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Jay Townley: Pressure builds to shift business out of China

Published June 5, 2019

By Jay Townley

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There's a word going around the Chinese internet describing the tight economic bonds that have formed between the world's two largest economies since the establishing of formal diplomatic and trade relations in the 1980s: "Chimerica."

I first visited China in 1983 for International Standards Organization bicycle standards meetings and this word accurately describes the relationship the U.S. bicycle business has had with Chinese sourcing since the 1990s that has led to the U.S. bicycle business being import-dependent, and since 2000 with the majority of that dependence centered on Chinese sourcing.

While there is no question that China can improve its access to markets and the rules of international trade engagement, the previous trade practices have been economically accommodated while the current trade dispute has had a detrimental impact on all aspects of the U.S. bicycle business that will only get worse if it continues to unfold as now forecast.

This is not a political or philosophical commentary, but an objective observation of current events in U.S. trade relations with China that have a high probability of having both short-term and long term affects on the American bicycle business that companies, brands and retailers have to take into account and plan for now!

The current trade war is taking direct aim at Chimerica. Current and threatened new tariffs, if they stick, threaten to cut off the U.S. market from its supply chain and source of supply for Chinese manufactured bicycles and related parts and accessories.

Beyond tariffs, trade hawks are pursuing what they call decoupling, or breaking up a relationship that they now feel poses a long-term strategic threat to the United States.

The trade hawks hope to get American companies to shift their factories to friendlier countries. They are pushing to restrict Chinese investment in the United States and cut academic and other long standing relationships.

The majority of the Chinese bicycle business export trade is owned or controlled by Taiwanese companies and U.S. customers will be able to move sourcing, and some will go to Taiwan with the majority to other Southeast Asian countries where the Taiwanese and North Americans have already started or are starting factories and joint ventures.

However, the capacity in Taiwan and elsewhere in Southeast Asia is currently well below that required to replace Chinese sourcing to U.S. customers.

In addition, the bicycle manufacturing and delivery supply chain in China is well developed and tied to the up-to-date and sophisticated Chinese logistics infrastructure that efficiently moves large quantities of consumer goods, including bicycles and related parts and accessories, from production facilities to U.S. ports.

The reality is, it will take two to four years, until 2021—2023, to completely re-source the U.S. bicycle business out of China.

The Risk of a Full-Blown Trade War with China Is Shifting to a Highly Probable Baseline

According to a recent Bloomberg report Goldman Sachs Group Inc., Nomura Holdings Inc., and JPMorgan Chase and Co. are among the leading financial firms that have rewritten their forecasts as the U.S. threatens to impose a tariff on around $300 billion of additional Chinese imports.

Analysts at Nomura have made the U.S. threat — which would mean practically all of China's exports to the U.S. being hit with tariff hikes — their baseline forecast. They see it as a 65% probability before year-end, and most likely to come in the third quarter.

On May 22 the Secretary of the Treasury stated that he has personally been contacting America's largest companies about their plans for weathering the trade war with China, including encouraging firms to reorient their supply chains and source their products elsewhere.

We take this to mean in the short term from 2019 through 2021 there will be major disruptions to the bicycle and bicycle parts and accessories supply chains from China and South East Asia to the United States, further aggravating an already volatile and generally flat to declining traditional bicycle business sector that is being challenged by changing consumer demographics, shifting economic and environmental conditions and the rise of micromobility.

U.S. companies, brands and retailers should adapt their business plans to the near-term supply chain baseline and revise and update economic and market assumptions in quarterly and six-month buckets and three-year rolling planning horizons with regular monthly reviews and updates.

Anyone interested in learning more can contact Human Powered Solutions by calling 920-351-4883 or by visiting www.humanpoweredsolutions.com.

Jay Townley has started his 63rd consecutive year working in the bicycle and human mobility business. He is a founding partner and resident Futurist for Human Powered Solutions, a new and unique consultancy focusing on Micromobility. He can be contacted at jay@humanpoweredsolutions.com.

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