Chicago: US retailers including Toys R Us are starting to negotiate with their Chinese suppliers to take advantage of lower manufacturing costs after China devalued the yuan, with many saying they want to be ready if currencies in China and other Asian countries drop more against the dollar.
The nearly 2 per cent cut on August 11, the most significant downward adjustment to the yuan since 1994, will make imports from China cheaper. The Chinese currency is down 3.2 per cent versus the dollar so far this year.
The cheaper yuan offers the chance for retailers to buy more with dollars, with a knock-on effect in other supplier nations eager to remain competitive. After China’s move, Vietnam devalued the dong by 1 per cent while the Malaysian ringgit dropped to a 17-year low, its largest one-day loss in almost two decades.
“Most US retailers have dollar-denominated annual contracts with provisions that allow them to renegotiate if the currency moves outside of a pre-established range,” Giuliano Iannaccone, chair of Tarter, Krinsky & Drogin LLP’s international and retail practice group, said.
Some retailers will reap benefits immediately by exercising those clauses while others expect to enter next year’s contracts with a stronger bargaining position, he said.
“We are already engaging with our suppliers,” a senior official from Toys R Us who spoke on condition of anonymity said. The company has dollar-denominated contracts and expects to benefit, the person said. “The bigger question is what’s next from China and how will that impact other countries where we procure from?”
Toys R Us procures toys and baby products such as strollers from China, the Philippines, Malaysia and Japan among other Asian countries and expects any potential future devaluations in China or other countries to prove beneficial.
Best Buy Co. Inc. Chief Executive Hubert Joly said China is a big supplier, with contracts in place for the rest of the year. “We annually review vendor agreements in the fall. and expect benefits from the devaluation when those talks begin,” he said.
Home Depot Inc.’s Chief Financial Officer Carol Tome said the company has identified potential cost benefits since the China devaluation and will pursue them. Home Depot procures products including lighting, fixtures, fans, bath accessories, hardware and tools from the country.
Steve Preston, chief executive of trade consulting firm Livingston International, said it will not be surprising if China continues to devalue its currency to boost their exports, forcing other countries to follow suit. “The currencies of all our big trading partners other than China have become substantially cheaper and if they continue to become more attractive businesses will start changing their buying patterns,” Preston said.
Gaining ground
Mexico, one of the largest trading partners of the US, which rivals China in the global sourcing game, stands to benefit substantially more than others, Preston said. For example, because the Mexican peso is down more than the yuan, buyers are more likely to start sourcing more from Mexico, Preston said.
The Mexican peso has depreciated 12.5 per cent so far this year, the Canadian dollar has fallen 12.1 per cent while the euro has slipped 7 per cent year-to-date against the dollar.
Still, many US retailers don’t expect a holiday boost. Macy’s procures products such as apparel and fashion accessories from China.
“Pricing could be lower for their exports,” Macy’s Chief Executive Terry Lundgren said. “But I think that will take some time because the orders that we have in the system today have been in the system for months.”
Tarter, Krinsky & Drogin’s Iannaccone said many of his retail clients have started talking to their Chinese suppliers to benefit from the current move. “[Some] are pushing for changes in contracts to ensure they benefit from any future currency devaluations.”
US companies without provisions for changes in prices in the event of currency changes are eager to add them, he said.
Chinese suppliers with dollar-denominated contracts must decide whether to try to keep the currency benefit or pass it on to customers. Taiwan-based Makalot Industrial Co. — which counts Target Corp., Kohl’s Corp. and Gap Inc. as its three largest clients — has moved most production out of mainland China to lower-cost areas such as Vietnam.
The devaluation is “good for us” because it still has some China factories and dollar-denominated contracts, said Makalot spokeswoman Mavies Chiu.
Gap Inc. Chief Executive Art Peck said on an earnings conference call that the company will process the currency devaluation and the retail chain doesn’t expect any significant difficulties in expanding its China business. A Target spokeswoman confirmed the retailer’s sourcing arrangements are denominated in US dollars but declined to share more information.
For some US buyers, who choose to buy goods in yuan, taking steps to reduce foreign currency exposure is likely to protect them from any potential risks for the moment.
For example, Feng Tay Enterprises Co., a major Nike supplier, says the shoe manufacturer buys in yuan and purchases currency hedges which protect both parties from currency fluctuations.
