Peloton Interactive Inc. is moving away from building treadmills and bikes at its factories to rely on partnerships for production. This represents one of its most significant steps in simplifying its business and reducing costs.
The move is an about-face from Peloton’s strategy over the past three years, when it split manufacturing between its own facilities and partners. As part of the acquisition of Tonic Fitness Technology in 2019, Peloton built some of its Bike+ models as well as the standard Bike model. Rexon Industrial Corp. from Taiwan was the company’s manufacturing partner. They also built its Tread treadmill and bikes.
Andrew Rendich (Chief Supply Chain Officer) told Bloomberg News the company will no longer be operating Tonic’s facilities. He also stated that all its treadmill and bike manufacturing would move to Rexon. “We are going back to nothing but partnered manufacturing,” he said. “It allows us to ramp up and ramp down based on capacity and demand.”
After months of chaos, Peloton has made the necessary changes. In February, co-founder John Foley was replaced as chief executive officer by veteran media executive Barry McCarthy, and the company cut nearly 3,000 employees — including many members of its executive team. In March, Rendich was elected to this role.
Peloton was a stock market giant in the first days of the pandemic. However, its share price has fallen by 75% so far this year. As gyms and economies started to reopen last year, Peloton’s growth sputtered. Peloton had wrongly predicted its business would survive the reopenings and was left with an oversupply of equipment.
The company previously canceled a plan to build its equipment in Ohio, but now it’s walking away from in-house production altogether. Peloton will expand its relationship with Rexon as part of this new agreement. It will also maintain other partners outside the company and add new ones.
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Peloton will continue to work with Quanta Computer Inc. in order to produce a critical piece of equipment, touch screens. It’s also adding Pegatron Corp., which like Quanta is a major Apple Inc. supply chain partner, to build its upcoming rowing machine. Rendich indicated that the product would be released in 2022.
While the company refused to give an estimate of how much it would cost for its operations to be shut down, it stated that about 570 people in Taiwan will lose their jobs at Tonic. To work with outside partners, it will keep 100 employees in Taiwan.
Rendich said that having dual supply chains — one internal and one external — required more resources to do well and that simplification is necessary to drive down costs and improve product quality. He stated that currently he oversees two different operations teams and will combine them into one.
Apple is one of many major consumer electronics manufacturers that outsources production. Apple creates its iPhones and works with Hon Hai Precision Industry Co. to make them.
McCarthy replaced Foley with a lower price for Peloton hardware and increased the monthly subscription fee. McCarthy also launched a leasing plan that would reduce ownership’s cost. Its equipment is still viewed as an expensive product, with uncertain demand. Wall Street has lost faith in the company.
Peloton hopes that changes in its operations will help it turn the corner.
“One of the best simplifications we can do is go to partner manufacturing and getting out of the business of owned manufacturing,” Rendich said. “This allows us to do it even better than we have in the past.”
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