US-China Trade War Tactics and Their Effects on the American Bike Industry
Over the past year, rapidly changing China tariffs on a $250 billion basket of goods from China, including bicycles, has brought severe pain and uncertainty to my bicycle business and many other American companies in the bicycle industry.
I’m the CEO and founder of Guardian Bikes, a young, fast growing startup company with the mission of making biking safer through innovation. We focus on selling the safest kids bikes available in the market, featuring SureStop technology, our own patented anti-lock brake system for bikes which we engineered and refined over the last 10 years.
Guardian appeared on Shark Tank in Season 8 and earned a 500k investment from Mark Cuban. Since our partnership with Mark, we’ve enjoyed rapid growth. However, as with any high growth, capital intensive, inventory based business, strong planning and forecasting become absolutely crucial in keeping the company alive and financially healthy. Key to running the business and making financial decisions that don’t kill the company come down to estimating demand well and having product cost certainty.
Just 12 short months ago, we paid a steady, unchanging, 11% tariff on bikes. During this past year, we’ve lived through a 10% increase in Sept 2018, a 25% increase in May 2019, and now a 30% increase which will start Oct 1 2019. As of Oct 1, we will be paying 41% tariffs (11% + 30% trade war increase). Many of these increases came with little to no warning. Many times the increases were floated, delayed, then enacted with short notice. I found myself checking the news every day just to find out what our landed product costs were most likely going to end up being the following quarter.
Who actually pays for the tariffs:
Contrary to what the President has stated, China does not pay for any tariffs imposed by the United States. China certainly does suffer when companies move out of China because of the tariffs put in place, but they don’t pay the tariffs. Tariffs are actually paid for by American companies who import goods. In fact, US customs bills us and automatically debits our bank account to for the tariff bill. This holiday season, 41% of our product costs of will get paid by Guardian Bikes as a tax to US customs.
Why not just leave China and manufacture somewhere else?
Some ask why not just leave China and make your bikes somewhere else? Once you dive into the details, you’ll see why this is impossible in the near term for most of the American bike industry, especially those who make kids bikes. 94% of the approximately 16 million bikes sold in the United States every year are currently made in China. 98% of the approximately 10 million kids bikes sold in the United States per year are made in China.
Bikes are made of up of many individual components, like brakes, grips, tires, chains, and shifters, all which are made by factories who specialize in manufacturing those specific components by the millions. Guardian Bikes, for example, are made up of 65 unique parts, with 40 unique vendor factories producing the various components which are brought together to make the bike. For bike companies to move their production out of China, the whole supply chain needs to move in concert. The reality of the bike industry is that it would take many years and hundreds of millions of dollars of investments to move the supply chain out of China. Today, there is simply not enough manufacturing capacity for US bike demand in any other country, not even close. This is such an issue for the bike industry specifically, these challenges were covered in the Wall Street Journal in May, here.
Safety concerns with abruptly moving
China has now decades worth of bicycle manufacturing experience. Its leading bicycle factories have learned, evolved, and refined their bike manufacturing acumen over many years. As American bike companies are looking find other potential production bases like Vietnam or Cambodia, they’re finding that quality is often far worse due to of outright lack of experience and poor infrastructure. Unlike with, say, shoes or garments, a product failure on a bike can severely injure or even kill consumers. There isn’t much room for taking production quality risks by moving.
Conclusion
I agree a new trade deal between China and the US is needed, but changing the tariff environment on American companies so rapidly and without much warning is extremely harmful for small US businesses like Guardian Bikes, with intense supply chain concentration in China for the products we make, and no real option to move elsewhere. Most of the American bike industry is stuck with no where to go until bicycle production capacity and supply chains are built elsewhere, and that won’t happen unless there is certainty in the trade environment.
