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U.S. bike firms face uphill slog to replace Chinese supply chains

[January 14, 2020] By Rajesh Kumar Singh

CHICAGO (Reuters) - When Mehdi Farsi decided to shift production of State Bicycle Co's niche fixed-gear urban bikes out of China to escape U.S. tariffs, it took months to find another factory in Asia willing to do business with his Arizona company.

Farsi, who founded the firm in 2009 with his brother and another cycle fanatic, turned to Taiwan but soon found most factories were so swamped with business from rivals that they declined his "low volume and less profitable" orders.

The company's struggle to find a competitive manufacturing alternative to China epitomizes the challenges many U.S. firms have faced since the start of the trade war between the world's two biggest economies 18 months ago.

A survey by Cowen & Co. at the end of 2019 found only 28% of North American companies had switched supply chains away from China. Of those firms, just a fraction had managed to shift 75% or more of their supply chain to a different country.

Alternatives often lack the infrastructure and capacity to absorb everyone seeking a new base. That has driven up the costs of moving and sourcing new supply chains to the point where some U.S. firms say it makes more sense just to take the tariff hit.

A Phase 1 trade deal between Beijing and Washington, expected to be signed on Wednesday, will at least hold off increasing tariffs U.S. President Donald Trump imposed on bicycles from China. But the 25% tariff on bikes and a host of other products will remain in place to give the U.S. leverage in further talks.

The bike industry is a small part of what experts call the biggest shake-up in cross-border supply chains since China joined the World Trade Organization in 2001.

From furniture, electronics, apparel, tires, vacuum cleaners, to name a few, companies are moving operations to Taiwan, Thailand, Vietnam and other Asian countries.

'CHRISTMAS GIFT'

Farsi's experience with State Bicycle echoes the Cowen & Co. findings. After months of research and several trips, a small Taiwanese factory agreed to make his bikes but he had to triple orders and pay 30% of the cost of goods up front, unlike in China where he paid upon delivery.

The new terms locked up as much as $1 million of working capital until the bikes were shipped and required a new credit line. After a year of toil, State Bicycle managed to shift production of only two of its five models which are sold in the United States.

"It took a lot of time and resources," said Farsi.

Gina Chang, secretary general of the Taiwan Bicycle Association, likened the Sino-U.S. trade war to a "Christmas gift". But she said the island's limited capacity meant some manufacturers had turned down business to focus on existing orders, mainly for e-bikes from Europe.

Taiwan's U.S. bike exports jumped 37% to 597,000 in the first 10 months of 2019, the association said. But Chang said manufacturers were hesitant about expanding production lines as they feared orders might dwindle if the trade war ended.

"Trump is fickle ... will the shift of orders continue in 2020?" she said. "We need to wait and see."

In a move to help bicycle companies, the Trump administration has been granting tariff exclusions to some of their imports since September. The relief, however, is only for a year and is meant to give them more time to move production - ideally to the United States.

But Don DiCostanzo, chief executive officer of Pedego Electric Bikes in California, said higher labor costs and the absence of a viable supply base have made it "virtually impossible" to assemble bikes in the United States.

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Co-founders Reza Farsi and Mehdi Farsi stand for a portrait in their warehouse at State Bicycle in Tempe, Arizona, U.S. January 10, 2020. REUTERS/ Caitlin O’Hara

DiCostanzo examined setting up a U.S. factory but said production costs would have doubled - and exceeded the tariffs. He moved Pedego's production to Vietnam in December 2018 instead.

"Even if they slap 100% tariffs on bicycles, I'm not sure that will be enough to bring production back to the U.S," DiCostanzo said.

Farsi, meanwhile, said he didn't even consider moving production to the United States and lingering uncertainty about tariffs has left him no option but to stay invested in Taiwan - despite the 12-month relief.

OVERBURDENED

In the 1970s, the United States assembled more than 15 million bicycles a year. Now it makes fewer than 500,000, according to industry data presented to the United States Trade Representative (USTR) in 2018. By contrast, China made about 95% of the 17 million bikes sold in 2018, U.S. Census data showed.

The world's second-largest economy also provides more than 300 million components such as tires, tubes, seats and handlebars - or about 60% of U.S. bike component imports.

While none of the alternative manufacturing bases can easily supplant China, a rush for safe havens has kept their factories very busy. Taiwan, for example, accounted for 6.3% of U.S. bicycle imports in 2019, up from 3.6% a year earlier, according to U.S. Census bureau data.

And with their factories bursting at the seams, Taiwanese suppliers are quoting higher prices.

In a September filing with the USTR, bicycle wholesaler J&B Importers Inc in Florida said some factories in Taiwan were quoting prices that exceeded the cost of the tariffs.

Farsi said State Bicycle's production costs were higher than in China and the Taiwanese factory was taking four months to fill orders compared with just two in China.

Pedego Electric Bikes said it didn't have any difficulty finding a factory in Vietnam because it was among the first companies to move there. But it faced other challenges.

It had to bring in workers from China to train local staff. Batteries had to be sourced from Japan or Korea and tires from Malaysia. "We had to set up the supply chain," DiCostanzo said. "That was perhaps the most frustrating part."

He said factories in Vietnam are so overburdened, suppliers were building new facilities or extending old ones. Industry estimates show factories outside China would need to boost capacity by 13 times to meet U.S. bicycle import demand.

In a USTR filing, Noble Bikes https://www.noble-bikes.com in Washington state said it had suspended plans to launch new models due to a lack of different manufacturing options.

"It is very difficult to get out of China," said Alex Logemann at U.S. industry association PeopleForBikes.

(Additional reporting by Yimou Lee in Taipei; Editing by Caroline Stauffer and David Clarke)

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