PLANT LOCATION PUZZLE

Problem:

This particular case study deals with a bicycle manufacturer named The Eldora

Company (EDC). It is faced with a situation where it has prospered in the local

marketplace but is suffering from stagnant growth potential. Much of their problem is

due to heavy low-cost competition and a saturated marketplace. Management is

therefore burdened with the decision to manufacture offshore (i.e. China, Taiwan,

Mexico, etc.) and penetrate a new target market.

EDC’s success is credited to their corporate flexibility and service. They have been

able to adapt quickly to changing demand and optimize the time of product

introductions. Located within a high demand market segment has also facilitated the

winning criteria of service and flexibility.

Prior to defining EDC’s strategy for growth it is important to work towards the corporate

mission. The case does not distinguish between a global or domestic mission for

Eldora. For the sake of further analysis, we will assume EDC’s mission is to become a

global corporation. This assumption is supported by EDC’s joint venture with an Italian

manufacturer, Rinaldi.

Conclusion:

China has an established base of skilled laborers (available with other bicycle

manufacturers in the area). They have also been quoted to “out compete other

places”.6 Attaining a wholly owned subsidiary also ensures that EDC’s technology

1

remains with them. This is vital in this highly competitive industry. This strategy will

prevent the birth of new competitors (such as Giant).

China has also prospered via increased manufacturing and growth in the past century

(Appendix 1). They have also increased value added work by providing complete

assemblies to the bicycle industry (SIC 3592). Six out of seven competitors studied

have manufacturing locations offshore. Some are joint ventures while others are wholly

owned subsidiaries (WOS). Joint ventures have resulted in the birth of new competitors

and technological imitation.

Design should remain in the United States. This will ensure technological advances.

EDC should also exploit their joint venture in Italy to gain a larger market share in

Europe. Targeting the Far East market requires the design of “simple” bicycles, which

can be accomplished in the U. S.

With the promotion of U. S. business in China, cultural barriers are reduced. The

growing Chinese infrastructure will promote low cost automated manufacturing with low

labor cost. Strategies for economic growth ensure financial stability in the Far East.

Globalization further liberalizes political factors associated with trade. Therefore,

leading to a more stable economic structure in the future. A driving force in this

decision is the renowned success that the competitors have had with this strategy. It is

essential to promote European sales while paralleling manufacturing and sales in

China. A sales force in China should be set-up; preferably with a Chinese sales force to

better understand the market and minimize training cost. The European market place is

growing and EDC has an advantage in entering that market.

2

After reviewing economic, market, cultural, and cost forces regarding EDC’s decision, it

is my recommendation to pursue a wholly owned subsidiary in China.

Analysis:

Initially we will examine the market forces involved for EDC’s global strategy. Demand

for bicycle transportation is the highest in China, followed by Netherlands, India, and

Japan (appendix 2)18. Major competitors of EDC include Huffy, Trek, Specialized, Giant,

and Schwinn.

In 1982, Huffy boasted automation, marketing, and “manufacturability” of their bicycles.

This was the driving force behind their success in the domestic marketplace.10 Within

five years, management decreased from seventy to seven. This was in an effort to

maintain competitive advantage.12 Four years after this drastic effort to compete Huffy

closed down both of their U. S. manufacturing plants. Production was moved to China.1

This is the same trend followed by Brunswick, manufacturer of the Mongoose brand of

bicycles. However, this decision was made after an unsuccessful attempt to compete

with production in Mexico. These decisions were made after realizing that China had

cheap labor (especially important with labor intensive production) and excess capacity

for manufacturing.5

Schwinn is another Boulder, Colorado based manufacturer. They have been criticized

for lacking in export sales and resulted in bankruptcy in 1993. Scott Sports Group

bought out the distressed organization. After reorganizing, Schwinn will rely on its 79%

3

brand awareness to enter the global marketplace. Schwinn now does some

manufacturing in China and Taiwan while stressing product diversification.11

Trek has centralized their operations and continues to manufacture in Wisconsin.

However, Trek has penetrated the European market (which is 25% of Trek’s total

business) by shifting production. They are also considering plants in Ireland and

Holland to further penetrate new target markets.8 The rise of the yen and decline of the

dollar is why Trek opted to continue manufacturing in the U. S. 4

Hero bicycles, in India, have boasted growth by taking advantage of joint ventures in the

UK, Eastern Africa, and South East Asia. Hero’s strategy is to utilize these joint

ventures to penetrate new markets with increasing demand.9

Giant, a Taiwanese company, has manufacturing in Taiwan, China, Netherlands, and

the U. S. They started by building bicycles under contract for American companies.

Now they boast twenty percent of the world’s output for bicycles. Production is at fifty

million bicycles per year, half sold in China. Ninety-three percent of their revenue

comes outside of Taiwan. Europe accounts for one-fifth of their production. Plants in

China were formed via joint ventures. Design occurs in Europe, U. S., and Asia. Asian

markets demand a low-cost bike versus European and American which demand higher-

priced “sporting bikes”. Two-percent of sales are spent on customized designs for local

markets. Giant will be shifting production away from Taiwan to address new product

innovations with higher profit margins.7

Decreased cost due to competition is the driving force for EDC’s decision. However,

the cost of transportation, lack of infrastructure, and skill must be looked at. According

4

to the World Trade Organization (WTO) the Asian economic crisis has “bottomed-out”.

This indicated a future strengthening of their world trade economy; 1997-1998 did not

portray desirable results (Appendix 3). However, there is a lag between re-emergence

of the economy and statistical evaluation. Latin America trade figures showed an

increase, partly due to increased intra-NAFTA trade.

Europe has shown the greatest contribution to added value for traded goods, followed

by Asia, and the Far East (Appendix 4). This is mainly due to Asian and Eastern

strength in unassembled products (commodity products). European currency stability

and manufacturing of assembled products has increased value of products.22 The Far

East has reacted to this economic instability by moving to integrated business

processes. They are using customer-based information to integrate their supply chain

directly into flexible manufacturing.3 China has also opted to reduce their over

production. This has been a cause for much of their “irrational industrial structure”.

This tactic should bring Chinese economy to a more stable state.2

In a recent presentation by William Zarrit, Officer for the U. S. Embassy in Beijing,

China, the Chinese economy and infrastructure is progressing to resolve issues such as

infrastructure. According to Mr. Zarrit:

“Although China faces challenges that many Western countries feel could

be overwhelming, and foreign business find obstacles … business

opportunities in China can be well worth the time, resources, and pain

involved … “21

5

Globalization has prompted financial integration, which in turn affects the local stock

market, foreign exchange, and interest rate. This liberalization is prompting Far East

countries to “build, operate, and own/transfer” business to promote economic stability

and growth. Such policies will ease financial constraints and promote the development

of infrastructure in the Far East.

6

BIBLIOGRAPHY

1. American Metal Market, v107n191, p4, “Huffy’s Last US Plants to Close”.

2. Asia Pulse, 990127, January 27, “China to Eliminate Excess Production Capacity”.

3. Best, William. Planning Review, v21n5, Sep/Oct 1993, p49-50, “Flexible, Integrated

Operations: The New Japanese Challenge”)

4. Carey, Patricia. International Business, May 1995, pp54-57, “Currencies, Free

Markets, and Sourcing”.

5. Chicago Tribune, p3, 000114, “Brunswick to Follow Bike Path to China”.

6. Chu, Wan-wen. Cambridge Journal of Economics, v21n1, Jan 1997, p55-72,

“Causes of Growth: A study of Taiwan’s Bicycle Industry”.

7. Financial Times, London Edition, 971024, p16, ISSN:0307-1766, “The Global

Company: Taiwanese Bikes – Made in the Netherlands, Designed in the U. S.”.

8. Hajewski, Doris. Milwaukee Journal, Sentinel, p1, 1998, n98-55454, “Trek

Streamlines Bike Production Plan Could Halve Manufacturing Time, Cost Few Jobs”.

9. India Business Intelligence, n68, 960918, p16, “Hero Plans Overseas Manufacturing

Plants”.

10. Rohan, Thomas. Industry Week, v214n3, Aug. 9, 1982, p42-48, “Fighting Imports:

How Some Firms Staged Comebacks”.

11. Romero, Christine. Daily Camera, Boulder, Co., 980616, ISSN:0746-8733

“Schwinn Counting on Its American Icon Status to Recapture Bike Business”.

12. Verespej, Michael. Industry Week, v237n3, Aug 1, 1988, p34-35, “Pedaling

Success”.

7

Information also taken from:

13.Brunetti, Aymo, et. Al. The World Development Report 1997, Doc # 1759,

“Institutional Obstacles to Doing Business : Region-by-Region from a Worldwide

Survey of the Private Sector”.

14. Dailami, Mansoor, et. Al. The World Development Report 1998, Doc. # 1995, “What

Macroeconomic Policies are “Sound?””.

15. Ishiguro, Masayasu, et. Al. The World Development Report 1995, Doc. # 1557,

“Electricity Demand in Asian and the Effects on Energy Supply and the Investment

Environment”.

16. Ng, Francis, et. Al. The World Development Report 1999, “Production Sharing in

East Asia : Who Does What for Whom, and Why?”.

17. Randolph, Susan, et. Al. The World Development Report 1997, Doc. # 1661,

“Determinants of Public Expenditure on Infrastructure : Transportation and

Communication”.

18. Transportation Statistics Web Site, www.ibike.org/statistics.

19. Tybout, James. The World Development Report 1998, Doc. # 1965, “Manufacturing

Firms in Developing Countries : How Well Do They Do, and Why?”.

20. United Nations Statistics Web Site, www.esa.un.org.

21. United States Statistics Web Site, http://www.stat-usa.gov.

22. World Trade Organization Web Site, www.wto.org/int/trad/internat.htm.

23. UNIDO Reference Info. Web Site, www.unido.org/data/stats/showstat.cfm?cc=CPR-

a (b,c,d).

8

APPENDIX 1

UNIDO Country Industrial Statistics: China B. Value Added (at current prices, in national currency) and

Employment by Manufacturing Branch Branch (ISIC)

Value Added(currency=Yuan)

Employment

Unspecified

valuation(millions

)

Unspecified

valuation(millions

)

Sharein total

(percentage)

Employees

(thousands)

Employees

(thousands)

Sharein total

(percentage)

1985 1997 1985 1997 1985 1997 1985 1997 TOTAL MANUFACTURING(300) 230202 1570739 100.0 100.0 29743 61582 100.0 100.0 Food products(311) 10082 113354 4.4 7.2 2319 3874 7.8 6.3 Beverages(313) 4980 55708 2.2 3.5 582 1447 2.0 2.3 Tobacco(314) 11744 82318 5.1 5.2 232 309 0.8 0.5 Textiles(321) 25221 111667 11.0 7.1 4229 7302 14.2 11.9 Wearing apparel,except footwear(322) 5041a/ 46379a/ 2.2a/ 3.0a/ 167a/ 2439a/ 0.6a/ 4.0a/ Leather products(323) 2195 29078 1.0 1.9 212 1372 0.7 2.2 Footwear,except rubber or plastic(324) ...a/ ...a/ ...a/ ...a/ ...a/ ...a/ ...a/ ...a/ Wood products,except furniture(331) 1735 16997 0.8 1.1 258 944 0.9 1.5 Furniture,except metal(332) 1509 8897 0.7 0.6 63 458 0.2 0.7 Paper and products(341) 4500 33889 2.0 2.2 584 1676 2.0 2.7 Printing and publishing(342) 2820 18757 1.2 1.2 497 1007 1.7 1.6

Industrial chemicals(351) 16401 181088b/ 7.1 11.5b

/ 2479 5430b/ 8.3 8.8b/

Other chemicals(352) 6732 ...b/ 2.9 ...b/ 796 ...b/ 2.7 ...b/ Petroleum refineries(353) 10797 60247c/ 4.7 3.8c/ 297 776c/ 1.0 1.3c/ Misc. petroleum and coal products(354) 537 ...c/ 0.2 ...c/ 140 ...c/ 0.5 ...c/ Rubber products(355) 4679 20967 2.0 1.3 367 925 1.2 1.5 Plastic products(356) 3869 35810 1.7 2.3 182 1553 0.6 2.5 Pottery,china,earthenware(361) 1265 11038 0.5 0.7 197 807 0.7 1.3 Glass and products(362) 2415 9910 1.0 0.6 365 631 1.2 1.0 Other non-metallic mineral prod.(369) 12748 89729 5.5 5.7 1936 5973 6.5 9.7 Iron and steel(371) 17063 102541 7.4 6.5 2281 3417 7.7 5.5 Non-ferrous metals(372) 5080 31125 2.2 2.0 520 1182 1.7 1.9 Fabricated metal products(381) 7582 51671 3.3 3.3 506 2577 1.7 4.2 Machinery,except electrical(382) 32133 134015 14.0 8.5 6820 7991 22.9 13.0 Machinery electric(383) 18966 172199 8.2 11.0 1655 3004 5.6 4.9 Transport equipment(384) 12143 100592 5.3 6.4 1259 4099 4.2 6.7 Professional & scientific equipm.(385) 2999 14861 1.3 0.9 357 889 1.2 1.4 Other manufactured products(390) 4966 37902 2.2 2.4 443 1500 1.5 2.4

Source: Based on data supplied by national sources with estimates by the Statistics and Information Networks Branch, UNIDO.

9

APPENDIX 1 (CONT’D)

UNIDO Country Industrial Statistics: China C. Labour Productivity and Wage Rates (at current prices, in

national currency) and selected real growth rates by Manufacturing Branch

Branch (ISIC)

(currency=Yuan) Average annual growth rate

(%) of:

Value addedper employee

at current prices

Wages and Salaries

per employeeat current

prices

Value addedat 1990 prices

Employment

Value addedper employee

at 1990 prices

1985 1997 1985 1985-1997

1985-1997

1985-1997

TOTAL MANUFACTURING(300) 7740 25506 1127 ... ... ... ... Food products(311) 4348 29260 960 ... ... 3.33 ... Beverages(313) 8557 38499 976 ... ... 8.09 ... Tobacco(314) 50621 266401 974 ... ... 2.86 ... Textiles(321) 5964 15293 1014 ... ... 4.48 ... Wearing apparel,except footwear(322) 30186a/ 19016a/ 1048a/ ... ... ... ... Leather products(323) 10354 21194 1028 ... ... 18.46 ... Footwear,except rubber or plastic(324) ...a/ ...a/ ...a/ ... ... ... ... Wood products,except furniture(331) 6725 18005 1105 ... ... 12.94 ... Furniture,except metal(332) 23952 19426 1063 ... ... 20.58 ... Paper and products(341) 7705 20220 1060 ... ... 9.05 ... Printing and publishing(342) 5674 18627 1030 ... ... 7.31 ... Industrial chemicals(351) 6616 33350b/ 1136 ... ... 6.93 d/ ... Other chemicals(352) 8457 ...b/ 1195 ... ... 8.03 d/ ... Petroleum refineries(353) 36354 77638c/ 1468 ... ... 8.04 d/ ... Misc. petroleum and coal products(354) 3836 ...c/ 1121 ... ... 8.93 d/ ... Rubber products(355) 12749 22667 1166 ... ... 8.27 ... Plastic products(356) 21258 23059 1016 ... ... 21.80 ... Pottery,china,earthenware(361) 6421 13678 1096 ... ... 41.72 ... Glass and products(362) 6616 15705 1096 ... ... 50.60 ... Other non-metallic mineral prod.(369) 6585 15022 1097 ... ... 60.76 ... Iron and steel(371) 7480 30009 1309 ... ... 4.13 ... Non-ferrous metals(372) 9769 26332 1365 ... ... 6.48 ... Fabricated metal products(381) 14984 20051 1138 ... ... 16.46 ... Machinery,except electrical(382) 4712 16771 1174 ... ... 0.76 ... Machinery electric(383) 11460 57323 1173 ... ... 8.66 ... Transport equipment(384) 9645 24541 1176 ... ... 12.13 ... Professional & scientific equipm.(385) 8401 16717 1162 ... ... 9.73 ... Other manufactured products(390) 11210 25268 1113 ... ... 16.13 ...

Source:

Based on data supplied by national sources with estimates by the Statistics and Information Networks Branch, UNIDO.

10

APPENDIX 1 (CONT’D)

UNIDO Country Industrial Statistics: China D. Value Added, Labour Productivity and Wage Rates (at current prices, in

US$) by Manufacturing Branch Branch (ISIC)

Value Added(million US$)

Value Addedper employee

Wages and Salaries

per employee 1985 (3) 1997 (3) 1985 1997 1985

TOTAL MANUFACTURING(300) 78389 189478 2636 3077 384 ... Food products(311) 3433 13674 1480 3530 327 ... Beverages(313) 1696 6720 2914 4644 332 ... Tobacco(314) 3999 9930 17238 32136 332 ... Textiles(321) 8588 13470 2031 1845 345 ...

Wearing apparel,except footwear(322) 1717a/ 5595a/ 10279

a/ 2294 a/ 357a/ ...

Leather products(323) 747 3508 3526 2557 350 ... Footwear,except rubber or plastic(324) ... a/ ... a/ ... a/ ... a/ ... a/ ... Wood products,except furniture(331) 591 2050 2290 2172 376 ... Furniture,except metal(332) 514 1073 8156 2343 362 ... Paper and products(341) 1532 4088 2624 2439 361 ... Printing and publishing(342) 960 2263 1932 2247 351 ... Industrial chemicals(351) 5585 21845b/ 2253 4023 b/ 387 ... Other chemicals(352) 2292 ... b/ 2880 ... b/ 407 ... Petroleum refineries(353) 3677 7268c/ 12379 9365 c/ 500 ... Misc. petroleum and coal products(354) 183 ... c/ 1306 ... c/ 382 ... Rubber products(355) 1593 2529 4341 2734 397 ... Plastic products(356) 1317 4320 7239 2782 346 ... Pottery,china,earthenware(361) 431 1332 2187 1650 373 ... Glass and products(362) 822 1195 2253 1895 373 ... Other non-metallic mineral prod.(369) 4341 10824 2242 1812 374 ... Iron and steel(371) 5810 12370 2547 3620 446 ... Non-ferrous metals(372) 1730 3755 3327 3176 465 ... Fabricated metal products(381) 2582 6233 5102 2419 388 ... Machinery,except electrical(382) 10942 16166 1604 2023 400 ... Machinery electric(383) 6458 20772 3902 6915 400 ... Transport equipment(384) 4135 12134 3284 2960 401 ... Professional & scientific equipm.(385) 1021 1793 2861 2017 396 ... Other manufactured products(390) 1691 4572 3817 3048 379 ...

Source: Based on data supplied by national sources with estimates by the Statistics and Information Networks Branch, UNIDO.

Note: (1) = Factor values (2) = Producer's prices (3) = Unspecified valuation

Source : UNIDO Reference / www.unido.org/data/stats/showstat.cfm?cc=CPR-a (b,c,d)

11

APPENDIX 2

Bicycle mode split by city:Paris, Marseille, Lyon, Toulon, Metz and Reims, France

less than 2 percent

Rennes, Bordeaux, Toulouse and Nantes, France

2-5 percent

Grenoble, Lille, Orleans, and Valence

5-10 percent

Strasboug, France 15 percentCopenhagen, Denmark & Basel, Switzerland

20 percent

New Dehli 22 percentMoscow, Russia 24 percentTokyo, Japan and Odense, Denmark

25 percent

Erlangen, Germany 26 percentDhaka, Bangladesh 40 percentBeijing, China 48 percentGroningen, Netherlands 50 percenttShenyang, China 65 percentTianjin, China 77 percent

Souce : Transportation Statistics Web Site, www.ibike.org/statistics

12

APPENDIX 3

Growth in the volume of world merchandise trade by selected region, 1990-98(Annual percentage change)

Exports Imports

Average1990-95

1996 1997 1998 Average1990-95

1996 1997 1998

6.0 5.5 10.5 3.5 World 6.5 6.0 9.5 4.0

7.0 6.0 11.0 3.0 North Americaa 7.0 5.5 13.0 10.5

8.0 11.0 11.0 6.5 Latin America 12.0 8.5 22.0 9.5

5.5 5.5 9.5 4.5 Western Europe 4.5 5.5 7.5 7.5

5.5 5.5 9.5 5.0 European Union (15)

4.5 5.0 7.0 7.5

5.0 6.5 12.5 10.0 Transition economies 2.5 16.0 17.0 10.07.5 5.0 13.0 1.0 Asia 10.5 6.0 6.0 -8.5

1.5 1.0 12.0 -1.5 Japan 6.5 5.5 1.5 -5.5

11.5 7.5 11.5 2.0 Six East Asian tradersb

12.0 4.5 6.5 -16.0

aCanada and the United States.bChinese Taipei; Hong Kong, China; Malaysia; the Republic of Korea; Singapore and Thailand.

Source : World Trade Organization, www.wto.org/intltrad/internat.htm

13

APPENDIX 4

Growth in the value of world merchandise trade by region, 1990-98(Billion dollars and percentage)

Exports (f.o.b.) Imports (c.i.f.)

Value Annual percentage change Value Annual percentage change

1998 1990-95

1996 1997 1998 1998 1990-95

1996 1997 1998

5225 7.5 4.5 3.5 -2.0 World 5410 7.5 5.0 3.0 -1.0898 8.5 6.5 9.5 -1.0 North America 1151 8.0 6.0 10.5 4.5274 9.0 12.5 10.0 -2.0 Latin America 339 14.5 9.5 19.0 5.0118 14.0 20.5 15.0 6.5 Mexico 129 12.5 25.5 23.5 14.0

157 7.0 8.0 7.0 -7.0 Other Latin America

211 15.5 2.5 16.5 0.5

2338 6.0 3.5 -0.5 2.5 Western Europe 2359 5.5 3.5 -1.5 5.02171 6.5 3.5 -0.5 3.0 European

Union (15)

2163 5.5 3.0 -2.0 5.5

178 7.0 6.5 5.0 -1.0 Transition economies 207 5.0 17.0 9.5 3.099 7.5 6.0 8.0 9.0 Central/

Eastern Europe

133 11.5 17.0 7.0 11.5

106 0.5 16.5 2.0 -16.0 Africa 129 5.5 -1.0 6.0 -1.526 3.5 5.5 6.0 -15.0 South Africa 29 10.5 -1.5 9.5 -11.0

138 1.5 17.0 4.0 -21.0 Middle East 139 5.5 7.0 6.5 -6.01294 12.0 0.5 5.5 -6.0 Asia 1090 12.0 4.5 0.5 -17.5

388 9.0 -7.5 2.5 -8.0 Japan 281 7.5 4.0 -3.0 -17.0

184 19.0 1.5 21.0 0.5 China 140 20.0 5.0 2.5 -1.5

504 14.0 3.0 2.5 -7.5 Six East Asian tradersa

438 15.0 3.0 0.5 -25.0

aChinese Taipei; Hong Kong, China; Malaysia; the Republic of Korea; Singapore and Thailand.

Source : World Trade Organization, www.wto.org/intltrad/internat.htm

14

The Plant Location Puzzle.

1. Identify the strategic threats and opportunities that EDC faced? What alternatives did it

consider to meet the challenges? What additional alternatives should it have considered?

2. What is EDC's core competence? Can it serve the company internationally?

15