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Lower Rebates Force Suppliers to Raise Prices

Published October 16, 2007

BY JOHN CRENSHAW

BEIJING, China—The Chinese government tossed a big rock into the international trading pond with a recent change to its tax structure, and the ripples are already rocking the bike
industry’s boat.

The core change affecting the U.S. bicycle industry was a big reduction of the rebate on value-added tax (VAT) that China allows on more than 2,800 product classifications of exported goods, including bikes and bike parts. Everyone in the supply chain will likely be affected, said Michael Tseng, executive vice president of Merida in Taiwan.

“I think the VAT export tax rebate reduction will have a big impact over the whole bicycle industry, and price increases from suppliers are inevitable,” he said.

“Since it’s a VAT export tax rebate reduction, most of the bicycles and components will suffer from this change, and we expect price increases from many suppliers. It will inevitably result in the increase of retail prices in
all the markets,” Tseng added.

Predicting specifically how much is difficult, but most observers believe it will shake out at around 5 to 6 percent
at retail, on top of whatever other increases stem from other causes—whether improved products, higher labor, energy, materials and shipping costs, or the rising value of China’s currency.

Chinese manufacturers typically pay a 17 percent value-added tax on products they buy within China, but until recently got it back when they exported the goods. About two years ago, the Chinese government began keeping 4 percent and rebating 13. As of July 1, it’s keeping 8 percent and rebating nine on many products, although it cut rebates on some goods more and a few by less.

China supplies more than 90 percent of the U.S. bike market, and brands here are already feeling the effects or
will shortly. Some factories may negotiate something other than the 4 percent, but hardly anyone will escape, said Joe Vadeboncouer, director of product development for Trek.

“The bike makers are first to react to these things, and we’ll see that 4 percent VAT change passed along to us in
some form or another,” he said.

“We’ve already received letters from suppliers in China informing us of that price change. So we’re dealing with that and it most definitely will be reflected in higher prices,” he added.

Trek went back to its spread sheets and will factor the new costs into 2008 models it introduces this month.

Bob Margevicius, vice president at Specialized and an old China hand, headed straight to Asia when the news hit. “My strategy was to go out and try to proactively communicate, saying ‘Let’s cooperate as partners and determine how we’re going to manage this to minimize the overall cost impact,’”
he said.

Like Trek, Specialized is introducing ’08 product now. The company will also resist any temptation to downgrade spec to maintain a price point, he said.

“We won’t be changing component content or in any way altering the integrity of what we’ve created. We’ll increase our prices to reflect this cost increase,” Margevicius said.

He noted that 4 percent is only a starting point, multiplied incrementally through the supply chain as duties apply to the higher value and each entity in the chain tries to hold its margin.

Pacific Cycle, the United States’ biggest bike importer, is negotiating with suppliers now and expects that the company,
its manufacturers and customers may each absorb part of the
price changes.

“I don’t see us taking a full 4 percent. Also, we won’t see any price increases this year; we’ll hold everything off until after the first of the year,” said Jeff Frehner, Pacific’s chief executive officer.

“It will affect the mass side of our business more than the IBD side. Thankfully, the independent dealer side is growing substantially, so it’s not as big a hit as it could have been,” he added.

Shimano reacted swiftly, reportedly messaging customers that it could not absorb this increase. Effective Aug. 1, it ticked up prices—on Chinese-made exports only—according to the rebate change. That’s 4 percent on components and 2 percent on cycling wear and shoes. Shimano was still studying what it will do with chain prices. Devin Walton, press spokesman for Shimano American, was unable to confirm those percentages in mid July.

The changes will primarily impact original equipment manufacturers, since most aftermarket Shimano components
are made outside China.

Taiwanese manufacturers not only have factories in China but also import substantial numbers of frames, forks, parts and components from China, said Louis Chan, president of Ideal Bike, who’s negotiating with his suppliers and will soon be talking with his customers.

He predicted that bikes under $200 FOB—which translates to about $600 retail—often contain about 50 percent Chinese parts and will be most affected. At price points above that, most components come from Japan, Malaysia or Singapore, he said.

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