Euro’s gains push costs up for U.S. customers

July 21, 2005 — When semiconductor company STMicroelectronics announced earlier this year that it would lay off 2,300 workers in Europe, the company blamed some of its difficulties on the “continued weakness of the dollar.” The U.S. currency experienced a boost since ST outlined its restructuring strategy in June, but its overall weakness compared to the euro is forcing ST and other companies to engage in a difficult balancing act.

“As a global company, many of our costs are euro-based, whereas most of our revenue (is) in dollars,” said ST spokesman Mike Markowitz. The company, headquartered in Geneva, Switzerland with fabs and offices throughout the U.S., Europe and Asia, lists more than 1,500 customers for products that include sensors, accelerometers and microfluidic and lab-on-a-chip devices.

Its MEMS initiatives are not immune to its troubles. A fab in the Italian city of Castelleto, for instance, is slated to close its MEMS pilot line in 2006.

About half of the company’s employees live in Europe and for the most part receive wages in euros, while many of its customers, including some clients based in Europe, pay in dollars. “For most large electronics companies, the industry is a dollar-based industry,” Markowitz said. “They purchase in dollars in order to remove the currency risk from the purchasing equation.”

The effect of this practice wouldn’t be so pronounced if the dollar’s drop hadn’t been so steep. It bounced up in June, but the general trend has been one of progressive decline. The dollar has dropped 25 percent against the euro since January 2002, when the European single currency started circulating.

The consequences of this decline have been mixed for European firms that design or manufacture microsystems and nanotechnology-based products. Swiss MEMS company Colibrys collects 40 percent of its sales in U.S. dollars, the remainder in Swiss francs and euros. The company makes custom and standard MEMS components for the telecommunications, life sciences and industrial imaging industries.

The dollar’s steady slip made Colibrys’ products more expensive for American buyers in recent years, according to Sean Neylon, the chief executive at Colibrys. The company started trading on the FOREX Exchange to diminish the currency risk, and “in order to remain competitive, we had to sign contracts that locked the dollar in within a certain trading band,” Neylon said.

The problem was alleviated when the company bought Texas-based Applied MEMS, a subsidiary of Input/Output Inc. in December of last year. The currency issue wasn’t the main reason for the purchase, but it was a motivating factor, Neylon said.

Colibrys is now better able to balance its sales in dollars with its purchases in dollars. “We don’t have a problem with that anymore,” he said. “Lately, we have in fact been benefiting from the strengthening dollar.”

Smaller companies such as Germany’s Nanogate find themselves less affected by the dollar-euro exchange, but they nonetheless anticipate some problems. Nanogate specializes in nano-enhanced films and coatings such as easy-to-clean coatings for motor parts, functional textiles and anti-fingerprint protection on ceramics. In 2004, Nanogate and Pennsylvania-based Air Products and Chemicals formed a joint venture company, Nanogate Advanced Materials GmbH.

About 85 percent of its sales are in Europe, with about half in Germany, said Ralf Zastrau, Nanogate’s CEO. Only about 10 percent of its revenues come from the U.S.

“It might become an issue for us in the future because we hope to move into the U.S. and Asian markets much more,” Zastrau said. “So we expect some difficulties in exporting our products, because the weak dollar makes things more expensive for them.”

The trailing dollar has actually helped Nanogate in some ways because many of the raw materials that it buys sell in dollars on the market, making them less expensive for a company whose revenues are largely in euros. However, this purchasing advantage has been partly offset by an increase in the price of raw materials. Indium, a metal that Nanogate uses in some of its ceramic powders and other products, commands top prices these days, for instance.

“The price has shot up 400 percent in one year,” Zastrau said.

Other smaller companies may remain insulated from international currency fluctuations, according to a consultant who focuses on micro and nanotechnology businesses. But they still wrestle with national and regional economic problems.

“It depends very much on the specific area of business each company is working in, on whether it’s a multinational company or a small or medium-sized business, on the location where they are producing their goods” and the proportion of foreign sales, said Matthias Werner of the Berlin-based group NMTC. NMTC stands for Nano and Micro Technology Consulting.

Werner argues that in the case of small businesses with mostly European customers — a category many European firms fall into — local market conditions have a greater impact on a company’s fortunes. The European Union defines a small business as a company with a staff of less than 50 employees and sales of up to $12 million. A micro-enterprise is a company with less than 10 employees and sales of up to $2.5 million.

“For small companies, the unemployment rate and the rate of growth in the individual country are generally more important than currency issues,” he said.

Growth in Europe has been sluggish, particularly in continental Europe. The most recent forecast from the Organization for Economic Development and Cooperation projects GDP growth of 1.2 percent for the euro zone in 2005, down from 1.8 percent last year. Werner points out that his country’s lackluster economic performance has reduced the venture capital pool to a trickle, something that can affect startups more than currency fluctuations.

“It has become very difficult to get venture capital,” he said. “It’s difficult to get venture capital in Britain, but it it’s even more difficult in Germany these days.”


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