Currency Controversy Could Put Roadblocks In Lenovo's Way

That&s one of the few pieces of strategy that Lenovo Chairman Yanqing Yang has been willing to identify publicly, but it also presents a potential problem. Controversy over China&s system for valuing its currency, which U.S. manufacturers and lawmakers say gives Chinese companies a pricing edge over goods produced here, could throw Lenovo&s strategy into doubt.

U.S. officials say China has manipulated its currency to keep its pricing below that of American competitors, a charge China denies. Earlier this year, China stopped pegging its currency, the yuan, to the U.S. dollar and instead pegged it to a “market basket” of foreign currencies. Chinese officials said the move would make the dollar and the yuan about 10 percent closer in actual value. The U.S. Treasury Department is monitoring the change to see if it makes a difference.

Already, though, some in the channel doubt China&s sincerity.

“That was a crumb,” said Al Lubrano, president of Technical Materials, a Lincoln, R.I.-based component manufacturer, of the Chinese action. “It was meaningless.” Lubrano, as a member of the National Association of Manufacturers, testified earlier this year before Congress on the issue, calling for close government scrutiny of any currency manipulation by China.

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Lubrano said pricing on Chinese goods, driven in part by the currency imbalance and in part by the cheap cost of labor, has made competition on price a tough proposition. Among other things, his company provides components for computer makers and other manufacturers, such as car companies, which are getting heat from the market, he said.

“It is common for our customers to tell us that their customers will pay the ‘Chinese price,& ” Lubrano told the U.S. Senate Finance Committee earlier this year. “And I am afraid we are just at the beginning of the process, with matters threatening to get much worse.”

The next step comes in October, when the U.S. Treasury Department releases an analysis of any currency imbalance vis--vis China, and reports on whether China&s so-called market basket approach has leveled the playing field. “We won&t know until mid-October whether they&ve done anything,” Lubrano said. “I&ll bet you 50 bucks you won&t see anything close to [a] 10 percent” change in the imbalance that some have suggested.

If that happens, any one or more of several bills in Congress could begin to gather momentum, Lubrano said, including a proposal by U.S. Sens. Charles Schumer (D-NY) and Lindsey Graham (R-SC), which would impose a 27.5 percent tariff, across the board, on all products imported from China. Such a tariff would, essentially, negate any manufacturing and cost-efficiency a company like Lenovo gains by producing components in China and importing them to the United States. Those gains, in some cases, have been substantial.

A tariff that high could also impact others in the channel, including system builders that source components from Chinese manufacturers. Mike Zabaneh, COO of Tangent Computer, a Burlingame, Calif.-based system builder, said he hasn&t yet begun favoring Chinese manufacturers on price issues. “We&re more concerned with the quality and do they have a presence in the U.S. to do support,” he said.

“You&re beginning to hear more from Chinese manufacturers,” he added, as well as software makers based in China. So far, it hasn&t affected his business in a major way.

Chinese-made goods are not only cheaper than U.S.-, South Korea- or Japanese-made ones when you&re in the United States, they&re also cheaper than the same goods when you&re in China. Bill Siu, general manager of Intel&s Channel Platforms Group, was relocated to Beijing since much of his role is to oversee channels in emerging markets such as China. He said prices on computer peripherals and equipment in the United States on Chinese-made products are so much cheaper that he recently shipped a computer LCD panel from the United States to his new home in Beijing. But, he said, he has seen no evidence the Chinese government would throw its economy into trouble by picking a fight over currency.

As a company, Intel, Santa Clara, Calif., has encouraged leaders of both countries to sit down and negotiate their differences before minor issues escalate into a trade war. Lenovo hasn&t made any public statements as of yet on the currency controversy. Its top officials were unavailable for comment last week.