Enron and the Hobbyist

July 1, 2002, by Bill Cawthon

Even though the economy looks to be rebounding from the recession, each day seems to bring another tale of wrongdoing in corporate America. Even if you are not an employee or stockholder, the scandals at Enron, Worldcom, Arthur Andersen and Merrill Lynch are affecting our lives. You may not have noticed, but the scandals are doing more than keeping the stock market from rebounding. They are hurting the American dollar.

The US dollar's decline could mean higher prices for new models, like the new Mercedes A-Class from Herpa

At this point, you're probably asking yourself, "What's going on here? Who cares?" After all, this column is supposed to be about models, not economics.

This time, it's about both.

The fact of the matter is, if you live in the United States or Canada, you very likely will care in the coming months. That's because, if nothing happens to correct the current situation, you're probably going to see some significant bumps in the prices of many of your favorite model lines.

This is because the dollar is falling in value compared to the euro. One year ago, on July 1, 2001, it cost a shade over 85¢ in American currency to buy a euro. On January 1, 2002, that had risen to just cost over 90¢, but that figure was back down to about 86¢ by the time the 2002 Toy Fair opened in Nürnberg. Since March, the dollar has been falling steadily. I am writing this column on June 27. As of the close of the exchange markets today, the euro is worth just under 99¢. The same is true for Canadians. A year ago, it took just over $1.29 Canadian to buy a euro. Today, that same transaction would require more than $1.49 in Canadian currency.

Prices won't necessarily go up for all models. Those manufactured in China will benefit from the fact the dollar buys almost exactly as many yuan renminbi or Hong Kong dollars today as it did a year ago. Prices for products from Japanese manufacturers won't change much because their government has a policy of keeping the yen weak compared to the dollar. The Japanese are buying millions of American dollars to make sure it does.

But models made in Germany and Austria may well start costing a lot more. That includes new releases from Herpa, Brekina, Busch, Roco, Trident and Wiking that are just now coming on the market. Ouch!

It is not be the fault of the manufacturer, the importer, the distributor or the retailer. A slide in currency values has the same effect as inflation. That is, it costs more to buy the same products. When Promotex places an order with Herpa, Promotex' payment must be converted to euros that Herpa can spend. Even though Herpa's prices may remain constant, the decline in the North American currency values means it takes more to buy the necessary euros. For example: an order for €10,000 in merchandise would have cost US$8,501.84 in July 2001. As recently as April 1 of this year, it would only have risen to US$8,749.38. That same order would cost US$9,847.28 today. That's a difference of US$1,097.90 or 12.55% in less than three months. While the big multinational corporations have hedge funds to cover swings in exchange rates, the same is not true for most hobby-related enterprises.

The bottom line is that a new model that would have been priced at $16.00 in March may actually cost $18.50 or more by the time it arrives this summer. Now do you see why I said you will care?

There are many reasons for the dollar's decline: soft financial markets and disappointing profits among them. But one of the most important factors is that foreign investors have become suspicious of American business. With every new report of wrongdoing or questionable practices, they are losing faith in the honesty of accountants, the credibility of Wall Street and the ethics of senior management. Therefore, they are reluctant to make new investments, including the purchase of corporate and government bonds. Foreign funds are critical to the United States economy. According to Arthur Levitt, former head of the U.S. Securities and Exchange Commission, we need upwards of a billion dollars each day in foreign investment. If the influx of foreign capital slows, or investors start demanding higher interest rates, we could be in real trouble. Worse, if the investors start to cash out of their existing holdings, it could create even more problems for the dollar.

There is hope. The increases haven't happened yet and the U.S. government is taking action. Congress and federal agencies are working on new laws and regulations to address the concerns of investors. If the government can act quickly enough to enforce better business management and accounting practices in the future, American and foreign investors will likely regain their trust in American investments, and the damage may be minimized before importers have to start increasing their prices.

If not, when you visit your favorite hobby source and see higher prices for the new releases, please don't blame the proprietor. You've already seen the real culprits on the evening news.

See you next time!

- Bill Cawthon

Bill Cawthon is an award-winning modeller and collector. His primary modeling interests are model railroading and vehicle models in 1:87 and 1:160 scales. He has written numerous articles for regional and division NMRA publications and is a contributor to the newsletter of the 1-87 Vehicle Club. He follows both the automobile industry and the European scale vehicle industry.

In real life, Bill is a full-time marketing and public relations consultant for the high-tech industry. He lives in Houston, Texas with his wife and four children.

Bill writes bi-weekly for Promotex Online. To learn more about him, click here.