Will tariff-related price increases effectively destroy the international ship model kit market?

[John Mitchell]

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?

Scratch modeling is necessary even with kits. Most kits don't supply the correct size or rigging line or blocks. Other fittings such as carronades are also often out of scale. I put more time into researching proper scale and plans than I do into the actual construction of my models. I also have spent more on new materials than I did on the original kits. And I only buy quality kits.
But I still need to purchase those parts, and most of them come from Canada or Europe. I make much of my own rigging rope, but I can buy much higher quality blocks than I could possibly build. I spent $800 dollars getting carronades machined to scale and then found I could get ones just as nice, or possibly even nicer on line for much less. (I actually used the purchased carronades instead of the ones I machined.)
So even if I am scratch building, I am still reliant on overseas parts. They may be temporarily more expensive due to tariffs. And this may cause me to curtail my model building somewhat. But it certainly won't stop me. And if the rest of the world suffers enough from the tariffs they may allow free trade again. That will make the ship modeling even more affordable for everyone.

 

[Stuart Little]

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?

All I can say is that a certain resident of a house painted white should be KEEL HAULED, which I think would be appropriate, in this case

 

[CharlieT]

My gut is we will see some temporary rise in pricing related to recoupment of tariff cost, but as I said this will be temporary. The goal is not to have a tariff in the first place, but to force other nations to the negotiating table to reduce or eliminate the tariffs that they have placed on US goods for years. The end goal is reciprocal and fair trade. We see the beginnings of this with GMs announcement of moving all Chevy and GMC light truck manufacturing (1500/2500) from Mexico and Canada to Tennessee to eliminate the tariff on completed trucks, there will still be some cost increase on the discrete parts that are produced overseas, but my gut said those will return onshore in short order. This pain is temporary, and it will suck for a bit, but then I expect it to get better for both the consumer and the nation. Time will tell if I am correct

My gut is we will see some temporary rise in pricing related to recoupment of tariff cost, but as I said this will be temporary. The goal is not to have a tariff in the first place, but to force other nations to the negotiating table to reduce or eliminate the tariffs that they have placed on US goods for years. The end goal is reciprocal and fair trade. We see the beginnings of this with GMs announcement of moving all Chevy and GMC light truck manufacturing (1500/2500) from Mexico and Canada to Tennessee to eliminate the tariff on completed trucks, there will still be some cost increase on the discrete parts that are produced overseas, but my gut said those will return onshore in short order. This pain is temporary, and it will suck for a bit, but then I expect it to get better for both the consumer and the nation. Time will tell if I am correct .

I won't go in to details, but I think it important to note that the idea that the goal is to have "reciprocal and fair trade" is, in itself, a highly political statement. There is ample reason to believe that the goal is something quite different.

 

[Peter Gutterman]

Many thanks to Econ prof Bob Cleek for doing the research, analysis and untangling this mess, and what it actually means to us less informed (especially at such a granular level) lay people who were likely to go off "half-cocked" on a subject which over which we have had little knowledge, command, understanding or control. Mea Culpa.
Metaphorically I feel a little like stuffed tiger Hobbes going over the cliff behind "President" Calvin on his sled as he gleefully careens over the brink into the abyss. " Hang on this ride's gonna be SWELL!!!

 

[Peter Gutterman]

Maybe the upside is that while prices are higher than normal (whatever that is) we'll all dust off those kit boxes on our shelves, under the bed, and stuffed in the closet and go to work. (You all know you have them.)

How can a hobby get too expensive when the average participant buys more kits than he'll build in his lifetime?

I'd be more concerned about the future of a hobby that doesn't attract people under the age of forty. If the hobby is doomed, it will die out from lack of interest as we all die off.

Well said. Again, Mea Maxima Culpa.
Pete

I just want to add that I will continue buying parts from Drydock models and Parts for as long as I can afford (which, despite all the dire "When in trouble, when in doubt, run in circles, scream and shout!" kerfuffle) doesn't look like much of a problem for me for the foreseeable future.
The quality of their products and superior, personally responsive service are well worth the cost.
I am losing enough sleep already because of things over which I have no control!

Pete

 

[Peter Gutterman]

My utmost respect to Donnie for adhering to his responsibility for keeping the lid on and doing his job, regardless of the popularity it may or may not have.

Pete

 

[rshousha]

It is still the cheapest hobby around. No matter the price of a kit, one can stretch out the "cost per hour of fun" by adding details, improving the finish, or adjusting parts. One can easily cover a 25% price increase by spending 25% more time on a kit.

How much does it cost to play golf for a year? How much does it cost to go skiing, or sailing, or hiking? How much does it cost to build a model over that same period? If there are difficulties in the scale model industry, they are not related to the price of kits.

 

[rtibbs]

It is still the cheapest hobby around. No matter the price of a kit, one can stretch out the "cost per hour of fun" by adding details, improving the finish, or adjusting parts. One can easily cover a 25% price increase by spending 25% more time on a kit.

How much does it cost to play golf for a year? How much does it cost to go skiing, or sailing, or hiking? How much does it cost to build a model over that same period? If there are difficulties in the scale model industry, they are not related to the price of kits.

It all depends on one's priorities. My 'other' hobby is target shooting which, depending on the caliber, can cost from 10 cents per round to $1 per round. With an average of ~500 rounds per visit you can do the math. Combine that with the cost of handguns which my most recent purchase was $2000.
You guy's crack me up with all the verbiage regarding tariffs.

 

[Smithy]

For me, that kit is Old Ironsides. I remain hopeful that the Constitution will continue to sail forward.

Clever!

 

[3L120]

I think that we must remember that the USA is playing catch-up. China, the EU, and most of the rest of the world already have, and have had, tariffs in place. I am encouraged, however, by the civility of most of the posts.