NEW YORK — Colorocs Corp.'s color copier seemed like a sure winner until the government devalued the dollar to save the economy.
The Norcross, Ga., company had designed a machine that it hoped to sell for $10,000--a price that Colorocs believed was low enough to spur demand among small businesses that haven't been able to afford such a product. To help keep costs down, Colorocs contracted to have the machine built by one of several Japanese firms with experience in low-cost copier manufacturing.
But as the yen rose about 48% against the dollar over the past 2 1/2 years, Colorocs' costs went up--and so, inevitably, did the price the new company would have to ask. Colorocs officials now believe that they may have to charge as much as $18,000 when the machine is ready for shipment next spring.
"That's going to cost us sales to small companies, and that's going to hurt," acknowledges Deborah Cox, the company's investor relations director.
Colorocs' dilemma illustrates an unhappy consequence of the devaluation strategy that has been so warmly embraced by many U.S. companies. While the dollar's decline has set off a boom among American exporters, it has brought higher import prices that are straining the growing number of American companies that depend on goods from abroad.
These include not only the bustling industries that import cars, consumer electronics goods and other finished products for resale here, but also a vast assortment of others that need foreign-made components to build their own products. The ranks of such import-dependent companies have swelled in the past decade, as foreign companies have come to dominate many areas of manufacturing and the world's economies have grown ever more intertwined.
Most worries about the strategy of lowering the dollar have focused on the risk that, by increasing import prices, the devaluation will set off inflation. But analysts say the negative effects of a lower dollar on the import-dependent sector poses risks that should not be minimized.
"The common wisdom is that a falling dollar is an unambiguous blessing for American business, and that's far from the truth," said Douglas Cliggott, senior economist with Merrill Lynch Capital Markets.
The German mark, like the yen, has risen about 48% against the dollar, and several other European currencies have risen nearly that much. The Taiwanese dollar has risen about 25% since February, 1985; while the South Korean won has risen only 6%, many analysts believe the Korean government may soon be forced to let its currency rise as well.
The U.S. dependence on imports has been evident in the stubborn persistence of the trade deficit through most of this year. Though the dollar has fallen sharply and exports have begun to edge up, the United States has continued to suck in more than $30 billion of imported goods each month, thus maintaining a trade deficit that was still $14.1 billion in October.
Another sign of this dependence is the run-up in the value of durable goods imports over the past decade. Between 1976 and 1986, the value of such imports from Europe and Japan alone grew nearly fivefold to $143.2 billion.
Part of the appeal of the devaluation policy lies in an expectation that, as import prices rise, American companies will be forced to abandon their foreign suppliers in favor of American sources. But the country's imports include an array of products--from computer chips to manufacturing machinery to scientific instruments--that U.S. companies simply can't duplicate from American sources.
When Colorocs looked around for a supplier, it found half a dozen Japanese companies, including Canon, Ricoh and Sharp, with experience in building low-cost color copiers. Among U.S. firms, only Xerox builds such a machine--and it builds it in Scotland, said David Artman, analyst with Gartner Securities in Stamford, Conn. "There really wasn't much choice among domestic suppliers," he said.
Other high-technology firms would find it similarly difficult to do without their foreign suppliers.
American manufacturers of laser-based computer printers have no choice but to rely on imports, because only the Japanese make laser engines, the key component of such machines.
Officials of printer manufacturer QMS Inc. of Mobile, Ala., said the engines account for 50% of the cost of building laser printers. So far, QMS has avoided raising prices by absorbing part of the added cost and by buying currency futures contracts to hedge against the yen's rise.
But Philip Cahoon, QMS' controller, said that if the dollar declines another 10% or so against the yen, "we'll have to give up some of our less profitable lines."
And Cahoon said currency hedging is far from a perfect solution to the problem, since it involves costs of its own. In such hedging, a company pays a premium for an option to buy currency at a certain exchange rate in the future.