Sunday, December 7, 2008

the price of "cheap"

The concept of an item or product being "cheaper" to buy than another is something that has bothered me for quite a while. Is "cheaper" better?

It really depends on how "cheaper" is defined, and in what context; near-term or long-run.

Ask yourself... would you rather buy a "cheap" $10 toaster every year for 10 years, or 1 $100 toaster that lasts 10 years?

I'll go out on a limb here and say that most American's prefer to buy the $10 toaster because it's a "bargain". It allows us to spend less on this item NOW, and allocate more financial resources to purchase other "stuff". But not only are we convinced that we need a toaster, but we need a toaster-oven, microwave, food processor, chopper, rotisserie oven, counter-top grill and any other gadget marketed to make our lives easier.

What is the real cost of all this?

We buy a $10 toaster and other "stuff" from a popular, well known, ginormous big-box retailer. In order for these items to be "cheap", they have to be built "cheaply"- using low cost labor, materials, etc. Low cost labor involves finding an opportunistic sweatshop overseas to take on the manufacturing project. This sweatshop not only needs cheap labor, but they need to use the cheapest materials and have the cheapest "process" costs (energy, etc.) because the big-box will only pay a certain amount for the toaster since it knows it must sell X quantity in order to make a profit.

The first concern here is that the cheapest materials directly lead to the failure of the product. This leads to the disposal and re-consumption of the item! The "disposal" does nothing but necessitate more and more landfills. As our landfills pile up, we lose valuable natural resources to toxic (because the materials were as cheap as possible!) and harmful exposure.

The second thing to consider is that the cheapest process costs lead to expensive long-term costs. Like what? Consider that "cheap" power, such as coal, oil or other fossil fuel resources emit massive levels of pollution. And these outsourced "cheap" production facilities in overseas countries DO NOT have the environmental safety protocols (or laws) in place to keep levels of pollution low. Further, because their only interest is being able to give the big-box what they order at the price the big-bix is willing to pay, they don't have the money to reinvest in ways to reduce pollution.

The third aspect of this supply-consumption chain is TRANSPORTATION. Forget for a moment that the raw materials have to come from somewhere and ask, "How does the finished product get from its manufacturing plant to my house?"

On a giant, fuel-oil guzzling ocean cargo ship of course! What's fuel-oil? Quick lesson... there are two types of engines that run on liquid petroleum: (1) internal combustion- aka gasoline engine, and (2) compression ignition- aka Diesel engine, or fuel oil.

Compression ignition engines are capable of delivering great levels of power. And they are rather efficient in terms of their consumption to power ratio. This is the reason they are used in construction and farm equipment, electric generators, hauling vehicles (OTR trucks and railroad locomotives), cargo ships and even some automobiles. But they still emit exhaust. What kind of exhaust? The worst kind!

Fuel oil comes in many different grades: 1 through 5. #1 is know as light oil such as kerosene. #2 is diesel fuel used in most standard diesel engine applications, #3 is light industrial oil, #4 is heavy industrial oil, and #5 is known as bunker fuel.

Bunker fuel is the heaviest, nastiest, thickest, dirtiest and "cheapest" of all fuel oil because it requires the least refining. As such, it pollutes the most!

Regardless of power to consumption ratio, bunker fuel, burned in cargo ships, is the worst polluting of all fuel oil. Not just because the oil itself emits the worst pollution when burned, but because the cargo ship HAS VERY LITTLE EMISSION CONTROLS to capture/clean the exhaust before it gets dumped into the atmosphere, and subsequently back to earth (and ocean) in the form of rain.

Now take into consideration the retail price of the toaster, $9.99. Typical retail margin is 40%, that means that the big-box, freight included, paid somewhere around $6 for the toaster.

So we're saying that it cost $6 to decide to sell toasters, decide on which toaster to sell, find a manufacturer that has the design for a toaster, have the manufacturer acquire the raw materials to make the toaster, actually have the worker convert the raw materials into a "toaster", pay the worker to do the conversion, dispose of any waste or by-product, pack and ship the toaster over seas. $6!

Now, for $3.99 more, we need to unpack and transport the toaster to a warehouse, transport the toaster to a big-box store, put the toaster on the shelf, turn on the lights so people can see the toaster, and conduct the transaction of the sale of the toaster. $3.99!

The only way for any of this to be profitable is on VOLUME. What kind of volume? The kind of volume created by selling "replacement" toasters when the original one lasts only a year because it was made on the "cheap"!

That assumes the toaster lasts a year. What about the ones that don't even make it that far? The ones consumers bring back when they break within a month or two. Not only does the big-box "give" them a new one, but REFUSES TO PAY THE MANUFACTURER FOR THE BROKEN ONE. With less revenue, the manufacturer is forced to cut costs by, (1) reducing wages, (2) finding "cheaper" materials, or (3) cutting shipping costs.

Any or all of these simply lead to lower standard of living for workers, less reliable products, more product failure, increased consumption, increased landfill and higher levels of pollution.

Further, do you think the manufacturer is going to take the toaster back, fix it, and send it out again? Hell No! The transportation costs alone would drive the company out of business.


I ask again, "What is the price?"

And what's the window dressing as to why we buy into this? Maybe it’s the image of a higher standard of living! The concept that we're better off if we "have the stuff" because it shows we have the ABILITY to "have the stuff."

I submit that the highest standard of living, the real exercise of power and the ultimate in consumer evolution is when we HAVE THE ABILITY TO CONSUME, YET CHOOSE NOT TO!

I'm reminded of the movie Schlindler's List, when Liam Neesan attempts to prevent the camp commandant from killing a prisoner by saying the real power isn't in having the ability to take a life, but in the ability to spare it.

Lest you think I’m oblivious to the way the world works right now, I know this is only but half the story. What, actually, does the repeated sale of a $10 toaster represent in terms of the world financial picture?

I would surmise that we tend to pay for the toaster with plastic instead of paper- credit card rather than cash.

This ads a whole new level of complexity to the scenario, that is nearly IMPOSSIBLE to comprehend.

Simply however, when plastic is used, we say to the store, "If you give me the toaster now, my bank promises to pay you because I've promised to pay them. And if I don't pay them exactly as promised, I will pay them more (interest) for the extra time."

The bank, in turn, may not have the ability to pay for the toaster either, so it goes to another bank and asks to use their money. Just like before, if the money isn't paid back as promised, interest is owed for the extra time.

Each time these "loans" are made, money is created. Money that never existed before. But it has to come from somewhere! It comes from the next sale, and the cycle repeats. This is the growth of the economy- creation of money.

The money goes back around the horn in the form of wages, other loans and consumption based spending. Of course, in order to keep prices low, wages (and other costs) have to stay low. AND WITH WAGES LOW, WE CAN’T FINANCIALLY AFFORD ANYTHING BUT THE CHEAP PRODUCTS!

We've seen what the real price of "cheap" money is- just look at the real causes and effects of the mortgage implosion. We've seen what the real price of "cheap" products is- pollution, landfill, low wages, etc.

Now we see what the real impact of “cheap” is…

Short term- WOW, a $10 toaster! Long-term- not so good.

1 comment:

The Hawk said...

This is good stuff Steve. So few people recognize the carbon footprint implications of everyday life and consumption.

This is why it is so important to buy local.