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Tuesday, April 28, 2015

Chinese Manufacturers Eat Merida's Lunch

Changhua Wetlands
Bike Europe is reporting that Merida's profits have declined compared to last year. 

This reminds me of a conversation I had with a reporter from Bike Europe during Taipei Cycle as we amiably sparred over the prospect of Chinese manufacturers edging out Taiwanese companies for both design and production. 

The reporter seemed to doubt that China would ever displace Taiwanese manufacturers as he felt they had done a very good job holding onto sensitive data and processes that enabled the Taiwanese firms to merely exploit cheaper Chinese labor without losing any advantage. I was doubtful. I always revisit the great debate over silicon wafer manufacturing in China from 2002, when Taiwanese firms and economists alike declared that there would be no leakage of sensitive technology to China through Taiwanese operations in that country. We see how that all worked out. 

We then saw the world rally around ECFA, the trade agreement signed between Taiwan and China with the aim, as Fortune mentions, to "end Taiwan's economic isolation." Regardless of Taiwan's decades of deep supply side economic ties to the United States, Japan and Europe. 

Giant's Tony Lo was an early champion of ECFA as evidenced in this Taipei Times article:
Anthony Lo (羅祥安), chief executive officer of local bicycle maker Giant Global Group (巨大集團), said the government needs to establish a vision.
“What Taiwanese enterprises want to see is the government striving to help businesses build unique brands that can provide innovative products and services,” Lo said on the sidelines of the forum.
Lo said Taiwan needs to integrate into regional markets as soon as possible so local firms can enjoy the trading privileges that other nation’s companies do, such as tariff exemptions.
“The markets are changing so fast that the rules have been reset, and if we don’t catch up, it is going to be harder for us to hold our own in the global market,” he added.
If anyone would like a little more spice with your shock doctrine, you can also read up on the threat to Taiwan without signing the Cross-Strait Services Agreement, a non-procedural agreement that was illegally passed, then assailed by the Sunflower Movement

Despite the promises of greater exports to China and increased sales of Taiwanese goods to the billions in need of a toothbrush, The View from Taiwan points out how ECFA has not improved Taiwanese exports vs. Chinese imports. 

Ho hum....

So what was the cause of Merida's profit troubles
JPMorgan Securities Ltd. reported in the Taipei Times that, “A lack of fundamental improvement in the outlook of its Chinese business remains the biggest structural issue facing Merida Industry Co.” Given Merida’s continued weakness in business in China amid intensifying competition with Chinese manufacturers, JPMorgan foresees a 7 percent increase in turnover this year. 
Last year Merida officially opened a new Chinese factory with an annual capacity of 2 million units making it the number two premium bike manufacturer in the world.
Moreover, the Chinese sport and leisure bicycle business has failed to materialize in all its glory due to pollution and a preference for alternative forms of superficial prestige. Even the Tour of Beijing, which was to serve as a major marketing tool for high-end/high margin bicycles in China has been shelved due to concerns regarding sponsorship, organization and China's notoriously toxic smog
Lots of bike industry eggs in this one basket. 

Maybe the next administration will discover a regional friend with mutual interests.... Oh, hello Philippines!