Asia’s CFOs may have dodged a bullet last summer when the worst of the
credit crisis passed them by. But many have taken a direct hit from
another side — the continued
fall of the U.S. dollar and the sharp rise of local currencies. Since the
start of the year,
the Thai baht is up 12 percent against the dollar, the Philippine peso has
risen 10 percent, and
the Indian rupee is up 10 percent. Other currencies, including the won,
the ringgit, and the
Taiwan dollar are also more expensive.

Of course, currency appreciation partly reflects good news for Asia: local
economies are
vigorous and attracting foreign capital. But that’s little consolation for
exporters. The pain is
particularly acute for service providers with foreign clients. Unlike
manufacturers — who can
usually offset currency losses on the export side with gains from imports
— service businesses
have fewer natural hedges. “The rupee is a very major worry for us,” says
S. Mahalingam, CFO
of Tata Consulting Services (TCS). “Even though we have some operations
overseas, a one percent
rise in the rupee translates into 35 basis points in terms of margin
impact for us.”

How should CFOs cope? There’s financial hedging, of course. Forwards are
readily available,
as are options in many flavors. But like other insurance, forex hedges are
expensive — particularly
at a time when the currency in question is already moving skyward. And
they are better
suited to large companies with
ample buying power. “If you
aren’t big enough, you have to
use the retail market with its
high fees and spreads so wide
that it may not be the effort,” says
Tim Pagett, a partner with PricewaterhouseCoopers
in Beijing.

Still, hedging has proven
valuable for many companies, particularly
in India, where the rupee
has been on the rise for years.
That’s true for TCS. The company’s
hedging program — which looks forward two years — employs
options to protect it from upward spikes in
the rupee but also allows it to book gains from a depreciation. Indeed,
gains from
hedges contributed to an expansion of the company’s margins in the past
quarter.

But financial instruments provide only part of the answer. CFOs are
grasping
a number of levers, ranging from cost cutting to efforts to improve
pricing. At
Chemtex Global, an engineering firm based in Mumbai, CFO Jimmy Spencer is
exploring ways to lift output per employee. The company is putting in new
technology
(such as machines that print engineering drawings more quickly) and
using critical path analysis to trim time required for projects.

Spencer, who oversees HR, has also found ways to put new employees to
work faster. Previously, it took 12 weeks before a new hire started
producing revenue —
that time has been cut by half. “We want to get them earning for the
company
rather than have them be overhead,” says Spencer.

Companies will also need to consider higher prices. TCS is looking at
expanding into areas of consulting that offer fatter margins, such as
knowledge
process outsourcing, which involves not just processes, but certain
low-level
business decisions, too. Coats Thread Malaysia, a subsidiary of a
U.K.-based textile
producer, is weighing whether some prices will need to rise. According to
CFO Tan Chee Wan, some of the company’s customers are starting to drag out
payments in expectation that a rising ringgit will lower their bills. “If
the appreciation
is too much, we’ll have to renegotiate,” he says. Still others, including
SM Investments in the Philippines, are responding to currency volatility by
refinancing
some of their debts in their local currency.

As unlikely as it seems, stronger currencies may ultimately strengthen
Asian businesses. In much the way that a heavy debt burden focuses a
manager’s
mind, slimmer margins due to currency appreciation can force new rigor.
“Our industry has been quite undisciplined — when the rupee was
depreciating you
could just keep accumulating inefficiencies,” says Mahalingam, who is
embarking on a range of cost control efforts at TCS.