How US bicycle makers master Trump's China tariffs

(Reuters) – Kent International, a US manufacturer of bicycles, has found a way around President Donald Trump's tariffs by transferring his production out of China.

Like most US bike manufacturers, Kent has long relied on cheap Chinese labor and parts, but Trump's fares have so far inflated its costs by around $ 20 million. dollars a year.

"We have no choice but – as quickly as possible – to seek to abandon production in China," said Arnold Kamler, managing director and majority owner of the motorcycle company based in Parsippany, New Jersey.

But Kent and the other bike manufacturers are not forced to transfer their manufacturing operations to the United States to avoid tariffs, or stop using Chinese components.

The company is now planning to manufacture bicycle frames in Cambodia while continuing to buy nearly half of the components it will attach to these frames to Chinese producers. The resulting bicycles can enter the United States duty-free due to US rules that generally allow products to be designated as manufactured in Cambodia, provided that 35% of the cost of parts and labor is met. Work comes from this country.

The rules-of-origin game is a legal avoidance strategy adopted by other American bike manufacturers and explored throughout the sector, as well as by others. manufacturing sectors, according to bicycle executives and supply chain consultants.

The evolution of the $ 6 billion bicycle industry shows that such rules allow manufacturers, despite tariffs, to continue to supply much of China, undermining thus the Trump Administration's goal of boosting employment in the US manufacturing sector. It also shows how light-weight manufacturers of capital-intensive activities can quickly move into Southeast Asia, a country that has seen a wave of new investment since Trump's first last spring.

The bicycle industry plays a minor role in what experts call the biggest disruption of cross-border supply chains since China joined the World Trade Organization in 2001. Companies in many sectors – furniture, electronics, clothing, tires, vacuum cleaners, to name a few – are moving their operations to Vietnam, Thailand and other Asian countries, while continuing to appeal to some suppliers in China. [L4N1XV1EX]

"It's a medium and long-term problem that is not going to fly off in a year," said Brett Weaver, KPMG supply chain consultant. "More and more businesses are starting to embrace this perspective."

The Trump Administration US Trade Representative (USTR) office did not respond to requests for comment.

Rising labor costs in China

For many companies, fares have been the decisive factor in the moves already contemplated due to rising labor costs in China. Three decades ago, when Kamler began relocating Kent production, the cost of labor in China cost him 20% less than in the United States. This gap has been reduced to 5%, he said.

Kent currently buys nearly 90% of the 3 million bicycles sold to Target, Walmart and other US retailers in China. But sales were hit hard by the price hike caused by last September's tariffs.

Kent's new plant in Cambodia is expected to cost $ 20 million, the equivalent of one year's additional costs associated with Trump's 10% tariffs, which have been added to existing rights. Trump's tariffs were to climb to 25% on March 2nd, but on Sunday he delayed the increase, citing the progress of trade negotiations with China.

Another major brand, Specialized Bicycle Components, has shifted production from China to Cambodia, Vietnam and Taiwan, expanding its existing operations in Southeast Asia, said Bob Margevicius, vice president of Morgan's bicycle manufacturer. Hill, California. Los Angeles-based small producer Pure Bicycles is preparing to move to Vietnam, said Michael Fishman, president of the Los Angeles-based firm.

Industry officials and supply chain consultants say all US bicycle manufacturers are considering similar measures to protect their low margin companies from tariffs.

"Their supply chains are disrupted," said Morgan Lommele, director of PeopleForBikes, an industry association. "They are looking at other countries."

& # 39; A CALL FOR AWAKENING & # 39;

All manufacturers face difficulties in transferring their activities to South-East Asia, including constraints in terms of port capacity and manpower. And no country can easily override China's scale and volume of bicycle production after three decades of US sector migration.

In the 1970s, US-based companies manufactured more than 15 million bicycles a year, compared with less than 500,000 today, according to data presented to the US sector by the US sector last year. . In addition, 94% of bicycle imports into the United States currently come from China, according to US Census data.

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China also supplies more than 300 million components such as tires, tubes, seats and handlebars – accounting for about 60% of total component imports.

Specialized has finished transferring all its production out of China by December but, like Kent, will continue to buy components from there.

Trump's rates have "awakened the industry's call," said Margevicius, who also serves on the board of an industry industry group, the Bicycle Product Suppliers Association.

China fight against the back

The Chinese authorities also want to protect jobs in the manufacturing sector. To mitigate the impact of tariffs, China has increased export tax cuts and accelerated tax refunds to exporters, said Margevicius. It also offers companies cheap loans.

A decline of more than 5% in the value of the Chinese yuan last year, as well as the forecast of new depreciations this year, also help to mitigate the effects of the increase in duties imposed by the United States.

Kent is still pursuing plans to start manufacturing in Cambodia in September, and Kalmer has announced that most of its production will be transferred to Cambodia in the long term. Declining labor costs were a major decisive factor in addition to tariffs, said Kalmer, who remains skeptical that Beijing will maintain its tax incentives for low-end manufacturers as its economy evolves towards lower incomes. services, consumption and production of high technology.

Southeast Asian countries are also courting companies that are exploring options outside of China.

Cambodia has allowed Kent to bring in short-term workers from China. Thailand presents itself as a regional hub of manufacturing, offering incentives such as a corporate tax exemption of up to eight years for certain industries and duty exemptions. Import for some raw materials.

Vietnam has finalized 16 free trade agreements, including with the European Union, and is a member of the Trans-Pacific Partnership, providing businesses with virtually duty-free access to major bicycle markets. Germany to Australia.

LOGISTIC CONSTRAINTS

Margevicius, of Specialized, advises companies considering moving to carefully check if sites outside of China have the infrastructure to meet their needs.

For example, each of the two largest ports in Vietnam has only one-sixth of the capacity of the port of Shanghai and Cambodia does not have a deep-water port that can accommodate larger vessels .

The rush of manufacturers moving their operations to Southeast Asia will also create new competition to hire and train workers from a much smaller workforce than China.

Kamler is not discouraged. Kent's Chinese partner has already purchased land for the Cambodian plant, five miles from downtown Phnom Penh. Construction is expected to begin next month and end in June.

The company will hire and train initially up to 300 workers to start production. He will also bring 100 robots from his Chinese facilities for welding work.

"We have a big company in the United States," Kamler said. "My priority 1, 2, 3 and 4 is to save my business in the United States."