Taiwanese bike maker has smooth ride on mainland
Giant Manufacturing got what it wanted from a free-trade agreement that took effect this year between its home base in Taiwan and the rapidly growing mainland market, but the benefits did not last long.
Giant is generally regarded as the world's largest bicycle maker, with sales expected to top 5.5 million this year. And it has been looking to the mainland for further growth. Since a trade deal with the mainland to lower import tariffs took effect on January 1, sales of its high-end bicycles there have grown to an expected 4,000 or 5,000 this year from about 3,000 last year, company chief executive Antony Lo said.
He expects within the next five years to sell as many as 80,000 Taiwan-made, high-end bikes on the mainland, which sell well on the other side of the Strait as manufacturers there focus on cheaper models. From next year, the trade pact will scrap bike import tariffs, which have already fallen from 13 per cent to 5.5 per cent.
But while reduced tariffs help Giant cut costs, rising mainland prices, an appreciating yuan and weak consumer demand outside Asia have offset those savings. Economists say other Taiwanese firms face the same contradiction.
The trade deal, called the Economic Co-operation Framework Agreement (ECFA), cuts import tariffs between this year and 2013 on 539 items shipped from Taiwan, everything from petrochemicals to machinery, and on 267 products coming the other way. Tariffs will eventually fall to zero. Both sides call ECFA a starting point for more talks that could drop tariffs on thousands more items.
On the plus side, ECFA has reduced tariffs on parts for Giant factories shipped in both directions, Lo said. The company operates a busy, cavernous factory in Taichung in central Taiwan and seven on the mainland, where it has done business for 25 of the 39 years it's been in business. Its factories on both sides make bikes, with the mainland plants giving it a cost-saving advantage.
'It was correct to locate in Taiwan and now, after ECFA, it's even more correct,' Lo said in an interview.
'I personally think the case of bicycles is a great example in cross-strait development.'
Lo will not disclose Giant's savings from the lower tariffs. But he says he is excited about increasing demand for bikes on the mainland, where consumers have money for exercise, local governments are pushing non-motorised vehicles to ease air pollution and Giant has 2,500 sales outlets.
Prices for the often lightweight high-end bikes start at US$1,500.
So far, ECFA has only had a limited economic effect as Giant weathered rampant inflation on the mainland and global economic uncertainty that might affect consumer demand outside the region, Lo said.
Because of ECFA, about 15 per cent to 25 per cent of the Taiwanese firms that export items covered in the trade deal are saving money, economists say. But those benefits do not always offset the impact of economic issues on the mainland or beyond.
Taiwan's share of total imports into the mainland edged down from 8 per cent at the end of last year, to 7.5 per cent in August because overseas orders declined for finished products on the mainland, said Donna Kwok, greater China economist with HSBC in Hong Kong.
Giant's revenues for this year were expected to hold near last year's levels of NT$44.22 billion (HK$11.25 billion), Lo said. He said last year's revenues were up 13 per cent on the year before, but problems in the global economy would prevent similar growth this year.
'There's a lot of uncertainty, so we're conservative on [the figures].'
Negotiators signed ECFA in June last year as Taiwan sought a bigger share of the mainland's market amid competition from industrialised neighbours. The country had lagged behind those neighbours in the past as political tension thwarted a pact with Beijing.
As of August, Taiwanese firms had saved US$12.16 million in tariff cuts, which covered 23.25 per cent of all exports to the mainland, according to the economics ministry in Taipei.
In ECFA-supported sectors such as machinery, Taiwan was slowly gaining on other Asian exporters, said Tony Phoo, an economist with Standard Chartered in Taipei.
'ECFA is not a solution for everyone, but it could be for industries that have a competitive edge over South Korea and eventually even over Asean,' Phoo said.
But the Taiwanese firm that made a total of 30 million bikes per year faced higher labour and materials prices on the mainland than before, as well as pressure from an appreciating yuan, Lo said.
'Strictly speaking, we haven't really saved any money,' he said. 'Stuff in China isn't cheap. Prices are going up at a terrifying rate.'
The yuan has risen more than 20 per cent against the US dollar since 2005, while inflation stood at 5.5 per cent in October.
The Taiwanese government had expected foreign firms would set up in Taiwan to piggyback on the deal's new cross-strait opportunities without setting up on the mainland and risking legal problems such as intellectual property theft.
But so far, for Giant at least, that has not happened. In 2003 it set up an alliance of companies to make high-end bikes in Taiwan. It has more than 20 members now. But no new foreign companies have joined as a result of the trade pact.
'They won't come to Taiwan just because of ECFA,' Lo said.
But, speed bumps aside, Lo said bicycles still enjoyed a smoother ride in the mainland than sectors not covered by ECFA, as 'China is the world's biggest [bicycle] market'.
The value, in billions of US dollars, of cross-strait trade each year, says Taiwanese cabinet spokesman Philip Yang