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.
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.
Both HP and Intel, through their respective spokespeople, declined to comment for this article, saying they did not discuss strategies.
The other major dilemma facing companies if the Yuan rises is what to do with the extra costs. Yates said it will be harder for vendors to pass along the costs to U.S. consumers, since many users will likely just hold off buying PC and other hardware if the final price increases too much. It will also be more difficult for OEMs to sell hardware to emerging markets since many already are already selling PCs there at a much lower cost than in mature markets.
“We are fairly well-trained to expect our next PC to cost either the same or cost less than the one we have now,” Yates said. “PC consumers really expect to pay less than a thousand dollars for their next PC and many of them have come to expect a 10 to 15 percent decline for the same configuration or even better technology. These companies are not all of sudden going to start passing on additional costs to consumers …. It might affect profits and the shareholders might have to absorb the cost.”
Technology Business Researchs Farina said that since gross margins for hardware vendors are already tight, the way these companies differentiate themselves from one another is in the quality of the product they produce.
“With the PC/handset market operating with tight margins, the key value proposition is product quality,” Farina said. “Therefore, I dont think manufacturers would make significant changes in suppliers based on short-term currency fluctuations.”
While large vendors are not talking about the potential for a rising Yuan, the companies on the frontlines of these changes will wait and see what happens, although one IT company does not feel a need to change strategy.
Lew Moorman, senior vice president of strategy and corporate development at Rackspace, a San Antonio, Texas, hosting provider, said his company does not take currency into consideration, just as it would not take into account the base cost of metal or plastic in determining the right price for a piece of hardware.
Most of those concerns, Moorman said, remain with the vendors his company uses, such as HP and Dell. However, he said that since hardware, unlike software, is highly commoditized and prices have steadily dropped for years, he doubts any changes to the Yuans value will deter Rackspace from its current pace of buying nearly 1,000 servers a month.
“There seems to be no reason to think any differently at this point and its not a major concern for us,” he said. “There has been some adjust and impact for fuel costs in order to ship the products here, but weve seen very little impact on the overall price of the components.”
He agreed that users simply expect low-priced hardware now, and said that if the costs of components do increase, most vendors will likely absorb most or all of the cost to stay competitive.
Although Rackspace does build some of the servers it runs in its data centers, Moorman said the company is continually searching for the lowest component costs. If parts made in China increase, his company will begin to look elsewhere.
“When we go to vendors for disk drives or CPUs, whether their source for components is Europe of Asia, [Rackspace tries to] find the best price possible,” Moorman said.
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