A LOOK AT THE FUTURE: CLIMATE, COVID, GEOPOLITICS AND MORE

I have been reading a new book by Ari Wallach, a futurist and the founder and executive director of Longpath Labs titled Longpath that is all about “Becoming the Great Ancestors Our Future Needs.”

While I really want to become the ancestor my daughter, grandchildren and great grandchildren need, I have come to the conclusion they can’t wait hundreds of years as Wallach talks about because they need whatever guidance and advice I can offer today. I have reached the same conclusion concerning our clients and readers of this of newsletter.

The reason is both simple and complex. The growing climate crisis has hit hard this summer at a time the world is still struggling with COVID. Supply chain and economic ramifications have been exacerbated by the Russian invasion of the Ukraine, as well as increasing tension between the U.S. and China over Taiwan. The latter just happen to be the largest source countries to the North American bicycle business.

In addition, the U.S. bicycle business has experienced unprecedented changes and shifts in consumer purchasing, design and use demographics and preferences. It is also experiencing a slowdown in consumer demand that has created an inventory overhang and a wave of order cancellations upstream in the supply chain, as well as discounting downstream, as the country heads into the Labor Day weekend and back to school.

Lastly, the bicycle business is experiencing more product safety and liability allegations, coupled with standards and regulatory issues, than it has faced in over three decades.

Let’s explore these in more detail.

Climate change is real. Climate is a supply chain and marketing impediment here and now. The recent factory closings in China due to power grid problems caused by the recent heat wave are an immediate example.

After weeks of scorching heat in France, it is possible to take a stroll on the parched bed of the Loire River. Low water levels in the Danube have forced countries in Eastern Europe to start dredging to keep barges moving along the critical waterway. The Rhine has fallen so low that is has become uneconomical for many vessels to operate.

Companies' first concern might be which of their plants, or their suppliers', are exposed to the rising risks. Governments are focused on the threats to food supply. But this year's drought highlights the danger that the waterborne infrastructure of global trade itself will dry out or shut down as climate change intensifies.

About 80 percent of global trade is carried at some point by ships, with seaborne trade up nearly threefold in the 30 years to 2020. Global changes, including consolidation and larger ships have made the system more susceptible to disruption. Climate change, including storms, has added to this vulnerability.

Think it’s hot now? The map below is from the First Street Foundation, and was published by Bloomberg August 15. It shows a projection of 30 years from now, when more than 100 million Americans will live in an “extreme heat belt” stretching from Texas to Wisconsin. Temperatures in this belt will tip 125 degrees F at least one day a year.

At 125 degrees F humans, representing just under one third of the population, won’t be able to be outside to work, much less go cycling. The bicycle business, including bike shops, are going to develop the systems, products and outreach to advise the public when and where they can cycle for transportation and recreation.

On August 27 Bloomberg Green published an article titled Keep Cool that provides good advice from Japan about what to do when temperatures climb. “It’s natural to turn on a fan and enjoy its cooling breeze. But what if you could wear one? Dozens of companies are starting to embrace that idea, putting fans in clothing to help laborers, athletes and everyone else stay comfortable as climate change sends the mercury soaring.”

In Japan, jackets and vests with cooling technology have been used for years by construction workers. This isn’t air conditioned clothing. There’s only a fan, with nothing to actually cool the air, but the country’s infrastructure ministry recommends it for operating in extreme heat.

With heat wave intensity growing, so too is the need for a solution. In Japan the market for clothing that addresses hot days has grown to US $120 million over the past five years. That potential is pushing clothiers to retool utilitarian garments for casual and athletic outdoor wear.

Hundreds of fan-powered garments are already available online. Osaka-based Teijin Ltd. is working with an electric power tools maker and a textile firm to develop double-layer cooling jackets. Japanese clothier Aoki Holdings Inc. is offering fan-cooled vests tailored for outdoor activities and sporting events. Tokyo-based Kuchofuku Co. has partnerships with dozens of apparel brands such as Asics, Mackintosh Philosophy and Manatash. 

COVID continues to be a factor. In addition to the heat, COVID and its variants are a continuing threat to the down-stream supply chain. Like it or not, the U.S. bicycle business is going to have to get its arms around the fact that the pandemic has not yet transitioned to an endemic, and that rolling lockdowns of millions of Chinese workers, factories and supply chains are going to continue into 2023.

In addition, the variants of COVID-19 are still the source of work force shortages and delays in business and commerce in the U.S., and will continue to do so through the winter into 2023. Bike shops are on the front line and will have to adjust as needed to provide the best possible customer service over the next six to 12 months.

We can also expect ongoing supply chain disruptions. Ocean and domestic freight rates are coming down, and brokers in Hong Kong report receiving notifications of reductions in rates from Asia to North America multiple times per day (none that will affect the cost of the goods already in inventory).

The number of container ships waiting to enter the twin ports of Los Angeles / Long Beach is down to eight as of this writing, and freight is moving more expeditiously.

With this said, inventory within the bicycle business has been building since the second quarter of this year. Many importers are holding on to full containers and are even using them for storage, a practice employed throughout U.S. channels of trade. This has created a shortage of containers going back to Asia.

All this will continue to create disruptions, at a declining pace, to the supply chain from Asia going into next year.

We’re continuing to see price increases and rising costs. Price increases and rising costs of doing business have also been cascading through the bicycle business since late 2020, throughout 2021, and into this year.

Without going into the detail, suffice it to say the bicycle business has been buffeted by supply chain and logistics price increases, including punitive tariffs, inflicted on many other consumer goods categories during the pandemic-induced surge in demand.

On August 19 Bloomberg published an opinion piece by Jared Dillian titled “This Economy Is Proving Too Hard for Economists.”

The premise is that the data isn’t fitting Wall Street’s longstanding models very well, but that’s no reason to dismiss the data as outliers.

This article points out that “The latest buzzword among many economists and investors is ‘noise.’ It’s being used to refer to any piece of economic data that doesn’t fit the prevailing narrative, which is happening a lot these days.”

Dillian goes on to say, “Don’t get me wrong — this economy is proving hard to understand. It is very strong in some respects and very weak in others.” The official government data shows gross domestic product just shrank for two consecutive quarters, meeting the technical definition of a recession, but it doesn’t feel like a true recession.

Our takeaway is that everything happening in the economy right now is happening for a reason, but that it’s a reason many economists and investors are struggling to understand.

We agree that it will take quite a few years before all of this is sorted out and we return to something resembling a normal business cycle, if in fact we ever do. However, what we are going though may not fit the previously accepted “model” of a conventional business cycle. Once you accept that this is not a normal business cycle and view the data for what it is, then the unexpected begins to make sense, and not something to be dismissed as “noise.”

This also means those in the bicycle business will need to change the way they approach business planning, and account for the unexpected.

Geopolitical events have also risen to the level of black-swan events. The invasion of Ukraine has had an economic ripple effect on the European bicycle business and the global supply chain.

We reference it here primarily as it has impacted the U.S./China/Taiwan situation. It is also having a growing impact on European bicycle markets, as well as creating potential shifts in investment in North America and the U.S. supply chain going forward.

Before the Russian invasion of Ukraine, there was a high risk factor associated with maintaining China and Taiwan as major supply sources in the U.S. bicycle business.

After the invasion this high risk went through the roof. It may ease in coming months, but at the present time there appears to be more enthusiasm for the U.S. supporting and defending Taiwan against China in the U.S. Congress than there is in Taiwan itself.

This does help explain the executive branch initial response to Speaker Nancy Pelosi visiting Taiwan, and the subsequent difficulty the State Department has had with the follow-up visits by members of the House and Senate, and various state governors.

This is a disconnect that will hopefully abate in the short term (12 to 18 months). Until it does there is very high risk associated with continuing to rely on China and Taiwan as the primary source of complete bicycles for the U.S. market. It also subjects the U.S. supply chain to the added disruptions that are caused by such things as China “practicing” the blockading of Taiwanese ocean trade routes.

There also has been only limited progress made in shifting U.S. bicycle sourcing to elsewhere in Southeast Asia, and virtually none in near-shoring or reshoring to the U.S. This may change in the mid-term (12 to 18 months).

We are also seeing unprecedented changes in consumer purchasing, design and use demographics. The NBDA Bicycle Buying Consumer Research, conducted during the last quarter of 2021 and published in early 2022, has uncovered the shift in demographics of bicycle and their preferences in use, product configuration and future buying.

Well over a quarter of adult bicycle riders during the pandemic were new to cycling and had never ridden a bicycle before. This and other changes are also shown by the consumer research. This can serve as the foundation for bicycle business planning and merchandising going forward.

The pandemic sales and service surge abated during the fourth quarter of 2021, and this has continued into 2022.

As consumer demand as ebbed, the Bullwhip Effect has resulted in an unprecedented inventory overhang throughout the U.S. bicycle business. All channels of trade are holding more inventory than they have in the history of most of their businesses.

The cost of holding that inventory has also gone up in the form of interest rates, as the Federal Reserve has increased the prime rate. So, not only did the channels of trade pay more than they ever have for the inventory they now have, they are paying and will pay more than they ever have to continue to own that inventory.

Brands have been delaying and cancelling orders upstream to their OEMs. They have also been offering what incentives they can for their dealers to keep accepting orders placed during the surge when consumers were demanding all the product bike shops could get from their suppliers.

Consumer-direct retailers offered discounts and cut prices during most of the month of August. The lead story in the September issue of Bicycle Retailer and Industry News is “Time to discount? After years of inventory shortages, many shops are having to run promotions to get their stock back under control.”

And the August lead times from the leading component brands is into 2023! QBP just announced the laying off of about 6% of its global work force. The trade is beginning to see sales reductions and declines reported.

The situation is not good, but it also requires new thinking and actions instead of expecting that it will be jerking back to the way it was pre-pandemic.

In addition, the American bicycle business has gone over 30 years comfortably cruising along with its common line of defense and the relative disinterest of the regulatory agencies that have been drained of manpower and enforcement resources by successive administrations. The bicycle business in turn has relied heavily on the good quality and consistency of manufacturing practices of their Asian sources.

For those U.S. brands doing business in Europe, they have relied on their manufacturing sources and network of independent testing laboratories to provide the certification for Europe and the U.S. compliance and importation.

Insurance coverage also settled into a decades-long cycle of testing certification, paying premiums, and for the most part settling claims before they became litigations.

The bicycle business had also developed a common line of defense for bicycles through copyrighted owner’s manual content that was and continues to be available at very reasonable license fees to both industry association members and non-members.  

E-bikes were a small, almost insignificant product category prior to 2019 and the pandemic of 2020. Since that time, e-bikes have changed everything. The 30-plus year period of complacency ended as the sales surge picked up and drove e-bikes to become one of the most important product categories in the U.S. market, which the U.S. bicycle business was totally unprepared to deal with.

E-bikes are a “system” that includes a sophisticated electrical propulsion system that requires a whole different testing protocol and system certification process that is in addition to the mechanical bicycle safety standards of the federal government and the chemical content regulations of the state of California.

There is currently no common line of defense in the form of a uniform owner’s manual for e-bikes, nor a set of business practices that apply to bicycles as defined by the U.S. Consumer Product Safety Commission.

The National Bicycle Dealers Association (NBDA) has taken a leadership position relative to this situation and has issued protocols for the safe handling and storage of lithium-ion batteries for bike shops and consumers. It also has published the first set of uniform business practices relative to certification of testing to all applicable standards and regulations for bicycles (including e-bikes), and certificates of product liability insurance from suppliers.

With all these factors impacting the market, business planning is more important than ever. Human Powered Solutions (HPS) has developed a new form of business planning that is inclusive of the unprecedented changes, challenges and opportunities facing the bicycle business.

We are recommending and assisting in the writing and creation of a three-part planning process:

1. Shortplan – next 2 quarters (6 months). This focuses on realistic assessment for survival of the business and its profitability, productivity and financial management.

2. Midplan – next 4 to 6 quarters (12 to 18 months). This would examine realistic sourcing and merchandising, profitability, productivity and financial management.

3. Longplan – next 8 to 10 quarters (24 to 30 months). This would include realistic sourcing/merchandising, profitability, productivity and financial management.

Contact me if you have any comments, suggestions or questions about any of this: jay@humanpoweredsolutions.com