Issue #0440/1 - As exchange rates perform record-breaking gymnastics, we look at US vs Japanese pricing policy and investigate why there are no Euro price reductions from Hewlett-Packard but increases outside the Euro zone.
Over the last two years, we have seen unprecedented currency fluctuations, primarily caused by an ever-weakening US Dollar but also by a strengthening Euro. On December 7th, 2004, the value of the Dollar was 36% lower against the Euro than on 1st February 2002 – more than one third of its value has been wiped out – €0.7442 against €1.16104. Looking at it the other way round, the Euro has strengthened by 56% against the Dollar and can now buy $1.3437, having bought only $0.8586 on 1st February 2002.
This has naturally caused difficulties between trading partners in Europe and the US. To much of the local population of the United States of America this probably goes largely unnoticed (it is estimated that as few as 10-15% of US citizens have passports). However, to those companies involved in the IT business in Europe, more than anywhere else in the world, this factor is of paramount importance.
At the present point in time, the cost to Europeans of buying products and services from the US is at an all-time low. What is not so certain is how much of that benefit is being passed on to end users and there are certainly practical problems to be overcome if benefits are to be passed on. Not least of these problems is the fact that a manufacturer has no control over what happens to pricing lower down in the chain. A manufacturer may reduce prices to the channel but never see any fluctuation in street prices, meaning that the benefit is being swallowed by the channel as extra profit and not passed on to the real customer.
This raises the issue of pricing policy within the industry – especially with regard to European managed markets. We see a significant difference in the behaviour of US printer manufacturers compared to Japanese manufacturers in this instance.
While US manufacturers adjust their pricing frequently in response to exchange rate fluctuations both on printer hardware and supplies, but more-so on supplies, Japanese manufacturers maintain strong stability in their pricing structure. For them, once a piece of hardware is launched to market, the price tends to be held until the product is removed from the market. In some instances, key products are the subject of strategic price reductions and, in a few instances, wholesale price adjustments have been noted on supplies products – but these are rare.
There are three perceived influences on these players that result in the difference in policy.
Firstly, the nature of the major players from each geography is very different.
On the one hand, we see Hewlett-Packard, Lexmark and Xerox in the US. All are IT-specific corporations with their primary interest in the hard copy industry (Hewlett-Packard being the only one of the three that has any interests other than hard copy).
On the other hand, Japanese printer manufacturers such as Canon, Epson, Konica Minolta and Kyocera Mita are all members of corporations that have interests in hugely varied industries. For instance, Canon’s product range is vast and diverse: from cameras to ophthalmic equipment; components to copiers; and from Bubble Jet printers to broadcast equipment. Seiko Epson comprises 110 companies involved in such activities as semiconductors, printers, LCD panels, lenses and wrist watches – to name but a few. Konica Minolta is even more diverse, with medical, optical, test and measurement, IT and photographic interests in addition to its business equipment. For its part, Kyocera Mita has its roots in the ceramics industry with hugely varied spin-offs such as kitchen, communications, medical, dental, automotive and ceramic fine art products, solar power generating systems, cameras, semiconductors and electronic components, lenses, LCDs and cutting tools – and printers/copiers.
All this aside, Hewlett-Packard is far and away the biggest of these companies, at 53rd position in the Business Week Global 1000 listing, while Canon comes in at 89th position. Xerox doesn’t appear till 489th place, beaten by the Kyocera Corporation in 384th position.
While in no way wishing to imply that a varied product base means less focus or motivation within any one area, perhaps it does indicate that there is more of a willingness to diversify, and thereby to delegate responsibility. Or, perhaps in Japanese culture there is a greater emphasis on local countries and business units proving their success rather than rolling it all into the one central pot to measure success.
Secondly, although the value of the Japanese Yen has a tendency to yoyo by 5-6% against the Euro, the fluctuations are generally short lived, with the long term trend being relatively stable and movements gradual. This is in sharp contrast to fluctuations between the US Dollar and the Euro, over the last two years in particular.
For instance, over the same period that the Dollar lost 36% of its value against the Euro, the Yen weakened against the Euro by only 16.5%, despite increasing Euro strength.
And, thirdly and most importantly, business culture between the US and Japan is very different.
US businesses are undoubtedly stock market driven, with an emphasis on results and performance in the short term. Monthly, quarterly and annual targets have to be met to satisfy the demands of the stock market and securities analysts.
Pricing of printer supplies seems to have been the subject of an intensely focussed results/performance driven attitude because so much of the profit for printer companies is derived from outside the initial purchase of printer hardware. The printer supplies industry is a very particular and unique business environment – there is none like it.
By contrast, Japanese business culture takes a long term view without the same degree of pressure to perform on a monthly or quarterly basis.
Dell appears to be the exception to the rule as far as US printer companies are concerned, despite short term performance being just as strong a driver as with the other US companies. Observation to date indicates that European consumables pricing is being maintained at a constant level rather than being constantly adjusted. The main reason for this difference is that Dell is essentially a retailer – the fact that it has moved into own-brand printer manufacturing is largely irrelevant. Much more important is that it has a direct retail relationship with all customers – a significant factor.
This ranks as a significant factor because it is the end user, the final customer, who constitutes the most important element in the equation. For a customer, particularly a business customer, to be faced with a different price every month, and no means of predicting annual expenditure, is a severe inconvenience and a potential business weakness.
In discussing this issue, Epson indicates that its thoughts are as much with the channel as with the customer. The company refers to its decision not to change prices constantly, unless severe long-term exchange influences demand, specifically in terms of the resulting obligation placed on the channel.
With 600 consumables products in the list, a wholesale price review by Epson means that distributors and dealers have to adjust their sales and accounting systems to reflect the new pricing on all 600 of these products. On top of this, the company warrants that any stock already held in the channel will not be worth any less – so price and stock protection has to be put in place at the point of any price adjustment.
For the sake of a percent or two in the exchange rate, the simple cost to Epson and the channel of administering the changes and providing the channel protection, is considered to be just not worth it. In addition, exchange rates are never static – therefore, there is strong possibility that price changes will need to be reversed in the short term – with all the associated cost implications for a second time (reference comment on Lexmark price changes in TCPglobal Issues #0438 - "Price book confusion as exchange rates break records" and #0427 - "Hewlett-Packard continues the downwards trend with cost of consumables").
Kyocera Mita refers to its Total Cost of Ownership marketing message and the fact that its customers make their decision to buy specifically on the basis of that message.
Initial supplies pricing is pitched at a level in line with average exchange rates so that there is some flexibility in both directions. “Sometimes we win and sometimes we lose”, says Nigel Allen, product manager at Kyocera Mita UK, “we have never raised prices and do not wish to undo the TCO message or destroy the trust of our customers”.
In principle, Epson reviews the exchange rate once every quarter, though a major rate fluctuation could trigger an interim review. As indicated, Kyocera Mita takes pricing decisions at the time of product launch and will not impose increases.
Hewlett-Packard approaches pricing in two ways – one for the major markets in EMEA and one for the minor markets. So, for the major countries of Western Europe, including the UK, the exchange rate (and therefore pricing) is reviewed on a monthly basis, potentially causing pricing to move in either direction. Where minor countries are concerned, the review is undertaken quarterly.
Looking back to exchange rate fluctuations since late August, we see the severe weakening of the Dollar against other currencies. For instance, comparing the first half of September with the first half of November, on average the UK Pound gained 3.4% against the Dollar, while the Euro gained 5.7%; the Japanese Yen gained 3.5%; and the South African Rand gained a huge 7.8%.
These movements would suggest that all countries should be experiencing price reductions.
However, as the Dollar weakens, the Euro is actually strengthening in its own right in relation to currencies like the UK Pound and the Japanese Yen - so much so indeed, that over the same period the UK Pound has lost out by 4.5% and the Japanese Yen by 2.1%.
Because local European prices are pegged to the Euro and not directly to the Dollar, and because there are no price reductions to Europe as a whole, what we actually see from Hewlett-Packard is higher prices in the UK for the third month in a row. This time the increase is an average of 1.8%, applied over 66% of products, despite the fact that the Pound is 3.4% stronger against the Dollar.
Hewlett-Packard has been willing enough to react rapidly to the weakening Pound against the Euro by increases prices again in the UK but is ‘watching’ the Euro/Dollar situation to ‘establish a firm trend’ before triggering a price reduction across EMEA!
By contrast, the South African Rand has made gains against the Euro of 2.0%. It is this factor that has particularly triggered alarm with regard to Hewlett-Packard pricing, prompting the question, “Why have prices in South Africa been raised by an average of 7.7% when the Rand is 2% stronger against the Euro (not to mention 7.8% stronger against the Dollar!)?”
Although it is clearly accepted and understood that the overriding factor for Hewlett-Packard is not the local currency against the US Dollar but the local currency against the Euro, this does not explain why there are no price reductions in the Euro zone, despite the 5.7% advantage it now has over the Dollar in comparison to September or why these 7.7% increases should be applied in South Africa.
It is only when the quarterly review factor is put into the equation that we find our explanation. Pricing reviews for December would be undertaken around the early part of November. The precise date that the internal exchange rates are set is unknown but we can assume that it is probably around the turn of the month.
What this means is that the review prior to the November review for December pricing would have been undertaken at around the beginning of August. So, we need to look at exchange rate movements from August (see charts on previous page).
This shows us that the Euro/Rand exchange rate took a real beating early in August, meaning that the decision over pricing for the next three months was taken at a time when the Rand was particularly strong against the Euro. Perhaps, on this occasion, Hewlett-Packard experienced that sick feeling when the plunge in the rate meant lower revenues coming back into the European marketing centre from the latter part of August.
So, given potential for an instant reaction, Hewlett-Packard would probably have wished to increase South African prices by as much as 8.6% in the middle of August. However, the increase was restricted to 7.7% because the next review occurred at the beginning of November when the Rand had strengthened again and the difference in rates had dropped to more like 4%.
Customers in South Africa are now contributing double measure into the Hewlett-Packard coffers as they suffer the 7.7% price increase on top of the 5.7% benefit to Hewlett-Packard in the subsequent exchange to the US Dollar.
From this, what we come back to is that customers in the Euro zone should have seen price reductions by now and, as a result, customers in the UK and South Africa should be able to benefit from minor reductions in local prices, not suffer increases.
One further interesting fact is that there are a number of currencies around the world that are tied to the US Dollar. For instance, the Rial in Oman, Qatar and Saudi Arabia are all tied directly to the Dollar.
Although those three countries are irrelevant to the case in question, the fact that the Hong Kong Dollar, the Malaysian Ringgit and the Chinese Yaun are all very closely linked with the Dollar, means that US manufacturers with large production plants in any of those countries can be assured of stable pricing from the factory.
Perhaps this is of no consequence but, equally, perhaps it points to markets where ‘other currencies’ are used being viewed by US corporations as being so foreign to the huge US market, that a protectionist pricing policy is applied.
Particular notes on UK price increases are as follows. Prices on 49% of inkjet products were increased in the UK by an average of 1.8% while 88% of laser cartridge products were increased by an average of 1.5%. Totalling price increases in the UK since September, we find that 92% of inkjet products have been affected by and average of 5%, while 99% of laser products have seen increases averaging 4.4%. Media products have also been increased, by an average of 5.1% on 85% of products.
All supplies products in South Africa are subject to price increases this month, averaging 7.3% on inkjet supplies and 7.9% on laser supplies.
In conclusion, again we believe that there should be price reductions coming from Hewlett-Packard across EMEA in the near future. On the basis of the monthly/quarterly review scenario, these will probably only affect major markets. In contrast, it is unlikely that price adjustments will be implemented by Japanese companies and Kyocera Mita will hold its position as part of its strong Total Cost of Ownership message.
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