Essay Instructions: You are to write a 3-page paper. “You Are to State Question first and then continue to answer”. Read the case Study, at the end of the Case Study answer discussion questions. *Do Not Use Outside Sources*.
Case Study: Logitech
Best known as one of the world's largest producers of computer mice, Logitech is in many ways the epitome of the modern global corporation. Founded in 1981 in Apples, Switzerland, by two Italians and a Swiss, the company now generates annual sales of more than $100 billion, most of our products such as mice, keyboards, and low-cost video cameras that cost under $100. Logitech made its name as a technological innovator in the highly competitive business of personal computer peripherals. Among other things, it was the first company to introduce a mouse that used infrared tracking, rather than a tracking ball, and the first to introduce wireless mice and keyboards. Logitech is differentiated from competitors by its continuing innovation in 2003 it introduced 91 new products its high-brand recognition, and its strong retail presence. Less obvious to consumers, but equally important, as in the way the company has configured its glow value chain to lower production costs while maintaining the value of those assets that lead to differentiation. Logitech still undertakes basic R&D work (primarily software programming) in Switzerland where it has 200 employees. The company is still legally Swiss, but the corporate headquarters are in Fremont, California, close to many of America’s high-technology enterprises, where it has 450 employees. Some R&D work (again, primarily software programming) is also carried out in Fremont. Most significantly, though, Fremont is the headquarters of the company’s global marketing, finance, and logistics operations. The ergonomics design of Logitech’s products their look and feel is done in Ireland by an outside design firm. Most of Logitech’s products are manufactured in Asia.
Logitech’s expansion into Asian manufacturing began in the late 1980s when it opened a factory in Taiwan. At the time, most of its mice were produced in the United States. Logitech was trying to win two of the most prestigious OEM customers; Apple Computer and IBM. Both bought their mice from Alps, a large Japanese firm that supplied Microsoft. To attract discerning customers such as Apple, Logitech not only needed the capacity to produce a high volume and low-cost, but it also had to offer a better designed product. The solution: manufacture in Taiwan. Cost was a factor in the decision, but it was not only as significant as might be expected, since direct labor accounted for only 7 percent of the cost of Logitech’s mouse. Taiwan offered a well-developed supply base for parts, qualified people, and a rapidly expanding local computer industry. As an inducement to fledging innovators, Taiwan provided space in its science based industrial park in Hsinchu for the modest fee of $200,000. Sizing this up as a deal that was too good to pass up, Logitech signed the lease. Shortly afterward, Logitech won the OEM contract with Apple. The Taiwanese factory was soon out- producing Logitech’s US facility. After the Apple contract, Logitech’s other OEM business started being served from Taiwan; the plant’s total capacity increased to 10 million mice per year.
By the late 1990s, Logitech needed more production capacity. This time it turned to China. A wide variety of the company’s retail products are now made there. Take one of Logitech's biggest sellers, a wireless infrared mouse called Wanda. The mouse it self is assembled in Suzhou, China, in a factory that Logitech owns. The factory employs 4,000 people, mostly young women such as Wang Yan, an 18 year-old employee from the impoverished rural province of Anhui. She is paid $75 a month to sit all day at a conveyer belt plugging three tiny bits of metal into circuit boards. She does is about 2,000 times each day. The mouse Wang Yan helps assemble sells to American consumers for about $40. Of this, Logitech takes about $8.00, which is used to fund R&D, marketing, and corporate overhead. What remains of the $8.00 after that is the profit attributable to Logitech's shareholders. Distributors and retailers around the world take a further $15. Another $14 goes to the suppliers who make Wanda’s parts. For example, a Motorola plant in Malaysia makes the mouse’s chips and another American company, Agilent Technologies, supplies the optical sensors from a plant in the Philippines. That leaves just $3.00 for the Chinese factory, which is used to cover wages, power, transport, and other overhead costs.
Logitech is not alone in exploiting China to manufacture products. According to China's Ministry of Commerce, foreign companies account for three quarters of China's high-tech exports. China's top 10 exporters include American companies with Chinese operations, such as Motorola and Seagate Technologies, a maker of disk drives for computers. Intel now produces some 50 million chips a year in China, the majority of which end up in computers and other goods that are exported to other parts of Asia or back to United States. Yet Intel’s plant in Shanghai does not really make chips from silicon wafers made in Intel plant abroad, mostly in the United States. China and less than 5 percent of the value. The US operations of Intel generating the bulk of the value and profits.
Theory of Comparative Advantage suggests that it makes sense for a country to specialize in producing those goods that can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries; even if that means buying goods from other country that it could produce more efficiently itself. Theory of Comparative Advantage suggests that free trade brings about increased world production; that is, that trade is a positive-sum game. Theory of Comparative Advantage also suggests that opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. The empirical evidence seems to be consistent with this claim.
Discussion Questions
1. Use the Theory of Comparative Advantage to explain the way in which Logitech has configured its global operations.
2. Why does the company manufacturer in China and Taiwan, undertake basic R&D in California and Switzerland, design products in Ireland, and coordinate marketing and operations from California?
