Manufacturers are, despite their efforts, at the mercy of larger market forces that they cannot control. In recent years, this fact has been magnified by an uneven global recovery and extraordinary levels of monetary and fiscal intervention that, in some regions, has struggled to produce sustainable economic growth. Large shifts in currency values and other economic factors have increased uncertainty for manufacturers, making it even more difficult for these companies to navigate global markets.
With a large number of manufacturers based in Japan – a major proponent of economic stimulus – the printing industry and its recent performance serves as a clear example of how market forces can be a boon one month, and a headwind the next.
The yen Boosts Exporters, Briefly
This time last year, monetary stimulus, including very low interest rates and huge government bond purchases, had helped drive down the value of the Japanese yen by about 18% against the U.S. dollar. By most accounts (and excluding the great recession), this was an extraordinary change in value between the #1 and #4 largest economies’ currencies.
For Japanese exporters, including the many Japan-based printer and copier manufacturers, the depreciation of the yen was a tremendous help. A weaker currency enabled companies to lower prices, if necessary, and still profitably compete in international markets. Sales and profits increased, and the markets in Japan also received a significant boost.
On the other hand, a stronger U.S. dollar translated into less pricing flexibility, and declining overseas sales, for U.S. companies such as HP and Lexmark. Lexmark, which is now close to completing a deal to be acquired, stated as recently as Q4 2015 that its EMEA sales dropped by 9% on “significant currency headwinds.” HP has experienced a challenging and uncertain pricing environment, with several consecutive quarters of declining EMEA sales. Even U.S. stalwarts like Apple have been impacted by currency – in Q1 Apple executives noted that currency had a negative impact equivalent to a Fortune 500 business’ annual sales.
A Quick Reversal of Fortunes
Back in today’s Japan: Over the past 12 months, the yen has quickly reversed course and gained about 22% against the dollar and euro, and 45% versus the British pound. This despite Japanese stimulus efforts, including, in specific circumstances, charging to deposit money (known as negative interest rates). Unfortunately, corporate investment is still too low in the country, inflation is almost nonexistent, and government debt is climbing. As was the case for U.S.-based HP, Lexmark, and Apple, now too is the case for Japan-based companies such as Kyocera and Konica Minolta. After several quarters of strong sales growth, these companies, and others in Japan, have now seen their currency boon turn into a major headwind.
As we look forward, there is no shortage of uncertainty about the direction of the markets. Just over two weeks ago Britains voted to leave the EU, causing manufacturers such as HP and Dell to warn of price increases in the region. The EU remains fragile more than seven years after the great recession. The Bank of Japan expanded its monetary stimulus plan and the country’s cabinet just approved ¥7.5 trillion ($73.7 billion) in new fiscal stimulus. Yet, despite the country’s efforts, the yen still strengthened and markets dropped, likely creating an even more challenging environment for Japanese OEMs in the months ahead.
Some businesses will benefit from change in the next year, while others will face unexpected and more difficult circumstances. Most publicly traded companies, on a given three-month period, will be subjected to knee-jerk demands for cost cutting and other near-term maneuvers to increase profits. In reality, there is no one antidote for today’s economic uncertainty. During these times, it is the successful companies that will, throughout the market's ebb and flow, continue to execute on the fundamentals of their business, evolve their strategy, and invest in innovation to drive sustainable long-term growth.
