[2449] The Business of Making Pedals

Date: November 29th, 2018 | Comments : [1] | Categories: DIY.

Why are US-made pedals significantly more expensive than Chinese clones?

TL;DR: Chinese companies receive subsidies from China’s central and provincial governments. They also have an artificially low currency-exchange-rate, smaller profit margins, few worker safety programs, little environmental control, low taxes, low wages, long hours and few worker benefits, so the price of Chinese products will always be lower than similar products made in the USA.

Let’s take a simplified look at the basics of running a pedal business in the USA. What expenses does a pedalmaker have?:

Cost of Goods: This is the cost of everything that goes into the pedal. It includes the printed circuit board, all of the electronic components and the metal box, as well as the other hardware; switches, jacks, knobs, etc. It also includes the packaging materials, which are the shipping box, the label, the printed instructions and anything else that is included with the item.

Tariffs: This is a real item for pedal builders in the USA who source materials from China. I am getting added charges (up to 25%) to cover tariffs on imported items including plastic parts that I have molded there. It’s not hurting Chinese suppliers but it is putting a burden on US companies.

Wages: Unless the pedalmaker is soldering every pedal himself, then there are employees who have to be paid to solder the boards, assemble the pedals, and then test them out. Minimum wage in most states is $11 to $15 per hour even though the Federally mandated wage is less. There is also the problem that workers with any skill at all do not want to work for the minimum. An employee who can run a CNC machine or a pick-and-place line will not be satisfied with minimum wage. When I visited a factory in China a few years back, the workers were being paid $0.42 per hour. Well there’s your problem!!!

Taxes: The employer not only pays the worker, but also contributes to Social Security for them. In some states, there may also be a payroll tax that the employer pays. Even it is a one-man shop, they are still responsible for paying their entire share of Social Security and Medicare (SECA).

Worker’s Compensation Insurance: This is insurance to cover medical expenses, lost wages, and rehabilitation services for employees injured on the job. It may also help with legal expenses when your workers sue you.

Retirement/401k: Probably only the biggest pedalmakers have this, or may have one but do not contribute to it for the employees. Others do, and it is an added expense.

Employee Health Insurance: Everyone in the USA is required to have health insurance, but small businesses with less than the minimum number of employees are exempt from having to provide it. If they do provide insurance, typically the employer pays at least part of the cost.

Cost of Shipping: Once you have made a pedal and sold it, the pedal has to be shipped to the customer, so there is postage as well as the cost of the packing materials, unless you just slap a label and some stamps on the box and drop it in the mail.

Service and Repairs: There will be customers who need their pedal repaired and most builders will service their pedals for free or at a low cost. It is not customary to make a profit on servicing so it becomes an expense for the builder. Getting cheap Chinese clones repaired is almost impossible since the actual manufacturer is seldom known!

Trade Discounts: The pedal maker only gets the full selling price if they sell direct, otherwise, the distributor (such as Sweetwater or Musicians Friend) have to make a profit so the pedal is sold to them at 25% to 50% off the list price.

Rent: The pedals have to be assembled somewhere, unless the builder is working in his Mom’s garage. There will be rent or a mortgage to pay, which can be substantial, depending on where the company is located.

Insurance: Even if you rent a place for assembly, it is a good idea to have insurance on your manufacturing and office equipment. If you are buying the property where the business is located, then you also have mortgage insurance (required by the lender), insurance on the property itself, as well as interest on the loan.

Real estate taxes: If you are buying the property where your business is located, you pay a tax on the property and it is almost always thousands on dollars per year.

Building repairs and maintenance: If you own the building, then it is up to you to fix it when something goes wrong. If the heat or a/c goes out, then you fix or replace before the workers go on strike. If you rent, there are still small expenses related to repairs that you pay, sometimes just to get things working instead of waiting for the slum lord to send someone over to look at it.

Office supplies: Paper, pens, toner cartridges, envelopes, computers, even toilet paper and soap for the bathrooms are an expense.

Telephone service: A business has to have this.

Utilities: Electricity, gas and water services. Don’t forget the trash pickup fee either.

Internet and web services: Everyone needs and has them, and a fast connection can be $100 per month or more if you don’t live next door to Google.

Cleaning/janitorial: Not everyone has this service but some do.

Bad debts and Collection fees: Fraudulent charges and charge-backs happen. The business owner almost always has to absorb these fees.

Banking and charge card fees: Unless they only take cash, then the pedalmaker is losing part of the selling price on these fees. In The Business of Machining podcast (Ep.91), John Grimsmo talks about how much fees on credit cards, Shopify and Paypal cost him every month. Pedal makers have to pay similar fees to process payments from customers.

Consulting fees: Every now and then, a pedal maker hires me to do some work on a project for them.

Conventions and trade shows: NAMM? Other shows? It costs money to get a booth at the show and LOTS of money to put up a decent looking display, as well as travel, food and entertainment.

Advertising: Ads in magazines cost money… even the online ones.

Professional fees: Accounting services, legal advice and so on. Trademarks cost money to register as do the attorneys who file them for you, if you don’t do it yourself.

Training for employees: Probably not an expense but it could be under certain circumstances. Hazardous waste disposal, DOT shipping regs and similar training may be required.

Equipment and repairs: Even soldering irons cost money, while pick-and-place machines and soldering ovens cost lots of money! Repainting the office and fixing the computer go in this category. Robert Keeley recently revealed that the equipment for a pcb production line cost $350,000 and that is only for the board production and does not included CNC machines for drilling boxes or UV printers for making the front panels pretty.

Losses due to theft: Most of your employees are not ripping you off, but there can be a bad egg sometimes. Burglary is not uncommon either, and they will steal pedals to sell for drug money! The business owner absorbs this.

Other assorted expenses come up from time to time including, commissions, charitable deductions, discounts to customers and seasonal sale price reductions, replacing furniture or fixtures, interest on loans or credit cards, office moving expenses, rebate programs, web site design and much more. If you paint boxes or are powercoating, you might have hazardous waste to dispose, and that is quite expensive with a lot of government red tape.

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At this point, once all of the above has been paid, the business owner would probably like to make a small profit, as difficult as that may be with all things involved, especially considering the number of hours that a small business owner has to devote to his business in order to be successful, or at least to manage to stay in business for another year. If he is making minimum wage for all those hours, then he is doing quite well.

I went to Small Bear Elec and looked up prices for all of the parts to make a pedal similar to a Caline model that sells for $30.00 online. The total for buying all of the parts at retail was $36.85 without the cardboard storage box, label and printed instructions. Even if I made 10 of these pedals, the price would not come down very much. This price is a little high since the components are priced at retail but it is going to be difficult to get it below $30, even if 100 of them are made in a batch. At 1000 pedals, the cost of the components will get into the low $20 range but that also does not include labor or the indirect costs listed above, and no profit.

So how do Chinese manufacturers produce a pedal that sells for retail at $30 from a distributor? The $0.42 per hour labor is a good start, with no benefits or retirement, but the Harvard Business Review gives us an additional clue:

“Chinese products routinely sold for 25% to 30% less than those from the U.S. or European Union. We found that Chinese companies could do this only because of subsidies they received from China’s central and provincial governments. The subsidies took the form of free or low-cost loans; artificially cheap raw materials, components, energy, and land; and support for R&D and technology acquisitions.”

Combine those reasons with an artificially low currency-exchange-rate, smaller profit margins, few worker safety programs, little environmental control, low taxes, low wages, long hours and few worker benefits, and the price of Chinese products will always be much lower.

 

One Response to “The Business of Making Pedals”

[786081] admin Says: 10:30 am, December 8th, 2018

Price is a story that you are telling potential customers. What story does a $27 Chinese clone pedal tell?

The race to the lowest possible retail price says:

  1. This product is made with the lowest cost materials that could be found in the Shenzhen market, irrespective of quality.
  2. There is no repair service if this product takes a dump on you.
  3. You should not ask who is laboring to make these pedals nor under what conditions they work.
  4. You should not ask what environmental impact the factory that produces these products is having on the world.
  5. There is no R&D for future products. We will just copy what more talented people have spent time, money and creativity to develop.

Click here to read about prison laborers in Chinese industry


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