International Business Group 6 Section - A Rishabh Gupta 12P039 Aitijhya Sarkar 12P064 Akash Mittal 12P066 Bikash Dhar

12P076

Agenda
Introduction Need of Low Cost Outsourcing for Logitech Story of Taiwan Entering into China Reasons for LCCS Potential Drawbacks Future Outlook Recommendations
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Introduction
Worlds Largest producer of Computer mice
Founded in 1981 in Apples, Switzerland, by two Italians and a Swiss Corporate Headquarters are in Fremont, California, close to many of Americas high technology enterprises Sells products like mice, keyboards, and low-cost video cameras that cost under $100 Generates annual sales of more than $1 billion Differentiators

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Continuous Innovation

Differentiated from its competitors by its continuing innovation In 2003 it introduced 91 new products First to introduce wireless mice and keyboards Huge expense in R&D work in R&D centers of Switzerland and Fremont
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High Brand Recognition 3 Strong Retail Presence
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Diversification
Fremont
Headquarters for global marketing, finance, and logistics operations

Ireland
Ergonomic design-their look and feel- is done here
Low Cost Country Sourcing

Asia
Most of the products are manufactured here

Logitech was trying to win two most prestigious clientsApple, and IBM who were sourcing mice from Alps They needed production capacity enhancement at high volume and low cost It had to offer a better designed product
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Entering into Taiwan

Opened a factory in the late 1980s

Cost was not the major reason as direct labor accounts for only 7% of Logitechs mouse
Taiwan provided a well developed supply base for parts, qualified people, and a rapidly expanding local computer industry Taiwan provided space in its science based industrial park in Hsinchu for the modest fee of $200,000 Shortly after it Logitech won the contract of Apple The factory very soon started out producing US facility The plants total capacity increased to 10 million mice per year, serving other OEM businesses as well

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Entering into China

Entered by the late 1990s Low labour Cost A factory in Suzhou employs 4000 people, mostly young women Their average salary is $75 per month

Price Logitech
$8 $15

$40

Factory 8%

Logitech 20%

Distributors, and retailers

$14 Supplier Chinese Factory

Suppliers 35%

$3

Distributors and retailers 37%

Wage | Power | Transport | Other Overheads R&D | marketing | Corporate Overhead | Shareholders

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Exploiting LCCS in China

Foreign companies account for three quarter of Chinas high tech exports Chinas top 10 exporters include American companies with Chinese operations, such as Motorola and Seagate Technologies Intel produces over 50 million chips a year in China China adds less than 5% of the value, the US operations generate the bulk of the value and profit

A S O F

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Reasons for LCCS

Low labour costs are a
primary driver of the substantial savings companies can experience. The hourly costs for labour in China and Mexico, for example, are substantially lower than in North America and Western Europe.

Penetration of new markets: By establishing local supply lines to support local manufacturing and meet requirements such as local content rules, LCCS paves the way for future sales into that particular country and neighbouring regions. Reduced inventory and cycle time, improved customer service: Establishing sources of supply closer to customers in foreign markets reduces inventory levels and cycle times, and logistically improves service to local customers. Access to new technology and innovation: Foreign suppliers sometimes possess technology and innovative products before competitors in other parts of the world do. Having a local presence increases access to such innovation and the opportunity to use it for competitive advantage.
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Procurement Savings:
Procurement savings can make a direct contribution to a companys bottom line, compared to other methods for improvement. For a company in the electronics industry, every procurement dollar saved may go directly to the companys bottom line. To otherwise achieve the same impact, the company must increase revenue 29 percent.
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Potential downsides of LCCS

Operational Risks
Inflexible customs practices Intellectual property protection threats Foreign exchange controls Business licensing limitations Political or joint-venture partner interference Project management challenges associated with migrating manufacturing operations effectively

Good staff can be difficult to find and retain, and other issues can also arise. Risks include:
Poor-quality staff High turnover or even poaching of effective employees Lack of experience Fraud Ineffective use of expatriate staff

Technical issues related to manufacturing and shipping the product can arise. Risks include:
Poor product quality Low-tech and labor-intensive production Infrastructure weakness Distant client markets

Establishing a new manufacturing source brings change, which affects the supply chain especially early in the process. Risks include:
Difficulties in communicating with staff and vendors Availability of accurate baseline data Underestimating the time required to complete transitions to low-cost country sources Sustaining savings after the initial benefit

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Future Outlook
Rising factor costs:
Rising wages and the appreciation of the renminbi have dampened Chinas exports in recent years and focused global attention on its future viability as a low-cost manufacturing centre. Increases in land prices, environmental and safety regulations and taxes all play a part. Labour costs have surged by 20% a year for the past four years, comparable figure was only 8% in the Philippines and 1% in Mexico. Wages have already risen by 10% this year. Foxconn, a Taiwanese contract manufacturer that makes Apple's iPads (and much more besides) in Shenzhen, put up salaries by 16-25% last month. If China's currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there

End of Cheap China

Heightened volatility
In Chinas steel industry, for example, annual demand growth slowed to 3 percent in 2012, after a decade of double-digit increases. The result has been lower capacity utilization, cutthroat competition, and a 56 percent decline in average profit margins for the industry from 2010 to 2012. Similarly, in Chinas massive auto industry, annual growth rates over the past five years have varied from 7 percent to 52 percent. Appliance and electrical-machinery producers have also experienced strong demand fluctuations, exacerbated by gyrating overseas demand.

Rising value-chain complexity Rapid urbanization requires product makers to manage, make, and deliver an array of diverse and customized products to increasingly remote locations. By 2015, for example, almost two-thirds of the growth in demand will come from Tierthree and Tier-four cities, which outnumber their Tier-one counterparts by a factor of 20.
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Recommendations
In a survey conducted by Bain & Company, China and India emerged as the top two destinations to go to, for both Leaders and Laggards But laggards are much more limited in their geographic footprint and are far less likely to consider other low-cost locations besides China and India. By contrast, cost leaders take a portfolio approach, calibrating capabilities and risk, function by function. They anchor decisions in two insights: understanding that the list of top low-cost destinations changes over time, and understanding that a portfolio of low-cost countries is critical to ensure security of supply and stable costs.

China may be the most attractive low-cost location for many products, a portfolio approach means accepting higher unit costs in other Asian countries, Eastern Europe or Latin America to protect against currency risks, political risks or the impact of natural catastrophes. Hungarys labour cost, for example, is more than four times that of China, but Hungary offers a highly educated workforce and relatively low political risk: a good bet for Western European companies looking to move skilled manufacturing
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