The price of die cast model cars will become higher
Autoart die cast model was first launched in 1998. At that time, the basic labor cost in China was around $1.60US per day for a ten hour working day. The rate then, was almost double what it was a decade before. There were plenty of workers waiting at the front gates of every factories looking for work. These factories provided food and shelter for the workers. These workers came from far away provinces in central China to live and work in the factories for a minimum of one year and they would return home only once a year.
Provinces in central China are the most populous. Sichuan province alone has almost 100 million people. There were few developments before the mid 2000’s and the young people in the region were forced to look for jobs in the industrial zone around the coast lines. Many of them were female workers as young as 18 years of age, the legal age of employment, and had finished eight to ten years of education. They wanted to earn some money to help their families. Despite the low wages, they were able to save most of their income and were able to buy a small place to live in their hometown after working for a couple of years. Life was simple and the workers were happy just to work and willing to stay in the factory year after year.
Until early 2000’s, an average 1:18 scale Autoart models with 100 ~ 120 components would retail for around $50US and mass market toy grade model cars would retail at only $19.99US. The manufacturers, producers, importers, and retailers were all able to make their fair share of profits and the collectors were very active in collecting the models.
Today, a regular Autoart 1:18 scale model retails for around $150US. The price has increased as much as three times over the course of 12 years but the people involved in the manufacturing and marketing of the products are not getting their fair share of the profit margin. Many factories are now losing money and the main reason for this is that the labor cost has gone up almost ten times when calculated in US dollar. The basic worker still earns $1.60US but it is now an hourly rate instead of daily rate. Despite the higher wages, the workers are not happy with their jobs and always demand a higher pay. They would quit as soon as another factory offers a higher pay. Inflation in China has become a major issue in recent years. Housing prices have gone up ten or even twenty times and workers can no longer buy a small place to live after working for a few years. On the other hand, the standard of living has improved greatly over the last decade. Televisions, smart phones and computers have become common household items in average families. There are 500 million internet users and 600 millions mobile phone accounts in China, three times more than the USA. There are also more Chinese learning English than the whole America. People in China are quickly learning what the desirable things in the world are and they are no longer happy with a life that consist of having a shelter over your head and food on the table to feed the family. There are more than 18 millions new cars filling the road of China every year, 50% more than America, every Chinese wants a car instead of paddling a bicycle.
The cost of manufacturing a high quality 1:18 scale model has gone up tremendously due in big part to the cost of labor. The retail prices may have tripled in the past decade but the people involved in the making and marketing of the products are much worst off.
The mark up factor from production cost all the way to the final retail price is largely depended on the upfront investment and the estimated selling quantity. For example, designer brand clothes itself may cost only $10US to produce, but the marketing cost such as fashion show, advertising, designing fee and packaging may cost tens or even hundreds of thousands of dollars. If the clothes are sold in hundreds of pieces, the retail price will have to be $100US or over in order to breakeven the investment. If it is mass-market clothing selling in tens of thousands of pieces, under the same production cost of the $10US, the retail price can be as low as only $30US. For a die cast model car, the main upfront investment is the tooling cost (moulds). The licensing fee can also represent a large sum of money for some hot subjects and upfront payment is to be paid to the car makers regardless if the model is selling or not. The tooling cost for a 1:18 scale model is an investment of six figure amounts, if the selling quantity is in tens or hundreds of thousands, then the amortization of the tooling fee is only one or two dollars for each model. But if the selling quantity is only in few thousands of pieces, then the amortization of the tooling is tens of dollars for each model. The same applies to license fees; a hot subject license fee can be in the six figure amounts.
Mass market toy grade die cast models can be sold in tens or even hundreds of thousands of pieces; the amortization of tooling fees and license fees is not a major cost factor in this case. But for high quality collectable die cast models, only thousands of pieces will be sold, very seldom would it break into the five figures level. Therefore, the amortization of tooling cost and licensing fees becomes a major cost factor.
Until now, the mark up factor for all die cast model cars is set at around 2.5 ~ 3 times from production cost to retail price. It may be workable for mass market products, but it is no longer viable for high quality models. There are in fact much fewer high quality new die cast models being released into the market recently because there is no profit to be made for people involve in the business.
The factories are being squeezed to keep the prices as low as possible and they are aware that if the prices become too high, very few people will buy model cars. Even if the factories make no profit, it is still better than receiving no orders. If fewer orders come in, thousands of workers are still paid the same but with lower output. Major OEM model car factories in China are minimizing their production capacity or changing their product line because manufacturing die cast models has become too expensive and too complicated when the labor cost is so high and the production involves hundreds of processes using thousands of workers.
When the price of model cars continues to climb higher and higher, less and less people are collecting them. When there are less collectors buying the model cars, retail shops have a much harder time to survive with the declining sales and the higher cost of operations. The online shops are also taking away a big part of the retailing business because they have much lower overhead and they can sell with a lower profit margin. We are seeing model car shops closing down one by one in recent years.
Die cast model cars are classified as toys and the companies can only participate in toy related exhibitions and trade fairs where mostly toy related traders go to conduct their business. As long as people regard these die cast models as a toy, it cannot be priced too high or else people will say it is too expansive and refuse to buy them no matter how nice and delicate the model may be.
For example, a normal Swiss watch consists of less than a hundred components and can be priced for several hundred or even several thousands of dollars. Most of these so called Swiss watches are all having the cases and bands manufactured in China then shipped to Switzerland to have the movement fitted which will then qualify the watch to become Swiss made. When it is Swiss made, it can be priced ten times more than watches made in developing countries. This is the norm in the market and the general perception of consumers. Most people accept that if the watch is made in Switzerland, it has to be expansive. And if the product is made in China, it has to be cheap even though the quality is very good.
The development time for a high quality 1:18 scale model that consist of more than a hundred components, is around one year. If the component number is several hundreds of pieces, then the development time can be two years or even more. Each process during the development period requires many experienced engineers to work on the project. The whole development is far more complicated than regular watch making.
For a high quality 1:18 die cast model car that is made in China, collectors are already complaining that the prices are too high when models are retailed at $100US or over. Some collectors even commented that the workers are getting too little pay and the producers are making too much profit by raising the prices again and again. The true fact is the opposite; the producers are not getting enough money to pay for the ever increasing worker salary. If the model producers were to apply the norm of the other products as mentioned, the viable retail prices would have to be doubled or even tripled. Unfortunately, the product is regarded as toy by the general public even though some will name it as collectable. When it is a toy, it has to be cheap, especially when it is made in China. There must be a change in the product perception by the general public and the price must be higher than what it is now, otherwise, the wages of the workers are going to increase year by year; more and more factories will stay out of the business when they can no longer afford to lose more money and very few collectable die cast models will be made in the future..
Fingercraft and car models making in China
Despite having the wages of basic labors in China increased almost five times over the last decade, model cars are still being manufactured in China. Nowadays, the basic income of a worker in China is more than double the basic wages of other developing countries such as Pakistan, Bangladesh, Indonesia, Vietnam and India; many factories in China, particularly in the garment related industry, have relocated their production facilities into these countries, an effort to reduce their production cost in order to be more competitive in the market.
One of the main reasons that the model car industry is still remaining in China despite much higher wages is that the work requires a lot of the fingertips maneuvering. We call it “fingercraft”, which is more sophisticated than “handicraft”. Fingercraft is unique to countries using Chinese characters (Kanji); countries using Chinese characters also using chopsticks to eat such as China, Japan, Korea, Taiwan and Hong Kong. Children in these countries learn how to write Chinese characters as young as four or five years old, which at the same time, also learn how to use a pair of chopsticks to eat. Learning Chinese characters is a training of seeing a character through the eyes; then the brain commands the movement of the fingertips to replicate the contour of the characters on a piece of paper using a writing tool repeatedly fifty or hundreds of time. Throughout the primary stage of education a child needs to learn more than a thousand characters so the process of replicating is repeated almost everyday. The calligraphy art is weighted heavily in Chinese community and many Children would go one step further and learned the brush pen calligraphy which is even more sophisticated. The soft tipped brush pen is not only about movement of the pen, it is also about the delicate pressure being applied on the tip to regulate the width of the strokes.
While learning how to write Chinese characters, most children would have to master a pair of chopsticks at the same time before they would be able to pick up the food they like on the dinning table. Eating with a pair of chopsticks requires the maneuvering of a tool with the fingertips and when it comes to picking up a peanut, for example, the amount of pressure being applied is rather delicate; too much pressure and the peanut will jump out; too little pressure and it will slip out.
Chopsticks has been commonly used in China for more than three thousands years while the rest of the world only started to use forks commonly on the dinning table not more than six hundreds years ago.
Applying decal on the bonnet using chopsticks skill
The present hourly rate in China is still around US$1.40 and the workers can handle delicate processes. The same kind of process would easily cost ten times more in developed countries and the average age of the workers are much higher. Many so called Swiss made watches selling for thousands of dollars are having the cases and bands fabricated in China and then shipped to Switzerland to fit the locally made movements in order to certify the watch to be Swiss made.
For a while, the model car industry will still remain in China even though the cost of labor keeps increasing. Other developing countries where the labor cost is only half of China, is mostly limited to manufacturing handicraft products but very rarely up to fingercraft products. Whenever mass market products require a lot the maneuvering of fingertips to work with, such as watches, hand-painted porcelains, embroidery and model cars, they are mostly crafted in China.
Real leather are trimmed and upholstered on the plastic seats of model cars
A short video clip in youtube showing how decals are being applied.
Why Are Model Cars Becoming Expensive
The long Chinese New Year Holidays are now over and the workers are gradually coming back to the factories from their home towns. By now, their wages have increased another 20% under the new minimum wages requirements announced by the Chinese Government in February.
A decade ago, the average basic worker would receive a lump sum salary of 400 ~ 500 RMB Yuan per month. The exchange rate at that time was around 8.9 Yuan to the US Dollar, so this was equivalent to $50 ~ 60 US Dollars per month. This salary was based on an average of 60 hours per week, Monday to Saturday, working about 10 hours per day. This was the norm for the industry in China.
Since then, the minimum wages, China’s development, and China’s living standards have been advancing at an enormous rate. The cost of living in China has become much more expensive compared to only ten years ago, particularly in the housing market. Because of this, the government needed to act accordingly in order to offset the ever increasing living cost. This is when the government enforced the Labor Law in 2007 which was largely ignored previously by the industry. Under the law, the national weekly hours worked is 40 hours per week. Any overtime hours would be paid at a rate of 1.5 times on weekdays and double on weekends. Also, all of the retirement and social benefits would need to be added on top of their income. When all of these changes are applied, the average income for the basic worker increased drastically to around 1200 RMB Yuan per month. These drastic changes forced thousands of factories making products at low profits and were labor intensive to close down.
The global financial crisis erupted in late 2008, but China was able to recover quickly. By the end of 2009, everything was pretty much back to pre-crisis levels and in 2010, China’s economy continued to progress at a very quick pace. Housing prices went up at a staggering rate and food became more and more expensive. Workers earning the basic salaries could hardly keep up with supporting their basic needs. So, the wages needed to be adjusted again and again or else the workers would leave the factories and look for work elsewhere for higher paying jobs. Workers now do not want to work at a factory that will not guarantee 60 hours per week. They need the all the possible extra income generated by the overtime pay. It is not easy for factories today to utilize all the workers for 60 hours per week, especially during weekends. But since they now have no choice, it is making the cost of production much higher for factories in China.
As of today, the basic worker earns a lump sum of about 2,000 RMB Yuan per month. With the RMB Yuan exchange rate under enormous pressure form the USA and Europe, it is forced to appreciate gradually from 8.3 to 6.6 against the US Dollar. The average minimum wage now stands at around $300US Dollars per month. This means that the basic salary in US Dollars has increased almost 500% in the last ten years.
A high end die cast model car brand like Autoart is particularly hard hit when the labor cost increases. The proportion between the material cost and the labor cost is approximately 1:4 due to the hundreds of workers needed to manufacture each and every model car on the production line.
The licensing fees for the model cars are also getting higher every year. Back in the 1990’s, no car makers really paid any attention to their intellectual property and only demanded a symbolic fee when a model maker was willing to produce a model to promote their brand. When the profits from car sales became slimmer due to competition, the car makers looked at other alternatives to yield extra income and the licensing of brands became a very good source of revenue for the car makers. Licensing has become such a money maker that race organizers, oil companies, tire companies, etc, are all jumping in to get their share. Today, if a model maker decides to make a race car using a special color such as the Gulf Oil’s blue and orange, they would have to pay a fee to Gulf because of their patented color combination. Some models today can have double, triple or even quadruple licenses and the combined licensing fees can be more then 20% the ex-work price. Because of this, there are much less racing model cars being launched by model makers. It has become too expensive to make and fewer buyers would be willing to pay that price.
It was more profitable for Autoart to sell the model cars back in the early 2000’s with models retailing at around $50US then it is today with model prices retailing at triple the price. Both the model makers and the buyers were happier ten years ago when the material and energy cost were much lower and the factory workers were quite happy with earning only a fraction of today’s wages because life was much simpler and also cheaper then. Even with an increase of almost 500% in the minimum wages in such a small amount of time, the factory workers are still unhappy and will quit their jobs easily to look for work elsewhere to find higher wages.
Despite increasing the selling prices over and over again, it is still impossible to catch up with the ever increasing production cost. When prices increase, the number of collectors buying the model decreases thus reducing the quantity of models sold. This directly affects the amortization of the investment made by the model makers and it drives up the cost of production even further. Most die cast model makers, especially the high-end model makers suffer badly due to the lack of sales and the ever increasing cost of production.
To lower the production cost, it may be possible to move the production facility to another country that still offers low labor cost. However, no other countries can match the quality of workmanship done by Chinese workers. The detailing work and precise manipulation of such small parts with their fingertips is unmatched in the world. It is very difficult for other developing countries to emulate China on anything related to arts and crafts.
Even though the labor cost in China has increased so much in only a decade, China is still considered to be a low cost labor country with a current hourly rate of around $1.20US per hour. Until the mid 2000’s when the hourly rate was around $0.30US per hour, collectors were mostly spoiled with the low price models and now with such a fast increase in production cost, many collectors do not understand why the models are now at such a price.
An average 1/18 scale Autoart model car is now retailing at around $120 ~ 150US. The price is still considered to be very reasonable considering the amount of time and investment put in each model that is released. Each model consists of hundreds of parts takes about one year to develop and the production of each and every model involves hundreds of workers in the production line. Many products such as watches which also have hundreds of parts and are as complex to make demand much higher selling prices.The price of a high end model car will continue to increase as the labor cost and living standards improve in China. There will be fewer people buying model cars as prices increase, but the collectors who understand what is involved in making a high end diecast model will continue to appreciate the reasonable prices and quality being offered. They will understand that there are no other countries able to offer the same in terms of price and quality and that these are not just model cars but a work of arts.