1. The volatility of exchange rates greatly complicates the issue of geographic cost advantages. Currency exchange rates often fluctuate as much as 20 to 40 percent annually. Changes of this magnitude can either totally wipe out a country’s low- cost advantage or transform a former high-cost location into a competitive-cost location.
CORE CONCEPT: Companies with manufacturing facilities in Brazil are more cost-competitive in exporting goods to world markets when the Brazilian real is weak; their competitiveness erodes when the Brazilian real grows stronger relative to the currencies of the countries where the Brazilian-made goods are being sold.
2. Declines in the value of the U.S. dollar against foreign currencies reduce or eliminate whatever cost advantage foreign manufacturers might have over U.S. manufacturers and can even prompt foreign companies to establish production plants in the United States.
3. Currency exchange rates are rather unpredictable, swinging first one way then another way, so the competitiveness of any company’s facilities in any country is partly dependent on whether exchange rate changes over time have a favorable or unfavorable cost impact.
CORE CONCEPT: Fluctuating exchange rates pose significant risks to a company’s competitiveness in foreign markets. Exporters win when the currency of the country where goods are being manufactured grows weaker and they lose when the currency grows stronger. Domestic companies under pressure from lower-cost imports are benefited when their government’s currency grows weaker in relation to the countries where the imported goods are being made.
4. Companies making goods in one country for export to foreign countries always gain in competitiveness as the currency of that county grows weaker. Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger.
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