Wednesday, June 22, 2016

Stealth inflation

When most people think of inflation, they think of the headline numbers being published like the producer price index (PPI) or some variant of the consumer price index (CPI) such as the CPI-U (CPI for urban consumers.  While those methods are itself are debatable, what I'm going to talk about is a little different.

This is really about how planned obsolescence is engineered into products.  Everything is affected from mundane household items like paper towels, garbage bags, and toilet paper to small and large appliances (toasters, refrigerators, etc.), to furniture, clothes shoes, computers, cars, you name it.  Basically, companies are able to engineer their products precisely for a certain lifetime.  Where companies took pride in building products that were practically indestructible and would last a lifetime (e.g. a washer or refrigerator that would last 30 years with no problems), they now engineer their products so that they last 5, maybe 7 years.  Financial engineering has allowed them to set aside money to deal with warranties and buybacks.  In the process the expense is being borne by the consumer.  Where you might have bought such an appliance for life, you now need to buy 8-10 of them over that same period of time.  On paper it looks like you're getting a lot of features for the same amount of money, but in reality, the quality is gone and you're really paying 6-8 times.  This kind of inflation is not reflected in any of the indices mentioned above.

Where I used to buy clothes that would last forever, it feels like I'm constantly wearing them out every few months now.  Where I could buy a pair of shoes and have them last a year, they are now gone in 3-4 months tops, usually even sooner.  The price of a pair of shoes is the same or lower, but it's now made of such poor quality, it just doesn't hold up.  In this process, we have not only lost our money, we also waste more time shopping and also spend many futile hours looking for something that might be of better quality.  Does better quality exist?  It does, but even that is hit or miss, and usually only with luxury brands.  To get decent quality from a pair of shoes, one would have to pay about 5-10 times what one might pay for a "normal" pair.  And yet, going with a luxury brand and paying that much may or may not yield a better product, so it's a roll of the dice.

What is most frustrating is when things fail in unpredictable way, e.g. trash bags puncturing and making a mess of everything.

Best of all companies will then send a survey to ask your perception.  There's probably an executive at that company saying "if people aren't complaining, we're building in too much quality and we need to reduce it."  In this way, they target a delicate balance where they achieve decent reviews (typically written by people who haven't owned the product long enough) and a few bad reviews (from people that experienced the product fail unexpectedly and actually bothered to write a review).

Planned obsolescence coupled with offshoring of manufacturing to cheaper locales has kept inflation in check.  What happens after every ounce of quality has been engineered out of the product and there are no other lower cost locales to move manufacturing to?  That's when a "new and improved" product is introduced (still worse than the original one) at a higher price, and that's when we start seeing regular inflation.

It's going to be a slow and painful journey into the future.

A new business model

Purely my perception--with planned obsolescence, we're seeing the emergence of a new business model.

The model works as follows.  The company builds a product with bad quality and starts selling it.  The majority of people won't complain.  For the small percentage of people that complain, the company simply issues a refund (if the customer complains to the store) or coupons for more free bad product (if the customer complains to the manufacturer).  Manufacturers have a finance department that determines how much funds need to be set aside for issuing such coupons and refunds.

Product quality, which was the primary driver of brand loyalty, has now been replaced by loyalty programs (rewards points) and marketing. But loyalty programs are itself an illusion--they encourage one to buy sub par quality, overpriced goods, in exchange of a tiny percentage of the purchase in rewards.

Legislation to the rescue?

France recently passed a law to require appliance manufacturers to display how long their appliances will last and how long spare parts would be available for the same.

Imagine if all products required that?  There would less room to cheat.

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