ASSIGNMENT 8

Journal of Business Case Studies – Third Quarter 2014 Volume 10, Number 3

Copyright by author(s); CC-BY 225 The Clute Institute

From OEM Supplier To A Global

Leading Company Wei-Li Wu, Chien Hsin University of Science and Technology, Taiwan

Yi-Chih Lee, Chien Hsin University of Science and Technology, Taiwan

ABSTRACT

Firms in developing countries generally have lower technological and marketing capabilities

compared to firms in developed countries. Joining OEM alliances can help firms with fewer

capabilities to learn from their partners and then upgrade their technological capabilities. In this

kind of scenario, learning firms in OEM alliances are usually from developing countries, and they

play the role of suppliers; on the other hand, teaching firms are usually from developed countries

and play the role of buyers. Although OEM alliances provide a platform for acquiring,

transferring and creating knowledge, few suppliers can sufficiently upgrade their technological

capabilities to reach a higher level and develop marketing capabilities in order to complete in the

global market. Therefore, it is an important issue to know how an OEM supplier from developing

countries can become a leading firm in the global market. In this study, we choose Giant Bicycles

to explore this issue. We conduct a case study to explore the growth of Giant Bicycles from an

OEM supplier to a leading company in the bicycle industry.

Keywords: OEM; Giant Bicycles; Global Strategy

INTRODUCTION

n the economic system of globalization, in order to focus resources on value chain activities with high

additional value (such as R&D and marketing), multi-national enterprises of developed countries tend to

outsource production to developing countries that have a lower labor cost. This practice is called original

equipment manufacturer (OEM). Generally speaking, OEM buyers are usually from multi-national enterprises in

developed countries, and OEM suppliers are from developing countries. The cooperative model of OEM has

different strategic meanings to buyers and sellers. For the buyers of OEM, reduction of the product cost is the main

factor. When the suppliers lose the advantage of labor cost due to economic development in their countries, these

buyers will search for OEM in other countries that have a cheap labor cost.

For the suppliers in developing countries, OEM plays a totally different role. We classify OEM suppliers

into three types. First, for most of suppliers, the acquisition of foreign OEM orders usually means they will have

excellent financial performance in the short term. However, if these suppliers only rely on cost advantage, they will

easily lose orders from the buyers when developing countries with a better cost advantage enter the labor market.

Hence, suppliers will have to either move their plants to countries with lower labor costs or stop their operations.

Secondly, for a small number of suppliers, OEM forms an excellent learning platform. In order to meet basic quality

requirement, in the OEM process, buyers in developed countries will conduct technological transfer related to

product knowledge to the suppliers, which then have the opportunity to learn the basic manufacturing techniques of

the industry. Subsequently, according to the product knowledge obtained from the OEM process, suppliers invest in

R&D and enhance the core technology of the product. Sometimes their technique and capacity can be superior to

that of the OEM buyers that taught them the basic product knowledge. Thirdly, for a very few number of suppliers,

they can cultivate their core capacity of product manufacturing through the OEM process, and also develop their

own brands instead of simply producing products for the buyers.

Generally speaking, for suppliers, having brands in the global market should be a critical factor of

sustainable operations. However, numerous challenges can be encountered during the process. For instance, the

I

Journal of Business Case Studies – Third Quarter 2014 Volume 10, Number 3

Copyright by author(s); CC-BY 226 The Clute Institute

suppliers must invest in more funds in uncertain R&D, and they will encounter the threats of losing the buyers’

orders and unfamiliar marketing. Thus, OEM suppliers in developing countries tend to fail when developing their

own brands. In this study, we will analyze Giant Bicycles, which has created a successful brand. Giant is a family

enterprise founded in Taiwan in 1972. In early times, it mainly relied on manufacturing. However, through the use

of prominent global strategies, Giant has become one of the leading bicycle suppliers in the world. We will find how

Giant enhanced its core capacity through the use of precise global strategies and arrangements at different stages,

which could serve as a reference for the OEM suppliers in developing countries.

GIANT

In 1972, Giant was founded in a small town in central Taiwan. In early times, it was a small-scale family

enterprise and was not familiar with bicycle manufacturing techniques. However, forty years later, Giant has

become one of leading bicycle suppliers in the world, with a global business volume reaching 54 billion dollars. It

has more than 12,000 retail partners around the world and has received numerous product design awards. Giant is

the best example of an OEM supplier in a developing country transforming into a brand name company. In the

beginning, it learned manufacturing techniques through OEM cooperation, while at later stages it developed its

prominent core capacity and competitive advantages. At different stages, Giant gradually constructed its core

capacity through strategic alliances and global arrangements. This study suggests that Giant developed its core

capacities by integrating internal and external resources, and enhanced this capacity through global arrangements.

CASE ANALYSIS

Using interviews, corporate annual reports, and secondary reports (Lin, 2008; Giant Bicycles website,

2014), this study will analyze the core capacity development of Giant. Table 1 shows the important events since the

foundation of Giant and the strategies of growth. We will divide the growth of Giant into four stages: the foundation

stage, the technical development stage, the growth stage, and the brand growth stage. The content is shown below.

Foundation Stage

At the beginning, Giant was unfamiliar with bicycle manufacturing techniques, and it could only imitate

and learn from Japan. Through entering an OEM agreement with Schwinn, the leading bicycle enterprise in the U.S.

at the time, it obtained knowledge transfer and enhanced its bicycle manufacturing techniques.

Technical Development Stage

With the technological base from the foundation stage, Giant combined the R&D capacity of external

academic institutes (the Industrial Technology Research Institute of Taiwan), developed a carbon fiber bicycle, and

applied new techniques using composite materials to bicycle manufacturing. Giant was aware that China had opened

the labor market, and that Schwinn could withdraw its orders at any time; therefore, Giant started promoting its own

brand and selling the brand in Europe and America.

Growth Stage

At this stage Giant possessed the differential R&D and manufacturing capacities needed to support

development of its brand. During this time Giant expanded to China, taking into consideration of the dual role of

China as the world market and the world factory. In Taiwan, Giant opened life experience stores under direct

management, thus reaching out to its customers, enhancing its service, and listening to customers.

Brand Growth Stage

In regards to the price competition in newly industrialized countries, Giant formed industrial alliances with

its main rivals and component suppliers in Taiwan, thereby upgrading the bicycle industry in Taiwan and avoiding

price competitions with other countries. In addition, it sponsored important bicycle competitions to increase its

brand reputation and product quality. Finally, it created a bicycle-friendly environment in Taiwan.

Journal of Business Case Studies – Third Quarter 2014 Volume 10, Number 3

Copyright by author(s); CC-BY 227 The Clute Institute

Table 1: Giant Bicycle’s Global Strategy

Year Events Strategies of Growth

Foundation

stage

1972-1984

1972

Founded in Taichung County, Taiwan,

with a capitalization of 4 million dollars

and more than 30 employees.

It learned basic bicycle manufacturing techniques

from Japan.

Based on industrial standards and Japanese

specifications, it convinced its partners and

component suppliers to upgrade the product quality.

1978

Schwinn, the leading bicycle company in

the U.S., started procurements from

Giant.

It enhanced its bicycle manufacturing techniques

through the manufacturing process for Schwinn.

It started marketing the Giant brand in Taiwan.

Technical

development

stage

1985-1991

1985

Signed contracts with the Industrial

Technology Research Institute to develop

carbon fiber bicycles.

By cooperation with external national R&D institutes,

it constructed its core technical capacity.

1986 China opened its low-cost labor market

and buyers began turning to China.

It started constructing marketing networks for its

brand.

Founded branches in Europe and the U.S.

1991 Terminated the OEM relationship with its

main buyer, Schwinn.

Development turned from OEM manufacturing to

brand development.

Growth stage

1992-2001

1992

Successful development of one-piece

carbon fiber bicycles and aluminum alloy

bicycles.

It supported brand construction through technical

development.

1992 Started investments in China. It expanded in potential markets and lowered its

production costs.

1998 Invested in Hodaka of Japan.

2000 Founded the first life experience store

under direct management.

By operating a direct sales store, it demonstrated a

consumer-oriented culture and reproduced this

experience in the operation of following stores.

2001 Awarded by Forbes as a global top 20

small-scale enterprise.

Brand growth

stage

2002-present

2002

To combat low-price competition from

China and countries in Southeast Asia,

Giant recruited bicycle suppliers in

Taiwan to found an industrial alliance

called the A-team, to create bicycles with

high additional value.

It avoided cost competition with new markets,

developed industrial alliances, upgraded the overall

bicycle industry in Taiwan, and created the market for

high-value bicycles.

2002 Sponsored professional bicycle teams in

Europe.

By implementing sports marketing, and through the

feedback from professional bicycle riders, it enhanced

its techniques.

2004

German T-Mobile won the grand

championship of the Tour de France

riding a carbon fiber bicycle produced by

Giant.

2006 Formed a brand reconstruction team and

invited Interbrand to be the consultant.

By cooperating with the consulting companies of

foreign brands, it reconstructed the brand thinking of

international market.

2007

King Liu, the founder and president of

Giant, toured Taiwan by bicycle at the

age of 73.

It created the biking culture.

2008 Founded the first female bicycle store in

the world. It enhanced the segmentation of different markets.

2009 Expanded to bicycle travel. Diversified operations

2011

Held “Taiwan rolling forward,” an

activity marking the one hundredth

anniversary of Taiwan. More than

110,000 people across Taiwan rode

bicycles at the same time, breaking the

Guinness World Record.

In the Taiwan market, it enhanced biking culture. By

constructing bicycle-friendly environments and life

attitudes in Taiwan, it established a market with

national competitive advantages.

Journal of Business Case Studies – Third Quarter 2014 Volume 10, Number 3

Copyright by author(s); CC-BY 228 The Clute Institute

LESSONS LEARNED FROM GIANT

1) For suppliers in newly industrialized countries, learning from international OEM alliances is an important channel of corporate growth. However, the key for sustainable operations is the business owners’

continuous investment in R&D to enhance the core capacity. In the beginning, Giant was an OEM supplier

for Schwinn, and through this it learned the basic techniques to manufacture bicycles and obtained

important business revenues. However, OEM has both advantages and disadvantages. It helps the growth of

suppliers in newly industrialized countries. However, when foreign clients acquire other low-cost labor

sources and immediately withdraw their orders, OEMs will encounter significant operational crises. Giant

serves a great example. After it learned the basic knowledge of bicycles during the OEM process, it started

cooperating with external academic institutes and the Industrial Technology Research Institute to develop

carbon fiber bicycles, develop differentiated manufacturing techniques, and promote products with its own

brand. Because of its brand, Giant survived when Schwinn, which represented 75% of Giant’s business

revenue, changed its orders to China.

2) Small and medium enterprises should be actively internationalized to find the needs of consumers in different areas, as the feedback of consumers in different markets can be used to enhance their techniques.

According to the author’s interview with Giant, sponsorship of international bicycle teams can not only

expose the brand but also be helpful to upgrade the company’s core technical capacity. In addition,

consumers in developed countries have different needs for bicycles, in comparison to Taiwanese

consumers. As regards to Giant, the riders’ continuous practicing and demands for functions were new

challenges for its R&D personnel. By satisfying the riders’ needs, Giant was able to upgrade its technical

capacity.

3) Since competitive advantage based on low cost usually does not last for long, industrial upgrading is the solution for sustainability. Although Taiwan has been an important exporter of bicycles, at the end of the

1990’s it gradually lost its competitiveness due to low-price advantages in China and Southeast Asia.

Hence, Giant recruited component suppliers and its main rival Merida to form a bicycle industry alliance,

called the A-team. Through this alliance, the members of the alliance disclosed the important product

manufacturing techniques and upgraded the quality of MIT (made in Taiwan) bicycles. Therefore, MIT

bicycles can be segmented from bicycle markets in low-cost countries.

4) Many enterprises starting as OEMs tend to have manufacturing and cost-oriented thoughts. However, only marketing and consumer oriented thoughts can lead to successful transformation of enterprises. Through

sports marketing, Giant considerably enhanced its brand reputation. For instance, it sponsored the German

T-Mobile teams which had several excellent performances in the Tour de France. When the riders won the

championship, their Giant bicycles became the company’s best marketing tool. Giant effectively changed

the bicycle environment in the market of its home country (Taiwan) and consumers’ concepts about

bicycle. After the founder accomplished a bicycle tour around Taiwan at the age of 73, consumers in

Taiwan not only treated bicycles as transportation and recreational tools, but also regarded them as the tool

to explore Taiwan and fulfill self-realization. The brand value of Giant was thus enhanced. In addition,

Giant developed the first bicycle store exclusively for female consumers. This business was expanded to

include bicycle travel. Giant also constructed planning and sponsorship for bicycle-friendly environments

in the cities of Taiwan. The marketing points were based on not only the functional appeal of the products,

but also the biking culture.

DISCUSSION QUESTIONS

Overall, Giant presents a successful business story.

1. Can Giant’s growth strategies apply to the bicycle industry of your country? 2. Can its growth strategies apply to other industries? 3. What do you think that how Giant can be stronger in the future?

Journal of Business Case Studies – Third Quarter 2014 Volume 10, Number 3

Copyright by author(s); CC-BY 229 The Clute Institute

AUTHOR INFORMATION

Wei-Li Wu is an Assistant Professor at the Department of International Business at Chien Hsin University of

Science and Technology. He received his PhD in International Business from the College of Management at

National Chi Nan University in Nantou, Taiwan. His research interests include knowledge management,

international business management, and organizational behavior. E-mail: [email protected]

Yi-Chih Lee received her PhD in Business Administration from the Fu Jen Catholic University of Taipei, Taiwan.

Currently, she is an Assistant Professor at the Department of International Business in Chien Hsin University of

Science and Technology, Zhongli, Taiwan. Her research interests include health industry management, data mining,

and customer relationship management. E-mail: [email protected] (Corresponding author)

REFERENCES

1. Lin, C. Y. (2008). Legend of Giant: Global brand management of Giant. Taipei: Commonwealth Publishing.

2. Giant bicycles website. Retrieved 12 January 2014 from http://www.giant-bicycles.com/en-us/ 3. 2012 Giant Manufacturing annual report.

Journal of Business Case Studies – Third Quarter 2014 Volume 10, Number 3

Copyright by author(s); CC-BY 230 The Clute Institute

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