BIKE BLOWOUT.

Byline: Sherri Buri McDonald The Register-Guard

All that's left now of BikeE, a once-popular Corvallis-based bicycle maker that outsourced work to Taiwan to cut costs, is the name and a thick, growing file of legal papers in U.S. District Court in Eugene.

BikeE's demise and ensuing legal problems provide a cautionary tale for a growing number of small Lane County manufacturers that are trying to stay competitive by using overseas contractors to make their products.

BikeE stopped selling its distinctive semi-recumbent bikes in 2002. For the past two years, BikeE and two of its former investors have been entrenched in a messy legal dispute with Taiwan-based Giant Manufacturing Co., which had made bicycles for BikeE.

Faced with a cash crunch several years ago, BikeE made the fateful decision to reduce costs by outsourcing all of its production to Giant.

Three product recalls and a dip in worldwide bicycle sales followed. So did a series of legal claims and counterclaims, alleging shattered contracts and money owed.

In August 2002, Giant sued BikeE, alleging that BikeE failed to pay Giant $370,549, plus interest, for bicycles that Giant had made and shipped.

In July 2004, U.S. District Court Judge Thomas Coffin signed an order requiring BikeE to pay Giant the $370,549, plus 9 percent annual interest. All other claims, such as Giant's contention that BikeE investors John Acres and Richard Carone are personally responsible for BikeE's debt, and BikeE's claim for damages because Giant delivered defective merchandise, will be heard by a jury. Trial is scheduled for Jan. 11.

Last month, BikeE filed a separate lawsuit claiming that Giant intentionally put BikeE out of business. BikeE alleges that Giant claimed to be interested in investing in BikeE as a way to gain access to BikeE's customer list, trade secrets and sales projections. Giant then used that information to secretly create its own semi-recumbent bike and to take BikeE's market share, the lawsuit claims.

Giant categorically denies those allegations, Giant's Portland-based lawyer, Richard Urrutia, said.

Giant had made bikes for BikeE since 1998, but in 2002 the two companies put their manufacturing agreement in writing. In July 2002, Giant used a provision of the new contract to declare BikeE in default because Bike E's payments were a bit late - a situation that had never bothered the company in the past, according to BikeE's court documents. Giant refused to make any more bikes for BikeE, which forced BikeE out of business, BikeE's lawsuit said.

BikeE is asking for $2 million in damages.

Giant denies those claims.

Urrutia, Giant's lawyer, said earlier this week that Giant hasn't responded to the latest lawsuit because Giant hasn't been served with a summons or complaint. But in a previous filing responding to similar claims by BikeE, Urrutia called BikeE's accusation that Giant schemed to drive BikeE out of business a "fanciful theory."

Urrutia argued that BikeE's own documents and testimony show that BikeE went out of business because of a tarnished reputation after several product recalls, decreasing sales and a weak market after the Sept. 11, 2001, terrorist attacks. BikeE's demise was well under way by October 2001, according to Giant's legal documents.

Further, Urrutia said Giant didn't release a prototype of its Revive bicycle until at least a month after BikeE closed, so how could it have unfairly competed with BikeE?

The feud is a bitter one. Settlement offers have been proposed and rejected.

"At this point, we've spent so much money and we think we have a multimillion-dollar claim against them," said Acres, a BikeE investor who served temporarily as the company's president in 2001. "Now it's our version of justice. We think BikeE was murdered."

Giant's lawyer Urrutia responds: "Giant categorically denies that it caused BikeE to go out of business, or that it had any plan to put BikeE out of business."

Bicycle manufacturing hub

Over the years, the Willamette Valley has gained a reputation as a center for niche bicycle manufacturing. Burley Design Cooperative, Co-Motion Cycles and Bike Friday are all based in Eugene. Those firms all use some parts or components that are manufactured overseas, but local workers build the bikes.

That's in stark contrast to the rest of the industry.

"Most bicycle manufacturing has now gone overseas," said Megan Tompkins, editor of Bicycle Retailer Industry News.

Intense price competition is even driving some of the high-end manufacturing overseas, and Taiwanese factories are picking up that work, she said.

The challenges BikeE faced aren't unique to bicycle manufacturing. A wide range of Lane County companies might learn something from BikeE's story.

"The lesson is a difficult one," said Acres, a BikeE investor and founder of Acres Gaming Inc., a developer of casino games and equipment. He sold that business to International Game Technology.

Now, Acres is president and owner of Bigha Development Inc., an 11-employee, Corvallis-based maker of outdoor-related products, including a high-end recumbent bicycle and a laser-guided device to view constellations.

"If you're thinking about starting a business," Acres said, "you need to give more thought to how you're going to compete with lower cost labor.

"You cannot build high-volume, low-cost goods here in the United States."

An alternative for small U.S. manufacturers is to make high-quality, customized products, for which customers are willing to pay more, he said.

BikeE's evolution

BikeE's story began in 1993 when founders David Ullman, a mechanical engineering professor at Oregon State University, Paul Atwood and Richard Rau created a high-quality, semi-recumbent bicycle with a compact wheelbase. The "E" stood for evolutionary, and in many ways the bike was. Instead of sitting upright hunched over handlebars, the rider reclined comfortably on a wide seat, stretching his legs out in front of him.

With the crank behind a small front wheel, BikeE's wheelbase design resolved some of the shortcomings of earlier recumbent designs. It offered stability at high speeds and maneuverability at low speeds.

As the bikes grew in popularity - at one point accounting for 40 percent of the semi-recumbent market - the company's sales rose from year to year. Sales grew from 854 units (revenues of $523,000) in 1996 to a peak of 7,427 units ($4.6 million revenues) in 2001, according to legal documents filed by BikeE.

But the company never made a profit. Annual losses ranged from $225,000 in 1998 to $894,000 in 1999, the documents show.

To keep the business running, BikeE sold stock to a total of about 35 investors and borrowed money.

Looking for a way to trim costs and stay in business, BikeE contracted with Giant Manufacturing in 1998 to produce its lower-priced models, and eventually Giant made all of BikeE's products.

From August 2001 to February 2002, BikeE announced three product recalls. The first was for pins in the front suspension fork that could become loose and fall out. The second was for problems with the steerer tube separating from the front fork. The third was for fractures in the seat slider, allowing the seat to come loose from the frame.

"The recalls devastated BikeE's sales and reputation," BikeE said in court documents.

BikeE claims damages of $566,033 for the steerer tube and seat defects.

Giant's lawyers said in court documents that the faulty components were manufactured by third-party vendors, not by Giant.