De-Dollarization is Escalating: What Does it Mean for the Tech Market?
However, this dominance has not been without opposition. While many countries have benefitted from the international trade made possible by a common currency, nations with a contentious relationship with the US have consistently voiced concerns that the US could use the dollar to exert political or economic pressure.
These concerns were validated in 2022 when the US and its allies froze Russia's dollar reserves and locked it out of the SWIFT system following Moscow's invasion of Ukraine. Countries like China, Iran, and Saudi Arabia saw the Russian sanctions as a cautionary tale and began reducing their dollar reserves.
So far, several nations have put together non-dollar trade agreements to reduce their reliance on the US dollar and strengthen their collective geopolitical position. For example, China and France are settling liquefied natural gas trades in yuan, while Russia is turning to China's yuan amid geopolitical tensions. Meanwhile, the BRICS nations (Brazil, Russia, India, China, and South Africa) have set up a joint development bank to boost local currency trading.
As one of the most dollar-dependent industries, the tech scene is set to be severely impacted by de-dollarization. From price disruptions to difficulties accessing US-based venture capital funds, tech companies must strategize carefully to survive and thrive in a de-dollarized world.
Read on as we unravel how de-dollarization will likely shape the tech market in 2023 and beyond.
How will de-dollarization impact the tech market?
A less dominant US dollar can be advantageous and disadvantageous to the global economy and geopolitics. On the one hand, a cheaper USD could make US exports more affordable and make it easier for other countries to conduct international trade without being subject to fluctuations in dollar value and availability. It could also encourage countries to diversify their reserve currencies, potentially creating a more stable and balanced global monetary system.
On the other hand, economists suggest that a sudden drop in the dollar's value could cause a domestic inflationary surge, translating to a decline in purchasing power, higher business costs, and decreased economic growth and employment.
The tech market will absorb these shakeups to varying degrees, depending on factors like location, segment, business model, and customer base. Below are five ways de-dollarization will likely impact the tech sector.
1. Increased currency risk and pricing uncertainties
De-dollarization will expose tech companies to currency risks, especially for those reliant on US dollar-denominated contracts. For instance, a component supplier operating in a country that has decided to trade with another country in local currency may experience lower profit margins because they would no longer benefit from the USD's appreciating value.
To safeguard its interests, the company may need to adopt a hedging strategy and a pricing model more adaptable to changes in currency valuations.
2. Limited access to US-based venture capital
US-based venture capital funds have been the primary funding source for many tech startups worldwide. However, de-dollarization may cause a shift away from US dollar-denominated investments, making it more challenging for non-US startups to access US-based venture capital. This could reduce investment and funding opportunities, potentially hindering the tech industry's growth.
3. Challenges expanding to new markets
A dominant US dollar has long made it easy for tech companies to expand their customer base beyond geographical borders. Chinese chip suppliers, for instance, have managed to trade seamlessly with electronic manufacturers worldwide by pricing their products in USD.
De-dollarization could usher in a new era where companies looking to venture into new markets must navigate a new and diverse currency landscape. Consequently, businesses may need to adjust their strategies, including pricing, marketing, and hiring, to penetrate and compete in new markets successfully.
4. Emerging opportunities for tech companies
De-dollarization may also create new opportunities for tech companies that can adapt to the changing global currency landscape. For example, companies offering alternative payment methods or currencies may be well-positioned to take advantage of new markets.
Similarly, businesses that can provide solutions for managing currency risks and hedging strategies may benefit profoundly from the trend.
5. Increased competition from non-US tech hubs
De-dollarization could boost the demand for tech hubs outside the US, providing alternative options for companies seeking funding and partnerships. These tech hubs could offer lower living costs and entry barriers, increasing competition for US-based tech companies. Businesses in these hubs could also have access to more diverse funding sources, potentially increasing innovation.
How can IoT suppliers best respond to de-dollarization?
De-dollarization has significant implications for the tech market. While benefits exist, the transition also poses challenges. Understanding both sides of the coin is critical for businesses and investors to adapt to the evolving nature of international trade and finance. IoT companies must be prepared to respond to de-dollarization by assessing the risks and opportunities and adjusting their business strategies accordingly.
As an IoT business, here are five steps to respond to de-dollarization effectively and secure your future.
1. Diversify your customer base: Look beyond the US market and establish relationships with customers in countries shifting away from the US dollar. This move will enable you to maintain revenue streams and reduce dollar devaluation risks.
2. Adopt new pricing strategies: Consider pricing your products in currencies other than the USD to remain competitive in de-dollarizing markets. Concurrently, monitor currency fluctuations carefully to safeguard your margins across all currencies.
3. Explore alternative funding sources: If you are a startup looking to raise funds, consider exploring non-US venture capital funds that may be easier to find than US-based venture capital. You can also look into alternative financing options like crowdfunding and peer-to-peer lending platforms, which can provide access to capital from a broader pool of investors.
4.Implement currency risk management solutions: Strategies like currency hedging can help you minimize the impact of currency fluctuations on your business. Also, consider diversifying your currency holdings by holding reserves in different currencies to reduce your exposure to any one currency.
5. Embrace alternative payment methods: Introduce alternative payment methods to enable customers to transact in local currencies. That way, you can reduce friction in the purchasing process and capture more business in de-dollarizing markets.
De-dollarization is escalating worldwide, and the tech sector already feels the impact. As more nations reduce their dependence on the US dollar, IoT companies looking to safeguard their future must be prepared to respond to new opportunities and challenges.
By diversifying your customer base, adopting new pricing strategies, exploring alternative funding, investing in hedging solutions, and supporting multiple payment methods, your business can succeed in an evolving international trade and finance landscape.