New High Grade Alloy Model from Giant and Merida Under $US 900? – Context and Possible Implications

by Sabinna on July 3, 2010

Andrew at Taiwan in Cycles recently posted on this week’s signing of a FTA between China and Taiwan, “ECFA“. He suggests that this will be good for the larger players such as Giant Manufacturing, and will put increasing pressure on the smaller companies. I’d briefly like to add some observations to this.

I have been talking to a lot of bike shops lately, in my capacity as a smaller manufacturer, many of whom are my dealers. Quite a few have been in business for almost as long as Taiwan has been producing bicycles and bicycle components. Some of them have said outright that the current slump in sales in Taiwan is the worst that they have ever experienced.

Yes indeed. Taiwan experienced a sustained “boom” in bicycle sales and has seen the consolidation of a broad-based cycling culture 2006-2009, peaking in 2008 and sustained thru the first half of 2009. Since then things have gone very quiet. Industry projections for this year were in the vicinity of 800,000 units. You have to really wonder. I’ll be interested to see the actual figures as they become available later this year.

I had a chat yesterday evening with one such shop located in one of Taipei’s satellite cities, San Chong. Let me point out that this is just hearsay, a whisper on the wind, pure rumor. I’m not one to stoke the fires of rumor but this does sort of make sense.

Mr. Hsu reported hearing that at least 40 bike shops in the greater Taipei area had shut up shop in the last few months. He suggested that many of these would have been recent entrants to the market who came in to make some quick money on the back of the recent boom. Their demise is likely to continue before things get better.

He also mentioned that Giant and maybe Merida are in the process of putting together a high grade alloy frame road bike with the new S 105 package. The price would be around $US900 (at today’s $US/$NT exchange rate) puts it around $US300 cheaper than the recently introduced TCR Composite 1 (see also further thoughts on this). It is certainly a buyer’s market at the moment and if this comes to pass, it will just get more so. As I pointed out in the first of these articles, the dealers who will also be put under pressure are the Giant dealers themselves, as they struggle to move existing inventories.

Anyhow, one opinion of ECFA is that the benefits will appear within one year. The real issue, of course, is that costs and benefits will be distributed in various ways. In relation to Andrew’s point, and to put it another way, comparative advantage is good if you are in a position to leverage the advantages. A company like Giant is well positioned in this regard.

You can survive in business without a profit, one saying goes, but you cant survive without a cash flow. The shops that can survive (most will of course) will do this through a high level of service, as in bike maintenance and component upgrades. They can ensure cash flows in this way.

And on the subject of components, many suppliers are doing pretty well, considering the situation, just on the back of moving components. If EFCA-influenced prices come down here, volumes will probably rise, but that does not mean profits will. And that’s an SME’s reward for work put in.

Another point in the article concerned Taiwan as an export oriented economy. One of  Stephen Roach‘s many observations in his compilation of analyses written over the last few years, The Next Asia, makes the case for achieving a balance between a domestic focus and the export sector (specific case here is China’s over-reliance on exports and weak domestic economy and the US’s unsustainable ‘love affair’ with consumption).

This perspective could be applied to Taiwan as well. Hopefully a positive effect of ECFA will be the stimulation of Taiwan’s domestic economy as a counter-balance to what appears to be our export oriented approach. That would hopefully help the smaller players get greater leverage from comparative advantages opened up by the agreement.

On a final note, Taiwan’s economy was almost overheated and was downgraded from Red to Yellow-Red in May. With unemployment at a 17 month low, and consumer confidence hitting a six year high, it’s an interesting question as to why the domestic bicycle business is not benefiting. If this rumor about a sub $900 bike is true, it’s sure not going to help.

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