“It means nothing.”
Before I had even finished asking how the devaluation of the Chinese currency would affect his connected doorbell manufacturing operations, Jamie Siminoff, the CEO and chief inventor at Bot Home Automation maker of the Ring video doorbell, told me what it meant for him and his business. “I was just talking about it this morning with someone … but it hasn’t changed any of our plans,” he said.
He wasn’t the only U.S. startup making hardware who had that reaction. Across the board, I heard a similar response, as startups building products in tech incubators or who have graduated from those incubators try to suss out how changes in the renminbi might affect their manufacturing costs. Benjamin Joffe, a co-founder of Hax Accelerator, a program that brings startups to factories in Shenzhen, China, said via email, “If things get cheaper in China due to [the] exchange rate it benefits our startups. They have foreign capital, produce in China and sell outside China. So in the short-term, it seems beneficial.”
However, he added that further fluctuations in China’s currency will introduce more uncertainty and it is possible that the factories will increase their prices to maintain the same value against the dollar. That’s what Siminoff expects will happen. Citing the effects of automation on the manufacturing market, he expects that costs won’t change much because, “Automation has taken out the percentage of labor in China anyway, so it will lower, but it’s not going to take it to nothing.”
Simeron added that manufacturing jobs that aren’t automated already are considered high skilled, which means those workers are paid well. Those workers are living in what Siminoff called a “dollarized society,” which means that even if wages did decrease in value against the dollar, he expects their rates to increase to meet current standards within a few months.
Scott Miller, the CEO of Dragon Innovation, which helps startups manufacture their products and does a lot of business with contract manufacturers in China, echoed the idea that the cost of manufacturing in China is tied to labor, and said that those costs would not change much in the wake of the currency devaluation.
“Most of our customers pay the contract manufacturers in U.S. dollars (rather than yuan), so there won’t be any immediate savings from the currency exchange rate fluctuation,” he wrote in an email. “However, the contract manufacturers are always under downward margin pressure, and the labor rate in China continues to increase—hence the surge in automation/robotics on the assembly line. This exchange rate change may help further accelerate the contract manufacturer’s drive towards robotics to reduce the labor costs.”
Miller also pointed out that, in relative terms, the devaluation resulted in about a 3% change in value for the cost of goods for the emerging hardware companies. For startups that produce in small volumes, such a fluctuation would not make the kind of difference that it might make for a large smartphone manufacturer. When you’re producing millions of products, a 3% change in your cost of goods can yield huge savings, but when you make a few thousand it’s not going to make—or break—the bank.
For those exporting products to the U.S., the currency shift is helpful as it lowers the price of goods slightly. This means that Wells Tu, marketing manager at Seeed Studio, a Shenzhen, China-based hardware platform that helps makers prototype products, should be happy. At the same time, he is a bit nervous because he also imports raw materials and chips from abroad, which means the change in currency will also act against him. “So devaluation could be a double edge sword,” he writes in an email. “Overall, volatility in currency exchange is difficult for business to make long-term planning. This is especially true for those who export extensively.”
Tu added that contracts that are either closing or at the fulfillment stage with fixed prices in U.S. dollars present the most challenge. Clients have an incentive to cancel those orders because they can now get parts for slightly less money if they convert the dollars back to yuan. For Chinese businesses, there is also a question of where to keep cash reserves and move them around without over-reacting. Overall, Tu said he is not too worried and believes it will help his business.
So, as Chinese entrepreneurs and large U.S. companies try to figure out how to capitalize on this currency shift, it seems like the smaller hardware startups have bigger problems to worry about. Like making sure they ship their products on time.