How Manufacturers Benefit from Currency Exchange
When evaluating a potential site for manufacturing operations the value and stability of the currency is an important factor. Fixed expenses such as labor, electricity and industrial facility leasing, are in local currency allowing manufacturers to realize savings when a currency is devalued. By working with a shelter manufacturing provider like Co-Production International, the currency exchange fluctuations can improve your bottom line.
Major banks are now posting the peso at over 19 on the dollar, leading Co-Production International to explain the benefits of Mexican peso devaluation for nearshore manufacturers. Companies manufacturing in Mexico are finding that the cost of labor and fixed expenses continues to reduce their overhead costs as the peso declines against the dollar.
To better understand how manufacturers can hedge the currency exchange market while operating in Mexico, Co-Production International spoke with Antonio Carranza, Finance Director and CFO for Goodridge Ltd. Carranza has over 20 years’ experience in financial planning, treasury management and hedging strategies. Having worked in Latin America, the United States and Europe, his expertise in global currency markets will give dynamic insight into how manufacturers can hedge the peso devaluation in Mexico.
Twenty years ago the Mexican peso, though significantly devalued against the dollar, was fixed and offered no opportunities to hedge against it for a greater return. With much of Mexico’s economy dependent on its nationalized petroleum industry, the peso becomes heavily dependent on oil prices. Carranza explained that with the global price of oil dropping over the last two years, Mexico has seen the peso go from twelve pesos on the dollar to upwards of eighteen.
Based on data from the World Bank, trends over the period 2010 to 2016 indicate the following:
Mexico’s peso started at 12.50 pesos to the US dollar in 2013 down to 13.29 pesos in 2014. Then the rates started escalating to 16.06 pesos in 2015 and reaching a new low of 17.362 pesos to a dollar in 2016.
For manufacturers the current news is highly favorable: A U.S. dollar now buys significantly more goods and services in Mexico than it did at any time over the past five years, what economists call a change in purchasing power.
By investing US dollars in Mexico in 2016, a company will save an additional 16% plus the natural 40% savings on labor, which is almost a 60% savings on labor which mean that for every $1 million dollars spent in the US, a company may expect to spend $400,000 dollars in Mexico, a $600,000 savings!
One of the things you look at in our case at Goodridge. We are a US/UK company with maquilas in Mexico. Our costs are in pesos and our sales are in dollars. When any of these currencies are devalued, but especially the peso, our expenses become cheaper.
You have to understand, as a corporation manufacturing in Mexico, we are in the business of making money from what we manufacture, not from the exchange rate. Fixed expenses are where the real savings are realized. Electricity, water and telecommunications costs are all in pesos, which when devalued add significant reductions in the cost to operate in Mexico.
In addition to savings from fixed labor costs, Co-Production has run the numbers for labor cost savings when the peso is devalued. Using a sample company with 100 employees, nearly $65,000 of additional annual labor cost savings occur when the peso is devalued from sixteen to eighteen, a scenario proven possible over the last year.
With his long history in finances, Carranza has begun to develop strategic planning tools for corporations who wish to analyze and plan for hedging the currency exchange market. For manufacturers in Mexico, this would allow them to know and measure the risks they are willing to incur. By determining what a corporation is willing to risk or gain, they can make smart decisions based on their overall business strategy. The end result means stronger financial statements for nearshore operations.
I am working with a bank in Mexico to put together strategies for SMEs which will help them understand the risks they have in their business, how they are impacted by the exchange rate, and to develop a strategy to hedge the currency while avoiding uncertainty in their financials.
Carranza believes it is this type of value-added service that will allow manufacturers in Mexico take an innovative and dynamic approach to operating in the country. Corporations cannot manufacturer in Mexico without considering the currency. The peso’s long term trends are a crucial to analyzing the viability of successful foreign operations.
The time is right to take advantage of both currency exchange rates and the low-cost, highly skilled workforce Mexico has to offer. If your company is considering moving or expanding manufacturing operations in Mexico, Co-Production International provides labor cost savings analysis at no charge. As a long-established shelter and administrative services provider, CPI provides innovative solutions to maximize manufacturer’s margins by operating in Mexico. Contact CPI today!