Global Business 3rd Edition by Mike Peng

Exercise 16

Amazon's Kindle is a revolutionary e-reader device developed by Amazon's Lab126 unit based in California. Kindle 1, which retailed for $399 and could hold approximately 200 e-books, sold out in its first six hours when it debuted in November 2007. Since then, Amazon unleashed a series of more powerful, but cheaper, Kindle models. In 2011, for the first time, Amazon sold more Kindle copies of books than print copies. Yet no US-based manufacturer is able to make this cutting-edge, high-tech product in the United States. Its components are made in China, Taiwan, and South Korea, and its final assembly is in China.
Why Kindle cannot be made in its home country has become a new exhibit in the debate about the future of the US economy. Since no US-based manufacturer has the capabilities to produce Kindle at home, Amazon has no choice but to outsource Kindle's production to Asia. Critics argue that after decades of outsourcing production to low-cost countries, US firms have lost not only millions of low-skill jobs but also the ability to make the next generation of high-tech, high-value goods. In addition to Kindle, the not-made-in-USA list includes electric-car batteries, light-emitting diodes, and carbon-fiber components of Boeing's 787 Dreamliner.
The common belief is that as long as US firms control upstream R D and design activities and downstream branding, marketing, and distribution services in a value chain, their competitiveness will remain unchallenged in global competition. Outsourcing basic manufacturing will not be a grave problem. However, critics argue that when a large chunk of value- adding activities, such as manufacturing, is taken out of a country, employment opportunities for these activities shrink, experienced people change careers, and smart students avoid these "dead-end" fields. Eventually, a critical mass of capabilities is lost and will no longer be able to support upstream and downstream activities, which will be forced to migrate too.
Consider the migration of PC production. Original equipment manufacturers (OEMs) in Asia, for sure, offered compelling low-cost solutions to US firms. US firms initially did not feel threatened. However, product innovation for new gadgets and process innovation in manufacturing are intertwined. PC designers need to interact with manufacturing specialists frequently in order to optimize the design. When the loss of USbased manufacturing makes US design engineers less able to handle complex new designs, plenty of such opportunities to work with manufacturing specialists in Asia make Asian design engineers more capable. Thus, the erosion of PC manufacturing capabilities leads to the erosion of PC design skills. Ferocious product market competition often forces US firms to relinquish the design function to their Asian suppliers, which then become original design manufacturers (ODMs) (see Figure 4.5). Of course, one solution is to jettison a US PC brand all together, as evidenced by IBM's sale of its PC division to China's Lenovo. Lenovo thus becomes an original brand manufacturer (OBM). Today for all the remaining US-owned PC brands, with the exception of Apple, every laptop is not only manufactured but also designed in Asia. Competing with them are a bunch of PC brands from Taiwan, such as Acer, BenQ, ASUS, Advantech, HTC, and MSI-in addition to Lenovo from China, Samsung and LG from South Korea, and Sony and Toshiba from Japan.
Nevertheless, the migration of PC production still fits the theory of product life cycle (that is, USbased firms manufactured and designed PCs first, and then gradually the production and design functions migrated to Asia). However, the theory of product life cycle no longer seems valid in the case of Amazon's Kindle. US-based firms simply do not have a chance to manufacture it, which does not generate a single US manufacturing job at a time when the US unemployment rate is sky-high. In another hightech industry, the $30 billion global solar industry, the United States has a chance to be a contender in manufacturing. However, the odds are not great because the United States produces just 5% of the world's solar panel cells, while China is already the numberone player, making more than 50%.
General Electric's (GE) CEO Jeff Immelt has recently admitted that GE has probably gone too far in outsourcing. He has labeled the notion that the United States could remain an economic superpower by relying solely on services and consumption "flat wrong." Recently, Ford's chairman Bill Ford and Dow Chemical's CEO Andrew Liveris have openly called for "industrial policy," an unpopular term (in the United States at least) that is otherwise known as government intervention by picking winners. However, by bailing out Detroit and rescuing Wall Street, the US government has been dragged into "industrial policy" without much of a clear long-term policy. At a time when global competition is heating up, how to beef up the manufacturing (and other) capabilities of US firms in order to enhance US competitiveness undoubtedly remains job number one for numerous executives and policymakers. But what does the future hold for future versions of the Amazon Kindle?
Case Discussion Questions :
From a resource-based view, what resources and capabilities do Asian firms involved in the production of Amazon's Kindle have that US firms do not have?