Supply Chain

Feeble Yen Could Help and Hurt HP

While a weaker Japanese currency will lower component costs on some of Hewlett-Packard’s hardware, it will also give the computing giant’s overseas...

As it continues a long-term restructuring and battles back from a second-quarter 32 percent drop in profit, Hewlett-Packard will find both friend and foe in a weak Japanese yen.

Although the computer-hardware giant reported higher-than-expected second-quarter earnings on Wednesday, its long-term struggles continue: Quarterly sales fell in almost every HP business segment. The company reported year-over-year declines in earnings and revenue, hurt particularly by sales slowdowns of 5 percent to 15 percent in its consumer and commercial hardware products, including printers.

In stating the numbers on the earnings call, HP CFO Catherine Lesjak said the depreciating Japanese yen, which weakened to about 103 yen to the U.S. dollar on Wednesday, could help improve some of HP’s results going forward by making some of the components it buys in Japan cheaper. Indeed, the weakening should providing the company “a significant benefit” in the second half — a sharp contrast to  last quarter, when the weak yen was only of “marginal benefit,” Lesjak said.

But the impact of the currency’s drop will be double-edged, according to Lesjak. A weak yen has brought out “signs of increased price aggressiveness from Japanese vendors” of competing products, whose export prices are falling in world markets, she said.

For HP, the good news will be lower product-input costs. HP buys manufacturing components from Japanese suppliers and it also has operations in Japan. “In the laser [printer] business, [what’s happened to the yen] helps us in terms of our profitability,” said Meg Whitman, HP’s CEO.

But Lesjak said the “big ramp” in savings would not occur until the second half, in particular the fourth quarter. That’s because of “the contract that we have with Canon and the hedges that we had in place at the point of time that the yen started to depreciate,” she said.

Canon builds and supplies parts for some of HP’s printers in Japan. And HP’s yen hedges have most likely turned unfavorable: When the yen was much stronger last autumn, at less than 80, sophisticated finance departments reduced their exposure through forwards and options. 

For example, a manufacturer may have put on a hedge that gave the company a better-than-market exchange rate of 85 yen to the dollar. But once the yen weakened substantially, to 85, then 90, and beyond, the hedge would have become a losing proposition, locking the company into a more expensive exchange rate.

On the HP earnings call Wednesday, Lesjak said the currency dynamic “is creating quite a war chest for Japanese competitors. They now have a lower cost structure than they did before.”

HP’s Japanese competitors include Canon, NEC, Fujitsu, Hitachi and Ricoh.

Data from the Japanese economy show that so far, Japanese exports are getting only a mild boost from the weakening yen. The country’s exports to all countries rose 3.8 percent on an annual basis in April, but the median estimate for the rise was 5.9 percent, according to Reuters. Exports to the United States, however, are getting a big boost. They jumped 14 percent year-over-year in April.

Lesjak stressed that HP’s hedging strategy is designed to mute the impact of currency volatility quarter-to-quarter. “HP is exposed to a whole basket of currencies,” Lesjak said. How HP hedges depends on a business unit’s products and sales cycles, as well as how quickly the company can pass on changes in currency and pricing, she added.

Still, CEO Whitman suggested that HP would take full advantage of the fallen yen to stay competitive. “We’re going to use some of that yen benefit to fight back, and I think that’s the right thing to do,” she said.