Software and PC prices are set to surge by as much as 15% in the next two months, after the rand moved to more than R10 against the dollar last Thursday, its weakest level in four years. Price hikes will start being felt first in areas where there is limited stock, such as memory, and then, as inventory dries up, items like monitors, notebooks and PCs will incrementally become more expensive over the next 60 days. The bulk of imported electronics is priced in dollars.
The rand is now at around its weakest level in four years and, although it is currently just below R10 to the dollar, is expected to weaken further. First National Bank’s consulting economist, Cees Bruggemans, says there are several factors that suggest more dollar strength ahead.
Research company Nomura noted the rand going past R10 was a “dramatic move in just a short period”. It believes there are more risk events to play out through June, but says much of this could already be priced into the exchange rate. Although companies will hedge against the movements, this will only protect prices for a short time.
AxizWorkgroup executive for software and enterprise, Craig Brunsden, says the rand’s performance is wreaking havoc with planning, especially within the context of recent weak market performance. “If the rand holds at these levels, we will see a dramatic increase in prices of hardware and software over the next two months… If current rates hold, expect up to a 15% price shock.”
The effect of the currency devaluation will be the highest in areas of low “in
country” inventories and short lead times, like memory, says Brunsden. Products
like monitors, printers, consumables, and PCs are generally shipped via the sea,
so there should be a two-month buffer before the full effect of the weaker rand
is felt, he explains.
Brunsden adds that the effect on products like servers and storage will be felt within a month at these levels. The increased prices should start coming through in increments over the next 60 days as the inventory coming into the country blends with existing stock, he adds. “The good news is that there is a lot of monitor, PC, notebook and component stock in country, which will buffer the price increase.”
MB Technologies CEO Glenn Fullerton says hedging policies will be adopted, but will only protect pricing to a certain extent and for a short period of time. Because most IT equipment is imported in dollars, the weaker rand is likely to have far-reaching effects across most product categories, he adds.
Fullerton notes that hedging adds to the cost of the product, although the practice does help mitigate price changes. “The challenge is not necessarily the level of the rand – it is the volatility of the currency that makes it hard to plan and that drives uncertainty in the marketplace.”
The weaker rand will have a more pronounced effect over the medium- to longer-term on those products that do not experience dollar price deflation, like consumables, while in the case of notebooks, desktop and servers, the weaker rand is – to an extent – dampened by lower dollar costs, adds Fullerton.
Higher prices will have to be passed onto consumers, although if the rand drops back to around the R9.30 to R9.50 level over the short-term, the price increase effect will be muted. “Given the rand’s track record of being both the world’s strongest currency and the weakest currency against the US dollar in the span of three years, it would be prudent to proceed with caution in predicting its trend.”
The Notebook Company expects the prices of laptops and tablets to rise by 10% and warns it cannot absorb the effects of the weaker currency. CEO Christopher Riley says: “We have been trying to absorb the currency hits, but this is no longer possible.”
Riley adds that “few companies will be able to absorb the weakness of the rand – and this, too, might not be an overnight thing”.
Mustek FD Neels Coetzee says most electronic imports are dollar-dominated and, over the past month, the weaker rand has been evident, which has a domino effect. If the exchange rate stays at around the R10 level, product inflation of about 10% on imported goods is likely, he adds.
As a result of anticipated higher prices, the current market outlook will worsen as anybody sitting on the purchasing fence will wait further before upgrading, says Brunsden. He notes that recent market data from both the client and server markets suggest consumers and corporates are watching their spending.
Brunsden notes the sector has weathered worse storms, such as when the rand tanked to R13 against the dollar, and he expects to ride through this as well. Current currency levels and speed of change are “scary”, although the currency does go through similar wobbles every few years, he adds.
Fullerton expects a mixed reaction to the weakening of the rand, with customers expecting the dollar gaining ground would speed up buying, while those who feel the rand has depreciated by too much in the short-term could adopt a wait and see attitude. “Over many years, we have experienced some degree of correlation between the exchange rate and volume, but in recent times some of the trends that held firm have been less evident.”
However, Coetzee points out that the bulk of IT spending in the market is not by consumers, but by the government, corporates and small, medium and micro-sized enterprises.
“We’ve seen in 2001 and 2008 that, generally speaking, sales volumes are not that affected by the weaker currency. Any decline in volumes will likely be offset by higher selling prices due to the weaker rand.”
Coetzee adds that PCs and laptops are not luxury items, and demand remains for the devices. He adds that, five years ago, the rand traded at around R8 to the dollar and weakened to around R10.80 during October 2008, after which it strengthened gradually to R6.60 in May 2011.
Since May 2011, the local currency started a weakening trend, and prices of ICT equipment have generally followed the same pattern, adds Coetzee.
