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.

EDCs 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 EDCs 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 EDCs mission is to become a global corporation. This assumption is supported by EDCs 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 EDCs technology

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.

After reviewing economic, market, cultural, and cost forces regarding EDCs decision, it is my recommendation to pursue a wholly owned subsidiary in China. Analysis: Initially we will examine the market forces involved for EDCs 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%

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 Treks 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. Heros 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 worlds 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 higherpriced 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 EDCs decision. However, the cost of transportation, lack of infrastructure, and skill must be looked at. According

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

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.

BIBLIOGRAPHY 1. American Metal Market, v107n191, p4, Huffys 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 Taiwans 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.

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=CPRa (b,c,d).

APPENDIX 1
Value Added (currency=Yuan) UNIDO Country Industrial Statistics: China B. Value Added (at current prices, in national currency) and Employment by Manufacturing Branch Branch (ISIC) Employment Share in total (percentage) 1985 1997 100.0 100.0 7.8 6.3 2.0 2.3 0.8 0.5 14.2 11.9 0.6a/ 4.0a/ 0.7 2.2 ...a/ ...a/ 0.9 1.5 0.2 0.7 2.0 2.7 1.7 1.6 8.3 2.7 1.0 0.5 1.2 0.6 0.7 1.2 6.5 7.7 1.7 1.7 22.9 5.6 4.2 1.2 1.5 8.8b/ ...b/ 1.3c/ ...c/ 1.5 2.5 1.3 1.0 9.7 5.5 1.9 4.2 13.0 4.9 6.7 1.4 2.4

TOTAL MANUFACTURING(300) Food products(311) Beverages(313) Tobacco(314) Textiles(321) Wearing apparel,except footwear(322) Leather products(323) Footwear,except rubber or plastic(324) Wood products,except furniture(331) Furniture,except metal(332) Paper and products(341) Printing and publishing(342) Industrial chemicals(351) Other chemicals(352) Petroleum refineries(353) Misc. petroleum and coal products(354) Rubber products(355) Plastic products(356) Pottery,china,earthenware(361) Glass and products(362) Other non-metallic mineral prod.(369) Iron and steel(371) Non-ferrous metals(372) Fabricated metal products(381) Machinery,except electrical(382) Machinery electric(383) Transport equipment(384) Professional & scientific equipm.(385) Other manufactured products(390)

Emplo Employ Unspecifi Unspecifi Share yees ees ed ed in total valuation valuation (percentage (thousa (thousa (millions) (millions) ) nds) nds) 1985 1997 1985 1997 1985 1997 230202 1570739 100.0 100.0 29743 61582 10082 113354 4.4 7.2 2319 3874 4980 55708 2.2 3.5 582 1447 11744 82318 5.1 5.2 232 309 25221 111667 11.0 7.1 4229 7302 5041a/ 46379a/ 2.2a/ 3.0a/ 167a/ 2439a/ 2195 29078 1.0 1.9 212 1372 ...a/ ...a/ ...a/ ...a/ ...a/ ...a/ 1735 16997 0.8 1.1 258 944 1509 8897 0.7 0.6 63 458 4500 33889 2.0 2.2 584 1676 2820 18757 1.2 1.2 497 1007 11.5b 16401 181088b/ 7.1 2479 5430b/ / 6732 ...b/ 2.9 ...b/ 796 ...b/ 10797 60247c/ 4.7 3.8c/ 297 776c/ 537 ...c/ 0.2 ...c/ 140 ...c/ 4679 20967 2.0 1.3 367 925 3869 35810 1.7 2.3 182 1553 1265 11038 0.5 0.7 197 807 2415 9910 1.0 0.6 365 631 12748 89729 5.5 5.7 1936 5973 17063 102541 7.4 6.5 2281 3417 5080 31125 2.2 2.0 520 1182 7582 51671 3.3 3.3 506 2577 32133 134015 14.0 8.5 6820 7991 18966 172199 8.2 11.0 1655 3004 12143 100592 5.3 6.4 1259 4099 2999 14861 1.3 0.9 357 889 4966 37902 2.2 2.4 443 1500

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

10

APPENDIX 1 (CONTD)
(currency=Yuan) 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) Value added per employee at current prices 1985 TOTAL MANUFACTURING(300) Food products(311) Beverages(313) Tobacco(314) Textiles(321) Wearing apparel,except footwear(322) Leather products(323) Footwear,except rubber or plastic(324) Wood products,except furniture(331) Furniture,except metal(332) Paper and products(341) Printing and publishing(342) Industrial chemicals(351) Other chemicals(352) Petroleum refineries(353) Misc. petroleum and coal products(354) Rubber products(355) Plastic products(356) Pottery,china,earthenware(361) Glass and products(362) Other non-metallic mineral prod.(369) Iron and steel(371) Non-ferrous metals(372) Fabricated metal products(381) Machinery,except electrical(382) Machinery electric(383) Transport equipment(384) Professional & scientific equipm.(385) Other manufactured products(390) 1997 Average annual growth rate (%) of:

7740 25506 4348 29260 8557 38499 50621 266401 5964 15293 30186a/ 19016a/ 10354 21194 ...a/ ...a/ 6725 18005 23952 19426 7705 20220 5674 18627 6616 33350b/ 8457 ...b/ 36354 77638c/ 3836 ...c/ 12749 22667 21258 23059 6421 13678 6616 15705 6585 15022 7480 30009 9769 26332 14984 20051 4712 16771 11460 57323 9645 24541 8401 16717 11210 25268

Wages and Salaries Value Value added per added Employ per employee employee at 1990 ment at 1990 prices at current prices prices 1985- 19851985 1985-1997 1997 1997 1127 ... ... ... ... 960 ... ... 3.33 ... 976 ... ... 8.09 ... 974 ... ... 2.86 ... 1014 ... ... 4.48 ... 1048a/ ... ... ... ... 1028 ... ... 18.46 ... ...a/ ... ... ... ... 1105 ... ... 12.94 ... 1063 ... ... 20.58 ... 1060 ... ... 9.05 ... 1030 ... ... 7.31 ... 1136 ... ... 6.93 d/ ... 1195 ... ... 8.03 d/ ... 1468 ... ... 8.04 d/ ... 1121 ... ... 8.93 d/ ... 1166 ... ... 8.27 ... 1016 ... ... 21.80 ... 1096 ... ... 41.72 ... 1096 ... ... 50.60 ... 1097 ... ... 60.76 ... 1309 ... ... 4.13 ... 1365 ... ... 6.48 ... 1138 ... ... 16.46 ... 1174 ... ... 0.76 ... 1173 ... ... 8.66 ... 1176 ... ... 12.13 ... 1162 ... ... 9.73 ... 1113 ... ... 16.13 ...

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

11

APPENDIX 1 (CONTD)
UNIDO Country Industrial Statistics: China Value Added D. Value Added, Labour Productivity and Wage Rates (at current prices, in (million US$) US$) by Manufacturing Branch Branch (ISIC) 1985 (3) 1997 (3) TOTAL MANUFACTURING(300) 78389 189478 Food products(311) 3433 13674 Beverages(313) 1696 6720 Tobacco(314) 3999 9930 Textiles(321) 8588 13470 Wearing apparel,except footwear(322) Leather products(323) Footwear,except rubber or plastic(324) Wood products,except furniture(331) Furniture,except metal(332) Paper and products(341) Printing and publishing(342) Industrial chemicals(351) Other chemicals(352) Petroleum refineries(353) Misc. petroleum and coal products(354) Rubber products(355) Plastic products(356) Pottery,china,earthenware(361) Glass and products(362) Other non-metallic mineral prod.(369) Iron and steel(371) Non-ferrous metals(372) Fabricated metal products(381) Machinery,except electrical(382) Machinery electric(383) Transport equipment(384) Professional & scientific equipm.(385) Other manufactured products(390) 1717a/ 5595a/ 747 3508 ... a/ ... a/ 591 2050 514 1073 1532 4088 960 2263 5585 21845b/ 2292 ... b/ 3677 7268c/ 183 ... c/ 1593 2529 1317 4320 431 1332 822 1195 4341 10824 5810 12370 1730 3755 2582 6233 10942 16166 6458 20772 4135 12134 1021 1793 1691 4572 Value Added per employee 1985 1997 2636 3077 1480 3530 2914 4644 17238 32136 2031 1845 10279 2294 a/ a/ 3526 2557 ... a/ ... a/ 2290 2172 8156 2343 2624 2439 1932 2247 2253 4023 b/ 2880 ... b/ 12379 9365 c/ 1306 ... c/ 4341 2734 7239 2782 2187 1650 2253 1895 2242 1812 2547 3620 3327 3176 5102 2419 1604 2023 3902 6915 3284 2960 2861 2017 3817 3048 Wages and Salaries per employee 1985 384 ... 327 ... 332 ... 332 ... 345 ... 357a/ 350 ... a/ 376 362 361 351 387 407 500 382 397 346 373 373 374 446 465 388 400 400 401 396 379 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...

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)

12

APPENDIX 2

Bicycle mode split by city: Paris, Marseille, Lyon, Toulon, Metz and Reims, France Rennes, Bordeaux, Toulouse and Nantes, France Grenoble, Lille, Orleans, and Valence Strasboug, France Copenhagen, Denmark & Basel, Switzerland New Dehli Moscow, Russia Tokyo, Japan and Odense, Denmark Erlangen, Germany Dhaka, Bangladesh Beijing, China Groningen, Netherlands Shenyang, China Tianjin, China

less than 2 percent 2-5 percent 5-10 percent 15 percent 20 percent 22 percent 24 percent 25 percent 26 percent 40 percent 48 percent 50 percentt 65 percent 77 percent

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

13

APPENDIX 3

Growth in the volume (Annual percentage change)

Average 1990-95 6.0 7.0 8.0 5.5 5.5 5.0 7.5 1.5 11.5 Exports 1996 5.5 6.0 11.0 5.5 5.5 6.5 5.0 1.0 7.5 1997 10.5 11.0 11.0 9.5 9.5 12.5 13.0 12.0 11.5

of

world

merchandise

trade

by

selected

region,

1990-98

1998 3.5 World 3.0 North America 6.5 Latin America 4.5 Western Europe 5.0 European (15) Union
a

Average 1990-95 6.5 7.0 12.0 4.5 4.5 2.5 10.5 6.5 12.0

Imports 1996 1997 6.0 5.5 8.5 5.5 5.0 16.0 6.0 5.5 4.5 9.5 13.0 22.0 7.5 7.0 17.0 6.0 1.5 6.5

1998 4.0 10.5 9.5 7.5 7.5 10.0 -8.5 -5.5 -16.0

10.0 Transition economies 1.0 Asia -1.5 2.0 Japan Six East tradersb Asian

a b

Canada and the United Chinese Taipei; Hong Kong, China; Malaysia; the Republic of Korea; Singapore and Thailand.

States.

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

14

APPENDIX 4

Growth in the value (Billion dollars and percentage)

Value 1998 5225 898 274 118 157 2338 2171 178 99 106 26 138 1294 388 184 504
a

of

world

merchandise

trade

by

region,

1990-98

Exports (f.o.b.) Annual percentage change 19901996 1997 1998 95 7.5 4.5 3.5 -2.0 World 8.5 6.5 9.5 -1.0 North America 9.0 12.5 10.0 -2.0 Latin America 14.0 20.5 15.0 6.5 Mexico 7.0 6.0 6.5 7.0 7.5 0.5 3.5 1.5 12.0 9.0 19.0 14.0 8.0 3.5 3.5 6.5 6.0 16.5 5.5 17.0 0.5 -7.5 1.5 3.0 7.0 -0.5 -0.5 5.0 8.0 2.0 6.0 4.0 5.5 2.5 21.0 2.5 -7.0 Other Latin America

Value 1998 5410 1151 339 129 211 2359 2163 207 133 129 29 139 1090 281 140 438

Imports (c.i.f.) Annual percentage change 19901996 1997 1998 95 7.5 5.0 3.0 -1.0 8.0 6.0 10.5 4.5 14.5 9.5 19.0 5.0 12.5 25.5 23.5 14.0 15.5 5.5 5.5 5.0 11.5 5.5 10.5 5.5 12.0 7.5 20.0 15.0 2.5 3.5 3.0 17.0 17.0 -1.0 -1.5 7.0 4.5 4.0 5.0 3.0 16.5 -1.5 -2.0 9.5 7.0 6.0 9.5 6.5 0.5 -3.0 2.5 0.5 0.5 5.0 5.5 3.0 11.5 -1.5 -11.0 -6.0 -17.5 -17.0 -1.5 -25.0

2.5 Western Europe 3.0 European Union (15) -1.0 Transition economies 9.0 Central/Easter n Europe -16.0 Africa -15.0 South Africa -21.0 Middle East -6.0 Asia -8.0 Japan 0.5 -7.5 China Six East Asian tradersa

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

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

15

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?

16