Any attentive cyclist riding Melbourne s Beach Road regularly in recent years would have noticed two things; there are a lot more people cycling, and; there are a lot more people cycling on nice bikes. It would appear that, in order for leisure riders to truly express themselves as cyclists, a quality composite bicycle is de rigueur. As always, bicycle brands have the solution for this demand.
It seems that everyone wants a piece of the cycling culture and why not? It s tasty.
Today, consumers with relatively modest budgets can purchase famous-brand bicycles that haven t trickled far from the halo models they reference; or they can purchase a serviceable lookalike from insert ODM brand here. In Australia, the most fiercely contested retail price point is AUD3,000. As recently as 2007, this cost (sales staff would choose the less crass word investment ) would yield a carbon-framed bike equipped with Shimano 105 components. In 2011, the same amount will net a carbon-framed bike equipped with Shimano Ultegra Di2; with $400 change. What many consumers may not have noticed during this short time is a discrete change in product origin, from Taiwan to China.
The last decade of bicycle supply chain changes and market share wars spawned a sustained inverse relationship between price and specification quality of complete bicycles. As European and American bicycle brands took the risky Taiwanese-made bicycles have only recently been embraced in western markets after years of consumer skepticism and misguided quality fears decision to incrementally move production East, it became possible to offer a better level of component specification with each successive year at a given price point.
In the Vertical limit series, we learned that bicycle brands can compress their supply chain to win market share at key price points where disparate consumer group price:value aspirations are most liquid. These structural shifts have occurred for many years, and it s quite easy today to spot the brands most successful at implementing them. However, once this particular power play reaches its limits, all brands are at the mercy of variable production costs outside their control.
The inconvenient truth for bicycle brands is embedded in consumer behaviour. If a cyclist buys a $3,000 bicycle this year, the same cyclist will not wish to pay more for the same product next year. As insensitive as it sounds, the market doesn t care about how much something costs to make; the market cares about value. Bicycle brands with significant manufacturing in Taiwan get worried when they see a graph like this:
In the five years to 2007, annual wages in Taiwan s manufacturing sector rose almost 15% to over USD1,300 per month which squeezed factory margins to the point where bicycle brands were unable to simply demand a cost reduction and get it [Note: 2008/09 was an anomaly caused by well-known global economic problems]. Of course, labour is only one input cost. Brands are able to get a little more creative in other areas subtle product specification changes, for instance. When everyone does this though, the comparative value dynamic doesn t change.
Luckily for Australian importers, retailers, and consumers, most high-end bicycles made in Taiwan are billed in US dollars. As foreign currency relationships have recalibrated over time, the impact of marginal cost increases has been relatively easy to contain. But the last decade of cost increases have been anything but marginal.
An almost 300% cost increase in the average price of bicycles exported from Taiwan between 2001 and 2010 isn t the unique product of wage increases, raw materials or factory overheads. Having known for a long time their emerging neighbour would seek to leverage its significant competitive advantage in manufacturing costs the average monthly wage in China s manufacturing sector is USD150-250, depending on whose statistics you prefer Taiwan s OEM s began repositioning themselves as purveyor s of quality.
The most tangible expression of this move was in the formation of the A-Team in 2002. Conceived by industry heavyweights Giant and Merida, the A-Team s missive was to reduce (Taiwan bicycle industry) production from 10 million bikes down to 4 million in order to focus on the high quality and innovative new product at reasonable price. By doing this, Taiwan could transform (itself) to a position that may become the future hub for innovalue cycling products for the global cycling world.
As portmanteau words go, innovalue is fairly ordinary, but the objective that molded it has been responsible for driving Taiwanese-made bikes into a new premium space; the space that American and European bicycle brands used to occupy before they shifted production to Taiwan. Which brings us back to the $3,000 proposition, and how Australian bicycle importers have adjusted to Taiwan s new direction. By combining export data from the Taiwan External Trade Development Council (TAITRA) with import data from Bicycle Industries Australia, the trend is apparent.
Imported quantities of Taiwanese-made bicycles have decreased as the average unit price has dramatically increased. As the overall market for bicycles has not also decreased, it must follow that someone has made up the difference. That someone is China. But as China embarks upon it s twelfth five-year plan, transitioning from its incumbent world s factory status to that of global consumer powerhouse, we can expect origin creep of popular price segments to continue; SE Asian countries like Thailand, Cambodia, Vietnam and the Philippines are already in the loop.
Meanwhile, keep an eye on Taiwan. It will not be long before Made in Taiwan carries the same cachet as Made in the USA used to. Which begs the question; when will the big American brands think of innovalue ?