If there’s one thing on everybody’s lips this year (besides Overwatch….sigh) it’s that the prices of things are seemingly increasing with every muttering of “listen properly” from our President’s mouth.
As South Africans we are in the unenviable position of being part of the most technologically developed economy in Africa (although not the most earning according to GDP) whilst being the farthest away from most of the high technology producing areas in the world, namely Asia, America and Europe. In all of Africa we seem to have the highest propensity to buy high-tech devices, yet we are very isolated from the tech world. Although the internet has annihilated space and time through instantaneous communication, the devices needed to do that still has to travel across that space and time; time and space equal money, and as consumers we often have to pay for that. Indeed, in a post-Nenegate world, that means we have to pay a lot more for it. In doing this article I’ll explore exchange rates, location and market size affecting the price of our pixel pushing components. To clarify certain points I went to ground and dug up the incredibly helpful and insightful perspective from Rune Ravnsborg, owner of local PC retailer Rebeltech.
After the announcement and local launch of the GTX 1080 on the 27th May, pricing has once again reared its head. Most often the question is asked “how can something that costs $699 cost over R14500 here?”. The common rationale most people flock to is the ZAR/Dollar exchange rate conversion (the “Caveman Rate” as Rune puts it), which at the time of writing (R15.82/1$) means $699 equates to R11 058. So, where does the rest actually go? Sure, a lot of it goes into maintaining local profitability for the suppliers (business is not charity), but there are also other costs that make it more expensive and puts the actual “PC Component Exchange Rate” at around R20/$—that’s an extra ~R4 above spot.
The first thing to note is that South African suppliers don’t get the same $ prices as their overseas counterparts. There are two reasons for this; firstly, we don’t get them through US distribution channels, and secondly, we also pay different levels of tax—our local prices include our 14% VAT, while US prices are listed excluding local sales tax, which differs from state to state. Regarding tax and customs, I’m not even going to delve into them since it seems like they change on a regular basis between 10-15% depending on whether the customs official had their breakfast that morning.
The price disparity between FE cards and non reference cards are also getting the locals up in arms. An example of this is the GTX 1080 STRIX, which being at $619 overseas you’d expect it to be cheaper than local “$699” FE counterparts. However, it’s actually more expensive here than the Asus GTX 1080 FE. According to Rune a large contributing factor for the price disparity has to do with enforced MSRP of the GTX FE cards, which yielded low margins for NVIDIA partners. However, even though NVIDIA has said MSRP for non-FE cards would be $599, that only covers a standard reference design with a blower styled cooler. For actual custom cards, there is no local MSRP which governs how much MSI, ASUS or Gigabyte can sell their cards at to local distributors. This means that non reference cards arrive on our shores at a higher than average price compared to overseas since the distributors that get those cards at a price that is determined based on laws of supply and demand–meaning they can set the price they want.
Coupled to this, our local market is so small compared to many developed nations that our suppliers can’t really negotiate for better prices based on volume. According to Rune when they or suppliers want to even broach the topic of negotiating a better rate, they have to do multiples of “minimum order quantities” , which for the size of our market (Rune states we comprise about 1% for Nvidia’s total sales), is very hard to do without substantial risk. Our location also means we pay more for shipping compared to the rest of the developed markets, notably the US, adding around 3% to the cost of a product. This again feeds into our market size, which means providing support, marketing and after-sales service like RMAs or repairs requires that South African distributors support these services on smaller volumes than their overseas counterparts. Essentially the cost of doing business in a smaller market is higher, and this cost is passed on to the small volume market. This is without even adding in import tax, supplier or retailer mark-ups, mark-ups which are not simply to cover costs, but to cover costs and grow their businesses. This is why “growing” the local gaming scene is so important for distributors and retailers—with growth (i.e, more people spending money in that area) local prices should naturally drop as it becomes more feasible to import larger numbers of goods at reduced pricing. However, even local growth still falls prey to the winds of change, and a change in Finance Ministers was certainly a large calamity.
A big discussion point as of late has been the effect of the exchange rate on local tech pricing—since most tech is imported, we pay dollar rates, which for a weaker currency, means we often end up paying more. One thing not readily discussed in many circles is how the volatility (i.e, the percent of change over time) of the exchange rate affects local pricing structures. When we briefly touched R18/$ for a time in January, the end times seemed near and R20/$ inevitable. Volatility in our exchange rates means that often the big suppliers and retailers have their hands tied when it comes to pricing. The prevailing wisdom is that prices should go down as exchange rates get better. Usually this happens as old stock clears out and newer stock arrives, but once your currency value starts bouncing around like a Gupta securing a state Tender, it gets harder and harder to continually sell at prices in line with exchange rates suppliers bought at, especially in a low volume market such as South Africa. According to Rune “They don’t work on spot price but instead on replacement value coupled with required margin.” Not every supplier does it this way, but essentially it means the local price of PC hardware is sold on the basis of how much it will cost to restock a similar item while employing risk reducing measures to maintain their margin of profit. They work this method when the value of the Rand goes up and down, so that if a supplier buys something and the Rand strengthens, they still employ some risk reducing to “higher” cheaper prices to offset future increases in price. This is why even though you are buying a graphics card that’s been sitting on a supplier shelf since September 2015, they will most likely sell it at the cost to ensure they can replace it profitably, which means current or higher exchange rates.
So, when you need to understand why the price of a GTX 1080 is R14500 or the estimated price of a GTX 1070 is probably around R9500, just remember to think about how many factors (besides exchange rate or dastardly presidents) come into play to determine local pricing. With a looming decision on our credit-rating status, this obvious placeholder pricing from Evetech could be telling of further astronomical price increases.
Pricing a few months after SA gets a downgrade XD pic.twitter.com/KXhU6X4pL2
— Not_A_Nazi_Marco (@Pansyfaust) May 29, 2016
Last Updated: June 2, 2016