Shimano is too scared of going too fast

Skil Shimano’s rider Yukihiro Doi of Japan cycles during the sixth stage of the Tour of Spain “La Vuelta” cycling race between Ubeda and Cordoba August 25, 2011. REUTERS/Miguel Vidal

Being in high demand isn’t always easy. Japanese premium parts giant Shimano (7309.T) is benefitting from a surge in bicycle purchases driven by pandemic lockdowns, but while it is running factories at full steam, its refusal to significantly boost capacity is starving retailers and aggravating a global bicycle shortage.

The $20 billion family-run firm may worry new production would come online just as sales peak. But its conservatism, along with that of its peers, has produced a massive bottleneck. Retail inventories have shrunk dramatically and wait times for some components have stretched to almost a year. The head of a big American bike maker told Breakingviews that he had warned Chinese suppliers this month that they either invested in new capacity, or risked losing market share.

Shimano celebrated its centenary in March with blockbuster first-quarter numbers. Fishing gear makes up a fifth of its business, but it was a 76% year-on-year jump in its bike unit’s sales, plus increasing existing production, that drove overall operating profit up 157% to 33 billion yen ($301 million). Net cash of $2.8 billion – enough to cover Shimano’s last 10 years of capital outlays – means funding any expansion is not an issue. Reluctance is more linked to past boom-and-bust experience, such as the implosion of the bike-sharing bubble, as well as the knowledge that it would take two years before new facilities came online.

Many industry insiders are confident that the increase in ridership will endure after the outbreak eases, citing governments’ interest in improving health and easing city congestion, as well as expectations that people will stick with leisure and exercise habits formed during lockdowns, especially if they continue working from home.

Shimano’s brand and its estimated two-thirds share of the mid- to high-end market give it some insulation. But it has two fierce competitors in Campagnolo and SRAM, plus other smaller players trying to scale up. Investors appear worried; Shimano shares have sold off sharply since mid-April, and it is trading around 27 times forecast earnings, down from a decade-high multiple of 38 four months ago. If it doesn’t find a higher gear, it could lose speed quickly.

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– Shimano on April 27 reported sales for the quarter ending March 31 rose 65% year-on-year, and nudged up its full-year net profit forecast to 79.6 billion yen ($726 million), a 25% increase from 2020.

– A sharp jump in demand began in April 2020 as pandemic-related lockdowns and work-from-home orders boosted interest in bicycles for transport and exercise. Manufacturers have warned of low inventories and stretched supply chains.

– Analysts who spoke to Breakingviews estimated Shimano holds roughly 70% of the mid- to high-end market for key components like derailleurs. Two-thirds of the 23 teams in the Giro d’Italia cycling race currently underway, which is second only to the Tour de France in competitive importance, are using Shimano products.

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