Although many bike makers have already decided to relocate their low-end operations overseas to take advantage of cheaper labor, a few have decided to sweat out the competitive heat by gearing up for high-end production in Taiwan. Their success illustrates that local entrepreneurs are capable of upgrading, and that moving production upscale is considerably more effective if there is government assistance.
After a decade of relatively easy coasting in the international bicycle market, Taiwan's manufacturers of low-end quality bikes have had a rude awakening. Macroeconomic changes have forced a restructuring of the industry. The last good year for low-end bicycle production was 1986, when local manufacturers exported 9.25 million units. The following year, rapid appreciation of the New Taiwan dollar (NTS), rising labor costs, and protectionist measures in the U.S. seriously threatened the survival of Taiwan's bicycle industry. So great was the potential danger that the Ministry of Economic Affairs placed the US$500 million-a-year industry on the list of endangered industries.
While pessimistic observers predicted that the island's bicycle industry was doomed, and many manufacturers scrambled to relocate in Thailand or mainland China, a number of businessmen refused to give up on local production. They decided to reinvest, upgrade, and turn out superior lines of products in their Taiwan-based factories.
These entrepreneurs calculated that high-end, value-added bicycles offered a feasible alternative—even though Europe, the U.S., and Japan already dominated the market, especially at the extremely high end. By "high end," Taiwan makers did not envision producing top-of-the-line products. They saw their best chance for success in manufacturing reasonably-priced "middle-high-end" bicycles.
One success story—manufacturers are producing fewer bikes, but per unit export values are rising.
Their reading of the market has proved correct. Government statistics confirm that even though bicycle exports dropped steadily from 9.25 million units in 1986 to 6.3 million in 1988, the export value of those units jumped from US$430 million to US$543 million in the same period. The average unit value of the bicycles climbed from US$61 to US$74. Taiwan bike makers are actually gaining speed in an uphill race.
Fritz Jou, general manager of the Fritz Jou Manufacturing Company, is one of the determined optimists who decided to go "high end" when others in the business were packing up to move abroad. "We had only three possibilities-quit, move operations offshore, or change," he recalls. "For us, the first two options were never a consideration. "
Jou says that resisting the temptation to flee overseas will prove wiser over the long haul: "In the Philippines or mainland China, labor and materials are cheap, but the political situations there are unstable and the social systems may change. I have more confidence in Taiwan."
Sales figures at his medium-sized firm parallel the trends in bike firms throughout the island. The company exported 360,000 low-end units in 1987, but only 180,000 in 1988. Gross profits held steady, despite the 50 percent drop in volume. The rise in export value resulted in part from the 40 percent appreciation of the NT dollar, but much more of it was a direct outcome of product upgrading and improved methods of production.
Like many other local companies seeking to upgrade products and production, the Fritz Jou Company asked for help and advice from the Industrial Development Bureau (IDB) of the Ministry of Economic Affairs. The IDB supports the Industrial Research Institute, which set up a special program to assist bicycle makers in improving their manufacturing techniques and technology. After consulting with the IDB, Jou invested NT$2.5 billion (US$92 million) to construct a modern factory just outside Taichung in central Taiwan. The project entailed installing the latest imported painting and assembly equipment, and training the work force in high-end production techniques.
Aptly-named Giant Bicycle Company is the world’s largest. Its Taichung plant alone can produce 7,000 units per day. (File photo)
Not only small and medium-sized companies are taking advantage of this government assistance. A notable example is the aptly-named Giant Bicycle Company-the largest bike manufacturer in the world. At just one mammoth factory located in Taichung, Giant rolls off 7,000 bicycles every day. The company produced 1.4 million units in 1988, and registered sales of US$140 million. But even with its massive production capability, Giant managers saw the need to upgrade for survival. Says company president Anthony Lo: "We're not going to make a Rolls Royce [of bicycles], but a BMW or Benz would be good."
For the past three years, Giant has been working with the government sponsored Material Research Institute on the development of carbon-fiber composites for use in bicycle frames. The next step will be to develop manufacturing technology for the material. Although carbon-fiber bicycle frames are the basic building block of any high-end bicycle, the companies that can produce them successfully do so only in small numbers and at high prices. Giant's long-term strategy is to produce the frames at an affordable price.
One company with only 35 employees may have already beaten Giant to the punch. Although unable to match Giant's huge output, the Shitamori Company, a local bicycle frame and component manufacturer, says that it is already able to produce one-piece carbon-fiber frames at exceptionally low cost. Using a specially-designed high-tech oven that can produce one frame per minute, Shitamori founder Terry Lin says his company can market carbon-fiber frames at a price which is "the lowest in the world."
Ready to roll toward higher profits at home—Fritz Jou Company rejected moving offshore and has shown that upgrading product lines works.
The Shitamori Company, which is considered a pioneer in Taiwan's high-tech development, has a current output of 4,500 frames per month. The company is preparing to expand its facilities, and is also developing plans for a revolutionary new bicycle made completely of carbon-fiber parts.
For many Taiwan companies, whatever their size, the move from low-end to high-end production is much more complex than simply building new facilities or developing high-tech machinery. Most Taiwan bicycle companies have been producing low-end, low-quality goods for 20 years. Better lines of products require new awareness at all levels of the manufacturing process. Company management and organizational methods have to become more sophisticated, and work forces must be retrained. Says one manufacturer, "It's been a big job. Not only did we have to change our organization, but also how people work and how they think about their work."
In past decades, worker training and retraining, as much as management-labor relations, have been long neglected fields in Taiwan. Industries must now adjust to radically new circumstances. This is especially true as factories shift into high-end production. Even though the introduction of mechanized assembly reduces the number of laborers, their quality must be much higher.
"Taiwan has changed, and so has the whole style of living," Jou says. "People are no longer willing to work overtime everyday, or to work for low wages. Now that the emphasis is on quality rather than quantity, upgrading refers to everything, including labor. Just as labor expects more from management, we also expect more in return from them. Quality doesn't begin only with quality control, but with improving every aspect of the factory from the reception desk to the plant floor."
Muscular advertising—local firms sponsor cycle races to help promote brand recognition.
In an effort to meet the aspirations of factory laborers, the new Fritz Jou factory features a large cafeteria, recreational facilities, and a dormitory complex for workers who prefer to live on site—benefits virtually unknown in Taiwan just a few years ago.
The Fritz Jou factory is now able to produce up to 25,000 high-end bicycles per month with its retrained work force and new factory facilities. The transition of product lines is still in progress. This year as much as 40 percent of the factory's production will remain in the middle range. But by 1990 middle-range products will represent only 20 percent of production, when the bulk of the bicycles produced will be high-end units made with locally-produced chrome and aluminum frames outfitted with high-quality, foreign components. The evolution of product lines at Fritz Jou is further evidence of the gradual maturation of Taiwan's bicycle industry.
After upgrading production methods and smoothing out labor problems, the next step for Taiwanese bicycle manufacturers will be to find markets for their new products. Many local manufacturers have already found that their higher-end products are regarded as unknown entities by U.S. buyers who already have sources for high-end products and are reluctant to change them. It is clear that success in the business will require further cultivation of the market and better brand recognition. Says one manufacturer: "Although at present our new higher end bikes are more suitable for the European market, with effort we can come through and also fight our way into the American market."
The strategy is straightforward: produce superior products that competing manufacturers in other countries cannot match in terms of price and quality. Taiwan's newly upgraded bicycle firms are confident that even if Taiwan's currency continues to appreciate-even to NT$24 to US$1—Taiwan's new high-end lines will still be competitive because of their quality, low price, and market penetration. Fritz Jou gives a typically upbeat entrepreneurial assessment of the future: "We'll make what the market demands. Right now in Taiwan everything is changing. The future depends on the market and how we run our industry. But the future is here, not some place else."