When I was a young boy growing up in the 1960s in New York, what I really wanted was a Schwinn bicycle—first the Black Phantom, then the Sting Ray, then the Varsity. Any kid in the neighborhood was proud to have a Schwinn. No other bike manufacturer came close.
At its peak, Schwinn employed more than 2,000 people, produced hundreds of thousands of bikes a year in five factories, and owned almost 20 percent of the U.S. market. The Schwinn name stood for cutting-edge innovation and unmatched quality. Today, however, Schwinn no longer exists as an operating company. There are no Schwinn plants and no Schwinn employees in the United States. The company that was founded in 1895 declared bankruptcy in 1992 and closed its last factory in 1993. The Schwinn name is now owned by Pacific Cycle, which in turn is owned by Dorel Industries, a consumer-products company based in Canada. All of Pacific Cycle’s bikes are manufactured in Asia. And the only thing the Schwinn bicycles currently for sale at Wal-Mart have in common with Schwinns of old is the brand.
What happened? Did Schwinn’s management think that its long history of designing, building, marketing, and selling some of the world’s best bikes would keep the company on top? Did executives fail to see that the economics of the industry were changing? Did they miscalculate their response to those changes? For instance, a poorly executed attempt to source low-cost bicycles from Taiwan helped create one of Schwinn’s biggest competitors. There are different stories that might account for the company’s demise, but the facts are that Schwinn went bankrupt and its brand was sold.
And today the fact is that many well-known companies—not just in the United States but in Europe and Asia as well—are facing a situation similar to the one Schwinn confronted. Yet the course of events is not predetermined. You don’t have to lose control of your destiny. You don’t have to be a Schwinn.
Schwinn’s story could have been different. Indeed, the company could have taken several different pathways to success. There are two potential alternative scenarios.
Alternative Reality One: Aim High. In this scenario, Schwinn decided not to embark on a path that would send almost every unit of its production to Asia. Instead, it tailored plans for each segment of its product line. For a short time, low-end bicycles were sourced from contract manufacturers in China and Taiwan, but Schwinn soon left that segment entirely to low-cost players. Meanwhile, for midrange and premium models, Schwinn determined that it could substantially decrease costs by turning to low-cost partners for labor-intensive parts. The company investigated and interviewed hundreds of potential suppliers and locked the best ones into long-term contracts. Schwinn then reconfigured its operations to perform final assembly and inspection in the United States, saving on logistics costs and ensuring that quality was maintained.
Still, the changes forced Schwinn to make some gut-wrenching choices. Almost 30 percent of the company’s work force was laid off in the process. However, the moves allowed Schwinn to produce bikes at half their previous cost, which allowed it to maintain a significant position in midrange bicycles while leveraging its product development and manufacturing capabilities—as well as its brand—to build a very strong position in the high-end market. For instance, Schwinn was able to develop new mountain bikes—and new brands—because it had the cash flow to take risks and compete in new product areas. As a result, Schwinn is now extremely competitive in the United States and is a major exporter of premium bicycles to China and Europe. Today even the Dutch ride Schwinns. And because of its growth, Schwinn currently employs twice as many people in the United States as it did before the outsourcing began.
Alternative Reality Two: If You Can’t Beat Them, Join Them. In this scenario, Schwinn went on the offensive. Rather than send most of its production volume to contract manufacturers, the company moved as quickly as possible to open its own factory in China. This move allowed Schwinn to make bikes at one-third their former cost. The company could actually have made its bikes for as little as one-sixth the cost. But by investing in building its own factory, Schwinn was able to bring in its own manufacturing techniques and train workers itself, helping it maintain quality. Indeed, the company was able to achieve high quality at a much lower cost.
The decision meant cutting more than 70 percent of Schwinn’s U.S. jobs. However, Schwinn kept expanding operations in China, and it soon started selling its bicycles in the Chinese domestic market—not only in the low-end segment but also, by leveraging the cachet of its history in the United States, in the high-end, luxury segment. In addition, Schwinn used its position to expand into other products sourced in low-cost countries, and it began to export first throughout Asia and then globally. As a result, Schwinn is the top-selling bicycle company in the world today, with new factories in Eastern Europe and Brazil in addition to China. All told, the company has now sold more than half a billion bikes in new markets—more than it did in its first 100 years combined. This success has helped the Schwinn family rise to near the top of the Fortune 500 list of wealthiest families, and the company now employs more people in the United States than it did before deciding to expand abroad.
Competing against low-cost rivals does not mean giving up. It means carefully working through what can be done and what the options are. First, understand the threat. Consider how lowcost competitors might attack. Are they going to cut price to gain volume or are they going to acquire brands to achieve a price premium? Where are you strongest?
Then answer these questions: Is doing nothing survivable? If not, how do you evolve? Does it mean going to the “other side” and sourcing in, say, China or even selling your company to the Chinese? Or does it mean finding ways to reduce your costs, manage your brand, and build a stronger competitive position? It is usually critical to understand your existing supply chain—and potential supply chains of the future—in detail if you want to identify where advantage can be gained and disadvantages offset.
Finally, act quickly. The threat is real: acting slowly can put you out of business. But so, too, is the opportunity: acting quickly may strengthen your position against both low-cost and traditional competitors. Sometimes making the choices that require layoffs or other hard measures is the best way to preserve jobs in the long run.
Many years ago, I worked with a pulp-andpaper company that was struggling to survive in a small Wisconsin town. The pulp mill, which employed 500 people, was high cost; but the paper mill, which employed 1,000, was cost effective. By shutting down the pulp mill, even though it was extremely painful for the town, the company was able to save the paper mill. In other words, the company cut 500 jobs in order to save 1,000. The paper mill has thrived, and today more than 1,500 people work there. By jettisoning the pulp mill, the company freed up the paper mill not just to survive but to grow.
Had Schwinn taken a similar course, it might have done the same. It might now boast even more jobs in the United States than it did when I was a child; or it might look quite different from the company of my childhood but still be alive and profitable. Of course, hindsight is always 20/20, but that just means there is no excuse for making the same mistakes and losing control of your own destiny. Denial is not a winning strategy.
- Harold L. Sirkin
- Senior Partner & Managing Director