Even the biggest global companies can feel the pain of exchange rates moving against them, especially those without a program in place to manage that risk. Currency markets are notoriously volatile, and these moves can distort the performance and costs of international operations, or worse – eat into your profit margins.
Take Toyota for example. They recently forecasted an 18% fall in profit in the 2018 fiscal year, which would mark the second year in a row where the second-largest automaker saw double digit declines. The culprit? A stronger yen, coupled with slowing demand in the States.
Auto sales in America reached an all-time high last year, but Toyota’s US sales fell 2% year-on-year, their first decline since 2012. Auto sales are expected to fall this year. While controlling the ebb and flow of demand may be beyond their control, managing currency exposure certainly isn’t.
Utilizing strategies and products to mitigate exposure to cross-currency movements allows you to accurately budget and create a predictable cost structure.
Although they are headquartered in Japan, Toyota has heavy traffic in the US market. Thus, Toyota has a significant amount of exposure to the ever-changing currency markets in the funds they move cross-border. With expected revenue at ¥27.5 trillion yen, Toyota budgeted their USD to JPY exchanges for this fiscal year at a rate of 105. What we’ve seen since last year is a dollar-yen exchange rate that has moved upwards of 18%. While it is unclear what, if any, of their USD exposure was insulated with products like a forward contract, it wasn’t enough to protect them from even a short period of yen appreciation.
A forward contract is a tool that many businesses use to balance their exchange rate risks. A forward contract allows you to purchase a block of currency for a future date. Your business then builds your accounting out with a set pricing structure – much like agreeing to a price with a vendor. The contract confirms the exact rate you will be moving your funds cross-border, controlling costs and securing your bottom line.
The yen spent much of July through October well below their budget rate of 105. This means that any USD revenues that were repatriated at this time were vulnerable to being brought back at 5% less than their budgeted value. At even half their anticipated revenue, Toyota could be looking at losses of 6.5 billion dollars from the floor to their budget line.
As consumers take their foot off the gas, Toyota’s annual sales are expected to remain flat. The expected cost to their profit teaches us a valuable lesson: exchange rates are a critical concern for any global business. Toyota is a case study for any company that works cross-border – no matter the size; currency exposure is an important consideration that you can’t afford to leave in the slow lane.