THE HPS MAY LETTER: BIG TRENDS FOR APRIL 2023

4/07/23 Can we call monetary policy a “blunt tool” anymore … Marketplace. The Fed raised interest rates from basically zero to about 5 percent in the past year, but the unemployment rate is still historically low. Can we call monetary policy a “blunt tool” anymore? Maybe it’s just dull and rusty. Fitch Rating economist Olu Sonola told Marketplace he started wondering whether COVID has messed with macroeconomic theory the same way it’s messed with downtown office buildings. “What the pandemic has done is introduce a number of variables and elements into the equation that the people who wrote macroeconomic textbooks just didn’t think about,” he said. Most econ textbooks don’t have chapters on revenge travel, boomer retirements, or long COVID, which have kept labor demand higher and supply scarcer. Anil Kashyap, a professor at the University of Chicago’s business school said part of this is just delayed pain. Multiple companies are still paying workers with the help of low-interest loans they took out before rates spiked. “There’s a bunch of businesses that have loans and bonds that were about zero that are going to need to refinance,” Kashyap told Marketplace, and “when they do, they’re going to face a much higher cost of capital.” HPS Analysis: Peter Drucker warned: “The greatest danger in times of turbulence is not the turbulence – it is to act with yesterday’s logic.” Olu Sonola may be among the economists who have figured out that the pandemic did introduce a number of variables that not only make it impossible to go back to the way it was, but have made the tools employed by the Fed to tame inflation less effective. Add to this the bicycle businesses that took low-interest loans to finance high-cost inventory, paid outrageous transportation costs, and acquired premium warehouse space. Many of these companies are now facing a pile of excess inventory that is going to have to be refinanced at much higher interest costs, if the businesses can even find the required refinancing. This all leads to the potential for long term turbulence.

4/08/23 The very busy ports of Los Angeles and Long Beach are effectively shut down … LAist. The ports of Los Angeles and Long Beach were effectively shut down April 7 because of worker shortages. The lack of activity at the ports – typically some of the busiest in the world – comes as contract negotiations have been underway for months. Shipping operators say the shutdown is because of a work stoppage by union dockworkers, but the union disputes that claim. The Pacific Maritime Association (PMA) put out a statement April 7 saying that the ports had been effectively shut down after the International Longshore and Warehouse, Local 13 (ILWA) union took a “concerted action to withhold labor” at the ports the nights of April 6 and the morning of April 7, leading to widespread worker shortages. According to the PMA, the lack of workers the night of April 6 meant “a majority of the jobs for last night’s shift went unfilled, including all jobs for cargo-handling equipment operators needed to load and unload cargo.” The ILWA, which represents 22,000 members at 29 West Coast ports, says its workers are not withholding labor. In a statement, union officials said that on the night of April 7 thousands of dockworkers attended a monthly union meeting, which they said in a statement is a “contractual right.” The said workers took April 8 off to observe religious holidays. HPS Analysis: During the last quarter of 2022, the shut-down of the two busiest ports on the West Coast would have been national news with headlines in every major media source in the country and statements from the White House. The fact that this was not headline news, and went almost unnoticed, is testament to how much the economic situation has changed in the first quarter of 2023. Overall consumer demand has ebbed, and as a result imports have subsided, and the pressure on the supply chain has deflated to the point that the shut-down of the two busiest ports for imports into the U.S. didn’t raise an eyebrow anywhere, including the bicycle business. The dockworkers contract expired in July 2022, and negotiations have obviously gotten a bit testy, but the greatly-reduced pressure on the supply chain will lead to a new contract by this summer.

4/10/23 The fastest-growing industrial production line in the U.S. right now may be the building of the factories themselves … The Wall Street Journal Logistics Report; Assembling Factories. Construction spending related to manufacturing reached a record $108 billion in 2022, with new factories rising in urban cores and rural fields, desert flats and surf towns. The Wall Street Journal reports that much of the growth is coming in high-tech fields like semiconductors and electric-vehicle batteries that are backed by government incentives. But it is also being driven by companies that once relied exclusively on lower-cost countries for manufacturing and now are responding to shifting supply-chain imperatives. Such companies and brands are found in apparel and the bicycle business. Arnold Kamler, CEO of bicycle company Kent International, which started assembling bicycles in South Carolina in 2014 from Chinese-made parts, is quoted as saying, “We are hoping some of our competitors will join us in producing bikes here, which would encourage more companies to make the component parts here.” HPS Analysis: Reshoring, as HPS has opined in this newsletter, is difficult at best. Kent International is a supplier to Walmart, and responded to the largest retailer of bicycles initiative to support American made products by working with the state of South Carolina to open Bicycle Corporation of America (BCA) in 2014 as the largest bicycle assembly operation in the U.S. It has been a struggle, including the imposition of punitive Section 301 tariffs on imported componentry from China. While Kent still imports the majority of the complete bicycles it sells to Walmart from China, it has sustained BCA, and is working hard at encouraging Japanese, Taiwanese and Chinese component manufacturers to commit to manufacturing facilities in the U.S. that will be the foundation of reshoring bicycle manufacturing. The quicker the whole of the American bicycle business joins together to make this happen, the quicker reshoring of bicycle manufacturing will become a reality.  

4/10/23 Banks are spooked and getting stingy about loans – and small businesses are suffering … NPR Economy. Weeks after the collapse of two big banks, small business owners are feeling the pinch. Bank lending has dropped sharply since the failures of Silicon Valley and Signature Banks. That not only hits businesses, it also threatens a further slowdown in economic growth while raising the risk of recession. Credit, after all, is the grease that helps keep the wheels of the economy spinning. When credit gets harder to come by, business starts to squeak. Even before the two banks failed last month, it was already more costly to borrow money as a result of the Federal Reserve’s aggressive interest rate hikes. Other lenders are now getting even stingier, spooked by the bank runs that brought down Silicon Valley Bank and Signature Bank. The Federal Reserve Bank of Dallas surveyed 71 banks late last month, and found a significant drop in lending. Weekly loan data gathered by the Federal Reserve also shows a sharp pullback in credit. HPS Analysis: The SBA defines a “small” retail business as one doing $7.5 million in annual gross revenue or less. This means the vast majority of bike shops in the U.S. are “small” businesses, and if they rely on a line of credit from their local bank, they need to communicate their requirements going forward and determine (1) if they will be considered eligible for a loan and/or line of credit and, (2) if their bank will have the liquidity to offer loans to “small” businesses and, (3) if they will be able to afford the interest rates that their bank is going to charge. It is a balancing act, and bike shops and “small” suppliers will need to watch their financials carefully to maintain revenue coming in balanced against the cost of doing business, and maintaining a positive cash flow as consumer demand and economic conditions evolve between now and the rest of this year.  

4/11/23 Pon.Bike turnover doubles to €2.4 billion in 2022 … Bike Europe. According to Bike Europe, 2022 was a historic year for Pon Holdings with sales exceeding €10 billion (euros) for the first time in the company’s history. The bicycle cluster, Pon.Bike, contributed significantly following the acquisition of Dorel Sports and the ever-increasing demand for e-bikes. CEO Janus Smalbraak also states that order books are currently full. The article goes on to state that the revenue of the bicycle division almost doubled from €1.3 billion in 2021 to €2.4 billion in 2022, due mainly to the acquisition of Dorel Sports, which was bought for US$810 million (€740 million) in early January 2022,  about 14 months ago. Pon is now considered the largest bicycle manufacturer in the world. Pon.Bike has given the starting signal for the construction of a state-of-the-art bicycle factory in Lithuania, where around 500,000 e-bikes and other bicycles will be produced each year. In addition to the manufacture and sale of bicycles, Pon.Bike is also active in parts and accessories, and new services such as leasing and subscriptions. Smalbraak is quoted as saying, “The hefty investments in cycling infrastructure, particularly in Europe and the U.S., will continue to give the sale of e-bikes, in particular, extra support. The economy faces headwinds in 2023, especially in Europe and the U.S. Economic slowdown will also affect us, as well as the still faltering delivery of parts here and there. At the same time, we have started the year with full order books for our automotive, bike and equipment and power divisions.” HPS Analysis: Pon is a privately held company, and this kind of detailed financial information is not normally available to the public. Smalbraak has been interviewed in Australia and Europe, and has been very forthcoming in discussing their Pon.Bike subsidiary. Bike Europe declaring that Pon.Bike is, by their calculations, “… the largest bicycle manufacturer in the world” is significant. Cannondale is the Pon.Bike brand competing as a multinational with Trek, Specialized and Giant. While Trek owns two bicycle manufacturing plants in Europe, it is still Giant’s largest OEM customer, and is dependent on OEMs in Asia for most, if not all, of its branded bicycles and e-bikes sold in North America. Specialized is 49 percent owned by Merida, the second-largest OEM in Asia, and the source of a large percentage of Specialized brand products sold in North America. Giant Manufacturing Company has been considered the largest bicycle manufacturer in the world, and all of its brand name bicycles and e-bikes sold in North America are imported from Asia. The bottom line – currently none of the top four specialty bicycle brands, Trek, Specialized, Giant, or Cannondale, are manufactured or assembled in the U.S. However, when Pon acquired Dorel Sports, it also acquired a warehouse and assembly facility under construction in Savana, Georgia. That facility has since been completed by Pon.Bike, and is currently operating. Pon.Bike owns 17 bicycle and e-bike brands, and it is just getting started in the U.S. Pon.Bike may be able to convince Asian and perhaps European component manufacturers to come to the U.S., and with Kent International, may represent the financial investment in the U.S. market that will foster reshoring of bicycle assembly and manufacturing.

4/12/23 Uber is funding an e-bike trade-in program to curb battery fires … CNN Business. Uber is funding a new program that aims to get electric bikes with dangerous non-certified lithium-ion batteries off New York City streets. The company said April 12 that it will soon allow the thousands of New York City delivery workers who use e-bikes the ability to trade-in their bikes for newer, safer models. The news follows a string of fires caused by lithium-ion batteries. Part of the issue is that not all lithium-ion batteries are created equal. UL-certified electric bikes and scooters from reputable retailers undergo extensive battery safety tests. But other online marketplaces, which some delivery workers may have turned to for more affordable options in the absence of company-provided options or subsidies, often make it hard to tell the origin of these products, and the quality of their batteries. To get more UL-certified e-bikes on roads, Uber is now partnering with e-bike company Zoomo to offer credit to delivery workers willing to swap their existing e-bikes for ones with higher-quality batteries. It will also offer rent-to-own pricing models and priority access to repairs and services. Uber is also piloting a trade-in program with The Equitable Commute Project, a non-profit, to provide a discounted UL-certified e-bike in exchange for a noncertified e-bike. HPS Analysis: Uber is funding a trade-in program that can actually work to prevent lithium-ion battery fires. Much of what the New York City Council has passed into laws that take effect on or about September 16, 2023, are going to be difficult to enforce, and are forward-facing. They will do little or nothing to eliminate the noncomplying bad actors that are already in use, and that will be shipped into N.Y. City over the next five months, and pose the most risk. The Uber trade-in program will get these noncomplying bad actors off the streets and into a recycling program where they will no longer present a risk to public safety. The American bicycle business and its trade associations need to offer as much assistance to Uber as possible to make this program a success.

4/14/23 Industry groups react to Congressional scrutiny of de minimis … Sourcing Journal. Industry trade groups are addressing concerns raised in a congressional letter to the Department of Homeland Security, which fingered companies like Shein and Temu for exploiting the de minimis “loophole” that allows smaller shipments from China to enter the country unchecked. Under Section 321 of the Tariff Act of 1930, as amended by Congress and signed into law by President Obama, overseas makers can send shipments valued under $800 to a shopper’s doorstep without having to report data on county-of-origin or manufacturer. It is estimated that 2 million direct-to-consumer (DTC) shipments a day, or 730 million per year, are entering the U.S. annually under the de minimis exception with no customs inspection, and paying no duty or tax. The letter underscores the rising alarm on Capitol Hill about the issue, focusing primarily on the issues of forced labor coming out of Xinjiang province in China. In addition to Shein and Temu, Amazon and the Footwear Distribution and Retailers of America (FDRA) are supporting the de minimis exception, and cautioning Congress from harming American shoe brands and consumers by doing away with de minimis or reducing the allowable value. HPS Analysis: The problem for the American bicycle business is the number of low-cost dodgy e-bikes, and more importantly replacement lithium-ion batteries and chargers, that are coming into the U.S. DTC under the de minimis exception. The lobby for continuing the de minimis exception with the current $800 value is well funded by some very large companies. PeopleForBikes (PFB) has come up with an excellent suggestion to simply add e-bikes, lithium-ion batteries and chargers to the list of items exempt from de minimis, allowing the shoe retailers and clothing brands to continue DTC sales. HPS and others believe the low-cost dodgy e-bikes and replacement lithium-ion batteries and chargers entering the U.S. DTC under the de minimis exception are the primary cause of the fires and deaths in New York City and elsewhere in the U.S,. and urge the bicycle business to get behind the PFB initiative. 

4/18/23 U.S., allies, weigh how to reduce economic ties with China … Wall Street Journal Economy. The U.S. and its allies are grappling with how to pare their economic relationships with China, attempting to limit ties in certain sectors they view as strategic, while preserving broader trade and investment flows with the world’s second-largest economy. The Group of Seven (G-7) advanced democracies, consisting of the U.S., Canada, France, Germany, Italy, the U.K. and Japan are, growing concerned that China, a dominant supplier of many goods and materials, could cut off key exports in the event of a conflict or another pandemic, as Russia did with natural-gas exports during the war with Ukraine. “So the lesson from that for all of us has been: Let’s do that hard work now on the front end,” said Wally Adeyemo, deputy Treasury secretary. The International Monetary Fund (IMF) released a report the week of April 10 echoing its previous warnings against carving the global economy into competing geopolitical blocs by the U.S. and China. Such a split would lower global trade and growth, the multilateral financial organization warned. New laws enacted last year offer major subsidies to lure key clean-energy and semiconductor technology companies into the U.S. The administration has restricted the export of advanced semiconductors and related equipment into China, and is preparing new curbs on investment in the country. HPS Analysis: The G-7 is way above the reach of the bicycle business, currently import dependent, with the majority of imports originating in China. The twist is the majority of the Chinese bicycle/e-bike export manufacturing to the U.S. is still owned or controlled by the Taiwanese. It is now well known that China considers Taiwan, an independent democratic island, a part of mainland China, and has threatened invasion to get it back. With this said, high-end bicycle products consumed in the U.S. originate in Taiwan, and mid- to low-priced products originate in Chinese manufacturing facilities. An example is Giant Manufacturing Co., a Taiwanese public company headquartered in Taiwan, has seven manufacturing facilities in China. Bicycles and related components and accessories certainly aren’t semiconductors or microchips, but they are an important non-tech industry to Taiwan. The G-7 focus on China and the growing anti-China political actions on the part of the U.S. make it vitally important for the whole of the American bicycle business, including all channels of trade, to join together in supporting a near-shoring and re-shoring initiative. 

4/18/23 This is what Americans really think about climate change … Electrek. Pew Research Center surveyed nearly 11,000 American adults in March and the results revealed how Americans view climate change. Nearly 7 in 10 Americans (69 percent) want the U.S. to take steps to reach net zero by 2050, thus adhering to the Paris Agreement. The same percentage (69 percent) also wants the U.S. to prioritize developing renewable energy over fossil fuels. Two-thirds of Americans said that big businesses and corporations aren’t doing enough to reduce the effects of climate change. Of Americans, 58 percent feel their state elected officials aren’t doing enough, and 55 percent believe that the energy industry isn’t doing enough to address climate change. Around 50 percent of Americans think they’re personally doing enough to help reduce the effects of climate change. Americans’ political affiliation, and whether they acknowledge climate change, is a serious problem that affects how they perceive climate impacts at the local level. With this said, Pew found that the majority of Americans are wary of moving completely to renewable energy. Around 3 in 10 (31 percent) want the U.S. to completely phase out fossil fuels. Adults between the ages of 18 to 29 are more open to the idea of phasing out fossil fuels altogether. HPS Analysis: Tell me if you think HPS is wrong in thinking that climate change and weather are two of the 10 most important topics for, and influencers of, the bicycle business going forward. I have not yet witnessed the American bicycle business declare its 100 percent support for the Paris Agreement, and embrace all aspects of sustainability. But as Gen Z gains more influence and purchasing power across the economy, the bicycle business, like all businesses, will have no choice if it is going to remain relevant to consumers. The current economic situation affords the bicycle business a huge opportunity to break-away and get out front on environmental issues and initiatives.

4/19/23 Utah is in a state of emergency as melting snow is likely to cause months of flooding … NPR Weather. A state of emergency was issued in Utah April 18 by Governor Spencer Cox after record levels of snow have started to melt, causing flooding. The melting could continue for months and cause avalanches, landslides, mudslides and rockslides, the governor’s order said. The Utah Division of Emergency Management has already deployed more than 1 million sandbags throughout the state to prepare for the flooding. HPS Analysis: Utah is a great place for bicycling, and months of flooding has the potential to keep too many bicycles in storage. The bicycle business can’t do anything about the snow-melt induced events, but it can tap into the National Weather Service (www.weather.gov) and provide up-to-date advisories to bicycle retailers and riders in and around the state of Utah to avoid hazards, and direct them to safe routes and trails to ride. The National Weather Service Climate Prediction Center Long Range Forecasts are posted regularly, and provide 8- to 14-day precipitation and temperature outlooks, as well as monthly and seasonal precipitation and temperature outlooks. The National Weather Service Climate Prediction Center is a resource bike shops can take real-time advantage of to provide a service to customers’ growing need to know what the weather conditions are for bicycle riding in their communities.

 4/19/23 U.S. economy stalls as credit narrows, Fed’s Beige Book says … Bloomberg Economics. The U.S. economy stalled in recent weeks, with hiring and inflation slowing, and access to credit narrowing, the Federal Reserve said in its Beige Book survey of regional business contacts. “Overall economic activity was little changed in recent weeks,” the Fed said in the report published two weeks before a meeting of the policy setting Federal Open Market Committee. “Several districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity.” Overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing,” the Beige Book said. Consumer spending, which accounts for two-thirds of the US economy, “was generally seen as flat to down slightly,” the Fed said. Wages remained elevated, but showed some moderation, and the labor market showed signs of loosening up, according to the report.  HPS Analysis: This is the first Beige Book since the banking crisis precipitated by the SVB collapse that showed lending volumes and loan demand generally down, and lending standards tightening in several districts. Keep in mind that the Beige Book is generally reporting what the Fed wants to achieve with its interest rate increases, with the stated goal to put the brakes on consumer spending, and slow down business expansion, neither of which is helpful to bike shops or the specialty bicycle channel of trade.

4/20/23 The question isn’t whether to shop, it’s where… Bloomberg. After a brief burst of in-store activity, there are signs consumers are returning to their online spending ways. Are retailers ready for the next wave of e-commerce? The long-running tussle over how people shop, online or in-store, has a new wrinkle. Coming out of the worst of the pandemic, stores got a new lease on life. Shoppers freed of mask mandates bumped up traffic, and retail landlords experienced the kind of swelling demand they had all but forgotten. The respite has been brief, with signs that people are returning to their old online ways. And really, that reversion seems inevitable, given how accustomed we’ve grown to the ease of online shopping and free returns, a process that the pandemic only turbocharged. Now, as the dust settles from the whiplash of COVID spending habits, the real test of strength for retail’s online businesses is beginning. Data last week showed back-to-back declines for retail sales at primarily brick-and-mortar stores, while spending grew online. Year-on-year online prices have been falling for seven consecutive months, drawing shoppers. The question this raises is whether traditional retailers have successfully absorbed the lessons of the pandemic, and whether the billions of dollars pumped into e-commerce technology and supply chains will be enough for them to hold on, or even flourish, in the next era of online shopping. There’s little doubt that stores will always have a place in our modern era of retail, though their ubiquity and utility are changing. Stores have more success now as a “vibe” that embodies the company’s brand, and as a place to show off new merchandise, and quickly exchange or return products. As retail companies struggle to find the right online-offline balance, our shopping-scape will continue to morph even as our passion and need for shopping remains intact. HPS Analysis: What this article is confirming is what HPS has been advising bike shops since pre-pandemic – become omnichannel, and develop a commerce-enabled website with supporting policies and procedures. The NBDA has a group of associate members that provide all the online, web, and omnichannel development services required, and they will help shops with a budget to make it happen. The April 14 article in Bicycle Retailer and Industry News (BRAIN) announcing that “Erik’s Bike Shop now selling Specialized bikes online” signals this trend, along with the graph at the bottom-left of the interview on page 16 of the May 2023 print issue of BRAIN. The article is titled “Better decisions with more data sources,” by Ray Keener. The graph at the bottom of the article is titled, “Pre-Pandemic & During & Post-Pandemic.” In referring to this graph, Patrick Hogan, PeopleForBikes senior research manager, told Keener “Potential customers didn’t think their local bike shop would have bikes in stock, so they planned to buy a bike from another source. You can see by the graph that Amazon was the big winner.”

4/20/23 Quality Bicycle Products releases 2022 Impact Report …BRAIN. Quality Bicycle Products is releasing its first ever annual Impact Report. In it, readers can learn about the company’s B Corp score, DEI (diversity, equity, and inclusion) initiatives, sustainability practices, community-building efforts, and advocacy work. The report features digestible infographics, the voices and action of changemakers within the company, industry and communities, and goals for the journey ahead. “We hope that, as you scroll through this document, you find inspiration and gain a better understanding of what we’re all about at Q. This report highlights where our values and priorities are as a company, and showcases all of our incentives in one place,” said president Rich Tauer. Click here to access the whole QBP Impact Report. HPS Analysis: Qualifying to become a B Corp is a big deal, and HPS will strive to follow Q’s example as it grows, but we would like to know why more companies the relative size of Q have not applied to be certified as B Corps. Q is now the only business of any size in the American bicycle business that is a B Corp, and we respectfully submit that while difficult,  it is the responsibility of everyone in the bicycle business to seek and attain what Q has. We urge everyone in the global bicycle business to read the QBP Impact Report, as we stand on the edge of a turbulent and challenging time. The bicycle business talks about diversity, equity and inclusion, while a B Corp takes action and publishes an annual B Corp score, including its DEI initiatives.

4/21/23 A corporate credit crunch is just getting started … Bloomberg. There are worrisome signs of corporate distress in the wake of the banking crisis, raising the specter that a pullback in lending will drag down the economy. A month after the collapse of Silicon Valley Bank, the U.S. appears to have avoided the worst-case scenario, a rapidly-escalating financial crisis, and markets have responded. And yet, just below the surface, signs are mounting that credit is drying up in pockets of the economy at a worrisome rate. Small businesses say it hasn’t been this difficult to borrow in a decade. The amount of corporate debt trading at distressed levels has surged about 300 percent over the past year, effectively locking a growing swath of businesses out of financial markets. Bond and loan defaults have ticked up, and the Federal Reserve says banks have tightened lending standards. Corporate bankruptcies are on the rise, too, particularly in the construction and retail industries. HPS Analysis: There has been a dark shadow growing in my mind ever since it became obvious that record amounts of inventory have been backing up in the American bicycle business channels of trade, as retail sales have declined to the lowest level since the trade association started record keeping in 2016. I have repeated Bill Austin’s mantra that “inventory is evil!” as often as I can. This is true in part because if it isn’t turned into cash, it eventually has to be re-financed, and that becomes increasingly difficult, and weighs negatively on the financial statements of large and small business when consumer demand keeps ebbing. The U.S. economy has reached a point where credit lines to small businesses are becoming non-existent for a combination of reasons, while consumers are turning back to online retailers. The NBDA has formed an alliance with the League of American Bicyclists at just the right time for combining resources to reach out to both bicycle-ebike riders and non-riders to bring the JOY of cycling back to American communities, and in the process turn inventory into sales and participation opportunities.  

4/24/23 NY Sens. Schumer and Gillibrand advocate for lithium-ion battery federal legislation … BRAIN. New York Senators Chuck Schumer and Kristen Gillibrand said during a news conference April 23 that they support federal legislation to regulate lithium-ion batery safety standards in the wake of increasing fires caused by the devices. N.Y. Fire Commissioner Laura Kavanagh accompanied Schumer and Gillibrand at the news conference, as did the family of a Queens 8-year-old girl who was killed last fall in a fire started by a lithium-ion battery. ”Without federal legislation, and so many of these batteries come from across state lines, or made overseas, or made in China, we will not have a complete and strong solution,” Schumer said. HPS Analysis: A house bill had-been introduced by Representative Ritchie Torres (D-N.Y.) when this news conference took place, and Senators Schumer and Gillibrand subsequently introduced a companion bill in the Senate. Commissioner Kavanagh said during the press conference that New York City has experienced 63 fires and five deaths caused by lithium-ion batteries this year. HPS is of the opinion that Senator Schumer is correct, in that it is going to take federal legislation directing the Consumer Product Safety Commission to remove e-bikes that do not comply with UL 2849, and lithium-ion batteries that do not comply with UL 2271, from exposure to the public. The legislation also needs to exempt e-bikes and lithium-ion batteries from the de minimis exception. Uber also has the right idea, and while waiting for congress to pass legislation, the bicycle business needs to join the effort to subsidise a complete e-bike trade-in program, and a lithium-ion battery replacement program that includes chargers, matched to compatible electric propulsion systems and recycling.

4/25/23 Shimano bike-related sales fall 17 percent; operating income falls 32 percent in Q1 … BRAIN. Company-wide, Shimano is forecasting that net income will be 46 percent below 2022’s results this year. Shimano’s first-quarter net income in its bike division fell 16.8 percent from last year, while its operating income in the segment was down 31.8 percent. After issuing a negative forecast for the full-year performance at the end of its fiscal year, Shimano again revised its forecast for ordinary income and net income for the first half of this year, and its forecast net sales for the full fiscal year. HPS Analysis: There is more, and it boils down to the largest bicycle component manufacturer to the world-wide bicycle business is forecasting a down year. HPS thinks the real story is told in the chart that accompanied this article in BRAIN more so than the press release or the bits that attempt to put a happy face on this situation. Take a good look at this chart that Shimano attached to the press release:

From the left, the chart starts at the first quarter of 2018, two years before the pandemic, and it shows both Shimano revenue (in millions of yen) and operating income (in millions of yen). You can see the dip when COVID-19 hit in Q1 2020, the growth in both revenue and operating income to Q4 2022, and the drop off and decline in Q1 2023. The percentages in the press release and the BRAIN article are all from Q1 2022, and not the peak revenue and operating income in Q2, Q3 and Q4 2022. Shimano is following accepted accounting practices and norms, but this chart leaves little doubt that there was a lot of money made during the pandemic. It is also interesting to note that at the end of Q1 2023, Shimano still had lead times out into the end of 2023 and early 2024, and in April 2023 lead times on most components were within 90 days. In these challenging times, a great deal more transparency would be very helpful to the overall American bicycle business, including bike shops.

4/26/23 Rad Power Bikes lays off employees for the 4^th time in the past year … GeekWire. The Seattle-based e-bike company confirmed the latest round of cuts on April 26. It did not provide an updated head-count, or information on what positions are being affected. Rad Power Bikes slashed 100 positions in April 2021, then made another 63 cuts in July, and had its third round of layoffs in December. The company now has around 400 employees, according to Linkedin. “We hoped the changes we implemented last year would put Rad in a better position to withstand the current economic downturn,” the company said in a statement to GeekWire on April 26. ”However, given current market realities, we are forced to further reduce the size of our team. This unfortunate measure is necessary for Rad to correct course and become a sustainable, enduring business.” Rad launched in 2007 and began selling e-bikes directly to consumers through online sales in 2015. It grew into the leading e-bike seller in North America and raised $304 million in 2021, part of two separate cash infusions to fuel its capital-intensive business. Rad was valued at $1.65 billion in October 2021, according to PitchBook, making it one of a handful of “unicorn” startups in the Seattle region. HPS Analysis: Rad Power Bikes has been in business for 16 years, and in addition to its DTC business it operates seven retail/service centers around the country. Its rapid growth during the pandemic has been impressive to watch, and its being valued at $1.65 billion in October 2021 put it up with Giant, Specialized and Trek. When PeopleForBikes dropped the NBDA from its board of directors in February 2021, the seat was offered to Rad Power Bikes. The list of investors is also impressive, and includes Fidelity Management & Research Company, Counterpoint Global (Morgan Stanley), Vulcan Capital, Durable Capital Partners LP, The Rise Fund (TPG’s multi-sector global impact investing strategy), and funds and accounts advised by T. Rowe Price Associates. In addition to layoffs, Rad has faced multiple challenges recently, including a wrongful death lawsuit, a lawsuit related to property damage, and the recall of nearly 30,000 units due to a safety issue. Along with Aventon, Super73 and Juiced, Rad Power Bikes has led the New Wave of DTC retailers that surged, marketing and selling moped/motorcycle-inspired e-bikes in the U.S. market from mid-2020 through the present. The American bicycle business is experiencing a shake-out, and some of the New Wave DTC brands were bound to experience difficulty. We will have to see how Rad Power Bikes management guides the company in the difficult months ahead.

4/26/23 Record number of foreign brands at Sea Otter Classic … Bike Europe. With the U.S. lacking a well-attended Eurobike-like event, Sea Otter is now a must-attend event of the North American cycling season for brands, industry leaders, top retailers and the media. That the show has an international draw was confirmed by CEO Frank Yohanan, “This year we had 125 brands from foreign markets in attendance, a record.” This year, the vast majority of the top brands sold in North America were in attendance with more than 1,000 brands on display. This is an increase from approximately 900 at the previous edition in 2022. There were a few notable absentees, including Trek and the Pon.Bike family of brands. There was also a record attendance of more than 80,000 visitors, including a strong influx of European and Asian C-level leaders who can now travel freely, and wanted to check in with North American customers following the global pandemic. The industry-level discussions centered around two prime topics in and around the tents and displays at Sea Otte, the reflection of first quarter results on 2023 figures, and the potential e-bike sales this year. It seems that most companies are planning for lower sales versus 2022, which came in at a healthy $7.4 billion (€6.8 billion). Most industry leaders are hoping for a modest 10 percent increase in revenues compared to the pre-COVID runup results in 2019, which had sales of $5.7 billion. The retailers are in most cases overstuffed with inventory that came in during the second half of 2022, and most of this bike inventory is still sitting at retailers’ showrooms waiting to move in Q2, when sales are strongest for most of the country. This issue is compounded by excess inventory sitting at supplier warehouses that will likely take most of the year to ship to retailers, and ultimately sell to consumers. While U.S. inflation has slowed somewhat to a more modest five percent clip, the higher costs of company borrowing in the eight to nine percent range, combined with excess inventories, will likely result in more bikes being sold at a discount, which will mean retailer and brand margins will likely compress in 2023, hurting earnings for most brands. The second topic of discussion was how much further would e-bike sales grow in 2023. In 2022, e-bikes accounted for 19 percent of the total market in revenues, or approximately $1.4 billion in value. This represents only 6 percent of unit sales. It feels like everyone is optimistic that e-bike sales still have room to grow to somewhere between 22-25 percent of forecasted 2023 dollars. HPS Analysis: Mix 80,000 cycling enthusiasts with 1,000 brand sellers, including 125 brands from foreign markets, interpreted through a European filter, and you get an overly-optimistic reading of the U.S. bicycle market at the beginning of the second quarter of the year. The Bike Europe reporter has good data that seems to be accurately presented, but the financial impact of the bank crisis on the small businesses that make up the majority of the American bicycle business is, in our opinion, under-reported or misunderstood. A 10 percent increase in American bicycle business revenue in 2023 is beyond modest. It is, in our view, an impossibility. We see the probability of growth in the e-bike segment, with some gain in 2023, but 22-25 percent of 2023 dollars is a bridge too far.  

4/27/23 Lyft says it will cut more than 1,000 people in new round of layoffs … Wall Street Journal Business. It’s been a tough few months for Lyft. The budget shortfall of $2 million that led Minneapolis to suspend its bike-share program, which was managed by Lyft, has transit advocates worried more cities could follow. In 2018, Lyft acquired Motivate, the largest bike-share operator in the U.S. When it took over the company, about 80 percent of all bike-share trips were in cities where Motivate was in charge. The latest cuts impact 26 percent of the company’s more than 4,000 employees. Lyft said it is also scaling back on hiring, and eliminating over 250 open roles. In a securities filing, the company said it would incur $41 million to $47 million in severance and other related costs in the quarter that ends June 30. While Motivate employees have not been specifically referenced so far, there is concern in the bicycle ride-share community that Motivate may be downsized or withdrawn from certain markets. HPS Analysis: Between 2010 and 2021, people in the U.S. have taken 500 million trips in total on shared micromobility, station-based bikes, dockless bikes, and electric scooters. Some bike shops don’t like bicycle ride share, while others support it in their communities. Our common objective, between all channels of trade and all organizations is simple: get more Americans on bicycles. Bicycle ride-share programs accomplish this objective in large measure. While Lyft and Motivate are for-profit corporate entities, their demise and leaving bicycle ride-share programs across the country abandoned, is a large step backwards. The bicycle business can reach out to the North American Bicycle and Scooter Ride Share Association (NABSA) to determine what can be done as a community of interest to provide bicycle ride-share services to millions of citizens living and working in cities across America.     

4/27/23 ‘Mobility’ market remains a good long-term investment, financial advisor says … BRAIN.John Bastian is bullish on the long-term prospects for the global bicycle industry. But he’s cautious on its short-term prospects, as world events roil the marketplace. Speaking at the recently concluded Sea Otter Classic Summit, Bastian, director of Baird’s outdoor products sector, used a slide to offer some perspective on the financial scope of the industry, a $70 billion global sector. And, he noted, cycling is the second-highest participation activity in the U.S., with only hiking ranking higher. Baird, however, said the current environment for mergers and acquisitions is suffering from the ongoing war in Ukraine, persistent inflation, fears of a recession, higher interest rates, and turmoil in the small to mid-size banking market best highlighted by the sudden collapse of Silicon Valley Bank. In short, he said, “investors are sitting on a lot of dollars.” Despite financial headwinds blowing across all markets, Baird is “bullish” long-term on investments in the “mobility” market, a phrase seen often in Europe but less so in the U.S., Bastian said. He noted in a series of slides that the cycling and outdoor markets tend to be “recession resilient,” participation rates appear to be higher than pre-COVID numbers, and trends in the electrification of wheeled products is accelerating. “People went to spend more time on their hobbies and that’s driving the outdoor segment,” he said. Bastian cited demographics as an important factor, and referenced the e-bike trends in Europe and Asia compared to the U.S. He pointed out that non-cyclists make up a significant portion of new entrants into the e-bike sector. “To be clear, we expect strategic and existing investors to continue making investments,” Baird research finds. And e-bike brand winners are attracting private equity investment with the top 10 brands controlling 70 percent of the U.S. market. HPS Analysis: John Bastian and Baird’s presentation about the mobility market is a breath of fresh air, and I am sorry I could not attend the Sea Otter Summit to listen to him in person. From the BRAIN article, I surmise he presented sound research and logical analysis of the mobility market both short-term and long-term, with a realistic view of what the American mobility sector faces the rest of 2023.

5/1/23 Regulators seized First Republic Bank and sold it to JPMorgan Chase, the latest attempt to end the U.S. banking crisis that began in March …The New York Times. First Republic failed despite receiving a $30 billion lifeline from 11 of the country’s largest banks. It will go down in history as the second largest U.S. bank by assets to collapse. HPS Analysis: It isn’t over ‘till it’s over. We will have more analysis for you in The Micromobility Reporter June issue.

Contact Jay Townley: jay@humanpoweredsolutions.com