The Case for Imported Bearings

Posted by Jeff 20/10/2015 0 Comment(s) The Bearing Market,

China is supposedly a communist nation, but anyone wanting to understand how capitalism is supposed to work needs to spend a few days there.  You can buy anything there and the price is always negotiable.

When I lived in Beijing, there used to be a guy on the street selling DVDs right in front of my apartment building.  He always had the newest releases and the cost was always the same: 8 RMB.  As far as the quality, they were very good about 90% of the time.  In some ways, it was a better product than what I would have gotten buying a "legitimate" DVD, because it wasn't region coded--meaning it would play in any DVD player anywhere in the world.  Which is better and different than the "legitimate" DVDs that will only play in certain regions of the world (Asian DVDs won't play in U.S. DVD players, for example).

In my economics class, I was taught that in a perfectly competitive market, price is going to equal the lowest marginal cost of producing something.  The cost of producing a DVD is probably somewhere around a nickel or a dime.  The cost of packaging it is probably another nickel.  The cost of distribution is another factor in the cost.  In China, that cost is whatever they have to pay the guy to walk down the street and sit in front of my building.  All in all, 8 RMB (about a dollar) seemed like a great price--and probably pretty close to the marginal cost of production and distribution.  And if the guy in front of my apartment raised his rate to 10 RMB, there was a guy a block down willing to sell for 8.  That is what competition looks like.

In the U.S., however, the idea that marginal cost = price is non-sense.  That is largely because we don't have a perfectly competitive free-market.  Our prices are determined by oligopolies.  There aren't 50 or a hundred companies producing entertaining DVDs and they aren't distributed through a million different channels.  We have about six companies in charge of all our media and most DVDs will get distributed through Wal-Mart, Target or a handful of other big box stores.  Which is why the same DVD that guy on the street in China is willing to sell me for a dollar costs $10 or $20 in the U.S.  Intellectual property and the cost of producing entertainment aside (those are fixed costs, not marginal costs), the market in the U.S. simply is not as free as the market in China.

The same is true for bearings.  Before Chinese bearings really started to come into the market in the 1990s, there were only a few choices for bearings in the U.S. and they all operated to keep prices high.  If you wanted to buy 10,000 bearings from one of the big companies (Timken, NTN, Koyo, Fafnir, etc.)--good luck with that.  Maybe you could get "distributor pricing", which is lower than the retail price but much higher than what a manufacturer would pay.  And if you were a manufacturer, maybe you could get a decent price, but often ridiculous lead times. 

This is not true with manufacturers in China.  If you want 10,000 bearings, they don't ask what you are going to use them for because they don't care.  They just want to sell bearings.  And if they don't give you a good price, there are ten other manufacturers wanting to quote.  This has been a great boon for companies like ourselves that deal in large volumes of bearings.  We have been able to shop for bearings and develop relationships with suppliers that are impossible to develop in the U.S.  Which is why you can now buy great bearings for a fraction of the price of U.S. made bearings.

China certainly has a monopolistic form of government--there is still only one party.  But in terms of its market economy, it is much closer to the ideal of a perfectly competitive market than anything that currently exists in the United States. And that is great news for anyone that wants to buy a bearing.

Leave a Comment