Trump’s Tariffs Would Kill These American Manufacturing Jobs
(Bloomberg) -- Donald Trump would love what Arnold Kamler’s doing.
One of the president’s top campaign promises was to bring manufacturing jobs back to the U.S., and Kamler is on a quest to revive a decimated industry: American-made bicycles. Almost all of the roughly 18 million bicycles sold each year in the U.S. come from China and Taiwan.
This year, about 130 workers at Kamler’s new factory in Manning, South Carolina, will assemble 350,000 bikes. In just three years since the 200,000-square-foot factory opened, Kamler’s company, Kent International Inc., has become the biggest U.S. bike maker under its Bicycle Corporation of America brand.
Trump has repeatedly threatened to impose high tariffs on imports from China and Mexico. A similar strategy worked swimmingly for Kamler’s thriving European counterparts: More than half of the 20 million bikes sold in Europe last year were made there, and European bike makers say heavy tariffs protected the industry and jobs. Putting together all those frames, gears, and wheels directly keeps about 45,000 workers busy on shop floors from Portugal to Romania, according to industry estimates.
Kamler’s experience shows why it won’t be as easy in the U.S. as slapping a big tax on a box.
The stark difference goes back to the 1980s, when China began to flood Western stores with cheap bikes. Europe fought back with tariffs. But with U.S. retailers hungry for inexpensive products, American manufacturers moved production overseas.
So Europe never lost its domestic bike industry. The U.S. did.
Kamler’s family has been in the bike business for three generations, long enough to see U.S. manufacturing soar, then wobble and practically disappear. Initially, the family largely served as middlemen, supplying retail stores with bikes either made in America or imported.
By the 1970s, more than 15 million bicycles were produced domestically per year—the biggest modern bike-making boom in the U.S. More than 1 million of those were built in the Chicago factories of Schwinn Bicycles Inc. “Every plant was at or over capacity,” said industry consultant Jay Townley, a former executive at Schwinn.
Schwinn supported tariffs during the 1950s and 1960s, then flipped its position in 1971, arguing against them for the next three decades. The company’s reversal was prompted by its decision to move production overseas, Townley said. Dorel Industries Inc., which acquired Schwinn’s parent company in 2004, didn’t respond to requests for comment.
In 1979, Kent also started producing its own bikes at a factory in New Jersey but couldn’t afford to compete with Chinese-made products. In 1991, the company closed its factory and continued selling imports. That’s still the heart of the business: Kamler expects to import 2.6 million units from China this year for retailers. Kent’s total revenue will reach $230 million this year, up from $215 million in 2016, he said.
Europe’s bike makers were chugging along, making roughly 12 million units annually, when the threat from China arose. They cried foul, suspecting the Chinese government was providing subsidies such as cheap or free equipment, energy, and property.
“Some of our competitors in China make money on the subsidies,” said Moreno Fioravanti, secretary general of the European Bicycle Manufacturers Association. “They sell product at a loss.”
Countries have long put tariffs on imports, both to protect domestic industries and raise money. But European bike manufacturers wanted more firepower to fight what they saw as unfair trade practices. They pushed the European Commission to use World Trade Organization rules to impose what are known as anti-dumping tariffs—additional levies meant to discourage foreign competitors from flooding markets with underpriced goods.
In 1991, the European Commission investigated and found “considerable price undercutting” by Chinese exporters that “had a major negative impact” on prices and sales for Europe’s producers. Two years later, Europe started charging an additional 30.6 percent anti-dumping tariff on bicycles imported from China—on top of the normal tariffs—steadily increasing it to today’s level of 48.5 percent.
A much different scenario unfolded in the U.S.
Major retailers blocked efforts from bike manufacturers to get U.S. officials to impose anti-dumping tariffs. They loved low-priced imports that lured customers in the door. By 1998, 87 percent of bicycles sold in the U.S. were imported. By 2000, it was up to 98 percent and has stayed around that level, according to industry figures.
These days, Europeans can buy a low-end, made-in-Asia adult model starting at roughly €90 ($106)—slightly less than its Europe-made equivalent. In the U.S., similar versions made in China start at around $80, about 25 percent less than they cost in Europe.
If the president follows through with an across-the-board tariff on all imports, Kamler said it will undermine his business, making it prohibitively expensive to supply the South Carolina factory.
Each bicycle made in Kent’s South Carolina factory has about 40 parts, all imported from Asia. In his search for domestic suppliers, Kamler has talked to dozens of U.S.-based companies but hasn’t found any with competitive prices—even without costs such as shipping and warehousing. He might end up making the parts himself.
“There is no American bicycle parts industry left,” Kamler said. “My competitors all congratulate me to my face, but behind my back they’re still kind of giggling.”
This is generally true at the lower end of the market; boutique manufacturers such as Chris King Precision Components in Portland, Oregon, and Phil Wood & Co. in San Jose, California, thrive serving the high-end market and by making their own specialty parts.
Kamler isn’t a Trump supporter. “I’m not in favor of barriers to imports,” Kamler said. “The government should help and encourage American companies with more than just rhetoric.”
Within three years, automation could make it just as affordable to manufacture parts in the U.S. as in China, Kamler said.
He points to a blossoming bicycle parts manufacturing center in Portugal as an example of a healthy supply chain.
Occupying a hefty chunk of an industrial park south of Porto, Triangle’s Cycling Equipments S.A. has built what it says is the world’s first fully automated aluminum bicycle frame maker. The factory is one of dozens producing parts and bikes in the region.
Triangle’s production lines of hulking German robots can help complete a frame in a minute or less—a fraction of the time it takes humans. And unlike Asian competitors with four-month lead times, general manager Luís Pedro said he can deliver frames at a similar price anywhere in Europe a few days after receiving an order.
That’s important to clients such as Spain’s Orbea S. Coop., Germany’s Riese & Müller GmbH, and the Netherlands’ Pon Holdings, which owns premium brands including Cervélo and Santa Cruz. “To speed delivery, having production as close as possible to consumer markets makes sense,” said Jon Fernández, the chief executive officer of 200-employee Orbea, one of Spain’s biggest bicycle makers.
Triangle’s €25 million, almost 200,000-square-foot factory opened in November. Pedro estimates the company will produce 100,000 frames for clients across Europe this year and bring head count to 120 employees next year. “We are in a low-cost country with skilled engineers,” in a location surrounded by other bike companies, aluminum suppliers, and “easy access” to the rest of Europe, said Pedro, noting these factors are crucial for an industry.
“There’s this whole nirvana of ‘We are going to make everything in our country,’” said Will Butler-Adams, managing director of Brompton Bicycle Ltd., which has been making folding bikes in London since its founder hatched the business in his South Kensington apartment in 1975. “It’s not so simple as Mr. Trump makes out.”
Brompton expects to sell 50,000 bikes this year, up from 44,500 in 2016. Last year the 240-employee company spent £1.65 million ($2.1 million) outfitting an 86,000-square-foot factory in West London.
“You’ve got to create the knowledge, the engineers, the demand through the infrastructure,” Butler-Adams said. “Politics is so short-term. And manufacturing, as a sector, is so long-term.”
Kent was able to spend $10 million on its South Carolina plant because it had a ready customer. Wal-Mart Stores Inc. wanted domestic bikes as part of its pledge to buy an additional $250 billion in products made, assembled, or grown in the U.S. by 2023. Wal-Mart bought 220,000 of Kent’s South Carolina-made units last year and will buy 280,000 this year, Kamler said.
A few weeks ago, Kent started making 2,000 bicycles a month for a high-tech bike-rental service and expects to increase that to 10,000 per month in November.
Kamler wants to eventually assemble 1 million bikes annually, making frames and forks in-house, which means more investment in automation and labor. He would grab business from importers, but he needs to get his costs down for it to work. He’s losing money on domestic production now but expects to be in the black next year.
“We’re not counting on the ‘Buy American’ thing,” Kamler said. “We’re not counting on the consumer to say, ‘Oh yeah, I’ll pay more for that product because it was made here.’”