China's Float Of Yuan Could Increase Tech Part Costs

China's move to float its yuan against a basket of foreign currencies could mean that U.S. technology companies that outsource manufacturing to the region will have to pay more for components.

While the adjustment would only mark a roughly 2% change in valuation against the dollar, industry watchers said that Chinese goods will become more pricey while American goods will get cheaper. That has both negative and positive implications for tech companies that not only outsource production to the region, but also sell there gadgets in that market.

For technology companies that have moved manufacturing to China, contracts often are inked a year ahead of payment, which could mean that payments will include the difference in currency value, potentially costing technology companies millions of dollars.

"There's a saying in China: one year or same as cash," said Richard Doherty, an analyst at Envisioneering Group, a research and consulting firm in Seaford, N.Y.

After keeping its currency set at 8.28 yuan to the U.S. dollar for more than a decade, China announced Thursday it will no longer peg the yuan to the dollar, but rather will let it float against a basket of foreign currencies. Some industry observers say the change is insignificant to technology companies, but others expressed concerns over the implications of component costs. Most agree that even a higher increase in the price of parts wouldn't mean production is brought back to the U.S., given the magnitude of cheap labor in China.

According to Envisioneering's Doherty, many contracts in China are paid months or even years after they were inked. He said it's unclear if technology companies will be charged based on the currency rate when the contract was signed; if they will have to pay the average of the currency rates; or, worse yet, pay at the current rate. Doherty said the issue has largely caught the industry off-guard.

"There has not been dialogues ... saying what to do if that ever happened," said Doherty. "It caught people by surprise."

Rob Enderle, an analyst at Enderle Group, a San Jose, Calif., technology consulting firm, agreed component prices could increase because of China's move to float its currency. The way Enderle sees it, most technology companies will be affected equally, but ultimately it will depend on how the contracts were originally drawn up.

Still there are positive implications for the many technology companies that have booming businesses in China. A few include Intel Corp. (INTC), which derives more than half of its revenue outside the U.S.; Cisco Systems Inc. (CSCO); International Business Machines Corp. (IBM); Microsoft Corp. (MSFT) and Qualcomm Inc. (QCOM).

"For anybody buying U.S. goods, the goods get quite a bit more cheaper," said Enderle. "China now becomes a much better consumer." Still, he cautioned that the Chinese government could move to place tariffs or charges on foreign goods that could offset the potential benefits.

-By Donna Fuscaldo, Dow Jones Newswires; 704-371-4263; donna.fuscaldo@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 21st July 2005