A Legend's Bumpy China Ride

Interesting China article in this weekend's Wall Street Journal.   Entitled, "A Legend's Bumpy Ride," the article details how the once legendary state owned Flying Pigeon bike manufacturing company failed to keep up with the changes in China's market.  After laying off nearly all of its 10,000 workers due to its inability to compete using a "Big Rice Bowl Mentality," Flying Pigeon eventually succumbed to a "partial management buy-out" and now offers its employees " low hourly wages, no benefits and few chances for advancement" just like its competitors. 

The article elucidates the economics for Chinese bike manufacturers that provide OEM production for companies like Schwinn, Huffy, and Wal-Mart:

But the future still looks tough. Factory owners in Tianjin say they earn a 3% profit margin on a mountain bike they sell wholesalers for around $35 -- a handsome model with 12 gears, padded seat and a front suspension system. That's about $1 in profit.

The same bicycle, which can retail for $70 at a U.S. chain store like Wal-Mart, is much more profitable for others in the sales hierarchy. The U.S. importer earns on average about $8 after paying shipping and insurance costs, according to Jay Townley, a U.S. bicycle industry consultant. The retailer does even better, pulling in at least $17. The upshot, says Mr. Townley, is that Chinese manufacturers "are getting screwed into the ground."

Using these numbers, the Chinese OEM bike producer shipping bikes to the United States makes only $1 for every $25 in profit that goes to the U.S. importer and retailer.  I previously blogged on this phenomenon in a post, entitled, "Lies, Damn Lies, Statistics and Making Lots of Money in China." where I talked about how the Chinese OEM producers of Barbie dolls that sell for $20 at retail make only around 35 cents per doll.

American politicians either seem to be unaware of numbers like these or just choose to ignore them.