Coyote2

I do that for a living, not for a hobby.

You could always try reading some books.

slide13

Your comparison to things like optics and such is pretty inaccurate in my opinion. If you think a set of DA cranks are expensive look at some pro level camera lenses. Thousands of dollars for a single lens is the norm at the top end (DA is top end so it's only fair). Check out Canon L stuff or anything from Leica or Hasselblad. It will makes cycling seem downright cheap by comparison when you figure you need a camera body, a selection of lenses and lots of other stuff.

As for the DA crank cost of production....why do you want to know? I doubt there are more then a handful of people at Shimano who know enough about all the company costs to figure that out. I don't think there is any way for you to figure it out but I can't imagine why it matters. If you take out design and r&d costs then the numbers seem somewhat meaningless at that point since without those factors the cranks couldn't be made in the first place.

carpediemracing 

I should point out that I am in no way an economist It might be painfully obvious but I hope that some of what I write makes sense.

I have had some first hand experience with what I've posted below, except for the cost of DA cranks. On with the show.

The Dura Ace crank you use as an example is a relatively unusual part because it's cold forged (Ultegra and below are NOT cold forged). Other types of parts have different costs associated with them, but cold forging is sort of the holy grail of shaping metal. Cold forging requires a lot of heavy machinery, prototype parts, expensive dies, and lots of energy. The beginning of this bit talks about some of it:

https://thisjustin.bicycling.com/2006...rst_impre.html

Shimano is one of the larger cold forging companies around. They supplied Saturn with their car transmission gears for a long time (they may still, I dunno). They're that big. They have a lot of industrial capacity but they need to pay for the "blocks and blocks" of factory and machinery.

Campy does cold forging too, they used to sell car wheels as well as bike parts and tractors I think.

This cold forging is similar to the "hydroforming" of aluminum (first used in a car I think in the second last generation of Corvette, now I noticed it's being used in bike frames). This also requires some sophisticated machinery and design.

Having said that, with production now at some very high number of DA cranks per year, Shimano can probably make them for $25 or $50 (just a wild uneducated guess) a crank. But that's the manufacturing cost, with the product sitting on a shelf in a Shimano factory in Japan (or wherever).

The hand built stuff might take less initial investment and therefore may cost less to make. Hand built wheels, for example, don't require multiple $500k machines, the space to install them, and the electricity and permits needed to run them. Instead you get a bunch of wheel builders, $300 Park stands, and tell them to go to it. However, the cost per item will be a bit higher since you have to pay and retain your skilled labor.

This is the same with CNC machining. The CNC machine may be cheaper and easier to operate than a cold forging machine (less design process - just punch in numbers and go) but it makes for weaker pieces. Cold forging is superior because the metal grain follows the contours of the piece, hence you don't see CNC stuff at the top.

If you make enough of whatever you're making, it gets cheap. But you have to sell it all. It's hard to balance demand and cost.

Oakley apparently pays about $5 to make virtually any of its plastic glasses (metal I have no idea). Their markup is insane since many Oakley dealers, at full price, do not even get a 50% margin (i.e. a $160 pair of Oakleys probably costs the dealer $90+, which means Oakley is getting $85 profit). But Oakley sells a lot of product, so they have long since recaptured their initial investment in production. They would be an excellent investment vehicle and some very successful financial companies have loaned them millions of dollars.

With expensive wheel building machines, I've heard from some authoritative people that cheaper fancy carbon wheels cost in the range of $100-150 to build (each). Those wheels would wholesale for $300 or more, but that's if you can sell them. If you can't, you have to dump them (this bit is something Oakley doesn't worry about, neither does, say, Zipp). Dumping obviously drives down the manufacturer's margin.

Finally shipping is a tremendous expense if you are manufacturing things overseas. If you air ship, it's really, really expensive, but sometimes you have to do it to meet demand or schedules (trade show, etc). But even by ship it's not cheap. First off, you're sitting on your inventory for an extra month as the ship crosses the ocean, sits in customs, etc. Second, ship cargo is charged by volume, not weight, so you jam as much as possible in a container. Shipping large, light items (say bike frames, rack pod things, bike cases) costs a lot because they take up a lot of room. Shipping small, heavy things (cassettes, derailleurs, cables, nuts and bolts) costs less because they take up, relatively speaking, so little room. Ideally you use the large items to hold the little items so you can ship a lot at once but without using anymore container space.

I learned a long time ago that manufacturing is where the money is made. But if you manufacture something and it doesn't sell, you lose big time. Risk and reward.

A friend of mine thought he could sell something and had 10,000 pieces produced (since it cost marginally more than having 1000 produced). He now has about 9,950 of these things sitting somewhere as the original buyers backed out. I don't know what he lost other than time but I can't imagine him spending more than 30-50 cents per item. It's still $3-5k. If he sold them, maybe he'd have made a 50% margin, i.e. $3-5k profit. Worth it? Only if you get repeat buyers and sell 10-50k pieces a month. Otherwise, probably not worth all the time and energy. (The item would be a wear item so you'd have repeat customers, but there are similar products out there now).

I'm just thankful that there are others who manufacture, others who have LBSs, others who distribute. It would be so limiting if that wasn't the case. More power to them for sticking it out in their respective businesses.

not an economist but a former retailer who helped (in extremely minor ways) some manufacturers and therefore got some info that way,
cdr

Treefox

Related to this, if not in an obvious manner - I was surprised that SRAM didn't try to undercut Shimano at the Tiagra/105 level. I wonder if FSA will.

(Yet I can understand a business model which produces a product range - initially Force and Rival - which put the buy-in level - viz. Rival - at a fairly high level so that all those who wanted to 'give it a go' then had to buy-in at the Rival level. I wonder if we'll eventually see a groupset priced into competition with Tiagra and/or 105.... I'll be interested to see how FSA approaches it - I have the impression that they already have a toe-hold in the OEM market with their other components; maybe they can leverage that into getting some lower-cost groupsets picked up as OEM. Imagine if someone came up with a cost-competitive better-quality 10-speed alternative to Sora!! [oh... Xenon... yeah...])

scr660

I'm certainly not an expert on economics, and I realize that the truth is much more complicated, especially since my knowledge of accounting is very limited, but it doesn't seem too unreasonable to model the cost of bike component production with some concave production function and ask what the difference is between the marginal (not average) cost of producing (not distributing) a crank and the price at which it is sold to distributors and, then, to consumers. Maybe this assumption isn't good at all, so you can tell me why.

Psimet2001 

Spoken like a true academic...

...I think we all know what that means.

iab

I'm pretty thick. Do you mean perhaps, those who can do and those who can't teach?

Psimet2001 

Hocam

+100000

Coyote2

You're correct about being thick.

kudude

You're quoting pcad in your sig, but sound like botto. I'm not even sure if I'm on the right forum.

krusty

Anyone in manufacturing can tell you that there is a frighteningly high cost associated with the compliance with ISO standards. For a manufacturer to comply (and few don't aspire to it), their supply chain must comply. The cost at every stage is multiplied. Development costs for a new product must be fully recovered, and profits made before the next new product cycle. Costs are high, and they get passed on.

The retailer must make roughly a 33 margin average on everything sold in the store, or he goes broke. If he drops the price of something to compete with an internet retailer, he must make that lost margin up elsewhere. Clothing has higher margins to the retailer than equipment. I hate it when people nickel and dime their retailer, yet expect them to be there year after year. Some don't deserve to be in business (that goes for manufacturers too), but some deserve support. To look at a product and suggest a reasonable retail price based solely on the perceived value of the materials used or the function without considering the process required to bring it to market is quite ignorant.

Psimet2001 

That's incorrect on a few levels. First ISO is not a required set of standards in many industries. Most have realized that the only people the ISO certifications help out are the auditors and registrars. Having been several iteratoins of ISO, QS, and now TS certified I can tell you that your supply chain deos not in fact have to be certified. you just have to have systems in place to ensure that non-conforming product does not make it inot your streams.

Also development costs, R&D costs, etc. do not necessarily have to be recouped within a cycle. In most cases the original costs - most of which are intellectual and capital equipment - can be effectively amortized over the life of the product line - not just the life cycle of a model.


As for 33% margin for LBSs...I can only quote the only open and available numbers that I have access to from the world of bicycle distribution...

That would imply that anything below a gross margin of 37.7% is effectively a loss. Marking an item up to 41.9% on average would result in their measly 4.2% earnings. On $1 Million in sales that nets to a measly $42,000 a year in earnings.....BEFORE TAX. There are many more sub-$1 Million LBSs than ones that are over that figure.

krusty

The 33 margin I quoted was what I remembered from working both retail and manufacturing end of the outdoor industry about 10 yrs ago. Your figures truly surprise me, but I fully believe them.

ISO is for a lot of industries, a waste, but it continues to be foisted upon them by consultants who stand to make a fortune. I agree that ISO is not required, but the pressure to conform (and the expenses) is definitely there. Insurance companies who deal with product liability are quite enamored by it and the so-called 6 sigma designation.