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Broken Chain: Why not build more factories? Here's why.

Published March 9, 2021
It may happen — AFTER the boom.

TAICHUNG, Taiwan (BRAIN) — Three years ago, social media feeds filled with colorful, striking images of abandoned share bikes in China, piled into teetering mountains. They shocked the world, or at least inspired use of "shocked" emojis for a few hours.

In the Chinese industry, the share-bike collapse lasted more than one news cycle. It may even help explain why it's hard to find bikes in the U.S., which got 88% of its bikes from China last year.

After the share-bike debacle, manufacturers are wary of another boom-bust.

"The major Chinese bike assemblers were left with millions of bikes (after the share-bike collapse). That's still fresh in a lot of their minds," said Aaron Abrams, Marin Bikes' Director of Product. Abrams said those memories "absolutely" contribute to a reluctance to invest in capacity now to serve the current boom.

Make no mistake, China's bike factories are running at record levels, adding production lines and operating 24/7 in some cases.

China's bike factories are running at record levels, adding production lines and operating 24/7.

China's Phoenix Bicycle, among the hardest hit by the share-bike bust, has recovered well. It reports it has bike orders well into 2022 and it bought two other Chinese bike manufacturers last year in a bid to modernize for the export market.

But despite all the good news, there are few, if any, reports of Chinese manufacturers making the capital investments to open new factories on home soil. It appears most factories hope to make the most of the current high-demand environment. But they are reluctant to bet big on a sustained increase in demand.

High- and low barriers

In a presentation to the Taiwan industry last week, Specialized's Bob Margevicius distinguished between components whose production has a high barrier of entry and those with a low barrier.

Companies making low-barrier products — like hubs and handlebars — have thrived in the current climate. They've added shifts, assembly lines and light machinery to quickly increase capacity.

But complete bikes require some of both kinds of products. It's the high-barrier companies — those making derailleurs, chains, and suspension forks, for example — that need convincing, in Margevicius' thinking.

"There's no sign of relief with the component makers, many of which are very reluctant to invest in additional capacity," he told the group.

Neither Shimano nor SRAM, who make both high- and low-barrier items, were available to be interviewed for this article.

In recent interviews with nearly two dozen industry members in the U.S. and Taiwan, none could point specifically to any Asian manufacturer's plans to make a significant capital investment in increased capacity. Some said they'd heard some unspecific promises to increase capacity. 

Instead, investment money is flowing to companies whose elevator pitches don't mention manufacturing, like Zwift, Canyon and Rad Power.

One exception? Indoor smart bike brand Peloton is investing millions in its own Taiwan manufacturing facilities. Peloton also is taking steps to add production in the U.S.

Riding out the boom

Besides uncertainty about sustained high demand — and the fact that it takes years for any factory to get online — other factors contribute to the lack of interest in capital investment in new capacity.

Before the current COVID-19-driven boom, if you can recall, China's trade wars with the U.S. and Europe dominated industry discussion. There was much talk of building more flexible supply chains and about adding diversity in sourcing.

For years many U.S. brands have been shifting to Southeast Asia, including Cambodia and Vietnam, to escape tariffs on Chinese bikes and rising labor costs in Taiwan. 

Even companies based in Taiwan and China looked to establish manufacturing elsewhere. Taiwan's Giant Group opened a factory in Hungary last year to serve the European market, for example. 

However, some of these offshoring plans have been put on hold in the last year because manufacturers are focused on meeting current demand. And opening a new factory in a pandemic is no small challenge.

Velo, Taiwan's largest saddle maker, which also has factories in China, built a new factory in Vietnam that was ready to open last July, Velo's Ann Chen told BRAIN.

"All hardware (factory and machinery) is already in place for testing and running," Chen said in an email. But she said because of COVID-19 restrictions, Velo's engineers have been unable to enter Vietnam and the factory is idle.

China's Shanghai General Sports, a minority investor in U.S.-based Kent International, planned to build a new bike factory in Cambodia before the pandemic. It abandoned those plans, although it is building a bike factory in Malaysia.

With the industry betting that its manufacturing future lies outside China and Taiwan, it's unlikely it will invest capital in expanding capacity there, even if bike-starved brands and retailers would love to see it ASAP.

Margevicius closed his talk to the Taiwan industry last week on an ominous note. "You are either at the table or you are on the menu, you guys," he told an audience of Taiwan industry members. "If you are on the menu, believe me, there are other countries and there are other companies that will certainly have you for lunch."

Coming to America

To increase flexibility and escape shipping costs, tariffs and other issues, domestic production looks better all the time.

At the high-end, Allied, Guerrilla Gravity, Moots and other smaller boutique brands are making frames in the U.S., while Yeti, Pivot, Santa Cruz and others assemble bikes using foreign-made frames. Argon 18, in Montréal, has shifted more assembly out of Asia recently.

In the mid-priced world, Detroit Bikes does frame-making and assembly at its factory in the Motor City, and has done highly visible projects for Dick's Sporting Goods, Schwinn, and New Belgium Brewery in the recent past. Kent International's Univega brand also does some assembly in the U.S.

In the mass market, Kent's South Carolina factory paints frames, builds wheels, and assembles bikes using frames and parts mostly from China.

Currently most U.S. brands are struggling with the same component shortage as brands that assemble in Asia. Increased assembly here solves some problems, but not that.

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Photo by Daisy Chen on Unsplash.
Topics associated with this article: Supply chain

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