct debits
and payment cards. Since 2008, the
instruments have operated alongside
existing national processes, with full
migration targeted for the end of 2010.
DAN FLANIGAN is a vice president and senior foreign exchange adviser at Fifth Third Bank. Reach him at [email protected] or
(513) 534-6872.
