A typical picture postcard of Peking, Shanghai or Canton shows major streets clogged with pedestrians, rickshaws and bicyclists.
Where tourists would be struck by a backward transportation system, Tom Nestrood, owner of a bike-component manufacturer based in suburban Franklin Park, sees vast potential.
Bicycles, of course, remain the chief means of transportation in the People`s Republic of China. The world`s most populous country annually makes 30 million bikes, double its output of two years ago but still far short of demand. (There`s a two- to three-year waiting list to buy a bike in China.) In the U.S., manufacturers produce about 5 million bikes a year.
Last month, during Chinese President Li Xiannian`s visit to the United States, Nestrood tapped into this huge market when his Excel Group Inc. signed two contracts with Changzhou General Bicycle Plant, one of China`s largest bikemakers.
With manufacturing operations already located in Brazil and Taiwan, the deal completes Excel`s moving of production overseas, a move defended by Nestrood as necessary to the company`s survival. Excel`s Franklin Park plant will remain its administrative and marketing headquarters, but employment at the plant has plummeted by more than 85 percent since 1983.
In addition to giving Excel access to the Chinese bike market and its cheap labor rates, the contracts allow the company to market exclusively Changzhou-made bike components outside China for an undisclosed period. Nestrood wouldn`t put a value to the deal beyond saying it`s worth
”multimillions.”
Changzhou gets Excel equipment and technical know-how to make the gearshifting mechanism used on 10-speed bikes (called derailleurs) and reflectors. Both components are essential to boosting exports of Chinese bikes, a goal of the Chinese government.
With Excel the only U.S.-based manufacturer of derailleurs and a pioneer in reflectors, Nestrood said Changzhou ”came looking for us.”
Virtually all of Excel`s derailleurs and reflectors will be made in China once Changzhou begins production in the next six months. Brazil will make most, if not all, of Excel`s two other products, hubs and pedals.
With Excel`s manufacturing concentrated in low-cost overseas locations, Nestrood said, ”We should be a major factor in the world in those products.” That would mark quite a turnaround for Excel, a division of Beatrice Companies until Nestrood, the division`s president, took it private in a leveraged buyout two years ago.
With its products ”marginally” competitive against low-cost foreign manufacturers, Excel saw market share plummet and revenue fall off the table, to between $4 million and $5 million in 1984 from $20 million in 1980, Nestrood said. The company barely broke even since going private, he said.
A strengthening U.S. dollar only increased foreign competitors` edge in recent years despite what Nestrood considered Congress` inadequate efforts to protect U.S. bike-component manufacturers by raising certain tariffs.
”To protect the business,” Nestrood says, he started up the plant in Brazil less than two years ago and formed a joint venture in Taiwan to develop a multispeed derailleur. Now, with the China deal in hand, Nestrood expects revenues to exceed Excel`s 1980 peak in two to three years.
The move overseas has paid off in two ways:
— Costs fell dramatically, particularly labor rates. Nestrood credited Excel`s automated Franklin Park operations and ”the most favorable labor costs in the U.S.” with keeping him in business this long. Yet, even if Excel`s Franklin Park employees had agreed to accept 50 percent wage cuts, Nestrood said, ”it would have made no difference.”
Wage costs at the plant averaged just $5 an hour and remained unchanged since 1983, when its union employees agreed to a three-year pay freeze. But hourly labor rates run between 25 and 50 cents in Taiwan and between 50 cents and $1 in Brazil, Nestrood said. Better yet, Changzhou`s labor rates total 19 cents an hour, he said.
— Excel expanded its markets. Once limited to the shrinking U.S. market, the company, with manufacturing operations in Brazil and Taiwan, distributes its components in South America and the Far East. With the Chinese deal, it will have a presence in markets producing almost 50 million bikes a year, a tenfold improvement over a few years ago.
Nestrood certainly wasn`t the first to see the advantages of producing bike components overseas. ”A large part of a bicycle is imported, even it`s made domestically,” noted Harold Vogel, an analyst for Merrill Lynch, Pierce, Fenner & Smith Inc.
And increasingly, bicycles aren`t made in the United States.
Imports have long dominated 10-speed bike sales in the United States, but in the last 2 1/2 years, foreign competitors, particularly from Taiwan, have made significant inroads into mass-market bike sales. Overall, import sales in the United States surged 56 percent last year to 4.2 million bikes, with Taiwan manufacturers accounting for more than three-quarters. The Bicycle Manufacturers Association of America expects sales of imports to reach 5 million this year.
Meanwhile, domestic bike sales fell 6.5 percent, to 5.9 million last year, and the bikemakers` trade group expects another 10 percent drop this year to 5.3 million.
Only Huffy Corp. and Murray Ohio Manufacturing Co. continue to make most of their bikes in the U.S.
At Murray Ohio, based in Brentwood, Tenn., a short distance from where General Motors Corp. will build its much-ballyhooed Saturn plant, bike sales fell 19 percent to $147 million last year. To shore up market share against the onslaught of imports, the company cut bike prices by as much as 25 percent last year.
While sales for the first half of 1985 dipped only 1 percent from a year earlier, Murray Ohio`s bike operations continue to lose money, leading Tom Hannon, its vice president of marketing, to admit, ”Whether we can remain in the bicycle business we`re not sure at this time.”
The story has been much the same for bike-component manufacturers. Taiwan has been grabbing more of the U.S. market for pedals strictly on price, Nestrood said. Excel has lost orders by half a penny a pedal. ”It`s that cut- throat,” he said.
Derailleurs, the most labor intensive of all bike components, sell for less than half their 1980 prices, Nestrood said. Even Japanese manufacturers, Excel`s major competition, build many derailleurs in lower-cost Singapore, he said.
The loser in this war has been Excel`s Franklin Park plant, which employed nearly 400 people just 2 1/2 years ago. Employment today totals less than 50.
Excel started in business 40 years ago, principally as a supplier to the Schwinn Bicycle Co. (Schwinn closed its Chicago manufacturing plant last year and imports the bulk of its bikes from Taiwan and Japan.) Excel once operated out of six buildings; now it`s in one building, and Nestrood made it clear that it is bigger than needed.
