Business Trends -
December 2007
from
Global Reach Consulting, Inc. “Your Guide to Doing Business in
India”
Author -
Ms. Kumkum Dalal, President, Global Reach
Consulting, Inc.
The
decline of the dollar relative to other currencies
causes foreign currency prices of US exports to fall
and dollar prices of US imports to rise. This
phenomenon is thus bad for outsourcing (equivalent
to imports of goods or services by US firms) and
good for US exports to India. The rupee price of US
produced goods has declined, so that Indian
businesses are better able to afford US goods (say
equipment or machinery manufactured in the US) and
the Indian consumer (ever growing and itching to
spend) can afford more of the consumer goods they
crave. Just think about it – a few months ago the
Indian consumer would have to spend Rs 46 to buy $1
worth of US goods, but now the same good can be
purchased for only Rs 40!
The decline of the dollar is hurting Indian
outsourcing to the US, India’s largest outsourcing
destination. By and large, prices for goods and
services bought from an Indian vendor are quoted in
dollars, not rupees. For example an Indian
manufacturer may have quoted the price of a product
as $1 when the exchange rate was Rs46=$1. Now when
the exchange rate becomes Rs40=$1, the same good
will cost $1.15. Not surprisingly this makes the US
buyer unhappy as he is probably buying the good to
resell in the US domestic market. The Indian vendor
too is unhappy as the depreciation of the dollar
makes his product less competitive.
The
Indian vendor’s dilemma: The Indian seller has
to meet his expenses in rupees. He will buy the
steel used to manufacture the product for the US
customer in rupees; he will pay for his utilities in
rupees and will pay his employees in rupees. These
prices are not affected by a change in the value of
the dollar.
The Indian exporters’ responses are likely to
include the following:
· If the Indian
exporter is a large company, they may pass on the
higher cost in a gradual manner to the US buyer,
absorbing short term losses or reduced profits.
· Indian
exporters providing a very specialized and high
priced service in the IT, BPO or KPO sectors have
more leeway to pass on the exchange rate fluctuation
to the US importer. Eventually vendors from other
countries may offer more competitive pricing and
wean the US buyer away from their current Indian
supplier. So, for these Indian vendors too, the
decline of the dollar is bad for US- India trade.
· For the many
smaller Indian vendors and manufacturers in
particular, the decline of the dollar has an
immediate and negative impact. Some are
renegotiating their purchase orders for future
shipments, some are providing revised quotes, and
one vendor, whose factory I visited in October 2007,
showed me a half finished product that had been put
on production hold because no agreement on a revised
price had been reached.
· Indian vendors
who have customers in the US that are extremely
price sensitive view the dollar fluctuation as bad
for relationship building. They are inclined to
provide quotes only in more stable currencies such
as the Euro, Yen and the British Pound. However,
while prices quoted in these currencies may be more
stable, the dollar prices would still increase
following a dollar depreciation.
The
American buyer’s dilemma: When I told my US
customers that I would have to provide revised price
quotes based on the new exchange rates, the gut
reaction was “No way! Ask the Indian vendor to
absorb the price rise,” or “Find us another vendor.”
First reactions aside, I make the following
observations among my small American manufacturers.
In one case where
the volumes are expected to be high, the Indian
vendor and the US customer have agreed to
renegotiate dollar prices each year in case of
any further fall in the dollar.
In several cases,
the projects that have come to my company are a
result of the US buyer having been down the
China route and been dissatisfied with the
product quality. These companies then contact me
in order to “check out” vendors from India.
Because they have been down the China route
already, they are willing to pay a higher price
to ensure that the goods delivered are of
acceptable quality.
In one case, my US
buyer had issued a purchase order; the vendor in
India had provided samples which the customer
had approved. At this point, my vendor told me
he required an upward price adjustment. After
some renegotiation, the vendor and the buyer
agreed to a compromise price that was truly a
collaborative win-win for both parties.
US
buyers must understand that, like the US, India is a
market economy. The providers of outsourced goods or
services are in business to make a profit, just like
them. Profit margins for such providers are slim and
their prices and profits are measured in rupees.
Even if prices in rupees are unchanged, a dollar
depreciation will inevitably lead to an increase in
dollar denominated prices. This is in contrast to
China, where the exchange rate is not
market-determined but is specified by government
mandate. US buyers must learn to deal with price
fluctuations due to changes in the exchange rate in
the same way in which we (the US consumer) deal with
unavoidable fluctuations in the prices of any other
inputs, e.g., utilities, gasoline, etc. US buyers
should remind themselves of the benefits to
outsourcing that caused them to pick a particular
outsourcing destination in the first place. My top 5
reasons why US firms should continue outsourcing to
India and locating R&D centers there: price,
quality, English language skilled, educated
technical labor and not least, the availability of
familiar democratic institutions such as legal and
accounting systems.
Kumkum Dalal is the president of Global Reach
Consulting, Inc an advisory
firm helping clients evaluate the risks and
opportunities on doing business in India. To
learn more about the services we provide please call
us at 630 267 8424.
