Tech belts to tighten over plummeting rand - TechCentral

Tech belts to tighten over plummeting rand

This week’s sharp fall in the value of the rand against major currencies is bad news for gadget-loving South Africans and the technology companies that import hi-tech gear and computer equipment. The currency’s fall may also reduce the uptake of smartphones in SA, slowing Internet adoption.

Between Tuesday and Wednesday the rand fell from R7,72/US$ to R8,25/$ and sank to a two-year low in afterhours trading on Wednesday evening.

David Kan, CEO of JSE-listed computer assembler and technology distributor Mustek, says the company will be forced to increase prices on the back of the weakening currency. Consumers will more keenly feel it than the corporate or government sectors, he says.

Kan says that if the rand continues to decline, laptop price points of R2 999 and R3 999 favoured by retailers will “disappear”.

However, he says “government and companies operate on a budget basis, so instead of buying 12 machines, they might only buy 10, but from a value perspective that’s not a huge shift for us”.

In the case where government or a large corporate needs more hardware than it can afford, for example in the case of a call centre with a certain number of seats, “they’re simply going to ask for more budget”, Kan says.

Many companies that do large volumes of imports opt to take out forward cover to protect against fluctuations in exchange rates, and Kan says that looking at the behaviour of the rand over the last 10 years, “whatever your policy is, you need to be consistent”.

“If you go for 100% cover or don’t cover at all, your risk remains unchanged. But you need to be consistent and you mustn’t panic and change strategy”. Kan says that Mustek’s policy is to cover 50% of its exposure.

Hardware manufacturers and technology retailers aren’t the only ones expected to feel the pressure of the declining rand: mobile operators will also feel the effects, both in terms of the handsets they import for resale to consumers and the cost of infrastructure, much of which is manufactured abroad.

Vodacom spokesman Richard Boorman says that strengthening dollar is going to have a “mixed impact” on both infrastructure costs for operators and handset costs for consumers.

“Local costs like civil works are unlikely to see a major change,” says Boorman, but adds that “there is potentially some impact on network equipment”, depending on how sustained the weakening of the rand proves to be.

David Kan

Boorman plays down the anticipated price hikes on handsets that currency fluctuations could lead to, saying that Vodacom’s ties to parent Vodafone and the latter’s “purchasing leverage”, combined with a “trend towards greater functionality at lower prices”, work in the company’s favour.

He concedes that as handsets are generally priced in US dollars, there “could be some impact from sustained rand weakness” but that Vodacom nevertheless expects the “demand for smartphones is likely to remain strong, barring major economic upheaval”.

He warns that currency movements are “notoriously difficult to predict, so it’s hard to speculate” on the effect the rand’s recent performance will have on smartphone uptake and handset prices in the longer term.

Brian Neilson, research director and head of telecommunications consulting at BMI-TechKnowledge, says a key consideration in the face of currency fluctuations is that the price-performance curve is constantly improving. “The same performance is costing you as much as 30% less than it did a year ago. Smartphones are a great example of that.”

He says even if the rand declines to R10/$, as it did a decade ago, that would be approximately a 30% swing, and thus might be partially offset by improvements on the price performance curve, particularly from a consumer perspective.

Neilson says both consumers and enterprises may opt to spend similar amounts to what they would’ve a year ago, but choose to go for lower performance items that they otherwise would’ve.

“There’s always a range, even within brands, so one can always pick slightly compromised performance,” Neilson says. “Thus, spending and volumes might not be that directly affected.”

He says that the large fall in the exchange rate between 2000 and 2002 showed there was a lag of about two quarters between the decline and the impact on volumes.

“We tracked PC unit sales on a quarterly basis and realised there was a lag in quarterly shipments because of channel stuffing and stock in the market already. If there was a sudden spike in the exchange rate, we only saw the impact three to five months later.”

He says BMI-T saw roughly a third of the percentage change of the currency change in unit sales. “So, a 30% spike in exchange rates translated into a 10% reduction in volumes, or a one-in-three price-elasticity ratio.”

Neilson says he is reluctant to say that remains a suitable benchmark today as the “price-performance curve is now more dramatic and moving faster”, but that it may be indicative that while there will be an impact on the local technology industry, it may not be as drastic as some pundits expect.

“There’s certainly going to be an impact, but that may come mostly in the form of slowing down people’s up-scaling,” Neilson says.  — Craig Wilson, TechCentral

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