Why HP's region coding excuse is bogus

The following business analysis was submitted by Boing Boing reader Buck Thighmaster

I thought you might perhaps want to throw up a more detailed business analysis of why HP's region coding defense is completely bogus. So I figured I'd write one out to try and save some time...

Sure it's true that a global multi-national company like HP has to worry about currency fluctuations, but their region-coding strategy is exactly opposite to a true objective currency fluctuation defense.

If a company is doing business in two major regions of the world and the currency is sinking in one region (the U.S.) and rising in another (Europe) then the company has to worry about the fact that it might be buying things in the more expensive currency while being paid in the sinking currency. In simple terms, HP has to worry about being paid $1US today, then try and buy $1EU of stuff next week, when that US dollar is only worth 80 cents in Europe - they just lost 20% on that transaction.

However, there's a simple defense for global companies in this situation - price in a larger profit margin on goods sold in the sinking currency, as a buffer against the value being lost in that currency. HP's printer cartridges should be more expensive (comparatively) in the U.S., to make up for the fact the the $40US (!!) you pay for a cartridge might be only worth $38 in global purchasing by next week. That's not what's happening here though.

(Some people might complain at this point that HP raising prices in the US would not be a good thing, because it's promoting US inflation. Duh!! Why do you think all the economists are so upset about the sinking US dollar and America's huge debt?!)

Instead, HP is charging more in Europe where the currency is rising and becoming more valuable. In effect, HP is double gouging here, because they're getting a bonus from the rising value of the EU currency. Every EU dollar they get paid this week might be worth $1.20 by next week in global purchasing, in which case HP just made extra profit! If HP was a fair dealer then print cartridges might be LESS expensive in Europe, not only because of the price premium people in the US would pay as a hedge against the sinking US dollar, but also because HP should prefer to be paid in Euros which they know are going to rise in value.

Another example in simple terms - if you were selling a car and someone offered you $1000, or $900 in gold bullion, and gold was rising in value so that gold bullion would be worth $1100 next week, you'd take the gold bullion. You offer a slight discount now because you know you'll benefit in the near future. Instead, HP's making people in Europe pay $1100 in gold for the 'car' - both gouging them extra, and profiting on the fact that the gold will be worth $1200 by next week.

HP's other stated defense for their region-coding is that this somehow protects them against Grey Marketers. This is also bogus.

Grey Marketers can be a problem with some products. These are importers who bring product across border into markets where it wasn't meant to be sold. This can be a problem, particularly with support costs.

For example, if HP Canada is selling Deskjet printers, and estimates they'll sell 10,000 printers, then HP Canada will budget the warranty support costs for 10,000 printers (let's say $5000). If some Grey Marketer then imports an extra 20,000 printers from the US, where they were on sale, and sells them in Canada then all of a sudden HP Canada is looking at an extra $10,000 in warranty costs on printers that HP Canada didn't even get paid for, since they were originally bought in the US!

One problem with that scenario in this case - there are no real support costs for an ink cartridge! They're practically a commodity product. There's no difference between an ink cartridge sold in Europe and one in the US. They all come out of the same factory. Ink cartridges WOULD be a commodity product if the printer manufacturers didn't silently collude on price. There is no way a print cartridge imported into Europe from North America costs HP Europe any extra support costs.

HP shouldn't care where their print cartridges are bought and sold, assuming HP has priced the cartridges appropriately. If HP prices the US ink cartridges properly with a premium to take into account the sinking US dollar, then they shouldn't care if some Grey Marketer buys a bunch and imports them into Europe. HP already got paid for the ink cartridge at that point. They have their money and their profit. HP should be happy to have sold the cartridges, period, and they didn't even have to pay for the shipping to Europe! Grey Marketers for printer cartridges ONLY 'hurt' the global manufacturer IF the manufacturer is price-gouging in the more expensive market.

In the end, there's two explanations for the current situation. Either HP is determined to gouge it's European customers, using the region coding to enforce the price gouge, or HP is so badly managed that their current US products are underpriced and they're losing money on them because of the sinking US currency. Possibly both are true.

I thought you might perhaps want to throw up a more detailed business analysis of why HP's region coding defense is completely bogus. So I figured I'd write one out to try and save some time...

Sure it's true that a global multi-national company like HP has to worry about currency fluctuations, but their region-coding strategy is exactly opposite to a true objective currency fluctuation defense.

If a company is doing business in two major regions of the world and the currency is sinking in one region (the U.S.) and rising in another (Europe) then the company has to worry about the fact that it might be buying things in the more expensive currency while being paid in the sinking currency. In simple terms, HP has to worry about being paid $1US today, then try and buy $1EU of stuff next week, when that US dollar is only worth 80 cents in Europe - they just lost 20% on that transaction.

However, there's a simple defense for global companies in this situation - price in a larger profit margin on goods sold in the sinking currency, as a buffer against the value being lost in that currency. HP's printer cartridges should be more expensive (comparatively) in the U.S., to make up for the fact the the $40US (!!) you pay for a cartridge might be only worth $38 in global purchasing by next week. That's not what's happening here though.

(Some people might complain at this point that HP raising prices in the US would not be a good thing, because it's promoting US inflation. Duh!! Why do you think all the economists are so upset about the sinking US dollar and America's huge debt?!)

Instead, HP is charging more in Europe where the currency is rising and becoming more valuable. In effect, HP is double gouging here, because they're getting a bonus from the rising value of the EU currency. Every EU dollar they get paid this week might be worth $1.20 by next week in global purchasing, in which case HP just made extra profit! If HP was a fair dealer then print cartridges might be LESS expensive in Europe, not only because of the price premium people in the US would pay as a hedge against the sinking US dollar, but also because HP should prefer to be paid in Euros which they know are going to rise in value.

Another exampe in simple terms - if you were selling a car and someone offered you $1000, or $900 in gold bullion, and gold was rising in value so that gold bullion would be worth $1100 next week, you'd take the gold bullion. You offer a slight discount now because you know you'll benefit in the near future. Instead, HP's making people in Europe pay $1100 in gold for the 'car' - both gouging them extra, and profiting on the fact that the gold will be worth $1200 by next week.

HP's other stated defense for their region-coding is that this somehow protects them against Grey Marketers. This is also bogus.

Grey Marketers can be a problem with some products. These are importers who bring product across border into markets where it wasn't meant to be sold. This can be a problem, particularly with support costs.

For example, if HP Canada is selling Deskjet printers, and estimates they'll sell 10,000 printers, then HP Canada will budget the warranty support costs for 10,000 printers (let's say $5000). If some Grey Marketer then imports an extra 20,000 printers from the US, where they were on sale, and sells them in Canada then all of a sudden HP Canada is looking at an extra $10,000 in warranty costs on printers that HP Canada didn't even get paid for, since they were originally bought in the US!

One problem with that scenario in this case - there are no real support costs for an ink cartridge! They're practically a commodity product. There's no difference between an ink cartridge sold in Europe and one in the US. They all come out of the same factory. Ink cartridges WOULD be a commodity product if the printer manufacturers didn't silently collude on price. There is no way a print cartridge imported into Europe from North America costs HP Europe any extra support costs.

HP shouldn't care where their print cartridges are bought and sold, assuming HP has priced the cartridges appropriately. If HP prices the US ink cartridges properly with a premium to take into account the sinking US dollar, then they shouldn't care if some Grey Marketer buys a bunch and imports them into Europe. HP already got paid for the ink cartridge at that point. They have their money and their profit. HP should be happy to have sold the cartridges, period, and they didn't even have to pay for the shipping to Europe! Grey Marketers for printer cartridges ONLY 'hurt' the global manufacturer IF the manufacturer is price-gouging in the more expensive market.

In the end, there's two explanations for the current situation. Either HP is determined to gouge it's European customers, using the region coding to enforce the price gouge, or HP is so badly managed that their current US products are underpriced and they're losing money on them because of the sinking US currency. Possibly both are true.