Weak dollar ‘harming Euro IT market’
The weak US dollar is helping boost IT companies’ revenues and impacting negatively on European vendors in the sector.
The 20 per cent decline of the dollar against the Euro and pound over the last year has meant US companies have benefited from sales in local currency. It has also meant Europe’s buyers have moved to buy products in the US, to the detriment of local agents.
European vendors have struggled to compete against cheap US imports and have seen the value of their US sales decline because of exchange rate fluctuation. They also face difficulty matching prices available in the US market.
The timing is bad: the IT industry has cut prices to the bone to deal with the recent market downturn in an attempt to stimulate demand; cheaper US imports has reduced vendor market share.
“This is a one-way street at the moment and it just can’t go on this way,” said Richard Holway, director of UK-based IT consulting firm Ovum.
Ovum has felt the pain of the currency exchange, Holway said. He estimated that the company’s profits for 2003 would have been £250,000 higher if the pound-to-dollar exchange ended the year the same way it began.
“It bloody hurts and we’re a small company,” he said. “Imagine what large companies are facing.”
While European vendors find themselves facing a macroeconomic headwind, it is a positive market for big US vendors such as Microsoft and IBM, which generate much of their revenue abroad, according to IDC analyst Roger Kay.
Indeed, in a recent research report Merrill Lynch & Co analyst Steven Milunovich wrote that “currency will provide most of IBM’s revenue growth in the next few quarters.”
Jos Brenkel, vice president of HP’s commercial channel in Europe, the Middle East and Africa, estimated that the slumping dollar accounted for a 5 to 8 per cent increase in HP’s fourth-quarter revenue.
“Fifty per cent of our growth was due to the weak dollar and fifty percent was market growth,” Brenkel said.
It’s better news for end users: “The currency issue is making a big impact on pricing issues for the moment,” said IDC analyst Thomas Myer. During the recent tech market downturn vendors cut prices to stimulate demand and now the currency situation is helping them extend those low prices, he said. “This is definitely a buyer’s market,” he added.
Holway concurred. “It’s a buying bonanza,” he said. “CIOs (chief information officers) have been getting a lot more PCs and software for their money.”
While US vendors sell in local currencies, most items are priced in line with dollar-denominated goods, he said. If there is a significant pricing difference between goods sold in the US and those sold abroad, IT buyers will just buy directly from the US.
“A lot of users are very savvy and can source equipment around the world,” Holway said.
Some European vendors are worried about how they will continue to compete if the weak dollar persists – which many think it will, at least until after the US presidential election in November.
European vendors are considering new business models, outsourcing production to companies such as China and other measures that mean tech jobs in Europe are threatened.
The threat to jobs and economy means that several European nations are expected to pressure the US administration to stabilize the dollar at the upcoming meeting of Group of Seven industrial nations his weekend.