“The golden age of globalization that we experienced in the last 30 years since the end of the Cold War has ended clearly and we are entering a new era, a new era that will be marked by greater geopolitical contestation,“ said Singapore’s Deputy Minister for Finance Lawrence Wong at the Forbes Global CEO Conference September 26.

Singapore has been an important manufacturing location in Asia for Shimano bicycle components. The company established Shimano Singapore Pte. Ltd. in 1973, and a sales office for all of Asia in 1996.

Wong’s opinion was taken very seriously by the attendees at the conference, and the members of ASEAN, the Association of Southeast Asian Nations of 10 states including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, half of which have become source countries for bicycles as brands moved sourcing from China starting just before the pandemic.

Wong’s statement kept coming back to me since I first read it. The company I worked for, Schwinn, had reached out to the global supply chain during the Bike Boom from 1971-1974 to import up to 250,000 lightweight Schwinn-approved bicycles from Japan to supplement the 1 million bicycles it produced in the U.S.

After the Bike Boom and during the shakeout from 1975 to 1980, Schwinn found itself in a financial situation that resulted in totally shutting down domestic production and out-sourcing 90 percent of its products to Giant in Taiwan, taking full advantage of globalization.

Ten years later, Schwinn followed the Taiwanese bicycle industry and globalization in sourcing in China. Several bankruptcies followed Schwinn over the next 30 years, until the brand was acquired as a part of PON Holdings acquisition of Dorel Sports from Dorel Industries in October 2021.

When the pandemic started in March 2020, the American bicycle business was totally import dependent, and 95 percent of all bicycles sold in the country were imported, primarily from China. In other words, the American bicycle business was totally dependent on globalization and the global supply chain.

COVID-19 accelerated changes in both the world and the American bicycle business. I have described the industry of the last 20 years as a pleasant place that changed with the seasons, but with very little of any real disruption beyond that. Rick Vosper has accurately described the state of “perfect competition” that prevailed from 2000 to March 2020.

The bicycle business in the U.S. became comfortable with Chinese holidays and planned its activities, including model year changes, around the Lunar New Year. Lead time for finished goods was a consistent 45 days from date of a firm order to sealing the container at the factory. Ocean freight rates and in-transit times fluctuated within a narrow band of predictability, with the occasional labor dispute, storm in the Pacific or economic hiccup.

You may have heard of the McDonald’s theory. It goes like this: where we have McDonald’s everywhere, the more we trade and invest in each other, the more we tamp down geopolitical rivalry and the less likely there will be contestation and war. This also served as a way to explain globalization. After March 2020, the McDonald’s theory became history and ushered in the end of the golden age of globalization with the pandemic induced by COVID-19, followed by the invasion of the Ukraine.

A fundamental change in the way the world works is underway, including product sourcing. Countries have not fully retreated into protectionism, but businesses are being increasingly influenced by geopolitical tensions leading to friend-shoring, near-shoring and re-shoring, all intending to shorten supply chains and bring manufacturing closer to consumers.  

It is ironic that Taiwan is still the center of the American bicycle business in Asia that leads China and the other ASEAN countries, while the geopolitical tension between Taiwan and China have triggered near-shoring, including interest in Chinese manufacturing enclaves in Mexico.

Some things that COVID broke can be fixed, but others are changed forever. The supply chain is still screwed up, primarily by China’s COVID zero-tolerance policy that has worn out its people with sporadic lockdowns affecting millions of people, workers and factories over the last 31 months, with no end in sight. Bicycle manufacturing facilities, component supply and raw materials are all affected, as are ports of entry and related U.S. logistics. The supply chain is one of the things that will be fixed, or at least will get better over time.

Lead time will be an early indicator of the supply chain getting better. I still marvel at the ability of the bicycle business to seemingly ignore the inventory that has been amassed in what I believe is every nook and cranny that the global bicycle supply chain has possessed, caused to be constructed, and has leased and rented over the last four quarters.

I have already related the observations of a friend who attended Taichung Bike Week and reported hoarding of components by OEMs. Firsthand reports describe domestic warehouses filled to capacity with finished goods, and recent specialty bicycle retail channel inventory reports of five units in inventory for every one being sold at retail. These trends are not showing up in the American trade press, but they do foretell what we predict is a shakeout that is already underway as lead times begin to melt away.

One of my HPS partners told me last week about a large dealer who recently sold all of their excess inventory of a top-tier component brand for about 10 percent over cost. The transaction was with another dealer who came in and handed over cash. The dealer who sold the components enhanced cash flow. The dealer who purchased the components has an opportunity to realize an above average profit and still sell below MSRP. This is an example of a component brand and its distributors having lost control in the marketplace, which is part of the definition of a shakeout.

Shipping costs from China to the U.S. have plummeted. Despite the erratic behavior of Chinese-based sourcing in the short-term, shipping costs for containers from China to the U.S. have plummeted recently. Ocean shipping companies have responded by cancelling dozens of sailings, adding to the uncertainty, although at a lower cost. It should also be noted that lower shipping costs will not reduce the landed cost of the goods already in U.S. inventory.

The New York Fed measure of global supply chain pressure, which is an index weighing delivery times, backlogs and inventories, is back down to levels last seen at the end of 2020.

Labor disputes still simmer. One of the rail worker unions has rejected the tentative agreement worked out by the Secretary of Labor and the White House, so there is now a renewed degree of concern about a settlement, dialing up the uncertainty.

There is still no labor contract between the U.S. West Coast ports and the dockworkers, and the Secretary of Labor reports a settlement is moving forward. There are also no current threats of work slowdowns or stoppages. However, this is another pain point on the uncertainty index. Stay tuned.

Warehousing has peaked in the sense that U.S. bicycle brand finished goods and aftermarket warehouses appear to be full to overflowing, as is contract and leased warehouse space. However, the demand overall has slowed, and the big players like Amazon are pulling back on expansion plans, as well as cancelling some warehouse and distribution center construction.

Inventory is too high. As we have said several times, bicycle finished goods inventory in the U.S. is high, but not balanced because certain models and categories are still either out of stock or in short supply. Top tier brands are informing their dealers that backorders still cannot be canceled, as they are taking in the shipments they could not cancel or change, and begin to roll out 2023 model offerings.

With this said, it now appears that brands and suppliers have dramatically slowed and adjusted orders and in-bound shipments, and are focusing on reducing the inventory they have built up since the last quarter of 2021 and into the first half of 2022.

Inflation is also driving global markets, economies and consumer demand. The Institute of International Finance calculates that inflation is now driven by the energy shock from the Ukraine war rather than the cost of supply disruption.

The bicycle business stands out as an early indicator of reduced consumer demand beginning the last quarter of 2021, at a time when consumer purchasing was shifting from goods to services, but remained robust in the face of the highest inflation in decades.

Jennifer Bisceglie, CEO of the supply chain consultancy Interos, says it’s about buying behavior. “First, consumers don’t need the same hard goods: they’re back doing travel, they’re back to buying services. The second is there’s so much uncertainty in the economy and there’s inflation. The third is that companies are sitting on inventory and so there isn’t the same throughput.”

What this amounts to is that bicycle brands and their dealers paid the highest prices they have ever paid for finished goods, as well as the highest cost of shipping that they have ever paid, and many of those goods remain in warehouses unsold because consumer demand has receded to the lowest level since, we are told, 2015.

Shakeout is a term used in business and economics to describe the consolidation of an industry or sector, in which businesses are eliminated or acquired through competitive pressure. 

HPS is of the opinion that the American bicycle business has entered a shakeout that could last from three to five years. This coincides with the end of the golden age of globalization, and the new era of realignment and reconfiguring bicycle business supply chains to supply networks or supply ecosystems, as Alan Beattie, author of the Trade Secrets newsletter, has opined.

Shakeouts can often occur after an industry has experienced a period of rapid growth in demand followed by over-expansion by brands and retailers.

In short, a shakeout is a business situation in which people lose their jobs, and companies go out of business, because of economic difficulties.

There is good news in the new adult bicycle riding participants who started cycling for the first time on the bicycles they purchased during the pandemic. However, purchases have slowed appreciably, and there is no indication of when they will either resume or increase.

The NBDA consumer research published this year has provided insight into both the new adult cyclists and returning adult cyclists. Future consumer research conducted by the dealer association will bring clarity to the questions of what bicycles adults will purchase and when going forward.

E-bikes have changed the rest of the game. What the current NBDA consumer research does clearly show is that e-bikes have changed and expanded bicycle design and style, one-step distribution focusing on direct to consumer (DTC), as well as sophistication and technical complexity, including risk management of electrical propulsion systems.

Just as the golden age of globalization is ending, and that “pleasant place that changes with the seasons” fades away, the American bicycle business is entering a new era of supply networks or supply ecosystems, propelled forward by e-bikes and the new bicycling consumer that they have brought to the marketplace.

Contact Jay Townley: jaytownley@humanpoweredsolutions.com