European Update

It is not a lifetime ago that the US Dollar was worth 1.15 Euros. At the beginning of the introduction of the Euro a lot of people were of the opinion that the Euro was overvalued at the introduction rate of approximately 1€ = $1. Today one has to pay over $1.50 for 1€.

Many of our European clients are subsidiaries of US companies. This change in parity between the two currencies has a number of important consequences – both for manufacturers and dealers – that should not be forgotten.

Products coming from the US allow great margins for the moment. Some manufacturers try to keep at least part of that advantage within their own company – but dealers have learned in many instances that they can obtain the product invoiced in US$ through other than the “proper” channels. This gives dealers an advantage over competition who produce or price in €. In many cases however dealers have gradually forgotten to sell their products in the “Phase III”-mode. They exploit this price advantage only marginally to increase their own profitability, but use it to “make the easy sale” and use price as their main sales argument. Thus teaching sales people the phase II (price) approach – an attitude which will come back and haunt them one day.

This is even more true in the parts department. Most dealers can buy spare parts at prices which are in € up to 50% cheaper than – say 5 years ago. However, looking at margins on parts we see no substantial improvement in the gross profit kept in that department in most dealerships. That is the case for both over-the-counter parts sales and for parts used in service and repair orders. What this really means is that dealers have gradually given away their existing gross profit on parts and now live on the G.P. generated thanks to the currency difference.

It is very improbable that the currency difference will go away overnight. Yet, it is not so improbable that the $ will strengthen – and may do so rather quickly once recovery has started. Dealers and manufacturers who became “lazy” and took the easy Phase II-approach to selling and pricing parts, might be in for a rude awakening.

The weak dollar position has also softened the blow of the increasing oil prices. According to figures from the European central bank, approximately 47% of the price increase of oil has been absorbed by the factual devaluation of the dollar. Nevertheless, oil prices have a huge impact on certain client businesses such as tyres and retreading. Manufacturers of construction equipment, farm equipment, trucks, compressors know that their clients more and more want energy efficient equipment and sales people have to learn new skills. Even the lowest price or highest discount may be insufficient to sell to customers who are cost-conscious rather than price conscious..

Money stays relatively expensive in Europe. Most European states and also the European Central Bank watch with concern the growing inflation which affects most European countries – especially because trade unions are aware that this creeping inflation erodes the purchasing power of their members, laborers. All over Europe – but especially in Central Europe – a number of spontaneous strikes have hit manufacturers. These strikes were very unwelcome in most cases because they came after a year in which many manufacturers had agreed to keep production facilities in Europe in exchange for “social peace” – i.e. no wage demands other than those agreed upon in advance. The fact is that labor cost is steadily increasing again in Europe.

This social unrest may lead to even more displacement of production. Whereas 10 years ago a lot of industries left Western Europe for Eastern Europe, the choice for new production facilities now goes to China and India – and even cheaper countries in the Far East. Europe is gradually facing the same question as the U.S. : can an economy which has lost almost all of its primary and secondary activities maintain its wealth and prosperity for all layers of the population?

Another trend which affects most of our dealers is the scarcity of well-trained and schooled technicians. In the old nucleus of Europe less and less people are eager to take a job as a technician – especially for equipment that asks for “in field”-service. This means that it is less and less possible to find people to do this kind of work and that these wages increase more rapidly than for other jobs. In spite of that it still stays difficult to attract good technicians – and very often they leave the “heavy duty”-jobs with tyre dealers, construction equipment dealers, agriculture equipment dealers for car dealerships, white goods dealerships and the like. This makes a lot of dealers reluctant to invest good money in the training of new recruits. As a result we see a “migration” of technicians from the former Eastern countries which are now part of the EU towards the older Euro-countries. The vacuum which they leave in their country is than filled by technicians from countries such as Russia, Belarusian, Ukraine and others.

Because they are so hard pressed for good technicians, dealers tend to overlook the big cultural differences that still exist between East and West. Many technicians can no longer communicate with the customer (and sometimes even with the boss) because of language differences. Also, many of these technicians have learned “in the old days” to repair no matter what, no matter how because parts were unobtainable. It is often hard for them to adapt to a new environment – which results often in repairs which are beneath the client’s quality expectations.

In a following newsletter we will talk about possibilities created for servicing dealers by the growing awareness on all levels for environment and ecology.