January 2008

Holy Inflation, Batman!
Article By John Evanthes (aka, TheChairGuy from AudioCircle.com)

  This title on a recent topic began by member 'Wayner' on the Vinyl Circle over at AudioCircle.com, created a virtual maelstrom of responses from varied folks willing to expand upon it. As resident big mouth (and Grado pimp!), I offered up my bird-eye view on the subject.

So, why are prices rising in our little hobby? 

After 30 years as an audio enthusiast, this article will serve as overwhelming proof that I have tin ears. The first piece the irascible Steven R. Rochlin asks me to pen at Enjoy the Music.com is about the economics of your li'l hobby and how worldwide events are shaping what you will pay (and charge, if you are a manufacturer) in the future to enjoy it. There's no denying it – I need to stick to something I'm good at – observing, and not listening (ha).

My burgeoning company has made as many as 800,000 portable outdoor chairs in the past... and that division was sold in August of 2007. We now make 600,000 Magna Cart portable hand trucks yearly (here's the plug: www.WelcomProducts.com) and are regularly communicating and traveling to our factories in mainland China. So, I'm an entrepreneur and businessman (with a Bachelor's Degree in Business Administration), not a trained economist by any means, other than by close-to-the-root observation and pure survival instinct. So if some of this is bush league to you trained economist, index trader types out there; so be it, just consider the source ;>)

Isolating and exploring China, whether or not a products final assembly point is there, is critical as the nature of world markets are closely interrelated now and components are often made in China, even if they are assembled elsewhere.

Below is material or currency components that many know have affected prices, but may not know the extent to which they've risen in the past 24 months:

The above affects all of us – with special focus on those in the United States.

The falling United States Dollar (USD) is pushing price of light crude up as we purchase far more than half our oil outside of the US. Our dollars are worth less so producers must raise prices of oil (which are denominated in USD) to offset the loss of dollar denominated revenues. Plastics and rubber are all crude oil products, and those too, are pushing ever higher.

Anything that is transported any distance is more costly now, too, as gas at the pump and oil that runs those freighters and UPS trucks has risen. This is gonna' wallop our little hobby

The falling dollar effects the cost as even if the product is made in China, the raw materials are generally purchased elsewhere (Australia and Russia and net exporters of raw aluminum)... the Chinese RMB is based on the USD so they are paying more for it in local currency. So, too, the China government will allow the RMB to float lower in the future with pressure on them from America, thereby making things far worse for us, particularly in the United States, than before.

The cost of the carts we make in China is up a staggering 15.2% in the 15 months. If we hadn't been purchasing in such large quantities, our price would've risen further. I have only passed along 8% thus far to my retailers. We cannot afford to cinch our belts any tighter, as our factories have actually shouldered a considerable cost burden too…the next increase we get will be passed along in the form of higher wholesale prices to my customers. Likewise, your favorite audio company will.

We've made all the efficiency gains in production and distribution we're likely to make for a time...now, here comes much-anticipated inflation. Everybody from producer to factory to middleman/distributor has tightened up their belt loops already... the only thing left is to pass it thru to Joe-consumer now.

Get used to it - it's likely here to stay for a good decade or so

Steel is also spiking. It's a lot less energy intensive than aluminum, and a lot more available... auto sales are off in the US and Europe... so reasons for its rise are murkier. But, it's likely the case of our falling USD, rising labor rates in Asia and consolidation of the steel industry (Mittal Steel is the largest steel maker in the world now, by far) conspiring to hit us hard with higher costs in steel.  Steel prices are expected to rise yet another 8% to 10% in 2008 as supplies dry up as Chinese factories are pushing steel quantity into the market before a new export rebate takes effect on January 1, 2008.

Export Rebate
Whoaaaa, what was that? – EXPORT REBATE – you may be asking. These immoral (if not illegal) subsidies are little reported, but of enormous interest to all of us.

Yes – The Chinese government has also changed a very significant policy that few know or understand that are affecting the higher priced further. Dependent on the products each factory exports (there was, until recently, relatively no domestic market to fulfill - that has changed a lot over the years, however, as an emerging middle class has come about in China) overseas...they received an EXPORT REBATE (aka, a hefty subsidy) at the end of the calendar year. So, a factory with a designated 5% subsidy could sell product at a 5% loss all year, collect a 5% tax abatement from the Chinese government, and break even for the year. That encourages dumping – and as a full-fledged member of the WTO (World Trade Council) these tax rebates / subsidies must end to be fair to the rest of the world and for China to be compliant. So fully expect the price of toys, rakes, beach chairs, carts, shoes, books, clothing, and other products from China to rise significantly in the future as this changes. Oh yeah, and most of your electronic gear.

It ranges, but my (former) chair factories and (now) cart factories were classified as 'basic industries' and the China government has rolled back the export tax to 7% to my factories in just the past 15 months.

Electronics assemblers solely of and by itself (as if that can exit anymore in reality, but play along in my dream world for a moment) likely isn't affected by this change... these are core industries that China has deemed important to future growth... they have changed the rebate tax only on 'basic' (i.e.., relatively unskilled) industries. But, the guys that make those nice steel and aluminum cases, knobs, wire, simple RCA jacks and the like are considered 'basic industries' and now get 7% less in export rebates than they did in 2005.Which means they charge the assemblers (where ever they be) 7% more than they did.

Labor Shortages
Labor shortages mean that to lure workers factories must pay more... the labor rate in the southern (powerhouse) province of Guangdong has risen over 20% in the past 3 years. Many of the audio toys from China are manufactured in and around Shenzhen, China... which is in Guangdong Province.

This QUADRUPLE whammy of higher material/crude prices, declining Dollar/RMB ratio, higher wages and lowered export tax subsidies – along with expensive wars(s) overseas (this is not meant as a political statement – just fact – please understand) will create inflationary impact the likes of which we haven't seen in the United States since the end of the Vietnam War.

All of these things conspire to raise the cost of our favorite audio devices

Of course, anything from Europe (almost 40%) and the UK (approx. 30%) has been impacted in the past 2 years due to USD de-valuation alone. Canada, Australia not quite as much, but still a significant amount the past two years. That's pretty much where we get all of our hi-end audio gear from nowadays.

Get ready, pare down your debt – save those pennies – they'll be worth a lot less in the near future. The era of cheap money and cheap products for us in the United States will be over for a while. The last low wage/high quality country in the world left is Vietnam... but 90 million Vietnamese cannot supply the world goods as the 1.2 billion Chinese have the past decade.

The Flipside To All This
The flipside is that America is cheap for visitors and United States manufacturers are winning over others because many of our export products are high quality and, now, cheap. From Boeing to GE to my little company (who bills in USD, even as the products we buy are Chinese made) we are now selling more overseas countries than ever before. Sweden, Brazil, Taiwan, Japan, Korea, Mexico, Canada, Australia and all hot export markets for me because our products are 'cheaply' priced in our currency to other countries.

We're all in for an inflationary cycle the likes of which much of the world hasn't seen in 20+ years... at a time (in the United States and other countries) where housing values are dropping – making you feel poorer (you aren't actually as you still might own your house, but the mind is a terrible anvil sometimes) than a year or two ago.

Hold on tight....

Hey you, American manufacturers, what can you do if you're feeling rather beaten-up right now? Cheer up – there's a flip side to the dour equation of rising prices on raw materials.

You might have had to raise your prices as the cost of material goods have risen, but because your goods are priced in USD your products will seem like quite a deal to much of the world paying in Euro, Krona, Yen, Pounds and Aussie, Cdn and Kiwi Dollars.

Worldwide currency chart December 26, 2007 at 1:05pm

Make an aggressive effort to reach out-of-US consumers, as your future may actually be a lot brighter than you think if you reach out beyond our borders (somehow) now.

ACI, maker of high quality loudspeakers and Revelation Audio Labs in Florida reported that 40% of their sales are now outside of America – and has steadily risen over time. Yes, they've had to raise prices a few % the past 24 months, but this was more than offset by the plunge in the dollar value against almost all major currencies. With no ad budgets to speak of, merely a reputation for excellent product and a website, they now look like conspicuous good value relative to local offerings from other countries due to the plunge in the USD.

I recently took orders from Taiwan, Korea, Japan and Brazil, plus interest from Canada and UK is high. We've never been able to tap these markets well previously. I think it solely because our goods are priced in USD and we look cheaper relative to their traditional suppliers in their own countries.

So, we're looking for additional venues (trade shows) outside the United States in 2008 to attend for that reason.

The future is likely less US-centric (in terms of overwhelmingly large pools of buyers) than ever before, fellow US manufacturers/importers / exporters.

To forget about the other billion consumers now flush with middle class money in their own wonderfully inflated currency is to imperil your business in the future.

On Friday December 14 (2007) there was a  report on inflation that showed the biggest jump in inflation at the wholesale level in the United States in 34 years.

Get ready, fellow Americans, for an inflationary cycle for the next (approximately) decade like not experienced in almost 30 years. We can thank enormous efficiency gains and the Chinese for keeping the lid on pricing for the past 15 years... those cows don't have much milk left

I can tell by my costs, ever rising from China, that this will affect everyone in every part of the globe, shortly. All producers/manufacturers are struggling to order as much as we can before the next price increase takes effect...either holding goods in China or domestically, but when those stocks run out it'll mean higher pricing to all.

The auto-pilot, silver lining to all of this for producers (not consumers), is that if you sell the same number of goods than you have an automatically boost in sales due solely to inflation

An escape route exist for enterprising United States makers, but for fellow hobbyists like me, prepare to pony up a few more dollars for your favorite (new) audio equipment in the very near future.