The Frontiers of Management. Peter F. Drucker
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than the earnings and cash flow of the Nagoya branch are Nagoya property. This enables the Japanese to take earnings out of one unit, for example, the United States or the German one—but also out of the Japanese parent—and to invest them in developing tomorrow's growth markets, such as Brazil or India. The Western-based multinational, conversely, expects the subsidiary in Brazil or India to finance its future market development out of its own near-term earnings, with the funds earned in more mature countries earmarked for investment there, or for dividend payments. Thus the Japanese treat the world market the way American companies treat the United States, where funds earned in New England are freely used for investment in the Northwest. As a result, the Japanese are rapidly gaining control of tomorrow's markets—which in the long run may be a greater threat to U.S. (and Western) industry than Japanese competition in its home markets.
Precisely because the subsidiary of the multinational will increasingly have to become part of a system in manufacturing, marketing, and financial management, management people will increasingly have to become transnational. Traditionally the foreign unit could offer its management people careers roughly commensurate with what domestic companies of comparable size could offer: opportunities to become top management in “their” company. This top management could then expect to have authority quite similar to that of top management in a truly domestic company.
“In all my twenty years as CEO,” the former head of the Swiss subsidiary of National Cash Register once said, “there were only six decisions where I had to go to the parent company in Dayton for approval.” Increasingly, however, almost every major decision will have to be made as a joint decision. This means, on the one hand, that the local management of the subsidiary will have far less autonomy and will see itself as middle management. On the other hand, it will have to know the entire system rather than only its own company and its own country.
To attract the people of talent it needs, the multinational therefore increasingly will have to open its management jobs everywhere to wherever the talent can be found, regardless of passport. Also, it will have to expose prominent young people early and often to the whole system rather than have them spend their careers in their own native countries and in the subsidiaries located there. A few multinationals do this already, IBM and Citicorp foremost among them. A Venezuelan headquartered in North Dakota is, for instance, head of Citicorp's U.S. credit-card operations. But these are still exceptions.
Finally, research and development—the one function almost totally centralized today in the multinational's home country—will have to be transnationalized. Research increasingly will have to go where the qualified people are and want to work. It may not entirely be an accident that the companies and industries in which the United States has best maintained its leadership position, IBM, for instance, or the pharmaceutical industry, are precisely those that long ago—despite all the difficulties of language, culture, and compensation—transnationalized research.
Economic realities are thus forcing the multinational to become a transnational system. And yet the political world in which every business has to operate is becoming more nationalist, more protectionist, indeed more chauvinistic, day by day in every major country. But the multinational really has little choice: If it fails to adjust to transnational economic reality, it will fast become inefficient and uneconomical, a bureaucratic “cost center” rather than a “profit center.” It must succeed in becoming a bridge between both the realities of a rapidly integrating world economy and a splintering world polity.
(1985)
CHAPTER FIVE
Managing Currency Exposure
OLD AND AMPLY TESTED WISDOM holds that unless a company's business is primarily the trading of currencies or commodities, the firm inevitably will lose, and heavily, if it speculates in either. Yet the fluctuating exchange rates of the current world economy make speculators out of the most conservative managements.
Indeed, what was “conservative” when exchange rates were predictable has become a gamble against overwhelming odds. This holds true for the multinational concern, for the company with large exports, and for the company importing parts and supplies in substantial quantities. But the purely domestic manufacturer, as many U.S. businesses have found to their sorrow in recent years, is also exposed to currency risk if, for instance, its currency is seriously overvalued, thus opening its market to foreign competition. (On this see also Chapter 1: “The Changed World Economy.”)
Businesses therefore have to learn to protect themselves against several kinds of foreign-exchange dangers: losses on sales or purchases in foreign currencies; the foreign-exchange exposure of their profit margins; and loss of sales and market standing in both foreign and domestic markets. These risks cannot be eliminated. But they can be minimized or at least contained. Above all, they can be converted into a known, predictable, and controlled cost of doing business not too different from any other insurance premium.
The best-known and most widely used protection against foreign-exchange risks is hedging, that is, selling short against known future revenues in a foreign currency and buying long against known future foreign-exchange payment obligations. A U.S. maker of specialty chemicals, for instance, exports 50 percent of its $200 million sales, with 5 percent going to Canada and 9 percent each to Japan, Britain, West Germany, France, and Italy. Selling short (that is, for future delivery) Canadian dollars, Japanese yen, British pounds, German marks, French francs, and Italian lire (or buying an option to sell them) in amounts corresponding to the sales forecast for each country converts, in effect, the foreign-exchange receipts from future sales into U.S. dollars at a fixed exchange rate and eliminates the risk of currency fluctuations.
The company that has to make substantial future payments in foreign currencies—for imports of raw materials, for instance, or for parts—similarly hedges by buying forward (that is, for future receipt) the appropriate currencies in the appropriate amounts. And other expected revenues and payments in foreign currencies—dividends from a foreign unit, for instance—can be similarly protected by hedging.
Hedging and options are now available for all major currencies and, for most of them, at reasonable costs. But still, selling short the Italian-lire equivalent of $8 million could be quite expensive. More important, hedging only ensures against the currency risk on revenues and payments. It does not protect profit margins. Increasingly, therefore, companies are resorting to foreign-currency financing.
The specialty-chemicals company cited previously incurs all its costs in U.S. dollars. If the dollar appreciates in the course of a year, the company's costs appreciate with it in terms of the foreign currencies in which it sells half its output. If it raises its prices in these foreign currencies, it risks losing sales, and with them profits—and, worse, permanent market standing. If it does not raise its prices in the foreign currencies, its profit margins shrink, and with them its profits.
In a world of volatile and unpredictable foreign-exchange fluctuations, businesses will have to learn to hedge their costs as well as their receipts. The specialty-chemicals company, for instance, might raise its total money requirements in the currencies in which it gets paid, that is, 50 percent in U.S. dollars and the rest in the currencies of its main foreign markets. This would bring into alignment the reality of its finances with the reality of its markets. Or an American company exporting 50 percent of its output might raise all its equity capital in dollars on the New York Stock Exchange but borrow all its other money needs short term in the “ECU,” the currency of account of the European Common Market. Then if the dollar appreciates, the profit in dollars the company makes as its ECU loans mature may offset the currency loss on its export sales.
“Internationalizing” the company's finances is also the best—perhaps the only—way in which a purely domestic manufacturer can protect itself to some degree against foreign competition based on currency rates. If a currency is appreciating so fast as to give foreign