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China tariffs and snowboarding  

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Velvet Hammer
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26/08/2019 6:49 am  

Tariff Action Page

https://www.skimag.com/news/chinese-tariffs-could-have-effect-on-snow-sports-industry

Any of you industry guys shitting your pants, or will this be a non issue for the snow sports consumer?

There is no fucking way any of these products will come back to the USA for production, are there any plans to pick up everything and move to China?

This topic was modified 3 weeks ago by Velvet Hammer

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c.fuzzy
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26/08/2019 8:34 am  

“It wasn’t just the snowsports industry. It seems like everybody that was there was talking about getting put out of business.”

“[The tariffs are] literally a tax that’s going to be placed on every product that’s tariffed, that’s going to be passed from manufacturer to retailer to consumer,” he says. “Someone has to deal with that 25%, and ultimately, I think it's going to be the consumer.”

“A $200 jacket is going to be $250, and that’s a lot of money to somebody saving up for a nice jacket. That’s enough money to make people think twice, for sure,” says Steinkamp.

In an interview with NPR, COO Gail Ross describes the roadblocks they are facing. “You can’t make [these] products in the United States. Literally, the machinery does not exist,” she says.

Admittedly cost of goods will go up.... BUT... do we really see snowsports consumers as price sensitive to the point that an additional $50 is going to put the brakes on purchasing? A single day pass to the bigger resorts is $100 or more. 

Who's going out of business? The small retailers that already have been going out of business year over year? 

And I'm not exactly buying the idea that bringing production back to the US is going to be cheaper than the tariff in the end. The argument that the machinery "literally doesn't exist"... um... well, it does exist somewhere, so get it here?

If everyone is worked up to this degree, there's more to this picture than we're being told. It's being framed as everyone being concerned about mom and pops and the end consumer, but I'm not buying it.

My guess is that it may have something to do with prebooks, orders already places, and prices (msrp/tags) on items already being set but the big brands now facing 20% decrease in profits when their orders come in?

Idk. Someone here that is more familiar with inside workings? 

donuts


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Velvet Hammer
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26/08/2019 12:11 pm  

Maybe it has to do with how tight the margins are on outerwear. 

I have no connection to any snow sport inside information, but to me it seems like most outerwear companies over produce like crazy.


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Lalune
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26/08/2019 12:24 pm  

Speaking from a complete outsider of the industry, I always think that companies like Burton sponsor athletes, host contests, produce snowboards, in order to sell more snowboarding related clothes. Clothes simply have the biggest profit margin among all products.


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matty
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26/08/2019 3:02 pm  

Large businesses have pretty complex budgets and financial structures (credit agreements, shared cost arrangements, payment schedules, etc.). A relatively sudden 20% tariff hit could seriously wreak havoc. If a snowboard or outerwear company's manufacturing costs suddenly go up by 20%, that amount might actually absorb the entire margin in the budget plus some. In a business where last year's sales are paying for next year's production, there may be a long delay before the manufacturing company can recoup their suddenly increased costs. Think of it this way:

  1. Retail gross margins for snowboards have generally been identified as being around 40%. Let's give an imaginary amount paid from the retailer to the snowboard company for each snowboard they sell for $500 as being $300 and guess that the net margin for the snowboard company at that price is 7.5%, or $22.50. (Of note, most manufacturing companies actually have a net margin that's more like 5% according to this resource from the NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html)
  2. Since almost all snowboard manufacturers are privately-held companies, their spreadsheets aren't publicly accessible. Still, if we make our (somewhat) educated guesses above, our example of a board that they sell to the retailer for $300 would likely have a total cost of production of around $277.50.
  3. Some of that $277.50 would be budgeted to cover fixed costs like rent, itemized depreciation cost, insurance, amortization, etc. For the variable costs, likely almost all of them would fall under "manufacturing costs" - and for a company doing its manufacturing in China, that entire cost category would seemingly fall subject to this new tariff.
  4. If we very roughly estimate that the potentially impacted manufacturing cost of each snowboard is about half of the overall production cost (it may actually be significantly more), then the current manufacturing cost of our sample board is about $140 and the tariff would effectively increase that cost by $28.
  5. The cost per unit would go from $277.50 to about $305.50. That new cost is more than $5 more per unit produced than the current margin, so the cost can't simply be absorbed through a decrease in margin. 
  6. From what I understand, the sales last Spring of this Winter's boards are already completed, and snowboard company to retailer pricing is already set and agreed upon. I believe that the money has Likely already changed hands. The snowboard company had counted on that money to cover operating costs (including manufacturing) until next year, when the sales cycle starts over.
  7. Unless they can defer incurring newly tariff-increased manufacturing costs until next year AFTER they can negotiate and charge increased prices to their retailers, then the difference between what they charged this year and what it's going to cost them to produce next year's gear is going to have to be covered by borrowing. The servicing of this new, previously unexpected debt will add another level of cost increase, meaning that the 20% tariff will likely increase the impact on manufacturing costs by more than 20%

This is not a small item for snowboard companies that produce in China. If they produce using contracted OEM factories, there may be a significant incentive to find OEM production partners in non-China locations, if possible. Those OEM production factories and skilled labor forces are expensive to set up and what is currently available will likely not have much more production capacity, so it may take more than one or two fiscal cycles to see significant movement of production from China to other places.

Also, we should probably expect a lot of consumer goods prices to increase over the next year by significant amounts. I would guess 10% or more. Boards that are currently $550 will likely be $600 or more next season. For products that have higher margins through which the increased manufacturing costs can be absorbed more readily, the manufacturers will still likely raise prices significantly in order to protect those margins as part of an overall budget strategy - especially if they can easily point to the new tariffs as a cause and similar price increases on other categories of goods as justification of a narrative that such price increases are inevitable.

This post was modified 3 weeks ago 2 times by matty

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tp1_kenobi
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26/08/2019 4:49 pm  

Here's an idea.  Maybe we should consume less, maintain our gear, and use programs (or push snowboard companies) from Patagonia's that repair their clothing.  There's other innovate ways for these business' to thrive instead of selling.

The snowboard industry always talk about the environment, consuming less is the first step in conserving it.


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drjcv
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26/08/2019 9:58 pm  

thats all it ever is, talk

the greenest thing any company could do (esp one as big as patagonia) is stop doing business

what much new gear does patagonia sell compared to what it repairs? it might repair 0.001% of what it sells. its such a fucking disgusting company it makes me nauseous. its in every fucking store, department, outdoor retailer, snow retailer. bike retailer, fishing etc all over the god damn world.

it has global reach built of gross marketing lies, positioning itself as the "greenest" of all the luxury outdoor brands.

99% of its customers are the worst of the worst status junky hyper consumer old white dickhead fuckwads. every stupid fucking overweight, bloated face executive cocksucking retard has a patagonia puffy vest.

as far as the china tariff goes companies will just start moving production out of china. there's plenty of sweatshops all over the world to be exploited. problem solved.


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89c51
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27/08/2019 1:21 am  
Posted by: drjcv

as far as the china tariff goes companies will just start moving production out of china. there's plenty of sweatshops all over the world to be exploited. problem solved.

It takes time/money to set up supply chains, factories etc etc. Depending on the product of course. It not always easy.  

This trade war has to stop though. It hurts everyone.


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Lonz
 Lonz
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27/08/2019 5:27 am  
Posted by: matty

Large businesses have pretty complex budgets and financial structures (credit agreements, shared cost arrangements, payment schedules, etc.). A relatively sudden 20% tariff hit could seriously wreak havoc. If a snowboard or outerwear company's manufacturing costs suddenly go up by 20%, that amount might actually absorb the entire margin in the budget plus some. In a business where last year's sales are paying for next year's production, there may be a long delay before the manufacturing company can recoup their suddenly increased costs. Think of it this way:

  1. Retail gross margins for snowboards have generally been identified as being around 40%. Let's give an imaginary amount paid from the retailer to the snowboard company for each snowboard they sell for $500 as being $300 and guess that the net margin for the snowboard company at that price is 7.5%, or $22.50. (Of note, most manufacturing companies actually have a net margin that's more like 5% according to this resource from the NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html)
  2. Since almost all snowboard manufacturers are privately-held companies, their spreadsheets aren't publicly accessible. Still, if we make our (somewhat) educated guesses above, our example of a board that they sell to the retailer for $300 would likely have a total cost of production of around $277.50.
  3. Some of that $277.50 would be budgeted to cover fixed costs like rent, itemized depreciation cost, insurance, amortization, etc. For the variable costs, likely almost all of them would fall under "manufacturing costs" - and for a company doing its manufacturing in China, that entire cost category would seemingly fall subject to this new tariff.
  4. If we very roughly estimate that the potentially impacted manufacturing cost of each snowboard is about half of the overall production cost (it may actually be significantly more), then the current manufacturing cost of our sample board is about $140 and the tariff would effectively increase that cost by $28.
  5. The cost per unit would go from $277.50 to about $305.50. That new cost is more than $5 more per unit produced than the current margin, so the cost can't simply be absorbed through a decrease in margin. 
  6. From what I understand, the sales last Spring of this Winter's boards are already completed, and snowboard company to retailer pricing is already set and agreed upon. I believe that the money has Likely already changed hands. The snowboard company had counted on that money to cover operating costs (including manufacturing) until next year, when the sales cycle starts over.
  7. Unless they can defer incurring newly tariff-increased manufacturing costs until next year AFTER they can negotiate and charge increased prices to their retailers, then the difference between what they charged this year and what it's going to cost them to produce next year's gear is going to have to be covered by borrowing. The servicing of this new, previously unexpected debt will add another level of cost increase, meaning that the 20% tariff will likely increase the impact on manufacturing costs by more than 20%

This is not a small item for snowboard companies that produce in China. If they produce using contracted OEM factories, there may be a significant incentive to find OEM production partners in non-China locations, if possible. Those OEM production factories and skilled labor forces are expensive to set up and what is currently available will likely not have much more production capacity, so it may take more than one or two fiscal cycles to see significant movement of production from China to other places.

Also, we should probably expect a lot of consumer goods prices to increase over the next year by significant amounts. I would guess 10% or more. Boards that are currently $550 will likely be $600 or more next season. For products that have higher margins through which the increased manufacturing costs can be absorbed more readily, the manufacturers will still likely raise prices significantly in order to protect those margins as part of an overall budget strategy - especially if they can easily point to the new tariffs as a cause and similar price increases on other categories of goods as justification of a narrative that such price increases are inevitable.

Great post, Matty.  I know nothing of manufacturing, so this detailed breakdown is illuminating for me.

I award you full marks and a California Raisin scratch-and-sniff sticker. 


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c.fuzzy
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27/08/2019 7:35 am  
Posted by: matty

Large businesses have pretty complex budgets and financial structures (credit agreements, shared cost arrangements, payment schedules, etc.). A relatively sudden 20% tariff hit could seriously wreak havoc. If a snowboard or outerwear company's manufacturing costs suddenly go up by 20%, that amount might actually absorb the entire margin in the budget plus some. In a business where last year's sales are paying for next year's production, there may be a long delay before the manufacturing company can recoup their suddenly increased costs. Think of it this way:

  1. Retail gross margins for snowboards have generally been identified as being around 40%. Let's give an imaginary amount paid from the retailer to the snowboard company for each snowboard they sell for $500 as being $300 and guess that the net margin for the snowboard company at that price is 7.5%, or $22.50. (Of note, most manufacturing companies actually have a net margin that's more like 5% according to this resource from the NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html)
  2. Since almost all snowboard manufacturers are privately-held companies, their spreadsheets aren't publicly accessible. Still, if we make our (somewhat) educated guesses above, our example of a board that they sell to the retailer for $300 would likely have a total cost of production of around $277.50.
  3. Some of that $277.50 would be budgeted to cover fixed costs like rent, itemized depreciation cost, insurance, amortization, etc. For the variable costs, likely almost all of them would fall under "manufacturing costs" - and for a company doing its manufacturing in China, that entire cost category would seemingly fall subject to this new tariff.
  4. If we very roughly estimate that the potentially impacted manufacturing cost of each snowboard is about half of the overall production cost (it may actually be significantly more), then the current manufacturing cost of our sample board is about $140 and the tariff would effectively increase that cost by $28.
  5. The cost per unit would go from $277.50 to about $305.50. That new cost is more than $5 more per unit produced than the current margin, so the cost can't simply be absorbed through a decrease in margin. 
  6. From what I understand, the sales last Spring of this Winter's boards are already completed, and snowboard company to retailer pricing is already set and agreed upon. I believe that the money has Likely already changed hands. The snowboard company had counted on that money to cover operating costs (including manufacturing) until next year, when the sales cycle starts over.
  7. Unless they can defer incurring newly tariff-increased manufacturing costs until next year AFTER they can negotiate and charge increased prices to their retailers, then the difference between what they charged this year and what it's going to cost them to produce next year's gear is going to have to be covered by borrowing. The servicing of this new, previously unexpected debt will add another level of cost increase, meaning that the 20% tariff will likely increase the impact on manufacturing costs by more than 20%

This is not a small item for snowboard companies that produce in China. If they produce using contracted OEM factories, there may be a significant incentive to find OEM production partners in non-China locations, if possible. Those OEM production factories and skilled labor forces are expensive to set up and what is currently available will likely not have much more production capacity, so it may take more than one or two fiscal cycles to see significant movement of production from China to other places.

Also, we should probably expect a lot of consumer goods prices to increase over the next year by significant amounts. I would guess 10% or more. Boards that are currently $550 will likely be $600 or more next season. For products that have higher margins through which the increased manufacturing costs can be absorbed more readily, the manufacturers will still likely raise prices significantly in order to protect those margins as part of an overall budget strategy - especially if they can easily point to the new tariffs as a cause and similar price increases on other categories of goods as justification of a narrative that such price increases are inevitable.

Yes, this is precisely what I was getting at, though Matty is clearly armed with more thorough understanding. Basically the importing brands are going to take a big haircut this year if tariffs stick. What they'll likely do is crunch the numbers and find where they can immediately cut costs... advertising / marketing / non-essential or high paid employees.

Make their margins and ratchet up costs for the next season.

The concern for mom & pop retailers and end consumers is disingenuous. 

donuts


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matty
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27/08/2019 10:17 am  

I think that the only real concern most of these companies have for retailers and consumers is that they keep buying. If products cost more, then the concern is that fewer of them will be sold. I would also imagine that the indicators that another recession may be on the horizon scare the shit out of them. Look at what the 2007 recession did to the snowsports business.

As for Doc's rant against Patagonia, we've been down that road before. While Patagonia has flaws, they also appear to have some genuine interest in doing business in a fashion that lessens the negative impacts of producing and selling their goods: http://ezloungin.com/ezlounge/gear/outerwear-thread/paged/36/#post-28147

This post was modified 3 weeks ago by matty

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Peter
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27/08/2019 10:41 am  

Because Patagonia doing something is soooo much worse than a company doing nothing to reduce


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c.fuzzy
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27/08/2019 12:27 pm  
Posted by: matty

I think that the only real concern most of these companies have for retailers and consumers is that they keep buying. If products cost more, then the concern is that fewer of them will be sold. I would also imagine that the indicators that another recession may be on the horizon scare the shit out of them. Look at what the 2007 recession did to the snowsports business.

As for Doc's rant against Patagonia, we've been down that road before. While Patagonia has flaws, they also appear to have some genuine interest in doing business in a fashion that lessens the negative impacts of producing and selling their goods: http://ezloungin.com/ezlounge/gear/outerwear-thread/paged/36/#post-28147

I loved the 2007 recession. The whisky militia deals were nutters. 

The economic indicators of something are mounting. Just how bad it gets and how CBs respond are up for discussion.

donuts


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pow_hnd
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27/08/2019 1:04 pm  
Posted by: c.fuzzy
Posted by: matty

I think that the only real concern most of these companies have for retailers and consumers is that they keep buying. If products cost more, then the concern is that fewer of them will be sold. I would also imagine that the indicators that another recession may be on the horizon scare the shit out of them. Look at what the 2007 recession did to the snowsports business.

As for Doc's rant against Patagonia, we've been down that road before. While Patagonia has flaws, they also appear to have some genuine interest in doing business in a fashion that lessens the negative impacts of producing and selling their goods: http://ezloungin.com/ezlounge/gear/outerwear-thread/paged/36/#post-28147

I loved the 2007 recession. The whisky militia deals were nutters. 

The economic indicators of something are mounting. Just how bad it gets and how CBs respond are up for discussion.

That won't happen this time around. The industry has totally changed the way they produce. Back then if a MFG had pre-season orders for 1000 of X-board, they would make 1500-1700 in hopes that shops would place reorders and then sell the rest to discount/closeout companies. That really fucked up the industry and pretty much everybody learned their lesson. With a few exceptions there is very little over production these days, 1000 units ordered, maybe 1100 produced, the extra 100 are for DTC and after x-mas re-orders from brick & mortars and and few of the big online retailers... 


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pow_hnd
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27/08/2019 1:26 pm  

 

  1. Since almost all snowboard manufacturers are privately-held companies, their spreadsheets aren't publicly accessible. Still, if we make our (somewhat) educated guesses above, our example of a board that they sell to the retailer for $300 would likely have a total cost of production of around $277.50.

 

 

I can tell you for sure your guess is way, way, way off... I worked in the industry for many years and worked for a very large company as a tech-rep and R&D rider. I was allowed to buy product at true cost, which the company I worked for referred to as "landed freight" price. This was the cost of manufacturing and then shipping to the US from Europe. A $500 snowboard was around $75 my cost, so the cost of MFG and shipping.( not the extra markup the company put on the product to cover operational costs of the company, just a true MFG cost, materials and labor )   The company also made skis, and lets just say I may have gotten into some hot water with said company by buying 10 or 15 sets of $1200 retail skis at landed freight cost of about $200 and then selling them for say $700 on eBay.... Eventually after a few seasons the company stopped letting the snowboard people by ski stuff... I never did it with snowboards because I didn't want to undercut the snowboard industry, but I had no problem undercutting and fucking the ski side of retail... 

Let's just say it funded some early 2000's Baldface trips... 


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