Tuesday, January 15, 2008

4 Cervelo's Compete on Quality Strategy


The above is an interesting picture. Look at it for a brief moment. What grips you most? Is it the fact that the its a sweet Tour ridden SLC-SL that you just dreamt of possessing.

Or is it the "Made in China" label?

I think most of us love to see a bike we ride made in the country it originates from, be it Italy, or Germany or the United States. Why? Not too sure, but maybe ask yourself. There does seem to be some preconceived ideas in our heads about Chinese quality. Granted that there have been a host of products originating in China that just, lets say, simply scared all of us. 2007's records are here.

But when you see Cervelo, one of the best bicycle companies in the world (whose exact products we use have been ridden by CSC in the Tour and other races) and you look at the "Made in China" label, is it not easy for us to make a compromise there? So where's our notions about cheap chinese goods gone?

Lets be clear. China hasn't been exaclty doing good with product safety and compliance. Another factor to blame is weak supervision from developed nations like the U.S. But on the other hand, I've read that the negative publicity Chinese goods have received over the past few months has proved to be an impetus to reforms and changes within the country. I read this in some newspaper but I forget which one. Old factories with no licenses are being shut down, people responsible for bad products have been dismissed, sometimes even executed by the government and companies are looking at changing their whole business ideas. I can understand that negative publicity can affect a country like China, responsible for maybe what, half the world's imports (?), everything from fish, toys, watches,books etc... to even bicycles. Chinese government officials are supposedly doing everything they can to protect the "Made in China" brand.

But the fact remains: The cheap labor costs in China is just simply too much to resist for companies who want to make good profits. Otherwise, it'd be so hard to compete and someone with good business sense can really understand this.

Here's an old article from Canadian Business about how Cervelo manages to keep tabs on their quality, even though they outsource all their manufacturing to China. This way, they can have the edge over cheaper bicycles made in China that are showing up in Canada.

Some important points have been made bold by me. Even Cervelo couldn't resist China, and really, people with good business sense like them advocate no to tariffs. And I think none of the quality issues (stemming from the "Made In" label) matter when manufacturers and suppliers comply with quality standards set by Cervelo. Needless to say I'm also pretty impressed by the engineering and R&D going on here.

Carlos Sastre with a Cervelo

Beat China On Quality: Cervélo cycles bets on premium design to win

Zena Olijnyk
From the November 7-20, 2005 issue of Canadian Business magazine

As far as Gerard Vroomen is concerned, the bicycles you find at your typical Canadian Tire store and the two-wheeled marvels of high-tech engineering that come out of the Cervélo factory in west-end Toronto are alike "in name only." Not that there's anything wrong with the inexpensive bikes sold at the large retail chains—indeed, Vroomen says, some of them are "pretty decent" for the price. But Vroomen, who founded Cervélo Cycles Inc. with his business partner, Phil White, in 1995, says there's no comparison with these traditional examples of cycle locomotion and the Tour de France-worthy racers his company produces, which cost anywhere from $2,000 to $11,000 each. In fact, when the European-based Team CSC rode Cervélo bicycles in the 2003 Tour de France, it was the first time a Canadian-manufactured bike competed in the legendary French cycling event. And that commitment to performance through design, he says, is the key to Cervélo's ability to survive the China manufacturing juggernaut. "Manufacturing in Canada will always be more expensive than manufacturing in China," he says, especially when it comes to something as basic as an ordinary bicycle. "So you have to figure out the best way to compete. In our case, it's pushing the envelope [of] bicycle design."

The decision to pursue quality means Cervélo isn't dealing with the same competitive forces now facing Canadian manufacturers of the inexpensive bicycles found at mass-merchant retailers like Canadian Tire, Zellers and Wal-Mart. Two manufacturers at the low end of the market—Raleigh Canada Ltd. and Groupe Procycle Inc., both with factories in Quebec—have been at the forefront of a campaign to urge the federal government to impose duties against cheaper bicycles imported from China and other low-cost countries, arguing their market share is shrinking and about 600 jobs are at stake. They even managed to convince a Canadian International Trade Tribunal panel to recommend in September that the federal government impose an emergency 30% surtax against bicycles from these countries. Such bikes have a freight-on-board cost of less than $225 and would typically end up costing about $400 retail.

No decision on the tribunal's recommendation has been made, and the federal government is now being lobbied by retailers and distributors not to impose the surtax, arguing merchants and consumers will be harmed the most by the increased expense of entry-level bikes. Vroomen says he opposes, on principle, measures that would only serve to protect a few hundred jobs at two manufacturers who are losing the battle with China. He adds there's not much point in trying to fight off developing nations' inevitable cost advantages through trade sanctions.

Indeed, given the country's vehement protests against the U.S. tariffs on our softwood lumber exports, Vroomen says it's hypocritical for us to then turn around and impose trade tariffs to protect our own industries when they are being outgunned by cheaper rivals. "You have to find an overall solution," he argues. "The Chinese are pretty good at making a decent low-end bike at a cheaper cost than those made or assembled in Canada. The next time it will be cars, and what are we going to do then?" Rather than running to the government for tariff protection, he says, Canadian manufacturers should be looking toward competitive advantages in areas such as technology and design, looking for that value-added niche market that has so far proved elusive to Chinese manufacturers. "You have to put a bit more ingenuity into what you do. Just being ordinary won't do when it can be done so much cheaper in China."

This is where Cervélo's compete-on-quality strategy comes in. As it happens, the company takes its name from a combination of the Italian word for brain, cervello, and the French word for bicycle, vélo. Literally, that translates into "brainbike," Vroomen says, emphasizing his and White's desire to build a bicycle with extra thought put into it. Vroomen, 34, and White, 43, both trained in mechanical engineering, started the company after a top Italian professional cyclist asked them to develop a bicycle with leading edge aerodynamics.

The company has grown from four employees just four years ago to 29 today, nine of them engineers who focus on design and product development. "You'd be hard pressed to find a bike company—big or small—that spends as much as we do on research and design," says Vroomen.(He won't give exact figures but says Cervélo's research budget is in the "seven figures.")The commitment to design has paid off in building Cervélo's business. Sales are growing at a rate of almost double each year, with revenue for 2004 at $11 million, compared with about $800,000 in 1999. Even at the current production capacity of about 100 cycles a day, Vroomen says the company is finding it difficult to keep up with growing demand—not only from professional cyclists, but from a growing contingent of baby boomers taking to two wheels for relaxation and exercise, and willing to spend thousands of dollars to cycle in style. In fact, one of the downsides of growing so quickly has been the company has had to move its Canadian operations four times in the past five years. Manufacturing of specific parts is farmed out to factories in Canada, the United States, Taiwan and, yes, China, but the design, engineering, quality control and assembly is done in Toronto.

Born in the Netherlands—a country known for its cycling tradition—Vroomen, an avid cyclist, studied mechanical engineering at the Eindhoven University of Technology in Eindhoven, Netherlands, specializing in composite materials. After five years of study there, he went to McGill University in Montreal for what was to have been a nine-month project to design an aerodynamic "time trial" bike. Vroomen admits that originally he was more interested in Human Powered Vehicles(specifically, an enclosed recumbent bicycle that can achieve speeds of up to 135 kilometres per hour)than in regular bikes, but that changed after he met Chet Kyle, one of the founders of the international Human Powered Vehicle Association but also the lead designer for the 1984 and 1996 U.S. Olympic team bikes. "He got me really excited about pushing the boundaries of cycling rules," Vroomen says. When he didn't get the support from the composite lab at McGill to build a prototype of his bicycle design, he decided to build it himself in his basement. That's when he joined forces with White, a fellow McGill graduate student with an entrepreneurial bent who had previously worked in project management for Lockheed and SPAR Aerospace. White, also a cycling enthusiast, joined Vroomen in putting up money(that should have gone to tuition)to finance the fledgling company. Their prototype, an aerodynamic time-trial bike called the Baracchi, is now on display in the entrance to the company's headquarters in Toronto. While the Baracchi tested well for aerodynamics, handling and comfort, Vroomen and White couldn't interest a bike manufacturer in commercializing their design, so they did it themselves.

Today, Cervélo manufactures five families of bike models, each with their own characteristics, for road-racing or time trial and triathlons. Road-racing bikes are used in mass-start events. For this purpose, the bike must have specific handling characteristics, says Vroomen, since the courses can involve tight corners and steep climbs, and race participants often ride in packs. Bikes used for triathlons and time trials don't allow for riders to ride in a pack, so wind is the biggest challenge for the cyclist.(In mass-start races, riding in packs greatly reduces the aerodynamic drag, so less effort is required.)This means the shape of the bicycle and the position of the rider must be tailored toward cutting through the wind for greater speed. At this year's Tour de France, Cervélo showcased its newest model, the Soloist Carbon. Weighing just under seven kilos—the frame itself only weighs slightly more than a kilo—Vroomen says a cyclist using the Soloist Carbon "doesn't have to choose between weight and aerodynamics." It was the lightest bicycle at this year's Tour, which has a minimum weight restriction of 6.8 kg. And the bike was more than up to the job. This year, members of Team CSC, which is sponsored by Cervélo, won one stage and came second overall on Cervélo bicycles; that gave the company a huge marketing boost and what Vroomen describes as "a lot of air time" in coverage of the tour.

But achieving this level of performance takes lots of highly specialized engineering skills backed up with serious budgets for research and design. Vroomen figures it costs about $25,000 each time they go into a wind tunnel for testing, while a prototype mould can cost on the order of $50,000—and sometimes as many as six moulds will be used before finding the perfect design. At the start of every project, the design team at Cervélo establishes performance goals for each bicycle they want to create. The Cervélo engineers then design bicycles with optimum characteristics, using wind tunnel testing, carbon mould design and research into the aerodynamics of tube shapes. At the final design review, the lead engineer presents the final design to the entire design team, with the hope that fresh input might lead to improvements before the design is put into preproduction. Prototypes are tested not only in the lab but on the road by professional cyclists, and adjustments are made based on their feedback. After the final review, the product undergoes fatigue tests by Engineering for Bikes, a German-based global testing facility for lightweight frames. Manufacturing of the frames is then outsourced to factories that can both achieve the necessary standards of quality and respect Cervélo's intellectual property. "This is where we are unique, so ensuring our designs aren't copied is very important to us," he says.

While many manufacturers of high-end bicycles will design special models for professional racers, Vroomen is proud that the bicycles sold in speciality stores(there are about 40 outlets in Canada that carry Cervélo bikes)are exactly the same as those used in races. "We don't make special bikes for professional races—every bike you see in a race is identical to what you can get at a store," he says. This dedication to creating accessible bicycles that meet professional standards is wildly applauded by recreational cyclists, judging from the lengthy list of customer reviews on Cervélo's website. Here's just one example from a recent purchaser of a Soloist Carbon: "After riding this bike, it's hard to imagine how any other bike could compete. It does everything fast. It climbs fast, it sprints fast, it descends fast, and it's an absolute rocket on the flats." Benjamin Sadavoy, editor and publisher of Toronto-based Pedal Magazine, says this kind of hard-core cyclist is "motivated by products that can enhance their performance." Having the same cycle as a pro is "like being able to buy the same race car as Mario Andretti."

Kudos from weekend warriors helps, but Vroomen admits getting the company noticed through the international cycling circuits is just as important to the company's business strategy. So Cervélo has been showcasing its bicycles through an exclusive contract with Team CSC, which includes Ivan Basso, the Italian racer who finished third in the 2004 Tour de France, second this year, and is considered a top contender for 2006 now that six-time winner Lance Armstrong has retired. When Cervélo started sponsoring Team CSC, in 2003, the team was ranked 14th on the International Cycling Union race circuit that includes the tour. Today, it ranks first in overall standings on that circuit. The team recently extended its agreement with Cervélo until the end of 2008. "As a story from Canada, getting to that level in the biking world is significant," says Sadavoy. "They just didn't get to the Tour de France. Their bikes did very well."

With both sales and brand profile on a serious upward trajectory, Cervélo's flying high right now, says Vroomen, and the future looks bright. Goes to show that even when you're faced with as formidable a rival as China, true winners don't need tariffs.

4 comments:

  1. Being a news anchor, I have to read these stories each time there's a recall. Last summer, after I cleaned out my son's Thomas The Train collection because of lead paint issues...I started checking everything around me. In most cases, our entire day is surrounded by products made in China. It's just mind boggling. I know there is quality there but it is hard to shake the worry.

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  2. Cheap labor is not the only criteria. It is one, that is true, but what country manufactures more than any other? The USA. China is growing rapidly. China overtook Japan as in manufacturing only in 2006.

    People focus far too much on cheap labor costs. China has had much cheaper labor for decades - only in the last 15 years have them gained manufacturing growth. There are huge amounts of cheap labor available in India, Nigeria, Vietnam, Brazil, Mexico... China is not just about cheap labor, they are successful by doing many things right. China needs to keep improving, as do all other countries.

    It is just not true that a company can't successfully manufacture in high wage countries. Look at Toyota manufacturing in Japan and the USA (and many other countries too).

    I talk about manufacturing on my management improvement blog.

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  3. Curiouscat,

    Its nice to see you've been reading as well. I believe that you've said the right thing. Cheap labor is not everything, but it is nevertheless an important factor in bringing costs down while keeping quality the same or more. It is a very interesting game that's going on and I'll try to reason why this is so :

    1. China is state run and quite pro business. There seems to be a planned way to development.

    2. China's infrastructure is very developed compared to other countries in the south Asian belt.

    3. China opened its doors to FDI way before other countries (late 70's), now there are quite experienced suppliers in the country who understand how businesses in U.S are run, they understand ISO standards etc. (Thats being moot as we're understanding that some bad products are made in China as well)


    4. China is a far more attractive than India perhaps for manufacturing because India is more geared towards the IT services industry. It is said that India's consumption of aluminum is about two pounds per person, compared with nine pounds per person in China.

    5. The foreign investment pouring into China is far more than other countries, where red tape-ism has been getting in the way in the private sector.


    You're right in saying that labor costs are not everything. That is all set to change as I hear that wages, especially in the rural areas of China, are steadily increasing.

    I think in high wage countries, Toyota, while not particularly interested in lower wages, has an excellent production system and that keeps costs to a minimum. They have gone outside Japan and duplicated their manufacturing plants and their production ideas exactly. Theirs has been a model to follow for auto makers in the U.S.

    I think China will exceed manufacturing in the U.S. The data you have provided is two years old.

    Think about it.

    1. China has the most number of people. Its amazing when you think of the number.

    Chinese people are developing fast and are demanding more of everything, cars, computers, tvs, what not.

    2. Steady oil cost increases for the U.S will ultimately slow down manufacturing unless they can get that oil cheaper, reduce transportation costs and what not from the supply chain.

    It'll be interesting to see what happens in the next couple of years.

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  4. Cheap labor is not the only issue for moving plants overseas.

    Bicycle companies like to be close to other bicycle manufacturers that will buy its products, and if they are there, the move will be perhaps a nice one. I can give an example of RockShox who made a move to Taiwan for the same reason.

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Thank you. I read every single comment.