The downside of a strong dollar for Eastern Iowa manufacturers

Quick question: Strong U.S. dollar - good or bad?

The answer is, it depends.

If you're a consumer, you're delighted by the lower prices on products made overseas. Investors can buy more - because they're cheaper - bonds in foreign currency, and a vigorous dollar generally keeps inflation at bay.

But if you are a manufacturer who sells your products in other countries, the playing field is more complicated. Simply put, with the dollar worth more, your stuff costs more to sell to overseas companies that use their own currencies.

Here is a snapshot of how some manufacturers in the Corridor are affected by the challenges.

The U.S. dollar has been on a relentless upward trajectory since May 2011. The trade-weighted dollar index against major currencies, such as the pound, the yen and the euro, has gained close to 40 percent over the half decade.

Iowa exports have declined each of the past three years, and the strong dollar is one of the major factors, affecting export sales for large and small Eastern Iowa companies.

For Apache, Europe is one of its largest markets.

'The strength of the dollar compared with the euro has made it more challenging for us to be able to compete in Europe, especially against competitors that are European-based,” said Tom Pientok, president of Apache, the Cedar Rapids-based manufacturer of fabricated belting and hose products, cut and molded rubber, and industrial consumer products. 'They have a clear price advantage over U.S. dollar-based companies.”

And a robust dollar has more of an impact on the sales of some products than others, noted Walt Corey, president of Pickwick Manufacturing Services in Cedar Rapids.

'The strong dollar makes it very difficult for it to sell overseas,” Corey said. 'There's no question about it and that really hurts us when the dollar is strong ...

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'We make a turf roller that is a relatively low-dollar item for golf courses. They are going to put off a purchase like that when the value of the dollar is high. There's no sense in buying it through us when they can get it directly from a local company.

'The big product for us is sensors that one of our customers ships overseas. Eighty percent of its products are shipped all over the world.”

‘Significant adjustment'

Rockwell Collins sells its avionics and communications equipment as well as information management services to many international customers. The Cedar Rapids company made 'a fairly significant adjustment” in terms of currency rates about two years ago, according to Chief Financial Officer Patrick Allen.

'We saw a fairly meaningful impact on our sales because our international sales are translated at current exchange rates,” Allen said. 'It probably impacted $30 million to $40 million worth of sales in that year.

'The dollar at its current rate is not really affecting our competitiveness on the world stage very much. The aerospace business is very much a U.S. dollar-based industry.

'Ninety percent of our aerospace sales are denominated in U.S. dollars,” he explained. 'The 10 percent of export sales denominated in other than U.S. dollars are to foreign ministries through our defense business.

'We have an active currency hedging program to hedge that risk.”

Jeff Hamilton, president and CEO of ESP International, said the strong dollar has both a direct and indirect impact on his company.

ESP International specializes in seals, rubber products and plastics for original-equipment manufacturers. Cedar Rapids-based, it has offices in China, India and Taiwan.

'Although exports are a fairly small percentage of our overall sales, the strong dollar makes it much more challenging when we are shipping seals and products overseas,” Hamilton said. 'We also do business with companies like AGCO, Case IH, John Deere, Baker Hughes and Halliburton.

'A lot of the smaller companies in Eastern Iowa are seeing an indirect impact of the strong dollar on export sales by large customers.”

That is, if bigger companies selling products in other nations are challenged, that in turn hinders parts and services they buy from the smaller manufacturers.

Overall, the value of Iowa exports - agricultural commodities and manufactured products - has fallen over the last three years, according to the U.S. Census Bureau:

l $15.1 billion in 2014

l $13.2 billion in 2015

l $12.1 billion in 2016.

'We can tie a large portion of that decline to the high value of the dollar,” confirmed Creighton University economist Ernie Goss. 'Of course, there were other factors, such as the drop in the value and sales of farm commodities.”

Goss, who tracks economic conditions monthly in a 12-state region that includes Iowa, has consistently cited the strong dollar's impact on exports and resulting reduced manufacturing employment by the agricultural and energy sectors.

Government data show the region's manufacturing sector lost more than 22,000 jobs between September 2015 and September 2016. In Eastern Iowa, John Deere has reduced its payroll by more than 10,000 jobs to align production with worldwide demand for its tractors, combines and other equipment.

AGCO and Case IH have made similar workforce adjustments as low commodity prices have reduced sales of new agricultural equipment.

While the strong dollar is a concern in terms of export sales, Eastern Iowa businesses also cite uncertainty with regard to the future of U.S. tax policy and the potential for trade disputes with China and Mexico.

President Donald Trump has called for renegotiation of the North American Free Trade Agreement, changes in trade agreements with China and repatriation of overseas earnings by U.S. companies.

'Without more clarity, it's really difficult to make long-term business decisions,” Rockwell Collins's Allen said. 'It's really a dynamic environment.”