First off, for those who believe that denial is just a river in Egypt, please refrain from getting your panties all in a bunch over "political" discussions. Without "politics," there would never have been the rise of the great European sailing navies, nor the rise of piracy, nor much of interest even in international trade and maritime commerce. It's always "about the economy, Stupid!" We all ought to be able to dispassionately academically discuss the economy of the present moment no differently than we do the economies of the Seventeenth or Eighteenth Century. Every ship modeler is an historian who expresses their understanding of history in three dimensions.
So, let's focus on the economy without getting tangled up in the politics.
The U.S. President, claiming the authority to do so under self-declared "emergency powers," has imposed tariffs on just about every identifiable other nation in the world. By a similar administrative order, existing foreign duties and tariff exceptions for individual purchases of foreign goods valued at less than $900.00 (upon which the business models of such foreign mail order operations as Ali Baba and TEMU are dependent) have been terminated. Now that these tariffs have been announced, what might they mean for ship modeling, and the ship model kit industry in particular?
Ship model kits are imported into the United States primarily from China, England, and the European Union. The new blanket tariffs announced are expressed in percentages which reflect existing tariffs plus the new tariff increases. While there is apparently much more detail which remains to be clarified, for the purposes of ship modeling imports into the United States, it appears that the previous tariff on Chinese imports of 34% will be increased by 20% to a new total of 54%. European Union imports will also now be taxed at 20%, while imports from Great Britain will now be taxed at the rate of 10%.
A consumer product manufacturing company requires a profit margin to remain solvent. The gross profit margin is the percentage of revenue that a company retains after deducting the cost of goods sold (COGS). A higher gross profit margin indicates better operational efficiency. In order to remain at all reasonably viable, a company must realize a gross profit margin which exceeds the average market rate passive interest on investments. In other words, it needs to make more money operating than it would by investing the value of the business in some other passive investment if running the business is worth the bother. The immediate financial market instability notwithstanding, an average rate of return on passive investments over time tends to fluctuate around 10% per year. Thus, it would appear that a Chinese or European ship model kit manufacturer will have to be able to realize 20% more gross profit, and a UK modeler 10% more gross profit to maintain their previous level of profitability.
I don't know the profit margins of the various foreign kit manufacturers. It is apparent, that there is a significant mark-up on ship model kits, because we routinely see substantial reductions in retail prices to promote sales or, apparently, for the purpose of inventory reduction at inventory tax time. Inventory tax is a type of property tax that applies to the value of goods held for sale by a business. It is based on the state in which you store your inventory. Although inventory itself is not directly taxable, there are carrying costs associated with it, including handling, storage, and depreciation. Businesses often sell off inventory at marked price reductions immediately prior to the date upon which inventory taxes attach, frequently in many states on March 31. It makes sense to sell off merchandise, even at the manufacturer's cost without taking any profit, in order to escape the inventory tax liability on the inventory which can easily be replaced at that same cost following the inventory tax benchmark date. We recently saw Model Shipways hold a pre-inventory Tax Day liquidation sale with discounts of as much as 50%. It might be inferred from that discount rate that Model Shipways' gross profit margin is somewhere around 50%, which is rather high. (The average profit margin for supermarkets, for example, is somewhere around 7%.)
Now, Model Shipways is a United States ship model kit manufacturer, and they won't be affected directly by the new tariffs. They will, however, be affected by the tariffs applicable to any materials, such as imported wood, that they must buy to make their kits and they will be impacted by any retaliatory tariffs imposed by other countries, so they are to one degree or another affected in much the same way as their foreign competition.
Considering a 50% gross profit margin, it might be thought that a foreign kit manufacturer could weather a 10% and even 20% loss of gross profit to tariff taxes, but it isn't that simple. First off, given the overall impact of the tariffs on the U.S. economy and the discretionary nature of a purchase of a non-essential product in what is likely to be a depressed economy, and to some extent in a product market which is heavily comprised of older customers, many retired and living on fixed incomes, it has to be expected that there will be a marked drop in sales when customers "tighten their belts for the duration." Additionally, any increase in the retail price of the product will exacerbate such a decrease in sales. This factor is likely to cut into the ship model company's gross profit rather significantly. Another downside factor will be that even the U.S. kit manufacturer's costs of production may well increase due to the tariff taxes as well. If imported wood species are used, as is often the case, there will be average minimum tariffs in the range of 20% imposed on those components.
When we consider that over the long haul a foreign kit manufacturer, by nature a relatively small enterprise, can realize interest income of ten percent or more over the long haul just by passively investing it conservatively elsewhere, such as the stocks and bonds markets, I doubt these new tariffs are going to "leave enough meat on the bone" to sustain foreign kit manufacturers' and other ship modeling related retail businesses who previously relied heavily upon U.S. expert sales. Indeed, even U.S. domestic ship model kit manufacturers and other related retail businesses may not find it possible to weather a prolonged ecoomic downturn and will go out of business. This is quite likely, in fact, if reciprocal retaliatory tariffs are applied by other nations, rendering the U.S. kit manufacturers' products priced out of foreign markets as the foreign kit manufacturers will be priced out of the U.S. markets by the U.S. tariffs.
This analysis presumes, of course, that none of the kit manufacturers raise prices to pass the costs of the tariff's off onto the consumers. It should probably be presumed, though, that before the new tariffs were imposed, they had already priced their products at the level of whatever the free market determined they could bear, so any increase in the retail cost is bound to reflect a rather closely corresponding reduction in sales.
In many ways, small closely-held companies are the "canaries in the coal mines" of the economy. Their inherent fragility makes them the first to fail when the going gets rough. Nobody needs to buy a ship model kit in a recession. I seriously doubt that the ship model kit industry can long endure the burden of a 20% or even 10% tax increase on top of their present overhead.
The only theoretical scenario in which the ship model kit manufacturers and related retailers might survive, will be if the imposition of retaliatory tariffs, there is an equalization of market share that maintains some semblance of the previous balance of trade. In other words, since neither nation's ship modelers can afford the imported ship modeling products, they turn exclusively to purchase all their required products from their domestic market producers in equal measures so that what one lost on exports, they gained on an increase in domestic business. This may sound like a good outcome, but as most have encountered in one instance or another, the loss is in the diversity of product availability. For insance, even before the present tariffs, modelers in the U.S. couldn't obtain Russian micro-carving tools, nor could the Europeans justify the additional import duties on U.S. made Byrnes Model Machines.
As much as the ship model kit industry has served to attract and hold the attention of the current number of enthusiasts, ship modeling isn't now, nor has it ever been solely dependent upon a kit and materials market for its existence. The pursuit of ship modeling is certainly made possible for many, if not most, by the availability of kits designed by the few for the many, but I do believe ship models will always be in demand, however small that demand may be, and will therefore always be pursued, by scratch builders, if nothing else. Absent some radical change of direction from the present course, I see the future of any sort of ship model builders' market being in the publishing of instructional and reference books and other media directed to scratch building.
It's a fact of evolutionary science that any organism which cannot adapt to change necessarily will go extinct. As a kit ship modeler, do you think you can evolve to a scratch builder given the dim prospects for kit availability in the future?
So, let's focus on the economy without getting tangled up in the politics.
The U.S. President, claiming the authority to do so under self-declared "emergency powers," has imposed tariffs on just about every identifiable other nation in the world. By a similar administrative order, existing foreign duties and tariff exceptions for individual purchases of foreign goods valued at less than $900.00 (upon which the business models of such foreign mail order operations as Ali Baba and TEMU are dependent) have been terminated. Now that these tariffs have been announced, what might they mean for ship modeling, and the ship model kit industry in particular?
Ship model kits are imported into the United States primarily from China, England, and the European Union. The new blanket tariffs announced are expressed in percentages which reflect existing tariffs plus the new tariff increases. While there is apparently much more detail which remains to be clarified, for the purposes of ship modeling imports into the United States, it appears that the previous tariff on Chinese imports of 34% will be increased by 20% to a new total of 54%. European Union imports will also now be taxed at 20%, while imports from Great Britain will now be taxed at the rate of 10%.
A consumer product manufacturing company requires a profit margin to remain solvent. The gross profit margin is the percentage of revenue that a company retains after deducting the cost of goods sold (COGS). A higher gross profit margin indicates better operational efficiency. In order to remain at all reasonably viable, a company must realize a gross profit margin which exceeds the average market rate passive interest on investments. In other words, it needs to make more money operating than it would by investing the value of the business in some other passive investment if running the business is worth the bother. The immediate financial market instability notwithstanding, an average rate of return on passive investments over time tends to fluctuate around 10% per year. Thus, it would appear that a Chinese or European ship model kit manufacturer will have to be able to realize 20% more gross profit, and a UK modeler 10% more gross profit to maintain their previous level of profitability.
I don't know the profit margins of the various foreign kit manufacturers. It is apparent, that there is a significant mark-up on ship model kits, because we routinely see substantial reductions in retail prices to promote sales or, apparently, for the purpose of inventory reduction at inventory tax time. Inventory tax is a type of property tax that applies to the value of goods held for sale by a business. It is based on the state in which you store your inventory. Although inventory itself is not directly taxable, there are carrying costs associated with it, including handling, storage, and depreciation. Businesses often sell off inventory at marked price reductions immediately prior to the date upon which inventory taxes attach, frequently in many states on March 31. It makes sense to sell off merchandise, even at the manufacturer's cost without taking any profit, in order to escape the inventory tax liability on the inventory which can easily be replaced at that same cost following the inventory tax benchmark date. We recently saw Model Shipways hold a pre-inventory Tax Day liquidation sale with discounts of as much as 50%. It might be inferred from that discount rate that Model Shipways' gross profit margin is somewhere around 50%, which is rather high. (The average profit margin for supermarkets, for example, is somewhere around 7%.)
Now, Model Shipways is a United States ship model kit manufacturer, and they won't be affected directly by the new tariffs. They will, however, be affected by the tariffs applicable to any materials, such as imported wood, that they must buy to make their kits and they will be impacted by any retaliatory tariffs imposed by other countries, so they are to one degree or another affected in much the same way as their foreign competition.
Considering a 50% gross profit margin, it might be thought that a foreign kit manufacturer could weather a 10% and even 20% loss of gross profit to tariff taxes, but it isn't that simple. First off, given the overall impact of the tariffs on the U.S. economy and the discretionary nature of a purchase of a non-essential product in what is likely to be a depressed economy, and to some extent in a product market which is heavily comprised of older customers, many retired and living on fixed incomes, it has to be expected that there will be a marked drop in sales when customers "tighten their belts for the duration." Additionally, any increase in the retail price of the product will exacerbate such a decrease in sales. This factor is likely to cut into the ship model company's gross profit rather significantly. Another downside factor will be that even the U.S. kit manufacturer's costs of production may well increase due to the tariff taxes as well. If imported wood species are used, as is often the case, there will be average minimum tariffs in the range of 20% imposed on those components.
When we consider that over the long haul a foreign kit manufacturer, by nature a relatively small enterprise, can realize interest income of ten percent or more over the long haul just by passively investing it conservatively elsewhere, such as the stocks and bonds markets, I doubt these new tariffs are going to "leave enough meat on the bone" to sustain foreign kit manufacturers' and other ship modeling related retail businesses who previously relied heavily upon U.S. expert sales. Indeed, even U.S. domestic ship model kit manufacturers and other related retail businesses may not find it possible to weather a prolonged ecoomic downturn and will go out of business. This is quite likely, in fact, if reciprocal retaliatory tariffs are applied by other nations, rendering the U.S. kit manufacturers' products priced out of foreign markets as the foreign kit manufacturers will be priced out of the U.S. markets by the U.S. tariffs.
This analysis presumes, of course, that none of the kit manufacturers raise prices to pass the costs of the tariff's off onto the consumers. It should probably be presumed, though, that before the new tariffs were imposed, they had already priced their products at the level of whatever the free market determined they could bear, so any increase in the retail cost is bound to reflect a rather closely corresponding reduction in sales.
In many ways, small closely-held companies are the "canaries in the coal mines" of the economy. Their inherent fragility makes them the first to fail when the going gets rough. Nobody needs to buy a ship model kit in a recession. I seriously doubt that the ship model kit industry can long endure the burden of a 20% or even 10% tax increase on top of their present overhead.
The only theoretical scenario in which the ship model kit manufacturers and related retailers might survive, will be if the imposition of retaliatory tariffs, there is an equalization of market share that maintains some semblance of the previous balance of trade. In other words, since neither nation's ship modelers can afford the imported ship modeling products, they turn exclusively to purchase all their required products from their domestic market producers in equal measures so that what one lost on exports, they gained on an increase in domestic business. This may sound like a good outcome, but as most have encountered in one instance or another, the loss is in the diversity of product availability. For insance, even before the present tariffs, modelers in the U.S. couldn't obtain Russian micro-carving tools, nor could the Europeans justify the additional import duties on U.S. made Byrnes Model Machines.
As much as the ship model kit industry has served to attract and hold the attention of the current number of enthusiasts, ship modeling isn't now, nor has it ever been solely dependent upon a kit and materials market for its existence. The pursuit of ship modeling is certainly made possible for many, if not most, by the availability of kits designed by the few for the many, but I do believe ship models will always be in demand, however small that demand may be, and will therefore always be pursued, by scratch builders, if nothing else. Absent some radical change of direction from the present course, I see the future of any sort of ship model builders' market being in the publishing of instructional and reference books and other media directed to scratch building.
It's a fact of evolutionary science that any organism which cannot adapt to change necessarily will go extinct. As a kit ship modeler, do you think you can evolve to a scratch builder given the dim prospects for kit availability in the future?
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