After Lost Sales and Layoffs, Section 301 Exclusions Belatedly Arrive for Some Small Bike Companies

At Pure Cycles, a 9-year-old company in Burbank, California, prices went up more sharply. Every model's price increased, in a range from 8 percent to 17 percent, and they were $50 to $100 more. Michael Fishman, co-founder and president, said that because all bike sellers had to raise prices, he didn't think that was the biggest drag on sales this year. Rather, both Pure Cycles and State Bicycle struggled with keeping their inventories stocked during the busiest time of the year for bikes, March to September. Farsi said, “All throughout the summer we were light on bikes and selling out of that $299 line, I would say our sales would’ve been up 20 percent” if not for the disruption. The $299 bike is State Bicycle's top seller.

Fishman, whose company has 10 workers, including the founders, started the year with 16, and had to let people go because of how hard the year has been. He said it's not right to blame it all on the tariffs -- the bankruptcies of independent bike retailers, and slowing business at those that survive also affects Pure Cycles -- but when the tariff on his imports increased from 5 percent or 11 percent to 30 percent or 36 percent, it wiped out his profits. He paid between $50,000 and $100,000 in tariffs this year.

When he had to pay more in tariffs, he had less cash to bring in more inventory. The Chinese suppliers did not work with Pure Cycles on how much money they needed up front for orders, nor did they lower prices. “They’re in no mood to make their prices lower. They’re laying off workers,” he said. In the end, Pure Cycles had half as many bikes on hand in the busy season as it did the year before. “We prioritized our best customers, REI, stores like that,” he said.

State Bicycle sells 80 percent direct to consumer, and 90 percent of those shipments come into America first, even if the end buyer is in Canada or Mexico. With the tariffs, even with an increase in wholesale prices, there was almost no profit when the bike was sold to a bike shop. “We were in a position this summer we had a retailer call, they wanted to order 100 bikes. Typically, we’d be cheering,” Farsi said. But this year, he said, the owners said: “This kind of sucks. We only have so many bikes in stock, and we’re going to run out of bikes.”

State Bicycle's inventory problems were for a different reason than Pure Cycles'. Farsi and his brother Reza decided to move the majority of production from China to Taiwan to get out from under the tariffs. There were the logistical issues in the ramp up, and the new factory needed 40 percent down for orders, where the longtime Chinese vendor was more flexible. The Taiwan factory is more expensive, but still less than the 25 percent tariff. Farsi estimates that between the cost of travel to Taiwan, the startup costs for that production and the tariffs, it cost State Bicycle close to $500,000 this year. That's a huge number for a company that does not quite $5 million a year in revenue.

In addition to being proactive on shifting production, State Bicycle also applied in June or July for two exclusions from the tariffs, and on Sept. 20 learned it had been successful. The exclusions cover single-speed bicycles and fixed-gear bicycles. As a result, the company hired one full-time worker, even though it hasn't gotten any tariff refunds yet. “We thought it would kind of be a shot in the dark,” Farsi said, and thought a big company, like Kent International, which sells to Walmart, would be more likely to get an exclusion. In fact, it seems to be the opposite.

Fishman said his company didn't apply for an exclusion, because the trade group he belongs to, People for Bikes, told him “don’t worry, we’re taking care of it, we have a team of lawyers on hand.” But he said the exclusion People for Bikes asked for was denied. But he's very thankful that State Bicycle applied for single-speed bikes, because his company will benefit now. Although for State Bicycle, single-speed bikes are just 10 percent of the business, for Pure Cycles, they're 50 percent of sales. Pure Cycles also sells fixed-gear models.

But Fishman said that deciding if he can roll back the price increases is complicated. The company is looking at dropping the price on single speeds, but they can't roll back the prices they sell direct to consumers if it means undercutting the independent stores and REI, which bought bikes for them at higher prices because of the tariffs. “They bought their bikes at x price, and they have to make x amount of margin,” he said. “It’s not just flipping a switch.”

Farsi said one of the companies State Bicycle considers a close competitor called him to say thanks.

Two more exclusions in the bicycle industry, also requested by small companies, were granted this week. One covers another size of single-speed bicycles, and one covers a bicycle of three, seven or 12 speeds, under Harmonized Tariff Schedule Code 8712.00.2500. One company that applied had 41 employees at the time of its application. A spokeswoman for People for Bikes said: “These two exclusions are not going to change the growing anxiety and losses caused by added tariffs on the bike industry because they are narrow in scope.”

But when a company gets an exclusion tailored to its products, it is significant. Farsi's company is not moving as much production to Taiwan, which means there will be less of a delay on new product releases. But Farsi said they're not sure they should reverse course and move all production back to China, even though it's cheaper there. There would be a lot of work to shift things back. Still, the exclusion is only for one year, and Farsi acknowledged it's possible it could not be renewed.

Farsi said the business will likely balance sourcing from both countries. Some items are better to get from Taiwan, and some items, he feels, are better from the longtime Chinese vendor, because they have learned just how State Bicycle designers want it done. “It would be nice to have no tariffs, where we could just pick what’s right for our business in terms of quality and price,” he said.

Fishman said he did not think the 25 percent tariffs would last this long. He didn't try to move more business to Taiwan -- the bikes his company sells in Europe are produced there, because it has a 50 percent tariff on Chinese bicycles -- because it would have cost about 20 percent more to buy them from Taiwanese factories, and his vendor didn't have capacity. Although his business doesn't usually have a strong Christmas selling season, he is trying a Black Friday sale at purecycles.com.

He is considering shifting electric bike production to Mexico, the single-speed bike to Vietnam and the City Bike to India.

“It’s frustrating to have something this far out of your control,” Fishman said, but added, “I don't really have time to be angry about it or really dwell on it.”

Farsi said he doesn't know that the U.S. strategy of tariffs is going to work. “I don’t know that a country the size of China could be pushed around. I spent a fair amount of time there, talking to the citizens and different people we do business with. They think it’s just punitive and out of jealousy.”