Even IBM Affected : How Strong Dollar Sells Out Firms

NEW YORK —  American farmers, swelling with pride, have called the Midwest’s amber grainfields the world’s breadbasket since their advanced cultivation methods helped them coax the U.S. share of world grain exports to a remarkable 50% in the early 1970s.

Perhaps their horror was understandable, then, when Cargill Inc., the world’s largest grain merchant, last month announced plans to import 25,000 metric tons of Argentine wheat into the United States.

The Minnesota firm was suggesting the unthinkable--the first wheat imports ever from the archrival Argentines--and “farmers didn’t like the idea one bit,” said Barry Jenkins, lobbyist for the National Assn. of Wheat Growers.

Cargill Backed Down

Cargill backed down after the farmers mounted protests across the nation. But the point had been made: The dollar has so risen in value against other currencies that overseas wheat growers have their biggest cost advantage in memory.

Most significant, Cargill’s aborted plan illustrates how even industries that historically have been among America’s most efficient are suffering from competition that has been fortified by the dollar’s relentless rise.

Although for years such adverse effects were largely confined to such lower-productivity industries as autos and steel, today the casualty list includes such prides of American business as makers of aircraft, construction equipment, chemicals, agriculture and even electronics.

“When they can bring coals to Newcastle by importing wheat, there’s dramatic proof that the problem’s spread across the board,” said C. Fred Bergsten, director of the Institute for International Economics in Washington.

Measured against a basket of currencies, weighted by the countries’ trade with the United States, the dollar has gained 40% in value since 1980, economists say, penalizing U.S. businesses.

Profits Diminish

As a result, consumers in foreign countries find U.S. products more expensive, and U.S. consumers find foreign products cheaper here. At the same time, profits earned by overseas subsidiaries of U.S. firms diminish in value when they are reported in their financial reports in dollars.

The effects of the stronger dollar were evident this week, when the Commerce Department reported that U.S. imports exceeded exports by $123.3 billion in 1984--a trade deficit that set a record and was nearly twice the $69.8 billion of 1983. U.S. officials expect that gap to widen this year.

Agriculture still provides a good chunk of America’s export earnings. For the fiscal year that ended last Sept. 30, farm exports assisted the U.S. trade balance by $19 billion.

But exports have been on a downward slide for four years due to the dollar’s strength, the worldwide recession and production increases in countries like Argentina. Also important have been farmers’ need to pay off growing debts and, according to some, federal price-support programs.

The U.S. share of the world wheat market has fallen to 41% from nearly 50% in 1974, the wheat growers’ group says.

Cargill expected to deliver grain in Gulf Coast ports at a cost of about $112 a ton, contrasted with a price of about $150 a ton from U.S. sources, said Robbin S. Johnson, a Cargill vice president. And foreign producers can undersell U.S. farmers in some other grains.

Argentine Corn

Argentine corn loaded for export costs $109 a metric ton, contrasted with $121 a ton for American corn.

The size of this threat to U.S. agriculture can be overstated. After all, last year the U.S. exported 12 billion bushels of grain and imported only 5 million--less than 0.1%, Cargill officials say. Few observers expect grain imports to the United States to rise much above that level.

But the episode illustrates that competition for overseas markets grows ever fiercer, and grain merchants and farmers see little prospect that it will soon abate.

If agriculture has bolstered the U.S. trade balance, manufactured goods are the primary reason it has become so lopsided. The trade deficit in manufactured goods more than doubled last year, to $88.5 billion from $38.2 billion.

Moved Overseas

To cut their losses, manufacturers have moved factories overseas, sometimes at the cost of U.S. jobs, to better compete with their adversaries. But not all firms can do so.

Seattle’s Boeing Co. has used technological know-how to claim about a 55% share of the world commercial aircraft market. But this year the company’s commercial aircraft unit faced unprecedented competition from Airbus Industrie, a French-based aircraft maker that is owned by a consortium of European nations.

In September, the industry was shocked to see Boeing lose to Airbus a $1-billion contract to build 28 planes for Pan American World Airways. Some analysts think Airbus’ deep discounts also cost Boeing contracts to sell aircraft to Thai, Chinese and Turkish airline companies last year.

Naturally, the aircrafts’ capabilities and other factors played important roles in the choice of contractors. “But that price advantage makes a big difference too,” said Wolfgang Demisch, an analyst with First Boston Corp., a New York investment firm. “Airbus outsold Boeing two to one in 1984, and that’s not good.”

Sales Increased

Boeing still sold more aircraft in 1984 than in 1982, and the company’s defense business is exploding. But the growing price spread between the products of Boeing’s commercial aircraft unit and those of its competitors has caused the company to launch a cost-cutting program.

“No question the dollar has had an effect, and we’re trying to do something about it,” said Boeing spokesman John Wheeler. He said it is not economical for an aircraft maker to move part of its manufacturing overseas, because any portions manufactured there would have to be sent back to the United States for assembly.

Wheeler noted that Boeing was at the top of Fortune magazine’s list of the nation’s 50 biggest exporters in 1981, and in 1983 was still No. 2, with exports worth more than $1 billion. “You’re not going to see us up that high this year, you can bet,” he said.

High-technology exports have been a bright spot in the trade picture. Generally, price advantages have not helped overseas competitors in such fields as computers, instruments and electronic parts, because customers are willing to pay more for products of advanced design.

U.S. computer exports, for example, rose 28% from 1983 to 1984. But some computer makers have had to cut prices to maintain their market presence.

40% Cost Advantage

By giving competitors a 40% cost advantage, the inflated dollar “is asking an athlete who can clear the high bar at 6 feet to clear it at 14 feet,” said Lawrence A. Fox, a vice president of the National Assn. of Manufacturers.

For example, Hewlett-Packard Co.’s profit margins were squeezed to an eight-year low in 1984, said Adam F. Cuhney, analyst with the Salomon Bros. investment firm in New York. The Palo Alto company’s orders “really took off overseas last year in instruments and computers,” he said. “But to get order rates up there, they had to cut prices to the bone.”

Hewlett-Packard officials say the strong dollar is one of several reasons the concern has undertaken an “aggressive” program of moving manufacturing overseas. The company, which won’t discuss how many U.S. jobs may have been lost by these moves, says it also has made such moves to satisfy foreign governments’ requirements that locally sold products be locally produced.

In 1984, Hewlett Packard expanded operations in China, Mexico and Korea, and is considering expansion in Europe as well, officials say.

Even IBM Affected

Even mighty International Business Machines Corp. has acknowledged the dollar’s impact on its earnings. Analysts say demand for IBM products is so strong that the company has not needed to trim prices to compete abroad. But in announcing its record 1984 earnings last month, IBM noted that earnings would have been even greater if the declining value of foreign currencies had not diminished the value of sales overseas.

If the dollar had remained at 1983 levels, the company said, profits from non-U.S. operations would have been nearly a third higher.

Motorola Inc., the maker of electronic parts and mobile communication gear, has seen booming growth over the last two years. But the Schaumburg, Ill., manufacturer has become so concerned about the dollar’s effects that last month it began trying to rally manufacturers to persuade Congress to impose a temporary surcharge on all imported goods.

Under the plan, prices of goods imported to the United States would be increased 20% the first year, 15% the second and 7% the third.

‘Significant Decline’

Veronica Haggart, the firm’s director of international trade relations, said the dollar’s strength has caused a “significant decline in our overseas business, and (has had) a particularly major impact on telecommunications products.” She declined to provide details, but said this worry has also led the 89,000-employee company to consider shifting more manufacturing abroad.

Analysts think the firm’s sales of electronic parts in Europe may have been especially hurt, as well as international sales of Motorola’s mobile telephone equipment.

William Krist, a vice president of the American Electronics Assn., contends the strong dollar is “third or fourth” among the export-related issues that most worry U.S. electronics and computer makers. More important, he says, are the import barriers erected by foreign governments and U.S. limits on the kinds of high-tech products that can be exported.

But the dollar is nonetheless a “major and enduring” concern, he said. “Those who take our industry’s health for granted make a big mistake.”

The dollar’s effects on once-strong exporters is well illustrated by the problems of Peoria, Ill.’s, Caterpillar Tractor Co. Still first among the world’s makers of earthmoving equipment, Caterpillar has absorbed huge losses in the last three years and laid off 20,000 workers.

Last month, Caterpillar announced it plans to shift the manufacturing of tractor-type loaders from its Davenport, Iowa, plant to new locations in Glasgow, Scotland, and Grenoble, France.

The move will mean the loss of 600 U.S. jobs. “It’s not because we think the overseas plants will be any more efficient--it’s just because of the dollar,” said Tim Elder, manager of Caterpillar’s Washington operations.

The dollar’s rise also has affected U.S. chemical makers, who increased their share of world chemical exports during the 1970s to about 40%, analysts say. But in the last two years, that share has begun to decline as the strong dollar exacerbated the effects of excess worldwide production capacity.

These factors forced down chemical makers’ earnings in the second half of 1984, and caused such leaders as Du Pont, Celanese Corp. and Dow Chemical Co. to close plants that made such products as methanol, ethyl oxide and glycol, analysts say.

Between 1982 and 1984, for example, exports of methanol, which is used to make paints, fuels and solvents, fell 80%. During the same period, imports rose 68%.

“The dollar isn’t the only problem, but it’s made foreign competition and world over-capacity a lot harder to take,” said George Midwood, treasurer of American Cyanamid Co., a maker of chemicals, medical and agricultural products.