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Apple Details Downside of Weaker Dollar

To paraphrase {complink 379|Apple Inc.}, the weakening US dollar offers some sales growth advantages, but they are offset heavily by highly disruptive investment and supply chain challenges.

In its latest filing with the US Securities and Exchange Commission, Apple warned investors the ongoing slide in the value of the dollar against major currencies will force it to engage in complex transactions to safeguard pricing, component availability, and manufacturing efficiency. Failure to manage the process successfully could hurt the company's growth and competitiveness, Apple contends.

The list of challenges Apple sees from the declining dollar is sobering. Rather than put a spin on it, I've itemized them below. For those advocating or implementing the weaker dollar policy, Apple's concerns should raise a red flag. A weaker dollar will make US goods more competitive internationally, but for high-tech companies, many of which design locally but source components and manufacturing outside the country, this could pose significant challenges. Here in Apple's own words are the implications of currency fluctuations to its operation:

  • Weakening of foreign currencies relative to the US dollar will adversely affect the US dollar value of the company’s foreign currency-denominated sales and earnings, and generally will lead the company to raise international pricing, potentially reducing demand for the company’s products.
  • In some circumstances, due to competition or other reasons, the company may decide not to raise local prices to the full extent of the dollar’s strengthening, or at all, which would adversely affect the US dollar value of the company’s foreign currency denominated sales and earnings.
  • Conversely, a strengthening of foreign currencies, while generally beneficial to the company’s foreign currency denominated sales and earnings, could cause the company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit.
  • Strengthening of foreign currencies may also increase the company’s cost of product components denominated in those currencies, thus adversely affecting gross margins.

For all the handwringing above, Apple and other US-based high-tech companies are neither helpless nor bereft of options to turn the situation to their advantage. The main problem they face, even with the hedging tools used in financing, is the continued volatility in the currency market. I will address the benefits of a weaker dollar to US companies in another post later this week.

4 comments on “Apple Details Downside of Weaker Dollar

  1. Anna Young
    November 8, 2010

    The challenge of managing the high-tech business is getting more complicated with the complexities coming from outside the sector. Apple's insistence on holding billions in cash has only made the job even more difficult.

  2. AnalyzeThis
    November 8, 2010

    As you say, yes, there are some advantages to the weakening US dollar, but there are so many negative things that (usually) more than negate those small positive things.

    I know it's important to look on the bright side, but it's a little like having your house burn down and having somebody say, “well, at least now you'll be saving a lot of money on your electric bills!”

    Anyways, I'm looking forward to your article later this week because out of all the high-tech companies out there, Apple probably has the least to worry about. They have a pretty thick cushion of cash they can sit on to help ease the pain of this currency crisis.

     

  3. Barbara Jorgensen
    November 9, 2010

    It sounds like this is really beginning to escalate. How long do these cycles typically last? If the Fed and Congress go ahead with their initiatives, is this a short-term fix?

  4. Parser
    November 12, 2010

    One solution for Apple is to bring some jobs back home where they belong to offset weaker dollar. Yes, it is easier said than done. On the other hand Apple is paid with euros in Europe so they get more dollars in exchange even if the price per unit will be competitive. There is a balance somewhere and we will probably never know where.

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