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White Paper: Understanding Exchange Rates and Market Conditions

Date: 10/27/2015 |Category: Exporting Cars, White Papers

A large part of constructing an export strategy involves figuring out which markets to enter. Before getting into the business of “figuring out markets”, it is important to understand what a market entails. A market is best understood as a set of consumers within a defined geographic area, or other unifying characteristics, that is interested in a product.

Defining a Market

Generally, exporters of vehicles from the United States would define their market by country primarily. However, markets can be further subdivided into smaller segments based on some unifying characteristics such as the middle class or urban dwellers or inhabitants of a particular region. Regardless of how a market is defined, it is important to understand that markets are influenced by both domestic and global economic conditions.

For example, analyses of the automotive market in recent years use the economic recession of 2007-2008 as a reference point for market growth and recovery. This economic event was the product of market forces on the domestic level and among global markets, which also experienced a significant downturn. Both domestic and global economic trends are cyclical, with one influencing the other and vice versa.

The Effect of Economic Downturns

In the context of exporting cars to foreign markets, it is therefore important to keep a close eye on trends that occur in domestic markets. For example, political or economic instability can have repercussions on consumer spending. Using the Ukraine as an example, data on car sales show “The new passenger car market in Ukraine in March reached only 2,259 cars, which is 79.2% down on March 2014 and 23% down on February 2015, the Ukrautoprom association has reported.” (1)

This drop in car sales has coincided with political and economic instability in the country. A further example can be found in the effect the 2007-2008 Global Recession had on car sales. According to Ibis World, “The Global Car and Automobile Sales industry experienced a significant decline during the global recession, as the industry is vulnerable to economic shifts in employment and spending. While demand for new and used vehicles in mature markets (e.g. Japan, Western Europe and the United States) fell during the economic downturn, the industry flourished in the emerging economies of Brazil, Russia, India and China.” (2)

What this illustrates is that a global recession can affect different markets in different ways. It may slow down sales in some market while spurring sales in others. Similarly, economic shocks may slow down the sale of new cars, but they may also spur on the sale of used cars. The main takeaway from this lesson is that exporters should keep a broad view of economic conditions and how the interplay of global and domestic economic conditions will affect a target market.

Exchanges Rates

Since an exported vehicle must be paid for with currency in the target market, it is also important to consider the role exchange rates play in deciding which markets to target. Firstly, not all currencies are created equal. Economists and financiers generally hold that there is only a handful of major currencies in the world or otherwise known as the “The Majors”.

This term is in reference to the most frequently traded currencies in the world, with the list normally including the Euro, US Dollar (USD), Japanese Yen, British Pound, Australian Dollar, and Swiss Franc. These major currencies generally have similar values in that there is no major disparity between different currencies.

Based on this consideration, imbalances in currencies can create opportunities for arbitrage. For example, a person in the United Kingdom, due to having a more valuable currency against the US Dollar, will have more spending power when making purchases in the United States.

Alternatively, a person who exchanges his or her US Dollars for Pounds will have less spending power in the UK. When taking these scenarios to the world of exporting cars, one can easily see where there could be opportunities for using disparities in currencies to their advantage.

Inflation

Besides disparities in currencies, inflation also plays a role in purchasing power. In countries where there is high inflation, consumers will have less spending power due to the inflated prices of goods. Therefore, a scenario may occur where the price of cars may be inflated in a country.

Therefore, it would be advantageous to someone in the United States (a country with little inflation) to sell to a consumer in a country with inflated prices. The seller could offer a vehicle at a bargain price due to not being subjected to inflated prices when buying the car to be exported.

Looking at the topic of major importers of used vehicles in the world, Mexico, Nigeria, Benin, UAE and Jordan, one is struck with the disparities in currency value and inflation rates.

Country Currency Value Against USD Inflation Rate
Mexico $.059 3.8%
Nigeria $.0050 8.5%
UAE $.27 5.2%
Jordan $1.41 -.76%
United States $1 .2%

Using the Power of the Dollar

What this illustrates is that an export strategy can easily take advantage of the spending power of the dollar in many overseas markets and leverage the fact that inflation rates in many countries make the purchase of vehicles cost prohibitive if purchased through traditional channels.

For example, a car dealer in Nigeria will be required to pay for an office, a car lot, maintain staff, pay for power, and any other variety of operating expenses. These expenses are all inflated due to a high inflation rate. Ultimately, these costs are passed on to the consumer. An overseas seller is not subject to these costs and, therefore, is not required to pass these costs onto sellers.

Planning a Strategy

Having determined the forces involved in shaping a market, including currency valuations and inflation, one can take this information and plan an export strategy that can take advantage of discrepancies in currency and inflation rates in order to maximize the profit margin on a vehicle purchased in the United States and sold in a target market.

View Market Reports for Selected CountriesOur Car AuctionsTruck Auctions, and Info on Buying With Us.

References

(1) http://russia-insider.com/en/passenger-car-sales-ukraine-plunges-almost-80-march/5387
(2) http://www.ibisworld.com/industry/global/global-car-automobile-sales.html

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