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How does a price hike in raw materials affect motorcycle cost?



 

By Sean Kerr

Raw materials have seen huge increases in price over the past years, largely driven by manufacturer demand across Asia; the factory of the World. From textiles to electronics and vehicles the necessary components required to assemble these products are more often than not derived from raw resources mined, felled, grown and spun all over the world.

Let’s take a look at where a motorcycle comes from and why the rises in material costs are causing factories to charge more for their units.

To break the process of manufacture down into its key components we need to understand where the parts are coming from, if they are produced on site by the motorcycle company or shipped in from elsewhere, how the materials are applied to the bikes and factors that are less to do with the machine itself and more to do with general business operations.

Starting with the bike we have large amounts of steel. Steel prices fluctuate and have famously dropped recently but that doesn’t necessarily reduce the cost of the actual production of the part in terms of the labour, technology and skill required to manufacture precision parts. Steel probably takes up close to 20% of a manufactures production budget making up the frame, engine and most other parts. Steel needs high temperatures to cast and weld, large machines are required to cut and bend steel. The cost of running these machines must be factored into the final retail price of the bike. The same goes for the crafting of most parts from various materials.

Plastics are used around the bike on all sorts of items such as mirrors, guards, fairings and other assorted parts. If we talk about a scooter here, most of the bodywork is comprised of plastics. Common plastics are derived from crude oil and many Chinese bike builders will choose to have them produced in another factory specifically set up for plastic production and moulding. Having to ship the plastic parts to where they will be added to a motorcycle will obviously cost extra money, once again bumping up the production costs.

Heavier costs come in the form of rubber. Rubber, like plastic, is used in numerous parts all over the bike, mostly in small quantities except for the tyres. Tyre costs can completely change the value of a bike depending on the quality of the rubber, so if rubber costs go up, tyre manufactures will have to pass these on to bike makers. Nobody is going to buy a new motorcycle without tyres on it.

While larger state owned companies can swallow these extra costs into their huge budgets, smaller independently run enterprises are hit much harder. Seeing their profit margins become smaller and smaller to the point of almost being non-existent these smaller firms have no choice but to forward on their production costs into the final sale value of the motorcycles that roll off their production lines.

It isn’t just material costs causing waves across the production floors and board rooms. As China’s economy progresses its worker demand increases in payment for their labours which nobody can really argue as unfair.

Grabbing a few views on the matter from several industry representatives at China’s last Canton Fair, many of the comments we received were along the same lines.

“We can describe how difficult the current situation is by saying that we will certainly go out of business if we don’t increase our product prices quite considerably,” said a senior official at Triangle Tyres.      This is a statement being echoed throughout all branches of Asia’s industry and is not exclusive the problem of motorcycle manufacturers.

Within the same sector, Mr. Mao Jianping, the chief analyst for Haitong Futures in the Chinese Rubber Industry, told us that natural rubber prices had raised by 500% from 2010. This price rise of tyre materials is indicative of the problems being suffered by the industry in general.

C2W’s chief editor, David McMullan, who keeps a keen eye on international finances, tells me -“under the global loose monetary policy condition, the soaring prices of major durable commodities may pose certain threats to China’s prices of commodities. In terms of the (PPI), the PPI in September suffered a rise of 4.3% year-on-year, up 0.6% in link relative and the prices of products like motorcycles and cars keep rising. Although the declining rate of the PPI has slowed down many institutions predict that it may rise again due to the increasing price of the raw materials required for the manufacturing automotive industry.”

It might be easy to think “Why not just sell more bikes?” In an already competitive market that isn’t an easy option. Once all cautions are taken to be as un-wasteful as possible and all improvements are made to make production as efficient as possible, when a company is still not making returns on their product, the only option left is to raise sales prices.

In the past many markets targeted by Chinese bike companies were also the target of India’s. The two nations produced similar machines at a similar quality and sold within a close price range. These days due to the added cost incurred by raised labour prices in China and the improvement of the Chinese motorcycle quality which obviously means using better quality materials the same markets that shared both China’s and India’s products are now opting for the cheaper, often lower quality bikes based solely on price alone. In importer nations where price caps are in place some of the potential market is automatically lost with the increase of price per unit.

 

 

 


February 17, 2016
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