ROLLING WITH TARIFFS
In 2008, my best friend Terry and I were at lunch talking about what we wanted to do with the rest of our lives. We were both fifty-something serial entrepreneurs who were in between ventures. Friends since college, we both loved cycling but hated hills. We loved the concept of electric bicycles but hadn’t found a really great electric bike. So, we decided to create our own. Over lunch, we designed our first bike on a napkin. And Pedego Electric Bikes was born.
Flash forward 10 years. Pedego is now the No. 1 electric bike company in the United States. Our bikes are sold in more than 100 Pedego-branded stores in 20 countries. Our revenues have grown 76 percent in the past two years. We were at the top of our game.
Then there was a game changer. In August, the U.S. government enacted a 25-percent tariff on nearly 300 Chinese-made products, including electric bikes. The tariffs affect every Chinese-made bicycle, electric or not, as well as nearly 5,000 other Chinese-made goods in a wide variety of industries, from aluminum and steel to farm equipment and baby cribs. Our story is just one example.
As early as June, there were rumblings coming from Washington D.C. about possible tariffs on Chinese-made electric bikes. On July 23, I testified in front of a U.S. Trade Representative’s panel to protest bicycles being on the tariff list because they did not fit the goals of preventing China from stealing intellectual property (there is no intellectual property on bikes) or bringing bike manufacturing back to the United States. There is no way to manufacture affordable bicycles in America. In fact, it would double the price of an electric bike to build it here.
I wasn’t alone in testifying. An attorney for the Trek Bicycle Co. of Wisconsin, one of the world’s largest bicycle companies, was also there as well as a representative from People for Bikes, a nonprofit devoted to increasing cycling in the United States. We weren’t just there for our companies; we were there to help the entire bicycling industry. We argued that tariffing bikes would accomplish none of the tariff’s goals and would greatly hurt the bicycle industry by increasing costs for every type of bicycle: from inexpensive kids bikes to high-end road bikes as well as the growing category of electric bikes.
We were each given five minutes to speak, but unfortunately, our testimonies fell on deaf ears. The first tariff went through on Aug. 23, a week earlier than expected. We had two containers from China come into port the next day, costing us more than $100,000 in tariffs that we hadn’t expected. Luckily, our volume of summer sales allowed us to withstand this blow, but it had to be a one-time thing.
We had already planned our expansion to Vietnam in response to the European Union’s 83 percent tariff on Chinese-made electric bikes, which was announced in the spring. With the August confirmation of U.S. tariffs on Chinese-made bikes, we decided to move our manufacturing entirely out of China. In addition to moving production to two factories in Vietnam, we also are manufacturing at a second factory in Taiwan. Both Vietnam and Taiwan are no-tariff countries.
Moving our manufacturing out of China doesn’t mean we won’t pay tariffs. We will still pay tariffs on Chinese-made bike parts. For example, one part that is almost entirely made in China is the throttle, a part that is on every single Pedego electric bike.
The number of Chinese-made parts on our bikes vary by the model. For example, our Pedego Interceptor Cruiser is made of about 80 percent Chinese parts while our newest bike, the Pedego Conveyor commuter bike, is made of only about 20 percent Chinese parts. To further reduce the impact of the tariffs, where possible, we will source more of our parts from tariff-free countries outside of China.
We have always sourced bicycle parts from about a dozen countries worldwide in an effort to utilize the most high-quality components available. For example, our new Conveyor is made from parts from 10 countries including Japan, Germany, France, Indonesia, Italy, Czech Republic, Taiwan and the UK, all of which are currently free from bike tariffs.
While I’m a big believer that our government should be run like a business and that leveling tariffs is, in theory, a good idea, the U.S. cost of Chinese-made goods is likely to increase dramatically in the United States. For example, our average electric bike costs $3,000. Adding 25 percent to cover the cost of the tariff would bring the cost to $3,750, a huge increase for the customer. However, our foresight in planning our move to Vietnam and luck in being able to make it happen quickly has enabled us to keep our prices fairly stable. Our entry-level electric bike remains priced at $2,299, the same price as it has been for four years. We did not increase prices on our newest bikes, which includes the Pedego Elevate electric mountain bike. Our mid-range bikes had a modest increase of just 8-10 percent.
However, just as we thought we were out of the woods, the U.S. announced a new tariff on bicycle accessories of 10 percent that went into effect in September. These tariffs aren’t just on bikes or even recreational products. In fact, the U.S. is now tariffing $250 billion worth of Chinese-made products in a variety of industries, accounting for more than half of the Chinese goods coming into America.
All companies that manufacture products on the tariff list must figure out a solution. If they stay in China and incur the tariffs, do they increase prices? Do they cut quality? Do they simply eat it? Or, like us, do they simply move away?
Don DiCostanzo is the CEO and co-founder of Pedego Electric Bikes, the No. 1 electric bike company in the U.S. according to Navigant Research. Email him at Don@Pedego.com.
Global Trade’s 2015 cover story on Pedego at www.pedegoelectricbikes.com/global-trade-magazine-peddling-to-a-global-market.