Currency And VFX

I post a bit about how the falling US dollar indirectly makes it more expensive for US studios and facilities to send VFX work to other countries.

A commenter disagreed:

You do know that 1 GBP goes a lot further than 1 USD, right? Approximately one and a half times as far in fact…

Soldier, I know you’ve never left Cali but I’m not going to start explaining exchange rates for you.

Well it seems someone needs to do some explaining.

The Wrap wrote an article called Currency Woes: Why the Weak Dollar Is Helping — and Hurting — Hollywood :

But for producers of movies like “The Hobbit” in New Zealand, the weak dollar pushes the cost of production higher.

Warner Bros., like other studios, traditionally locks in the exchange rate when it greenlights a movie for overseas production.

But as “The Hobbit” faced endless delays stemming in part from co-backer MGM’s bankruptcy, the dollar weakened, which has driven up the cost of the mammoth shoot.

Also this from a VFX facility management blog on how a higher Canadian Dollar is hurting Canada:

Should we be concern by a higher dollar?

The answer is : YES.
Everybody knows corporation are always looking for the best deals. They come to Canada, go to Australia and they’ll go to India or China to save more money. Corporations have been moving factories from one country to an other just to save a few bucks and to generate better income to their shareholders. The entertainment industry is not an exception, at the end they want to make money. The reality Canada is facing is that to keep runaway and any other productions in Canada they will have to offer better tax incentives, the US currency is plunging and will probably continue for the next few years.

The reason why the US dollar has been falling is because of quantitative easing. The federal reserve is expanding the monetary base which leads many to conclude the US is “printing money”.

The hope is that by making it more expensive to go overseas, more inward investment will occur. Critics of this policy argue that this will lead to inflation and higher interest rates.

After two rounds of quantative easing, we have seen interest rates fall and no real increase in inflation. According to some economists, inflation tends to lag and the hope is that the economy will be growing by the time a measurable amount of inflation arrives. In fact, some inflation would actually be good for the US economy.

Whatever the reasons behind this method, it’s an incredibly effective tool. The alternative is much worse: Countries that have adopted the Euro such as Spain, Portugal, Greece, Italy, and Ireland are unable to engage in such a practice because they cannot control the Euro currency. Many of those countries are at risk of default, interest rates are soaring, and now France and Germany are left to bail them out.

Lastly, it looks like things are going to get even tougher for US studios looking to send work outside the US: Predictions are Fed Chief Ben Bernanke will announce a third round of quantative easing this Friday.

Soldier On.

10 Responses to Currency And VFX

  1. vfxguy says:

    Well I can stop picking up The Economist now that you’re on the case!🙂

    You’ve taken my words slightly out of context, Soldier. I was responding to you writing that “1 British pound sterling is 1.61 us dollars.” My point was that a USD-GBP exchange rate of ~1.5 is about “normal”, i.e. you have roughly the same buying power in either currency.

    It’s when things get wildly out of whack (like with the Australian and Canadian dollars recently, or when sterling went above 2 USD a few years back) that it starts becoming a problem (or a bonus, depending on which side of the fence you’re on). Ultimately I think we’re both saying the same thing anyway.

  2. WTO says:

    Great article Soldier. Now explain how quantitative easing is morally different than foreign film/vfx subsidies you often decry on this blog.

    In both cases, it seems that a local government is meddling with a global business, creating an “unequal” playing field.

    • VFX Soldier says:

      I’m glad you asked.

      The WTO rules against subsidies specifically define one as being targeted towards a specific industry.

      For example the subsidies in Canada are specifically for the film industry.

      I welcome nations that are adversely affected by qe to challenge them however this policy is directed towards the overall us economy and not a specific industry.

      Let me be clear that while I’m against subsidies for fat cat studios, I’m not against them for things like education, healthcare, and welfare.

  3. alanb says:

    there’s another factor that you’ve missed. The studios make a lot of money in the UK, Canada, Singapore, Aus, NZ. Better to spend it where they make it than to repatriate their profits and pay US taxes.

    • VFX Soldier says:

      I find that hard to believe.

      Most us films are making huge amounts of money in Japan. This is also compounded by the rise in the japanese yen. Yet not much film production gets done there.

      The same can be said for brazil and other huge international film markets with rising currencies.

  4. fizz says:

    From the beginning of 2006 through to the end of 2008 the pound was very strong against the dollar, running between $1.86 and $2.05, sustained in part by the relatively high interest rates set by the Bank of England (vs. the Fed which had rates at historically low levels throughout this period). For the UK facilities to stand a chance of winning work – even with the tax rebate on production costs – this meant huge discounts were applied across the board. Margins and overheads were cut to the bone to support discounts of anything up to 60% off ratecard. The proportion of relatively higher-paid US staff dropped with more recruitment coming from the EU. Several facilities began major internal training programs to develop their own staff rather than having to buy in knowledge from outside.

    At the beginning of 2009, with the collapse of Lehman Bros. and the run on Northern Rock, the pound dropped through the floor, falling as low as $1.47 at the end of January. Perversely this didn’t make things more expensive for the US studios, at least not in the short term. Instead it meant that the UK facilities were cashing in on the exchange rate, getting far more sterling for the same dollar spend by the studios. The relentless drive to force down overheads put the UK houses in a killer position to take advantage of the situation – the only significant rising cost was that of US-recruited staff, and that gap had been filled by internal development and the burgeoning EU labor pool (which incidentally was being driven to the UK in part by the Eurozone crisis – Spain, for instance, produces lots of great CG/VFX grads every year, but without any jobs to go to more and more of them are turning up in London). Hardware and software rose at much slower rates, offset by the relentless grind of Moore’s Law. Gasoline prices went through the roof, but only a madman tries to drive to work in London so the impact was relatively small.

    From the spring of 2009 UK facilities could afford to raise prices in sterling and still beat any bid from companies who do their accounting in dollars – the UK tax rebate was the icing on the cake, but not the deciding factor on awards across a whole host of shows including Fast and Furious, 2012, Sorceror’s Apprentice, Avatar, Iron Man 2, The A-Team, Percy Jackson, GI Joe that didn’t qualify.

    The smarter facilities have learned to take advantage of volatility of the dollar, using currency hedging to protect themselves against swings in the value of dollar bids. I know of one facility manager who scored $500K in a week by hedging against a drop in the pound whilst bidding a show – it all went straight to the bottom line. Needless to say that the smart guys in Vancouver, Russia, Singapore, NZ, Australia and elsewhere are thinking along the same lines.

    Tax incentives do make a difference, but the situation is more complicated. I can’t see how removing them – either unilaterally or through some possible WTO ruling – would restore things to “the way they used to be”. Anyone who has worked directly with US studio management knows that those guys will cut off their own noses if they think they’ll save a buck on costs and that pressure will override directorial choice of location for post in all but the rarest of elite cases.

    • fizz says:

      Of course, some of the UK companies are getting a bit fat and lazy now as the “good times” have lasted a couple of years. But then again, the UK economy as a whole isn’t exactly booming so sterling stands at around $1.62 which is still way below the recent – and prolonged – high of $2.00.

  5. Drew says:

    Out of the major vfx countries: USA, Canada, UK, SIngapore, Australia, NZ… for an american citizen which one do you think would be the best to go to financially speaking? assuming they want to negotiate for ex. 90,000 usd as the salary?

  6. fizz says:

    Choose a place where the local currency is strong against the US dollar: Canada or Australia for example. Assuming they’re not adjusting their salaries downwards to take advantage of the dollar’s relative weakness (which, to be honest, they will do if they’re paying attention) then you’ll win if you repatriate your earnings to the US.

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