Case Study

Department of Business Administration

Course Title: International Trade
Course Code: MKT 703

SUBMITTED BY
Name: Samira Anjum Shorna
Roll Number: 3889
Registration Number: WUB 01/18/57/3889
Batch: 57/A
Program: BBA
WUB email id: [email protected]
World University of Bangladesh

SUBMITTED TO
Dr. Wasib Bin Latif
Assistant Professor
Department of Business Administration
World University of Bangladesh

Submission Date: 25th October, 2021.

 Summary
Logitech is a modern global corporation which founded in 1981 in apples, Switzerland. It has
been differentiated from its competitors by the policy of continuing innovation. It made its
name as a technological innovator in the highly competitive personal computer business
world. It is the first company which produced a mouse that used infrared tracking rather than
a tracking ball. Its main revenue comes from selling low cost mouse, keyboard, & video
camera in worldwide. It is legally a Swiss company but its corporate headquarter is in
Fremont, California. Its R&D work (primarily software programming) is done in Switzerland
& the products of the company are designed in Ireland. In the late 1980's it had expand its
business in Asia & opened a factory in Taiwan.
After that it started serving well-respected OEM customers like Apple. Logitech knew that if
they did not reduce the cost of their product they would soon lose the market. So, in the late
90s Logitech decided to make products out of Taiwan while at that time Logitech was still
producing most of their products in America. At the time Logitech was moving to China to
set up a manufacturing facility with the intention of making products at lower cost. In this
way Logitech has finally been able to use its comparative profits from cost, construction,
R&D, marketing, finance, big business and became the final beneficiary of the competitive
market. By using the Logitech business as an example we can clearly see free trade in the
global environment helps to reduce prices, increase consumption, improve the economies of
participating countries, increase productivity and increase competitiveness.

Question: 1. In a world without trade, what would happen to the costs that American
consumers would have to pay for Logitech's products?
Answer: In a world without a trade, the price of Logitech‟s products will increase, either for
American consumers or other consumers around the world. This circumstance could happen
since all the product‟s parts would be produced in Logitech‟s production origin which is
Switzerland. When all the parts of Logitech‟s products are manufactured in Switzerland, the
costs of production will increase because either labor or assembly cost in Switzerland is
higher than those in China or Taiwan. The example from the passage is given that the price of
a mouse is US$40 when it is produced in China. From that US$40 price of one unit of mouse,
it could only cover the cost of wages and factory overhead for US$3. That US$3 won‟t be
enough even when it is only to pay the employee‟s wage if the mouse were produced in
Switzerland. Switzerland labor cost is much higher than in China, considering the lower
number of population in Switzerland. It indicates that if the mouse were produced in
Switzerland, the price of each mouse will be increased by more than US$40 per unit of
mouse.

Question: 2. Explain how trade lowers the costs of making computer peripherals such as
mice and keyboards.
Answer: In this case, Logitech would likely to win the market of Apple and IBM‟s bulk
orders for their products. Thus, the company should press their labor to produce merrier
product in order to supply their product, and to gain their targeted clients‟ trust. Trade in
Logitech is applied by manufacturing their product in a different country with entirely lower
labor cost. This is why computer peripherals (mice and keyboards) by Logitech could be sold
at a lower price level. Other than that, Logitech has an R&D headquarter located in Fremont
(which is famous for credible research companies), and Software Programming R&D
Headquarter in Switzerland (which is also famous for software). However, the most
appealing trade emerged in this case is about how the cost of producing Logitech‟s product is
pressed down when the manufacturing company is located in Taiwan. Other than getting their
labor costs lowered by 7%, getting parts and resources from companies in Asia could be a
significant change in pressing down the cost as well. By lowering the costs, Logitech could
attain more revenue and therefore gain better margin to satisfy its stakeholders.

Question: 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?
Answer: David Ricardo further developed Adam Smith‟s theory regarding absolute
advantage into the theory of comparative advantage. The theory explains that a country may
specialize in the production of those goods that it produces most efficiently and buy the other
goods which productions are less efficient from other countries—even if it means to buy from
other countries that can produce it more efficiently. According to the theory, a country or
company may receive benefits from doing international trade, especially in terms of cost
efficiency. In this case, Logitech manages to configure its global operations by moving some
of their manufacturing process outside California headquarter to other countries that can do it
in a much more efficient way. Using Ricardo‟s theory, Logitech realizes that their
headquarters in California is only most efficient in handling the corporate functions and
R&D. This may be caused by the price of labor and materials that are relatively expensive in
the U.S. compared to other countries. Therefore, Logitech, using the theory of comparative
advantage as their basis, decided to move their production to Asia. This strategy is proven to
be successful for Logitech at controlling their costs efficiently, considering how they manage
to be one of the world‟s largest computer mice producers and other low-cost computer
peripherals. In this case, we‟d see how Logitech‟s business operations are being held in many
other countries outside the U.S.. First, they move the company manufacturers to China and
Taiwan. Logitech does this since China and Taiwan‟s labor rates are much more affordable
and efficient for their production process compared to the U.S.‟s labor rate. This condition is
highly influenced by the large amount of China and Taiwan‟s population that‟s currently in
working age and they tend to be hard-skilled labors. Besides that, China and Taiwan also
have access to tremendous supplies of materials which makes it much more affordable to be
obtained by Logitech. Second, Logitech undertake their basic R&D and also coordinate for
the corporate functions in California and Switzerland. The reasons why they‟re focusing their
headquarter in California is because its location in California is competitively strategic. The
California headquarter is located very close to many of America‟s high technology
enterprises and many credible research companies, which makes it strategic for Logitech to
further develop and innovate themselves in an environment which could support their
researches. Besides that, the Switzerland location is also considered as competitively strategic
since Switzerland is best known for their software development. Lastly, the company decided
to design their product in Ireland. This is most likely because Ireland is famously known for
their expertise in designing ergonomic products—suitable for what Logitech aims in their
products. These competitive advantages that each country has leads to the decision for
Logitech to spread their global operations in the most efficient way—aligned with Ricardo‟s
theory of comparative advantage.

Question: 4. Who creates more value for Logitech, the 650 people 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?
Answer: In this case, the one who creates more value for Logitech is the 650 people in
Fremont and Switzerland. Although the 4000 people in the Chinese factory produces the
product that would later be sold around the world, the amount of the product that they sell are
incomparable to the 650 people in Fremont and Switzerland who are doing all the marketing,
finance, operations, and R&D for Logitech‟s whole operations. Without these two offices, the
Logitech Company wouldn‟t exist and already crumbled long ago. On the other hand, the
factory in China only creates and assembles the product. Without the idea and innovation
from Fremont and Switzerland, the company won‟t have any product idea to be created.
Furthermore, without headquarters where marketing, finance, and operations are being done,
the company wouldn‟t exist and wouldn‟t be able to function well.
Free trade is beneficial for Logitech because it creates a lot of benefits for Logitech from the
creation of factory in China and Taiwan. The cost of labor that they need to spend has
decreased as they move their factory to China, which has a cheaper labor market. Taiwan, on
the other hand, has the necessary and great condition for Logitech. Well-developed supply
base for parts, skilled people, and rapidly expanding local computer industry are the things
that make producing mice, keyboards, and cameras profitable for Logitech. This condition
enables Logitech to produce lots of their products which can be sold around the world. With
the presence of free trade policy, Logitech has gained a competitive advantage as they are
able to produce in a cheap labor market and then sell their products with a cheap price around
the world.

Question: 5. Why do you think the company decided to shift its corporate headquarters from
Switzerland to Fremont?
Answer: Logitech relocates corporate headquarters to Fremont, California in states for
several reasons. This area widely known as Silicon Valley is home for many major high-tech
companies such as Facebook, Apple, Google, Intel, and many more. Similar business in this
case the technology industry concentrating in the same area in Silicon Valley. This creates
competition which encourages the surrounding company to develop themselves better.
Logitech can benefit from exposing them to the current situation and conditions of the
technology industry by being close to competitors. They can develop a business strategy to
overcome current and future challenges in the industry. The close distance between similar
companies can expand and build connections with these companies in the industry, in this
case, the technology companies. With this connection, they can get many things like
consumers, suppliers, partners, and others. Moving a company location there can also provide
benefits in the form of a specialized workforce in this field. Logitech can get the best talents
in the industry especially for the R&D work in developing its product where the product is
the core of the company itself. Relocating the corporate headquarters from Switzerland to
Fremont can be beneficial for Logitech.
Question: 6. To what extent can Porter's diamond help explain the choice of Taiwan as a
major manufacturing site for Logitech?
Answer: Porter contends that the degree to which a nation is likely to achieve international
success in a certain industry is a function of the combined impact of factor endowments,
domestic demand conditions, related and supporting industries, and domestic rivalry. He
speaks of these four attributes as constituting the diamond. He also maintains that chance and
government can influence the national diamond in important ways. These six attributes can
be applied in the case of Taiwan, which becomes a manufacture site for Logitech‟s electronic
goods.
a. Factor endowments: Porter argues that advanced factors are the most significant for
competitive advantage. Unlike the naturally endowed basic factors, advanced factors are a
product of investment by individuals, companies, and governments. Taiwan is selected as a
major manufacturing site for Logitech because it offered abundant qualified people.
b. Demand conditions: Porter argues that a nation's firms gain competitive advantage if their
domestic consumers are sophisticated and demanding. With growing computer and
information technology in Taiwan along with in the whole world, the local demand of
products of Logitech in Taiwan has also been an influential factor in the choice of the place.
c. Related and supporting industries: The benefits of investments in advanced factors of
production by related and supporting industries can spill over into an industry, thereby
helping it achieve a strong competitive position internationally.
Taiwan offered a well-developed supply base for parts and a rapidly expanding local
computer industry.
d. Firm’s strategy, structure, and rivalry: Logitech has adopted the strategy of producing
at high volume and low cost to gain competitive advantages. Choosing Taiwan has
advantages of low cost, well-developed suppliers, qualified people, etc.
e. Chance: Logitech won the OME contract with Apple which is not within the control of
Logitech. It was during the time when Logitech entered Taiwan for manufacturing and placed
the industry to high profit, the plant capacity increased to 10 million per year.
f. Government: As an inducement to fledgling innovators, Taiwan provided space in its
science-based industrial park in Hsinchu for the modest fee of $200,000.
Question: 7. Why do you think China is now a favored location for so much high-technology
manufacturing activity?
Answer: There are many factors that make China more attractive location to do high-
technology manufacturing activity. China has plentiful resources not only natural resources
such as land and water, but also human resources like technical human skills. They also have
a well-built infrastructure for transportation, ports, and communication. Moreover,
government-supported exporting firms help enhance demand for the goods they manufacture.
All of the mentioned factors have made China a favored location for high-technology
manufacturing activity. China can be considered as favored location for much higher
technologies for number of reasons.
 Production capacity in China is also high. Logitech required increased production
capacity to supply the growing demand for its products that lead the move to China to
assemble its products.
 Low cost labor and is also an important factor that contributes for China being chosen
for manufacturing activity. In Chinese factory where 4,000 workers work at USD 75 per
month as a result Logitech product “Wanda” is sold for USD 40 that creates competitive
advantage in order to complete in the world market.
 In Asia, as a country China is having a fastest economic growth so therefore with a
high economic growth needs to keep continuous link with technology manufacturing activity.
 The large population of China means expectation of high demand for Logitech
products consequent economies of scale.
The above factors have resulted in China to be a favored location for manufacturing
activities. According to the Ministry of Commerce, China (2009), foreign companies account
for three quarters of China„s high tech exports. China‟s top ten exporters include American
companies with Chinese operations, such as Motorola and Seagate Technologies, a maker of
disk drives for computers.

Question: 8. 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?
Answer: China increases in global trade will ensure that investment flows into China for
manufacturing. Its balance of payment position will become very strong. It can use the trade
as a lever for political mileage. As more investment happens it will help China to reap the
advantages of economics of scale.
It can provide better living conditions for its citizens. It will also generate funds for planned
investments. The world‟s developed economics will be able to take advantage of the low cost
manufacturing available in China. The global companies can improve the efficiency of their
supply chain by manufacturing in China.
The following are the potential problems associate with moving work to China:
The political changes, when they happen, can lead to disruption of work. Decision making at
government level is opaque, which can cause problems if unfavorable decisions are taken.
When there is trouble in the political relationship between the home country and China. The
companies may lose an opportunity to develop an alternate to China as a manufacturing hub.