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Friday, March 11, 2016

Bullish or Bullsh*t: Is More Uncertainty Ahead for Taiwan's Bicycle Makers?

Giant Stock Price--Bloomberg

Every year the opening of the Taipei Cycle trade exhibition begins with an optimistic litany of industry figures and projections that seem to forecast sunny and clear with blue skies over the bicycle industry. This year we were treated to more of the same.

The latest statistics released by the Taiwan Bicycle Association (TBA) show that Taiwan’s bicycle export increased by 10.04% in 2015. Total export value reached 1.74 billion euro, compared to 1.58 billion euro in 2014. Also Taiwan’s bicycle parts export rose last year by 5.45%, with total value reaching just over 1 billion euro.

Despite the boilerplate assurances that the show was lights-out from the perspective of the exhibitors,  in private, and by proxy, there seemed to be more than just a general concern for the state of the entire industry in the short and medium term depending upon a company's position along the food chain from OEM/ODM, supply chain, subcontractor, brand, distributor and retailer. Even as TBA Chairman, Tony Lo, issued his report stylized as the industry's Auda Abu Tayi, from Lawrence of Arabia, declaring himself to be " a river to my people", there was an overall echo of anxiety in the relative quiet of the Nangang exhibition hall last week that did not resound with such confidence.

The greatest concern was the fact that the high-end bicycle market, which enjoys some of the highest profit margins, has been affected by multiple factors, including a sluggish European and American markets resulting in higher than normal inventory, aberrant weather patterns in the northern hemisphere, falling oil prices, the failure of the Chinese market to materialize as predicted due to unsustainable economic growth and oppressive air pollution.

Bike Europe reports
The market for Taiwanese bicycles in China declined by 33% to 79,000 units. Though not yet that big, the Chinese market was seen as a main growth market for several years. That development has come to a full stop thanks to the economic decline in China. 
The US is still the biggest single market for Taiwan made bicycles with 570,000 units between January and September this year, an increase of 26.3%. Export to the UK surged by 26.8% to 552,000 units and to the Netherlands by 17.3% to 316,000 bicycles. 
Next to bicycles, also total bicycle components export expanded by 7.01% reaching a value of 723 million euro.
Remember, the ECFA agreement was supposed to increase exports to China, and bicycles were part of the "early harvest" products upon the implementation of ECFA

Shimano, the groupset and component manufacturer that supplies components across several retail segments echoes this sentiment and has issued a cautious projection for 2016.
Shimano is taking a very careful position for 2016 and expects a decrease of its net sales (-7.6%) as well as an its net income (-23.9%). This will be the result of the strategy to bring forward the production scheduled for the first half of the fiscal year 2016 to the second half of 2015. Though the moderate growth of the European economies is expected to continue Shimano also expresses its concern over the possibility that the influx of refugees and the slowdown of the Chinese economy may lead to deterioration of the economic sentiment in Europe.
Despite all the bullish talk, Giant, Taiwan's largest bicycle manufacturer, has seen its stock price drop over 25% over the past year and the Financial Times forecasts advises investors to either hold or expect the stock to under perform.  

Another concern from some vendors was the increasing shift of Chinese companies competing for more of the high-end bicycle market. 

Many Taiwanese subcontractors and links in the supply chain have their start in the small to medium sized enterprises (SME) that served as the engines of the Taiwan economic miracle during the second half of the 20th century. Many of these companies were founded as joint family ventures where a day's work meant a seat at the dinner table. These companies thrived on the networks of personal relationships and upon the backs of brothers, sisters, aunts, uncles and children. 

Although the SMEs rapidly grew, many of them are still running on the narrowest of margins where the salaries are nowhere near competitive in the global workforce. It is no secret that Chinese headhunters are keen to exploit this weakness to woo knowledgeable employees into the service of China's competing enterprises. This is true in all of the sectors Taiwan has held the advantage of technical experience.

So, what will come of it?

For a few years we have seen bicycle events, a bicycle festival and the integration of the bike into tourism and city transportation. The idealist in me would like to think that good people want to make the wold a better place and simply want to promote cycling as a way to end our reliance on fossil fuels and save the planet.The pessimist in me knows that all of these events and programs are, at their cynical best, part of a greater plan to help sell more bicycles for the purpose of rewarding shareholders and satisfy a board of directors and make them rich.

“We see a significant increase in the number of people and countries where people start cycling for sports, leisure and to commute,” said TBA chairman and Giant Global Group CEO Anthony Lo at the presentation of the industry sales statistics. “The average unit price of Taiwan made bicycles went down only slightly by 0.8% to 411 euro. The average export price for MTBs is now 618 euro and for road race 628 euro." 
Anthony Lo pointed out the importance of the cycling experience to get more people cycling. 
But I really think we have already seen the first, best, adjustment to drive sales with last year being the year of the disc brake. 

Disc brakes were actually quite a brilliant first step in trying to drive industry sales, and may prove to be far more effective that earlier attempts of a solution in search of a problem as we saw with the bottom bracket wars a few years ago. Disc brakes represent a radical change in form factor that currently requires the indispensable reengineering of almost every part of the bicycle to accommodate disc technology. Disc brakes require reinforced frames and forks with disc mounts. They require reinforced rims and wider hubs. They require groupsets to be redesigned for integrated hydraulic fluid units. They require the buyer to start anew and leave "yesterday's tech" behind. For someone with years of accumulated components and wheels, this is no small investment. 

The second initiative to reinvigorate sales has just gotten underway and I am pretty sure we'll be seeing a lot more of it-- Direct Online Sales. 

In the past, cheap brands like Motobecane were making gentle waves by selling bicycles online directly to the consumer without the typical retail markup. 

Then along came the German brand, Canyon, to completely upset the apple cart for the digital age by efficiently selling high-end racing bicycles exclusively through online sales. 

This approach drastically reduced overhead costs and served as a means to control the consumer's experience in an environment that is free from the typical competition in a standard retail store. 

Canyon has been going gangbusters in Europe, and now the big boys want to muscle in on the action by doing the same. 

First, Trek announced plans to sell online-direct to the consumer through its network of retail stores. Now Giant has entered the arena and the fight looks like it will only continue to get uglier with companies scrambling to offer similar services within a narrow time frame or risk being undercut by whoever gets there first.

Of course, the online-direct scheme throws decades of carefully groomed relationships between manufacturers, brands, distributors and retailers into chaos and the casualties are sure to mount, especially for the smaller brands that do not have the corporate backing to offer either a similar service, or a similar price point. Another casualty may be the choice a consumer has for components as each company will corral online customers into their own house brands as opposed to leaving it to the whim of the consumer. Lastly, it will be interesting to see how much of an effect this has on cycling culture as it is bound to change the traditional purpose of the bike shop. 

Lastly, the bicycle is going home. To better compete within the lucrative EU market, Taiwanese OEMs, assemblers and finishing houses are looking to move assembly to Europe in a move that will satisfy EU requirements for status as a domestic product. The Taichung based Fritz Jou Manufacturing (a loose term) just recently declared plans to move some "production" to Portugal. 
“We are joining Bike Valley Portugal as this is the ultimate project where the industry can take control over the supply chain again,” says President Fritz Jou of Fritz Jou Manufacturing. “In the past decades I have seen many production shifts based on GSP+, anti-dumping duties, and other tax incentives. These aspects are difficult to control by the industry. In the Bike Valley project we can finally produce where the market is, reduce the time to market and improve our flexibility. That is our ultimate goal.”
In short, it looks like there will be changes afoot in the coming years and Taiwanese companies had better be prepared for change.