Currency Exchange Fluctuation in Localization

Exchange rates have always been a concern in our industry, but in these past few quarters, many Language Services Providers (LSPs) have probably been checking the exchange rates of their local currencies more eagerly than ever.

Translation and localization are arguably among the most international of services. Ultimately our industry is here to help release products and provide services internationally. The dominant production model is to source translators and translation in-country, regardless of the country of origin of the service provider. This means LSPs are heavily influenced by the strength of local currencies (with which they buy the translated words) vis-à-vis the selling currency, and the effects can be positive as well as negative. Another factor that determines the influence of currency fluctuation in our industry is the location of production offices for any non-translation activities.

When currency fluctuations are considered, it is the exchange rate between the US dollar and the euro that gets the most attention. This not only reflects the size of the respective economies using these two currencies, but also the fact that the US dollar is the most widely traded currency today. That's because it effectively serves multiple roles: as an investment currency; as a reserve currency for many central banks; as a transaction currency in many international commodity markets such as oil and foodstuffs; and as an invoice currency in many contracts.

According to IFSL research conducted in April 2007, the US dollar was involved in 86% of foreign exchange transactions, followed by the euro (37%), Japanese yen (17%), pound sterling (15%), Swiss franc (7%) and Australian dollar (7%). And the US dollar/euro was the most widely-traded currency pair in April 2007 accounting for 27% of overall trades. US dollar/yen was the next most traded currency pair, generating 13% of trades, followed by US dollar/pound sterling with 12% and US dollar/Swiss franc with 5%.

For our translation and localization industry, the typical situation is that services are sold either in US dollars or in euro for nearly all languages and types of services. In other words, invoicing in the currency of the target language/country is the exception rather than the rule. This reflects clients' corporate policies but is also due to the impracticability of maintaining rates across a range of local currencies, say for 50+ languages.

The table below shows a snapshot of what currencies influence the in-country costs for individual target languages:

The US dollar has fallen since January 2004 against the euro as well as against most major European and Asian currencies. The charts below show how the percentage value of the US dollar against local currencies has changed over time, using official interbank rates (with the base rate of 100% as of January 1 2004).

Figure 2: Exchange rate of the US dollar against the euro and local currencies

The currencies against which the US dollar depreciated the most during this period are the Central European currencies (such as the Czech koruna and the Polish złoty), followed by the euro, other European currencies and the Brazilian real. Asian currencies have been less affected.

Considering the aggregate depreciation of the US dollar against local currencies since January 1 2004, as of September 1 2008, the US dollar was worth 86% of what it was in January 2004 compared with the euro, though this is an improvement over where it was in early July 2008 (81%). Most of this fall has taken place since early 2006. On January 1 2006 the USD/euro exchange rate stood at 1.184 USD/euro; by July 1 2008 the US dollar had fallen to 1.578 USD/euro, a drop of more than 33%.

This means that unless their contracts include currency exchange clauses, LSPs invoicing in dollars but producing in-country have had to absorb a significant drop in the value of their US-denominated revenues. While the final client may have paid the same amount in 2008 as they did in 2006, the actual revenues of LSPs have dropped in value anywhere from 14 to 29% for European languages, and between 5 and 15% for Asian languages.

Another equally important exchange rate affecting the industry is the one between the euro and local currencies. Considering the relative values, that is, how the value of the euro against local currencies has changed over the period since January 1 2004, the graphs below demonstrate this trend.

These graphs show that while the euro has appreciated against the US dollar, at the same time a number of local currencies have60 appreciated against the euro; specifically the Czech koruna by 23%, the Polish złoty by 28% and the Brazilian real by 34%. On September 1 2008, the Russian ruble had almost the same exchange rate as in 2004 and the exchange rate of Scandinavian currencies against the euro also remained largely unchanged. Asian currencies have largely depreciated against the euro, including the Japanese yen by 18%. The Chinese renminbi has been maintaining its value against the euro over the past four years; currently it is 4% stronger compared with January 2004.

Currency Exchange Fluctuation in Localization

One conclusion of the April 2008 Common Sense Advisory research report “The Price of Translation” is that "...translation prices have been relatively stable over the last four years. With few exceptions, prices dropped or went up less than 10 percent - over the entire period, not per year." Set against the backdrop of rising local costs and falling values of US-denominated revenues, this means that while clients are receiving services with a greater added value, LSPs or in-house translation departments at client locations are working hard to offset the negative trends.

We have observed the following ways in which LSPs are constantly working to increase the value of their services, and by extension limiting the negative effects of currency trends and fluctuations:

Deployment of translation automation tools, translation workflows or other technologies is one way of reducing per-unit overhead costs and the number of human touch points and transactions, for both LSPs and clients. Typically, as was the case with translation memory technology in the 1990s, these savings have to a large extent been passed on to clients.

Improving processes in the overall workflow from authoring to translation and publishing can again reduce the total costs of translation and increase productivity. Examples include migrating to XML or DITA.

Processing larger volumes with proportionally lower indirect costs. This applies to the overall volume of work, as well as to centralizing production and activities in a smaller number of locations.

Moving production to lower-cost locations has been a general trend globally. With rising local costs and currency exchange movements, the definition of a low-cost location is shifting. While traditional locations continue to posses strong competitive advantages, others are gaining ground. In many cases, sourcing more from the US or countries with currencies largely pegged to the US dollar such as Argentina is gaining popularity. This applies to sourcing translation work as well as to technical, engineering and in general pre- and post-processing activities.

Pricing is often adjusted to take into account the changing value of the US dollar and the rising local costs, or else selling rates are changed from US dollars to the euro.

Introduction of currency fluctuation clauses in contracts is another method of protecting both clients and LSPs against future changes. Since these work in both directions, these contract clauses protect both parties in the case of any future depreciation or appreciation of especially the US dollar against the euro.

Larger LSPs often have formal foreign exchange risk management processes in place. These include a range of different hedging techniques, natural internal hedging, or advanced treasury management.

In a similar vein, currency movements often work well for US producers with a larger proportion of their costs being in dollars but selling worldwide. International revenues not only translate to higher US-denominated revenues, but they also contribute to higher margins which can be achieved globally.

Q1 2008 for instance marked a milestone for Google, whose international revenues exceeded US revenues for the first time. Revenues from outside of the United States represented 51% of total revenues in the period, compared to 47% in the first quarter of 2007 and 48% in the fourth quarter of 2007. In Q2 2008, this had increased further to 52%. According to Google, "Had foreign exchange rates remained constant from the second quarter of 2007 through the second quarter of 2008, our revenues in the second quarter of 2008 would have been $249 million lower."

The weaker US dollar also helps on the macroeconomic level. For instance, 2007 was a break-though year for the US trade balance with the European Union, when the US trade deficit with the 27 European Union countries reversed direction and decreased from 93.7 billion USD in 2006 to 80.4 billion USD in 2007, breaking the previous trend.

Many LSPs have watched with horror as the exchange rates of their local currencies have developed against their invoicing currencies (USD or euro) over the past few years. The situation has stabilized during the past few months, and in some cases the trends have somewhat reversed. Still, it is safe to assume that like in many other ways in our lives, there will be no “business as usual” when it comes to currencies. Exchange rates have been notoriously hard to predict, and they are just one of the aspects that our industry will need to adapt to, in the worst cases, or seek to benefit from in the best cases.

This article was originally published in GALAxy newsletter:
www.gala-global.org/GALAxy-newsletter.html