On 24 Mar 2005 16:18:26 -0800, "Magician"
wrote:

Hi All

Having been in the industrial equipment market for 30 odd years, can I
make a few points about 'cheap' power tools and just why our Chinese
friends can make them so cheap.

A huge part of the cost of a new product - Bosch with the jigsaw, Skill
with the circular saw, is development. Not just the huge cost of
developing the tool, but developing the market for it.

If you look at the progress of any product in marketing terms the
initial sales of a new product will be low - people resist new ideas
and it takes time to get new products accepted. You don't make any
money at this stage.

The sales graph then starts to grow rapidly and this is where you stick
on an absolutely huge margin and make mega bucks.

Sales will then level off, your margin will drop a little, but is still
good and you get steady sales, but no growth. The product is a cash
cow in marketing terms.

If the margin came under pressure, you could only lower production
costs by cutting back on quality of materials.

So far you have described a marketing text book scenario. You
haven't taken into account the effect of the route to market and
distribution channel. Depending on the nature of these (e.g. how
many layers and their nature and the nature of your product and
brand), the financial model between manufacture and point of sale can
be remarkably different.

For example, a very high end manufacturer of capital goods may well
sell and support his products directly (perhaps you do that).

A quality manufacturer of equipment may choose to market his products
predominantly through value add channels. Said channel (e.g.
specialist tool supplier) may have a sales part to his business and
also service and spares.

At the low end there are the volume distribution outfits which work on
two parameters only. Maximal margin and minimal product returns.

Each of these has very different characteristics and hugely affects
the front to back business model for the manufacturer.



With most products the sales start to decline for various reasons; the
product is replaced by new technology (typewriters for example) or it
becomes a 'me too' product that everyone is making.

Some industries encourage this, the motor trade for one. Dawoo were
tarted up Vauxhall Astras. Vauxhall sold the rights & machinery and
moved on.

Many other industries do the same thing. Italy was the first 'cheap
producer' of power tools, compressors, welders, cleaning machines etc
because their labour rates were lower.

Now look at the Chinese. They only make copies of other peoples
products. No product development, no market development, no huge
investment whilst waiting for the return, no marketing to create a
brand.

This is not quite true. The Chinese manufacturing houses also make
products for western manufacturers to their specifications and quality
levels and to their designs.



They don't make original items, they make 'me too' products - often
passed on by European manufacturer's who have moved on.

You are ignoring patent, copyright and licensing of designs.


Add to that the huge difference in labour rates; monthly wage that
compares to a European hourly wage and no wonder they can make stuff
cheaply! They don't have to cut material quality to cut costs!

This isn't entirely true. They certainly do cut material costs. If
you compare a Chinesified version of a quality western power tool, you
will find that there are loads of substitutions of component material
and type to reduce the cost.

The other huge factor for them is the distribution channel. They are
forced to predominantly sell through the volume outlets who have only
two parameters in mind - maximum margin and minimum returns (the
latter ameliorated a little if the manufacturer is prepared to take
the hit on returns). There is zero added value by the volume
retailers, no service, no spares, simply shifting of product.




Another factor comes in, the rise of the huge retailers and especially
the 'hard discounters' like Aldi, Lidl, Netto. These people have major
market shares in Europe, but struggle in the UK because of our high
brand awareness (read snobbery).

There is brand awareness everywhere and in different ways. It is
wrong to equate it with snobbery - that is an oversimplification that
doesn't stand up to scrutiny.

For example, the chavs go for their fake Gucci, Rolex and Barbour
products - not really snobbery, more to do with following like sheep.

JCB decided to prostitute theirs on cheap power tools. It was low
risk for them because although they are known for mechanical diggers,
it would be unlikely that a bad press in £30 electric planers would
affect excavator image.

These cheap supermarkets struggle in the UK for a variety of reasons.
One is that they have assumed that everybody wants to buy on price.
Big mistake. They have assumed that people in the UK are keenly price
aware. Most people are not, they shop by habit.
They have also assumed that people want to buy things in a warehouse
rather than having it properly displayed. The major supermarkets do
a bad enough job at that. If you visit a large supermarket in France
like LeClerc, Auchan or even Carrefour, the fresh produce displays are
superb and so are the fish counters - and the French think that even
they are marginal.

The biggest mistake that any sales or distribution channel can make is
in believing that a business and product model that works in one place
will work everywhere. It doesn't.

For example, a Safeway supermarket near to me was acquired by
Morrisons. Previously, although it was not brilliantly run and the
displays were lacklustre, they did have a profile of products that
people wanted to buy - low end own brands, high end own brands and
major brands. I buy very little prepackaged food, but they had a
broad variety of items from all around the world. We don't have a
large ethnic population, so thae market was clearly to people with a
shortage of time who wanted to try out different things. All of this
has been replaced. They have loaded the shelves with their own cheap
products, the high end ones are all but gone and they have
substantially reduced the ethnic food range and replaced it with pies.
The result is that people are going elsewhere in droves. Somebody who
works there told me that sales are down by over 30% and falling.
They made the mistake of assuming that the business model and product
profile that works in one part of the country will work in another. It
doesn't.

Sainsburys - an incompetently run organisation if there ever was one -
has managed to gain market share from them
http://news.bbc.co.uk/1/hi/business/4378035.stm



Suddenly the retailers can shift the huge volumes the low cost
manufacturers need.

Simple facts are; that cheap Chinese power tool from Aldi was probably
once a top of the range brand manufacturers pride & joy. But due to
overheads you will find the same product at different prices.

That would make the assumption that the original manufacturer would
license out his design. A big assumption.


It is now entirely possible to have power tools that are made cheaply
but not cheaply made. You may be buying old technology, but there is
no reason to suspect inferior quality in every case.

There is always a reason to suspect inferior quality when a product is
at the low end of the range. This is common economics. It may not
actually *be* of low quality, but it comes back to the principle of
whether you want to buy solely on price without considering all teh
factors. If you do, and price is the only consideration, then you
might as well buy the cheap thing and not look any further.




Three year warranty a marketing ploy? Possibly. More often that the
cost of manufacture in a low wage economy exceeds labour rates and
transport costs in a high wage economy.

It's exactly a marketing ploy, and a very cynical one. For the
volume retailers it is an attempt to give the person buying the
impression that the product is of quality. they hope that people in
their minds equate this to the warranties given by the quality
manufacturers which are instead about that manufacturer standing
behind their product. There the expectation is that nothing will
happen during the warranty period and that there will be spares and
service after that.

The warranty offered by the volume retailer is far from being that. It
is a con to attempt to convince the gullible purchaser that the
product is of quality and in some way equivalent to the branded
offering with all of its backup. The reality of course, is that
there is typically no service or spares at all and failure after
warranty results in bin. This practice should be made illegal
because it is highly misleading.



--

..andy

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