The Declining Dollar

Like UTC, Simon is largely operationally hedged. Although most of its business is in the United States, it operates 50 properties in Europe, where it reinvests profits in its local operations. "Our leases are in local currency, we borrow in local currency, and we're using our profits to reinvest locally," says Sterrett. "We have a natural hedge."

Making Adjustments
For companies that have significant costs outside the United States but recognize much of their revenue in dollars, the picture is not as rosy. In a striking change, many are considering moving manufacturing operations to the United States to reduce costs. European carmakers like Fiat, BMW, and Volkswagen are looking to establish or expand their stateside production to strengthen ties to U.S. consumers and reduce their euro exposure. BMW executives have said that they plan to increase U.S. production by more than 70 percent in response to the dollar's decline. The French manufacturer Alstom announced plans last December to build a $200 million facility in Tennessee, in part to mitigate the impact of the weak dollar on its margins. And in perhaps the highest-profile rumored defection from the eurozone, the CEO of EADS, the parent company of Airbus, has said the airplane manufacturer will consider moving some production to the States, much to the dismay of French government officials.

Novo Nordisk, a Danish pharmaceutical company, derives more than 30 percent of its sales from North America and an additional 30 percent from other locations outside the eurozone, but produces nearly all of its product in Denmark. The insulin maker also conducts most of its research and development just outside Copenhagen. CFO Jesper Brandgaard says the company has taken a number of steps to reduce its exposure to the weakened dollar. In addition to increasing its financial hedging, Novo Nordisk has expanded its production facilities around the world, opening a new facility in Brazil and planning to expand production in China this year. The company also opened an R&D office in New Brunswick, New Jersey, in 2006 and has established a 50-person research team in China. "We are looking for a better balance between our production cost base and our income base," says Brandgaard.

In Asia, outsourcing firms like India's Infosys Technologies Ltd. are facing currencies that are strengthening against the dollar even as local wage rates rise, squeezing their margins and forcing them to consider operational changes. "Indian companies are very exposed. About 98 percent of our revenue comes from overseas and about 63 percent comes from North America," says Infosys CFO V. Balakrishnan. "A one percent change in the rupee affects our margin by around 50 basis points." As a result, the company is pursuing higher-margin consulting work, instead of more-routine application-development projects, to buffer margins. Balakrishnan says he is also focused on containing costs.

Infosys rival Tata Consulting Services is also seeking higher-end work, and the company is trying to steer clients toward projects that are based at its own facilities in India, rather than at the client's location — again, to boost margins. All these changes may not be enough, says CFO S. Mahalingam. "If the exchange rate drops to 35 [rupees to the dollar], that's a different matter. Then we will have to look at creating more delivery centers overseas." At the end of 2007, the rupee clocked in at 39.2 to the dollar.

In contrast, at companies headquartered in the United States, some CFOs are looking hard at investments overseas. "New investments could become less justifiable because of higher local costs," says Pablo Edelstein, CFO of Dow Latin America. Because many of Dow's raw materials — such as ethylene, which is derived from oil — are linked to the dollar, margins will shrink internationally unless the company raises prices. "We do transfer those increases to our selling prices, but sometimes there is a lag, particularly when oil prices shoot up rapidly," Edelstein says. If the dollar's weakness lingers, the company might even reconsider the economics of new investments, he adds. Edelstein stresses that the company would not scrap a project due to currency fluctuation alone.

Simon Property's Sterrett says his company will also proceed with caution as it pursues international acquisitions or new international developments with local partners. "The weak dollar has made it increasingly difficult for us to look at a large-scale acquisition that would require a significant commitment in U.S. dollars," he says. "It has gotten harder to look for viable growth alternatives outside the U.S."

Looking Ahead
For many CFOs, there is a sense of inevitability about the dollar's current plight. "The U.S. economy is growing slower than much of the rest of the world, which puts continuing pressure on the dollar," says UTC's Hayes. "The deficits we are ringing up to fund the wars in Iraq and Afghanistan add to that pressure."

"My concern is not that the dollar's decline is cyclical, but that it's a long cycle," says Scott Goble, finance chief at Alliance Flooring, a private company with more than $1 billion in annual sales. Although Alliance does business only domestically, the company has been affected by rising raw-materials costs. "We need to keep interest rates low to keep the housing situation from getting out of hand, but we need to maintain high enough rates to keep foreign investment coming in," Goble says. "I don't see a way to do that without a devalued currency."

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