Bicycle Industry

Marginal gains | Giant Bicycle’s China yield play

From rather humble beginnings as a maker of bicycle products for other brands, to becoming the world’s largest manufacturer of bicycles, Giant Manufacturing Co Ltd has pioneered global brand development in the bicycle industry. From the outside, it might appear that Giant has done it all, and has it all.

Certainly, the Taiwanese-headquartered juggernaut has solved some pretty lofty problems during its 40 year journey. Like, how to break into the closed ranks of the continental professional cycling circuit. Or, how to evolve into the most powerful Original Brand Manufacturer in the bicycle industry, but keep OEM clients. Or, how to realize overarching ownership across the supply chain.

But as Taiwan’s 7th most powerful global brand (smartphone manufacturer HTC holds first position, whilst rival bicycle brand Merida lies in 13th position) goes deeper into China, there is another problem to solve. How to make good margin in China? As reported in The Taiwan Economic Times recently, Giant’s Chinese division grew year-on-year sales by 25% in the year to October 2011, but on average profit margin of 15%.

Compare this with Giant’s Japanese division where, according to the Economic Times, Giant’s profit margins are 30%. Giant Bicycles reportedly sold 90,000 units in Japan in 2010 – Japan’s bicycle market volume is approximately eight times greater than Australia at approximately 10,000,000 units – where they face stiff competition from local brands such as Louis Garneau, Panasonic and Bridgestone.

Why the big difference between two proximal nations? Regular visitors to Japan may already know it as one of the most expensive countries to buy a bicycle in the world. Indeed, only a very recent and aggressive push by major bicycle-centric e-commerce retailers into Japan has alerted otherwise-savvy Japanese consumers to the disparate pricing structures the notoriously long local distribution chain has created. [Those readers interested in brand trivia may already know that Giant Co. Ltd. Japan is also the exclusive SRAM distributor for Japan].

As Giant waits patiently for the qualified consumer pipeline – the average bicycle purchased in China is still extremely basic when compared to western markets – to arrive, it would appear the current phase in development strategy is simply to price low, sell high. Alongside market maturity and volume:margin ratios, consumer purchasing power is a determining factor in Giant’s price-setting. CEO Tony Lo told the South China Morning Post this month that Giant only sold about “4,000 or 5,000″ high-end (above USD1,500) bicycles into China in 2011, compared with 3,000 units in 2010. Lo expected that number to reach 80,000 units by 2016.

As mentioned in the ‘Vertical limit’ series and alluded to in this recent Cycling iQ article, average household wages in China are extremely low when compared to developed neighbours like Japan. However, as Japan’s protracted economic slump continues, China’s 12th five year plan aims to significantly boost domestic consumption via policy measures to markedly boost per-capita income. China wants its citizens to spend, spend, spend on domestically-produced goods (Giant recently completed another factory in Jiangsu province, with another two scheduled to be completed in 2012), but they need to earn more to do that.

So keep an eye on Giant’s fortunes because, as has been proven in the past, history reveals the company’s strategy has proved sound so far.

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