These days it's tough for anyone in cycling to avoid association with Shimano. The Japanese company's parts set the standard in quality, innovation, durability -- and ubiquity. In the past two decades, Shimano has become the dominant supplier of parts for higher-end bikes, and today 90% of those sold by Trek, Giant, and Specialized, the top three brands in the U.S., have Shimano parts. "They're the Intel of the bike business," says John Burke, president of Trek Bicycle Corp.
Shimano also manufactures fishing rods and reels, snowboard boots and bindings, and golf clubs. But for the family-run company, founded as an iron works near Osaka in 1921, bike components are where the action is. They accounted for three-quarters of Shimano's $1.3 billion in revenues last year and 80% of its profits. Thanks to booming sales of the Dura-Ace System -- used by Armstrong and other top riders -- and a range of mountain-bike parts called Saint, Shimano's operating profits this year are expected to jump 20%, to $213 million, says Daiwa Institute of Research analyst Aya Oyanagi. An inventory buildup may cut earnings slightly in 2005, Oyanagi says, but she is bullish for the long term. Investors seem to agree: Shimano's shares are up 20% this year.
The key to Shimano's success is its commitment to research and customer relations. Every year, it dispatches more than a dozen employees to work with manufacturers and retailers for several months at a stretch to gauge consumer trends. And Chairman Shimano's son, Kozo, president of Shimano America Corp., regularly meets top racers such as Armstrong to discuss products and prototypes. That kind of market research allowed Shimano to pounce on the 1980s craze for mountain biking, which turned into a lucrative market for its rugged derailleurs designed for off-road use. Since then the company has led the market with new developments such as shifters built into brake levers and pedals that riders can click into like a ski binding. Today, Shimano is developing Smover, a new line of computerized shifters, derailleurs, and hubs meant for leisure and commuting bikes.
Still, Shimano can hardly afford to coast. Italy's Campagnolo, its chief rival in high-end components for racing bikes, is pushing hard into lighter carbon-based materials, shaving precious grams off a bike's weight. Shimano so far has chosen to stick with aluminum, figuring there is too big a trade-off in durability. That could be shortsighted, says Nobu Yamamoto, president of bikemaker Scott Trading, the Japanese unit of Scott USA. "Carbon bikes are getting popular," he says. And even as two-wheelers enjoy more favor in the U.S. due to Armstrong's success, the long-term trend is down. Then there's the threat from China. Ever more bikes are being built there, and parts makers have popped up to supply mainland manufacturers. Most are small today but could become formidable competitors if they can boost their quality. So Shimano itself is shifting production to China to stay cost-competitive. In April, it opened its second factory there.
Shimano also needs to watch its back. The company has just $6 million in long-term debt and some $600 million in cash, so it has been cited as a potential takeover target. To counter that danger, the company this year has repurchased 12 million shares, or about 8% of the total outstanding. For now, though, Shimano rules high-end bike components just as surely as Armstrong dominated this year's Tour de Lance. And it is very good to be king. By Brian Bremner, with Hiroko Tashiro, in Tokyo