CASE STUDY 1: THE GLOBALIZATION DEBATE

Back in 1970, companies in the United States assembles more than 15 million bikes a year. The globalization took hold. As cross-border tariffs tumbles, U.S. bike companies increasingly outsourced the manufacture of component parts and final assembly to other countries where production costs were significantly lower. By far the biggest beneficiary of this trend was China. In 2018, about 95 percent of the 17 million bikes sold in the Unites States were assembled in China. China also produced more than 300 million components for bikes such as tires, tubes, seats, and handlebars - or about 65 percent of U.S bike component imports. Most American bike companies that remained in business focused on the design and marketing of products that were made elsewhere. American consumers benefited from lower process for bikes. One exception to the outsourcing trend was Detroit Bikes, a company started in Detroit, Michigan by Zakary Pashak. Pashak weas partly motivated by a desire to bring some manufacturing back to Detroit, a city that had suffered from the decline in automobile manufacturing in Michigan. He reasoned that there would be lots of manufacturing expertise in Detroit that would help him get started. While this was true, ramping up production was difficult. Pashak noted that when you send a whole industry overseas, its hard to bring it back. One problem: Even the most basic production equipment was hard to find and much of it wasnt made in the U.S. Another problem: While the company figured out how to assemble the bikes in the U.S., a lot of the components could not be solved locally. There simply were no local suppliers, so components had to be imported from China. Despite these problems, by 2019, Pashak had grown his business to about 40 people and was gaining traction. Things started to get complicated in 2018 when President Donald Trump imposed 25 percent tariffs on many imports from China, including bikes and component parts. For Detroit Bikes, this was a mixed blessing. On one hand, since assembly was done in Detroit, the tariffs on imported finished bikes gave a cost advantage, On the other hand, the cost of imported components jumped by 25 percent, raising the production costs, and cancelling out much of that advantage. In response, Pashak started to look around to see if parts made in China could be produced elsewhere. He looked at parts made in Taiwan, which arent subject to tariffs, and Cambodia, which benefits from low labour costs. It turns out, however, that switching to another source is not that easy. It takes time for foreign factories to ramp up production, and there may not be enough capacity out of China to supply demand. There is also considerable uncertainty over how long the tariffs will remain in place. Many foreign suppliers are hesitant to invest in additional capacity for the fear that if the tariffs are removed, they will lose their business to China. 2 Faced with such realities, Pashak has contemplated other strategies for dealing with the disruption to his supply chain. One option he has considered is bringing in Chinese parts to Canada where they do not face a tariff, shipping his American-made frames up to Canada, putting the parts on them and then importing them back into the United States. While this would reduce his tariff burden, it would be costly to implement, and any advantages would be nullified if the Chinese tariffs are removed. Faced with this kind of complexity and uncertainty, the easiest solution for many companies, in the short run is to raise prices. Pashak is unsure if he will do this, but many other companies say they have no choice.

What business problems do Detroit Bikes face?

What are the causes of these problems?

How can Detroit Bikes address the problems?

What measures can Detroit Bikes adopt to ensure that it does not face similar problems in future?