Shimano And The High-End Road Bike Industry
2006 | Case No. SM150
For the die-hard cycling enthusiast, the Spring Classics, Dura-Ace components, and Phil Liggett were words that conjured up exciting images and enthusiastic anticipation for a new road bike racing season. Cyclists often spoke of the wind in their faces during their own bike rides or the rush they felt when a peloton (group) of bike racers rode by at 35 miles per hour. Like any sport, road biking and racing had its own specific vocabulary and culture reserved for its most die-hard enthusiasts. But most every non-cyclist or dabbler in cycling has heard of Lance Armstrong and his epic seven victories in the Tour de France—six times with the United States Postal Service Team and in his final year, with the team sponsored by media company, the Discovery Channel. Although cycling has traditionally been Europe’s sport (just witness the spectator crowds on any Tour de France mountain climb), Armstrong’s victory over testicular cancer, along with his victories on the bike have made cycling more of a global sport. Every professional cycling team had a slew of sponsors beyond the title sponsor such as the Discovery Channel. Everything down to a team’s socks was sponsored by companies. Road bikes were characterized by drop-handlebars and skinny tires on a taller frame (versus the fatter tires, mechanical suspension, powerful brakes, and low/easier gearing of mountain bikes and other cross-terrain bikes). The road bicycle itself was made of several parts or components. Trek, based in Wisconsin, manufactured the carbon-fiber bike frame of Armstrong’s 2005 Tour-winning Trek Madone 5.9. Carbon-fiber maximized power and minimized weight and was material typically used in the aerospace industry. Beyond the frame, Bontrager (acquired by Trek in 1995) made the “fork,” or the part of the frame that allowed the rider to steer the bike (looks like a large wishbone), and the ultra-thin road racing wheels and tires, along with the saddle, seat post, and handlebars. Pedals held a cyclist’s special shoes in place so they could “clip in” for greater control and power, similar to a ski binding, and several companies made different models of pedals—Armstrong’s bikes used Shimano pedals. Shimano, a company founded and based in Sakai City, Japan (an Osaka suburb famous for making gun barrels and sushi knives), made many of the key components of a bike—the shifters (to shift gears to make it easier to climb hills or to go faster on flat terrain), hubs (the center of the wheel, where the spokes connect), cranks or a component that allowed the rider to transfer human energy through pedals, the derailleurs (front and back) or a device that moved the chain across cogs (metal discs that had teeth on them or rear sprockets), and the cassette or a set of matched cogs for a rear hub. The fact that each of the different components to a high-end road bike were manufactured by different companies made for a complicated bike industry supply chain. By 2006, Shimano had grown from a family-based business (founded by Shozoburo Shimano in 1920) that focused on freewheels, to a $1.6 billion dollar global company (with net income of $186 million) that not only manufactured mid-to high-end bike components (and low-end components as well), but also made fishing tackle. Eighty percent of the company’s sales were from high-end bike components and 20 percent for mid-range bicycle components. Seventy-five percent of the company’s earnings could be attributed to components. Shimano led the bike component industry, owning over 80 percent of the high-end component market, and the company was often called the “Intel of the bike business,” but that growth did not come overnight. In fact, in 1985, Shimano components were specified on less than 35 percent of all new bicycle models sold in the U.S., for example. By 1990, Shimano’s share had risen to 69 percent and to 79 percent by 1996. As the Shimano leaders reflected on the company and its growth trajectory, they were particularly proud of the market domination that Shimano had achieved, largely attributable to the company’s commitment to research and technology, as well as to the amount of value the company had been able to leverage from the industry’s supply chain. As new technologies and new companies and products such as component rival SRAM began to enter the market, and the longer-term sales trend of a mature road bike industry remained relatively flat (3 to 4 percent per annum), despite the “Armstrong effect,” the Shimano leaders and their team wondered how to continue their growth in the mid- high-end components market and achieve growth on an even greater global scale.
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