David Cersley and I recently represented Golfsmith’s R&D staff on a trip to China and Japan, where we met with our suppliers and attended to matters concerning new product design and development. We make these trips at least twice a year and intend to increase their frequency as clubhead designs become more intricate, requiring greater attention to detail during the tooling and development cycle.
Nearly all clubheads are now manufactured in the Far East and Southeast Asia. China is the largest manufacturer of heads for original equipment manufacturers (OEMs) and component suppliers. However, there are heads still being manufactured in Taiwan, Japan and Vietnam, too. Very few clubheads are produced in the United States anymore. While companies such as Karsten Manufacturing (PING Golf) and Callaway Golf possess their own foundries in North America, most of their production is cast in Asia along with everyone else’s.
I reported on the profound effects that the aerospace industry was having on the graphite shaft business a few years ago. Production startups for the Aerobus A380 and Boeing 787 Dreamliner passenger jets consumed mass amounts of carbon fiber, placing strains upon supplies for the graphite shaft industry. The law of supply and demand resulted in escalated shaft costs and longer lead times.
We’re now experiencing similar problems with the foundries producing clubheads. However, there isn’t a massive program like a new aircraft consuming all of the resources. Instead it’s more like a Chinese Industrial Revolution affecting all aspects of manufacturing, manpower and raw materials. That combined with some currency fluctuations can make the situation appear somewhat volatile.
China has been consuming massive amounts of raw materials this past decade as new factories, housing, highways and city infrastructures keep popping up faster than dandelions in spring. I’m always amazed by how quickly a factory or neighborhood has been completed between my visits. Each new community or factory consumes large amounts of steel, concrete, glass and other raw materials, in addition to consuming a great deal of energy (gas and electricity).
Golf clubheads utilize steel and titanium, in addition to massive amounts of energy to melt the material for casting or forming. Raw materials costs have escalated rapidly the past five years, but we have been fortunate not to see much of an increase in component costs. So far, these increased costs have been absorbed by the foundries supplying the heads. But as the Chinese economy continues to flourish, more factories, cities and housing will be erected, placing further strain on raw material resources. Steel, titanium and the energy used to process production is escalating beyond a point the foundries can bear. Consequently, costs will be passed onto the consumer.
Separate from the materials challenge is the quandary that the Chinese government has placed upon the factories. For starters, manufacturers used to receive a rebate on the raw materials they purchased. For example, a foundry would import sheets of titanium material used for stamping the face inserts and bodies of drivers. They would pay a tariff on the material, but once it was processed into the form of a clubhead and shipped out, a significant amount of the tariff would be rebated back to the foundry. Now those rebates have all but stopped, contributing to higher raw material costs.
The elimination of the rebates was introduced as a means of slowing down the fast growth rate of the Chinese economy. However, on its own it has not succeeded. More drastic measures were taken by the Chinese government this past January, when it introduced labor laws intended to slow manufacturing growth. The new labor laws are heavily weighted toward workers, not employers. Based on the length of time or number of contract periods the employee works for the company, tenure is established, preventing future termination. New severance policies have also been established under the new rules.
The new labor laws have made employers much more cautious with their hiring practices, and as a result, multitudes of employees were let go from their jobs at the end of 2007. Subsequently over 2000 factories (not just golf-related) have shut down in the past six months in the Guangdong province alone. Much of the work that had been done in-house is now subcontracted out, resulting in longer lead times and more expense. This affects not only the golf industry, but also every other facet of Chinese manufacturing.
On March 28, the Chinese government announced to companies in the Shanghai province that effective April 1, the minimum wage was to increase 14%. Such an announcement is unprecedented in any other country and would not be tolerated by employers. Similar announcements can likely occur in other provinces with minimal notice. As an employer, it is difficult to manage your labor budget and overhead costs in the face of such last-minute labor law requirements.
Ultimately, we are seeing longer lead times and higher prices for all clubhead manufacturing in 2008. Where it used to take 45 days to get a titanium head produced, we are now seeing up to 75 days for the same production. All timelines have lengthened, not only because of the labor situation, but also because of the intricacy of today’s complicated designs.
The final element affecting clubhead manufacturing is the valuation of the Chinese currency (renmembi or RMB) versus the U.S. dollar. For the past six months, the RMB has been appreciating at a rate of 1% a month, a big departure from the RMB’s heretofore unwavering exchange rate. The result is a weaker U.S. dollar, requiring more dollars to purchase Chinese goods. This is affecting all products manufactured in China, not just golf equipment. Ironically, only the U.S. dollar is weakening against the RMB. The rest of the world’s currencies have remained stable or actually have strengthened against it in the past year.
All of these factors may sound like doom and gloom for the golf equipment industry. On the contrary, there continues to be a bright future, with continued technical innovations in the design and manufacture of clubs. Woods, irons and putters have never been as user-friendly as they are today. While refinements drive new designs here at home, we will not likely find any of these models produced domestically, and that is actually a good thing. Since clubhead manufacturing has gone to China, we have see improvements in clubhead cosmetics, specification tolerances and overall quality. Costs have remained reasonable, especially when compared to domestic production. So for now, we must and grin and bear some of the growing pains associated with our global economy. And that can mean slightly higher costs for this game we love.