Sunday, November 2, 2008

The cost of doing buisness...

Companies are not immune to the "living on a thread" concept that it seems a lot of Americans are hanging by. The image that there are many people who are a paycheck away from living on the street is not just a little scary, it's a whole lot of scary. Folks could be plugging away, carving out a niche for themselves and then, BAM!, the rug is pulled out from under their feet.

I'm not saying the following example is even related to this concept, but it illustrates just how drastic things can change. In the past couple of days, Rivendell has been hit with two potentially devastating, unexpected expenses. I'm only using Rivendell as an example because they have posted this information on their site but it can apply to any company doing business overseas and dealing in foreign currency, which could lead into a totally different tangent, but that's not a topic I'm going to touch.

When US companies work with companies based overseas, they have to negotiate which currency to use - USD, JPY, NTD, Euro... And if you are having complete bikes built for you in Taiwan, you will likely use all these forms of currency, including Swiss Francs. When the cost of the bikes is quoted by the assembly factory, it could be 6 months before they are actually produced. Six months is an eternity in today's economy as things flip-flop day-to-day. If you are good at negotiating, you can lock in a price and sign a contract that it is good for XXX days/months. Six months down the road, all the prices could be the same and everyone wins. Or the exchange rates could fluctuate and either you or the assembly factory comes out the winner or loser. You just never know. The parts are exactly the same, but because of a weak dollar and a strong foreign currency, the cost of that same part could be 20% higher. And they say gambling is bad...

So, what does all this have to do with the Rivendell mention? Last week, Grant posted this bit on the weak dollar/strong Yen. It takes about 2-3 weeks for a container from Asia to arrive in the states. Assuming it took 3 weeks for that container of Rivendell frames to arrive, it would have left port on October 8 for arrival on October 28. At that time, the JPY:USD was at about 108. Nervous time according to Rivendell's happy rate. As the ship was sailing, the Yen's strength grew and those frames (keep in mind that they were exactly the same frames as they were when they were loaded) all of a sudden were going to cost Rivendell more. It appears that the dollar bottomed out at just over 93 Yen on October 27 - that's a 14% price change just in the time it took the frames to arrive in the states. That's one of those situations were an approriately placed expletive probably seems appropriate.

And as if to add insult to injury, Rivendell's insurance rates went through the roof. Their insurance premium went from $5,000 to $20,000 - just because they sell bikes with their name on them. That's a 300% increase! I'm paying just under $2,000 a year for insurance and I do also want to sell frames with my name on it. I'm going to have to call my insurance agent tomorrow.

If there is one silver lining, it's that the frames I'm going to buy are price in US dollars. When I receive the final price, I know that's the same price I'm going to pay when they are ready to ship. Small consolation. I feel bad for Grant. That's a hard couple of pills to swallow, especially for a company such as Rivendell, which is not extravagant in their spending by any means. In an era where the big (and some smaller) bike companies have new product year launches in exotic locales and spend countless millions sponsoring teams whose riders are one momentary lapse in judgment away from dipping that needle in a vial of go juice, seeing a champion of bikes for bike folks get hit with expenses such a this is a tough one take.

(What's playing: Led Zeppelin Dancing Days)


Guitar Ted said...

Wow! Well, you've got to wonder a few things in light of your post here...

#1. When does the "gray train" end in terms of the media camps, big teams, etcetera.

#2. When does the yo-yo economy, and exchange rate kill off companies like Rivendell. Sure, Grant signs off by saying, "We'll be okay....", but for how long? How much of this can a company take?

#3. When do we all figure out that we can just ride our own rigs and become insurance salesmen/women? (Sheesh! That rate is highway robbery, not insurance.)

blackmountaincycles said...

"Gray" train? Missing a "v" perhaps? I don't think we'll see a lessening of road sponsorship. It seems US companies are falling over themselves to sponsor high profile teams. Media/dealer camps will probably move from places like the Canary Islands to the company's back yard.

With the exception of what the euro had been doing, exchange rates (especially the Taiwan dollar and Japanese Yen) seem to fluctuate around a rate that seems to work well for most. This recent case of the JPY has since rebounded ever so slightly. I would anticipate it leveling out at a bit over 100 - based on historical data and a pure WAG.

As soon as we start taking responsibility for our actions.

Bushpig.vrc said...

Seems like the insurance costs of foreign currency hedges are in order, e.g. if you are buying yen, sell dollar futures or vice versa. No sense having your behind on the line for FX risk given all the other potential pitfalss out there.

laffeaux said...

Mike, keep us posted on what your insurance company says. If your insurance triples because a down tube says "Black Mountain Cycles," it's safe to say that few bikes shops will want so sell a handful of bikes per year that say "Crazy Joe's Bicycle House." Selling enough house-brand bikes to cover the increased insurance costs is not likely to happen.

It's an unfortunate situation when small business (like bike shops and Rivendell) are forced to create a business strategy based on their ability to pay for insurance, instead of their ability to sell products.