Price adjustment August, 2008
China is experiencing the fastest economic growth of the modern era. This has brought with it rising living standards, massive investment in the country's infrastructure and advances in technological achievement. Thus, Chinese consumers now make up the largest user base for mobile phones, are benefiting from a highway network rivaling that of the United States and have witnessed a Chinese astronaut being sent into space.
The downside of this economic success, however, has been the dramatic increase in the cost of raw materials to record levels due to the enormous demand. Inflation is now at its highest level for decades and the prices of foodstuffs, utilities and property rentals have risen significantly over the last eighteen months or so.
All die-cast model car makers are suffering badly due to the ever-increasing production costs. Model car manufacturing is a labor-intensive business. Since the second quarter of 2006 the average wage of an unskilled worker has more than doubled, from less than US$100 per month to more than US$200 nowadays (including food and accommodation). In the case of AUTOart, labor costs alone represent half of the product cost. Every model passes through several hundred pairs of hands during its conception. Record high oil prices have simultaneously driven the costs of energy and oil-based by-products such as plastic, paint and thinner to record levels. These increments have not been of the order of tens of per cent. Rather, the increases we have experienced have been in hundreds of percent. Furthermore, the cost of zinc used to cast the body along with the nuts and bolts needed for assembly has also risen more than threefold since the turn of the century.
A shortage of labor is no longer a major issue. Recently hundreds of factories in our region have been closing down every month due to the rising production costs described above. The recent earthquake has also made many people homeless, causing some to leave their home towns to search for work further afield. As long as we are willing to pay what they ask, we can hire sufficient labor for our needs. However, China no longer benefits from comparatively low labor costs. These are now much higher than in neighboring developing countries such as Thailand, Indonesia, Vietnam and India.
Since last year the revenue from selling our model cars has not covered our production costs. In short, we are losing money simply because our existing pricing is no longer viable, this despite a price adjustment not too long ago. We have been producing to a quality level that cannot be sustained in an era of labor and material costs that are close to double the levels we enjoyed at the turn of the century. Furthermore, the construction of our models is becoming progressively more sophisticated, resulting in a higher rejection rate and longer lead times, thus pushing the effective production costs even higher.
The high oil price is not likely to fall in the near future. There exists the general phenomenon around the world of rising prices coming up against income levels that are barely increasing. Real incomes are being squeezed, resulting in less disposable income being available for hobby items such as model cars. If sales volumes decline the amortization of our tooling costs will have to be calculated over lower quantities, thereby increasing the product cost significantly.
Regrettably, a further price increase is imminent and inevitable. This is the only way for AUTOart to continue providing the range and quality that the brand is known for. As toys our products are too expensive and inappropriate. As artifacts, however, they continue to represent terrific value for collectors who appreciate the investment, both financial and human, that go into the development of our model cars. Our dedication, experience and professionalism remain undiminished.
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