closing case: 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 $2.2 billion, most from products such as mice, keyboards and low-cost video-cams. Logitech made its name as a technological innovator in the highly competitive business of personal computer peripherals. It was the first company to introduce a mouse that used infrared tracking, rather than a tracking ball, and the first to introduce the wireless mouse and keyboard. Logitech is differentiated from competitors by its continuing innovation, its high brand recognition, and strong retail presence. 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's 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 logistics operations. The ergonomic 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 at high volume and low cost, bit 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 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 fledgling innovators, Taiwan provided space in its Hsinchu Science and Industrial Park for the modest fee of $200,000. Sizing this up as a deal that was too good to pass up, Logitech signed the lease. Soon 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 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 itself 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 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 from the $8 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 195196the 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 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 Technology, 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. In a world 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 computer peripherals such as mice and keyboards.

3. 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?

4. Who creates more value for Logitech-the 650 people it employs in California 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?

5. Why do you think the company decided to shift its corporate headquarters from Switzerland to Fremont?

6. To what extent can Porter's diamond help explain the choice of Taiwan as a major manufacturing site for Logitech?

7. Why do you think China is now a favored location for so much high-technology manufacturing activity? How will China's increasing involvement in global trade help that country? How will it help the world's developed economies? What potential problems are associated with moving work to China?