(Bloomberg) Grant Petersen’s Rivendell Bicycle Works has carved out a niche with rides that recall an era of leather, twine and beeswax, its anachronistic products made possible only by modern international trade.
The 14-person shop designs ornate frames, has most of them built in Taiwan and then transforms them in its California headquarters into complete cycles that Americans buy for thousands of dollars.
Now, a Republican plan meant to boost U.S. manufacturing may slow its roll or stop it dead. A broad tax reform plan put forth by House Republicans would cut the corporate tax rate and pay for it by effectively taxing imports at 20 percent. Small retailers that depend on a global supply chain may be caught in the lurch.
Brian Tester, bicycle mechanic at the Rivendell Bicycle Works, assembles a bicycle at the company's headquarters in Walnut Creek, Calif.
David Paul Morris/Bloomberg
Petersen’s business in Walnut Creek, near San Francisco, has a clientele willing to pay for detail and quality. Still, the company has slashed profit margins and will probably lose about $10,000 this year, Petersen said. Since 1994, Rivendell has made a profit only about half the time, and its cash flow is about neutral. The company often uses credit to pay taxes.
“We’ve been treading water for 22 years now, and we’ve gotten good at it,” Petersen said. “Every year, our taxes go up anyway, and we try to give raises and employ people— and we’re at the quick right now.”
The Republican-backed tax rewrite would cut the corporate rate to 20 percent from 35 percent, helping businesses compete in the global market. But the plan to pay for it with a border-adjusted tax, championed by House Speaker Paul Ryan, would reward companies that sell outside the U.S. while punishing those that rely on low-cost overseas suppliers.
“This is existential to our economy, and we know this,” Ryan said in a Feb. 16 press conference. “We are doing tax reform. Tax reform is going to happen.”
The proposal faces an uphill climb. Senate Majority Whip John Cornyn said it’s “on life support,” and President Donald Trump hasn’t taken a clear position on the idea.
The plan has divided corporate America, with retailers and net-importers pitted against exporters. Supporters say the tax will encourage investment in production and that the U.S. dollar will rise in value to offset costs. Opponents argue that companies will have to cut expenses in other places, like jobs.
Small businesses like Rivendell are caught in the middle. Such concerns, those that employ fewer than 500 people, account for 99.7 percent of U.S. employers and 64 percent of net new private-sector jobs, according to a 2012 Small Business Administration report.
The border levy “may create some very challenging economic outcomes,” said Steve Barr, consumer markets leader in San Francisco for consulting firm PwC. “For the smallest businesses who don’t have the economic resources and the human capital bandwidth to analyze these things, it’s a very big unknown.”
AshLee Strong, a spokeswoman for Ryan, didn’t respond to requests for comment on the provision’s effect on small businesses.
Mike Brey, whose 50-person Brey Corp. sells remote-controlled cars, boats and planes and accessories to hobbyists in Washington and Baltimore, said his options to remain competitive under such a tax are limited.
Brey, 52, doesn’t manufacture on a large enough scale to use his own factory—instead, he piggybacks off the work others are doing. He can’t raise prices and still compete with retailers like Wal-Mart. And he can’t hire legal, accounting and lobbying experts to find loopholes.
“It would be the last and final straw of actions the government has taken to tilt the scales away from Main Street businesses,” Brey said. “Businesses like mine, depending on how it was implemented, would totally go away.”
For Republicans who invoke the virtues of U.S. manufacturing and small-scale entrepreneurship, that’s the worst outcome. Rivendell shows how such risk-takers might suffer.
Across the Water
Petersen, 62, founded Rivendell after years of designing bikes for the U.S. division of Japanese conglomerate Bridgestone Corp. His department was unprofitable for 10 years until a shift in the U.S. dollar-yen exchange rate made just breaking even impossible. Bridgestone closed the unit, and Petersen started his business at 40 with $89,000 he cobbled together from retirement savings, loans and selling stock to friends.
Rivendell has since outgrown Petersen’s garage and moved to a 6,000-square-foot location.
A complete bike like the blue Appaloosa with imported parts will cost $1,950—on sale. Rivendell also sells custom frames made in Wisconsin and Colorado, and a domestic-made Atlantis costs about $2,000 more. About 75 percent of the 700 bikes Rivendell sells in a year are made in Taiwan, Petersen said, but he tries to support domestic production when he can.
In addition to U.S.-made frames, his company also owns an apparel collection called Musa, which stands for Made in the USA. The clothes, made in in Oakland and Emeryville, aren’t very profitable.
Petersen provides employees a retirement plan, medical benefits and public transportation expenses. Another cost could break him, he said.
“We don’t have the cushion to be able to absorb any more,” Petersen said. Most of the employees “have been around for 12 to 15 years, and the plan is to keep everyone. Foreign labor is keeping these people employed, it’s keeping me employed.”
- Lindsey Rupp