Hardware Vendors: Yuan a Wait-and-See Game

A higher Yuan may force vendors to look outside China for manufacturing.

A continued rise in the value of the Chinese Yuan would drive up the component costs of computers, but consumers and businesses shouldnt expect to see much change in the prices of their hardware.

Instead, those costs would be eaten by the computer makers, who would fear driving away customers by hiking prices in a highly commoditized market.

How that would drive OEMs future plans remains to be seen. Officials with the top computer makers and component vendors are keeping mum about any long-term changes in corporate strategy, though some, like Dell, already are expanding their overseas operations to other Asian countries and Eastern Europe.

Still, analysts agree that any change in the Yuans value compared with the U.S. dollar will have some effect on how IT vendors approach their relationship with their manufacturing counterparts in China.

Josh Farina, an analyst at Technology Business Research, said the Yuans value is only one factor that vendors have to take into account when considering the companys bottom line.

"In current-year terms, companies will see an increase in currency expenses; for future years outside the current budget plan, product costs will be adjusted and theres a potential for lower gross margins," Farina wrote in an e-mail to eWEEK. "However, many factors affect gross margin, so I dont expect to see a sharp decline in gross margin simply due to currency rates."

Simon Yates, an analyst at Forrester Research, said the top-tier vendors do carefully follow worldwide currency trends as well as other factors, such as rising labor costs, in China.

/zimages/7/28571.gifHP is continuing to dominate the worldwide PC market. Click here to read more about it.

All of those factors could lead to companies moving manufacturing out of China to other parts of Southeast Asia, such as Vietnam or Cambodia, or other locations around the globe, such as South America and Eastern Europe.

Intel, the worlds largest chip maker, appears to have already thought about these types of changes and announced in November that it would expand its own investment in Vietnam.

At a July 10 event in New York City to promote his companys new line of PCs for small business users—Vostro—Michael Dell also talked about his company opening new facilities in Poland and India, two countries that are looking to become alternatives to China.

At the same event, Dell said his company was not concerned with either rising wage costs or the possibility of a rising Yuan. He said that while other types of goods might be affected by these changes, PCs and other hardware would not feel the effect.

Yates said Michael Dell has good reason to be optimistic since his company, despite its sagging PC shipments and ongoing internal financial problems, has mastered squeezing its supply chain for all its worth.

"They are in a better position than their competitors and Dell is a master of [gathering] components from other places and assembling those parts in plants all over the world," Yates said.

Other companies, Yates said, such as Hewlett-Packard and Lenovo, have not made such adjustments yet, although the trend in PC manufacturing in the last 20 years shows that all vendors will eventually adjust and find the lowest cost center for producing hardware.

/zimages/7/28571.gifClick here to read more about Intels plans for expanding into emerging markets.

Both HP and Intel, through their respective spokespeople, declined to comment for this article, saying they did not discuss strategies.

Next Page: The other dilemma.