Currency Trends Are Poised to Change Electronics Manufacturing Forever

It is not difficult to notice the effects of inflation on our daily lives. In the cost of groceries, in gasoline and energy costs, and in the value of paychecks, we see the dollar’s declining value in nearly every aspect of our daily lives. It is no different for manufacturers, who are currently tasked with navigating a near-historic worldwide component, critical inventory, and raw materials shortage. Not only are the costs for such inventories increasing along with lead times, but the individual dollar itself is also declining in inherent value. According to a recent report from Bloomberg, microelectronic manufacturing following the COVID-19 pandemic is now 20% to 30% more costly. Combined, these factors result in a scenario where companies must somehow maintain production schedules even though their inventory demands often outweigh the free capital available to invest in them.

Amid these troubles, there is another larger, more existential issue in play that poses a threat to manufacturers, and indeed the global economy as a whole: the dwindling influence of the U.S. dollar as the world’s primary reserve currency.

Since the end of WWII, the U.S. business community has enjoyed a variety of benefits due to the unique status of the U.S. currency. The strong demand for the dollar and dollar-backed securities, for example, reduced interest rates and, by extension, borrowing costs for consumers. Additionally, it allowed consumers to purchase imports more cheaply, reduced transaction costs, and provided the U.S. economy with added insulation from sudden fluctuations in exchange rates. Should the world ever move away from using the U.S. dollar as the world’s currency, nearly all of these benefits would cease to exist, putting the U.S. economy are far riskier ground — especially regarding such issues as the rising U.S. national debt which, despite currently operating at around $31 trillion, represents minimal risk as long as global faith in the dollar remains strong.

Unfortunately for the U.S., these fears are now taking real shape in a variety of regions. The largest of these trends can be seen in China, who has long been at the forefront of a global push to move away from the U.S. dollar in favor of its own currency. In February, China’s holdings in the U.S. Treasury shrank to only $849 billion, which is a 12-year low.

China has not been the only trendsetter, however. In April, Brazilian President Lula visited Bejing, where he reportedly called for reduced reliance of the U.S. dollar in global trade. This coincided with total trade between Brazil and China increasing 10% from a year ago. Additionally, Malaysia Prime Minister Ibrahim recommended an “Asian Monetary Fund” be set up to help reduce reliance on the U.S. dollar and promote the use of local currencies, such as the Indian rupee. One of the primary reasons cited, he said, was the rising instability of the dollar due to inflation and high interest rates

Beyond this, there is yet an even more radical idea gaining momentum. Many countries, including China, Japan, and Sweden have even begun testing of their own central bank digital currencies, which has a variety of benefits such as lower borrowing costs for lower-income households but also poses an existential risk for companies (such as those in the electronics manufacturing industry) who rely on central banks for credit lines.

Indeed, the movement away from the U.S. dollar and the promotion of digital currencies both signal to the electronics industry that they must completely reimagine how their financial processes run. For example, if the manufacturer is dependent on U.S. bank credit lines for inventory acquisition and paying contract manufacturer partners, they might instead have to transition to a model that is more reliant on on-hand capital for funding. For many manufacturers, who have most of their capital at any given time tied up in inventory, alternative options —such as the use of a trusted supply chain partner like Partstat — will be indispensable.

For information on how Partstat can help your company realize tied-up capital, click here.