Everything you wanted to know about trade tariffs relating to U.S and Chinese bike manufacturing

I have spent the last four months learning everything there is to know about trade tariffs in the U.S./Chinese bike manufacturing industry. I did this, not only for the advancement of my own knowledge, and to educate myself on specific policies in relation to making an educated vote for a political candidate; but because I was attempting to acquire funding for an import and distribution business, which has been a lifelong dream.

A brief narrative on U.S. bike manufacturing
I have been involved in the cycling industry in one form or another since 1982. I have seen the industry go from large companies like Raleigh, Murray, and Trek, that operate large manufacturing facilities in the U.S., to only a remaining handful of companies operating successful U.S. based manufacturing facilities. In the 1980’s, smaller U.S. based BMX companies popped up all around the country. Since that time, most have sold off to much larger companies, while others grew into much bigger companies all on their own. Mongoose, GT, Haro and Redline fall into this category. Other companies like Intense and Foes still operate successful aluminum bike manufacturing faculties here in the U.S. There are also U.S. based companies like Lenz Sport, Independent Fabrication, and the newly revived Fat Chance that make boutique brand bikes that are high on cost and quality, but low on sales. Yeti, Marin, and Santa Cruz fall into a category of companies that took manufacturing overseas to China or Taiwan some 20 years ago. There is even a company called Optibike that has been making e-bikes, with parts sourced and assembly done in the U.S for over 10 years, a manufacturing concept that is reflected in their price point.

Why did the bike factories relocate Overseas?
A few things happened to push large scale bike manufactories to relocate their plants overseas. In the late 1960’s Schwinn started making bikes in Japan, . Later, President Nixon re-opened diplomatic ties to China. Nixon wanted to rebuild China from a third world nation thinking it would give the two countries close ties and make for much better relations going forward. In return, the U.S. would receive cheaper consumer imported products that would build our retail industry and increase profits for other U.S companies.

About this same time, a factory was formed in Taiwan called Giant Bicycles whose goal was to make cheaper bikes for large scale bike companies. Their first customer was Schwinn. What may be surprising to most bike enthusiasts is that Schwinn made very few bikes in the U.S. after the mid 1960’s and virtually no Schwinn bikes were manufactured in the U.S. after the early 1970’s. Schwinn bikes were every kid’s dream, however their high cost meant they were out of reach for most kids on a paper route or grass cutting budget. Moving their bike manufacturing factories overseas allowed Schwinn to offer more affordable bikes during the original bike boom of the 1970’s, during which Schwinn dealerships exploded in the U.S. As the U.S. government and business advised China on how to improve their manufacturing business, Chinese manufacturers began to make better and better products and more U.S. based companies moved manufacturing to China/Taiwan throughout the 1970’s and 1980’s.

The rise and fall of U.S. bike manufacturing 1977-2000
The rise of the mountain bike and growing popularity of BMX in the 1980’s led to a boom in U.S made bikes. Small companies began popping up, whose origins were frequently formed by bike enthusiasts such as dads with a welder making BMX bikes. This is how Mongoose, GT, and SE started. In the case of mountain biking, it was a hippy with a welder making bikes in his garage. This is how Ritchey, Gary Fisher, Breezer and Specialized started (technically, Specialized started making tires in a garage, but I digress) In the 1990’s U.S. based brands like Yeti, Trek, Specialized, Marin, and Jamis made high quality and very expensive mountain bikes. In the mid 1990’s, a nice hardtail mountain bike could cost consumers upwards of around $1,500 to $2,000. Today you can buy a better hardtail for just $400.

Most people believe the downfall of Schwinn was not introducing an affordable mountain bike in the early 1990’s when mountain bikes began growing in popularity. Executives at Schwinn thought the growing mountain bike craze was a fad. In 1995, Schwinn bought the Yeti brand and began manufacturing mountain bikes under the brand name Schwinn Homegrown and Yeti in Colorado until 2001 when the two entities were sold separately. Schwinn to Pacific Cycles, which relegated the once great American brand with hundreds of Schwinn bike shops to big box Stores only. They are now controlled by Doral, a Canadian company that started making cabinets of all things. By then, Specialized and Trek had already moved much of their manufacturing to Giant’s factory in Taiwan. Later, Cannondale would follow suit with a move to Taiwan after filing for Chapter 11 bankruptcy, brought on by a failed attempt to make motorcycles. Cannondale is now owned by Cycle Sport West along with GT. Their move of manufacturing in Taiwan effectively ended the manufacturing of mountain bikes in the USA on any grand scale. Intense and Foes still hold on in the U.S. and I am happy for that.

Additional Economic Factors to Consider
Other factors that contributed to the demise of the U.S. bike manufacturing industry include stagnated wages in the 1970’s through present day. Additionally, the rise of large-scale big box discount shopping centers, such as Walmart, spelled doom for brands like K-Mart and Sears that sold many American made products in the 1970’s. The cheaper consumer products manufactured overseas and sold by Walmart, solidified the American addiction to inexpensive Chinese products. “Made in the USA” meant that you could no longer be competitive in the new global manufacturing market and one of China’s first volleys in the trade war was bicycles in 1972 with Schwinn. That is why it is one of their biggest and most dominant industries today.

What would it take for electric bikes to be made in the USA?
The biggest piece of the puzzle for electric bike manufacturing is making the motor and the battery domestically. The Giga Factory, that Tesla and Panasonic are collaborating on in Nevada, is part of that puzzle. Tesla needs to double the supply of lithium ion cells currently in production in order to meet production goals for the Model 3. Currently Tesla uses the 18650-cell format, as does the vast majority of e-bike brands. Tesla is currently building the Giga factory to make the new 2170 cell that will be more powerful and cheaper to produce and ultimately purchase. With batteries typically being the most expensive part of an e-bike, this will be a big win. (https://qz.com/879121/teslas-tsla-c...-the-perfect-embodiment-of-its-factory-model/)

Making the battery cases in the U.S. as well, would not be an issue. Injection molding is still a big industry in the U.S. The larger issue is the motor itself. To make efficient motors like the ones used on e-bikes, manufacturing companies need rare earth metals such as neodymium used in magnets. Toyota has announced that it may be able to use cheaper and more abundant metals in a new efficient motor. (https://www.bloomberg.com/news/arti...aper-electric-motor-by-halving-rare-earth-use) But at the same time, Tesla is going to start using neodymium in the Model 3 which will put a huge strain on the earths supply of the metal. China controls the rare earth metals market. However, there are REM mines located in West Virginia and elsewhere in the U.S that would need to be reopened and could be helpful to our security and manufacturing as well as U.S. fossil fuel issues. U.S. Senator Joe Manchin (D-WV) is working on efforts to reopen the REM mines. There is an executive order, however coal manufacturing is included in that order and most efforts are focused on that energy source. (https://www.washingtonexaminer.com/coal-industry-could-be-in-store-for-a-rare-earth-reboot) China does not export rare earth metals so we have no source for raw materials in the U.S. without our own mines.

The final big issue is large scale wage stagnation in the U.S. over the past 30 years. If the average American could afford a $5,000 e-bike, then there would be a bigger opportunity to make and sell them here.

Tariffs? What is a tariff and Who Pays For It?
Bottom line is, you do. Here are some numbers. A distributor buys 180 bikes in a 40ft container. They pay $750 for each bike. That is $135,000. Then add another $3000 shipping from China and customs clearance so it is now $138,000. The distributor sells that bike to the dealer for $1000. That means they make $180000 gross profit ($42k net) After overhead is covered for six to eight weeks to sell those bikes, the bike manufacturer or distribution company might net $5k to $10k. The dealer then adds 30% to 40% (the days of 50% are over) and that bike now costs a consumer $1,666 at top margin.

Now let’s add a 25% tariff. So that $138k container, will now cost the distributor $183k after it lands in a U.S. port. Each bike costs the distributor $1000. He sells it to the retailer for $1333. Add 40% and you get a retail price $2222. So, the tariff costs the consumer $556. I have heard people imply, including the president, that China pays the tariff. This is not true. I have seen some one mention on the forums here that companies are asking that Chinese companies to split it with U.S. companies. I suppose you can ask but they will say no. China sells products at around 5% above cost of manufacturing. They are reimbursed by the Chinese government through a VAT (Value added tax) and bonuses for high export numbers. It is a strategy for China to control the worlds manufacturing. Chinese manufacturers can’t afford to pay any part of the tariff. I have heard suggestions that Chinese manufacturers could supply false trade documents that are less than a distributor actually paid. This is fraud and the Chinese manufacturers will not take the risk. Chinese manufacturers do sometimes draw the line on how shady they will be. The only option is to manufacture e-bikes in Taiwan, Vietnam or Cambodia. Taiwan is more expensive (not 25% more but more) Vietnam has a few factories (owned by the Chinese mind you) but Vietnam is not ready to make all the worlds e-bikes. Cambodia makes bikes for Specialized and others , but Cambodia is not capable of manufacturing e-bikes on a grand scale. India is a viable option, but India’s quality is not where it needs to be to be competitive with Taiwan, China or Vietnam. All these moves take time and any of the countries may be the next target for U.S. tariffs under the current administration.

What the heck is a Free Trade Zone and could it be the answer?
Free Trade Zones are areas around the U.S. typically located near seaports or airports. A company can import duty-free goods into a free-trade zone and pay the duty or tariff when the product ships to customers. So instead of paying $40,000 when the product lands in port, a U.S. manufacturer can pay $1,000 when it ships four bikes to a local dealer. This helps cash flow. The real reason that free-trade zones were developed was to help bring assembly back to the U.S. The idea is this: say bike parts have a 10% tariff. If the bike comes in as unassembled parts, then final assembly is done in the free-trade zone, then a manufacturer can opt to pay the lower tariff of 10% when the product ships complete. The currently issue is that all bike parts carry the 25% tariff, so as of now, there is no lower rate to take advantage of. Originally, acoustic bikes (can’t take credit for the term but I like it) and parts were going to have a 10% tariff, but the cost was raised to 25% across the board. Missed opportunity for sure.

Final thoughts….
I would love to make bikes in the U.S. like my original predecessors did (many of whom I now call friends) and the young guns that are making awesome bikes here now. However, most of the “originals” had to make the move to China or they would not exist. Say at its peak, American Bicycle manufacturing employed 5k people. I base the number on how many factories there were at a peak in 1998. Right now, about 12k to 15k people work in independent bike shops in the U.S., and probably another 5k jobs in distribution. 17.6 million bikes were imported in 2015 that support these employees. Wal Mart is America’s largest retailer of bikes. About 200k were produced domestically in 2015 by 124 companies (probably less than 1000 people. 99% of those are small to medium sized operations with less than 5 employees and many are 1 or 2 person operations. (https://usamadeproducts.biz/vehicles-bicycles.html)

The real problem is the bike we all love, the e-bike. There is no feasible way to make affordable e-bikes here any time soon. Boutique, U.S. made, acoustic bike brands will see an uptick, and that is great. I am not sure the e-bike industry, as we know it, can survive the tariffs and I don’t know if the tariffs will change the landscape of domestic bicycle production. It hurts to be hit with a tariff just as the e-bike was taking off. A likely scenario if the tariffs persist is for the consumer direct model (see Rad Power Bikes) to expand and for the local bike shop to become more service oriented along with sales of accessories and consumables (tires, tube grips and chains) rather than complete bike sales. Not the end of the world to be honest, but it still makes me sad. There is a real joy in picking out a bike at a bike shop. One last statement, after 4 months of work on my distribution deal, it is currently on hold. My investor said everything looked great, but he is not interested in paying a 25% tax off the top on any product.
 
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fst

New Member
Chris, I can tell your 4-months was well spent and your post contained a lot of good information that should be of interest to other ebike owners. What you say about tariff structures and comparative costs between the US and its Asian trading partners is also very true. Personally speaking, I do not think the current trade tit-for-tat between the US and China is going to have a win-win outcome, more the reverse. In the near term, I think US ebike consumers looking to purchace an ebike only have two broad choices: a more expensive, but better quality ebike manufactured in Europe (some with Japanese components), or cheaper, lesser-quality ebike manufactured in China. Taiwanese manufactured ebikes with PRC-made components fit somewhere in-between. Some buyers of PRC made ebikes might take issue with what I am saying, but most would agree.
 

JRA

Well-Known Member
"Today you can buy a better hardtail for just $400."

Those would be fighting words on a vintage bike forum...:)

My findings don't concur with yours about the 2170 batteries however. Due to development costs and scarcity of supply, don't count on Tesla for any of their production and LG's is tied up to BMZ who does work with eBike manufacturers and has a US presence might be a source if you can afford their engineering, development and testing costs up front which are based on US wage scale.

Samsung 5A cells are becoming available but they are more per cell than their 3A 18650 at this time. There is a 2A difference and less batteries to build the same Ah rating but it still costs more at this time for the 2170 pack. It is my experience in the bike industry that the manufacturers get used to getting a price and rarely do any costs to the consumer lower from the original asking price unless the dealer takes the hit.

Thanks for the effort you put into your post.
 

MisterM

Active Member
"Here are some numbers. A distributor buys 180 bikes in a 40ft container. They pay $750 for each bike. That is $135,000. Then add another $3000 shipping from China and customs clearance so it is now $138,000. The distributor sells that bike to the dealer for $1000. That means they $180000 gross profit ($42k net) After overhead is covered for six to eight weeks to sell those bikes, the bike manufacturing or distribution company might net $5k to $10k. The dealer then adds 30% to 40% (the days of 50% are over) and that bike now costs a consumer $1,666 at top margin.

Now let’s add a 25% tariff. So that $138k container, will now cost the distributor $183k after it lands in a U.S. port. Each bike costs the distributor $1000. He sells it to the distributor for $1333. Add 40% and you get a retail price $2222. So, the tariff costs the consumer $556. I have heard people imply, including the president, that China pays the tariff. This is not true."

Not sure I follow your math. In your example, pre-tariff, LBS sells the bike for $1666, or $666 gross profit vs the $1000 they buy the bike from the distributor.

In your post-tariff example, you say that same bike sells for $2222 (vs the $1333 cost to the LBS), for a gross profit of $889 (an increase of $223/bike). Again, it's a rich 40% margin. But why would any LBS charge an additional $223 gross profit per bike if they worry about the effect of rising prices due to tariffs? If they kept gross profit per bike the same, they'd accept the $666 they'd make in the pre-tariff example and sell the bike for $1999 (sure, margin % would decline, but gross profit would stay the same, which is what matters).

However, the manufacturer, the distributor and the retailer would likely absorb some of the tariff cost in order to keep sales going and lower the overall cost to the end consumer IF they truly believe the end consumer is price sensitive.

In this example, the final post-tariff price to consumers would be somewhere between $1666 and $1999. How close to $1666 depends on how much fat can be cut and how price sensitive consumers are. I suspect there's a fair amount of fat based on the dozens of tiny, relatively inefficient, sellers out there. Economies of scale haven't yet driven the small/inefficient manufacturers out of business - yet.

My understanding is the 25% tariff doesn't fully kick in until Jan 1.
 
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erider_61

Well-Known Member
However, the manufacturer, the distributor and the retailer would likely absorb some of the tariff cost in order to keep sales going and lower the overall cost to the end consumer IF they truly believe the end consumer is price sensitive.

As was said earlier, the manufacturer has a marginal profit line and I doubt very much they will absorb ANY of the tariffs. Makes more sense for them to look for other markets as the US is small for them anyways.
 
"Here are some numbers. A distributor buys 180 bikes in a 40ft container. They pay $750 for each bike. That is $135,000. Then add another $3000 shipping from China and customs clearance so it is now $138,000. The distributor sells that bike to the dealer for $1000. That means they $180000 gross profit ($42k net) After overhead is covered for six to eight weeks to sell those bikes, the bike manufacturing or distribution company might net $5k to $10k. The dealer then adds 30% to 40% (the days of 50% are over) and that bike now costs a consumer $1,666 at top margin.

Now let’s add a 25% tariff. So that $138k container, will now cost the distributor $183k after it lands in a U.S. port. Each bike costs the distributor $1000. He sells it to the distributor for $1333. Add 40% and you get a retail price $2222. So, the tariff costs the consumer $556. I have heard people imply, including the president, that China pays the tariff. This is not true."

Not sure I follow your math. In your example, pre-tariff, LBS sells the bike for $1666, or $666 gross profit vs the $1000 they buy the bike from the distributor.

In your post-tariff example, you say that same bike sells for $2222 (vs the $1333 cost to the LBS), for a gross profit of $889 (an increase of $223/bike). Again, it's a rich 40% margin. But why would any LBS charge an additional $223 gross profit per bike if they worry about the effect of rising prices due to tariffs? If they kept gross profit per bike the same, they'd accept the $666 they'd make in the pre-tariff example and sell the bike for $1999 (sure, margin % would decline, but gross profit would stay the same, which is what matters).

However, the manufacturer, the distributor and the retailer would likely absorb some of the tariff cost in order to keep sales going and lower the overall cost to the end consumer IF they truly believe the end consumer is price sensitive.

In this example, the final post-tariff price to consumers would be somewhere between $1666 and $1999. How close to $1666 depends on how much fat can be cut and how price sensitive consumers are. I suspect there's a fair amount of fat based on the dozens of tiny, relatively inefficient, sellers out there. Economies of scale haven't yet driven the small/inefficient manufacturers out of business - yet.

My understanding is the 25% tariff doesn't fully kick in until Jan 1.

The tariff on e-bikes went into effect in August. I have worked the math to try to absorb some of the tariff and also have the bike shop absorb some of it. Bike shops are unwilling to take a lower margin (say 35%) on bikes at this price. Most of the competition is selling at 40%. There is really no fat to cut. Shops nor distributors are rolling in profit. Bike shops can't afford to absorb $223. Distributors typically make between 22% and 25% tariff to stay marginally profitable. Shops need to avg at minimum 40% across the store including service and accessories to bring home around 10% net. $223 is a lot for the avg shop. All companies that are made in China will be going up significantly as soon as the bikes that are landed pre tariff are sold. The only person paying is the consumer unless you include slower sales for distributors and retailers.
 
Chris, I can tell your 4-months was well spent and your post contained a lot of good information that should be of interest to other ebike owners. What you say about tariff structures and comparative costs between the US and its Asian trading partners is also very true. Personally speaking, I do not think the current trade tit-for-tat between the US and China is going to have a win-win outcome, more the reverse. In the near term, I think US ebike consumers looking to purchace an ebike only have two broad choices: a more expensive, but better quality ebike manufactured in Europe (some with Japanese components), or cheaper, lesser-quality ebike manufactured in China. Taiwanese manufactured ebikes with PRC-made components fit somewhere in-between. Some buyers of PRC made ebikes might take issue with what I am saying, but most would agree.

Many companies are trying to move production to Vietnam or Taiwan but the issue is that most of the factories are full and can't take on new clients and they are behind the Chinese on e-bikes. Many companies that have production in Taiwan for pedal bikes still have e-bikes made in China. The Asian market was not ready for a mass exodus from China. No one wins from an ill conceived and poorly implemented tariff structure.
 
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Many companies are trying to move production to Vietnam or Taiwan but the issue is that most of the factories are full and can't take on new clients and they are behind the Chinese on e-bikes.Many companies that have production in Taiwan for pedal bikes still have e-bikes made in China. The Asian market was not ready for a mass exodus from China. No one wins from an ill conceived and poorly implemented tariff structure.

Most of Shimano's parts are still made in China as is SRAM. Parts made outside of China are actually sold out for the next year according to what I am hearing through he grapevine.
 

JRA

Well-Known Member
So what about the tariff money being collected? Will that go towards setting up manufacturing of the tariffed goods here to compete. Ha ?
 
"Today you can buy a better hardtail for just $400."

Those would be fighting words on a vintage bike forum...:)

My findings don't concur with yours about the 2170 batteries however. Due to development costs and scarcity of supply, don't count on Tesla for any of their production and LG's is tied up to BMZ who does work with eBike manufacturers and has a US presence might be a source if you can afford their engineering, development and testing costs up front which are based on US wage scale.

Samsung 5A cells are becoming available but they are more per cell than their 3A 18650 at this time. There is a 2A difference and less batteries to build the same Ah rating but it still costs more at this time for the 2170 pack. It is my experience in the bike industry that the manufacturers get used to getting a price and rarely do any costs to the consumer lower from the original asking price unless the dealer takes the hit.

Thanks for the effort you put into your post.

You are correct on counting on Giga Factory in the near future but it is small progress towards having a U.S. Supplier
 
So what about the tariff money being collected? Will that go towards setting up manufacturing of the tariffed goods here to compete. Ha ?

It is funny you mention that. I have been asking myself where the money goes. There was a grant system people could take advantage of under the last administration that went to retool factories. It was ended early in this administration. I would love to see it go into a fund that people like myself could use to bring manufacturing back to the U.S. It will probably go to border protection or be allocated somewhere else in that department