Dealing with the dollar
- 10 April, 2000 12:01
The Australian dollar is being caught up in a global firesale of all currencies, versus the US dollar, according to David Mozina, senior fixed income strategist of investment bank, Merrill Lynch.
"What it means is that international investors are basically in love with the US economy and US dollar-denominated assets. They don't really want to put their money into any other country or region because they believe that the US economy and US assets will outperform the global competitors," Mozina said.
He attributes this attitude by investors to the fact that the US economy has defied critics during the past 10 years. "Its growth profile has been phenomenal, ranging from anywhere between 4 and 6 per cent GDP growth," he said. "What's more important from an investor point-of-view is its productivity and its composition of growth. Productivity in the US is roughly running at around 4 to 5 per cent, whereas in Australia, productivity is only running at 2.2."
Despite the Australian dollar being down roughly 18 per cent year-to-date against the US currency, Mozina urges Australians to keep it in perspective. "There's only one of the major currencies that has held itself relative to the US - the Japanese Yen."
Australian channel companies, particularly those which buy product in US dollars, are having to deal with these exchange rate fluctuations.
Ian Bertram, regional director & principal analyst, computers and peripherals, at Gartner's Dataquest Asia/Pacific, describes the Australian dollar as having "obviously fallen through the floor".
From a distribution point-of-view, he believes this could affect channel companies in two ways. Vendors with a local presence who import their products "bear the brunt of the dollar exchange," Bertram said. Secondly, there are also distributors which buy products from other regions such as Taiwan, Korea, China or the US, and may be paying for these in US dollars. "If they're importing them, then they're bearing the brunt of those import costs," he said.
The flow-on effect from this may be felt by resellers. "From a hardware perspective, margins are being squeezed," Bertram said. He sees the impact on software and services as being less, due to the "fatter" margins in these areas.
Asked by ARN if this is going to impact reseller's businesses, Bertram said he believed there was a possibility it would be the case for resellers which were into "box flogging".
"Pricing possibly could go up because somebody's got to bear these exchange rate fluctuations," he said. These may either be absorbed by vendors, taking a margin hit themselves, or it could be passed on to resellers through higher-priced products.
Bertram offers a warning to resellers which focus too heavily on "box moving". "Being just a box-flogger these days at the reseller level, you're not adding any value to clients, all you're doing is passing on a box," he said. "If you're then adding value to the whole supply chain process and you're giving services around that, then that's where your margins and your profit can really come in."
Merrill Lynch's Mozina also believes the current state of the dollar is going to put pressure on the prices of products or raw materials being imported. "It's going to pressure them [the resellers] to pass that through to the Australian consumer if the currency remains around these levels," he asserts.
But passing on increased costs does not always prove to be a simple exercise. If the market is highly competitive, which global markets are increasingly, additional costs are absorbed and margins are squeezed, Mozina said. However, in aggressive equity markets, he adds, cost increases may end up being passed on when they start to affect a business' bottom line.
In terms of pricepoint, this impact is also an issue highlighted by Chris Spring, managing director of distributor Brocker Vendor Services (formerly Sealcorp Australia).
"As the dollar goes down you've [as a distributor] got to create your own level of control of pricepoint into the market. So you tend to work with vendors to explain the effect the disparity of the two dollars is having on the market," he said, "because in some instances, they may need to keep the pricepoint closer to what it is. . ."
This may result in a shift in the reseller's product prices. Alternatively, some vendors may maintain pricing, regardless of fluctuations.
Brocker Vendor Services covers quotes made to resellers for a 30-day period, regardless of what happens to the dollar. "If a distributor or vendor is not [offering] a window to cover the quotes [made to] the reseller, then they would have a significant impact on lost business."
Spring believes small and medium-sized companies, which are seeing growth at the moment, are trying to maintain the pricepoint they had six to eight months ago.
He estimates the number of resellers who pass on the increased cost of products to the number of those who absorb it is about 50:50. "It depends on the competitive nature of the bid," said Spring. It may not necessarily be dependent on a competitor's failure to pass on the cost. Rather, "it depends on whether the customer is saying I can or can't afford any more' or I will or won't pay any more'," he added. Spring said there was no simple answer to this problem because every customer was different.
The bottom line
As Charles Lattuca, general manager at ERP vendor Open Text explained, Australian representatives of US-based vendors are faced with a dilemma, either raise prices per unit or sell more units, to meet revenue targets.
"Unfortunately we still have to meet revenue targets based on US dollars, so at the moment we have to increase our profit by 20 per cent, at the end of the day we have to work a lot harder," Lattuca asserts.
Nonetheless, Lattuca is confident that, given the fall in the exchange rate, Open Text's US operations are not expecting their Australian branch to perform miracles. "The Australian marketplace is very small when it comes to the overall Open Text market. [The company] sees this market as a long term investment in terms of people and in terms of the market position."
Business as usual
Whatever the future may hold for the Australian dollar, it appears to be business as usual for resellers.
Jonathan Klug, director of integrator Professional Advantage, said it had no plans to change its business model as a result of exchange rate fluctuations. "Because we're a services-orientated organisation, it has less of an impact on us than it might on [resellers that are] purely product-based organisations."
He said the fluctuations had not had an effect on his company's business. "Obviously, as distributors and suppliers change their prices we'll change ours. But I don't see that as having a significant impact."
Colin McKenna, regional manager of integrator Avnet Computer Marketing Australia/NZ, would not be surprised if vendors increase their prices in response to the decline of the Australian dollar.
He said Avnet Computer Marketing intended to pass these increases on to customers, where possible.
Tips for resellers
Andrew Blunden, finance director of distributor LAN Systems, said it had seen deterioration in the exchange rate, which was causing it to revise its pricelists for product invoiced in US dollars. "LAN Systems is fortunate that the majority of its product is purchased in Australian dollars and is therefore hedged, and our customers are hedged from exchange rate fluctuations."
Blunden said, in some cases, it was having to change the pricelist for products purchased in US dollars as often as twice a month to reflect the Australian dollar fluctuation.
According to Blunden, there has been a general understanding from resellers he had spoken to. "We certainly haven't seen any deterioration in sales as the result of the dollar. But prices of products have increased, reflecting the dollar's downward movement."
He advises resellers to build a clause into their contracts with customers, particularly those to be fulfilled over a period of time, which allow for exchange rate fluctuations. He said it would only be the hardware and software component of the sale which would be susceptible to the movement of the Australian dollar, as opposed to the services element that remains unaffected.
Another tip from Blunden is for resellers not to lock in their prices too far in advance. "In other words, don't say we will keep our price fixed for two months', because you might find the value of the underlying product moves up in the meantime."
He said, from a services perspective, Australia was an attractive place to do business. "You might find you are more attractive to foreign-based customers." To illustrate, Blunden uses the example of a US company which may either have a subsidiary in Australia, or want an Australian company to do work for them overseas. The Australian dollar's deterioration might offer a marketing advantage from an international perspective, said Blunden.