Full circle? Bicycle brands resist costly China

In an effort to curb the rising costs of doing business on the mainland, Advanced International Multitech Co Ltd (AIM), a publicly-listed OEM to some of the world s most evocative bicycle and golfing brands, intends to migrate Chinese production lines back into its Taiwan operations.

With annual revenues exceeding NTD12 billon (USD403 million) in 2011, 10% of which came from its growing composites sector, AIM is seeking to circumvent mainland wage increases and EU anti-dumping duties on Chinese-origin bicycles both factors are considered critical barriers to sustained OEM client demand, given the potential impacts of fragile US and European economies on lifestyle consumer products.

Yes, Chinese manufacturing is apparently becoming too expensive for AIM s clients. Read that again if you have to.

Wage pressures appeared last year in the shape of the Chinese Communist Party s (CCP) 12th Five Year Plan, which prescribed substantial economic and industrial thrust across its provinces through 2011-2016. In alignment with the central government s vision, Guangdong a OEM/ODM-focused turnkey manufacturing province in southeast China; and the province where AIM bases its Chinese operations ordered minimum annual wage increases which averaged 18%.

In theory, this may be a long-term positive for purveyors of recreational goods seeking to expand market share in China. If inflation is kept in check (which may prove to be China s biggest monetary and fiscal headache) increasing real income may lead to a corresponding increase of discretionary spending in leisure and recreation something the bicycle offers in equal doses. As people earn more, they spend more.

The whopping (48.5%) anti-dumping duties lobbied for by European Bicycle Manufacturers Association (EBMA) members such as Accell Group NV (Lapierre, Koga) and Derby Cycle (now owned by Cervelo suitor, PON Holdings) were extended for an additional five years in 2011.

AIM produces equipment for famous golf brands such as Callaway, Ping and TaylorMade, whilst also being subcontracted by Merida to produce Bianchi, Look and Cannondale products as well as being a recent OEM to Trek Bicycle Corporation. [Note: somewhat ironically, it was less than two years ago that AIM expanded its operations in China to cope with increasing client demand, which in turn was fuelled by positive post-GFC sentiment.]

Though at first glance this move by AIM may appear contractionary, the Year of the Dragon should be kind to bicycle manufacturers with operations spanning Taiwan and China in spite of the potential threat of decreasing US and EU-based consumer demand.

Courtesy of the China-Taiwan cross-strait economic cooperation framework agreement (ECFA), tariffs on bicycle imports between the two countries have dropped from their previous levels of 12%, to 0% this year. The ECFA has been well-received by Taiwan-based makers of higher-end bicycles; but mostly those who had previously added mainland infrastructure to their manufacturing arsenal, years before they caught a whiff of earnest free trade discussions. They can now toggle their operations almost effortlessly between the two countries, depending on demand and client need. Other, smaller, OEM s may struggle to compete against such flexibility in a declining global market.

It wasn t long ago that Taiwan was, figuratively speaking and solely in an economic, not social, context in China s position; cheap factory labour was abundant, manufacturing capacity (facilitated by German or Japanese machinery) and knowledge was accelerating, whilst US and EU currencies embarrassed the local dollar.

Beyond the constant financial negotiations between brand and manufacturer, rapid technical and innovation exchange occurred in the push for progressive quality improvements. Taiwanese factories, with their propensity for learning and adapting, absorbed it all. In fact, some Taiwanese OEM s over-performed to the extent they no longer relied on their clients. Some bicycle brands would argue this was always the strategy their Taiwanese manufacturing partners would earn from them, learn from them, then spurn them.

Whatever the intentions, the OEM s that morphed into giant OBM s launched a dual-mode strategy within Taiwan s bicycle manufacturing sector; position domestic production within the premium innovative value sphere, and invest in China-based infrastructure to satisfy demand for increased volume. China s cheap labour and lack of costly (eg environmental) regulatory adherence permitted substantial cost savings, relative to producing in Taiwan. Remember, this strategy was as much about conquering the emerging Chinese consumer market as it was about satisfying client (foreign bicycle brand) demand for a lower price.

So, now that the income gap between Taiwan and China is closing fast, and in light of the CCP s focus on value-added industry, has the race to the price floor run its course? It has been suggested that neighbouring countries such as Vietnam, Cambodia and Sri Lanka will now become the new manufacturing centres for the bicycle industry. However, on the face of it, such nations lack the immense economies of scale that China does. And, with Taiwan as its established proxy for Westerners, doing business in China has never been easier.

One last point: unless nobody has noticed, premium bike terminology has recently trended towards composite materials. What we used to refer to as carbon fibre bicycles are now being constructed from an increasingly vast array of raw materials. If bike prices keep dropping, with everything else remaining constant or rising, we need to remember the you get what you pay for mantra.