Remember when that ship got jammed in the Suez, and goods shipped around the world got stuck? Remember when Covid disrupted the natural flow of shipping containers and products, and everything got delayed? If you thought that was a mess, that’s nothing to what could be about to hit us.
Taiwan makes loads of stuff – semiconductor products in particular – and has become a significant manufacturing base for many bicycle companies. Whether they’re buying catalogue items to add in to products manufactured elsewhere, or producing bespoke products to order, there are very few – if any – bicycle companies who don’t have a connection to Taiwan somewhere along the (production) line. If you’ve been paying attention to the news, you may have heard some increasing concerns that we could see some significant political issues around Taiwan this year. Before we head into the potential impacts on the bike industry, let’s start with a bit of background as to why I think it’s worth keeping a close eye on happenings in Taiwan.
The political landscape
Taiwan is an island country off the coast of China… or, if you’re China, Taiwan is an island that is (or should be) a province of China. Seen by Chinese authorities as a breakaway republic, Taiwan has democratically elected leaders and has a ‘robust unofficial relationship’ with the USA. China has increasingly expressed its desire to bring Taiwan back into full control of China – its position on the edge of the Pacific is seen as offering a strong strategic position. If this is all ringing bells between Russia and its views on Ukraine, you’d be about right.
The rhetoric about bringing Taiwan back into Chinese control has been rumbling on for around 70 years, but the pressure seems to be ramping up in recent times. Military activity in the area is not new – back in 1995 there was even a ‘missile crisis’ when China flew missiles over the island. China has continued to undertake military exercises in the waters around Taiwan, as well as flying Chinese aircraft and missiles near the island. But while military posturing has been happening for years, more recently China has added more high tech means to its armoury, with Taiwan being subjected to a constant barrage of cyber attacks. There’s also a whole array of spycraft type shenanigans. For people and businesses in Taiwan, living under the threat of Chinese ‘reunification’ has become a way of life that waxes and wanes.
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As well as something of an uptick in rhetoric, taking a look at the wider state of the world gives a few hints that some sort of move by China against Taiwan could be in the offing. A sign that Taiwan is not taking the the situation lightly comes in the form of its recent change to its military draft rules: the country has extended the length of required service from four months, to a year. The USA is also boosting its military presence in response to tensions, opening new bases in the Philippines.
Recent protests against the Chinese government may serve to increase the risk of shifting from talk to action – a successful show of strength might be seen as a way to win back support from a dissatisfied population. Whether the West would step in or not, or what measures it would take, it a point of some deliberation and perhaps a key factor in whether China will move against Taiwan. On the one hand, Russia’s attack on Ukraine was met with worldwide economic sanctions and some military support, and this might signal that China would be met with a similar response. On the other hand, further restricting Chinese exports would significantly impact on consumers in the West. China also owns signifiant worldwide interests in infrastructure such as ports and energy generation, making sanctions against it especially difficult. And, do Western democracies have the will or capacity to go head to head with two superpowers at once? Taiwan’s position at the hub of so many key manufacturing processes makes it critical to the West – would access to that capacity be retained by defending it, or by doing a deal with China? A new Cold War is potentially just a few power moves away.
A manufacturing powerhouse
Despite life alongside a threatening neighbour, Taiwan has become a centre of global manufacturing, with particular specialisation in semiconductors and microchips. The Taiwan Semiconductor Manufacturing Corporation makes more than 50% of the world’s semiconductors and microchips, and while not all its manufacturing operations are based in Taiwan, the majority are. This technology has become increasingly important to the bike industry, both in terms of ebikes and electronic accessories such as lights and GPS devices, but also in the machinery needed to make components.
It is the combination of technological capacity, flexibility and strong protection of intellectual property that keeps more hi-tech businesses in Taiwan. Micki Kozuschek, founder of Lezyne, explains that Taiwan is not necessarily the best place to be for those that have a labour intensive product. While the government is very business focussed, it is also pro workers’ rights. Workers – including migrant workers – get quite a lot of protections, including overtime, limits on working hours, healthcare, and safe working conditions. (Sounds pretty great, doesn’t it: an island nation, economic prosperity and workers’ rights…). If you’re manufacturing in Taiwan, your profit margins are not based on cheap labour – if you need a lot of cheap labour, you need to look elsewhere.
Mark Peterman of tyre insert company Air Fom, and previously of GT Bicycles, has been living and working in Taiwan since 2013, and a regular visitor since 1994. He says that there is a growing trend for apparel companies to move operations to Vietnam, and for bicycle assembly functions to move there too. These more labour intensive tasks can benefit from the greater availability of a lower cost workforce, and don’t need the same hi-tech functions that are available in Taiwan. He predicts that in the next 10 years Vietnam will become a major centre for the bike industry, at the expense of China. Indeed, Ibis has just launched a new ‘price point’ carbon fibre Exie, manufactured in Vietnam.
The current political situation in Taiwan is just one factor causing companies to look to broaden their supply base. The cost of workers and changes in exchange rates across the world, as well as efforts to reduce wastage and transport costs, had already caused some companies to take a look at manufacturing in other locations. The vulnerabilities of supply chain caused by Covid served to add another shove in the direction of supply chain diversification. But Taiwan still offers much that cannot easily be found elsewhere in the world, keeping businesses there.
For those like Lezyne who need the skilled workforce and high tech capabilities available in Taiwan, it is harder to find alternative locations. Lezyne’s manufacturing is currently based in Taiwan, where the company owns the factories that make its products. Despite this investment, Micki told us he had looked to see if he could manufacture in Europe, recognising the vulnerability that exists in Taiwan. Ultimately, however, he decided that it was just too hard to do, and instead he is continuing to invest in expanding his Taiwan operation, adding further in house functionality.
Ben Pinnick of Bird Cycles told us that Taiwan offers a complete package of services that is pretty much unbeatable when it comes to bike design and manufacture. With so much experience and skills available to them, Taiwanese suppliers can offer a one stop shop of design and manufacturing advice, prototyping and subsequent manufacture. To try and replicate the development of a bike in the UK, Ben says he would need to source a good seven or eight different suppliers, and then take on all the coordination work between them. Imagine the difference between going to a travel agent and getting them to just book a complicated multi centre trip for you, or trying to book every hotel, flight, transfer and day trip yourself… and then finding that the self serve option costs more anyway. Taiwan has the complete package, ready and easy to use.
The pull of the established infrastructure and business network in Taiwan remains strong, despite any risks. Micki says that people in Taiwan have been living with a ‘false sense of security that they [China] will never come’. If they do ‘it will be up to the West to decide the outcome’. His gut feeling is the the USA won’t allow China to take control, but ‘there is no back up plan’. If Taiwan became under the control of China, or production was disrupted ‘the bicycle industry ceases to exist’.
Economic challenges
For those I spoke to involved in the bike industry in Taiwan, the current economic situation seems more pressing than the political one. Many bike companies have cancelled or scaled back their orders, leaving factories with excess manufacturing capacity or unsold stock. The rollercoaster of Covid panic cancellations, followed by huge demand, followed by over ordering, followed by reduced demand, followed by cancellations has put a lot of pressure on some factories and their cashflow. While some products remain incredibly hard to get hold of (for example, Shimano cassettes – which are not, in fact, made in Taiwan) many are now easily available. Some factories have switched from a position of ‘nope, we can’t make you that any time this year’ in early 2022 to ‘hey, we’ve got that item sitting on the shelves right now because someone cancelled their order, do you want it now?’. It was Giant that hit the headlines for having requested a delay in payments to its suppliers, but we’re told others are doing the same. Cancelled orders and delayed payments puts a huge strain on cash flow, and some we spoke to expect to see factory closures and liquidations as a result.
The scale of the impact, and a possible recovery?
Disruption to production in Taiwan would cause immense worldwide supply chain issues. In this modern age when microchips are in so many products, the potential impact of losing access to – or even just temporary reduced production capacity in – Taiwan’s semiconductor manufacturing market cannot be understated. The Taiwan Semiconductor Manufacturing Corporation itself recognises this, and has been courted by governments into establishing manufacturing facilities elsewhere in the world – China, Japan and the USA all have facilities either established or in development, though none have the same high level capacity as its Taiwanese base. So let’s take that as a given – anything electronic would be significantly hit, and capacity elsewhere in the world to take Taiwan’s place is very limited.
But what about the more traditional machined and forged bits of metal that our bikes have been made of for the last 200 or so years? In many instances operations have been moved to Asia, leaving behind little or no manufacturing capacity. Fox and Marzocchi for example moved operations from the USA and Italy, to Taiwan. Now, Fox only retains manufacturing capacity for powered vehicle products in the USA.
Some bike companies still make much of their countries of origin. Hope products and bikes are famously British made. WeAreOne designs and makes carbon fibre products in Canada, and there is something of a concentration of carbon fibre and composite technologies in Utah. Colorado and California offer further pockets of relevant skills and production, with companies like Moots and Paul Components still manufacturing in the USA.
But these are all pockets of production, often within a specialist niche, rather than the extensive ecosystem of large scale production capacity that is available in Taiwan. Some mass production capability has been created elsewhere in recent years, sometimes even by Taiwanese companies looking for lower cost locations. Portugal in particular has a growing bike manufacturing scene. But on the whole, there is significant dependence on Taiwan and it would take long term investment in skills and infrastructure to create a bike manufacturing scene that could compete with – or compensate for the loss of – production in Taiwan.
The magnesium lowers of suspension forks might just be the bike industry’s mirror of semi-conductors: as far as we can establish, until recently there were only two factories in the world making magnesium fork lowers, and both were in Taiwan. Lose access to these and we’ll be servicing what we’ve got, or going to a rigid fork… Italian suspension company EXT found that it was struggling to compete for space in the order books against bigger suspension companies, with their original supplier ceasing to take their orders. Franco Fratton, founder of EXT, described how, through their motorsports contacts, they were eventually able to find a factory in China who could make the lowers – following some significant investment in purchasing the necessary casting dies.
EXT’s manufacturing experience also illustrates how skills and capacity have been lost, even in locations that used to produce items. Franco explains how the fork lowers were not the only tricky items:
‘Other fork components such as stanchions, stem tube and forged parts are no longer available in Italy or Europe, all of what Marzocchi made and developed in the Italian supply chain in the past was lost when they moved production to Taiwan, so we had to reinvent all process and techniques to be able to be independent from Taiwan, but also from the monopoly of the big MTB industry players that have the strength to swing market, demand and force suppliers to neglect other minor customers!’.
Franco Fratton, founder of EXT
Hope – perhaps the quintessential ‘Made in Britain’ bike brand success story – sources no materials from Taiwan, and the few parts it buys could be found elsewhere. Nonetheless, Hope would not be insulated from the effects of disruption in Taiwan, nor does it see that it would benefit from any shift in product availability. Indeed, Hope’s Sales Director, Alan Weatherill said ‘We aren’t in the business of taking advantage of others suffering. In the pandemic we managed to increase production though productivity improvements as we always knew the demand would return to normal levels. We keep away from the boom/bust mentality and so have a very measured view on expansion‘. If a company so apparently well positioned to withstand or even benefit from a need to source products outside Taiwan takes such a view, it’s hard to see how anyone else in the bike world can be anything other than pessimistic.
EXT has deliberately set out to be outside this ecosystem, but it’s not easy:
Manufacturing in Italy and Europe have much higher costs than Taiwan or Asia. We manufacture very good quality but our production cost is much higher as our labour and taxes are very high! So independence has costs but we are the only company in Europe that has no dependency on the Taiwan MTB ecosystem and economic monopoly to produce suspension!
Franco Fratton, founder of EXT
Perhaps understandably, not everyone I asked wanted to comment on their production capacity – or vulnerability. Many companies have close working relationships with companies in both China and Taiwan, and no one wants to see any friends and acquaintances in either country suffer as a result of political power moves. It’s a situation with such huge implications that it seems like there’s very little to be done to address it. You could try and move business elsewhere and diversify, but it’s expensive and inconvenient. You could just keep hoping it’ll all work out, but if it doesn’t, the consequences look catastrophic and go well beyond the bike industry.
Alan Weatherill summarises the situation:
‘We would obviously be devastated to see this type of action escalate, not just from a business point of view. We have friends there who we have been selling to for many years who would be severely affected. Although our day to day production would be affected very little, the impact on the bike industry in general would be massive. There are brands and components that are only available from Taiwan, or Taiwanese controlled companies. If these supplies are cut then no complete bikes could be built, so even if we could increase our production there would be no bikes to fit them to. The direct effect on bike components is also probably the smallest issue. A bigger issue is semiconductor supply which would affect every part of our lives.’
Alan Weatherill, Hope
Heads in the sand
Asking ‘what about the bike industry?’ in the context of Taiwan and the broader potential impacts to global supply chains feels a little like saying ‘what about my ski holidays?’ in the context of climate change. But the absence of snow at your ski chalet might be the inconvenience that makes climate change feel like a reality you should pay attention to. Perhaps understanding how important Taiwan is to your weekend playtime in the woods might make the precariousness of the situation in Taiwan feel a little more personal. We might try to escape from the big issues in the world as we pedal our way along the trails, but everything is connected. How this plays out will affect us all.
Thanks to Micki Kozuschek, Mark Peterman, Ben Pinnick, Tim Williams, Dominic Loh, Kenny Jau, Alan Weatherill, and Franco Fratton for their input and insight.
