Case Study on Shifting Production Out of China

https://www.fidelity.com/news/article/top-news/202001140706RTRSNEWSCOMBINED_KBN1ZD1FV-OUSBS_1

The above-linked article provides an interesting example of a small company trying to move production out of China to avoid the tariffs.  This is a low volume, niche bicycle company.  Some of the points made in the article merit comment:

After months of research and several trips, a small Taiwanese factory agreed to make his bikes but he had to triple orders and pay 30% of the cost of goods up front, unlike in China where he paid upon delivery.

The new terms locked up as much as $1 million of working capital until the bikes were shipped and required a new credit line. After a year of toil, State Bicycle managed to shift production of only two of its five models which are sold in the United States.

Let’s step back and take a look at this situation.  Bear in mind, we’re talking about bicycles here.  Bicycles are not terribly sophisticated nor difficult to make.  The biggest components – the frame and the handlebars – are nothing more than bent and welded tubing.  Tools to bend and weld tubing are readily available at low cost right here in the U.S.  Beyond that, we’re talking about rims, hubs, spokes, sprockets, bearings, axles, chain, a seat, tires and little else.  The million dollars of working capital and the money spent on those trips to Taiwan could have easily purchased the tooling to make those parts right here.  How much sense did it make to spend months of globe-trotting like a chicken with your head cut off, and all that money?

In a move to help bicycle companies, the Trump administration has been granting tariff exclusions to some of their imports since September. The relief, however, is only for a year and is meant to give them more time to move production – ideally to the United States.

Therein lies a big part of the problem.  Companies believe the tariffs won’t hold and can just wait them out.  Eat the tariffs for a year or so and avoid the cost of moving production.  Trump’s use of tariffs has been far too timid and too narrowly focused on China.  Why only focus on China when, in per capita terms, other countries’ trade surpluses with the U.S. are much larger?

Don DiCostanzo, chief executive officer of Pedego Electric Bikes https://www.pedegoelectricbikes.com in California, said higher labor costs and the absence of a viable supply base have made it “virtually impossible” to assemble bikes in the United States.

Seriously?!?!?  Again, we’re talking about bicycles here.  We build cars, trucks and airplanes in the U.S.  Are we to believe that the simple parts I’ve listed above can’t be sourced in the U.S.?  Most any half-competent machine shop, of which there are thousands in the U.S., could quickly produce those parts.  With a little effort, Pedego could set up shop and make them themselves.  Yes, labor costs would be a little higher, but not that much, and they’d be offset by far lower shipping costs.

In the 1970s, the United States assembled more than 15 million bicycles a year. Now it makes fewer than 500,000, according to industry data presented to the United States Trade Representative (USTR) in 2018. By contrast, China made about 95% of the 17 million bikes sold in 2018, U.S. Census data showed.

OK, wait a minute.  This paragraph just refuted the whole premise of this article – that there’s no supplier base and labor costs are too high to build bicycles in the U.S.  Now we learn that somebody is actually building a half million of them in the U.S.  Obviously there actually are sources available for the parts and bikes can be built and sold here at a profit.

Pedego Electric Bikes said it didn’t have any difficulty finding a factory in Vietnam because it was among the first companies to move there. But it faced other challenges.

It had to bring in workers from China to train local staff. Batteries had to be sourced from Japan or Korea and tires from Malaysia. “We had to set up the supply chain,” DiCostanzo said. “That was perhaps the most frustrating part.”

They had to bring workers in from China to train the Vietnamese?  Why didn’t Pedego train them themselves?  It’s likely because Pedego laid off everyone in the company who actually knew how to manufacture bicycles when they moved to China in the first place.  Personally, I’d be ashamed to market bicycles that I didn’t even know how to make.  Nor would I want to buy one from a company who knew so little about their own product.

“It is very difficult to get out of China,” said Alex Logemann at U.S. industry association PeopleForBikes https://peopleforbikes.org.

Baloney.  They had no problem getting into China when it was an undeveloped backwater of rice farmers and little else.  Getting setting up somewhere else, especially in the U.S., should be far easier.

By the way, I own two bicycles myself – both of them Schwinn.  The oldest, a Schwinn Continental that I bought in 1971, is a beautiful bike that was built in the U.S.  While somewhat crude by today’s standards, it was one of the finest bikes you could buy back then and it’s my favorite.  The newer one I received as a gift and it’s a nice bike, but it saddened me when I learned that it was built overseas.

When I first read this article, I was rooting for these companies to figure out a way to set up shop in the U.S.  I think I’ve changed my mind.  Frankly, I hope they all fail, making it that much easier for those companies who are currently building those half million American-made bikes to flourish and grow.  Nearly every bike sold in the U.S. was American-made at one time.  It could be that way again.

 

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