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Courting China

Published May 10, 2012

As middle-class incomes rise and consumerism abounds, Western brands feel out future opportunity in the fast-changing country.

By Nicole Formosa

SHANGHAI, China—Nowhere in Shanghai is the pull of European and American brands more prevalent than the famed Nanjing Road East pedestrian mall. The new glass-walled Apple store, the third location in Shanghai and the biggest in China, is constantly packed with shoppers and gawkers as security guards keep watch outside. Posters splashed on renovated buildings advertise new stores coming like the Gap and Forever 21, as locals clutching iPhones weave their way through the crowds.

A shoulder-to-shoulder squeeze through the six-kilometer (3.7-mile) Nanjing Road shopping district—reportedly the world’s longest and certainly one of its busiest—with its neon lights, wall-to-wall shoppers and upscale jewelry and cosmetic boutiques and luxury department stores, there is little question that Shanghai consumers are primed to spend.

China’s population of 1.3 billion people, a middle class of approximately 250 million with rising disposable income, its rapidly growing private sector, and an economic engine second only to the U.S., spells opportunity for companies around the world, including those in the bike business. The prevailing opinion is if premium bike brands could cash in on even 1 percent of China’s wealth, surely that would be enough to fuel a new revenue stream in a limited-growth industry.

But across the Yangtze River in Shanghai’s modern Pudong district, which sits in the shadows of the city’s dramatic and changing skyline amid Western-style housing subdivisions and wide, tree-lined roads, Eric Koh is candid about the realities of breaking into the high-end bike retail business in China.

“Right now it’s still at the investment stage,” Koh said, sitting at a large conference table in the offices above Specialized’s first concept store in China, which is also its first company-owned store in the world. “It’s still about investing into China. We’ve been here five years. I think it will take another five years of investments before we see the real return. The culture, the needs over here are quite different. And recreation, especially spending high dollars for recreation, is a new thing.”

Five years ago, Specialized hired Koh, a Malay who lived in Shezhen for 10 years working in the food industry before joining carbon fiber factory Martec. Smart, connected and knowledgeable about China, Koh was pursued for many months by Specialized chief Mike Sinyard to be his point man in Shanghai.

Since then, Koh has taken a calculated approach to the market. He has opened about 20 concept stores in China so far, carefully handpicking dealers in first-tier cities with adequate experience and the financial capability to invest the approximately 1.5 million yuan ($250,000) in inventory and other costs to open. It takes time to find retailers that can shoulder that kind of financial risk, and it’s often difficult to secure a space that meets Specialized’s needs: a ground-floor location with high ceilings near a busy street.

Once a store opens, staying in business can be even more challenging, which is why Koh has not blanketed China with shops. He doesn’t want retailers to fail and see confidence in the brand to plummet, taking hard-learned lessons from missteps by such Western brands as Best Buy, Mattel and Home Depot. Specialized has always positioned itself at the top end of the market in China to differentiate itself from domestic and international brands catering to the gateway or entry-level customer. Specialized bikes range between 3,000 yuan ($500) for the least expensive mountain bike to more than 100,000 yuan ($16,000) for an S-Works Shiv.

Even the lowest-priced bikes represent a lot of money for all but the wealthiest consumers in China considering the annual per capita disposable income in 2009 in China’s urban households was 17,175 yuan ($2,700). While that’s 10 times the amount from 20 years earlier, it’s still a pittance by Western standards.

“Less than 2 percent of the people are earning enough to buy my cheapest bikes, my absolute rock-bottom cheapest bike,” Koh said. Most Chinese workers put in 12 to 14 hours a day just to afford basic needs like food, medicine and housing. And without government-backed social programs to help in hard times, saving takes precedence over spending.

Cycling, or recreation at all, is at the bottom of a long list of life’s other priorities in China. At his Pudong store, Koh said only about 30 percent of his customers are locals, with the bulk of the business coming from foreign expats (when he first opened, only about 1 percent of his customers were Shanghainese). But even if more people could afford premium bikes, would they buy? The Chinese culture does not look at sports the same way European or American society does.

Cycling’s profile is increasing on the professional scene through a growing number of UCI races like the Tour of Beijing at the World Tour level and Tour of Qinghai Lake, Tour of Hainan and the Tour of China on the continental calendar. But the disconnect between China’s middle class and the sport remains significant. Fears over theft and riding safety are two huge barriers holding back the sport’s progression. There is little support for advocacy efforts in China, and the government is prone to pave over existing bike paths to widen roads as cars become the primary mode of transportation.

“So far cycling in China is not a mainstream sport. It’s changing; it’s developing,” said Jian Gong, sales and marketing director for Trek China Corp. Trek entered China seven years ago and has about 70 concept stores, but it’s difficult to make a profit, Gong said. Rent is expensive—a 200-square-meter (2,100-square-foot) space in Beijing can cost 800,000 yuan ($125,000)—and labor costs are constantly increasing. The pool of quality retailers is still underdeveloped and simple warranty issues can be complicated because many of the industry’s parts suppliers don’t have customer service offices in China, save for Shimano.
Patience, many say, is the key to building a lasting business in China. If you’re willing to put in the time to grow the market, and don’t expect instant results, China can bear fruit.

Take Merida, for example. The Taiwanese manufacturer has been plugging away in China for two decades and has opened more than 1,500 stores. In 2011 its sales to China doubled to 560,000 units, and the company is expecting a 30 percent gain this year. Giant, which set up its China operations in 1979, sold nearly 2 million bikes in China last year. Outdoor brands that have been in China for much longer than the bike industry are just now starting to see substantial returns. It took Nike 25 years to reach the $1 billion sales mark in China, where it has about 7,300 stores built over the past three decades, according to a recent story in daily newspaper The Oregonian, and revenue had climbed to $2 billion by the end of 2010.

“It’s not the hot time yet, but it will come,” said Uwe Kalliwoda, president of Accell Group Asia. “You have to invest, but when it kicks off, it’s going to go big.”

That expectation is driving companies like Accell Group, Cycling Sports Group and Advanced Sports International into mainland China. Predicting that China’s enthusiast market will become significant in the next three to five years, Cycling Sports Group recently opened its first sales, marketing and distribution office in Shanghai to support Cannondale and GT in China. Kalliwoda will debut Ghost mountain bikes in China priced at 500 to 1,000 euros ($650 to $1,300) in the next few months, and is initially targeting exposure in 50 to 100 shops. London folding bike brand Brompton is opening its first Brompton Junction store in Shanghai’s tony French Concession district later this year, responding to demand for British-made products.

Others have looked at China and turned back. Ridley owner Joachim Aerts signed with a Chinese distributor last year and planned to deliver 400 units, but when the distributor repeatedly put off prepaying for the bikes, Aerts canceled the order.

“It’s too early,” Aerts said, adding that he may take another look at China next year through a partnership with his Japanese distributor.

For brands already in China, it can sometimes seem that the challenges outweigh the opportunities, but there are enough positive signs that locals are ready to spend on luxury items to keep pushing forward.

Specialized’s Koh said all his concept stores are making money and dealers haven’t had any problems selling through their most expensive $20,000 carbon fiber bikes, oftentimes with customers asking if there are better bikes in stock.

“There are many things that still work against us trying to sell high-end bicycles, but again things will change,” he said. “We are betting on it will change and we don’t need the whole country to change. All I need is this 1, 2 percent of people who are environmentally friendly, who care about their health, who aspire to be fitter or healthier and embrace cycling.”

Topics associated with this article: From the Magazine

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