When we think of outsourcing, it usually involves farming out mundane services and products to low-wage producers in China, India and elsewhere. But works of art? Here’s an interesting note from a friend of ours, a sculptor based in Oregon who must decide whether to outsource a key part of his production to a Chinese shop. He writes as follows:

“I've written in the past about my art sales as a reflection of economic conditions.  Sales have increased as this market peaked in January and sales have continued to grow through the downturn and bounce.  Or, is it the start of the new bull ?  For someone who is an extreme realist to even suggest there might be a new bull market developing is reason enough to suggest to a contrarian that the top has been had.  Yet, my words today are not about a new bull market or a bear, they are about inflation in a real way from an artist that has to deal with real wage and price inflation in real numbers as they affect costs and sales.

Montana Getting Pricey

“Inflation is pegged at about 2.3 percent for next year and has been contained according to the Fed between 1 and 2 percent for quite some time.  I just received a price increase due to labor and material from the Montana foundry for 15% effective Jan. 1, 2005.  This is on top of a 10% increase in 2003, and a 10% increase in about 2001.  In the two year span from 2003, to 2005 I have had an effective increase in costs of 7.5 percent per year based upon material and wages.  Or, it is more accurately stated I have had 5% yearly cost increases for 4 years while the Fed was worried about deflation, had core inflation in the tenths of percent, and now that the Fed is concerned about inflation I have a real present 15% increase for 2005.  My niche seems to be out of sync with the Fed's reality.  As a practical point the Fed's words don't find any traction with me with a present and real 15% cost increase based upon "material and labor costs" on top of 5% for each of the past 4 years.

I have refrained from increasing retail prices through 20% in increased costs from 2001 through 2004 maintaining a retail of $4295.00 that was established nearly 10 years ago.  With a 15% increase in costs effective Jan. 1, 2005 I can no longer maintain 'reasonable' margins at the wholesale and retail levels.  Excellent sales ending 2004 make my 'net' increase in profit look really good on the books, but; my normal margins have been squeezed to the point that only 'extreme' increases in gross sales can make up the difference in lost margins.  Now, with an additional 15% increase in material and labor costs at the manufacturing level I can no longer expect 'extreme' sales increases to give me a good net profit.  Interest rates are trying to go up while 30 year mortgage rates continue to drop fueling some refi-art-buy.  I need to increase retail prices to reflect good management practices, or find another way to cut costs.

Price Hike Coming

“Will my sales continue to increase when my retail on said $4295.00 piece moves to $6225.50 and a bit more because shipping costs are increasing with UPS ?  Would it be better to press my price up slowly hoping that we will not get another 15%, or 20% price increase in 2007 ?

“This past Christmas season showed us that retail has not been able to press up prices for domestic products while non-domestic prices continue to fall.  Retailers were compelled to discount and discount heavy in the last week of Christmas to reduce inventory to avoid real tax disasters from destroying what net profit was made.  Yet, falling non-domestic costs allow retail net margins at heavy discounts to increase year over year because of currency fixing by China, Japan and a host of others.  The Asian currency fixing appears to fuel purchase of Treasurys keeping long term interest rates 'fixed' lower fueling refi-art-buy. 

Piracy a ‘Cost’

“I have an option. I can go to China for production of lost wax castings.  I will reduce my hard costs by 50% and will be able to hold my current retail prices without the 10-10-15 cost increases I now need to exercise because of the benign 2.3 percent inflation reported by the FED for next year.  I will lose quality control and the product will be more subject to piracy in China as one of the costs of doing business.  The product produced by Chinese foundries is known to be of lesser quality, but; it would be a way to really increase my margins.  I will do well and the Montana foundry owner can go to China to get a job, start a Chinese foundry where he can control quality, or he can go to Burger King because I will be able to buy more double cheese burgers.  After all being gainfully employed at Burger King is better than having a part time foundry job, or living in China.

“Inflation does not exist because I have the option to go to China and get an inferior product to sell at $4295.00 instead of increasing the retail on a quality American made product to $6225.50.  Wages for the foundry owner are not going to increase because he is going to produce less product creating less yearly gross wages even though he may be making 15% more per hour.  Our man at the foundry is now Part Time labor and should not even count economically because he does not work a 40+ hour a week job.  I guess I could say Mr. Foundry just increased productivity by 15% to see a declining standard of living in the United States for himself ! 

Fewer Employees

“On a real level Mr. Montana Foundry ran an operation with about 15 employees in 2001.  He had 25 to 30 employees in the 1990's. Today his operation is two employees and himself.  His wife, office manager ( 1 employee ), is now able to do wax pattern work, replacing an employee, because the office is not so busy with the increased productivity able to reduce staff and thus office workload.  Mr. Foundry is no longer 'gaining' from his employees so he must address wage and material pressure for himself by increasing his personal wages based upon his manufacturing labor.  He has improved productivity to the point he is the only income producer left and he can no longer absorb wage costs by not receiving any gain on his employees.  His answer has been to reduce staff to improve profit by reducing labor costs.

“My picture seems to reflect a certain business reality on a micro level in a small market for fine art.  Every reality I see establishes a smaller and smaller labor pool making less and less wage, or working less hours.  Mr. Montana Foundry has come to the point he must have 15% because of material and wage pressure this year.  The artist can no longer absorb increased costs without raising retail, or without taking his manufacturing needs offshore depriving Mr. Montana Foundry of income.

Steak Inflation

“Inflation in my microart 'ecosphere’ is real, present, and a danger to my future.  My decision to move offshore to China is a present danger to wage pressure, and productivity as a product of less hours worked by the Montana Foundry, or a lesser job at Burger King.  How is it the FED figures inflation ?  I was told that if New York Strip costs $2.50 a pound and the cost of New York Strip goes up to $7.00 a pound; that we consumers have no inflation if we can replace the New York Strip with ground Round for $2.50 a pound. 

“I guess I need to go for Chinese manufacturing so that I can still buy the New York Strip at $7.00.  Who cares about the Montana Foundry owner, he doesn't buy my product anyway !  My only concern is; what will I do if the Chinese raise their prices, or the currency exchange rate no longer favors my decision to move to Chinese manufacturing ?  Will American manufacturing still exist if I need to bring my product to an American producer ?  I guess that if this realist has decided to head to China for manufacturing to increase margins; as a contrarian - its too late - the party is already over.   Wal-Mart got there first !”