Vision - July/August 2008 - (Page 6)

The economisT ANALYZING FUTURE TRENDS ] • [ by Shawn G. Dubravac, cFa There has been significant talk of rising prices for consumer technology products. Is this talk warranted and what will the future hold? continue to fuel their growing economies. For example, Asia’s increased demand for oil in 2008 is forecast to represent nearly 40 percent of the entire global increase in demand, while these economies represent less than 40 percent of the global economy. This price surge is impacting commodities at the heart of the CE industry. Copper, for example, is up more than 50 percent in the last two years and more than 350 percent in the last five years. Gold costs twice what it did three years ago. And, of course, oil is up more than 300 percent from the $30 a barrel we were used to in 2004. These are only three examples of a broader trend that has engulfed most commodities. While the global economy is slowing slightly in 2008, commodity demand from important emerging markets will continue to remain robust—keeping commodity prices high for the foreseeable future. While the dollar likely will begin to trade higher against currencies like the Euro or Yen in 2009, the dollar will not likely gain ground against the Renminbi anytime soon. Although it is relatively straight forward to hedge currency fluctuations in the short-term, it becomes more difficult to hedge currency fluctuations over a longer time period. Ultimately currency changes will show up somewhere in the supply chain—either in higher prices or lower margins. Because the RMB arguably is the most important currency for the CE industry, the crucial question remains: Where will an appreciating RMB eventually land within the supply chain? L What’s Going on with Prices? Dick Palulian/Corbis China’s New Labor Contract Law ook in any grocery store, drug store or mass merchant, and there’s no doubt that prices are going up. Prices of imported goods are seeing their fastest increase in 20 years. The inflation-adjusted price of imported goods into the U.S., even excluding petroleum products, has increased roughly 4.2 percent in the second quarter of 2008 over the same period a year ago—the fastest increase in non-petroleum, imported goods prices in nearly 20 years. The rise in prices stems from many factors, including rising raw material costs, a declining dollar and changing labor laws overseas. The underpinning economic environment suggests no sign of abatement anytime soon for many of these factors, but whether they significantly impact the prices for consumer technology products remains to be seen. Escalating Costs for Materials Prices for raw materials have escalated tremendously during the last few years as the demand has risen, especially in emerging markets like India and China where they In 2007, China enacted a new labor contract law that went into effect January 1, 2008. The new law provides employees with a variety of benefits, including written contracts, overtime pay and pension and insurance The Dollar Decline The falling U.S. dollar contributes to the contributions. Although there are merits, these new regulations could easily price surge. Interest rate differenadd 10 to 20 percent to manufacturtials between the U.S. and its trading costs in China. A secondary effect ing partners push the dollar down. could cause prices to increase as facAdd to that the pressure from the tories and plants close as a result of current account deficit, as domestic demand for foreign goods has outthe new regulation. At the same time, stripped foreign demand for dolChina still has a tremendous amount lars, and the dollar falls further. On Shawn DuBravac of untapped labor, as do other parts of a trade weighted basis, the dollar Asia, so the ultimate impact remains has been declining for more than six years, to be seen. having peaked in the first quarter of 2002. And while it has declined significantly The 2008 Summer Olympics against currencies like the Euro, it has only The 2008 Summer Olympics are the first recently moved against the Chinese Ren- Olympic games hosted by China. This minbi (RMB). event has stimulated significant debate that After remaining fixed for years at around China will go to great lengths to ensure a 8.28 RMB to the dollar, the Chinese Gov- successful summer games and first impresernment widened the trading band for the sions for those not familiar with China. dollar-RMB exchange rate on July 21, 2005. This includes closing down factories before Since then, the Renminbi has appreciated the summer games in an effort to improve nearly 16 percent against the dollar. This air quality in China. compares with about 12 percent appreciaWhile CE factories will not be targeted tion for other major currencies against the directly, it is unclear if there might be auxdollar on a trade-weighted basis over the iliary effects as other plant closings disrupt same period of time. facilities manufacturing consumer technolwww.ce.org 6 July/August 2008 http://www.ce.org

Table of Contents Feed for the Digital Edition of Vision - July/August 2008

Vision - July/August 2008 Contents Shapiro's Spectrum In This Issue The Economist C4 Trends Visionary Embracing Disrupting Technology Vaulting Ahead with Your Brand International Risk Stop Boomerang Products CEA Newsline Tech Speak Tech Policy Going Global Eye on Business Market Insider Just the Stats

Vision - July/August 2008

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