Reference no: EM132629809

Finding a Location for Electronics Component Manufacturing in Asia ACM is an electronics component manufacturer that has been located in Singapore since 1991, supplying original equipment manufacturers (OEMs) with quality components. In the past several years, ACM has experienced increasing pressure from other manufacturers located in other countries. In Singapore, while labor remains quite inexpensive, there has been a relatively steady increase in labor costs. In addition, utility costs - most notably water and energy costs - have led the firm to contemplate moving operations elsewhere in Asia in an attempt to make the firm more competitive. ACM remain profitable, but margins have shrunk, and management interested in ensuring that the firm remains competitive against other component manufacturers in the medium term to long term.

A senior management team has formed a committee to reach a decision regarding possible relocation. The committee has identified two additional locations as possible candidates for relocation: Hong Kong (People's Republic of China [PRC]) and Kuching (Malaysia). Hong Kong's main attractions stem from the fact that since 1997, when its sovereignty was transferred back to PRC, labor cost have decreased as access to labor has increased. Hong Kong enjoys a large seaport and very good transportation infrastructure, and this is important in moving in raw materials and moving out finished components to customers. Presently, the customers are geographically dispersed, making access to seaport very important in delivering products to customers. Senior management believes that an increasing number of OEMs will move to the PRC in the next several years, as has been the case in the past decade. This will only increase the attractiveness of locating the manufacturing facility in Hong Kong.

Kuching is located in the Malaysia province of Sarawak, on the island of Borneo. It is the fourth-largest city in Malaysia and home to population of around 650,000. Several points make Kuching attractive to the relocation committee. First, locating here would provide access to natural resources and other production inputs. Second, the transportation infrastructure is good, and the city hosts a deep sea port for moving raw materials in and finished goods out. That said, the port is not as large or accessible as those of Hong Kong or Singapore, and several committee members have expressed concern about the frequency of ship visits to Kuching. If the port does not receive regular service from the container ships, transportation costs to ship components to OEMs will increase. Finally, another selling point is that labor is relatively stable and inexpensive in Malaysia.

The committee has contacted the government of Singapore to elicit possible incentives to not relocate to another country. Singapore is offering a 5-year exemption on taxes for ACM if the plant remains in Singapore. The government will also assist by partially subsidizing labor, water, and energy costs for 5 years.

Committee members realise that the Singapore plant, which has been operating for year, has already been amortized, and opening a new plant would require additional capital costs. That said opening a new factory would also provide an opportunity to upgrade production equipment to more productive and energy-efficient alternatives.

Source: Dr. Ian M. Langella, Shippensburg University, USA. Based on the article,

1. What advantages and disadvantages each potential location offer? Present your answer in a table format.

2. Identify three (3) other relevant factors that are not mentioned in this case study might play a role in the team's decision?

3. Why is transportation infrastructure so important in this decision?

4. This is a long term, strategic decision; what factors might change in the next 10 to 20 years? How will the possibility of such changes influence the decision?

5. Which alternative would you recommend, under which circumstances?