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"Secrets" about the consumer audio business you may find interesting

Bjorn

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The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at mainstream retailers.
Can't speak for others but we do direct sales and COGS is considerably higher than 30%. I think higher than 30% is quite common with direct sales.
 
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kemmler3D

kemmler3D

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we do direct sales and COGS is considerably higher than 30%. I think higher than 30% is quite common with direct sales.
Yes, direct sales are a way beyond 30% or lower COGS. If you can make it work, it's a great model. IME the problem arises if you need more reach than direct marketing can reasonably provide.
 

Bjorn

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Yes, direct sales are a way beyond 30% or lower COGS. If you can make it work, it's a great model. IME the problem arises if you need more reach than direct marketing can reasonably provide.
Absolutely. While internet has made the world smaller, distributors and retailers still are crucial when you want to reach a large market.
 
D

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I worked for a consumer audio business for several years, from 2012-2015 and 2017-2020. It was a tiny company and we aimed directly for the middle of the market, say $100-300, which for our target customer, was expensive. Mainstream. (I won't say which one but you can probably figure it out if you're good with Google.) So much of what I say won't apply to bigger companies, or higher-end ones.

However, it might be good to know a little bit of what goes on behind the scenes. I see some assumptions about the biz that are not quite on the mark here and there, so maybe my experience can "lift some veils".

None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. Also, I only worked at small volumes. Our company was a startup and about 10 people. My view of the industry would pale in comparison to someone who worked for Bose, Logitech, UE, etc. But these were some of my observations.

  • The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at mainstream retailers.
    • Our company's COGS were higher than this, which was a problem. It didn't allow for us to recoup our costs, make enough money to pay our expenses (like salary, electric bill), and also leave something for the retailer. The rule of thumb for us in the US was retailers will ask for half of the retail price, or more. That leaves us to make our cut from the remaining half.
  • Retail price is free to deviate upward from COGS in an unlimited fashion.
    • We all know Beats headphones. Undoubtedly they don't cost more in parts than an MPOW or Anker set. But people will pay more, so they charge more. What people will pay is much more important than how much something costs.
  • Except for outlier brands, marketing expenses don't have a lot to do with COGS / product quality.
    • It's common to attribute high cost / low performance equipment to "too much spent on marketing, not enough on R&D". This is only true for the absolutely massive brands that can afford to saturate the airwaves. You can name all of them because there aren't very many, and their advertising works.

      When a small brand (sub-$100M in revenue at the lowest) spends money on marketing, they generally intend to (need to) make the money back in short order. They can't make the sale on name recognition alone. (I can go further into the math on this, but the numbers don't work unless you can shovel money at your audience for years at a stretch before making the sale.) Unless you can outspend Sony or Apple for 2+ years without going under... forget this strategy.

      Smaller brands have to compete on actual product features, reviews, and quality in general - which means that taking significant budget out of COGS to buy ads is often self-defeating. These brands do spend a good deal on marketing, but it tends to come out of profit margins, not COGS.
  • Very few audio brands operate their own factories.
    • You can probably name most of them. Even big reputable names do not manufacture all of their own parts. Almost all consumer brands are simply re-selling or contracting out to overseas factories. (This isn't a bad thing - it's really hard to competently manufacture many types of components like drivers, cables and housings under one roof, and usually inefficient. But if you assumed XYZ brand did everything in house from soup to nuts, you very likely assumed wrong.)
  • Most Chinese factories and engineers are perfectly capable of producing high-end equipment... but their customers don't ask for it.
    • Would you rather make $50 per unit on 100 units, or $5 per unit on 100,000 units? Yes, so would they. Niche applications are not of interest to most manufacturers, especially in China, because marketing to high end audiences isn't (at least a few years ago, it wasn't) as easy for them. They mostly operate on a B2B model focused on high volume orders. A major reason for that is switching production lines from product to product is costly. They much prefer to make 10,000 of something mainstream and fast-moving than 10 runs of 1,000 that might (or might not) sell for a high price. Many can do either, but prefer a few large contracts over many small ones.

      The factor that drives "Chinese (or insert the country of your choosing here) audio is low quality" attitudes is actually the customer. I will never forget the man who walked up to a booth attendant in Hong Kong on a sourcing trip. He skipped the formalities and brusquely said to the woman: "Show me your biggest speaker. Biggest and cheapest. I want, BIG, CHEAP and LOUD." This was actually at a booth that had some items approaching hi-fi. Too bad. But they make what they can sell.

      In truth, this man did understand the mainstream western consumer pretty well, but it's not nice to say it out loud. :)
  • Economies of scale are really important.
    • Speaking of factories. Factories that are willing to do small runs are often less established, working with new suppliers themselves, and therefore can run into QC issues. This combined with low quantities pushes up the price of small-run products even more. Niche products are more expensive in large part because the cost per unit goes way up when you fall below 50K or 10K units per run.
  • Audio companies are not all as sophisticated as you'd like to think.
    • You don't need a degree in anything to start an audio brand. Many companies don't even employ any engineers or design their own products. Many audio execs would be totally lost reading threads here, and have the critical listening skills of a shriveled potato. They're in the role for business, not functional reasons.

      If you find yourself wondering "Did they even measure XYZ before shipping this" the answer could actually be "no".

      This is far from all companies, and I do think it speaks to the sophistication of ASR and DIYaudio and similar forums, than it speaks to laziness or malfeasance on the part of manufacturers. Although, that is a factor too.

      The people who do actually design and build speakers tend to be quite sophisticated and skilled. You don't drop $100K on an injection mold on a hunch. The people making decisions about speakers, what to sell, how to price them, etc - often have less knowledge than a serious hobbyist. They may or may not follow the advice of knowledgeable people. They may just ask their golf buddy what they think of the sound. So, I'm here to confirm that your thoughts of "I could surely do better" are sometimes correct.

      edit: A note on people working in audio companies who aren't experts in audio. Product development and management (among others) are important skills that most businesses can't live without. And you don't need audio expertise to be good at them. Audio companies simply suffer from the same problems as any other technical business - sometimes management ignores engineers at the wrong time. Or engineers don't speak up at the right time. You may have heard the results of such failures here and there. :)
  • Shipping costs are a huge factor.
    • This won't surprise anyone, but keep in mind that the manufacturer has to ship all the big / heavy parts of a speaker at least once or twice before they ship it to you. This adds up and there is a disproportionate incentive to keep the size and weight of a mainstream speaker down. Really everyone knows that heavier parts tend to work better (housings, magnets, etc.) but the cost explodes due to logistics costs, not just quality / tolerances.
  • Packaging costs are probably a bigger factor than you think.
    • There are undoubtedly mid-low-end IEMs where the package costs more than the IEM. In fact it's not even hard to do this. You can source a low-end IEM for $2 and put it in a $3 box without going out of your way. It goes on Amazon for $20 or so and oddly enough everyone seems happy.

      However, it's possible to spend a significant fraction of COGS on packaging even at the higher end. $10 worth of box (printing, foam, nice manual, etc.) is not hard to do. When the COGS of that product are around $100 you're actually ultimately paying nearly $30 or $40 for the box. Best to keep it for resale value, then... ;)
  • Big retailers can't focus on sound quality or sell SOTA gear.
    • I do mean "can't". A major retailer like Target, Best Buy, Walmart etc. isn't set up to focus on extra-high quality sound like ASR members are looking for. The buyers at these stores are good at their jobs. And they do have ears. But their job isn't to offer the absolute highest-end gear. It's to make sure they make good money on the shelf space allocated to audio. They do this by ensuring they stock the type of thing their customers are likely to buy. To do THAT, they look for items that already sell, or brands that are well-established. This also excludes state-of-the-art stuff, which is by definition new, and therefore unproven.

      If the thing that sells well happens to sound good, they'll stock it. They may use sound quality as a tie-breaker between two equally salable goods. But they aren't in the business of introducing the best sound to people.

      If you want excellent sound, you need to look for a specialty shop or a DTC online marketplace (e.g. Amazon). If you want anyone in retail to know and care about audio, well, follow the advice of many people in this thread exhorting you to support local specialty shops. They are the only ones who can afford to care.

Edit: Cliche: "wow, this blew up". I will update later with some clarifications and responses to comments here! Glad this is interesting to read.

A note on DIY: When you build your own gear, you pay a lot more for parts. But DIY is often apparently cheaper for high-quality speakers? Why? because you don't have to pay for: Overhead (unless you rent or buy a workshop), wages (unless you pay yourself for your time?), sales taxes (you're not selling it, right?), shipping (except the parts to your house, and often wood comes from the local DIY store), etc. This should illustrate directionally why gear costs what it costs. In some cases even with high-end equipment, parts cost is a small fraction of what it costs to develop, build, and deliver the item to you.

Note: COGS doesn't include R&D or other costs of running a business. Some have noted that the Genelec teardowns don't reveal any unobtanium or incredibly fancy innards. Sure, but they have spent decades learning how to put those things together properly - at significant cost. I would personally rather pay $100 for $10 worth of parts combined in the best way possible, than pay $100 for $50 worth of parts assembled by drunk baboons. YMMV.

In that sense, a 3:1 retail to COGS price is arguably very fair or even low, especially for firms that do any R&D at all. I personally wouldn't say something is overpriced until you hit 10:1 or more. If you try to list all the costs (other than parts and R&D) that companies need to bear, you will get bored of writing before you think of them all. From employee health insurance to RoHS certification, it all costs money, and either you the consumer pay for it, or the company goes under eventually.
I would think the German and Austrian countries are too...proud of what they do to outsource to China, but I could be wrong. I bet Behringer does. AS for American businessmen, they would have their mother's heart monitor made in Bangladesh to save $20. Gordon Gekko is their hero. But look at German and Japanese cars. Those guys take manufacturing seriously.
 

Descartes

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I would think the German and Austrian countries are too...proud of what they do to outsource to China, but I could be wrong. I bet Behringer does. AS for American businessmen, they would have their mother's heart monitor made in Bangladesh to save $20. Gordon Gekko is their hero. But look at German and Japanese cars. Those guys take manufacturing seriously.
Whoa, a big nationalistic are you not! You think German companies don’t manufacture in China think again!
 

Doodski

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Whoa, a big nationalistic are you not! You think German companies don’t manufacture in China think again!
Some german corporations are designing and engineering in Germany and assembling and manufacturing in Eastern Euro countries where labor is less expensive. Not a bad deal all around I figure.
 
D

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Whoa, a big nationalistic are you not! You think German companies don’t manufacture in China think again!
Not a nationalist? We invented planned obsolescence and made more on parts than selling new cars. We have no manufacturing base because we gave it all to China. We have a government whose decisions are made by Raytheon, Cigna, Pfizer, Exxon, Time Warner and Goldman Sachs, a media incapable of criticizing any of the above because they give them billions in advertising or are part owners via GE and Westinghouse. Who are wildly partisan on the surface but only really argue about social issues because it doesn't cost corporations any money. But as long as they keep donating they can poison the air, water and food, hook teenagers and old people on drugs, and run around bombing anyone in a scarf. So, to answer your question, no I am not nationalistic.

“The cheapest sort of pride is national pride; for if a man is proud of his own nation, it argues that he has no qualities of his own of which he can be proud; otherwise he would not have recourse to those which he shares with so many millions of his fellowmen. The man who is endowed with important personal qualities will be only too ready to see clearly in what respects his own nation falls short, since their failings will be constantly before his eyes. But every miserable fool who has nothing at all of which he can be proud adopts, as a last resource, pride in the nation to which he belongs; he is ready and glad to defend all its faults and follies tooth and nail, thus reimbursing himself for his own inferiority.” - Arthur Schopenhauer
 

Jimster480

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I would think the German and Austrian countries are too...proud of what they do to outsource to China, but I could be wrong. I bet Behringer does. AS for American businessmen, they would have their mother's heart monitor made in Bangladesh to save $20. Gordon Gekko is their hero. But look at German and Japanese cars. Those guys take manufacturing seriously.
Sorry to break your nationalist bubble but German cars are the worst ones on the road. With the least reliability; they manufacture parts everywhere at whatever low cost they can find. What is made in Germany is typically pretty good, but it's a small subset of parts.
They also make their Electronics in Asia and half the parts still come from secondhand factories outside of europe. And as far as European cars sold in America they specifically have plenty of models made straight in mexico. Such as the Volkswagen jetta. I believe also the passat. You can just go through and look at all of the models and see where they are made. They even have some models of German cars which are made in China and South korea.
There are plenty of German companies outside of just those car companies I mentioned that manufacture in Asia or in other cheaper countries like Bangladesh or even Eastern European countries like Romania or bulgaria.

Also in terms of Japanese cars they are also made in the USA and other models made in mexico. Such as the Corolla and the Nissan sentra. They have made other models in China as well but mostly have shied away from Chinese Manufacturing in specific due to Quality problems in the recent years. That however does not mean that various parts from their cars are also not made in china.
In fact unless you purchase a model of Japanese car that is made in Japan they Japanese cars are no more Japanese than a Volkswagen made in mexico. There are models of Mazda as well made in Mexico just like Chevy. In fact some of them are even made in very similar plants if not the same plant.
Cars as a whole have just become Commodities like everything else with only high-end specialty models from each manufacturer actually being made by that manufacturer. Never mind that the electronics even in the high-end models are typically all made in Asia anyways.

I just suggest that since this is a scientific Forum that you do a bit of research before making such an outlandish comment again.
 
D

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Sorry to break your nationalist bubble but German cars are the worst ones on the road. With the least reliability; they manufacture parts everywhere at whatever low cost they can find. What is made in Germany is typically pretty good, but it's a small subset of parts.
They also make their Electronics in Asia and half the parts still come from secondhand factories outside of europe. And as far as European cars sold in America they specifically have plenty of models made straight in mexico. Such as the Volkswagen jetta. I believe also the passat. You can just go through and look at all of the models and see where they are made. They even have some models of German cars which are made in China and South korea.
There are plenty of German companies outside of just those car companies I mentioned that manufacture in Asia or in other cheaper countries like Bangladesh or even Eastern European countries like Romania or bulgaria.

Also in terms of Japanese cars they are also made in the USA and other models made in mexico. Such as the Corolla and the Nissan sentra. They have made other models in China as well but mostly have shied away from Chinese Manufacturing in specific due to Quality problems in the recent years. That however does not mean that various parts from their cars are also not made in china.
In fact unless you purchase a model of Japanese car that is made in Japan they Japanese cars are no more Japanese than a Volkswagen made in mexico. There are models of Mazda as well made in Mexico just like Chevy. In fact some of them are even made in very similar plants if not the same plant.
Cars as a whole have just become Commodities like everything else with only high-end specialty models from each manufacturer actually being made by that manufacturer. Never mind that the electronics even in the high-end models are typically all made in Asia anyways.

I just suggest that since this is a scientific Forum that you do a bit of research before making such an outlandish comment again.
My brother had a used auto parts business and his own warehouse. For decades American cars were literally designed to fall apart because they made more on parts than new cars. As for German cars, I've never owned one. Just Japanese the past decade or so. You're the one who should do some research

 

Jimster480

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My brother had a used auto parts business and his own warehouse. For decades American cars were literally designed to fall apart because they made more on parts than new cars. As for German cars, I've never owned one. Just Japanese the past decade or so. You're the one who should do some research

Planned obsolescence was a thing for many American cars especially in the lower tier cars for many years. however it has been a thing for German cars for many years as well especially in the higher end cars period basically everything from Mercedes has been designed to fail since the mid 2000s at least.
Japanese cars today are nothing like the Japanese cars of old and realistically unless the Japanese car you own is truly made in Japan it's not a Japanese car anyways. For example Honda which is said to be "insanely reliable" is actually unreliable over time. They have had multiple transmission recalls in the past decade as well as electrical issues for decades... Their engines are solid but the rest is really hit and miss. Honda is also mostly made in the USA unless you have a specific model like the new Type-R Civic that they are building in Japan.

I personally own four Japanese vehicles and two American ones however one of my American Vehicles is actually from Australia under holden. Of my four Japanese Vehicles two of them are produced directly in Japan and two of them are made in the usa.
So technically I own 3 cars made in the USA, 2 made in Japan and one made in Australia. The last one has most of it's parts made in the USA other than some electronics which come from Asia like all modern brands.
I would say of all of my vehicles my Infiniti QX80 has been the most reliable being driven for 70,000 miles with only changing the alternator and starter which has to do with age because I bought it with 80,000 miles. Technically the truck is 13 years old this year as mine is a very early produced model from 2011. I have a Nissan Titan which is not as reliable as the QX80 and I have only had it for about 2 years, however it is older and some of the issues could be related to age.

At the end of the day the point is that today items are not good or bad based on where they are made. It's entirely based on who made them, what the target market is and how much longevity is built in.
I knew several people who owned those horrible corolla's from the last 10 years that had tons of issues with them... The cars mostly ran but the sensors failed all the time making them run badly.

Edit: Sorry that my thoughts are kind of all over the place above. I wrote most of it using Speech to Text while I was working on various things.
 
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anmpr1

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And as far as European cars sold in America they specifically have plenty of models made straight in mexico. Such as the Volkswagen jetta. I believe also the passat. You can just go through and look at all of the models and see where they are made. They even have some models of German cars which are made in China and South korea.

VAG Mexican product sold in the US include the GTI and Audi Q5. Some parts are shipped from Europe, and then assembled in Mexico. US Passat (no longer made) was sourced from the plant in Chattanooga TN. It is/was not the same car as the Euro Passat. I've owned both GTI and Q5, made in Mexico-- fit and finish on both was superb. Most heavy assembly is robotic, and I imagine Mexican robots are the same as German robots.

Indonesian and Chinese guitars (which I'm familiar with) are typically first rate at their price point, and for the $$ cannot be made in the US, at the volumes required. An Indonesian PRS, or Chinese Epiphone often has better consistency than comparable US product, although US models will always have more desirability.

One of the incentives for 'overseas' production (that is, not made in USA) turns on domestic (US) tax regs. For a multinat corp, tax burden is said to be less on overseas production as long as the profits remain outside US jurisdiction. For a multinational, that is not a problem.

Also, the US has encouraged the FIRE sector over manufacturing. Along with the 'service' sector, which essentially produces nothing--with the exception of fast food operations, producing stuff that is quickly consumed, but otherwise having no 'added productive value', later on (it might benefit the medical sector, though).

Economists have different opinions, and sometimes when you read one or another you think it's simply 'toss a coin'. FWIW I've found Michael Hudson's arguments compelling, at least from a strictly descriptive standpoint, as he contrasts US sourced finance capitalism v Chinese industrial capitalism-- the basic difference between the two economies, etc.

In any case, most stuff 'made in the US' is actually assembled in the US. I've heard it explained that the reason Fender USA guitars simply say USA on the headstock is because California law dictates that 'Made in USA' means most if not all parts are USA sourced, and some of Fender's parts come from Mexico, or elsewhere. Schecter's USA models say, Sun Valley California on them, but don't say Made in USA, even though they mostly are. I don't think Gibson USA indicates anything.

When I was growing up, Japanese electronics were considered junk. Now, anything made in Japan sells at a premium.
 
D

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Planned obsolescence was a thing for many American cars especially in the lower tier cars for many years. however it has been a thing for German cars for many years as well especially in the higher end cars period basically everything from Mercedes has been designed to fail since the mid 2000s at least.
Japanese cars today are nothing like the Japanese cars of old and realistically unless the Japanese car you own is truly made in Japan it's not a Japanese car anyways. For example Honda which is said to be "insanely reliable" is actually unreliable over time. They have had multiple transmission recalls in the past decade as well as electrical issues for decades... Their engines are solid but the rest is really hit and miss. Honda is also mostly made in the USA unless you have a specific model like the new Type-R Civic that they are building in Japan.

I personally own four Japanese vehicles and two American ones however one of my American Vehicles is actually from Australia under holden. Of my four Japanese Vehicles two of them are produced directly in Japan and two of them are made in the usa.
So technically I own 3 cars made in the USA, 2 made in Japan and one made in Australia. The last one has most of it's parts made in the USA other than some electronics which come from Asia like all modern brands.
I would say of all of my vehicles my Infiniti QX80 has been the most reliable being driven for 70,000 miles with only changing the alternator and starter which has to do with age because I bought it with 80,000 miles. Technically the truck is 13 years old this year as mine is a very early produced model from 2011. I have a Nissan Titan which is not as reliable as the QX80 and I have only had it for about 2 years, however it is older and some of the issues could be related to age.

At the end of the day the point is that today items are not good or bad based on where they are made. It's entirely based on who made them, what the target market is and how much longevity is built in.
I knew several people who owned those horrible corolla's from the last 10 years that had tons of issues with them... The cars mostly ran but the sensors failed all the time making them run badly.

Edit: Sorry that my thoughts are kind of all over the place above. I wrote most of it using Speech to Text while I was working on various things.
Supposedly American cars have gotten a lot better the last 20 years in the age of the SUV. Mainly because they had to. Honda and Toyota decimated the mid and economy size market for American cars. My first Corolla was traded in with 209K original engine and trans running perfectly. My last was sold for $2,400 with 204K, original engine and trans running perfectly. As for Honda, I haven't owned one in a long time. German cars, never.
 
D

Deleted member 60987

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VAG Mexican product sold in the US include the GTI and Audi Q5. Some parts are shipped from Europe, and then assembled in Mexico. US Passat (no longer made) was sourced from the plant in Chattanooga TN. It is/was not the same car as the Euro Passat. I've owned both GTI and Q5, made in Mexico-- fit and finish on both was superb. Most heavy assembly is robotic, and I imagine Mexican robots are the same as German robots.

Indonesian and Chinese guitars (which I'm familiar with) are typically first rate at their price point, and for the $$ cannot be made in the US, at the volumes required. An Indonesian PRS, or Chinese Epiphone often has better consistency than comparable US product, although US models will always have more desirability.

One of the incentives for 'overseas' production (that is, not made in USA) turns on domestic (US) tax regs. For a multinat corp, tax burden is said to be less on overseas production as long as the profits remain outside US jurisdiction. For a multinational, that is not a problem.

Also, the US has encouraged the FIRE sector over manufacturing. Along with the 'service' sector, which essentially produces nothing--with the exception of fast food operations, producing stuff that is quickly consumed, but otherwise having no 'added productive value', later on (it might benefit the medical sector, though).

Economists have different opinions, and sometimes when you read one or another you think it's simply 'toss a coin'. FWIW I've found Michael Hudson's arguments compelling, at least from a strictly descriptive standpoint, as he contrasts US sourced finance capitalism v Chinese industrial capitalism-- the basic difference between the two economies, etc.

In any case, most stuff 'made in the US' is actually assembled in the US. I've heard it explained that the reason Fender USA guitars simply say USA on the headstock is because California law dictates that 'Made in USA' means most if not all parts are USA sourced, and some of Fender's parts come from Mexico, or elsewhere. Schecter's USA models say, Sun Valley California on them, but don't say Made in USA, even though they mostly are. I don't think Gibson USA indicates anything.

When I was growing up, Japanese electronics were considered junk. Now, anything made in Japan sells at a premium.
Same with Taiwan. I'm trying to figure out if Superlux is Japanese or Taiwanese. And their build is crap. But their sound? don't know who does high end better. Not Beyer. And anyway this is all off topic when I explained why I'm not nationalistic. 1953 the democratically elected leader of Iran wants to nationalize British Persian Oil (BP). We overthrew him in a coup, installed a dictator, the Shah, they rebelled and now have a theocracy. 2001 family friends and business partners of the Bush family (Like John Hinkley Jr) have a son who destroyed the Twin Towers almost exclusively with Saudis, so naturally we invade Iraq. Riiight after Hussein suggested using the Euro instead of Petrodollar. Gaddafi we invaded Libya, overthrew and killed him when he tried to use his hundred tons of gold to have an asset backed currency, the Dinar for all of Africa, challenging the fiat based monopoly money of America and Europe. So we killed him. Don't know where that gold went. Assad was an optometry student, who didn't want to inherit his fathers political power, but his brother died so he did, doesn't want pipelines built through Syria, so we've been trying to overthrow him for over a decade. All our enemies are really just enemies of corporate America. Banks, oil companies. So we can throw another half a trillion at defense contractors. That's why we can't have nice things. As Smedley Butler said, war is a racket. But so is everything in this country.
 

notsodeadlizard

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I worked for a consumer audio business for several years, from 2012-2015 and 2017-2020. It was a tiny company and we aimed directly for the middle of the market, say $100-300, which for our target customer, was expensive. Mainstream. (I won't say which one but you can probably figure it out if you're good with Google.) So much of what I say won't apply to bigger companies, or higher-end ones.

However, it might be good to know a little bit of what goes on behind the scenes. I see some assumptions about the biz that are not quite on the mark here and there, so maybe my experience can "lift some veils".

None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. Also, I only worked at small volumes. Our company was a startup and about 10 people. My view of the industry would pale in comparison to someone who worked for Bose, Logitech, UE, etc. But these were some of my observations.

  • The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at mainstream retailers.
    • Our company's COGS were higher than this, which was a problem. It didn't allow for us to recoup our costs, make enough money to pay our expenses (like salary, electric bill), and also leave something for the retailer. The rule of thumb for us in the US was retailers will ask for half of the retail price, or more. That leaves us to make our cut from the remaining half.
  • Retail price is free to deviate upward from COGS in an unlimited fashion.
    • We all know Beats headphones. Undoubtedly they don't cost more in parts than an MPOW or Anker set. But people will pay more, so they charge more. What people will pay is much more important than how much something costs.
  • Except for outlier brands, marketing expenses don't have a lot to do with COGS / product quality.
    • It's common to attribute high cost / low performance equipment to "too much spent on marketing, not enough on R&D". This is only true for the absolutely massive brands that can afford to saturate the airwaves. You can name all of them because there aren't very many, and their advertising works.

      When a small brand (sub-$100M in revenue at the lowest) spends money on marketing, they generally intend to (need to) make the money back in short order. They can't make the sale on name recognition alone. (I can go further into the math on this, but the numbers don't work unless you can shovel money at your audience for years at a stretch before making the sale.) Unless you can outspend Sony or Apple for 2+ years without going under... forget this strategy.

      Smaller brands have to compete on actual product features, reviews, and quality in general - which means that taking significant budget out of COGS to buy ads is often self-defeating. These brands do spend a good deal on marketing, but it tends to come out of profit margins, not COGS.
  • Very few audio brands operate their own factories.
    • You can probably name most of them. Even big reputable names do not manufacture all of their own parts. Almost all consumer brands are simply re-selling or contracting out to overseas factories. (This isn't a bad thing - it's really hard to competently manufacture many types of components like drivers, cables and housings under one roof, and usually inefficient. But if you assumed XYZ brand did everything in house from soup to nuts, you very likely assumed wrong.)
  • Most Chinese factories and engineers are perfectly capable of producing high-end equipment... but their customers don't ask for it.
    • Would you rather make $50 per unit on 100 units, or $5 per unit on 100,000 units? Yes, so would they. Niche applications are not of interest to most manufacturers, especially in China, because marketing to high end audiences isn't (at least a few years ago, it wasn't) as easy for them. They mostly operate on a B2B model focused on high volume orders. A major reason for that is switching production lines from product to product is costly. They much prefer to make 10,000 of something mainstream and fast-moving than 10 runs of 1,000 that might (or might not) sell for a high price. Many can do either, but prefer a few large contracts over many small ones.

      The factor that drives "Chinese (or insert the country of your choosing here) audio is low quality" attitudes is actually the customer. I will never forget the man who walked up to a booth attendant in Hong Kong on a sourcing trip. He skipped the formalities and brusquely said to the woman: "Show me your biggest speaker. Biggest and cheapest. I want, BIG, CHEAP and LOUD." This was actually at a booth that had some items approaching hi-fi. Too bad. But they make what they can sell.

      In truth, this man did understand the mainstream western consumer pretty well, but it's not nice to say it out loud. :)
  • Economies of scale are really important.
    • Speaking of factories. Factories that are willing to do small runs are often less established, working with new suppliers themselves, and therefore can run into QC issues. This combined with low quantities pushes up the price of small-run products even more. Niche products are more expensive in large part because the cost per unit goes way up when you fall below 50K or 10K units per run.
  • Audio companies are not all as sophisticated as you'd like to think.
    • You don't need a degree in anything to start an audio brand. Many companies don't even employ any engineers or design their own products. Many audio execs would be totally lost reading threads here, and have the critical listening skills of a shriveled potato. They're in the role for business, not functional reasons.

      If you find yourself wondering "Did they even measure XYZ before shipping this" the answer could actually be "no".

      This is far from all companies, and I do think it speaks to the sophistication of ASR and DIYaudio and similar forums, than it speaks to laziness or malfeasance on the part of manufacturers. Although, that is a factor too.

      The people who do actually design and build speakers tend to be quite sophisticated and skilled. You don't drop $100K on an injection mold on a hunch. The people making decisions about speakers, what to sell, how to price them, etc - often have less knowledge than a serious hobbyist. They may or may not follow the advice of knowledgeable people. They may just ask their golf buddy what they think of the sound. So, I'm here to confirm that your thoughts of "I could surely do better" are sometimes correct.

      edit: A note on people working in audio companies who aren't experts in audio. Product development and management (among others) are important skills that most businesses can't live without. And you don't need audio expertise to be good at them. Audio companies simply suffer from the same problems as any other technical business - sometimes management ignores engineers at the wrong time. Or engineers don't speak up at the right time. You may have heard the results of such failures here and there. :)
  • Shipping costs are a huge factor.
    • This won't surprise anyone, but keep in mind that the manufacturer has to ship all the big / heavy parts of a speaker at least once or twice before they ship it to you. This adds up and there is a disproportionate incentive to keep the size and weight of a mainstream speaker down. Really everyone knows that heavier parts tend to work better (housings, magnets, etc.) but the cost explodes due to logistics costs, not just quality / tolerances.
  • Packaging costs are probably a bigger factor than you think.
    • There are undoubtedly mid-low-end IEMs where the package costs more than the IEM. In fact it's not even hard to do this. You can source a low-end IEM for $2 and put it in a $3 box without going out of your way. It goes on Amazon for $20 or so and oddly enough everyone seems happy.

      However, it's possible to spend a significant fraction of COGS on packaging even at the higher end. $10 worth of box (printing, foam, nice manual, etc.) is not hard to do. When the COGS of that product are around $100 you're actually ultimately paying nearly $30 or $40 for the box. Best to keep it for resale value, then... ;)
  • Big retailers can't focus on sound quality or sell SOTA gear.
    • I do mean "can't". A major retailer like Target, Best Buy, Walmart etc. isn't set up to focus on extra-high quality sound like ASR members are looking for. The buyers at these stores are good at their jobs. And they do have ears. But their job isn't to offer the absolute highest-end gear. It's to make sure they make good money on the shelf space allocated to audio. They do this by ensuring they stock the type of thing their customers are likely to buy. To do THAT, they look for items that already sell, or brands that are well-established. This also excludes state-of-the-art stuff, which is by definition new, and therefore unproven.

      If the thing that sells well happens to sound good, they'll stock it. They may use sound quality as a tie-breaker between two equally salable goods. But they aren't in the business of introducing the best sound to people.

      If you want excellent sound, you need to look for a specialty shop or a DTC online marketplace (e.g. Amazon). If you want anyone in retail to know and care about audio, well, follow the advice of many people in this thread exhorting you to support local specialty shops. They are the only ones who can afford to care.

Edit: Cliche: "wow, this blew up". I will update later with some clarifications and responses to comments here! Glad this is interesting to read.

A note on DIY: When you build your own gear, you pay a lot more for parts. But DIY is often apparently cheaper for high-quality speakers? Why? because you don't have to pay for: Overhead (unless you rent or buy a workshop), wages (unless you pay yourself for your time?), sales taxes (you're not selling it, right?), shipping (except the parts to your house, and often wood comes from the local DIY store), etc. This should illustrate directionally why gear costs what it costs. In some cases even with high-end equipment, parts cost is a small fraction of what it costs to develop, build, and deliver the item to you.

Note: COGS doesn't include R&D or other costs of running a business. Some have noted that the Genelec teardowns don't reveal any unobtanium or incredibly fancy innards. Sure, but they have spent decades learning how to put those things together properly - at significant cost. I would personally rather pay $100 for $10 worth of parts combined in the best way possible, than pay $100 for $50 worth of parts assembled by drunk baboons. YMMV.

In that sense, a 3:1 retail to COGS price is arguably very fair or even low, especially for firms that do any R&D at all. I personally wouldn't say something is overpriced until you hit 10:1 or more. If you try to list all the costs (other than parts and R&D) that companies need to bear, you will get bored of writing before you think of them all. From employee health insurance to RoHS certification, it all costs money, and either you the consumer pay for it, or the company goes under eventually.
Actually, there is nothing specific in all this to the conditional "audio" industry, especially for small producers in it.
Exactly the same situation is in any small- and medium-scale production of electronics.
Traditionally difficult areas are analog electronics and RF, the RF does not actually concern not audio only, even despite the abundance of all kinds of Bluetooth and Wi-Fi channels in the products, these are almost always pre-certified modules, which even a baby with a diploma can handle using.
Analog electronics was and remains very difficult, there are fewer and fewer specialists, specialization is becoming narrower and narrower, and one should not overestimate China, for example. In the real world, audio amps analog designers of scale and class of James Bongiorno, for example, are incredibly hard to find.
Digital electronics at the level of using large convenient chipsets (such as DAСs from different manufacturers) is generally the lowest form of primitive activity, which is why we see such an "explosion in the cheap DAC market", which is actually a stupid replication of reference designs with minimal (and not always good) improvements.
The same can be said about almost all class D amplifiers, which are de facto single-chip devices (but this does not apply to designs of talented analog developers such as the Belgian Bruno Putzeys). All those countless amplifiers based on all those TPA* and Merus and etc are essentially the same, because the entire amplifier in them is an one chip.

In general, the most on the market is that it is extremely easy to replicate with virtually no investment in R&D. It is terribly banal, but it is a fact.

The culture of designing low-cost, small-scale devices is very low. In any mass-market oriented area. Because market share is expected to be tiny, because profit margins are expected to be meager, no one really bothers.
Service, certifications, etc. are either factors due to which the business does not take off at all, or it is all completely ignored due to the possibilities of different sales models.

All this is very obvious and boring.
 

KellenVancouver

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All of the above is... interesting. But the inescapable bottom line is caveat emptor. AudioScienceReview, above and beyond any other source of information, is the best way for us purchasers to be aware and thus buy quality. Period.
 

Jimster480

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VAG Mexican product sold in the US include the GTI and Audi Q5. Some parts are shipped from Europe, and then assembled in Mexico. US Passat (no longer made) was sourced from the plant in Chattanooga TN. It is/was not the same car as the Euro Passat. I've owned both GTI and Q5, made in Mexico-- fit and finish on both was superb. Most heavy assembly is robotic, and I imagine Mexican robots are the same as German robots.

Indonesian and Chinese guitars (which I'm familiar with) are typically first rate at their price point, and for the $$ cannot be made in the US, at the volumes required. An Indonesian PRS, or Chinese Epiphone often has better consistency than comparable US product, although US models will always have more desirability.

One of the incentives for 'overseas' production (that is, not made in USA) turns on domestic (US) tax regs. For a multinat corp, tax burden is said to be less on overseas production as long as the profits remain outside US jurisdiction. For a multinational, that is not a problem.

Also, the US has encouraged the FIRE sector over manufacturing. Along with the 'service' sector, which essentially produces nothing--with the exception of fast food operations, producing stuff that is quickly consumed, but otherwise having no 'added productive value', later on (it might benefit the medical sector, though).

Economists have different opinions, and sometimes when you read one or another you think it's simply 'toss a coin'. FWIW I've found Michael Hudson's arguments compelling, at least from a strictly descriptive standpoint, as he contrasts US sourced finance capitalism v Chinese industrial capitalism-- the basic difference between the two economies, etc.

In any case, most stuff 'made in the US' is actually assembled in the US. I've heard it explained that the reason Fender USA guitars simply say USA on the headstock is because California law dictates that 'Made in USA' means most if not all parts are USA sourced, and some of Fender's parts come from Mexico, or elsewhere. Schecter's USA models say, Sun Valley California on them, but don't say Made in USA, even though they mostly are. I don't think Gibson USA indicates anything.

When I was growing up, Japanese electronics were considered junk. Now, anything made in Japan sells at a premium.
I understand the sentiment here; except about VW vehicles which are typically bottom tier vehicles.
From personal experience with Mexican built cars; things in Mexico are just poorly made. Mexican parts and mexican assemebled cars have panel gaps, lack of consistency and parts that tend to fail (assuming the parts are made in mexico). There is no pride taken in their work in these factories and for the most part this results in bad QC.
I can tell you with the GM vehicles; anything made in mexico is utter trash. Same for Toyota or Nissan. My babysitter had a VW Jetta made in mexico.... she had a loner car every other month because it was constantly broken. She didn't drive it hard and didn't drive very far but she didn't even trust her car to take her from FL to GA because it broke down so often. It was purchased new as well so its not even like it was a used car that was beat up.


Some items can simply not be made in the USA at these lower price points required because of the labor market. American Labor is simply too expensive and it eats the entire profit margin that could exist. Back in the day this wasn't a problem because we didn't have such bad inflation and such a bad government that constantly sells us out. Now that this has been going on for 30 years+ the train is over and nothing can be made in the USA unless it is niche and expensive.
Supposedly American cars have gotten a lot better the last 20 years in the age of the SUV. Mainly because they had to. Honda and Toyota decimated the mid and economy size market for American cars. My first Corolla was traded in with 209K original engine and trans running perfectly. My last was sold for $2,400 with 204K, original engine and trans running perfectly. As for Honda, I haven't owned one in a long time. German cars, never.
Honestly it really depends on the model. As a gear head; I look at what is made properly. Companies are more often than not engineering cars to last 100k miles or 8 years tops so that by the time the payments are over (since some can go to 8 years now) they will have to buy a new car. 72 and 84 month loans are more and more common so the cars are engineered to last the life of the loan and not really any longer.
In the mid market SUV segment there are some decent offerings from GM but I think that brands like Mazda and Infiniti and to an extent Lexus still dominate that segment truthfully with better vehicles that are built better and last longer. GM definitely wins on price though if you live near a bulk dealer or are willing to travel.
The American automakers did produce some decently reliable mass production cars after the last market crash because they needed to make money and get back on their feet. They needed to change their brand images..... however as they improved their images they went back to their old ways. The Malibu's which are still sold today came out in 2015 and the early models had issues with the engines dying around 100k miles due to the 0w-20 oil they were being told to use in them. For the 2017 model year they revised the oil weight back to 5w-30 and the problems went away..

Honestly I could go on all day about different car problems from different brands over the recent years.
Bottom line is that most people want quality goods but actually don't want to pay for quality goods. This is especially true in the US market where people often buy cheap junk that is marketed and don't do any research on what is good at all. Companies have now started treating the US market the way it acts; as moronic consumers who deserve nothing. So products for the USA are intentionally made poorly and marked at a lower price to sell in volume. Garbage like Beats headphones are just brand capitalization on cheap products made expensive because of the brand and nothing else.
It truly is a sad state of affairs.
 

caught gesture

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Back in the day this wasn't a problem because we didn't have such bad inflation and such a bad government that constantly sells us out. Now that this has been going on for 30 years+ the train is over and nothing can be made in the USA unless it is niche and expensive.


It truly is a sad state of affairs.
Slow and unequal wage growth in recent decades stems from a growing wedge between overall productivity—the improvements in the amount of goods and services produced per hour worked—and the pay (wages and benefits) received by a typical worker.

The figure shows that in the three decades following World War II, hourly compensation of the vast majority of workers rose 91 percent, roughly in line with productivity growth of 97 percent. But for most of the past generation (except for a brief period in the late 1990s), pay for the vast majority lagged further and further behind overall productivity. From 1973 to 2013, hourly compensation of a typical (production/nonsupervisory) worker rose just 9 percent while productivity increased 74 percent. This breakdown of pay growth has been especially evident in the last decade, affecting both college- and non-college-educated workers as well as blue- and white-collar workers. This means that workers have been producing far more than they receive in their paychecks and benefit packages from their employers.

1683538635126.jpeg

(https://www.epi.org/publication/charting-wage-stagnation/)

So the blame is with inflation, the government and the consumer? Give me a break! Workers made to produce more, paid less, management/stockholder share of profits increased…

I agree. It truly is a sad state of affairs.
Follow the link and have a look at the rest of the charts. Be saddened some more for the regular American worker.
 
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D

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I understand the sentiment here; except about VW vehicles which are typically bottom tier vehicles.
From personal experience with Mexican built cars; things in Mexico are just poorly made. Mexican parts and mexican assemebled cars have panel gaps, lack of consistency and parts that tend to fail (assuming the parts are made in mexico). There is no pride taken in their work in these factories and for the most part this results in bad QC.
I can tell you with the GM vehicles; anything made in mexico is utter trash. Same for Toyota or Nissan. My babysitter had a VW Jetta made in mexico.... she had a loner car every other month because it was constantly broken. She didn't drive it hard and didn't drive very far but she didn't even trust her car to take her from FL to GA because it broke down so often. It was purchased new as well so its not even like it was a used car that was beat up.


Some items can simply not be made in the USA at these lower price points required because of the labor market. American Labor is simply too expensive and it eats the entire profit margin that could exist. Back in the day this wasn't a problem because we didn't have such bad inflation and such a bad government that constantly sells us out. Now that this has been going on for 30 years+ the train is over and nothing can be made in the USA unless it is niche and expensive.

Honestly it really depends on the model. As a gear head; I look at what is made properly. Companies are more often than not engineering cars to last 100k miles or 8 years tops so that by the time the payments are over (since some can go to 8 years now) they will have to buy a new car. 72 and 84 month loans are more and more common so the cars are engineered to last the life of the loan and not really any longer.
In the mid market SUV segment there are some decent offerings from GM but I think that brands like Mazda and Infiniti and to an extent Lexus still dominate that segment truthfully with better vehicles that are built better and last longer. GM definitely wins on price though if you live near a bulk dealer or are willing to travel.
The American automakers did produce some decently reliable mass production cars after the last market crash because they needed to make money and get back on their feet. They needed to change their brand images..... however as they improved their images they went back to their old ways. The Malibu's which are still sold today came out in 2015 and the early models had issues with the engines dying around 100k miles due to the 0w-20 oil they were being told to use in them. For the 2017 model year they revised the oil weight back to 5w-30 and the problems went away..

Honestly I could go on all day about different car problems from different brands over the recent years.
Bottom line is that most people want quality goods but actually don't want to pay for quality goods. This is especially true in the US market where people often buy cheap junk that is marketed and don't do any research on what is good at all. Companies have now started treating the US market the way it acts; as moronic consumers who deserve nothing. So products for the USA are intentionally made poorly and marked at a lower price to sell in volume. Garbage like Beats headphones are just brand capitalization on cheap products made expensive because of the brand and nothing else.
It truly is a sad state of affairs.
A Toyota will last twice as long as an American car at ay price point. I've traded in or sold several with perfectly running engines and transmissions over 200,000 miles. American cars may be made to go 100K now compared to 60K in the 80s, but if you change the fluids Toyota engines are basically immortal.
 
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