Vertical limit: the long and short of bicycle manufacturing
Free-market capitalism, a cycling boom and supply-chain protectionism made the 1990 s a financial boon for bicycle brands, their distributors and retailers. The highly profitable business model of selling bicycles manifested in scaled-up physical supply nodes designed to cope with increasing volumes and demand. It was a comfortable situation for all.
Raise your hand if you operated a bicycle distribution or retail business during the 1990 s and were attentive to global and local industry movements in the context of a change-management framework. Apart from looking stupid with your hand raised (incidentally, it s frankly unhygienic to be reading this on your smartphone while in the bathroom), well done. Most of your peers weren t. How did that work out for them?
The Made in Taiwan movement in bicycle manufacturing was viewed differently depending on who you were. Bicycle brands welcomed the opportunity to focus on research and design, palming off actual production to factories in Taichung, Tainan and Kaohsiung. [Note: for simplicity throughout this article, bicycle brand refers to a producer of bicycle frames and/or bicycles, not parts or accessories unless otherwise stated]
Reduced local input costs and strong US/European currencies bought down production costs significantly, though brands with heritage value (ie Cannondale, with a strong Made in USA brand identity) held back from producing their top-of-range bicycles abroad for many years, until they could no longer resist competitive reality.
Distributors, especially those in Asia-Pacific, were delighted to ship product from a location closer to home. The generous margins largely over-rode any resistance to manufacturing origin. This was also generally true for retailers. Consumers, on the other hand, were initially cautious to the point of resistant. A scepticism of Taiwanese-made product existed, which would only diminish with the slow creep of social proof.
One of the earliest brands to embrace their far-east origin was Giant. For years a local brand, they also focused on building a reputation as a quality third-party manufacturer for other brands. This foreground scope allowed Giant to consistently develop its engineering competencies and understanding of global market trends. From the early 1980 s, Giant began to methodically roll out brand operations infrastructure in key locations (Netherlands, USA, Japan, Australia) with smooth efficiency. In Australia, this occurred in 1991 when Giant Australia Pty Ltd was formed.
It s at this stage of the Vertical Limit series that we look at supply chain verticals and their impact on today s global bicycle market. A vertical denotes the top-down supply chain of any product from producer to consumer.
Starting at the top of the bicycle industry supply chain are the manufacturers. As mentioned yesterday, a manufacturer can also be a brand. This occurs when a bicycle company has ownership of its production facilities (factories) and brand. In manufacturing parlance, this is referred to as an Original Brand Manufacturer (OBM). Examples of OBM s are Giant, Merida and Shimano. These companies design and produce their own branded product.
Some bicycle manufacturers design and produce original bicycles and accessories, but choose not to brand and market the products. Instead, they sell these products to new or established bicycle companies who in turn brand and market the products as their own. This type of manufacturer is an Original Design Manufacturer (ODM). The Taiwan Bicycle Buyer s Guide is crammed full of ODM s eager for foreign brand decals to be applied to their products. ODM clients are most commonly bicycle accessory brands.
Most bicycle brands today design their own product (even going so far as in-house prototyping and testing) then engage a third-party manufacturer for pilot, then serial production. Manufacturers that produce to a bicycle brand s design are called Original Equipment Manufacturers (OEM). Examples of OEM clients are Scott, Felt and Cannondale.
So, you have OBM s, ODM s and OEM s. Pretty straightforward, I hope. However, it s more interesting than that. See the notes section on the below diagram.
Why on earth does this matter in terms of supply chain verticals?
In the most basic sense, bicycle brands that don t produce product themselves are price-takers. An OBM knows the true cost of producing a frame and assembling a bicycle. Clients of OEM s or ODM s must negotiate their cost. This immediately places them at a competitive disadvantage when compared to an OBM, as they pay for the both the product and the service of providing the product. Service is intangible and is therefore valued in the eye of the beholder.
An OBM might produce an aluminium frame at a cost of USD50. They will then bolt on parts, box it and ship it to the next supply chain point at an agreed price. An OEM might produce exactly the same frame (not in reality, as this completely disregards IP laws; however, this depends on country and I should stop before these brackets span two pages) for $50 too, but then they need to make a profit when selling to their client, who is a bicycle brand. Even if that profit is USD10, that difference is amplified when processed through the multiple margin layers of a supply chain
In summary, an OBM is fundamentally better positioned than any other manufacturing business model to get original product to markets, quicker and cheaper. Of course, this holds true only when all factories have the same input costs, ie: labour, local/provincial/centralized governance (taxes, duties, bribes), land, utilities, raw materials. If all bicycle factories are operating out of Taiwan, they theoretically have same or similar input costs.
However, nothing is that simple. Coming up in the next instalment, we ll add the internet to the equation, dive into gray market selling and explore the exodus of bicycle factories to China and beyond, as we all race to the price-floor of a heavily-deflated consumer market in 2011.
Apologies for the small font on the diagrams. I m traveling at the moment and don t have access to my iMac or graphic-designer wife, who is much smarter and more creative than me.