This is a question that has been bothering me for a long time.
A question that is not only important in the bike industry but also more and more important in the automotive and in many other industries.
Why are products from China and other Asian nations so much cheaper than when they are made here ?
To get this question answered I got into discussions with many people and talked with owners of few remaining real production companies.
Here are three main reasons I heard and my thoughts on them:
- Most often we hear that production worker wages in Europe are higher than in Asia.
This may be true for some countries but recently the wages in China tend to be higher than in Eastern Europe, sometimes reaching the South and Central Europe levels. So this can’t be an excuse for us to have significantly higher prices of products. Only thing I can think of here is that the workers in Asia are working longer hours plus more days to produce more units per worker for the same wage. We can catch up on this with automatization and better organized work.
2. Cost of materials and parts is lower in Asia.
This makes sense because the mining industry there is very developed. But, for example, when you look at the cost of alloy that is used in one bicycle (weight of the material) it is only a small fraction of the price. How much does 10kg of alloy cost ?
So even if we have double or triple of the price this means a very small price difference that is neglectable. It seems that we rather like to outsource all of the processes out of our factories to make our productions simpler for us (production of various parts is very difficult to plan). So by doing this every one of these outsourced processes will include someone’s profit, hence burdening the end prices by a significant margin. More processes outsourced the more value and profit you give away!
The side effect of this is that you can’t be competitive with the pricing when it is needed to get more business. This is what we are seeing these days with companies losing more and more money and continuing to cut costs with outsourcing more processes making them even more uncompetitive. Also this is what we saw when Chinese companies were trying to enter the new markets or customers. They have the ability to drop the prices and still not lose money and then gradually increase the pricing when it is possible to be very profitable.
3. Energy costs are lower in Asia
This might have been an issue before we all had the options of solar panels, wind generators isolating materials for buildings etc. Natural gas can be a problem because it’s price recently is a bit higher in Europe due to the situation we are in.
What is interesting to me is that this doesn’t influence the rapid development of plastic molding and composite materials we are seeing now entering the bike industry. Everyone is chasing the plastic parts which actually require a lot of energy to be molded and carbon materials (oil) to be produced. I still need to learn somewhat about this but I am very curious about this plastic trend we are seeing and why everyone thinks it is the future.
Conclusion (long one)
There are some other factors that I see influencing the prices as well.
Often we can see complex management structure with many employees which are not producing actual value and this affects the prices in a huge way (especially the smaller companies below 200 workers).
Then there is government with it’s own set of complex needs and taxes which makes a business more and more complicated in the real world. This in return demands again more workers to comply with the rules. The side effect of this is that it is almost impossible for the young people to start a company that will actually produce something. New companies are often some consulting, development, “start up something” so called bla bla companies. This is crippling for the economy.
We are always paying for the marketing, even if we don’t produce the product, hence we are paying the marketing for other people’s productions! This can also be said for the recycling for example.
So what are our advantages and what is the way out of this vicious circle ?
For our own market we have the advantage pure out of location and speed. Then we have the advantage of stability of supply and quality stability both of which are very very important when you are in production. Then we have an understanding of each other, cultural resemblance, being good neighbors and colleagues.
Solutions for this are layered.
First there is a political layer where the governments need to simplify the laws and processes for doing businesses. We also need to let the traders prove the same thing for the products they are importing in our market that producers need to do, not just show some document made up somewhere that products comply. Take fat bike example from few weeks ago.
On top of that, what we are seeing now are the subsidies and handouts which are popular contests for politicians but that only brings instability to sales, market and planning. We better use that money to support the producers to make more and bring down the price themselves.
Second layer is bringing so many processes back in house, in Europe, to have competitive industry overall.
Third layer is simplify the management, we need less everything in connection to the production. Production must be efficient and unburdened by crazy software solutions, slow decision making, corporate structures and millions of reports.
Little less short term think and greed would also help…
Fourth layer is that we all need to work harder. Not be slaves, but basically to work more hours and more effectively. We can take Poland as a good example of hard workers and competitive industry.
If we don’t start working more and harder, like our parents did, we and our children will be slaves in the future for those who are doing the work now.
