Weak dollar squeezes European suppliers

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Weak dollar squeezes European suppliers

Major swings in currency exchange rates have helped boost some US companies' revenues and put the squeeze on their European rivals.

The US dollar's 20% decline against the euro over the past year, and similar fall against the pound have allowed US companies to net extra cash when translating European sales into dollars. The plunge in the dollar has also meant bargains for European users sourcing their IT goods from US suppliers.

European suppliers have been hard pressed to compete against cheaper US imports and have found revenue from US sales slashed because of the exchange rates.

The dollar's prolonged dip and the timing - coming when many suppliers had already slashed prices and their margins to stimulate demand during the market downturn - have made the currency swing particularly potent.

Ovum director Richard Holway has estimated that the company's profits for 2003 would have been £250,000 higher if the pound-to-dollar exchange ended the year the same way it began.

SAP said it expected its 2003 fourth-quarter software licence revenue to slide 3% year on year because of the euro's strength. Demonstrating the exchange rate's impact, SAP said that on a constant currency basis its quarterly revenue would have been up 4% over the previous year.

While European suppliers are experiencing a market downturn, for big US suppliers such as Microsoft and IBM it is a positive market, as they generate much of their revenue abroad, according to IDC analyst Roger Kay.

Merrill Lynch analyst Steven Milunovich said that "currency will provide most of [IBM's] revenue growth the next few quarters".

Jos Brenkel, vice-president of Hewlett-Packard's commercial channel in Europe, the Middle East and Africa, estimated that the slumping dollar accounted for a 5% to 8% increase in HP's fourth-quarter revenue.

Some European suppliers are worried about how they will continue to compete if the weak dollar persists.

"Supplier margins are getting smaller so what it really means is that suppliers are forced to look at their business models, how they are building products and whether they want to outsource or build to order," said IDC analyst Thomas Myer.

Companies' decisions to outsource and offshore to countries like China to save costs have already caused concern, as European nations fear a massive loss of tech industry jobs.

For users this means that prices will probably stay low in the short term, Holway said. Analysts do not expect the dollar to remain low indefinitely and foresee a reverse of the situation in 2005.

Scarlett Pruitt writes for IDG News Service


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