Chapter 4 Comparison Of Bicycle Industry in China and Taiwan
4.1 Historical Overview on Bicycle Industry Development in China and Taiwan
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C HAPTER Comparison of Bicycle Industry 4 in China and Taiwan
Konzelmann (1997) grouped the East and South East Asia new pattern spatial configuration together into three tiers, reflecting a process of ‘considerable industrial dynamism during the past two decades’. Tier one includes Japan; the four Asian Newly Industrializing Economies (NIEs) (Hong Kong, Republic of Korea, Singapore and Taiwan); Tier Two: the ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand); Tier Three: mainland China; and Tier Four: the newly emerging ‘layer’ of countries such as Vietnam, Laos and Cambodia.
Industrial clusters are the drivers of regional and even national economic growth. Bicycle industry has been a case in Taiwan. China’s planned economy made one factory and formed the other parts factories into a bicycle cluster, but the clusters only formed inside the province and did not cooperate with each other nationally. Bicycle clusters in Taiwan were naturally shaped by the movement of the enterprises themselves in considering inter-firm transaction cost.
In the section 1, from the historical review China’s bicycle development, the horizontal specialization for manufacturing and rigid price system for distributing bicycles in the home market. Taiwan’s bicycle industry had been boomed by exporting business and been aiming the global market instead of home market so the strategic policy among government, firms and academy maneuver actively and it is the private sectors instead of the government act a dominant role in the promoting the industry. In section 2 the analysis of SWOT on the industry in China and Taiwan is to be explored.
4.1 Historical Overview on Bicycle Industry Development in China and Taiwan
After economic reform was launched in 1978, China entered a period of accelerated industrialization. The industrial institution and development mechanism took the lead in
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transitioning from the planned economy to the market economy and realizing sustained fast industrial growth. Industrialization boosted the international competitiveness of the Chinese industry.
During the 1980s and the 1990s, China swiftly expanded its industrial production capacity and market share through severe competition by leveraging its comparative advantages in low-price factors. The pulling force of China’s abundant cheap labors and lands attract Taiwanese and other foreign bicycle manufactures to move their production line to China.
Industrialization of Chinese local companies and globalization of world society ignite the spatial transformation within China.
First bicycle industry development in China is discussed followed by Taiwan’s bicycle industry development historical review. Briefly Chinese bicycle industry has gone from the period of planned economy to period of market economy. During the process, it is the matter of supply and demand. After 1970, the expansion of production started due to an increase of requirement. At the middle of 1980s, the requirement of Chinese branded bicycles was still high.
It was the starting that there was a surplus of production and meanwhile the state-owned bicycle companies were facing the competition from the local and foreign private sectors. Since Taiwanese bicycle industry entered China in the end of 1980s, bicycle industry in China started aiming overseas market instead of home market.
Taiwan’s whole bicycle companies were few during 1950s-1970s accompanied many parts manufactures. In 1970s output of bicycles increased and started exporting business. Bad quality of bicycles was caught attention by both customers and government. Anti-dumping charge forced the enterprises and government to improve the quality and invented a new item, BMX to capture the US market and enjoyed a boom BMX trend in bicycle market. In 1980 Taiwan enjoyed huge trade surplus but the high cost and fierce competition made the enterprises moving to China starting from the end of 1980. From 1900 till now, Taiwan enterprises exported bicycles from China and Taiwan and meanwhile the branded companies start to expand global market share.
4.1.1 Historical Overview on Bicycle Industry Development in China
In 1954, First Five-Year plan (1953-1957) China set state-own factory in Qingdao where there were 49 existed bicycle parts and repairmen. In Second Five-Year Plan (1958-1962), the
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output of bicycles was escalating, but due to Soviet’s drawing back the investment, decreasing steel output, seven small private sectors were found during the time there were existed the three Shanghai Factories, and two Tianjin Factories (Zhang, 1992).
In Third Five-Year Plan (1966-1970) and Fourth Five-Year Plan (1971-1975) there were more new factories established. The output rose, but the efficient on investment was low. One reason was that the capital was invested on new factories, not on the original factories. One state-owned factory received 1million RMB in the beginning but the state invested another 1 million RMB not on the former factory but in a brand new factory to increase the output. Another reason was new companies were small scales and pursued internal self-manufactured production line in one factory instead of outsourcing the necessary parts (Wang and Yao, 2001).
In a planned economy, firm’s decision is based on comparing internal hierarchy cost with external hierarchy cost. Tax system in China was borrow from the Soviet Union and based on sales taxes (Wong and Bird, 2004). By taxing the portion of sales in any firm, the product taxes or industrial-commercial taxes encouraged vertical integration within firms. Morever, other provinces which can’t obtained intermediated inputs inside the province were eager to gain independence to produce their own bicycles.
From 1978 to 1983, outcomes of people were rising and the bicycle price remained the same level, and big requirement in the market caught the local government’s attention. Local governments set new bicycle factories to create revenue and employments. Moreover, in addition to the planned economy policy which focused on the output of heavy industries, central government set the high price for light industry, which included bicycle industry, and move the profit from the light industry to high debt heavy industry. Although local government set new factories, the share of Phoenix, Forever, and Flying Pigeon decreased from 48% in 1979 to 27%
in 1983. The efficiency of these state-owned factories was still low (Komagata, 2011).
From 1984 to 1987, overstock was occurred during the record of bicycle commercial system which was the basement for planned bicycle price on stock of bicycles in the factories.
From 1984 Light Industry Bureau examined the factories and closed them if they did not pass the standards and by the mean times, bicycle factories needed a production permission to produce bicycles. Total production was declined due to this policy and forced the private sectors to cooperate with the state-own factories under the so called “Economic Horizontal Integration”.
The production of three branded bicycle factories were going up but the overstock happened
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again. The bicycle ownership reached its peak and another requirement of new fashion bicycle rose but the branded companies react to the market needs late and hard to compete to other private manufactures in varied cost (Komagata, 2011).
In the end of 1980s, Taiwanese companies entered China’s bicycle industry. Bicycle manufactures in China took advantage of Taiwan and Japan’s manufacturing machines and as original equipment manufacturer supplied parts or bicycles to overseas customers. According to China Bicycle Association (2011), bicycle parts imported USD0.32 billion in 2010, and the exports were six times of imports, USD1.81 billion, which also included Taiwanese and Japanese manufactures. In beginning of 2000, Guangdong took the biggest share of exports for around 45%, and went down from year to year. In 2005, central region took 50% of the exports and Tianjin was catching up.
The market of bicycles, especially MTB, was noticed by Chinese private manufactures.
They started to imported or purchased Taiwanese parts for a bicycle and they found that the quality was too good for the local market. Central region’s manufactures assembled a cheap bicycle with cheap parts with only one or two key Taiwanese of Japanese parts for sales in the market and earned a big success. A bicycle industrial cluster formed around the Taiwanese and Japanese bicycle suppliers in Central and Southern regions. Tianjin’s state-owned companies were looking cheap parts suppliers and with development of bicycle clusters in Central and Sothern regions. The manufactures from these two regions started to supply Tianjin’s factories.
4.1.2 Historical Overview on Taiwan Bicycle Industry
Taiwan bicycle industry development can be briefly explicated as following five stages.
Stage 1: 1950-1970
First stage is from 1950 to 1970. Assembly of bicycles in Taiwan began. Many parts were imported from Japan, and most manufactures imitated Japanese components until Taiwan government limited importing bicycle parts. There only twelve bicycle components could be imported, such as the frame, chain, brake, gear, etc (Chen et al., 2009). Various parts bicycle manufactures and four major bicycle assemblers thrived under the protection of import substitution in 1950s (Chu, 1997). However the four major bicycle assemblers could not compete with other cheap quality bicycle manufactures, the quantity of the four major suppliers remained low until the orders placed by United Sates and other countries after 1980.
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In stage two, it was a timing of expanding exports in 1970s. The output ranked seventh in the world. City, traveling, mountain and racing bicycles started to be produced. After the energy crisis in 1973 the requirement of bicycle grew rapidly. It was Tai Hsing Wang, the Taiwanese agent of Japan’s Kyokuto Ltd, began selling Taiwanese bicycles to an American firm for the first time and introduced Taiwanese bicycles into the global market (Hu and Wu, 2011).
The booming bicycles output didn’t rise up the bicycle’s quality and incurred dumping charge by the USA and Canada in 1974. In 1972 Metal Industries Research & Development Centre set up “Bicycle Industry Consulting Plan” and in 1974 “Bicycle Manufacturing Commission” was founded. These two governmental sectors promoted Taiwanese bicycle manufacture for building a new technology for the new model, BMX, and a light-weight bicycle to compete with Japanese manufactures in the US market (Hu and Wu, 2011) .
Stage 3: 1980s
Industry upgrading in stage three from 1980 to 1990 is the golden age for bicycle industry. The output of bicycles ranked fourth, 10 million sets in 1987 in the world. Taiwan’s exports transcended Japan for the first time. However the profit of producing bicycles started declined due to high labour cost and appreciation of Taiwan dollar. In the end of 1980, bicycle manufactures start moving production lines to China, such as Giant, and Merida. The government set a program of “Center-Satellite System”. The project strengthened Taiwan’s bicycle production network and contributed to the delicate division of labour in the industry (Wang, 2009).
The Materials Research Laboratories (MRL), which are a part of the Industry Technology Research Institute (ITRI) studied and helped firms for applying bicycle material, carbon fibre on bicycle frames. At that time steel, Cr/Mo steel and aluminium alloy are the major material for bicycles. This project was executed by Industrial Development Bureau Ministry of Economic Affairs supported building key technology (Shi et al., 2005).
Stage 4: 1990s
Taiwan bicycle industry stepped into the stage of globalization. The production ranked second in the world. The application of composite carbon fibre frame had successfully transferred from government sectors into private firms, such as Giant, Merida, Hondaka and Ta-Ming production companies. Due to Taiwan’s export was subject to the supply of Japanese
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exclusive key component, derailleur gear units from Shimano, in 1992, the industrial Development Bureau established the first research institution, the Taiwan Bicycle Industry R&D Center, specifically dedicated to the Taiwanese bicycle industry. Its role is a bridge for government and bicycle firms. This non-profit organization made international bicycle components suppliers, SRAM and SunTour to set the production bases in Taiwan(Hu and Wu, 2011). Free from the limited supply of Japanese derailleur gear units, Taiwan’s output of derailleur gear had grown and ranked the second in the world (Shi et al., 2005).
Stage 5: After 2000
After 2000, Taiwan branded bicycles account more and more share in the global market.
Taiwan’ famous branded company, Giant has succeed in selling 5.7 million bicycles with revenue USD 640 million ranking the top 1 followed by the former top 1 American company, Trek, in 2004, 33 years after Giant’s establishment. To compete with other manufactures in China and southeastern Asia, Taiwan bicycle manufactures dedicated in innovation on bicycle’s design, materials and market. The average price per bicycle of home market escalated 300%
from NT 3185 in 2000 to NT9990 in 2009. The ratio of home market revenue had risen 9.9%
by middle of 2009 comparing to 2.7%, the ration of export and home sales in 2005 (Wang, 2009).
A-Team was established on January 1st, 2003, led by Giant and Merida. The first goal was to achieve effective production and introduced Toyota Production System (TPS) to reduce the lead time of assembly bicycles from 30-40 days to 10 days. In second stage, the organization encouraged the members to strengthen R&D and producing the branded products in terms of special function to meet the needs of specialized dealers or shops (Shi et al., 2005). The third stage is to implement market strategy and launching the brands of the members. The collaborative strategy for launching A-Team branded bicycle is that members use frames by Giant and Merida, with 60 to 70% of the components being produced by the A-team member companies, and launching them on the market (Oortwijn, 2009).