Pinkbike's henhouse was rattled
last week after we picked up a recent news story from BikeEurope
about the US government's latest proposal to levy a ten to 25-percent duty on over six thousand more Chinese imports, including bicycles and frames. Washington's latest escalation of this country's tit-for-tat trade war with the world's largest Walmart was reportedly in retaliation to Beijing's campaign to use any means (legal or otherwise) to acquire sensitive information from US corporate and military sources in exchange for domestic manufacturing. The new levy and expanded list of affected goods came on the heels of a 25-percent tariff on 50 billion dollars worth of exports that the US slapped on China for blowing off those negotiations last month. Total exports affected could total 200 billion USD annually.
Mountain Bikes Will be Affected
The US mountain bike industry, which relies heavily on Chinese imports, dodged the bullet in the first round of tariffs, suffering only collateral damage. Duties affected things like hubs, spokes, bearings, cable housings, inner tubes, and geared hubs. (eMTBs were included on that list as well.)
Mountain bikes, however, were spared from those first rounds, but if the latest proposal is ratified, complete mountain bikes and frames imported from China will face a similar fate. The news spurred a hailstorm in the comment section, but there were some salient questions and statements peppered in there that deserved to be addressed.
How much will the tariffs affect the cost of mountain bikes in the US? How will import duties affect US bicycle makers? Are tariffs on Chinese imports necessary to boost the bicycle business in the US? Are bike brands selfishly raising prices to cash in on tariff fever? What does Washington have to gain by imposing stiff tariffs on this country's largest trading partner? I'm paraphrasing, but those were the most valid concerns voiced in the Pinkbike popcorn gallery.
Industry Insiders Weigh in
(From left) AJ Ariss, Andrew Herrick, Chris Cocalis, and Will Montague.
To shed some light on those questions, I reached out to some key players in the US bike industry. Understandably, some chose not to respond, so here's my shout-out to the brave souls who did.AJ Ariss
, the product and marketing manager for Reynolds Cycling weighs in from the perspective of a US carbon wheel manufacturer that also has factories in Taiwan. Chris Cocalis
, founder and CEO of Pivot Cycles, imports frames from China and components from Taiwan, then assembles his bicycles in the USA. Will Montague
, Guerrilla Gravity's co-founder and president, answers from the perspective of a US-based bicycle manufacturer that has been growing its range of aluminum-framed dual-suspension bikes for five years running. And, Andrew Herrick
, who has a wealth of experience in both the component and bicycle side of the sport, including US and Asia-based manufacturing.
Are the proposed tariffs real or simply a threat?AJ Ariss:
They are certainly a “real threat.” President Trump has demonstrated that he is serious about being disruptive to trade with China. In the USA, over ten million bikes are imported annually from China. We do remain hopeful that, like many of his threats, this turns out to be more of a negotiation tactic that results in movement toward a compromise, without having to resort to punitive tariffs, which, if enforced, will likely lead to increased prices for consumers. We are a small industry, caught up in a political fight and that is certainly unfortunate. Andrew Herrick:
If you can predict what the US government is going to do, you could make a ton of money, probably even more than being a cycling editor. Nothing would shock me - although as soon as the administration figured out their soybean tariffs were really bad for US farmers, they didn't pull back the tariffs, but instead, offered the farmers subsidies. So, yes, it could actually happen and it could be devastating to bike companies and really crappy for our customers. If anyone in Canada wants to adopt me, my bags are packed...Chris Cocalis:
It’s a strong possibility and a real threat. It will affect US customers, but even more so, it may damage our ability to assemble here in the US and grow our US manufacturing/assembly operation (really, the opposite of the tariff's stated intention). Will Montague:
From our vantage point, it seems to be a mix of action and threats. The first round of tariffs has already gone into effect, so it's certainly not all a bluff. However, whether or not the latest round of threats is realized is yet to be seen, but we don't think that the full gamut of proposed tariffs will be implemented.
2018 Bicycle Exports to the USA: Ranked by Country China
($24,044,413), and Indonesia
How will this affect the US mountain bike industry as a whole? Andrew Herrick:
As you and I have discussed many times when we've had our "coffee talks" and "drinking about it," we are in the luxury goods business. Even bikes that we may see as "entry-level" (at $1000, for example), a mountain bike is a luxury or special purchase for 99% of our customers. Furthermore, we are in the innovation business and, as consumers, we are hard-wired to expect innovation to be deflationary by its very nature.
With the current state of retail, not just in bikes, yes, it's going to hurt. Bike companies, distributors, and retailers are seeing eroding margins and they cannot raise prices. Again, consumers expect this year's technology and spec to be less expensive next year. If the price goes up, then the consumer understandably shies away. If the margins continue to get eroded, then companies will lose money and they also will shy away from buying inventory to service the market.
What we need is a healthy value chain and we don't have that now. I don't see how a 10 to 25-percent increase in cost is going to be good for anyone, especially now. I think that Pinkbike readers understand this very well. Bike riders love their bikes and the companies that make them. They want to see them succeed, and the same can be said for their favorite local retailer. It's tough times for them now - the worst time I can think of for rising costs.Will Montague:
The biggest concern we have about the tariffs, in relation to our company, is at more of a macro level: What happens if the tariffs trigger inflation for everyday household goods and thereby limit discretionary income for recreational items, like mountain bikes? Or even if this isn't realized, what's the systemic effect of shaken consumer confidence and the spending habits thereby affected? And could that drive changes in the real estate market, further compounding the economic severity?
Luckily, our customers are unlikely to see any price increases. Our costs aren't scheduled to be affected because of our in-house frame production and primarily Taiwan-sourced build kit components. From what we've read, the tariffs are aimed exclusively at China. We don't currently import any of our components from China.
Tariffs on Bicycles Imported from China: EU vs USA EU
= 48.5% (anti-dumping tariff) SourceUSA
= 11% (current), plus the proposed increases = 21% to 36%
What does a 10% or a 25% tariff translate to at the retail level say, for a $5000 bike?Chris Cocalis:
As it doesn’t affect all parts, and it doesn’t affect anything from Taiwan and several other countries, I estimate the effect [for a theoretical $5000 Pivot] could be an additional $300 to $750, plus sales tax on that.Andrew Herrick:
If everyone maintains their already diminished profit margins, and the tariff was only ten percent; that bike would retail at $5600 almost exactly. Then in most states, there is a ten-percent sales tax, so that's an additional $60 in tax. So, a $5,000 bike leaves the store at $650 more than it does now. That is outrageous for the rider and will drive more consumers to hold off their purchase for another year or by a used bike on the ever-growing secondary market. If you follow that through a 12-month cycle, that means all companies will have to lower their purchases now, or the close-out market next summer will be quite large. This hurts everyone, as we have proven in the past three years.
Reynolds manufactures its top-drawer Blacklabel wheels, (like this DH wheelset) in its Utah factory. Reynolds also has a factory in Taiwan, which is a requirement for any component maker that hopes to supply OEM manufacturers there.
How will the tariffs enacted last month, or the new tariffs proposed more recently, affect Reynolds and its retail customers?AJ Ariss:
Fortunately, Reynolds' country of origin for our wheels is not China, as much of the work performed and value is added in Taiwan. As such, our wheel business should not be directly impacted. However, since we source components other than rims, there will likely be some impact on our component costs. The metal tariffs will have a direct impact on us when and if those go into effect, as we source raw aluminum from the EU to produce our tooling here in the US. Reynolds will take every step necessary to mitigate the impact of these tariffs prior to considering passing on the impact to our customers.
Bike brands are already shifting production from China to other Pacific Rim countries to avoid stiff EU tariffs. Can suppliers in countries like Taiwan, Vietnam, Cambodia, and Indonesia ramp up to absorb a Chinese exodus?Chris Cocalis:
In some areas it is possible and in some areas it is not. If you have a low to mid-end product, then maybe it’s a bit easier. When you’ve worked with your manufacturing partners for many years and have stable and very high quality production, running to the next lowest price option is not a great idea. It can be done, but it takes time to do it correctly and sometimes the actual cost is not worth the savings on paper.
Like Pivot, some high-end brands that import Chinese frames assemble their bikes in the US. Most enthusiast level components are made in Taiwan, so complete bikes assembled there with Chinese-made frames do not incur the new tariffs. Could a potential, $300 plus retail price increase for Chinese frames imported to the US provide a disincentive to move those assembly jobs to Taiwan?
There is already a duty in place on complete bikes [11%, including Taiwan], which is higher than the duties currently paid on [Chinese made] frames and some components. Other components, like brakes, shocks and complete wheels, have a higher, 10% duty at present. So, if an additional 10% tariff (or 25%, which is now what [US Customs] are now talking about revising to) were to go into effect, it could certainly be an incentive for companies to shift their production elsewhere. It is much more than just the additional $300 (or $750 if this latest increase goes to 25%). US bike assembly is done by very few companies currently, because it’s generally less expensive to build the bikes elsewhere. This is just icing on the cake [for US assemblers].
Is Washington protecting US businesses? Are they forcing bike buyers to shoulder the cost of punishing China?Andrew Herrick:
As for forcing bike buyers to shoulder the cost of punishing China, that is exactly what will happen. I don't know who in the US is being protected by these tariffs - the spirit of tariffs is to protect the domestic production, a practice that dates back hundreds of years.
To find the highest quality of a manufacturing process, you follow of the labor pool. Carbon fiber production of bikes and components requires a massive amount of man-hours. Fifteen or twenty years ago, China was the source of a large labor force, so it was the natural place to start making mass production carbon. Now, they have 20 years of experience and the best capability to make it.
US Bicycle Imports vs. Exports: Not Much Trade to Protect
Rated on a scale from one to ten, what is the viability of producing mountain bikes and components in the US?Chris Cocalis:
For carbon, I would give it a 3. Now that we have a nice 25% tariff on steel and aluminum, that makes the ability to manufacture our tooling even less competitive. And, for alloy frame manufacturing? Basically, that puts the US out of the game.AJ Ariss:
Today, Reynolds does produce limited production runs in our Salt Lake City factory. Industry Nine, our exclusive Blacklabel hub supplier, makes all their hubs in the US, and we source ALL our raw carbon fiber from California. Consumers also now expect quicker delivery and more customization options. The long lead time from Asia poses several challenges, so you either have to stock a significant inventory in many variants, stock inventory in a flexible state, or produce it locally. In the end, we think production in the US can make a lot of sense.
However, for us the biggest problem with US production is that all the bicycle assembly factories are found in Asia. Until a significant quantity of bike assembly moves to the US, it is unlikely for US production to increase. With the industry in its current state, we’d say 3 on a scale of 1 to 10. Assembly of bicycles is still primarily a hand operation and this is likely to remain in countries where the availability of inexpensive labor can be found. For this to change, major component manufacturers would have to invest in component factories in the US in tandem with major frame manufacturers to not only manufacture, but automate and streamline assembly.Will Montague:
For a new operation: 10. For an existing operation: 3. From our analysis, the cost benefits of manufacturing in Asia have diminished, as the primary initial benefit of manufacturing there was low labor costs. With rising labor costs, freight costs, and the introduction of new technologies (in software, machines, and materials) there is a blue ocean of opportunity to break with the status quo of an Asian supply chain that, (in our industry) is typically slow, inventory intensive, and not integrated into product design. It's difficult to change, though, because so much has already been established there and the costs of moving a factory are prohibitive. Additionally, most companies in the bike industry are branding, distribution, and (occasionally) design houses - not manufacturers.Andrew Herrick:
Unfortunately, except for very special products that are in the very high end of the price spectrum, such as Enve wheel sets and Chris King headsets, handmade frame-builder artisans - companies that we should all be proud of in our industry - there's no supply chain in the US. In your question, I assume you mean manufacturing in the pure sense, not just assembly. In that case, the viability, as a business case, is close to zero.
We don't have to be sad about that - we are truly a global family in the industry. No need for nationalism here. We can all share in the process of designing, building, marketing, selling and servicing bikes. The best companies in our industry are companies like SRAM that have great people in the US, great people in China and Taiwan, great people in Germany and other countries and they all work together in the common language of bicycles. How cool is that? Sorry to get off on a tangent, but I am very proud that bikes mean freedom for everyone in every place, for every race, boys and girls, men and women, all with a common thread. We are truly a global family and that will be the lasting legacy of the bicycle in all of its forms. And to that I say, "amen."
Analysis: Follow the Money
Tariffs are blunt instruments. The federal government is attempting to punish China by raising prices at home until Americans have had enough and stop buying Chinese goods. It's clear many industry leaders are skeptical that US tariffs on imported Chinese bicycles and components will help US bicycle brands. So, what's the motivation? Reportedly, the President tasked US Customs last month to assemble a list
of an additional 200 billion dollars worth of Chinese exports. There are 6,031 items on that list (it must have been a Herculean task) and bicycles were simply low-hanging fruit.
Combined revenue from the new tariffs will be significant. The Feds plan to pocket over 450 billion dollars
annually. That represents a massive tax burden, but because it is paid by corporate entities and then passed down indirectly through increased retail prices, many will not recognize it as such. To bring that down to earth, it's close to $1400 for every man, woman and child living in the US. That's a lot of money to spend in hopes that China will quiver in her boots for a few months. And while US citizens shoulder that burden by paying higher prices on just about everything, Washington gets to go on a spending spree. Economists concur that the Fed should raise taxes when the economy is strong (which it is) in order to pay down debt-spending incurred during recessions. One can only hope that the national debt is high on Washington's shopping list. Forecast for the Mountain Bike Industry: Better Than Expectations
The trade war between China and the US will inflict some casualties, but some good may come to US mountain bike brands as well. On the one hand, the timing for a substantial price increase for bikes and components could not be more disruptive.
Customer-direct brands like Commencal and YT have helped to drive prices down and set the industry on a new course of high value/high performance bike design. In response, consumer confidence is ramping up and riders who felt they had been priced out of the high-end market are again shopping for new bikes. You don't need a crystal ball to predict how adding $300 to $800 to the MSRP of a new bike will change that dynamic.
On the flip side, artificially supported prices could actually encourage some made-in-the-USA efforts. Alchemy Bicycles is ramping up its carbon bicycle production. Ibis has soft-launched in-house production of its small-sized carbon Ripley LS frames, and at least two other "conspicuous" brands are secretly working towards limited US production. There is also the possibility that Washington could be pushed into offering startup bicycle manufacturing ventures subsidies in the form of low-interest loans and tax breaks as a way of mitigating the damage that tariffs may inflict on the industry.
Further evidence that US bike makers can weather this storm and emerge profitable comes from the EU. European Union countries levy astounding anti-dumping and import tariffs against China and neighboring Asian manufacturers, yet somehow, European bike brands are surviving quite well. Flawed though it may be, the US economy is robust. History suggests that it won't take too long to get this tariff thing sorted. - RC