MOTOCROSS MONEY WATCH! WHY BIKES COST SO MUCH!

August 10, 2012
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IF YOU HAVE SPENT YOUR ENTIRE LIFE BUYING THINGS WITH THE U.S. DOLLAR, IT CAN BE DIFFICULT TO WRAP YOUR BRAIN AROUND FOREIGN-CURRENCY VALUES.
 

If you have spent your entire life buying things with the U.S. dollar, it can be difficult to wrap your brain around foreign-currency values. For one dollar, you can buy about 78 Japanese yen or 0.80 euro (give or take the currency fluctuations of the day). Back in 2008, just four years ago, you could buy 125 yen for one dollar. So what, you say?

So that means in 2008, a $5000 motorcycle translated to 625,000 yen. Fast-forward to 2012 and let’s assume that it still takes 625,000 yen to manufacture that bike?$5000 won’t cut it anymore?because it takes more yen to buy a dollar, thus it takes more dollars to buy Japanese products.  The Japanese company would now have to charge $8333 for that same bike without making a cent more profit, because it sold for the equivalent of the same 625,000 yen.

Currency exchange rates constantly fluctuate as a net effect of many variables, so it’s difficult to understand and even more difficult to predict ebbs and flows. There is no hard-and-fast formula and no backing by precious metals to help determine the value of a U.S. dollar. The value increases due to a greater demand for that currency. Logically, when the overall production in a country is cranking, interest rates are high and conditions are favorable for foreign investors, there is more demand for that currency. But it’s not only about demand and tangible business, it’s about supply, abundance of currency and perception.

Trading in currencies is a market of its own. So government policy, overall economic strength and monetary stability all contribute to the perceived value of a currency. If people think that the dollar will depreciate, they will trade it for something that they think will appreciate?be it another currency, gold or pork bellies. When they get rid of those dollars, the supply of dollars increases and the value goes down.

What does that mean for U.S. businesses? When the value of a dollar is relatively weak, compared to the euro or yen, the situation favors U.S. exporters who can trade for something made with cheap dollars for a relatively valuable foreign currency. The problem with that is, motocross bikes aren’t made in the U.S.

WHY DON’T THE MANUFACTURERS JUST RAISE PRICES AND CALL IT A DAY? IT DOESN’T TAKE A DEGREE IN ECONOMICS TO REALIZE THAT RAISING THE PRICE OF OUR HYPOTHETICAL $5000 MOTORCYCLE BY 66 PERCENT WILL HURT SALES.

Since one U.S. dollar only buys 78 cents worth of a Japanese product, American consumers have to pitch in an extra 22 cents to make up the difference on the price.

Why don’t the manufacturers just raise prices and call it a day? It doesn’t take a degree in economics to realize that raising the price of our hypothetical $5000 motorcycle by 66 percent will hurt sales. An extra $3300 dollars is nothing to sneeze at. To earn a living, manufacturers need more than a profit margin on an individual bike; they need to sell a certain number of units. Producing fewer bikes to match that reduced demand can mean losing advantages of economies of scale.

Think about it: tooling, material and many other production costs averaged out per bike or specific part are lower when more of them are produced. It’s like getting a discount for buying in bulk. Lowering production volumes can raise the price of the product again, which would theoretically decrease sales again. It’s a downward spiral. And motorcycle production and sales are down?way down.

A motorcycle is the sum of a lot of parts and pieces that can originate from all over the world. OEMs may outsource many of their components from companies in other countries, and the raw materials they use for their in-house components can come from other places. As currencies change value, the cost to produce the bikes changes, too.

To further complicate things, most bike manufacturers don’t put all of their eggs in one basket, and that also goes for component companies. Honda, for example, has automobile manufacturing plants and assembly plants all over the world, including China, New Zealand, Indonesia, Argentina and Thailand. Motocross bikes, however, are produced in relatively small numbers compared to cars, so most are made in the same place. Labor, shipping, facility costs and everything else that go into running a business must be paid with local currencies that are subject to exchange-rate fluctuations. A company may accept the additional expenses of additional manufacturing facilities for the security of knowing that if one factory burns down, the company won’t go under. Additionally, they may choose to open a facility in a country where they do a lot of business to combat price fluctuations. If Yamazuki built a motocross bike plant in the U.S., the falling dollar would be offset by reduced production costs. Many individual components aren’t necessarily manufactured in one plant alone, because if Yamazuki uses the same hubs on every model bike, it might be smart to make them in two different plants in two different countries, even though it might sacrifice some advantages of the economy of scale. What it sacrifices in scale, though, it might make back in the currency exchange.

DIFFERENT COUNTRIES LIVE UNDER DIFFERENT REGULATIONS WITH DIFFERENT CONDITIONS AND RIDER PREFERENCES, SO BIKE SPECS CAN VARY WIDELY.

There was a time when one U.S. dollar was equal to one euro. Today, it takes $1.22 to buy one euro and theoretically 22% more to buy a dollar’s worth of European bike.

Different countries live under different regulations with different conditions and rider preferences, so bike specs can vary widely. Some bikes might have a lower compression to run on the local gasoline, use a different muffler to meet the local sound requirements, or have different spring rates and tires to suit the local customers’ preferences. Different specs mean different costs. You are probably aware that every major motocross bike manufacturer has R&D people in the U.S. who weigh in with the bigwigs back at headquarters on what should be improved on future models. Did you know that they can lobby to change U.S. models only? They can, but in the past year, the trend has been to build a global spec?with the same jetting, suspension, tires and mufflers. Why go global? Because the production runs of motocross bikes have become too small to split them into different versions for different countries.

FOREIGN BIKE MANUFACTURERS ARE FORCED TO CHARGE AMERICANS MORE DOLLARS FOR THEIR PRODUCT WHEN THE CURRENCY EXCHANGE RATE DEMANDS IT.

Foreign bike manufacturers are forced to charge Americans more dollars for their product when the currency exchange rate demands it. Raising prices has the side effect of making the bike too expensive for a large number of potential customers. What can they do about it? There are strategies to keep the production numbers up. These include increased advertising and sales incentives to drive customers to the dealerships, but these don’t really change the bottom line for the consumer. Manufacturers can also work with their dealers and financial institutions to help finance their product to the consumer. This is when manufacturers can use a rate subsidy. By subsidizing and lowering the interest rate for buyers, they can increase the lessor’s margin while making it more affordable for the lessee.

A forward-thinking vendor and manufacturer will try to achieve a reasonable term and fixed rate for the consumer. But as many credit-card abusers know, some lenders specialize in getting the borrower in trouble to keep him from making payments. This was a fairly common strategy in the early 2000s and prior. Some vendors and manufacturers essentially had their own credit cards that some customers got upside down on with their purchases.

Ask yourself this: if the exchange rate of currency is constantly changing, why don’t prices change in the middle of the year? Good question, and the answer is that manufacturers hedge their bets.

The OEMs cannot take a chance on selling bikes at a loss, so some enter into currency-futures contracts. Bike manufacturers take a hard look at projected currency values and projected motorcycle sales on a six-month or yearly basis. If Yamazuki projected that they would sell a million dollars worth of bikes in the U.S. and the exchange rate is 80 percent, Yamazuki can agree to exchange a million dollars for 800,000 euros by the expiration date. Even hedging isn’t foolproof. A very wild currency fluctuation could force Yamazuki to raise the MSRP anyway. This is where an American production facility is the best hedge?because a dollar is worth a dollar in the USA.

WHAT DOES ALL THIS MEAN FOR THE U.S. CONSUMER? IT’S CLEAR THAT MANUFACTURERS ARE HAVING TO CHANGE THE WAY THEY DO BUSINESS TO SELL BIKES.

What does all this mean for the U.S. consumer? While we are confused by all the complicated inner workings of today’s global economy and the buzzwords used to simplify them, it’s clear that manufacturers are having to change the way they do business to sell bikes. Remember that R&D is an enormous part of the cost of production. Manufacturers who continue to make significant updates or even introduce new models deserve credit for not cutting development to combat unfavorable exchange rates. The final price of a motorcycle is decided by the dealer, but manufacturers juggle a lot of different things to try to keep bikes within a reasonable range for consumers.

If you’re a fire-and-brimstone person, you may think, “How in the world are they going to stay in business?” On the flip side, you may realize how far manufacturers will go to sustain business, and where currency is concerned, there are plenty of ways to skin a cat.

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