The dollar is strong, and most of the other currencies in the Americas are weak by comparison. Even the Canadian dollar has been falling significantly against the greenback all year, and in some ways this is presenting great opportunities for those seeking IT and other services abroad.
There are positives to having a strong dollar when looking for foreign providers, according to Carlos Amaral, a director at the Dallas-based advisory firm Alsbridge. “From the aspect of getting services delivered out of Brazil into other countries, it could be a good thing,” Amaral said. “Because you’ll be paying U.S. dollars, so the cost is less.”
The savings can be substantial, especially if the local currency continues to fall and the payments are being made in that currency. Given this, many are wondering if now is the time to sign new or long-term contracts. Others feel like they must. The strong dollar increases the pressure to use foreign services, particularly for companies that rely heavily on exports and are losing profits due to weakened demand in foreign markets with slumping currencies.
The road ahead is only rockier for emerging market currencies now that China has devalued the yuan, particularly if the U.S. Federal Reserve maintains its plan for interest rate hike by the end of the year. “Emerging market currencies will be the biggest losers,” said Alfonso Esparza, senior currency analyst at Canadian-based foreign exchange company Oanda. “This in turn will give those nations a competitive edge to grow through exports to developed countries. The usual suspect that have close commercial ties to the U.S. is Mexico, who will be a recipient of further inflows to its manufacturing base. The Trans Pacifict trade Pact will reduce tariffs for trade in Chile and Peru, counting Mexico also a member. Early investment on those nations will be rewarded as other TPP members — Japan, Australia, Canada and the U.S. — will be net purchasers of TPP’s Latin American members.”
Proceed With Caution
There are skeptics, however. Patrick Heffernan, practice manager and principal analyst at Technology Business Research (TBR), doesn’t see any major opportunities to exploit a weak currency. “Absent a massive devaluation, you’re probably looking at marginal opportunities to gain profitability,” Heffernan said. “And, of course, massive devaluation always comes with massive macro-economic disruption, which is never good for long-term outsourcing operations.”
For Heffernan, operating in a location where the currency is falling creates more problems than advantages. Predictability, he says, is a better reason to be enticed by a location. “Stable currency is one of those factors behind why vendors chose to operate in a particular country,” Heffernan said. “In our experience, the political fall-out from currency devaluations almost always negatively exceeds expectations.”
In a way, it can be a lose-lose situation where the company exposes itself to risk without much chance for gain. Because even if a company can overcome the downside of a weak local currency to realize the benefits, customers will expect to reap the rewards too. “In today’s more-transparent market, the client will understand the devaluation’s impact and will quickly expect a discount, potentially eating away completely any new profit,” Heffernan said.
Where to Look
Still, there are ways to win. Caterpillar is one company that has proven that. While discussing its 2014 earnings in January, financial services vice president Mike DeWalt said that the dollar’s rise during the year led to more profit. “Now, this might be counterintuitive for some, but the stronger dollar, while negative for our sales, is positive for our costs overall,” said DeWalt on a conference call. “That’s because of our non-U.S. operations and our material purchases outside the U.S. Overall, that’s expected to be a positive for profit.” Caterpillar is a customer of Luxoft, a global provider of software and IT solutions, with operations in, amongst others, Mexico.
Few companies have the global reach of Caterpillar, of course. The Fortune 200 firm certainly benefited from an ability to source lower-priced commodities in bulk from local markets, and it is notable that, six months later, Caterpillar is in cost-cutting mode as the dollar continues to soar. But its ability to benefit from low-cost labor for various services has definitely been an asset.
Businesses looking to follow that lead, even on a smaller scale, have plenty of places to look. Given China’s recent move to devalue the yuan and an interest-rate hike on the horizon in the United States, currency markets across the world will likely remain unpredictable for the foreseeable future. But those seeking a country where the currency is in their favor should consider these locations.
The Colombian peso has plummeted over the past year, moving from less than 1,900 pesos against the dollar to nearly 3,000. That fall isn’t over either, as the peso was the world’s second-worst-performing major currency in the world in July and it most analysts aren’t wondering if it will eclipse the all-time high of 2,980, but simply when it will.
Despite all this, there is good news to report. Overall, the Latin American contract-center outsourcing services market earned revenues of $11 billion in 2014 and could eclipse $15 billion by 2020, according to California-based consultancy Frost & Sullivan. The firm says that this growth was in part driven by impressive performance by Colombia.
“Colombian is another one that is suffering, just because the U.S. has not been investing as much, but the local market is still doing relatively well,” Amaral said. There is a solid IT infrastructure in the nation, and a large talent pool. This appears to be one location where a weak currency could lead to a large benefit.
Labor costs in Peru are already among the cheapest in South America, and a major fall in its nuevo sol currency makes its service providers even more appealing. Like Colombia, Lima certainly has an array of established talent to lean on.
A recent report from Scotia Bank, however, shed some light on the upcoming hurdles that may lie ahead as Peru prepares for a presidential election early next year. “Election-related uncertainties will likely delay investment decisions until later in the year,” states Scotia Bank report. “We project that infrastructure investment will be a key growth factor in 2016.”
On the one hand, developing relationships with providers now could pay dividends later, as investments lead to even more robust returns on low-cost services. But on the other hand, elections add unpredictability and there is no guarantee that further infrastructure spending will materialize.
In July, the Brazilian real hit its lowest level in 12 years, Standard & Poor’s cut the nation’s credit rating to one level above junk, and financial organizations far and wide forecast that the economy would remain in recession throughout the year — and perhaps longer — as corruption scandals deteriorate confidence domestically and abroad.
“There is a really great, strong college,” Amaral said. “They have a strong technology base. They have really good financial services…Brazil is a really great economy when everything else goes well,” Amaral said. “But it is just a different market right now.”
Peter Ryan, lead analyst with research firm Ovum, recently wrote that the currency advantage should prompt U.S. firms to consider outsourcing to the north. He noted that Canada’s third-party workstations servicing U.S. consumers fell to just 13%, a drop from almost 50% just 10 years ago, as the nation’s dollar gained strength against the U.S. dollar.
But this is changing. “Tables have turned over the past year,” wrote Ryan, “with the Canadian dollar hitting its lowest point in the past 10 years…leading many outsourcers to wonder whether it is worth re-examining Canada for U.S.-focused capacity, based on currency costs.”
Esparza also sees some opportunities in Canada’s service sector. “The silver lining for investors looking to Canada is the rise of the non manufacturing sector,” said Esparza. “Canadian exports are just starting to benefit from a weaker currency. Commodity and manufacturing exports are lagging due to low prices and structural issues, so it is the service sector that has provided most of the growth. The Bank of Canada is a supporter of an export led recovery which should keep the loonie weaker in the short to mid term making it an interesting investment alternative for a lower-cost near shoring opportunity for American companies or those looking to export to the U.S. via Canada.”
For those who fear instability but want more labor and currency benefits than can be found in Canada, the answer might be Chile. Copper accounts for nearly half of Chile’s exports, so the commodities crash has had an outsized effect on the national economy. The Chilean peso has dropped significantly over the past year as a result, and the Pacific nation does sell a lot of its ore to China, so the slowdown across the ocean will have a prolonged impact in Santiago.
But there is a reason that Chile is the only South American member of the OECD, as its economy sits on a more solid foundation than arguably all of its peers. As a result, entering into service agreements or longer-term investments here is a safer bet than in many other locations. And there are good IT resources to tap, even if a population of 18 million makes Chile a much smaller pool than Brazil, Mexico, or Colombia.
“They established themselves as a good center of delivered services for some of the suppliers of Latin America,” Amaral said. “They have not as big a pool of talent, but they do have really strong talent available in the market. And the local companies have embraced sourcing better than some of the Latin American countries.”