China- Whether We Like It or Not. What’s to Do?

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 Okay, let’s review the rules.

 
1)            The consumer eventually gets what they want to the extent the market is capable of providing it.
2)            Companies do whatever they perceive will give them a competitive advantage, or at least let them survive.
3)            The less real differentiation there is among products in the same product class, the more important price will ultimately be to the consumer. Marketing can delay and reduce, but does not eliminate, this tendency.
4)            Lots of people have lots of stuff made in China and it works fine.
 
Don’t get me wrong. I am for sure not sitting here saying, “Isn’t it great that there can maybe be a lot of high quality skateboards from China!” It would be great for skaters, I guess, that they could get a less expensive product (for some reason nobody is allowed to say “cheaper” anymore) that performs well.   But this industry is sustained by a fairly small number of companies that can afford to support and nurture skateboarding because they make a pretty good margin on the product they sell. What happens to those companies and to the skateboard industry if China uses its manufacturing cost structure (that is, cheap labor) to take a chunk of industry production?
 
A Few Realities
 
First, let’s dispose of the argument that the Chinese can’t make good skateboards. I have heard all the arguments about why it won’t happen. They can’t get good wood, there’s problems with humidity, lead times are too long, production quantities required for China are too high, etc. These, and others I can’t remember, may be valid arguments at the moment. But they are tactical, by which I mean they can be solved if it’s worth the time and effort to the off shore manufacturer to solve them.
 
Low cost, foreign manufacturing has gutted (I don’t think that’s too strong a word) various U. S. manufacturing industries including wood products. Last time I checked, a skateboard was a wood product. But my guess is that until recently the segment was perceived to be too small to attract the attention of the off shore manufacturers. Now it’s not.
 
Second, it’s already happening. You know it, I know it. There have been cheap “Chinese maple” skateboard being made for a while and sold through the mass markets. Most “core” companies I have talked to are at least looking into the idea of getting decks from China or trying to figure out how to deal with it if their competitors do it. I don’t know who is or is not actually getting them now. Nobody seems too anxious to discuss it in detail.
 
Third, lots of skateboarders are willing to buy lower priced decks. Blanks and shop decks make up a big percentage of decks sold in U. S. shops. Whatever that percentage is here, it’s higher in Europe, where skateboards imported from the U. S. are even more expensive then they are here.
 
Finally, it won’t ultimately matter to consumers that the product isn’t made in the U. S. It doesn’t matter for a host of products made in China, including snowboards and skate shoes.
 
The opportunity/threat analysis is obviously a bit different depending on whether or not a company is a manufacturer. Let’s start with brands that are not.
 
Brands With No Factory
 
On the surface, it’s conceptually easy. You buy boards from an OEM manufacturer for X dollars a board now and you can get them from China for one half of X.
 
Wish it were that simple. My own experience getting stuff from China is that shit happens, and your control of said shit diminishes by the square of the language, customs and distance barriers. A solid relationship with your manufacturer, your own people on the ground where the stuff’s being made, and constant focus is required. The price may start out half of what it costs to buy it made here, but by the time it’s late and you have to air freight it, the registration is off on the screening, and the voids in the glue make every 10th board breaks, a lot of that cost advantage disappears.
 
But see rule 4 above. People are going to figure it out because the cost difference is so compelling. Maybe it’s worth it to air freight some decks. Maybe you bring blanks over and screen here. Some brand is going to do it if they aren’t doing it already. 
 
Then the issue becomes, what does that brand do with their newfound money from the portion of decks they have made in China? They basically have three choices. They can put the money in their pockets, they can cut their prices to grab share or they can increase marketing. Obviously, they can do some or all of those. Other brands, either because they want some of that extra money or because they have to respond to the competitive threat, are likely to respond by getting some decks from China as well.
 
Sourcing from China, or any other low cost country for that matter, is not a disruptive technology. It does not confer a long-term competitive advantage on anybody. To the extent it confers an advantage at all, it confers it temporarily on the brands that do it quickest, but not so quickly that it’s screwed up as described above. Pioneers are often rewarded by having monuments built on their graves. 
 
Next, what probably happens is that some of this pricing advantage inevitably begins to ripple through the market and reaches the consumer level. I can’t quantify how that will happen, but remember that if prices are lower you end up with less total margin dollars to work with unless you raised your margin percentage. Maybe as an industry we will exercise enough self-discipline so that we hold margins. 
 
Of course, I’ve never seen that happen in action sports and am not holding my breath. If, in fact, total margin dollars decline, then the volume you have to sell to make the same profit rises, and that’s what puts small companies out of business. Our existing industry business model seems to allow quite a number of smaller brands to survive, if not thrive. I think they are critical to skateboarding and we risk losing some of our market advantage, energy, and legitimacy with core customers if they go away.
 
One other thing could happen. Maybe, as they say in economics, demand is elastic with respect to price. That is, cheaper skateboards mean that more are sold. I expect that’s true to some extent, but I doubt it’s enough to prevent the compression of total margin dollars for the industry as a whole.
 
Factories With No Brands
 
Will have a problem if and to the extent that the brands they manufacture for can work out the problems with Chinese described above. At the very least, brands will use the threat of China to negotiate lower prices. Size, for any factory, will matter. Factories doing bigger volume will have an advantage. 
 
Factories With Brands
 
Will have a chance to find out just how important their teams and advertising programs really are to skateboarders in product choice. I’m not suggesting for a moment that, in the current market, they aren’t critical. We all know they are. But if a product that somebody doesn’t think is quite as cool is suddenly significantly cheaper, that can be pretty cool.
 
To the extent that Chinese production becomes viable, I expect them to have the same problems with OEM customers as any factory. To the extent their margins and volumes are higher, they have some flexibility in dealing with pricing pressures that stand alone factories and brands may not have. I won’t be even slightly surprised when I see these companies continuing to run their factories, but getting some of their production from China.
 
What’s An Industry To Do?
 
The only credible argument I’ve heard so far as to why some variation of the Chinese production scenario I’ve outlined above won’t happen is that our product cycle and process of distribution makes it impossible. I haven’t quite decided if that’s an actual barrier to entry or just another tactical problem to be overcome like the others I’ve described above. I hope to hell it’s a barrier. Keep changing those graphics and shapes!!
 
Know any other reasons? Let me hear from you and I’ll share them. The only thing I don’t want to hear is, “The skateboard industry is different.” It’s never been true in any industry I’ve seen. The worse thing individual companies, and the industry as a whole for that matter, can do is delude ourselves into believing that the usual competitive dynamics don’t apply to us.

 

 

Changes in the Skateboard Competitive Environment. Time to Run Your Business Differently?

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It’s interesting how a handful of events and business trends seem to be converging in skateboarding at this time. They have, I think, the potential to change the industry and how it does business. The consumers, as always, will get what they want. For some companies- usually those willing to take a risk and do something a little different- this will represent an opportunity. For others, it won’t.

 
Let’s look at these trends and speculate a little on how companies might be impacted and how they might take advantage of them.
 
The Trends
 
I don’t claim to know which of these is or will be most important so don’t conclude anything from the order in which I list them. More interesting than individual trends may be the way they interact. One plus one plus one plus one plus one may be more than five. It may also be three Or at least result in some surprises.
 
First is Chinese (or where ever is cheap) production. I wrote a whole article on that last issue, so ‘nuff said.
 
Second is the apparent slowing in the rate of growth of skateboarding. Look, some slowing was inevitable. If skateboarding kept growing at recent rates, soon everybody person on the planet would be on a skateboard and we’d be trying to sell to people (or whatever) on the third planet in the system of the star at the end of Orion’s Belt. Imagine a vert contest on a low gravity planet. “Dude, I’m going to go have lunch while we wait for him to come down.” Kind of boring.
 
Anyway, the third trend is the increasing willingness of kids to buy blanks and shop decks to save money. No surprise there. It’s not like that’s new. I don’t see it slowing down.
 
Number four on the hit parade is the decision on the part of certain brands to include new materials in their decks. It’s been tried before and hasn’t really taken hold. But what if it does?
 
Finally, like really baggy jeans and baseless snowboard bindings, the habit of changing shapes on skateboards every twenty minutes has run its course, at least for now.
 
A Lesson From Snowboarding
 
Seems like every four article or so, there’s a section with this title. Before snowboarding became run by a bunch of ski companies, back when it was as hot as skateboarding is now, I always looked forward to going to the SIA trade show in Vegas and seeing the latest “new” snowboard. One year it was the articulating snowboard. The next I was the dual camber snowboard. One especially memorable year it was the honeycomb snowboard. That’s my all time favorite because somebody flexed it and it broke in half. A gut splitter for me- not so funny to the guy trying to sell them.
 
Anyway, did any of these technologies actually work? Who the hell knows? It didn’t matter because they were never adopted by any of the leading snowboard brands. So they weren’t legitimized in the minds of snowboarders. So they died. Snowboarders knew what a snowboard was and these things weren’t it no matter how good they might or might not have been.
 
Skateboarders have always known that a skateboard is made of Canadian maple and glue. Now Tum Yeto, Santa Cruz and Mervin Manufacturing all have skateboards with new materials in them. They claim they work better and/or last longer. Great. But now skaters are being asked to accept that a skateboard isn’t just Canadian maple and glue. It can be something else as well, and this something else can result in a better skating experience.
 
What else can it be? What other materials might be included? How about a complete composite deck if (when?) somebody figures out how to do that? Might different woods be okay with Kevlar or fiberglass reinforcing the deck? Like Chinese maple maybe.
 
Plots Within Plots Within Plots
 
Now things get strategically interesting and we can look at some of the other trends we identified earlier. Let’s say growth slows enough to leave us with some excess manufacturing capacity. The usual result, if you’re making a product that isn’t really different from what everybody else makes, is price competition. So maybe brands without factories start shopping for manufacturers who can offer a little better price, or terms, or something. The factories with brands go, “Oh shit.” They want to keep their factory working, so maybe they try new materials in certain of their decks. The skaters like it. The decks do, in fact, last longer. But of course any factory can eventually learn to make a deck with these materials. As skaters, being bombarded with pictures of their favorite team riders on these decks, accept them as legitimate skateboards, more are produced. But they last longer, so total deck sales decline. And competition keeps margins from moving up. So unless skateboarding continues to grow quickly, total gross margin dollars available to the industry decline.
 
Maybe the good news is that the factories with brands are smart enough not to make blanks and shop decks. And early on, the new material decks might even sell for a premium. Blank sales decline as longer lasting decks with Kevlar or fiberglass take hold.
 
But advertising is lauding the functionality of new materials. Intentionally or not, part of the message is “the wood isn’t as important as it use to be.” Some factory without brands, or some smart person, sees an opportunity. Soon blanks and shop decks with new materials are pouring out of their factory. Or they went over to China and, with wood not quite as important it was, are bringing in Chinese maple decks with Kevlar or fiberglass or whatever. The price is low- like half the price- and they now have a way to deflect the wood argument.
 
Back when everybody was experimenting with new skateboard shapes every month, bringing decks in from China was even tougher. With that phase apparently over, another barrier to entry has fallen.
 
At the end of the day, when there is little real product differentiation, product changes are fairly easy to copy, and there are no effective barriers to entry, the consumer tends to get a better product at a lower price.
 
Good for the consumer. Not so good for the industry. I don’t expect skateboarding to be threatened with the kind of near total collapses in interest it has experienced in the past. I won’t say never, but not in the foreseeable future. It’s just become too accepted and too much a part of the mainstream for too many kids.
 
Still, in the scenario I paint above you can see the pressure on the industry that could be created. Some of that pressure is inevitable and already starting. I don’t claim to know which pressures will be greatest and how they will interact with each other. I, or you for that matter, could probably imagine half a dozen other ways things could get tougher for the industry than they are now.
 
On the other hand, we could also imagine ways things could get better. Maybe skateboarding can continue to grow. Demographics are still favorable. Maybe most kids won’t want to pay more for a deck even if it lasts longer. I have no idea how a twelve-year-old skateboarder thinks. Speaking from the perspective of having a thirteen-year-old boy, it isn’t even clear that they do think regularly and clearly. He, of course, feels the same way about me I suspect.
 
What To Do
 
If skateboarding continues to grow, and kids want wood decks with pictures of their favorite riders, enjoy the ride. It’s not that you shouldn’t try and run your business better, but cash flow covers up a variety of shortcomings.
 
If, on the other hand, you think, as I do, that some of these trends, individually or as a group, will make the skateboarding industry tougher than it is right now what should you do?
 
First, when you hear people talking about what “the industry” should do, smile politely and nod your head. Then remember that every single company out there will do what it perceives to be in its own best interest. You’re going to scurry back to your company and do that I bet. It’s this dynamic that always leads to somebody trying to do some of the things I outline above.
 
At the recent surf industry conference at Cabo San Lucas, the surf companies were worrying about skateboarding and the new chain of Hollister surf stores. At the National Ski Areas Association convention in New Orleans (tough spring I’ve had) they were worried about retention of new snow sliders. I remember when snowboarding was worried about the buy/sell cycle. In each case, the industry seemed to hope that the industry, or their association would collectively fix the problem for them.
 
In all three of those circumstances, and in skateboarding’s current circumstances, the message is the same. Business is a risk. It is a risk whether you sit on your butt and do nothing or try some innovative approaches to a changing competitive environment. If you do nothing, competitors may walk right over you. Or maybe not. If you try some innovative, new things some of them will probably fail and some will probably work. But at least you will be leading the way and making people react to you. It’s a risk either way, but my experience is that the companies with the mindset to take some risks are usually the winners when competitive circumstances change quickly.
 
Create your plan and execute it. Focus on what you can do right, not the stuff that can go wrong that you can’t control anyway.
 
Don’t worry, be happy. After all, you could in an industry that’s a whole lot less fun than this one.