A rough ride for Schwinn Bicycle

As world economy shifted, so did firm’s fortunes
By Griff Witte Dec. 3, 2004
   MADISON, Wis. - In the glass atrium that marks the entrance to the Pacific Cycle company, the old and the new of the bicycle business are displayed side by side. Each is called the Schwinn Sting Ray, and each in its time has been a bestseller
  But the similarities end there. In the space of a generation, everything about the process of designing, producing and selling a Schwinn has changed.
  The old Sting Ray broke the conventions of bicycle design, boasting a banana seat, high handlebars and extra-wide tires. In the 1960s and early '70s it became not only a symbol of middle-class aspirations, but also a provider of thousands of jobs that paid good wages with health and retirement benefits.
  Now they come from China, where the average factory worker makes less than a dollar an hour. It is a symbol of a different sort -- an illustration of how global economic forces and the sometimes clumsy responses of U.S. companies transformed middle-class jobs into low-wage work both at home and abroad.
  In a nation that measures jobs in the tens of millions, changes to a few thousand barely register. But when multiplied across a wide range of industries, the rise and fall of companies such as Schwinn help explain why the economy has become less forgiving of workers who lack higher education or specialized skills.
  "We're missing a big, important part of our society. Either everyone has to go to college or everyone has to have very low-paying jobs," said Richard Schwinn, part of the fourth and last generation to run the firm that bears his name. "I'm not sure that's a great balance."
  The Schwinn Bicycle Co. went bankrupt in 1993 and sold off the brand. But at its peak two decades earlier, the Schwinn family oversaw a labor force of 2,000, the majority of whom never made it past high school. Several thousand more U.S. workers benefited from jobs at Schwinn dealerships, or in the steel and rubber factories that supplied parts.
  Richard Schwinn, a large, bearded man with the bearing of a lumberjack, now oversees an empire of 17 at a small custom bike factory in rural Waterford, Wis.
  About 75 miles away, in Madison, Pacific Cycle manages the Schwinn brand from a sleek office with just 80 workers. Pacific, part of a Canadian conglomerate, has a couple of hundred employees in California warehouses, taking in the bikes imported from the seven Chinese factories where most Schwinns are produced.
  From California, the bikes fan out to mass merchants such as Wal-Mart. Once there, cashiers making less than $10 an hour ring up the latest Sting Ray at prices much cheaper than the original. Pacific sells more than a quarter of all bikes purchased in the United States, with just about 350 U.S. employees.
  This is the outcome the Schwinn family had desperately sought to avoid. But like many companies struggling to decipher how American production and service workers fit in a globalized market, Schwinn erred badly. Industry insiders say the family's dogged but ultimately flawed determination to stay American-made contributed to its doom.
  "They did a lot of things right over nearly 100 years," said Gary Coffrin, an industry consultant. "But at the end, there were a lot of things that caught up with them."

Building a brand
   The Schwinn factory jobs paid what in today's dollars would be around the national average of $17 an hour, with benefits -- the kind of job that has been getting increasingly difficult to find.
  Many jobs disappear because their products or services become obsolete -- think buggy whips -- but the world still needs bicycle makers. Just not many American ones.
  In 2002, 41.4 million Americans rode a bike six times or more. But 99 percent of the bikes sold in the United States today are imports. "It's still a going industry," said Michael Kershow, former counsel for the now defunct Bicycle Manufacturers Association of America. But in terms of U.S. employment, "it's really a shadow of what it used to be."
  Imports held only a sliver of the market when Schwinn dominated the industry. It was founded in Chicago in the 1890s but rose to prominence through Depression-era innovation that redefined the bicycle as both durable and stylish. Its marketing genius was to cultivate a network of small dealerships run by people who knew bikes, and who were eager to promote the brand. Schwinn dealerships became a staple of downtowns, typically employing a manager, a full-time worker or two and perhaps a few teenagers in the summer.
  As employment rose at Schwinn and other factories after World War II, so did the fortunes of the middle class. From 1947 to 1979, median family income more than doubled, from $21,201 to $45,989 in inflation-adjusted terms. The gap between rich and poor narrowed, as the middle 20 percent of families gained ground more rapidly than the top 5 percent.
  Frank Greco's family was one that benefited . He started on the Schwinn assembly line at 25, grateful for the opportunity since he was just back from the service and lacked a college degree. "They paid good -- 80 cents an hour," he said.
  Greco's fortunes improved with the company's. By 1950, Schwinns accounted for one of every four bikes sold in the United States. Buying a Schwinn became a sign of making it in the middle class, just like the picket fence and the station wagon.
  Greco stayed for 40 years, rising to become a foreman. "I made a living. I bought my home. I raised my children. I got paid every week for what I did. I told [then-chief executive] Edward Schwinn when I retired, 'You don't owe me 2 cents,' " he said.
  Schwinn was at its busiest in the early 1970s when a nascent environmental movement coupled with a sudden exercise craze spawned a bicycle boom. Dealers began making pilgrimages to Chicago to appeal for more bikes.
  "We could only build so many," said Jack Smith, the executive in charge of distribution . "I'd tell them, 'I'd be glad to give you more. But who am I going to take bikes away from to give them to you?' "

Imports roll in
   As tastes began to change, however, Schwinn didn't. It continued to churn out the same heavy, tough-to-maneuver bikes that had been the mainstay of the industry for decades. "Durable? Yes. Lasts forever? You bet," said Jay Townley, an industry consultant and former Schwinn executive. "What the customer wanted? No."
  Competitors like Mongoose became pioneers in the burgeoning BMX market, while newcomers such as Specialized and Trek offered mountain bikes.
  There were new entrants from abroad, as well. In the aftermath of the bike boom, the tariffs on foreign bikes were lowered and it became easier to import. Entrepreneurs in Korea, Japan, Taiwan and eventually China, stood ready to feed American demand for ever-cheaper goods by supplying components and whole bikes under U.S. brands, or their own.
  Schwinn was among those that began to shift to foreign parts and imported bikes. But in its initial forays into globalization, it got burned badly. Its foreign suppliers, especially Taiwan-based Giant, soon became its toughest competitors, applying Schwinn technology and techniques to their own, cheaper lines. The Schwinn brand lost its cachet, its bikes indistinguishable from many of the rest.
  The total cost of just the parts for a Schwinn Varsity made in the United States might have been $70, but a Taiwanese producer could deliver the whole bike for that price, Richard Schwinn said. "Once that came up, you say, 'Oh, party's over.' " Compounding the problem was that Schwinn had failed to invest in its Chicago factory. It had become a relic -- a rickety, fire-prone facility incapable of producing the quantities of lightweight bikes that consumers demanded. In 1983, Schwinn shut it down.
  That decision foreshadowed a broader decline in U.S. manufacturing, with the sector supplying 5 million fewer jobs today than at its peak in 1979. Meanwhile, family income growth slowed, rising only about 15 percent over nearly a quarter-century. Americans without a college degree -- who make up about three-quarters of the adult population -- now earn lower wages in real terms than they did a generation ago.
  As it became clear the Chicago plant was doomed, the Schwinn family made one last attempt to preserve its heritage as an American manufacturer. While competitors focused their strategies overseas, Schwinn opened a plant in Greenville, Miss., in 1981. The location was no accident: A century earlier, Southern farmers migrated en masse to northern cities like Chicago in search of steady factory work. Now northern factory owners were looking south to traditionally agricultural, anti-union areas where they could cheaply hire the descendants of those farmers who had stayed behind.
  The plant struggled from the beginning. Costs were high and the quality uneven: The bikes coming off the assembly line in Greenville weren't necessarily any better than the ones shipped from Asia. Wages may have been low in Greenville compared with Chicago, but they were still several times higher than those paid to laborers in China or Taiwan. As the plant hemorrhaged money, Schwinn's leadership pulled the plug in 1991. The company declared bankruptcy two years later.
  Tommy Hart, who ran the area's economic development office, managed to acquire the last bike that rolled off the assembly line in Greenville. He had coveted a Schwinn as a kid. But as his own son prepared to leave for college, the pleading began: The bike would be perfect for getting around campus. Couldn't he take it with him, if he promised to take good care of it?
  "I let him talk me into it," Hart said, sighing deeply.
  It wasn't long before the bike was stolen.
  "That was the last U.S.-made Schwinn bicycle," Hart said. "And the crook doesn't have a clue. To him, it's just another bicycle."

The road not taken
   As Schwinn declined, another U.S. manufacturer moved into the breach. Unlike nearly every other major bike company, the three-decade-old Trek Bicycle Corp. still makes a considerable share of its bikes in the United States -- any bike that costs more than $800, about 30 percent of its production. At its Waterloo, Wis., headquarters, about half of its 785 employees work in manufacturing, and the plant is expanding. An additional 440 Trek employees work elsewhere in the United States.
  Still, to make its expansion pay off, Trek will have to sail against the trade winds; it makes a higher profit on its lower-end, foreign-made products. "It's definitely getting tougher to compete. You can get a complete bike offshore for what it costs us to weld one," said Zapata Espinoza, Trek's brand manager. "But being made in America is not just about the warm feeling of giving jobs to people. We control the process. We invented it. And we're doing it the best way we can by keeping control of it."
  For Schwinn, this is the road not taken, a model for how a company can simultaneously retain at least some U.S. manufacturing and stay competitive. Even though Trek's share of the total bike market is small, it dominates among customers at the high end. Industry insiders say a slimmer Schwinn with quality domestic manufacturing could have joined Trek at the top. Instead, Schwinn got caught in the middle: unwilling to move down to the mass-merchant level where most customers now shop; unable to compete for serious riders willing to shell out top dollar.
  "Schwinn was in such a dominant position. It's shame on them," said Chris Hornung, chief executive of Pacific Cycle. "They should have had my business and Trek's business."
  Instead, Hornung has Schwinn's business. He bought it out of bankruptcy in 2001, the second time Schwinn had gone belly-up in less than 10 years.
  Hornung's strategy has been simple: Import quality bikes from Asia. Get them to mass merchants such as Wal-Mart. Keep payrolls to an absolute minimum
  Since applying that strategy to Schwinn, the brand has lost the support of most independent dealers, whose ranks are in decline. But it's been a hit among mass merchants, with the Sting Ray expected to top many kids' Christmas lists this season. "The bikes that we're putting the Schwinn brand on and selling to Wal-Mart are absolutely the best bikes that Wal-Mart has ever sold," Hornung said.
  Grudgingly, Richard Schwinn has to agree. Reviving the Sting Ray, he said, "is probably the coolest thing they've done."
  Schwinn is fatalistic about the fall of his family's company. The cause wasn't his family's mistakes, he insists, so much as the worldwide pressure on prices to keep sinking lower, a phenomenon to which he sees no end.
  To many economists, this is how things should work, with efficiencies making products cheaper and creating new opportunities at the high end -- in building satellites, if not in bicycles. Schwinn is less sure the trade-off is always worth it. What happens to a worker who has mastered the art of welding a bike frame, but whose command of advanced physics is shaky? "I know I have the right to life, liberty and the pursuit of happiness," he said, smiling wryly. "I didn't realize I had the right to the lowest possible price."
  And consumers do pay less for the new Sting Ray under Pacific's ownership. It may not be the engineering marvel that was the old Schwinn, but it retails at Wal-Mart for $180, about a third of the original's price in today's dollars.
  "People complain that a Schwinn is not what it was. True," said Greg Blake, an engineer at Pacific.
  "But," he said, "it doesn't cost what it did, either."
Scary reality
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