Peloton Interactive Inc. will stop manufacturing its bikes and treadmills in its own factories and rely solely on manufacturing partners, marking one of the most dramatic steps yet to simplify operations and reduce 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. The company has built some of its standard bike models and the high-end Bike+ using facilities it acquired in 2019 through the purchase of Tonic Fitness Technology. It also relied on its Taiwan-based manufacturing partner, Rexon Industrial Corp., to build bikes and its Tread treadmill.
Now the company will stop operating its Tonic facilities and move all of its bicycle and treadmill manufacturing to Rexon, supply chain manager Andrew Rendich told Bloomberg News in an interview. “We’re not going back to anything but partnered manufacturing,” he said. “It allows us to ramp up and down based on capacity and demand.”
Peloton makes the change after several months of turbulence. In February, co-founder John Foley was replaced as chief executive by media veteran Barry McCarthy, and the company laid off nearly 3,000 employees, including many members of its management team. Rendich was appointed to his post in March.
A stock market juggernaut in the early days of the pandemic, Peloton has seen its stock price plummet about 75% this year. As gyms and economies began to reopen last year, Peloton’s growth exploded. The company had incorrectly predicted that its business would resist reopenings, and it found itself with an overabundance of equipment.
The company previously canceled a plan to build its equipment in Ohio, but it is now moving away from in-house production altogether. Under the new agreement, Peloton is expanding its partnership with Rexon while maintaining other outside partners and adding new ones.
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Peloton plans to continue working with Quanta Computer Inc. to manufacture a key piece of its equipment: touchscreens. It’s also adding Pegatron Corp., which like Quanta is a major supply chain partner of Apple Inc., to build its next rower. Rendich said the new product is on track for release in 2022.
The company declined to say how much it would cost to shut down its operations, but said it would cut about 570 employees in Taiwan who work at Tonic’s facilities. It will retain 100 existing employees in Taiwan to work with its overseas partners.
Rendich said having dual supply chains – one internal and one external – required more resources to function well, and simplification was needed to reduce costs and improve product quality. He said he currently manages two separate operational teams which will now combine into one.
Outsourcing production is standard practice with many of the biggest consumer electronics giants, including Apple. The iPhone maker designs its products and then works with Hon Hai Precision Industry Co., also known as Foxconn, to manufacture the devices.
Since replacing Foley, McCarthy has slashed prices for Peloton hardware, increased its monthly content subscription fees and rolled out a rental program that could lower the cost of ownership. Yet its equipment is seen as a premium product with uncertain demand, and the company no longer has the trust of Wall Street.
Peloton is banking on changes to its operations to help turn the tide.
“One of the best simplifications we can make is to move into partnered manufacturing and get out of the proprietary manufacturing business,” Rendich said. “It allows us to do it even better than in the past.”
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