Greece’s recent debt scare in Europe rattled the cage for many investors and for other Euro-based economies. I guess it’s not surprising that rampant borrowing, as opposed to government cutbacks, comes at a time when debt pricing is at or near historical lows and has been for quite a while.
The allure of “free” money is strong when faced with budget shortfalls, double-digit or more for some countries. At some point, though, the money needs to be paid back. Concern about the ability for countries to pay back their debt put pressure on the Euro, at its lowest level in some time against the US Dollar. This suggests that investors see greater strength in current US economic policy.
What does this mean to Asian exports, and computers in particular? With the Chinese Yuan fixed against the US dollar, the cost of goods from China is going up for Europeans. Over the last quarter, the cost of goods from China has increased by 7% (ignoring the effect of currency hedging). Looking at computer companies like Dell and HP, this fluctuation can virtually eliminate their profit. (Both companies have a comprehensive currency hedge program.)
So, this financial pressure in Europe should drive up the cost of Chinese goods. Computers, predominantly made in China, should be more expensive. The longer that Euro-zone countries allow the economic uncertainty to persist, the more expensive computers will get in Europe. Such timing is bad for computer companies looking to grow European business. The increased volatility in the bond markets at the end of a global economic slowdown can make it harder for companies to sell new computers in Europe.
Major companies purchase new computers every 3 years, on average. That means that most systems in the enterprise were purchased in 2007 during the peak of business activity. With the credit crisis of 2008 effecting many major capital expenditures, some companies may have delayed their refresh, meaning users have computers that are 4, 5, or even 6 years old. Computers that old impact a company’s ability to conduct business. How can new software be rolled out to make the enterprise more efficient when half the workforce doesn’t have a computer platform capable of running the application?
Perhaps we can expect to see, then, creative financing with large balloon payments in the second or third year. If companies and manufacturers agree that the current circumstances are temporary in nature, then costs will go down in the future and sales and profit will increase. If computers are needed today to grow business, then both buyer and seller can agree that transactions executed today and financed for future payment are necessary.
With a credit crisis in 2008, a global economic recession in 2009, and uncertainty in Europe in 2010, is this a great gamble? Maybe when pigs fly.
