316 Part 3 «(/)) Casos Logitech Best known as one of the world’s largest producers of computer mice, Logitech is in many ways the epitome of the modem global corporation. Founded in 1981 in Apples, Switzerland, by two Italians and a Swiss, the company now generates annual sales of over $2.2 billion, mostly from products such as mice, keyboards, and low- ‘cost video cameras that cost less than $100. Logitech made its name as a technological innovator in the highly ‘competitive business of personal computer peripherals. Te 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 in- novation, high brand recognition, and strong retail pres- ence. Less obvious to consumers, but equally important, has been the way the company has configured its global 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 several hundred employees. The company is still legally Swiss, but most of the corporate functions are run out of offices in Fremont, California, close to many of America’ high-technology enterprises, where it has more than. 500 employees. Some R&D work (again, primarily software programming) is also carried out in Fremont. Most significantly, though, Fremont is the headquarters for the company’s global marketing, finance, and logis- tics operations. The ergonomic design of Logitech's products—their look and feel—is done in Ireland by tan 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 ofits mice were produced in the United States. Logitech was trying to win two of the most pres- tigious 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 at high volume and low cost, but it also had to offer a better designed product. The solution: Manufac- ture in Taiwan. Cost was a factor in the decision, but it ‘was not as significant as might be expected because di- rect 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 fledgling innovators, Taiwan provided space in its science-based in- dustrial 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 outproducing Logitech's U.S. facility. After the Apple contract, Logitech's other OEM busi- ness 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’ retail products are now made there. A wire- less infrared mouse called Wanda, one of Logitech’ biggest sellers, is assembled in Suzhou, China, in a Logitech- ‘owned factory. The factory employs 4,000 people, mostly young women such as Wang Yan, an 18-year-old em- ployee ftom 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 this 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, which is used to fund R&D, marketing, and corporate overhead. What remains 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 that 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 for the Chinese factory, which is used to cover wages, power, transport, and other overhead costs. Logitech is not alone in exploiting China to manu- facture 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 the United States. Yet Intel’s plant in Shanghai doesn’t really make chips; it tests and assembles chips from silicon wafers made in Intel plants abroad, mostly in the United States. China adds less than 5 percent of the value. The U.S. operations of Intel generate the bulk of the value and profits.! Case Discussion Questions 1. Inaworld without trade, what would happen to the costs that American consumers would have to pay for Logitech's products? 2. Explain how trade lowers the costs of making com- puter peripherals such as mice and keyboards.Use the theory of comparative advantage to explain the way in which Logitech has configured its global operations. Why does the company ‘manufacture in China and Taiwan, undertake basic R&D in California and Switzerland, design Products in Ireland, and coordinate marketing and operations from California? ‘Who creates more value for Logitech, the 650 peo- Ple it employees in Fremont and Switzerland, or the 4,000 employees at its Chinese factory? What are the implications of this observation for the argument that free trade is beneficial? ‘Why do you think the company decided to shift its corporate headquarters from Switzerland to Fremont? ‘To what extent cari Porter’ diamond help explain the choice of Taiwan as a major manufacturing site for Logitech? a7 7 Why do you think China is now a favored location forso much high-technology manufacturing activity? How will China's increasing involvement in globel trade help that country? How will it help the world’s loped economies? What potential problems are associated with moving work to China? Sources 1. MK Jolly and K. A. Bechler, “Logitech: The Mouse That Roared,” Planning Review 20, no. 6 (1992), pp. 20-34, K. Guerrino, “Lord of the Mice,” Chief Execute, July 2003, pp. 42-44; A. Higgins, “As China Surges, It Also Proves, a Buttress to American Strength,” The Wal Sree Journal, January 30, 2004, pp. Al, AB; |. Fox, “Where Is Your Jeb Going,” Fortune, November 24, 2003, pp. 84-88, and R. Wray, “Logitech Cuts 500 Jobs and Targets,” ‘The Guardian, January 7, 2009, p. 28