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<b>China 2007</b>: Bike Industry Faces Mounting Cost Pressure

Sales & Trends

BEIJING, China – Its not evident in the production volume of complete bicycles and components, which continued to grow during 2006. However, the competitiveness of the Chinese bike industry received some serious blows last year as production and transport costs rose rapidly. Labour is becoming more expensive and more strictly regulated, while serious quality problems have even spurred the central government to take action. Will China still be the workshop of the world by the end of the decade?

<b>China 2007</b>: Bike Industry Faces Mounting Cost Pressure

BEIJING, China – It’s not evident in the production volume of complete bicycles and components, which continued to grow during 2006. However, the competitiveness of the Chinese bike industry received some serious blows last year as production and transport costs rose rapidly. Labour is becoming more expensive and more strictly regulated, while serious quality problems have even spurred the central government to take action. Will China still be the workshop of the world by the end of the decade?

After a record year in 2005 with a 16% increase in the production of bicycles and E-Bikes to slightly over the 80 million mark, 2006 also set a new benchmark with close to 90 million units. According to the numbers issued by the China Bicycle Association (CBA), production climbed 11.1% in 2006 to a total of 89,350,000 units. That number excludes e-Bikes, whose popularity in China seems unstoppable.

Sales climbed by at least 79% to 12.1 million units in 2005. That record was exceeded in 2006, with close to 14 million units (13.6 million to be more precise) produced and sold, bringing total Chinese production volume over the 100 million mark   102,950,000 to be exact.

Domestic market

The Chinese domestic market continues to mature and companies are investing to cater for a market which is expected no longer to be dominated by ultra low-end bikes. As a ‘new breed of customers’ (as Giant CEO Tony Lo calls them, see separate article on page 12) makes its way to bike shops in China, investments are being made by Giant and Kenda, among others, to cater for rising demand in the mid-priced sector of the market.

However, there’s also a trend that could hinder the maturing of the bike market in China. That trend is rising car ownership and an emerging middle class that is increasingly showing an interest in four-wheeled vehicles. Beijing this month cancelled its bicycle registration requirements, a move viewed by the state press as highlighting the nation’s full-fledged emergence as a ‘car society’ and the demise of the bicycle as a ‘transportation tool’. In Beijing, some four million bikes now compete for road space with more than two million cars, and a quick glance at the newly widened boulevards, overpasses and ring roads of the capital clearly shows which means of transport has been getting priority.

Tough times

The 2006 production numbers don’t tell the full story of China and its bike sector. In 2007 things turned for the worse and the picture is not looking any better for this year and beyond. Measures by the central government are having a direct effect on the competitiveness of the Chinese bike industry. In mid-2007, for example, the government, under pressure by the World Trade Organization (WTO), lowered its export subsidies.

The tax rebate percentage was lowered by 4% on complete bikes as well as on parts, and for many Chinese exporters this makes the difference between profit and loss. For complete bikes and components the tax rebate percentage stands now at 9%. It is likely that it will be lowered again in the near future under further pressure by the WTO.

Another government measure that came into force January 1, 2008 is also leaving a distinguished mark on Chinese industry. On that date the Chinese government issued a new law for employment contracts. As a result some 300 factories in the Tianjin area supplying low-end components to the bicycle industry, ceased operations.

It is said that the low-end sector will quickly disappear; even sooner than previously expected. The new law makes it harder for employers to lay-off employees. Every employee that is fired has to be provided with one months pay for every year he or she worked. The new law also stipulates that the employer has to provide each employee a labour contract that outlines his or her activities. If not, the employer risks a fine plus double salary payment to the employee. An employer also has to register all his employees.

Rising production costs

As well as the cut in tax rebates and the new labour laws, the Chinese industry is also faced with rapidly rising production costs. In the second half of 2007 price increases of 6 to 7% for components as well as bikes manufactured in China were announced. And more increases are in the pipeline as labour costs climb by 30% per year. Even bigger increases are expected in 2009 due to new regulations on pension funds.

Other factors that contribute to the rapidly rising production costs in China are higher prices for steel and plastics plus the cost of transport due to the increase of oil prices. The weakness of the US dollar is also a contributing factor. On top of all that, the Chinese government is said to have announced a new tax for foreign companies operating in the country. That tax is on money transfers out of China and consists of 10% on the remittance amounts.

The rapid rise in costs is reflected in changing payment terms as well as in the shorter validity of quotations. Recent reports say that some suppliers are only confirming prices on an order-by-order basis.

Exchange rate

Along with the price increases, China is faced with an appreciating currency – the exchange rate with the dollar and the euro has in fact been steadily on the rise since China joined the WTO. Despite that, European OEs are still enjoying a very favourable EUR/US$ exchange rate.

On top of all these problems, product quality is still a major concern for companies sourcing in China. This was demonstrated again last year when the government announced restrictions on the export of carbon frames. Faced with continuous reports in the US and European press of poisoned Mattel dolls, dumplings stuffed with cardboard and broken carbon bike frames, causing a lot of damage to China’s image, the government reacted with the restrictions. They stipulate that carbon frame manufacturers must have their products tested by government approved testing facilities before they can ship them. But soon after the new regulations were announced, it became clear that there were not enough testing facilities: frame testing can take up to three months.

Given the developments in China, it is said that other production locations are looking more and more favourable. So it seems that Chinese companies who moved part of their production or assembly to Eastern Europe or to countries that benefit from the Generalized Tariff Preferences (GSP) scheme have made the right bet.

For more on the GSP scheme, click here

 

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