The dropping euro is pressing hard against the comfort zone of many electronic-component suppliers, raising concerns that higher costs may not be easily passed on to OEMs and their customers.
Intel Corp.'s recent outcry jolted the industry, which had watched silently as the euro, introduced in 1999 to make the European Union more competitive, slumped 25% against the U.S. dollar and sheared into the microprocessor maker's revenue. Intel's warning late last month sent the company's shares skidding 22% on a whopping trading volume of 300 million shares. Intel's fortunes sank further last week, settling to $42.75 in midday trading Friday, from a 52-week high of $75.83.
Component suppliers said they are keeping a wary eye on the situation, although executives interviewed last week insisted that the euro and rising energy costs-brought about by spiraling crude oil prices-won't hurt earnings. But even if Intel's announcement and similar statements last week from the contract electronics manufacturing sector amount merely to a cry of wolf, the industry isn't prepared to go back to bed just yet.
"One-third of our business is in Europe, so we are affected by any swings in the value of the euro," said Glydnwr Smith, senior vice president of marketing intelligence at Vishay Intertechnology Inc., Malvern, Pa. "The weak currency's impact is negligible, but if it continues to decline, we'll have to re-evaluate the situation."
Industry executives are preparing to take steps, including currency hedging, to safeguard their operations against further softness in the euro. On a macroeconomic level, the weak euro could combine with high energy costs to topple consumer confidence, spinning the global economy off its expansion axis, economists said.
"Clearly, a severe winter could worsen the current oil shock significantly," said Edward Yardeni, chief economist at Deutsche Banc Alex. Brown, New York. "In this case, a quarter or two of falling real GDP during the first half of 2001 is possible."
Shareholders of Intel and CEM Manufacturers' Services Ltd. don't need to look that far ahead. Western Europe's currency problem is already hitting their investments hard. On Wednesday, MSL's shares plunged 66%, to a 52-week low of $10.50 from the previous day's closing price of about $31, after the Concord, Mass., company said its quarterly earnings will be as much as 15 cents below analyst estimates partly because of foreign currency problems.
"We're anticipating unfavorable foreign exchange on a transaction basis," said Bob Donahue, MSL's president. "We'll hedge everything we can from an accounts payable perspective in order to reduce the transaction exposure."
A similar problem is brewing at APW Ltd., a Waukesha, Wis., maker of integrated electronic enclosure systems. While revenue rose strongly in the company's recently ended quarter, net income growth was crippled by a foreign currency loss of $3.3 million before taxes.
Flash-memory and mixed-signal chip supplier Atmel Corp. felt compelled to assure investors that its "financial results will not be materially impacted by the current weakness in the euro."
For multibillion-dollar suppliers and OEMs with extensive global operations, the weak euro appears to be nothing more than a nuisance. That is the way Bob Mahoney, chief financial officer of Molex Inc., and Jan DuPreez, president of Infineon Technologies AG's North American operations, see it.
Mahoney admitted the declining euro will put a slight squeeze on margins, but said any impact will be offset by expanding revenue at the Lisle, Ill., connector maker.
"It's more annoying than a concern," he said. "Because we have plants in Europe and import products from other parts of the world, the euro does put some pressures on margin. I wouldn't want it below the current level, though."
Infineon's DuPreez said the company's global presence helps offset the negative effects of currency fluctuations in one geographic region. Infineon, Munich, Germany, has seen no reason to make any strategic changes in its operations because of the weak euro or rising crude oil prices.
"Due to the large size of our organization and the size of our purchasing and invoicing activities, we're very much interested in currency fluctuations, but we really don't see any negative effects of the euro right now," DuPreez said. "There's a point where you ask, 'where can I get better value?' But we haven't reached that breaking point yet."
Central bankers in Europe, Japan, and the United States thought the euro had crossed into dangerous territory when they intervened Sept. 21 to halt the currency's slide. And they'll have their hands full in the months ahead.
Thursday, Danish voters rejected changing to the euro in favor of the national currency, yet another sign that the euro has yet to find wide acceptance on the Continent. The euro dipped slightly after the Danish referendum. It had bottomed out at 84.38 cents to the U.S. dollar before the European Central Bank-led intervention, down more than 27% since its launch.
At the same time, oil prices have risen sharply. Since crashing to a low of $10 a barrel in 1998, crude oil prices have swung to a 10-year high of about $37, sparking demonstrations in Europe and the release of strategic oil reserves in the United States. Suppliers interviewed last week said rising energy costs have not translated into higher transportation or shipping costs and see no cause for concern.
Nonetheless, these kind of wild swings are what electronics-industry executives find aggravating, despite a widely held view that the sector is largely immune to short-term oil and currency fluctuations.
Additional reporting by Claire Serant