Inflation is Coming
Posted by Sam Petegorsky on
This isn't a topic we normally discuss, but since it will greatly impact us (as well as everyone else), we figured we would make a post about it.
Like most companies, including some of the largest companies in the world, we don't manufacture products ourselves, rather we outsource it to contract manufacturers. Unfortunately, there are not a whole lot of contract manufacturers in the U.S., and for the products we sell, there are none.
As a result, we are forced to import our products. We are selective with the manufacturers we use, use only high quality materials, and test each product before we sell them. however, due to the fact that the products are imported, we are subject to the same supply chain issues that most other companies are.
Right now, the supply chain and associated costs is a disaster. To start with, the U.S. dollar has fallen against Asian Currencies by 10% over the past year. For a while our suppliers held the line on costs, but now we are seeing raise their prices due to the falling exchange rate.In the large scheme of things, that is a relatively small issue in the overall cost of our products.
A much bigger issue is shipping. During peak covid, shipping fees had more than tripled. It was assumed at the time, that shipping rates would return to normal as Covid waned. Unfortunately, that has not happened.
In fact, not only has shipping rates not decreased, but last month our cost for shipping was more than double of what it was during April of last year, and our latest shipment, was 40% higher than it was just last month.
For some smaller products, the cost of shipping is relatively inconsequential, but for the larger items we sell, the cost of shipping right now, can be almost as much as the cost of manufacturing the item.
We are trying to hold the line on our prices, but that is becoming increasing difficult to do. So unfortunately, we will likely be raising the prices in the near future on our products, particularly the bulkier products like the backpack sprayers and foggers.
If you want more of my personal take on this read on
So you maybe wondering, why not manufacture our products in the U.S.? Well, as we mentioned, contract manufacturing for the most part does not exist in the U.S.
The next obvious question is why doesn't contract manufacturing exist in the U.S.? The answer may surprise you. For the most part, it is not cost. Sure labor is more expensive in the U.S., but many products, including most of the ones we sell are not labor intensive, and the cost of shipping, and tariffs would easily outweigh the additional cost of labor.
The real obstacle for returning manufacturing to the U.S., is that manufacturing is capital intensive. The machinery required to manufacture is capital intensive, and a long term investment. Investors are not going to spend a fortune on equipment, when the rise in import costs may be temporary.
The tariffs weren't a bad idea, but the issue with them is that they are only in place due to an executive order, which can be reversed at any time, Similarly, the astronomical rise in the cost of shipping, may only be temporary, and considering that foreign nations control much of the shipping, it is highly likely that if their would be a resurgence of manufacturing in the U.S., the cost of shipping would immediately drop putting the new U.S. manufacturers at a disadvantage and out of business.
The other issue, is that the supply chain for parts no longer exists ion the U.S. So even if you would want to manufacture items in the U.S., you would still rely on imports for much of the parts.
This paints a pretty bleak picture, it is something I personally think about often, and it bothers me every time I think about it.
There is a long term solution to this problem but it would require our politicians to have the will to do something about it. The current temporary tariffs should be made permanent, this would give investors confidence to risk invest in manufacturing.
The other step which should be taken, is to provide grants for companies to purchase manufacturing equipment. Congress has spent trillions, and is talking about spending trillions more, while some of it maybe necessary, none of it benefits the economy in the long term. None of it will reverse the 2 decades long stagnation of wages, or improve long term employment. My two suggestions will accomplish both.
U.S. Corporations can also play a larger role. For example, Wal-Mart has a program to invest millions in domestic manufacturing. Sounds great on paper, and Wal-Mart is using it to get good press. Yet when I looked into it, I was shocked to find that the first grants Wal-Mart had given out, were to Universities to produce studies on U.S. manufacturing.
Maybe they were well intentioned, but their actions are typical of how we got into this situation. Shoveling money and grant into studies are nice, but won't do anything to actually effect change. If Wal-Mart really wanted to make a difference, they should be giving grants directly to companies to be used for manufacturing equipment.
This blog post may have turned more into a rant, but this is a subject I feel strongly about at given a lot of thought to. Who knows, maybe someone who can actually have an impact will read it.