Here’s an interesting question, especially coming so close to that national monument to the benefits of ruthless colonialism known as Columbus Day. It goes something like this: The nascent Chinese recession notwithstanding, the cost of manufacturing bicycles in China will only continue to rise over time. So where will America’s next generation of affordable bikes come from?
As I say, it’s an interesting question. And an increasingly timely one, for three reasons:
- The first is that every bike company I’m aware of is already asking it, at least internally…but not one of them is discussing the answers publically.
- The second reason is, that may be because nobody seems to be coming up with very good answers.
- And the third reason we should be talking about the next generation of cheap bikes is that Chinese labor costs are already rising faster than we collectively think.
Of course bike companies aren’t dumb; they know this stuff already. Bikes are a low-margin business at every phase of the global supply chain, and some of the smartest people in any bike company are often its buyers and inventory planners. And prices on low-end Chinese bikes are already 10-15% higher in 2012 than they were in 2011.
The 中文 is already on the wall, so to speak, and even if it isn’t, the Pinyin ain’t too far behind it.
So maybe it’s time for a public discussion on the topic. Here are just three of the possible scenarios:
1. U-S-A! U-S-A! The New York Times article I cited a couple of paragraphs ago (here’s another link in case you missed the first one) suggests that rising Chinese labor costs may trigger a renaissance in USA-based manufacturing. Well, it might be pretty to think so for high-end, high-profit items like consumer electronics or even exotic carbon frames, maybe, but don’t expect if for mild steel cruisers or entry-level IBD aluminum frames any time soon.
2. The Mexican Connection. A more practical solution would be the establishment of Mexican framebuilding maquilladoras, which then assemble Mexican frames with world-sourced components. In addition to an increasingly affordable labor source, Mexico offers the twin benefits of being both duty-free thanks to NAFTA and above all, close. Which means any incremental labor costs might be easily offset by savings in duty (0 versus 10-15%), freight (on the order of hundreds of dollars per container), and time (a couple days versus 3-4 weeks depending on delay in U.S. Customs).
The good news on this scenario is that there is has been significant bicycle-making infrastructure in place for years in Mexico, with some fourteen facilities currently in production of mostly low-end, affordable model for the domestic and Central/South American markets.
The not-so-good news is that Mexican bicycle production has also been on the ropes for years, as fabrication shifted inexorably to—you guessed it—Asia, and specifically China. The smart folks at Bike Europe did a couple of good pieces about the demise of Mexican production capacity under the asphyxiating effects of ever-cheaper Asian product a few years back, which you can see here and here, respectively.
Assembly is an easier nut to crack, and might be a good first step, but bringing quality frame production back to Mexico—even at mass market or entry-level IBD price points—would require significant investment by the Mexican government, USA-based bike brands, or both.
But it’s nowhere near impossible. The Chinese learned to make world-class bikes from the Taiwanese, after all, who learned it from the Japanese and Americans, and all in the last thirty years or so. The even better news is that American product managers provided much of the oversight and QC effort that made the whole Asian shift possible in the first place.
If the Mountain Bike Boom of the ‘80s was about anything it all, it was about the globalization of fabrication technology as much as it was about the change in bikes and riding styles worldwide. And if the current generation of American bike companies learned anything at all from it, they learned how to demand—and consistently achieve—world-class results under some of the toughest working conditions the global market has to offer.
Besides, ask a bike business PM whether he (or increasingly, she) would rather fly to Jiangsu Province again or take the much shorter jaunt to the sunny states of Nuevo León or Jalisco and see what kind of answer you get. Baijiu or Tequila? Holdala or Y Pa' Dentro?
3. Digging Deeper Into Asia. The third—and frankly, most likely—possibility is to continue sourcing eastward in search of ever-cheaper labor.
I say “most likely” because workers in places like Bangladesh and Thailand are still a heck of a lot cheaper than they are in Mexico; because global containerized freight rates seem relatively stable for the time being; and mostly because the increasingly keiretsu-style involvement and investment/ownership of Asian bike manufacturers with respect to U.S. bike brands makes it the most convenient solution currently on the table.
Oh — and I almost forgot— because our friends in the European Union are already building infrastructure there for us.
A thorough explanation of how this situation came about is beyond both my personal expertise and my patience. But the bottom line comes down to the EU’s longstanding anti-dumping duties of close to 50% (!) on Chinese bikes and the fact that European bike brands (not to mention USA-based bike brands that sell products into EU nations) have been quietly building up infrastructure in other Asian countries for years as a result.
This has freed up a significant amount of Chinese production capacity which American brands are happy to take advantage of, at least in the short- to middle-term.
Then there’s the whole arcane question of whether Chinese bike makers have been secretly gray-marketing product into the EU via third-party countries to avoid the duties, and how the outcome will impact product availability in Europe (and elsewhere) for years to come.
But for our typically xenophobic Columbus Day American purposes, let’s just say our cousins across the Atlantic are spending a lot time, money, and effort to develop manufacturing capacity in places like The Philippines, Bangladesh, and above all, Cambodia.
And that means big opportunities for American bike brands to manufacture there in the years to come.