Analysis by Andrew Hines sent to me in a fax then converted to PDF then converted into text which was really screwed up and I had to spend an hour fixing it…sorry for any screwed up spelling, text, paragraphs ar any other weirdness also I couldnt figure out how to include some of the tables and graphs at the end of the article.
12/21/2005 17:15 1-520-745-8875 POLYMER CHEMISTRY PAGE 01
…
:
A Summary of the Post-Clark
State of the U.S. Surfboard Manufacturing Industry
.
by Andrew Hines
DISCLAIMER
i I have attempted to identify forward looking statements by
, terminology including “anticipate.” I believe,"“can,” “continue,”
: “could,” estimate," “expect,” “intend,” “may,” “plan” “potential,”
; “predict,”"should,"or"will"or the negative of these terms or other
comparable terminology. These statements are only predictions
and involve known and unknown risks;uncertainties,and other’
: factors.
…
A PERSONAL NOTE:
Hi, this is the author, Andrew. I want to relate here at a more personal level before you
go on to read this. I wrote it formally because that’s how I’ve been trained to do it. I make no
claim to being an authority on the industry, although it may seem as though I’m trying to "tell
everyone what’s up". On the contrary, this should be subject to criticism and commentary _.
maybe it will benefit our understanding. '. , . .
In Clark’s analysis last year, he spent some time addressing our options for "Efficiency
Improvements to Compete With Imports’;, He talks about five things’in that section, One of .
which is ditching the historically shoddy management stye of our.industry. I strongly suggest
anyone who reads my analysis to read Clark’s piece also, available online at
www.foamez.com/pdfs/octobu2004.pdf It looks like we need to get lean and buckle down,
start doing things efficiently and with sound strategy-If we are smart about this, many
opportunities will be found and our surfboards will be the better for it. .
12/21/2005 17:15 1-520-745-8875 POLYMER CHEMISTRY PAGE 02
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The Post-Clark State of the U.S. SurlboardManufacturing Industry.
Interpreting Gordon Clark’s 2004 Projection.
In Octoberof last year,gordon Clark disseminated a 33-pagedocument containing his
analysis of the future of the surfboard industry" . entitled AnAnalysis of the Future of the
Surfboard Industry. The analytical document is preceded by a letter which champions Matt
Biolas for his efforts in lobbying the government to levy a tariff on imported surfboards. This, of
course, is in violation of multiple free trade agreements (FTAs) including those accorded in the
Uruguay Round of the World Trade Organization (WTO). Addressing the implications of Ftas
in the U.S. surfboard manufactUring industry is oUtside the range of this study, although this
should be made clear: FTAs are established to expose poorly managed and inefficient industries
to foreign conipetition, with the intention that those industries might become more efficient and
more competitive.
In Clark’s anaiysis, the foremost dedaration is that the prospects of the domestic industry depend
upon the sophisticated buyer. Clark defines the sophisticated buyer roughly as (1) the surfer who
wants a custom.board built to their specifications, (2) The surfer who can pick out a surfboard
with little or no help, and (3) the surfer who makes the purchasiug decision based upon technical
knowledge. On the.flnal page of the document, Clark relates his conclusion as follows:
My conclusion is still based on the ‘sophisticated buyer’ as defined in the introduction to this
document. If this type of buyer disappears, which is highly unlikely, then our market will
evetltually disappear. If this buyer exists in large numbers and we can both service 'sophisticated
buyers’ and develop mOre ,‘sophisticated buyers’. then I believe we will remain in good shape."
p.33 …
Throughout his document, Clark makes substantial reference to the commodity-type surfboard.
Often~he relates the commodity surfboard to his mythical" Asian producer (presumably
intended to represent the companies who do, in fact, manufacture in Asia) to whom he attributes
the derogatory name YingYong Foo". He states that surfboards produced overseas are the
same and therefore. commodity-like, He goes on to.explain that "concentrating on the servicing
and development of the ~sophistcated buyer’ will serve as a strong barrier to an oversupply of
more or less’commodity’surfboards. Clark Foam failed to realize its role in the
commoditization of thc surfboard. industry.
,
Clark Foam Commoditized the Surfboard Jndustry
For nearly 40 years, Clark Foam supplied an estimated 80-90% of the entire U.S.
surfboard manufacturing industry with their key upstream input: polyurethane (PU) foam blanks.
Clark’s prodndtion volume has been estimated at 1.000 blanks per day reaching more than.
300,000 per year. Excluding fin systems, surfboards essentially have two components: core and
skin. Skin construction was standardized to a fiberglass/polyester. (PE matrix shortly after the
advent of foam (i.e. Clark Foam). The standardization of the two major components of
surfboards had resulted in the.commoditization of the surfboard.
Indeed, mauufacturing operations had been standardized for the use of Clark Foam PU blanks
and PE resin. This presented significant barriers to entry for other blankproviders because any
new core material would require a restructuring of the manufacturing process. This is evidenced
by the inability for expanded/extruded polystyrene (EPS) to penetrate the market; EPS is
incompatible with PE resin and manufacturers could not bear the switching costs. Moreover,
Clark was keenly aware of his monopolistic position and leveraged his authority to squash.
attempts to introduce alternative manufacturing technologies. Consider this statement addressing
the possibility of new manufacturing technology as an efficiency gain Deve1op neW
manufacturing technology. Good luck on this option. Since I have been in this business there
have been a staggering number of people thinking and working on a new surfboard.'" p.27 Here
we see that Clark aCknowledged the homogeneity of surfboards, stating that since he entered the
business, then~has been no “new surfboard”.
The structure Of the industry and the standardization of processes and materials have prevented
fIrms from realizing any substantive value-added from their production processes. The adoption
of CNC macMnes have enabled some fIrms to add value by gaining efficincies. not by
differentiating their product. This supports the assertion of a commoditized surfboard industry
where the main competitive advantage is derived from a low cost strategy. However,several
more establisHed and well recognized firms have added value through their marketing and brand
strategies.
Thereis an argument that claims that manufacturers realize value added from a shapers designs in
virtually everY case the difference in design is negligible and no value is added. It is not to say
that producers’can not realize value-added in this way. only that they have not. In most cases. the
perceived value of a shaper’s design is developed by marketing and brand sttategies not, in
fact, by any substantive difference in design. This is evidenced across the industry by the
homogenization of basic design elements. .
Clark Foam developed its competitive advantage by offering an extensive line of "close-
tolerance" blanks. By definition close tolerance implies the blank is designed to be as
close as
possible to its final intended. shape. It follows that variation of design was prevented, in large
part, by the close tolerance nature of Clark foam blanks. In both design and constrUction, we see
the compreherisive commoditization of surfboards.
Commoditization and Firm Strategy
,
Accepting that tbe surfboard industry was commoditized under the Clark Foam
monopoly, it .is important to identify the effcct it had on firm strategy. A manufacturing firm
could not develop a diffetennation strategy (outside of branding) without shifting manufacturing
technology, which carries a heavy cost penalty. Switching to an altemative manufacturing
technology requires R&D and operating capital outside the reach of most producers. As with all
commodity-type industries, a low-cost strategy dominates and drives down profit margins. This
is exactly what the surfboard industry has eXJrerieuced. Contrary to popular wisdom. outside
investors have not been. averse to the surfboard industry because of its small size, but because of
its poor profitability. Top line volume is immaterial if there is nothing on the bottomline.
Clark Foam’s almost violent cessation of PU blank production should enable surfboard
manufacturers ,to explore differentiation strategies, at least in the short term. The differentiation
strategy, in fact, may be forced upon manufacturers by the simple unavailability of PU blanks
and the destabilization of the surfboard retail market. Alternative construction technologies may
enable manufacturers
to pursue a. differentiation strategy in the long run as well.
’
The Hole in the Supply Chain and Excess Demand
As stated previously, the closure of Clark Foam has created a 1,000 blank-a-dayhole in
80-90% of the collective supply chain. This is the supply-side change; there is also a demand side
change. The demand-side change is more complicated because’it includes several markets:
(1) the industrial market for blanks between Clark Foam and direct customers (either distribution
centers or larger manufacturers), (2) the wholesale market for blanks between distribution
,
centers and smaller manufacturers, and finally (3) the retail market for fInished surlboards
between manufacturers/wholesalers and retailers/consumers.
.
It will take sometime for the full effects to be felt at the consumer/retail1evel. As of Monday
December 13th, prices were raised in many retail shops by as much as 30% in an effort to retain
inventory until production increases. Quotas are also being used as an inventory-control
mechanism (eg.one board per customer per month). Killer Dana O’Neill,and Wise SurfShop
have employed this control device.
Presently, the quantity of excess demand in the industrial and wholesale markets is the loss of
ClarkFoam’s production volume intended for the u.s. market. If 90% of Clark Foams
production was for U.S. markets, the excess demand will be 900 blanks a day. This quickly will
translate to an /900 surfboard-a-day excess demand in the retail market for finished surfboards.
Thc excess demand is multiplied by purchasing behavior during supply shortages: purchasing
increases above normal levels in expectation of tittle or no supply in the future.
As the blank shortage experienced by manufacturers continues to become a surfboard shortage
experienced surfers, retail prices will rise further. It would be iInprudent to predict the future
equilibrium retail price, but indicators suggest that equilibrium price almost certainly will
stabilize somewhere above. its previous position. The equalization of the market will depend
uppn the four major methods of servicing the excess in demand: (1) the importation of foreign
PU blanks, (2} the ramping-up of domestic PU blank:producers, (3) the increase in production by
alternative construction providers, and (4) the increase in production of EPS blanks.
Increase in Foreign Import.of PU Blanks
The aggregate foreign production capacity of PU ,blanks is nowhere near that of Clark
Foam. Communication with Australian, South American… South African, and European suppliers
has provided little concrete information. One telling fact is that Clark Foam was a global
supplier; therefore the foreign markets may also be feeling the shortage. Australia is in peak
production with their summer demand siting squarely on their shoulders. While Australia
surely has thelargest capacityof all the regions aforementioned. their domestic demandis large
enough to occupy most of that capacity. ShapersAustaIia recently reported: "At the presentwe
are at full capacity until around mid next year, as you can appreciatewe have all the demands of
theAustralian summer firmly on our shoulders. We would certainly like to help as many people
out as we can and if the situation arises where we can, then we will look at ways to assist."
On being contactcd, several other Australian PU blank manufacturers reported that no further
container loads of blanks could be exported to the U.S. within the next three months. The
current import volume has not been established, but surfboards made with foreign PU bJanks will
continue to gain market share until domostic PU and EPS production ramps up.
Increase in Domestic Production of PU Blanks
The following is an excerpt from a memorandum released on December 12thby SIMA’s
Bill Bahne, concernilig southern California blank suppliers Walker Foam and Just foam: "We.
are hoping tbese two sources combined will be able to produce and deliver approxcimately 2,000
domestically produced blanks per month within 45-60 days. In addition, Walker Foam is
negotiating with a production facility in China to manufacture btanks under licence for
distribution in America." Neglecting the possible Chinese operation, a production volume of .
2,000 blanks-a.-month translates into about 90 blanks-a.-day. This would reduce excess demand
by less than 10%. .
Another report suggested that Wa]ker would reach levels of production to provide "'foam for
everyone" within 90 days. The credibility of this claim. has not been established. .
Notwithstanding, those 90 days would represent 90.000 blanks absent from inventories
(neglecting imports), and it will take production at levels of excess supply in order to replenish
that loss of inventory. The loss in aggregate blank:and finished-surfboard inventories. however.
will be replenished most likely over the long-run by a some combination of imported PU blanks,
EPS blanks, and domestic PU blanks.
Increase in Production by Altemative Construction Technology Providers (ACTEPs)
This group cODsistsof firms like Surftech, Boardworks and Salomon. While there
certainly are domestic and custom ACtEPs, the term will be used to refer exc1usively to
overseas molded-board manufacturers. Their supply chain will remain unaffected by Clark
Foam’s closure -as they do not participate in the market for blanks-and they will continue to
be able to produce finished surfboards without any disruption. They will capitalize on the excess
demand and increase their production accordingly. The excess in demand will ensure that.
ACTEPs quickly gain retail market sharc. It is important to note that of the four:'major methods
of servicing the excess demand, this is the only one that services it at the retail level
immediately; the other three will service it over time. This is a distinct advantage:for ACTEPs.
Increase in EPS Blank Production
The combination of extrUded or expanded polystyrene cores and fiberglass/epoxy skins
has been.proven extensively by innovators like Greg Loehr. It has been prevented from entering
the market for blanks (and finished boards) by Clark’s complicated barrier to entry. At this time,
that barrier to entry has been eliminated. The PU blank shortage has rendered EPS switching
costs irrelevant in comparison to costs of remaining with PU. For most surfboard manufacrnrers,
adopting EPS blanks and epoxy resin will require a fairly marginal restructuring period.
EPS/epoxy
is positioned to gain a substantial share in the market for blanks and consequently,
substantial retail market share.
A Santa Cruz-based company in the business of providing CNC shaping services, Marlin
Cybershapes. is one such entrepreneurial company that will undertake the capital investment.
required to begin high capacity production of EPS blanks. Assuming there are other fims like
Cybershapes, significant capital may be invested in the production of EPS blanks. Epoxy is
readily available and virtually no investment is necessary to use this material aside from
.relatively simple oven s.ystems~oensure a.funy cured matrix. The capital investment made by
entrepreneurial firms implies a long-term commitment that will compete against the scrambling
domestic PU blank producers, both in the short~ and long term
QualityIssues . .
Clark Foam dominated the industry for several reasons-one of which was extremely
consistent high quality. Provided that Clark Foam supplied 80-90% percent of the
manufacturing industry with blanks. finished surfboards were also of consistent high quality
(neglecting variations in lamination quality and over-shaping)-With the introduction of blanks
imported from. several countries, quality will be inconsistent. using the best of terms…Quality could suffer from the use of smaller and less-established
PU blank providers. This would result
in theproduction of higher-priced, lower-qualityPU/PEsurfboards.
Surfboards constructed with EPS/epoxy maybe ofvarying quality due to inexperienced .
production. staffs. This problem could be resolved quickly, though. Long-time advocates of this
construction technology argue that EPS/epoxy is a superior technology by nature. Assuming that
is the case, EPS/epoxy boards will be extremely competitive, facing ,resistance only by the tastes
and preferences of consumers. Coincidentally, the excess demand implies that consumer.tastes
and preferences will be skewed by the simple availability of finished surfboards.
Established ACTEPs will not suffer.from quality issues, assuming they do not make sacrifice*,in
quality in order. to increase production volumes.
’
Price Pressures
Price pressures are critically dependent on the decisions of individual suppliers and
manufacturing firms. Foreign imports will drive up the cost strUcture of the impqrting firms. A
40 foot container filled with PU blanks will bear a $2,000 to $3,000 shipping cost. This cost will
be amortized over each finished board. This could drive up finished PU/PE board prices by a
significant margin-anywherefrom 15to 30%.
If domestic PU blank suppliers raise prices, it will help equalize the market for PU blanks. If
domestIc PU blank producers do not raise prices, it will exacerbate the excess demand and
protract the recovery period. This scenario may be flawed, though, due to the introduction of
new competition from EPS blanks. Domestic PU supplers may be forced to keep prices
artificially low In order to compete with EPS.
The price of EPS blanks will have a significant impact on the competitive environment in the
market for all surfboard blanks. EPS blanks wi11 be relatively inexpensive, 'potentially priced
under the previous level of Clark Foam blanks. Any price increase for PU blanks will encourage.
surfboard manufacturers to make the switch to EPS.
Alternative construction technology providers (ACTEPs) will have a.significant impact on the
competitive price structure of the retail market. Their cost structure is unaffected by the PU
blank shortage,so their prices presumably will remain’unchanged .'This may drive down the
competitive price level and apply downward pressure on profitmargins!but othernon-price
.factors may enable higher priced non-molded surfboards to compete effectively. These factors
include the implementation of differentiation strategies, distribution efficiency (which is
intrinsically disadvantaged of overseas production and intrinsically advantaged in domestic
production), and the development of the sophisticated buyer.
Table of Factors Forejqn PU Domestic PU EPS ACTEPs
…Short-term mkt. share Up …down UP. .Up . … …
Long-term tnkt. share Down Down Up Up
Short-term price press. Up Up Up Down
Long-term price press. Up Up Down Down
Short-term quality trend Inconsistent Down Down Consistent
Long-term quality trend inconslstent Up Up Consistent
Appraisal & Outlook
The impJicatiOJJSof the Clark Foam closure are complicated and far-reaching. It is
important to distinguish between the different markets discussed previously: industrial,
wholesale, and retail. Precice forecasting is outside the scope of this study, but identjfying the
critical factors will assist in the prediction. of the future competitive environment of the u.s.
surfboard manufacturing industry, The exact quantity of excess demand (approximately 1,000
boards-a-d~y) is a critical factor, which will be exacerbated by purchasing at levels greater than
normal, but ameliorated by the following four major methods of servicing that demand:
-
Increase in foreign imports of PU blanks
-
Increase in domestic production of PU blanks
-
Increase in production of EPS blanks
-
Increase in production of established alternative constructions.
Each of these changes will shift up the level of aggregate production, which was nearly flattened
by the ClarkFoam closure. Blank and finished-surlboard inventories will fall dramatically to
a
minor fraction of their previous level and aggregate production reaches levels greater than
demand. inventories will remain low in production warehouses and.retail floors.
Importing of foreign. PU Blanks: is a costly short-term solution. Firms that import PU bianks
as an a1temativc to switching to EPS/epoxy surfboards will face debilitating inefficiencies. Their
cost structure will increase and quality will be inconsistent. If surfboards containing foreign PU
blanks jncrease their retail market share to 40% in the short-term, their share will fall to near zero
in the long-term.
PU/PE surfboards will lose market share permanently. The increase in domestic PU blank
production is the sole factor that will prevent PU/PE boards from becoming forced out of the
U.S. market. In the short-run. PE/PU boards will lose market share rapidly to established
ACTEPs. In the long-run, they will continue to lose market share to EPS/epoxy boards. If
PU/PE surfboards held an 80% retail market share before, they may hold less than a 40% share
in the future,
.ACTEPs will gain market share permanently. ACTEPs are poised.to gain market share
immediately. Their supply chains are intact and they will increase production immediately.
They will gain significant market share in the short-term and probably retain that share in the .
long run. Their only disadvantage is the inability to cater to the sophisticated buyer and this may
prevent them from gaining market dominance. If ACTEPs held a 20% markd share before, they
may hold more than a 35% market share in the future.
EPS/epoxy surfboards will gain market share permanently. Capital investment in EPS blank
production ensures that EPS/epoxy surlboards will not bc a shQrt-term solution. There may be
variations in the details of construction but the general method has been proven viable. PU blank
price and availability factors will encourage manufacturers to adopt EPS/epoxy processes. If
EPS/epoxy surfboards held a near-zero market share before, they may hold more than a 35%
share in the future.
Cost structures win increase in the short-term but decrease to previous levels in the long
term. This may have a profound impact on profit margins in me long run. Accepting the
commoditization of the surfboard industry. we can model the change in margins after other
commodity.industries. During asupply shortage, cost structures increase. so prices are raised;
but as supply increases to meet demand, prices are not lowered. Commoditized industries
compete with low-cost strategies that drive down their profit margins. After a supply shortage,
when prices have risen and cost structures are lowering, the indUstry does not decrease prices but
rather improves their margins.
The surf industry has suffered from poor profit margins and this supply shortage may be the
Opportunity to improve them. However, this may not happen, depending upon the following
factors: (1) the ability of the industry to collaborate and refrain from self-destructive competitive
price gouging; (2) the magnitude of downward price pressure from ACTEPs; (3) the ability for
manufacturers of non-molded surfboard manufacturers to execute differentiation. strategies and
develop the sophisticated buyer; (4) the extent of industry decommoditization and product
differentiation
Contrary to popular wisdom, Surftech, Boardworks, NSP, Santa Cruz Surfboards, Salomon. and
other ACTEPs have not commoditized the industry -in fact. they have decommoditzed it The
monopoly of Clark Foam and PU/PE blanks established an ovelWhelming market dominance.
From the commmers’ perspective (and,indeed, the business perspective). that homogenized the
industry. The inevitable increase in production of EPS/epoxy surfboards will further
differentiate surfboards and decommoditize the industry.
Andrew Hines is currently an upper division student of international business and global economics at San
Francisco.state.University. He serves as a.performance analyst for a $150 million manufacturing company in .
northern California, He began surfing and shaping in Santa Cruz, California when he was 12 years old. He has
hand-shaped several hundred boards. developed computer-aided surfboard design methodologies and served as the
. coordinator of research and development for a hollow composite start-up surlboard co.mpany based .1nnorthern
California. Andrew continues to build surfboards and follow the industry closely.
ApexSurf 112/1412005