It seems like all we do is talk about wheels lately, huh? Well, there's a lot to talk about about wheels, and we have some really really nice wheels. If you're on the mailing list, you'll know that we've just announced a Rail trade-in program, where you can trade in your older November carbon clinchers for new Rails. It's a great program, but talking about wheels is not my purpose here today.
Have you noticed that there are relatively fewer carbon frames going around these days? I don't mean from Trek, Giant, or Specialized. I mean like Blue (the company was shuttered a couple of weeks ago), and Van Dessel (their primary cx bike is the very cool new aluminum "Aloominator"), and companies sort of that size and smaller. There are a bunch of different market forces at play creating that.
One is what I call the forest syndrome at the bike dealer. The big companies are the tall trees and they soak up the sunlight and the moisture from the ground and the big get bigger and the small fight over what's left. This is decidedly not me wearing some punk hat right now, it's a simple fact of the way things go. In order to thrive in that environment you really have to be well adapted and do something unique. We've chosen to go a different route entirely, and that's been pretty good for us so far.
Another thing is floor plan financing. This is really part of the forest syndrome, but it bears talking about quickly. The bikes that you see on the shop floor are being financed. The bigger brands can finance more stuff at better terms than smaller ones can. They have more access to capital, and their draw as brands puts people through dealer doors, so the dealers generally need them to thrive. It drives a lot of shop floor homogeneity, but until it becomes a bad thing (dealer sales don't meet expectations, dealer gets behind financing) it's a good thing in terms of keeping inventory available to buy. As the bike buyer, you pay for it, but that's part of the stew.
A big and growing challenge for a lot of brands on the undercard is lead time and carrying cost. If you want to buy frames from someone worth buying them from a) they're not cheap, b) you have to buy a ton of them, and c) there's a long lead time after you pay for them and before you get them. So, say you are a company like us, and you are aware of and have access to the companies that you want to be buying frames from. In order to have bikes to sell, you need to buy what we politely refer to as a metric f**kton of them, and pay for them at time of order. Anywhere between 90 and 120 days from that time (from the quality suppliers, lead times have been growing, and prices have been rising), they'll be ready to ship to you, so you're out the use of that money for that entire time, and you're paying the vig on whatever of it you had to borrow.
Call it 100 days later, you get the nice notice that the frames are ready to ship to you and you get to pay the shipping cost then, and soon enough customs duty and broker fees as well. If you do it like we did our last pre-order, when the frames were a bit at risk of arriving behind our promised delivery window, you air freight them. That costs a ton. If schedule allows, you sea ship them. That takes a ton of time. Say you've shipped them by sea, which takes on average about 30 days from Taiwan. Now you are looking at a clean 4 months from when you've paid for the frames to when you even have them. Then you start selling them, but because of the nature of this whole morass you are taking any where between 6 months and a year of inventory in the shipment.
If you've taken 6 months worth of inventory, you're going to sell approximately half of that inventory in the first three months and half of it in the back end. Say your sales go well and you sell half of the inventory in the first two months (which, incidentally, has now given birth to your resupply problem). So now you are starting to get recoup some of your investment that you made 6 months ago, and if sales continue to go well, you will get out of the red and into the black before much longer. Hopefully you've gotten the size mix right so a bunch of your inventory doesn't become a white elephant.
Most small businesses simply don't have the capital to finance COGS (cost of goods sold - one of the acronyms I do use, and often) for half of their year's sales for 6 months. The various responses to that are going out of business (a la Blue), or shifting to a different supply (Van Dessel), or realizing that their original plan of doing pre-orders is actually really smart (us).
As with every blog post about complicated topics, I've had to leave out a lot in order to keep it to a length you might actually read. If the world slows down just a little bit hopefully I will be able to fill in some of that shading.
6 comments
how long before we start to see any of those suppliers coming on as "partners" in the process? That might alleviate the upfront costs for the "small guys" on some of this. Of course, the incentive for them might not be there until they end up with idle capacity due to too many of the smaller fish washing ashore and just going away….. Takes money to make money, huh? and the only people who can get a loan are the ones who can prove that they don't need the funds….
Scott – I don't think we'll see that too soon. First, it would irk their enormous clients (or their hoped-for enormous clients) if they did that. Secondly, to them, if you're not big, you're nothing to them. Specialized going down however many years ago would have knocked Merida on its butt, which is how Merida came to own such a huge piece of Specialized. But that situation is unique and unlikely to replicate itself often, and certainly not en masse. Witness Blue – their supplier probably could have partnered with them but chose not to. I don't think it's business they have any hankering for. – Dave
Is it getting to the point where going to a supplier in North America makes sense? Has anyone tried this approach?Everyone uses Toray carbon now, and Toray is opening up plants outside of Japan now, including in the US. So you locate a manufacturer in a low-cost state, and pledge to meet strict environmental standards, heavily publicize that fact, and it might work.The product itself would cost more, but this might be mitigated by faster turnaround times.I think some boutique clothing manufacturers figured this out… With the delays at Long Beach, it was cheaper just to open a plant in Southern California and ship those instead. Note that I'm not talking about Sears and Walmart here; I'm talking about low-volume sellers. But that's fine; Specialized isn't going to sell 30,000 Venge's; they're going to sell maybe a few hundred (of the EPS model, that is).By the way, I recently bought a generic. It was under $500, delivered, for an FM001, straight-blade forks, 12k weave, gloss finish, with headset, seatpost, 2 hangers and a terrible seat binder I immediately replaced with a Thomson. It's a great frame. Two year warranty.I also think it won't be long before people are printing high-end bikes. That could put a dent into the Shenzen suppliers.
MikeM – The capital cost of setting up production here is exponentially more than setting up sewing here. You couldn't make it pay without huge production, and you couldn't be cost competitive until you had MASSIVE volume. I think you'll start to see some of it sprouting up, but there will never be anything like a $500 frame out of that. The $500 frame question is a whole 'nother bag of potatoes. Our frames cost us comfortably more than that and we have to buy them in huge quantity and suffer long lead times (as detailed above). Maybe we're just buying from the wrong guy? (That's a rhetorical statement, to prevent me from writing a book on the topic – in all seriousness, some people get lucky going that route)Printing or anything like it is super unlikely to happen until there's some quantum leap in applying that tech. Also as many times as we say it, we work with Taiwanese companies.
People are printing some really precise stuff these days. Take a look at the story on CNN today, where the head of some company printed a metal firearm on a printer that he describes as costing more than his education from a private university cost. Still, those prices are going to fall, and once you've printed 50 frames, you've paid for the printer. I know of at least one company is printing their TI rear dropouts.I could provide a lot more info on that CNN article here, but I'd rather not. I kind of wish a lot fewer people had such free access to guns.I almost hesitate to do this, but I will anyway. I got my frame from Hongfu. You can redact that if you want; as long as you see it, that's fine. I just wonder if you shouldn't order one and see what you think. I know of at least one European company that's selling these as complete bikes. I really like mine.http://www.velonation.com/Gear/Review/View/ID/4200/2011-Onix-Azzuro-Review.aspx