Tariff Implications from 1st September

[Albert in N]

Bachmann raised the retail price $10 on their new N gauge GP40.  Their MKT #245 first release was $79 and the "coming soon" MKT #231 raised to $89.  Even the Trainworld price went up by $10 with backorder #231 now at $53.99 up from sold out #245.   My thought is tariff tax.

[learmoia]

If things settle down, and the tarriff  doesnt go into effect, it will be interesting to see if prices go back down, or will they pocket the difference.

.. If we get more than 6 months of price increases, I'm pretty sure prices won't go back down, either because the company will pocket the difference.. or Chineese will up their production costs because they know we will pay it.

~Ian

[carlso]

Thanks Steve for posting Scale Train's release. I think I hear you guys saying as I am thinking "if it is something I just can't do without" what the heck is a few more bucks. And me on a fixed reducing income.

However, I have a question or comment depending on how you want to read it. ST stated they are going to invest over $1,000,000 this year in new tooling. Doesn't that become a real crap shoot if Chinese Govt. owns the tooling. Isn't that what we heard out of some of the manufacturers when the major sudden shut down happened ? Maybe it would be better to invest that money into the USA and find some manufacturer in our own country who can make the same or better quality product. We, me included, might have to pay  more per unit purchased but this tariff situation will probably not get better soon.

Just burning off some of the noggin sawdust,
Carl

[daniel_leavitt2000]

Thanks Steve for posting Scale Train's release. I think I hear you guys saying as I am thinking "if it is something I just can't do without" what the heck is a few more bucks. And me on a fixed reducing income.

However, I have a question or comment depending on how you want to read it. ST stated they are going to invest over $1,000,000 this year in new tooling. Doesn't that become a real crap shoot if Chinese Govt. owns the tooling. Isn't that what we heard out of some of the manufacturers when the major sudden shut down happened ? Maybe it would be better to invest that money into the USA and find some manufacturer in our own country who can make the same or better quality product. We, me included, might have to pay  more per unit purchased but this tariff situation will probably not get better soon.

Just burning off some of the noggin sawdust,
Carl

@carlso, a few points here:

1. ST builds a model that is not sustainable without cheap labor. These are all hand built models using lots of different materials. Look at how many parts and details the rivet counter line uses. If I were to build a model using those parts it would take several hours. This is skilled labor and takes time to train. It also costs a lot here. You could be looking at $400 plus just for labor on an engine - before tooling, equipment, paint, electronics, packaging, warehousing, distribution, overhead and profit.

2. There are serious holes in American manufacturing. Model trains sort of followed the watch industry in America in terms of loosing their manufacturing base. There are no sources for motor, few for gears and bushings and any custom parts ordered (think geared axle sleeves that can't be used in other industry). This is the same for watches... there are no sources for main springs and balance wheels or even jewel bearings. Each one of these parts requires a separate industry, business and material base. So it's not just tooling a new model in the US and throwing the molds in injectors, you need to ALSO create several other businesses just to feed yours.

3. Stop investing in China and your current product lines will dry up. This is pretty much what got Deluxe and several other smaller companies in trouble. If you start moving production, then the companies in China who produce your product have little incentive to add your products to the production schedule over other companies that DO continue investing. And without a steam of product, how will you get money to invest in American manufacturing? Short answer - you can't.

4. Labor market in the US is not good for model making. This is a skilled labor. It requires a large learning curve. Sure you can pluck skilled labor from other markets - say jewelry, watch making, product printing and medical tool making. But these labor bases are VERY, VERY expensive. I'm talking 60-100K salaries here. And you end up paying even more to get them away from profitable, stable markets to try their hand in something unstable and subject to economic fluctuations.Want to see what an American product looks like with only semi-skilled labor? Get some LBF cars. Poor construction quality, major paint issues and even then, they still couldn't make a profit on their product.

5. Think that people would buy an "American Made" product? Nope. This has been proven time and time again as big box stores replace local businesses with foreign made products.

6. A product here isn't guaranteed to be American Made. To be able to use the trademarked term "American Made" or "Made in America (or the USA), you have to source all materials from America. An American made engine with a Japanese motor? Could not be listed as "Made in America". This is why you see cars listed as "Assembled in Grand Rapids" rather than "Made in America" too many parts are from Canada, Mexico and China. Look at Shinola watch company. They are assembled in the US but use Swiss, movement parts and cases from Asia. They got in trouble for their "Made in Detroit" slogan.

BTW the Swiss use a very different definition of "Swiss Made". To use that trademark, a company must produce over 60% of the value or the watch in Switzerland. This has led to much of the cases, crystals, movement parts, hands and straps to be made in China. The parts are then sent to Switzerland for assembly and "finishing" (like adding pearling to the movement or polishing and brushing the cases). This of course requires a VAT system where each product that enters and leaves the country to be taxes and evaluated.

There are a few things that can help with American manufacturing. We are right up there with the Japanese on automation. That's great and would help bring the cost of model making down. But robots are extremely job specific. Until there are more "universal labor" bots on sale (that can provide a variety of functions to different industries), the cost of automation is too high for model making that relies on low production runs and specific details. Again, economies of scale work against us.

Americans have always had a strength of making large amounts of a quality product. That's just our way. It's why there are so few supercar manufacturers based in the US.

Setting up some production in India, Thailand, Vietnam and other countries with skilled but fairly cheap labor is a possibility. But guess what? All these countries use the same business model that China does. For example, Thailand requires a 51-49% joint venture for a foreign company to start production there. And yes, the local entity will own the tooling. This isn't a big issues for some products like hard drives or cars because the depreciation rate is very high - in a few years that tooling will be useless because technology has moved on. But model making relies on tooling that can be 40 or even 50 years old. That makes those models "stuck" in whatever country and factory they are built at. And that is the cause of a lot of the issues we have today.

Mexico and S. America have much more friendly production rules, but labor is getting expensive in these regions or the pool or skilled labor is non-existent. Brazil actually has some very skilled labor in the tech, defense and aviation sectors, but getting someone to leave Embraer for Bob's Model Train Production Company would require a lot of incentives.

I know this post is long. But I hope it explains that the situation is much more of a quagmire that will take a nuanced, long term solution.

This not meant to be political in any way - in fact I think both parties have serious shortcomings to fixing this. A long term viable fix would need to implement policies from both capitalism and a government planned economy - yep socialism. Even regulated companies do not take American made products a high priority, and until that is forced - either by public will, or by the government, that wont change.

In the end, I'm not sure it's a problem that NEEDS to be fixed. It's just a reality we live in. The best solution for us as consumers is to keep the markets as stable as possible.

[MK]

Very well written and thought provoking post there Daniel.

[Bob]

Thanks Daniel - very thoughtful and well written.  I hope ScaleTrains hangs in there and continues to produce N scale products.

[DKS]

I'm not sure it's a problem that NEEDS to be fixed. It's just a reality we live in. The best solution for us as consumers is to keep the markets as stable as possible.

This. This. Definitely this.

[Ed Kapuscinski]

@carlso, a few points here:
...

POST OF THE FRIGGIN YEAR RIGHT HERE BOYS

But seriously. The issues that this are addressing to fix are so complicated that brute force approaches like tariffs are really not going to be effective.

You know what might help? Doing things to make SMB ownership and startup easier by removing the (sometimes) artificial barriers erected to protect entrenched large businesses. Having to pay an inordinate amount of a company's profit to health insurers is a real drag on a company and I know many people (myself included) who have foregone opportunities because of the issues around needing to provide health insurance for my family and anyone I'd employ while the venture begins.

It makes me wonder if a company like Rapido could happen in the US. ScaleTrains might be close (and I hope they're as successful), but I don't think they've got that size of operation quite yet.

[Rich_S]

With close to 20 years working either for, or with, the agency that collects any duty or tarriffs I can say while you are correct that hobby material margins are not as much as general merchandise they are not as low as you guess.

This is something I've wondered about for many years and hobby shop owners are very tight lipped on the actual cost. An example, A well known retailer is selling Bachmann N scale Baldwin 4-6-0 Steam Locomotives that are DCC Equipped for $79.99 and the original list price is $219.00.  I would venture to say this retailer is not taking a loss on these locomotives and I'd also venture to say the current price of $79.99 is not yet at cost.

Yes I understand model railroad companies need to earn a profit to enable them to finance their next project, but at what point do they begin pricing their products out of the reach of the average modeler? Here is a question I ask Atlas Model Railroad Company, if your products are classified as Toy's or electronics then they will be tariff exempt, so why aren't they? This becomes a slippery slope very fast. 

Let's fact the cold hard facts, a vast majority of our money is flowing to China, very little of that money is coming back to the USA. This is the reason for the tariff. If the current trends continues and China is able to convince other nations of the World to trade in Renminbi, the dollar will become worthless. You may say nonsense, but as we speak China is buying all the gold they can get their hands on and was up to the number 5 spot on the top 10 list of gold owning countries, that is until Russia when on a gold buying spree. You think maybe Russia is a little worried about China?  But remember this, China's economy is expanding and lot of money from all over the world is flowing to China. Now for the nitty gritty details, out government does not produce any products to sell, the only money our government has is from the taxes it collects from us. If all of that money is flowing out of the United States, how does the government pay for all the services it provides for the population of the United States. Well I guess one way to do it is raise taxes on companies within the United States like Model Railroad Companies or place tariff's on products other countries are trying to sell within the United States. In the long run, pick your poison.         

[Ed Kapuscinski]

Rich, it's a bit more complicated than that though due to the oddity of the Federal Reserve Bank and fractional reserve banking.

When you think about it, the whole thing is pretty much a bunch of make believe. I mean, the only thing REALLY backing the dollar, when it comes down to it, is on this list here (mostly the Minuteman, Trident, Tomahawk and B61): https://en.wikipedia.org/wiki/United_States_and_weapons_of_mass_destruction

But you do hit on an important thing: much of the US's geopolitical power and our high standard of living is based on the global importance and reliance on the US dollar. Much of THAT is because it's been a pretty stable and predictable thing over the past 70 years or so. Modern politics is actively undermining that stability and predictability and is something I worry about MUCH more than the amount of manufacturing being performed offshore.

[learmoia]

I completely agree with Daniel's post...

When we talk about moving production... In my mind, I'm thinking Bandai,l Mattel, Hotwheels, Apple iPhone, ect.. Companies with high volumes, high margins and consistently turn over tooling year after year.

NOT Scale Trains..

The model train industry may long term benefit from those kinds of changes, as China would find itself with excess production and bring costs down for the mfg that stays there..

~Ian

[TLOC]

Daniel, an excellent report. Thank you.

Tom

[Rossford Yard]

There is a real train wreck of a thread going on FB right now on the ST page, not unlike this one, but way more irrational.

A few comments -

Rich S - Most of our wealth isn't going to China.  We still make $1.8T of goods vs their $2.0T, and they only surpassed us a few years ago.  If our trade deficit is less than the total annual growth of our economy, in general we are okay.  It's somewhere between $500 and $700B most years.  We import about $600+ Billion from each of China, Mexico and Canada.  Our economy grows at about 22 Trillion, and expanding about a Trillion a year, so real growth is perhaps $300 Billion per year, not bad.  We are still accumulating wealth, but more slowly than is ideal.  Of course, distribution of that new wealth is a hotly debated political topic as well. 

Not trying to be political here - the short version is that the perception that there is no mfg in the US is wrong, but commonly held.  While not an expert, there are some high value and big goods (airplanes, bulldozers, cars) that we can be competitive at.  There are some mid value items (irrigation sprinklers, garage doors and openers, and a million other things that still work in our favor to manufacture here. 

High value and very low value consumer goods (trains fit the low value, low tech model) aren't competitive in the current worldwide environment.  Living in Texas, I do know of a few companies that factory in El Paso and along the Rio Grande.  They can say US Made, but the labor comes across the river every morning and works for near minimum wage. 

Of course, the budget deficit is of concern long term, but no one in Washington seems alarmed, for reasons I am apparently not smart enough to understand, LOL.

[peteski]

There is a real train wreck of a thread going on FB right now on the ST page, not unlike this one, but way more irrational.

Rich S?  I wonder if  it is "our" Rich_S who also posted in this thread?

[Rossford Yard]

Don't know. Up to 583 posts as of now.  Seems to have calmed down.  Is mostly respectful of the page host.

In reality, who among us thought that 3 new companies would enter the N Scale loco Market to compete against the then big boys of Atlas and Kato (LL, Bachmann also in there)?  And offer off beat locos like the C39-8 (I have two of them, but they admitted in Salt Lake they took a bath on them)  So, they deserve our respect, and where possible given our modeling interests, support.

I gotta believe the economics are what they are.  If someone has figured out a US based business model, more power to them (or they have a special case of circumstances.) Lots have entered this biz, and gotta think they know what they are doing more than we do.....