Archive for oligopoly

Getting Hosed – Price fixing in the rubber market

We have written here before about what price fixing in the rubber market means to the motorcycle industry. The corporate corruption on the part of our beloved suppliers continues.

According to this Oligopoly Watch post “Getting hosed“, the EU competition commission recently issued $173 million in fines to six global corporations for conspiring to fix the price of marine hose. Included in the list:

  • Bridgestone Tire and Rubber (Japan)
  • Trelleborg SA(Sweden)
  • Manuli Rubber Industries (Italy)
  • Dunlop Oil and Marine (UK-based, but a part of Herman conglomerate Continental Tire Group)
  • Parker ITR (Us/Italy)

Any of those names sound familiar? Getting credit for an also-ran position is Japan’s Yokohama, which chose to expose the cartel to avoid fines. These companies control the great majority of a world-wide commodity product — rubber — that is used for a lot of motorcycle parts besides tires.

According to the article, there is some hope as the UK appears to be moving more aggressively toward criminal investigations of complicit executives. It’s about time. After a dozen years of letting companies do whatever they want we need a serious redirection of anti-trust action.

As a side note we, as motorcyclists, need to be extremely cynical that global corporations have our best interests at heart. They do not. Not Honda. Not Suzuki. Not Yamaha. Not Kawasaki. Not BMW. Not HD. None of them. And we need to be extremely vigilant that these companies do not co-opt our rider organizations for their own goals just because they have the money.

Long live the two-stroke Part Deaux: FUD in the marketplace

Editor’s note: You may want to read Long live the two-stroke: Part 1 and FIM to put 2-strokes on even footing in 2010 for more background.

Recently a vintage racing/CZ friend posted the following query here:

Hey Terry, Correct me if I’m wrong because I’m not totally sure, but hasn’t Calif banned 2 stroke sales there or Read More…

Why has only one company successfully entered the MX market since 1985?

cobrajumpTo my knowledge only one (1) company has successfully entered the motocross market since 1985 – the small Hillsdale, MI firm of Cobra Motorcycle Mfg. What did Cobra do? They brought innovation to a market the Big Four were ignoring. They met a need. They built good products – right here in the USA.

Once – in almost 30 years – has new blood successfully entered the motocross market. And they only did it in minibikes – 50cc-85cc. Ask yourself – is this really the best it can be? It’s difficult to make a credible claim than an industry (any industry) is healthy and competitive when it’s consisted entirely of the same five (really four) suppliers for more than 25 years. Are we really that naive? Or, like the Soma pills in Orwell’s 1984, have we swallowed the company marketing sedative so long we no longer care to see reality?

A little background

Back in December I wrote an article about how production-based racing has affected the motocross world. The article got quite a few readers (it was first featured over at McCookRacing.com) and drew fire on some of the discussion groups. People came away from reading it with a lot of different opinions, but it was clear that almost no one got my main points, which are these – the single-minded, all-encompassing “production bike” mentality that has consumed two-wheel racing has had a lot of negative consequences. And we have all been so totally brainwashed with it that most of these consequences are completely invisible to us.

Production-based racing is a great thing when it is provided as an alternative to hand-crafted racing machines. But take away the incentive and motivation to build handcrafted racing machines and you have an anti-competitive, controlled marketplace that ultimately provides less choice, less innovation, and higher costs. Think about it – motocross racing is now so thoroughly dominated by four global corporations (KTM is a bit player that exists solely at the behest of the Big Four to “prove” they are not anti-competitive. Ducati remains in road racing for the same reason.) that sanctioning bodies and promoters will do almost anything to keep them happy. Does that sound like a healthy environment to you?

But it’s not just that. Production-based racing stacks the deck for the factories – in an obvious, definable way. Here’s a quote from Cycle News journalist Henny Ray Abrams talking about the proposed 2009 AMA road racing rules in Cycle News issue 23, June 11, 2008:

The closer racing is to production, the greater the advantage to the factories. Power isn’t the issue – it’s torque. The factories can produce parts that aren’t available to privateers. They can also produce parts that appear similar in every way to the production unit, but are about as related as Ben Spies is to Ben & Jerry’s

Road racing isn’t motocross, but the parallels are clear. Setup your racing rules for the factories and pretty soon you have a self-reinforcing loop that guarantees no one new ever disrupts the big corporations’ neat little world. Factories love production racing because it controls competition, not because it benefits the racers.

We are now on our fourth full generation of motocross racers who have no idea that a competitive bike can be fielded by anything less than a global mega-corporation. And they are right. It would probably cost $50-$100 million dollars to enter the market with a competitive dirt bike that could sell enough copies to meet homologation requirements and pay for its development and manufacturing costs. Even the venerable Harley-Davidson (via its Buell subsidiary) gave up after a brief flirtation with the idea.

What is reality?

Reality is that very few successful forms of motorsport are restricted solely and completely to production-based racing. Here’s a quiz for you. Name a successful, well-known motorsports franchise with the following characteristics:

  • Requires every racer, every championship, and every discipline to race vehicles based solely on what a major manufacturer produces
  • Restricts their entire racing field, in every class, to the homologated machines of a handful of multi-national corporations.
  • Has achieved success and popularity without a single new manufacturer or constructor entering its ranks in the past 30 years.

Championship Off Road Racing (CORR)? Nope. IndyCar? Nope. F1? Nope. American LeMans? Nope. Rolex Sports Car Series? Nope. How about dirt track racing? Sprint cars? Midget cars? Nope, nope, and nope. Not even NASCAR, arguably the most successful motorsports franchise in the world – one that even has Stock Car in its name – doesn’t require production racing in any of its championship classes.

But motocross (and nearly all motorcycle racing) is quite literally defined by these characteristics. Every so often an economics genius with a degree from Obvious State pipes up in a newsgroup with a comment like “Motorcycle companies are in business to make money. There’s nothing new about that.” I’m always amused by the attitude of such people. Defense contractors, cell phone companies, mortgage bankers, and stock brokers are also in business to make money. I wonder if they have the same laissez-faire attitude toward them? Do they blithely accept that whatever such companies do is acceptable and provides the best options for customers? Or do they think these companies do whatever they can to stave off competition and manipulate markets in their favor? So why are motorcycle companies exempt from this same healthy skepticism?

What does this mean?

I’m not arguing that big motorcycle companies are bad. They aren’t. I am arguing that blindly accepting the Big 4 view of the world, and quietly rolling over for whatever they do has taken a toll. The bountiful cottage industry that existed in motorcycle racing from the 1920s through the 1970s is dead. The talented framemakers of the past have been relegated to building replicas of (production) vintage bikes (because even in vintage we can only race production bikes). Even in flat track – which is the last remaining outpost of the custom frame – the AMA tried to kill custom frames as one of its last official acts. There is no room for innovation or the small startup company that wants to do things its own way. There is only one way, the way of the Big Four. All the business, all the sales, all the development must be an offshoot of what the Big Four want to sell.

None of this is suggesting that we don’t have good bikes available to us. We do. We also have lots of beer available to us on the store shelves. But did you know they are nearly all produced by the same five companies? And that soon it may be the same three companies? Yes, your local grocery’s refrigerator case is filled with dozens and dozens of different, brightly-colored cans and boxes, but there are not dozens and dozens of different beers. There are a handful, with minor variations supported by different packaging and advertising campaigns. Thankfully, the beer industry doesn’t have a big governing body that makes it illegal for small brewers to come up with new ideas and (eventually) get them to market. And the micro-brewery industry is pretty healthy. So why is it so hard to imagine a smaller, more creative subset of the motorcycle industry?

What can be done?

Perhaps it’s time to rethink the production rule in motorcycle racing, time to let a different drummer set the beat. Not in professional racing, certainly. That horse is long gone and nothing is going to wrest professional motorcycle racing out of the hands of the Big Four anytime soon – too many people have built their empires sucking the Big Four teat while we, the motorcycle racers pay the price of extremely limited choice.

But maybe there is opportunity at a different level. Maybe there is a place – somewhere between vintage and the 450f – that a different type of motocross bike can exist. Maybe there is a market for a sport that is competitive on bikes that are lighter and less optimized for Supercross-style racing, racing that is fast and fun but a little less demanding in the death-defying category.

I have no idea, but I do know that you can have a lot of fun, and really good racing, on different technology platforms than what the multinational corporations provide. Car racers of all kinds prove it every weekend. I have some thoughts on what such a platform should strive to achieve. More on that in Part II.

Why all the dirt bikes look the same

market_dom_smallIn his excellent book Market Domination author Steve Hannaford explores how consolidation in an industry leads to conversion between erstwhile “competing” products and ultimately reduces choice for customers:

Competitive differences tend to narrow over time, as they must when companies are trying to keep up with better selling rivals. When markets are dominated by a few companies, the consequence is a notable sameness among the big players and their products. Erstwhile competitors become increasingly similar, in strategy and in their impact on society. We might call this a side effect of competition for market dominance, because it is not directly part of the high-level financial struggles that motivate the market but is almost incidental to the bigger issues. Nevertheless, it may have a direct impact on our daily life.

As Hannaford notes, this is not to argue there is no difference in handling between a Toyota Camry and a Ford Taurus (or in our case the Honda CRF450R and the Suzuki RM-Z450.) But it’s almost certain that gap is narrowing. If you go back to the 1950s and 1960s you can see wide variety in both style and approach to offroad motorcycles. In the 1970s the technology wars began and the variety in modifications, experiments, and technologies was explosive. But by the mid-1980s most of the variety had been shuffled out of the dirt bike market. The Japanese, with their big conglomerates (making automobiles, ships, trains, power equipment, etc.) had the resources to match and absorb every innovation made by a competitor, and the dollars to out market them. Again, from Market Domination:

Certainly, originality can be a plus. But as oligopolies tighten, rivals have the means and interest to match every competitors breakthrough. The comparative advantage of any original move is short-lived, readily imitated. As we have seen in Chapter 4, real, disruptive innovation can create problems for bigger companies. Recognizing and adopting useful, bite-size innovations, however, is something many market-leading companies are really expert at.

What they are also expert at is killing any disruptive innovation – either through buying up the innovator or simply burying it through media and marketing. Within a few short years the real choices for motorcycle customers had dropped from dozens to a handful. Today the motorcycle market is dominated by six companies. That the products are all the same is apparent every time you read a bike test in a modern magazine and one of the first features they list is bold new graphics.

mindnumbing_sameness2_small

How sad is that? Bold new graphics are what you’d expect to read about a new Volkswagen or maybe the latest little import shoe-box car. But certainly not a race bike. Style over substance is the marquee indicator that the products are really all the same. Over time customers become conditioned to the sameness, accepting it without any consideration at all. From the market’s perspective there are many advantages to the sameness – widespread availability of product and parts, ubiquitous support, and much less thinking required in product decisions. How many motorcycle dealerships are now Honda/Yamaha/Suzuki/Kawasaki/KTM dealers, with real expertise in none of them?

There is also security. When every product is similar there is little chance of getting a lemon, and there is comfort in knowing that a million other people bought the same thing. We are soothed by this lack of risk, hypnotized by the flashy ads, and anesthetized by the monotonous tone of big companies telling us how smart we are.

But there is real risk in this apathy. We have ceded real control of our future to a handful of individuals who decide what is and is not important. Our interests are only addressed to the extent they align with the interests of the sellers. And this is not good.

Motorcycling is an individual pursuit. It’s an individual exercise. Yes, we are a community, but a community of individuals. Do we really want our future decided by someone else?

Effects of motorcycle industry consolidation on the AMA

Recently I was on PitPass Radio, a weekly radio show that covers motorcycle racing. The hosts of the show – Scott Casbar, Tony Wenk, and Ed Kuhlenkamp – are really nice guys and do a great job. Their guest list is filled with industry leaders, racers, promoters, and interesting personalities from the world of two-wheeled competition.

I got on the show because I wrote a letter to them a few weeks earlier regarding a topic they had touched on and asking them to talk more about it. Their response was to have me on as part of the debate. The topic? Should the American Motorcyclist Association (AMA) be the only sanctioning body for motocross racing in the US? Phrased a little differently – is it bad for the sport of MX if other groups or organizations try to wrest control of MX racing from the hands of the AMA?

In my letter I raised the issue that when the AMA was formed there were literally dozens of motorcycle manufacturers. But today there are just a handful – mainly the Big Four Jap companies and Harley-Davidson. The point I wanted to make is that as the industry consolidates we cannot afford to assume that what is good for the industry – nee the manufacturers – is good for motorcyclists.

The response I got was that this just isn’t true, that the industry still has many vibrant players – e.g. Ducati, Victory, KTM, etc. – and that consolidation hasn’t had the effect I think it has. Sadly, I just can’t agree.

Ducati is indeed a very active competitor in the industry and kicking butt in the MotoGP scene. Victory is certainly making some waves in the cruiser market. And KTM is having great success in off-road racing. The trouble is that being competitive on the race track, or selling a few bikes in a niche market, in no way correlates to the amount of power these companies have in the industry.

For example, according to BusinessWeek Ducati has $600 million in market cap. By contrast, Honda Motor Company has $59.3 billion in market cap with more than $5 billion in net profit (Forbes). Honda, by itself, could buy the entirety of Ducati with profits from a single month. Do you seriously believe these two are in any way equal politically or at a bargaining table? I looked at this a little further, trying to validate my theory that the Big 4 and HD dominate. Here are the market cap values I found:

I couldn’t find market cap info on KTM, but their sales, at €500 million/year, are about 30% of Piaggio’s so I’d reckon them about the same size as Ducati. (Editor’s note: It’s also nearly impossible to find unit sales or gross sales dollars specific to motorcycles for the larger manufacturers as they do not like to break them out. If you have authoritative numbers for unit sales or dollars by brand I’d like to see them.)There are other bit players in the market – Husqvarna, TM Racing, etc. But none of them matter. This is what the market looks like:

motorcycle_mkt-cap_comp

The Big 4 Japanese have 70% of the capital dollars in the motorcycle industry. BMW and H-D combine for another 26%. Everyone else is pretty much a rounding error. At least by this measure these six companies (the Big 4 Japs, BMW, and H-D) utterly dominate the motorcycle market in every way that really matters (it’s all about the money.) If you want to argue against that I don’t think we can even have a rational debate.

But my main point is that these same companies also dominate the AMA in every way that matters – policy, decisions, rules, etc. – for the simple reason that they have all the money. Now if you want to argue against that please be prepared to answer the following questions:

1) Can ~5% of the financial power of the motorcycle industry exert any meaningful economic influence over the other 95%?

2) Can ~5% of the financial power in the motorcycle industry exert any significant bargaining power politically, economically, or socially?

3) When the AMA must decide whether or not to take an action that will benefit rider-members but will significantly anger the 6-member motorcycle oligopoly – who control $150 billion of capital and 80%-90% of the market –  will the rider-members prevail?

If you answer yes to any of those questions you live in a very different, and vastly more naive, world than I do. Like it or not it’s all about the money. The AMA cannot represent the riders and the motorcycle industry at the same time because we, the riders, are not equal to the industry. Our interests and needs are not going to align perfectly with the industry. And we are stupid if we think our paltry membership (250,000 members is about $10 million in dues) is going to get us equal footing in a conflict.

This doesn’t make the AMA “bad” or inept. The people at the AMA are good, well-intentioned, hard working folks who love motorcycling.  But the AMA has an inherent conflict of interest — no organization can evenly represent two such politically and financially unequal bodies.

In my opinion the AMA should, first and foremost, represent the American motorcycle rider in all his/her permutations and an organization that tries to simultaneously represent the industry, no matter how well intentioned or managed, will not be the quality representative we deserve.