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updated / added: 3/12

Problems in China: The Inside Story

If there is a common theme throughout this newsletter it is that "stuff has been delayed." We are not the only ones. Most model train manufacturers have experienced production delays, and here is why.

In January I broke the news on the
CanModelTrains forum that another large model train factory in China had shut down, forcing 3000 people out of work. Whatever your beliefs may be about globalization, nobody wants to hear that 3000 people lost their jobs just before a big family holiday. This was just the latest event in the ongoing saga of manufacturing model trains in China.

A couple of years ago, Sanda Kan was purchased by
Kader Holdings (the Chinese company that owns Bachmann Trains). Sanda Kan was the largest supplier of model trains in the world, and most of the trains made by North American and European manufacturers came out of Sanda Kan's many factories in Guangdong province, China.

After initially telling their clients that nothing would change, Kader decided to dump the vast majority of their customers. Suddenly, about 50 model train companies around the world had no factory to produce their models. As you can expect, a form of panic ensued as everyone was scrambling to find a supplier. Our industry is what you could call "cash poor." We manufacturers make money, and then invest it in new tooling. That means that for all but the biggest manufacturers, a delay in production can cause serious cash flow problems as we don't have piles of cash lying around.

The result of Sanda Kan booting out their customers is that the existing model train factories found themselves with an onslaught of new clients desperate to get their models back into production. These clients also needed to start new projects to ensure that they don't run out of cash in the long term. No model train factory was, or is, anywhere near the size of Sanda Kan. The demand outstripped the supply - by a huge margin.

The industry is still recovering from the eviction of Sanda Kan's clients. The January closure of one of the largest remaining suppliers in the industry will only add to our collective problems. This closure was caused in large part by the fact that model railroad price increases (averaging 10%-25%) have not kept pace with cost increases in China, and it is often difficult for the Chinese suppliers to stay in business while meeting the demanded price point from their major North American clients.

Our industry is currently tied to Chinese production, as southern China has developed the special skill set required to produce model trains. Bringing the manufacturing back to North America would cost even more due to very high start up costs and higher overhead, and there are no reliable model train factories set up yet in places like India. So I think we're looking at tough times ahead in our industry: more delays and even larger price increases.

Rapido has largely been insulated against these major price increases. But, as you can see from this newsletter, we have not been insulated from the major production delays in China. Rest assured that we are not taking these challenges lying down. We are working on a plan to significantly speed up our production in 2013, and I will be able to tell you more about these ventures later this year. Stay tuned.

written by Jason Shron, President, Rapido Trains Inc. - February 29, 2012


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