Cash machine The business of printing money thrives on financial crises
FEW businesses do well in a climate of global political instability and mistrust of banks. De La Rue, the world’s largest commercial banknote printer, is one of them. The Basingstoke-based firm’s profits rose by a fifth in 2003 thanks in part to a contract to supply a new currency to Iraq. It also created a currency for the world’s newest country, South Sudan, in time for its independence a year ago. Disintegration of the euro zone would be terrible for most businesses but an opportunity for De La Rue.
Indeed, the financial crisis has broadly been good for banknote printers. The collapse of Lehman Brothers in 2008 led to a surge in demand for the folding stuff, which has not ebbed. Low interest rates have cut the opportunity cost of holding cash. With banks looking wobbly, many prefer to keep their money stuffed in the mattress, creating extra demand for banknotes. After falling steadily during the 1970s and 1980s, as the use of chequebooks and credit cards spread, cash in circulation has been rising again (see chart).
Private-sector printers like De La Rue inhabit a small but vital corner of a huge business. State-owned print works make around 85% of the 150 billion banknotes produced each year. But commercial outfits can be asked to step in when central banks fret that state printers may not be able to meet demand, as De La Rue did for the European Central Bank in 2001. Small countries are more likely to contract out banknote supply to commercial printers, who can harness economies of scale. That logic prompted the Bank of England to outsource its printing to De La Rue in 2003.
The firm devises 100 or so new banknotes each year as well as around 2,000 “design concepts”—a security feature, say, or a new image for a big-denomination bill. It has helped produce more than 150 currencies and won design awards for the banknotes it crafted for the central banks of Kazakhstan and Uganda, among others. De La Rue also prints identity documents, including British passports.
Trust creates a high entry barrier into the industry. “Few firms can do what we do and those that can have a long history and established relationships with central-bank clients,” says Tim Cobbold, De La Rue’s chief executive. The business was founded in 1813. Portals, a firm it acquired in 1995, has an even longer heritage: it began supplying banknote paper to the Bank of England in 1724. De La Rue’s two main rivals, Munich-based Giesecke & Devrient (G&D), and Oberthur Fiduciaire, a French firm, date back to the mid-19th century.
Their challenge is to provide hundreds of millions of perfect copies of a product that is cheap to make but impossible to fake. Designs need to blend aesthetics with durability and security. There is no strict formula but some broad rules apply, says Alan Newman, De La Rue’s design chief. Notes are often folded in half, so the security strip should never be in the middle. Paper currencies have no intrinsic value and need the appearance of worth to inspire public confidence. “It can’t look like a theatre ticket,” says Mr Newman. Engraved images in uncommon shades have the required seriousness. They are also hard to reproduce with colour photocopiers.
In essence De La Rue is a high-quality contract manufacturer. It pitches for business much like any other firm that relies on government procurement, basing a tender on its past history with a customer and its best guess as to how rivals will bid. De La Rue will provide forecasts of the demand for cash but it is up to customers to control the supply of their currency. Any reputational damage from a shortage, or surfeit, of cash lies with the central bank.
Investors feared that De La Rue had done irreparable damage to its own reputation in 2010, when it botched an order for high-quality banknote paper from a big client, said to be India’s central bank. De La Rue had declared the paper met the required standards when it had not. Its chief executive resigned and the share price almost halved. Before long the firm had to fend off a takeover bid from Oberthur. De La Rue’s fortunes have improved under Mr Cobbold, who has a background in engineering. He concedes that supply-chain problems had been missed in part because of the focus on forging relationships in a sales-led business. He has invested to improve the manufacturing process.
De La Rue’s stock has recovered the ground it lost in 2010. Investors with one eye on the euro-zone crisis are aware that the firm has a proven ability to design, print and deliver brand new currencies against a tight deadline. Its accomplishment in supplying 1.75 billion new Iraqi banknotes, starting just two months after the country’s interim head called for a new currency, is especially notable. De La Rue’s plants in Britain, Kenya, Malta and Sri Lanka switched to a seven-day working week to meet the deadline, and the firm chartered 27 Boeing 747s to deliver the freshly printed banknotes. Countries that might need to conjure up a new currency quickly know who to call.