The Frontiers of Management. Peter F. Drucker
is the rapid rise of the dollar in 1983–84 vis-à-vis the yen and the mark—a domestic manufacturer may borrow in the currencies of its foreign competitors or sell those currencies short. The profit the company makes in its own currency when buying back the amount it owes in the foreign currencies then enables it to lower its domestic price and thus to meet the competition that is based on the foreign-exchange rate.
This is, however, a tricky and dangerous game. It straddles the fine line between hedging and “speculating.” The amounts risked, therefore, always should be strictly limited and the exposure time kept short. The successful practitioners of this strategy never sell short or borrow for more than ninety days at any one time. Yet it was this strategy that protected many West German manufacturers against losing their home market to the Americans when the dollar was grossly undervalued during the years of the Carter inflation. And although the strategy might be speculative, the alternative, to do nothing, might be more speculative still.
With currency fluctuations a part of economic reality, business will have to learn to consider them as just another cost, faster changing and less predictable, perhaps, than costs of labor or capital but otherwise not so different.
Specifically this means that businesses, and especially businesses integrated with or exposed to the world economy, will have to learn to manage themselves as composed of two quite dissimilar parts: a core business permanently domiciled in one country or in a few countries, and a peripheral business capable of being moved, and moved fast, according to differentials in major costs—labor, capital, and exchange rates.
A business producing highly engineered products might use its plants in its home country to produce those parts on which the quality, performance, and integrity of its products depend—say 45 percent or 50 percent of the value of the finished product. And if the company has plants in more than one developed country, it might shift this core production among those plants according to exchange-rate advantages. The remaining 50 percent or 55 percent of its production would be peripheral and quite mobile, to be placed on short-term contracts wherever the costs are lowest, whether in developed countries with favorable exchange rates or in Third World countries with favorable labor rates.
The volatile foreign-exchange fluctuations of today's world economy demand that managements, even of purely domestic businesses, manage their companies as “international” companies and as ones embedded in the world economy. It might even be said that exchange-rate instability means that there are no more American or German or French businesses; there are only Americans or Germans or Frenchmen managing world-economy businesses, at least in manufacturing, banking, and finance. This is the most paradoxical result of the shift, nearly fifteen years ago, from fixed to floating exchange rates.
One of the major advantages then claimed for floating exchange rates was the strengthening of the national character of business by eliminating, or greatly lessening, differentials in comparative costs between major economies. But we also were promised then that floating exchange rates would eliminate, or greatly lessen, international short-term capital movements.
Exchange rates were supposed to adjust themselves automatically to the balance of trade between countries. And, indeed, economic theory still preaches that foreign-exchange rates are determined by the balance of trade in goods and services. Instead, with liquid short-term funds amounting to $3 trillion sloshing around the world economy, short-term flows of capital have come to determine exchange rates and, largely, the flow of goods and services.
Floating exchange rates were also expected to eliminate, or at least to curtail, government manipulation of foreign-exchange rates by imposing fiscal discipline on governments. But surely the United States would have had to face up years ago to its government deficit had the American government not been able to postpone the day of reckoning by keeping the dollar's value high. Above all, however, floating exchange rates were expected to promote currency stability and to eliminate volatile currency fluctuations: the exact opposite of what they actually have achieved.
But the fact that the economic reality of a floating-exchange-rate world economy is totally different from what it was expected to be does not change the fact that it is reality and will continue to be reality for the foreseeable future. Managements have to learn to manage currency instability and currency exposure.
(1985)
CHAPTER SIX
Export Markets and Domestic Policies
PEOPLE IN JAPAN WOULDN'T BELIEVE ME when, in 1982, I told them that President Reagan would cut off American equipment for the gas pipeline from Siberia to Western Europe. “That would take world leadership for heavy earth-moving equipment away from Caterpillar and the United States and hand it on a platter to Komatsu and us Japanese! But earth-moving equipment is the one heavy industry with long-term growth potential. No government would do this!” Several of the usually superpolite Japanese came close to calling me a liar when I said that the impact on the competitive position of this major American manufacturing industry wouldn't even be considered by the administration in making the decision. It wasn't—and it couldn't have been, given American political mores.
Similarly, the impact on the competitive position of U.S. manufactured goods wasn't even discussed in 1981 in the decision to fight inflation primarily by raising interest rates, even though this meant pushing up the international value of the dollar and pricing American goods out of the world market.
For 150 years, ever since Andrew Jackson, it has been a “given” of U.S. politics that American manufacturing's competitive position in export markets isn't a legitimate concern of the policymaker.
It's true that we have a long tradition of protecting our domestic market. Despite all our free-trade rhetoric, protectionism is as American as apple pie. And at least since the Civil War the competitive position of U.S. farm products in the world market has been a major policy concern.
Yet it has long been thought improper to consider the impact on manufactured exports when setting policy. Only one president in the last 150 years thought otherwise: Herbert Hoover. For all the rest, even the most “pro-business” ones, concern for manufactured exports was taboo. It meant “looking after the profits of the fat cats.”
For a long time this did little harm. Manufactured exports were at most of marginal importance, accounting for no more than 5 percent to 8 percent of output—and even less in our major industries. But this has changed drastically in the last twenty years. Politicians and economists still berate U.S. manufacturers for their “neglect of export markets,” and article after article implores the industry “to learn to sell abroad.” But the American manufacturing industry now exports more than twice as large a proportion of its output as Japan; indeed the export share of U.S. industrial production exceeds that of any major industrial nation except West Germany.
In part this is the result of American multinationalism. The subsidiaries and affiliates of U.S. companies, far from taking away American jobs, are the best customers of the domestic manufacturing industry. Part of the tremendous expansion of American manufactured exports is, however, the result of a very real change in the attitude and the competence of American business, especially of small and medium-size high-tech companies. As a result, exports of manufactured goods accounted in 1982 for one of every five jobs in U.S. factories.
Yet 1982 was not a good year for the exporter. Part of the cause was the world recession, but the major reason was the overvalued dollar. Fred Bergsten, former assistant secretary of the Treasury for international economics and now a consultant to private industry, reckons that a 10 percent lower dollar would have raised the level of American exports a full quarter higher than they were; exports would have reached almost one-fourth of a much higher U.S. manufacturing output. According to Mr. Bergsten, the overvalued dollar cost more American manufacturing jobs and created more unemployment than the crises in the steel and auto industries combined. The world market still means more to the American farmer than it does to the industrial worker: two-fifths of farm