Trade War Sends Giant Back To Its Roots

When Trumplethinskin announced tariffs on goods from China, one thing was clear to anyone with an IQ of room temperature or higher:  Jobs would not suddenly re-appear in Ohio and Michigan and Pennsylvania.  Of course, El Cheeto Grande, not being a member of that exclusive club, went ahead with his move.  

Maybe I am not giving him enough credit for his intelligence:  After all, sold the promise of jobs returning, as if they'd simply migrated for a season, to large numbers of people.  Then again, at least some of those people are as desperate as he is avaricious or delusional, depending on what you believe.

So what are the results of those tariffs, so far?  Well, for one thing farmers--many of whose livelihoods are tied to exporting what they grow--are losing sales.  And it doesn't look like jobs are coming back to the US, at least not in the bicycle industry.

Prices are already increasing for many bikes and related goods.  But the world's largest bicycle producer found another way to deal with those new import taxes:  going back to its roots.

I am talking about Giant.  Chairwoman Bonnie Tu said, "we took it seriously," when Trump announced a 25 percent surcharge on almost everything coming from China.  "We started moving before he shut his mouth."

Giant's factory in Taichung City, Taiwan

That meant, of course, she had a very short window of time in which to act.  But act she did:  She shifted production of the company's US-bound bikes from its Chinese factories to the company's headquarters in Taichung City, Taiwan.

The first Giant bikes sold in North America during the 1980s were made in Taiwan.  So were all of the products the company exported to the America, and most to the rest of the world, during the 1990s and early 2000s.  

Bonnie Tu

Ms. Tu says, though, that the company's long-term plan involves moving as much production as possible as close to the markets as is feasible.  Right now, in addition to its Taiwanese facility and the five factories it operates in China, Giant also has a plant in the Netherlands and has announced they are building another in Hungary.

Will Giant start making bikes in the US?  Ms. Tu hasn't said as much, but it wouldn't surprise me if they set up shop in some low-wage "right to work" state in the South.  If they do, I just hope the bikes are better than some of the stuff that came out of Schwinn's since-shuttered Greenville, Mississippi plant.

Where Your Next Bike Might Come From

In a couple of earlier posts (See here and here, I examined some of the ways in which the new tariffs on Chinese goods could affect cyclists and the bike business here in the US.

Some American bike firms, like Brooklyn Bicycle Company, are deciding whether to absorb the price increases or pass them on to customers.  Others, like Detroit Bikes and BCA, are calling for even higher tariffs and extending them to all imported bikes.  

Trek and Kent--two bike companies rarely mentioned in the same breath, let alone the same blog post!--are contemplating yet another strategy which, really, shouldn't come as much of a surprise.

Trek is, arguably, the most prestigious mass-market American bike brand.  (Specialized and Cannondale are probably Trek's chief competitors for this title.)  Their highest-priced bikes are still made here, albeit with imported components.  The rest of their bikes are made by sub-contractors that include Giant, which also sells its bikes under its own name.

Kent's offerings, in contrast, are at the bottom of the market and found, not in bike shops, but in big-box stores like Walmart and internet retailers.  Some are sold, under license, bearing the Jeep, Cadillac and GMC brands.  Although some of its bikes are assembled in South Carolina, their frames are made in China and Taiwan and assembled with components made in those countries.

So...Is Trek returning to its roots by returning its manufacturing to the US?  Well...no.  You're not going to see a revival of those nice lugged steel frames they made in Wisconsin during the '70's and '80's.

Likewise, Kent isn't going to build a factory in Parsippany, New Jersey (the location of its headquarters), or anywhere else in the good ol' You-Ess-Of-Ay!

No, they are not going to do what El Cheeto Grande told all of those laid-off blue-collar workers in Ohio and Michigan and Pennsylvania companies would do in the face of tariffs.  Instead of making their wares in the country Trump thinks he can Make Great Again, they are talking about shifting their production to a country that isn't getting a tariff wall built around it.

If you are European, what I am about to say next will come as no surprise:  That country is Cambodia.  

The Southeast Asian kingdom is already the biggest supplier of bicycles to European Union countries.  Most of the country's bike factories are in the north, near Vietnam--which some have called "the EU's China." If you buy, say, a backpack or jacket in Europe, it's more likely than not to have been made in Vietnam, just as the new bike is likely to be from Cambodia.

It will be interesting to see whether other American bike companies make similar moves.  If anything, wages in Cambodia, Vietnam and other countries in the region are lower than they are in China. And some Cambodian bikes are already coming into the US--though, in far smaller numbers than bikes from China or Taiwan.

How Will Brooklyn Pay For A Tax Against China?

About three weeks ago, I wrote about ways in which the recently-imposed tariffs on Chinese goods could affect the bicycle industry.

I presented as clear a picture as I could, not being a bicycle industry insider or an economist who specializes in trade policy (or any kind of economist at all).  So, today, I am going to share part an Inc. article Norman Brodsky wrote based on his conversation with such an industry insider.

Brodsky's friend Ryan Zagata is the founder and owner of Brooklyn Bicycle Company.  I've never ridden any of their machines, but they are praised for being very good at what new urban cyclists--particularly commuters and utility cyclists--want.  From all accounts, their bikes are comfortable and practical.  What I know is that they are stylish enough that one of their models is sold at the Museum of Modern Art's gift shop.

Plus, I must say, Brooklyn's prices are actually quite reasonable.  That could change, although Zagata doesn't want that.

He told Brodsky that a typical model from his company costs about $200 to make.  Right now, he pays $11 on import duties for such a bike, but the new tariffs could hike that to $61.

That leaves him with a dilemma:  Does he absorb the increase or pass it on to customers?  Of course, he could also "split the difference" and increase consumer prices, but by a smaller amount.

None of those options is particularly appealing because, as anyone who has worked in the industry knows, it's a low profit-margin business.  The retail markup on bicycles, percentage-wise, is not nearly as high as it is for such items as clothing and luggage.  Every shop in which I worked made a much greater proportion of its income from repairs or the sales of accessories and parts than it did from selling new bikes.  As I understand, that is the case in just about all bike shops. That's why you don't see year-end half-price or 75 percent off sales on bikes. 

Brooklyn Bicycle Company's Driggs 3

Brodsky asked whether Zagata could have his bikes and parts manufactured in another country like Vietnam.  It wouldn't be worthwhile, Zagata says, unless the move would shave $50 or more off the cost of producing the bike. More to the point, though, are the difficulties that come with such a move: among them,  the research and development--and travel-- costs of sourcing a new factory and having samples made and tested.  Also, he points out, every new model from a new supplier has to be sent to the Consumer Product Safety Commission for testing.  

In addition, moving production would mean losing the relationships they have with suppliers, who understand what Brooklyn Bicycle wants and needs.  "Will a new manufacturer understand what we're looking for and give us the same level of quality?" Zagata wonders.

He might have been thinking of Fuji's experience around the turn of the millennium.  They were one of the last major Japanese bicycle manufacturers to shift their production to Taiwan.  As a result, they didn't have the sorts of relationships enjoyed by other companies who shifted their production earlier.  Fuji's once-stellar reputation fell; it has recovered only during the last few years.

Finally, Brodsky inquired as to whether Zagata could manufacture his bikes in the US. Even if he made the frames, and assembled the bikes, in the US, he'd still have the same problem with tariffs.  "There's nobody in the United States making rims, hubs, spokes, saddles, chains, drivetrains--all the things we'd need, in the quantities we'd need them."  He still would have to import those components, he said, and they would be subject to the same tariffis as bicycles.

(He is right about the lack of American component-making  capacity.  Hubs are made here, but they are all high-end items like Phil Wood and Chris King:  a set would cost nearly as much as most of the bikes Brooklyn offers.  The other components, to my knowledge, are no longer made here:  even Sun Rims, designed in the USA, are made in Taiwan or China.)

At the moment, Zagata says he can't do much more than "watch my competitors."  Without a doubt, many other small- to medium- size business owners (BBCo., at $2 million a year, is considered in the latter category) could say the same. 

Make American Bikes Again: Will Tariffs Make That Happen?

I've never been very good at predicting the future.  One thing I can tell you, though, is that come the first of January, bikes and anything related to them are going to be more expensive.  Way more expensive.

Currently, most imported bikes are subject to tariffs of 5 to 11 percent. (I learned that when I purchased my Mercian frames.  I was even charged import duties when I had two of my frames refinished by Mercian!)  An additional fee of 10 percent was added to bikes, and most parts, from China in August.  That extra fee will increase to 25 percent when the new year begins.

Given that most new bikes and parts are made in China, and very few are made in the US, most people who buy bikes or parts will notice the difference, if they haven't already.  Now a couple of manufacturers want even higher tariffs, and to expand them to cover more bikes.

Bicycle Corporation of America (BCA) and Detroit Bikes are about as different as any two companies in the bike business can be.  For one thing, the bikes they offer have little in common:  Detroit Bikes offers a full line of city bikes as well as "comfort bikes" assembled in the USA and, for next year, plans to offer a  line of USA-made bikes.  As near as I can tell, their products are aimed at the sorts of riders who might buy, say, a Linus:  folks who want stylish bikes without the price tag of a bike from another Detroit maker: Shinola.  On the other hand, BCA's offerings (some of which are sold under the "Concord" name) seem to consist of kid's bikes along with beach cruisers and inexpensive mountain bikes for adults.

City FC Limited Edition from Detroit Bikes

I laud both companies for their attempts to bring bike manufacturing jobs back--in Detroit's case, to a ravaged city and in that of BCA, to a part of South Carolina that has been economically stagnant for most of the past century.  But I have to chastise them (as if they're listening to me) for asking the Federal Trade Commission to increase tariffs on all imported bicycles to as much as 50 percent.  

BCA Bicycles

Not only that, they want to reduce the de minimis threshold for such duties.  Currently, any package of imported goods valued at less than $800 is not subject to import duties.  BCA and Detroit's petition calls for reducing the de minimis to $50 for at least four years.  That would include, of course, just about any imported bike but could also mean that, say, a package containing bicycle parts such as inner tubes (nearly all of which are made in China) could be subject to the charges.  

To be fair, the US industry as a whole has been lobbying for a reduction of the de minimis for all imports.  So have American companies in other industries.

While BCA, Detroit Bikes and other American bike companies believe that such tariffs will increase their business and bring jobs back to the US, at least one example from another industry shows that their move could backfire.  Last year, the US International Trade Commission recommended tariffs on some photovoltaic cells and large residential washing machines. Last January, the Trump administration approved 30 percent tariffs on the cells, which would decrease after the first year.  On the other hand, it approved a 20 percent tariff on the first 1.2 million washers imported, and 50 percent on any imported after that.

It won't surprise you to know which company initiated the petition for these tariffs:  Whirlpool.  Though the company celebrated its initial success, its profits have declined in recent months because the Trump administration's tariffs on steel and aluminum imports have driven manufacturing costs upward.

So, while Zak Pashak, the Canadian-born head of Detroit Bikes, is excited at the prospect of running three shifts "at full tilt" and thus bringing "hundreds of new jobs" in "an area where we really need jobs", one has to wonder whether his enterprise will be so profitable if he, like Whirlpool, has to pay more not only for raw materials, but also for the parts--almost none of which are made here--he hangs on his frames.

What's He Protecting?

The moment anyone with power uses the word "protect", I reach for my trusty frame pump.  Not only does it get my tires up to pressure in a pinch, it's great for swatting away stray dogs and other threats and nuisances.

You see, I've come to realize that any powerful person who thinks he or she can "protect" anyone or anything he or she hasn't met is delusional or lying.

And so it is with El Cheeto Grande.   He's passed another round of tariffs because he's, once again, got his knickers in a twist over China.  

Of course, the tariffs will not "protect" American industries because...well, they don't exist anymore, if indeed they ever did.  

(Besides, all you have to do is look at Smoot-Hawley to realize that tariffs almost never have their intended consequences.  But that would be the subject of, not just another post, but another blog--or a book!)

To wit:  Back in the Clinton administration, I tried to put together an all-American bike.  Of course, I did it on paper.  Frames and forks weren't hard to find, though they were almost always more expensive than imports.  Ditto for the Chris King headset, as great as it is. Yankee-made handlebars, stems and seatposts were available, but they were mainly "boutique" items.  

The other components, on the other hand, were a lot more difficult to find.  Sun was making its rims, and Wheelsmith its spokes, in the USA.  And there were a number of small companies fabricating hubs here in the USA, such as Phil Wood and Chris King.  They, of course, cost far more than even Dura Ace or Record stuff, but at least they kept my exercise going.

That is, until I tried to find tires.  To my knowledge, none have been made here since Carlisle ceased production, apparently some time in the early '80's.  Goodyear, Firestone and other rubber companies had exited the non-motorized trade long before that.

OK, I thought:  The tires are just one part (or two components, depending on how you look at it.). Surely, I could make the rest of the bike into a Yankee Doodle Dandy.

Then I tried to put together a drivetrain.  Mind you, this was during the days when it seemed every 25-year-old in California or Colorado who had access to a lathe was turning out lightweight (and very expensive) cranksets and derailleurs in a rainbow of colors.  I thought cassettes would be my next hurdle but, as it turned out, some company--in Massachusetts, I think--was making titanium bits--including cassettes.  

Eight speeds were the standard at that time.  If you remember anything about Shimano's 8-speed equipment, you knew that not everything was interchangeable between gruppos.  Namely, a Dura Ace hub would take only Dura Ace cassettes--not Ultegra, 105 or any other.  Turned out, the titanium cassette was made only for Dura Ace--which, I supposed, made sense, given what Dura Ace and titanium equipment cost.

(Aside:  Shimano's 9-speed stuff was interchangeable.  So Dura Ace hubs could take Ultegra cassettes, which weighed a bit more but cost about half as much.  And the standard 9-speed Dura Ace cassette was made of titanium, which pre-empted aftermarket stuff.)

But there were no chains made stateside.  Back in the day, the baloon-tired coaster brake bikes had American chains; however, as far as I know, no derailleur-compatible chain has ever been made here.  Nor were any pedals, save for the rubber-block variety found on said wide-tire "bombers".

Oh--and there were no American-made saddles.

Today it would be even more difficult to put together an all- (or even mostly-) American machine.  And almost very few bike accessories are made here.  Yet they are all subject to tariffs.

And it's all but impossible to find some items made anywhere besides China.  Almost anything electronic--lights, computers and the like--come from Cathay.  

So do helmets.  Interestingly, they have been exempted from tariffs.  It's ironic when you realize that one of the rationales for the tariffs is to protect against intellectual property theft--and nearly all helmets are designed in the US!

Of course, bicycles are far from the only things to be affected by the tariffs.  I'm not sure I'd want to be a farmer who raises corn, soybeans or hogs right about now.  But I have yet to hear anyone explain how any job or industry will be "protected" in this country.  

What--If Anything--Wii This Trade War Cost Us?

I passed the only economics course I took as an undergraduate by promising the professor that he would never, ever see me again if he gave me credit for the class.  If I were to fail, I warned him, I would be forced to take the class again and he might get stuck with me for another semester.

It worked.

Well, all right. It didn't quite go that way.  I passed the class, but I didn't make any such promises or threats.  I think the prof, though, realized that I had absolutely no talent for the subject to which he devoted his life and I wanted to return to school the following semester.  In short, he seemed to feel pity for me, and might've added, oh, a point or two to my final grade.

Anyway...The point of this is that I should not, under any circumstances, be mistaken for an economist.  And, no, I didn't play one on TV. (How does one play an economist on TV?)  So, take anything that resembles economic or business forecasting on this blog with a large bottle of frame prep solution.

As you all know, El Cheeto Grande is proposing tariffs on Chinese imports.  They are in retaliation for similar fees China imposed on imports from the US--which, in turn, were a reaction to earlier tariffs Trumpf slapped on Chinese goods.

The difference between the first and second round of Trump Tariff Punch is that the later round includes a greater number of products than the first, from which consumer goods were mainly absent and, instead, included farm products and basic materials such as steel.

Although details of the second round haven't been made public, some folks who know more than I know say that simply because the second round encompasses about twice as much of what the US imports from China (by monetary value), it's likely to include consumer goods.

As to which consumer goods might be affected:  No one has said outright that bicycles will be in the crosshairs, but it's hard to imagine that they won't be.  The tariffs might even include "bike-related imports", as more than one article put it.  

So, even if you don't buy a Chinese-made bike, there's a good chance that some of the accessories or parts you hang on it will have that tax levied on it.  For example, of my six bikes, four are British (Mercian), one American (Trek) and the other Japanese (Fuji).  I don't have any Chinese parts on them, and about the only accessories from China I use are the rack, lights and handlebar wrap on the Fuji. So, if I were to buy those things today, I wouldn't be affected much, if at all.  

But in spite of my efforts to buy from companies based and operating in countries where workers are paid decently and are guaranteed some basic human rights and protections, I find that I am not "innocent", if you will.  Turns out, my Giro helmets are made in the land of Leninist Capitalism.  So are my riding glasses, gloves and a few other things I use while riding.

What gets taxed, of course, will depend on how the categories of taxed goods are defined.  If there's a group called "bicycle-related goods", or something similar, watch out!  On the other hand, the law might specify certain categories of bicycles defined by price point or wheel size, as is done in places where there is a sales tax on new bicycle sales.  Naturally, none of us would like that tax, but at least you have a clearer idea of what will and won't be taxed.

Now, if this tariff were in the works during my youth, I would have scoffed:  "Well, I don't buy such crap bikes."  These days, though, it's hard to avoid buying Chinese unless you are shopping near the top of the price scale.  Some of those bikes and parts with familiar names you've long known may no longer be made in Europe or Japan or the USA--or even Taiwan.  They may be produced in Chinese factories.

My prediciton:  Some bikes and "bike-related products" will be affected.   But I think they will be a result of falling into larger categories of imports that are affected:  Somehow I don't think that the folks who are charged with turning El Huffy's Twitter storms into international trade law are thinking about bicycles in particular.