Introduction: Electronics FX Risk, Margin Pressure, and the Currency Puzzle
For electronics manufacturing services (EMS) providers and original equipment manufacturers (OEMs), thin operating margins are the norm. With cross-border supply chains, frequent USD and CNY exposures, and ongoing freight delays, coping with currency volatility is an essential part of protecting profitability. Traditional hedging tools such as forward contracts or options add certainty, but increasing numbers of EMS/OEM finance leaders are complementing these instruments with natural hedging strategies such as currency netting—a risk-reduction approach that offsets payables and receivables in the same foreign currency.
This article provides a practical, FCA-authorised guide to currency netting and natural hedging, with industry-relevant examples and a simple checklist for electronics sector finance teams.
What is Natural Hedging and Currency Netting?
Natural hedging refers to aligning cash flows—such as matching foreign-currency sales and purchases—so that currency exposures cancel each other out, reducing net FX risk. Currency netting is the practical process by which exposures in the same currency are summed (i.e. ‘netted’) across the business or group, completing only the net currency conversion, rather than each transaction individually.
- Example: If your UK-based EMS buys circuits in USD and sells finished devices to US customers in USD, those inflows can offset outflows, lowering the amount needing to be converted to GBP—thereby reducing exposure to USD/GBP moves.
Why Electronics Manufacturers Embrace Netting
Electronics manufacturers are particularly suited to natural hedging and currency netting due to:
- Frequent FX inflows/outflows: Most large suppliers invoice in USD, and key customers pay in USD or CNY.
- Thin margins: With profit margins under 5% typical, a 2% currency move can wipe out over a third of annual margin on major deals.
- Multi-geography production: Paying Asian contract manufacturers, importing components, and exporting finished units all create opportunities for netting.
In volatile periods (e.g. rapid USD/CNY swings in 2022–2023), electronics firms with structured natural hedging have reported more consistent margins than those relying solely on transactional FX hedging tools.
How Currency Netting Works in Practice
Effective currency netting typically involves:
- Mapping flows: List all forecasted payables/receivables in each foreign currency over the month or quarter.
- Grouping & offsetting: Match inflows against outflows by currency; this can be done at the entity or group level.
- Net settlement: Convert or hedge only the remaining net position, minimising conversions and associated costs.
Benefits and Limitations of Currency Netting for EMS & OEMs
Key Benefits
- Lower FX exposure: Reduces amounts at risk from adverse currency moves.
- Simplified treasury operations: Fewer conversions, clearer forecasting, and greater control over working capital.
- Cost efficiencies: Minimises aggregate margin lost to FX conversions and bank fees.
- Complementary to hedging instruments: Remaining net exposures can be managed with forwards (Forward contracts are binding derivatives and may require collateral if rates move against you).
Primary Limitations
- Currencies may not fully offset month-to-month depending on order cycles.
- Some revenue streams (e.g. UK/EU clients) cannot be netted if invoiced in GBP/EUR and costs are in USD/CNY.
- Requires robust forecasting and central visibility across accounts—challenging for EMS/OEMs with decentralised treasury.
Practical Steps: Implementing Currency Netting
- Identify currencies: Catalogue all major payables and receivables by currency, entity, and counterparty.
- Forecast key flows: Collaborate with sales, procurement, and logistics to improve monthly/quarterly flow accuracy.
- Consolidate group data: Centralise cash flow data (using ERP or dedicated treasury tools) to enable group-level netting.
- Decide netting frequency: Monthly is common for EMS/OEMs, but some mature groups run weekly cycles.
- Document procedures: Set group treasury policies, approvals, and thresholds for netting and on when to hedge residuals.
While basic spreadsheets can support early efforts, many mid-sized firms benefit from treasury management system (TMS) or FX platform integration for scalability and audit trail.
Combining Currency Netting with Traditional Hedging
For most electronics manufacturers, natural hedging via currency netting should be the first line of defence. More volatile or persistent exposures—especially on larger long-term contracts or CapEx—may justify using FX forward contracts or swaps. Forwards can help achieve future-rate certainty for a net position, but as a reminder: Forward contracts are binding derivatives and may require collateral if rates move against you.
Options contracts can provide upside if the FX moves in your favour, but are often pricier and less commonly viable for SMEs or those with tight budgets.
Checklist: Launching a Netting Programme
- ✔ Map all FX inflows and outflows by entity and currency
- ✔ Align payment and invoicing terms with suppliers/customers where feasible
- ✔ Install processes to track and net exposures centrally
- ✔ Set a review cadence—monthly works for most EMS/OEMs
- ✔ Decide policy for hedging any net positions remaining after intra-group netting
- ✔ Review and adapt as seasonality, product mix, or supply locations shift
Case Example: Netting in Action at a UK EMS
A UK-based PCB assembler, invoicing £6m/year to UK/EU buyers but relying on $8m/year of CNY- and USD-linked component imports, structured its global cash management so all CNY/ USD inflows from Asian customers offset outflows before any conversion. Over one year, this reduced FX conversion costs by 29% and cut year-end FX exposure by £320k, directly protecting nearly 4% of pre-tax margin—a significant improvement in a competitive industry.
Conclusion: A Strategic Advantage for the Electronics Sector
Currency netting and natural hedging are powerful tools for EMS and OEM finance leaders seeking to defend margins in a world of FX volatility, supply chain shocks, and ongoing market uncertainty. While not a substitute for forward-thinking hedging policy, a structured netting programme should sit at the heart of any electronics manufacturer’s FX strategy.
Millbank FX is Authorised by the FCA (Financial Conduct Authority). FX derivatives such as forward contracts are not suitable for all businesses; please seek our professional guidance before making hedging decisions.
