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With tariff increases on the way, should retailers stock up? Suppliers have opinions

Published September 19, 2018

RENO, Nev. (BRAIN) — With a 10 percent tariff hitting bikes next Monday, and an additional 15 percent being added Jan. 1, should retailers dig deep and order all the bikes they can before the end of the year?

KHS has launched a "Trump Tariff Buster" promotion at the show, giving retailers the opportunity to split the tariff increase with the company on China-made bikes they pre-order. 

Wayne D. Gray, KHS's vice president, said, "KHS believes in free trade, and we think these tariffs are the wrong move." However, Gray can adopt a diplomatic tone when needed. "I do hope they (the tariffs) are successful in encouraging Chinese authorities to adopt policies that are more favorable to the U.S.," he said.

Retailers note that suppliers have been encouraging orders to beat the tariffs since the e-bike tariffs hit in August.

"Giant is going crazy, sending out emails telling dealers to buy, buy, buy now. They really want us to stock up. They're famous for trying to front load customers so I take it with a grain of salt. What will happen is that sales that would have otherwise happened in November and December will happen sooner," said Stephen Newhall, the manager of Rob and Charlie's, a Santa Fe, New Mexico, bike shop.

However, some suppliers question whether retailers should commit more money to inventory for a variety of reasons. First, given the mercurial nature of the Trump administration, things could change any time.

Also of note: the Chinese currency, RMB, fell 8 percent in value recently, making Chinese parts 8 percent cheaper than a few months ago. Given that, the 10 percent tariff will have little impact on pricing — maybe a 2 percent hike to the end of the year.

Also, the tariffs impact so many consumer goods that consumers could take a conservative approach given the confusion and limit non-discretionary spending. In that environment retailers want to run very lean on inventory.

"The impact of these tariffs is huge, and this is not limited to the increase in pricing, it's already throwing our supply chain into disarray and at this point no one has any idea how this is going to play out," said Pat Cunnane, Advanced Sport Enterprises' CEO.

Bob Margevicius, the executive vice president of Specialized bike group, also suggested that stocking up would not be wise.

“Dealers know their business better than I do," Margevicius said. "If they are low on something they are selling then they should order how they usually do at this time of the year. Should they order more inventory because of the tariffs? If it was me I wouldn't make a business decision based on these tariffs until things settle down. No one knows what the impact of these tariffs will be.”

The tariff will apply to almost all mass market bikes, as well as entry-level and high-end IBD bikes from China.

For a taste of the chaos swirling around in the industry, consider the trip of a composite bike to a bike shop. Most carbon frames are built in China. Some are also assembled in China of parts made in China, Italy, Japan or Taiwan.

Some Chinese composite frames are finished, decaled painted and assembled in Taiwan, and according to Taiwanese law, the Taiwanese content in parts and labor qualifies the bike as "Made in Taiwan" that dealers see stamped on the boxes they receive from various suppliers.

The big question for many suppliers is how will the new tariffs impact pricing of these bikes. The traditional understanding in the U.S. of a bike's point of origin is where the frame is made. So will U.S. Customs ignore the "Made in Taiwan" labeling on a composite bike box and slap the 25 percent tariff on the composite frame portion of a complete bike? Or will they levee the 25 percent tariff on the complete bike, even though it's Japanese components have a higher value than the frame?

For an aluminum mountain bike with a frame and most components made in Taiwan, but with Chinese tires and tubes, will U.S. customs deem the Chinese content below some threshold and not apply the tariff? Or will just the Chinese content of the Taiwanese bike be tariffed? Will suppliers have to provide a complete component manifest of the point of origin of each individual part?

"Since building a bike takes components manufactured in a variety of countries, the big issue is what constitutes as 'Made in China,'" said Margevicius.

And he notes that there are additional penalties associated with "circumvention" of the new tariff rules. Circumvention is when importers attempt to obscure a product's point of origin.

"Right now we do not know how this administration defines circumvention. A bike's point of origin is not necessarily clear because it is made from components from so many sources. It is an extremely confusing time right now," Margevicius said.

One thing is certain, suppliers are doing what they can to limit Chinese content on their bikes. Tire makes like Thailand's Vee Rubber and Japan's IRC say people were setting up appointments the first day of the show to talk about product sourcing and private label business.

"They are the appointments you want," said Jason Rico, Vee Rubber's North American sales manager. "They need a manufacturer for their tires outside of China. From the conversations we've already had it is looking to be a great year for the company," he added.

In part the tariffs were to drive business to U.S. companies and support domestic manufacturing, but in the short run they are doing the opposite.

"In the bike industry you cannot onshore production overnight," said Arnold Kamler, Kent International's CEO. "While I've created 167 bicycle related jobs over the last few years these tariffs are going to endanger those jobs, not give them job security," he added.

Kent assembles its bikes, including its new IBD-targeted Univega bikes, in South Carolina, of mostly Chinese sourced parts. Come Jan. 1, those frames and components will become 25 percent more expensive. A price hike like that may have parents looking for cheaper options for their kids, or new adult cyclist might conclude cycling is too expensive to try.

Kamler and Zak Pashak, Detroit Bikes' president, note that there is growing interest in their assembly operations. And not necessarily because there is cost savings.

"Many people are looking around for Plan B, looking for options given all the change that is happening. Making things in the U.S. is one of the options they want to explore," Pashak said.

A version of this story appears in BRAIN's Interbike Show Daily, Day 2, which is available at Interbike Wednesday, or for download at read.dmtmag.com.

 

Topics associated with this article: Trade/tariffs

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