Dollar drop delivers mixed channel reaction

For retail and manufacturing it's good news, but disties are more cautious

The value of the Australian dollar is falling and the spirits of exporters, manufacturers and retailers are rising. It’s a simple equation but there’s cause for optimism as the dollar finally regains some sense of normality against its US counterpart.

However, some of the channel’s distributors are less ecstatic about the slide although there appears to be plenty of upside. Hardest hit will be consumers as prices will rise and, of course, the cost of buying an item overseas will not be nearly as attractive.

So what can we expect in the next year? Well, firstly, a dollar below $US0.90 (currently it sits at $US0.918), according to financial and industry experts. And that’s a long way from the 2011 peak of $US1.10 it enjoyed on the back of booming mining and resources export prices, and US economic woes.

But it won’t stop there, according to JP Morgan economist, Tom Kennedy, who is forecasting the Australian dollar will hit a low of $US0.89 by the end of the year.

“We’re starting to see Australian economic activity slowing a little and at the same time that’s occurring, the US economy is slightly gathering some momentum. That’s been reversing what we’ve seen for the past five years,” Kennedy said.

“It looks like the easing cycle in Australia is going to continue for sometime yet as the Reserve Bank of Australia [RBA] has to continue to support the economy through a lower cash rate and, in contrast, it looks like the next move in the US will be towards tighter policy. Quantitative easing will be first, but rates will also have to start to go higher. When you put both those factors together, it paints the picture of a lower Australian dollar over the coming quarters.”

Good sign

A declining dollar is good sign for the Australian export market, and Kennedy said retailers and wholesalers that have been going through a tough time during the dollar highs, will become a lot more competitive.

Importing goods through Asian markets such as Korea and Japan, could see a rise in the cost of goods such as IT components, he said.

“If the Aussie dollar goes lower, goods from that region will become more expensive,” Kennedy said. Multimedia Technology (MMT) managing director, John Hassall, said a lower dollar will make goods about 10 per cent more expensive. This meant people may be 10 per cent less likely to buy discretionary items.

Hassall said when the price of the currency went up from $US0.65 to $US1.10, the price of IT goods fell and in order to maintain the same revenue, the company had to sell 40 per cent more stock.

“It also meant that the stock we had in the warehouse was worth less, but now that the currency is going down again, the warehouse stock is actually cheaper than the goods we have to buy. When we buy new stock, it’s more expensive,” he said.

“The currency going down also helps with ageing inventory problems. You can also say that as it drops, goods get more expensive. So if we sell the same number of widgets or units, our revenue is theoretically higher and that’s not a bad thing.”

Hassall said in distribution, MMT dealt with changing prices all the time, but during its 23 years in business, the one thing that hadn’t changed was what customers wanted – good products, services and prices.

Pricing

Express Data CEO, David Gage, highlighted two areas where some vendors price in Australian dollars and some in US dollars.

“When vendors price in US dollars, we’re responsible for pricing it for our resellers in Australian dollars and when there’s currency fluctuations, you tend to see volatility in terms of pricing,” Gage said. “Where the vendors price in Australian dollars, you tend to see a bit more stability.”

Gage said vendors would generally only reprice their products when there was a significant and sustained move in currency.

“A lot of vendors are pricing in Australian dollars, and they don’t like changing their prices frequently, so they will wait and make sure we’re seeing a fairly significant and sustained move. We’ll likely see prices go up if the dollar further depreciates,” he said.

However, Nextgen Distribution CEO, John Walters, said buying products from the US will become more expensive, which isn’t a good thing for the IT community at this point in time.

“The IT environment isn’t overly buoyant at the moment and for them to throw an extra 10-15 per cent more on top, could delay decisions on IT deployments and infrastructure,” Walters said.

“Distributors have got very tight margins and it’s hard enough working to get a deal at a certain margin and to watch some of it eaten away by foreign exchange volatility, is pretty tough.

“You’ve got to have some good hedging policies in place.”

The rise in hardware prices may, however, favour Cloud service providers, he said.

“It may enhance customer questioning to moving towards a Cloud environment because the fact that infrastructure has gone up 10 to 15 per cent means they might want to consider moving to an annuity style integration of the platform using a Cloud model,” Walters said.

“Whether that’s positive or not, it depends on which part of the market you’re playing in. If you’re driving a Cloud strategy then its probably going to be good, but if you’re selling product orhardware, it may not be so good.”

Synnex A/NZ CEO, Kee Ong, said currency fluctuations don’t necessarily impact his business, but businesses must factor in a risk management clause.

“Whether the dollar goes up or down, you have to balance your business carefully,” Ong said. “You have to deal with it and adjust accordingly.”

Export potential

Substantial technology exporters are the prime winners in this situation, particularly if they sell their technologies in foreign currencies, Newport Capital managing director, Lou Richard, said.

Richard is one of the people behind setting up the Australian Technology Exports Council (ATEC), which is currently seeking to raise about $250 million for a Technology Exporters Fund.

He said at least one party was already interested in providing the full amount, which will be used to fund Australian technology companies with export potential across the hardware, software and services sectors.

“ATEC member companies that are export oriented will be provided with financing capacity to participate in foreign markets to establish or expand their presence,” Richard said.

One of ATEC’s goals is to address the technology products and services trade deficit, which stood at $21 billion in 2007/2008 and continues to rise.

Richard has compiled a facts sheet which shows that ICT forms a significant part of the Australian economy, generating an estimated annual revenue of $85 to $98 billion, and contributes 7.7 per cent to Australian GDP - on par with the mining sector, but behind manufacturing (8.7 per cent) and finance and insurance (9.8 per cent). Total ICT exports in 2009 were 2.3 per cent of GDP, down from 3.9 per cent in 2004.

More about: Express Data, JP Morgan, Morgan, Multimedia Technology, Newport, Nextgen Distribution, RBA, Reserve Bank of Australia, Synnex, Technology
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Tags: Australian Technology Exports Council (ATEC), Express Data, JP Morgan, Newport Capital, Nextgen Distribution, Multimedia Technology (MMT), cloud computing, Synnex
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