On your bike

Sep 18th 2008 | TAICHUNG, TAIWAN
From The Economist print edition

Obesity and high oil prices are good news for the world’s biggest bikemaker

THESE are tough times for carmakers, many of which are labouring under high oil prices, slowing demand and financial weakness. For makers of human-powered, two-wheeled vehicles, by contrast, business is booming. Giant Manufacturing, the world’s largest bicycle-maker, sold a record 460,000 units last month and is heading for its best year ever. Such is the demand for bikes that shortages were reported in New York earlier this year. In Taiwan, Giant’s home market, supply is tighter still: for many models, buyers put down deposits months before their bikes come off the assembly line.

After a slow 2006, sales took off last year in Europe and America as fuel prices shot up. Suddenly a bicycle seems like the remedy for many modern ills, from petrol prices to pollution and obesity. Each market has its own idiosyncrasies. Europeans mainly use bikes for commuting, but have the odd habit of ignoring models made explicitly for that purpose in favour of sleeker, faster models which are then expensively modified. Americans prefer off-road BMX trail bikes. Taiwanese demand is led by racing-style bikes used for exercise.

Giant, as the largest producer, makes everything for every market. Its share price has held up fairly well despite stockmarket turmoil and dramatically higher costs for raw materials, notably aluminium. Strong demand and a desire for better bikes have allowed bikemakers to pass higher material costs on to buyers. Since 2004 wholesale prices of bikes have gone up by 23% in Europe, 45% in America and almost 50% in Asia, even as thousands of low-cost factories in China, including some run by Giant, churn out boatloads of cheap bikes.

Giant began in 1972, taking advantage of low-cost Taiwanese labour to make bicycles for foreign firms as well as domestic buyers. A critical early order came from Schwinn, the dominant American brand of the time, which wanted to reduce its dependence on a factory in Chicago that was beset by poor labour relations and low productivity. After contracting out to Giant proved successful, Schwinn shifted its orders to a factory in southern China. But quality was poor, deliveries were late and Schwinn slid into bankruptcy. (It is now owned by Dorel Industries of Canada.)

Meanwhile, having started out as a low-cost manufacturer, Giant was moving upmarket. Even its cheapest bikes, which are sold in China, are relatively expensive (at around $100), yet Giant has the largest market share, at around 7%, according to Deutsche Bank. Globally, Giant is one of a handful of big companies that can make frames and forks (the most important components of a bicycle) out of sophisticated alloys and carbon fibre. Components from other manufacturers are then added to the frame. The resulting bikes are sold under Giant’s own name, or under contract to big customers in Europe and America.

Because frame- and component-makers are happy to sell to potential competitors, there are in effect no barriers to entry to the bike business-all that is needed is a brand name. As a result, competition is brutal. Capturing customers at volume, and at ever-higher prices, requires an unending series of improvements. Giant will soon begin distributing a new frame with built-in lightweight shock-absorbers, which should appeal to riders on potholed streets and off-road trails. Details of the design remain a secret, because good ideas are commonly copied within a year. By then, Giant must come up with a further innovation. It is the only way to survive.