Teleleader Case

Problem Identification: Should Teleleader build a new manufacturing plant in Malaysia or Mexico? Will the factory provide for the 10% decrease in cost of the pager that can be transferred to a 10% price eduction to maintain their competitive pricing and regain/maintain their pager market share? Is Malaysia actually a cost savings? What about risks involved with inflation and foreign exchange rates?

Hypothesis:Teleleader should build their second manufacturing plant in Malaysia creating a cost savings greater than would be created by constructing an additional facility in Mexico. More specifically the facility should be located in the Penang/Selangor area.

Analysis of Hypothesis

Is there a significant cost savings associated with a Malaysian based manufacturing plant?

• Opening a factory in Malaysia offers significant cost savings in many different areas.

1. Corporate tax rates 7% savings over Mexico’s

2. Teleleader will enjoy a tax vacation period of 3-5 years beginning immediately upon opening

3. Due to agreements made with the Malaysian government Teleleader will enjoy cost savings of 9-14% on European exports, this converts into a 3-8% overall cost savings.

4. Direct labor costs are on average 34% less than those in Mexico.

What are the advantages of locating in Malaysia?

• Global coverage: Locating the second manufacturing plant in Malaysia offers a greater coverage of the global market it serves.

• European tariff savings: Due to the special tax treaty that Malaysia negotiated with the EEC rather than pay the 15%-20% that Teleleader is currently paying it would be cut down to 6%. There is a catch to this process; the goods could not be shipped back to the US to be inspected for quality control. A separate quality control division would need to be established somewhere within the EEC. This is necessary to avoid the higher tariffs charged for exporting from the US to the EEC. The initial expense incurred to setup this extra center would soon be recovered by the ability to price competitively within Europe to regain slipping European market share; in addition to the market share recapture the new quality control facility would increase Teleleader’s production capacity.

• Diversification: By building the manufacturing facility in Malaysia rather than a second built in Mexico creates a natural economic risk diversification. The Malaysia Mexico mix dilutes the risk involved with inflation and foreign exchange rates. For example, if manufacturing becomes too expensive in Mexico because the rate of inflation far exceeds the rate of foreign exchange, making the dollar coasts associated with production too expensive, Teleleader would still have the production facility in Malaysia to fall back on.

Why should Teleleader build the facility in Penang/Selangor?

• Infrastructure: Khota Bharu does offer cost savings on direct labor this is primarily unskilled labor. Employees would require extensive training in the manufacturing process. This would delay the ability of the facility to reach efficient capacity production.

• International Airport: One of the explicit criterions that Teleleader requires for a manufacturing location is an international airport. This is especially important in the case of something breaking down in the facility requiring a specialist to come in from the corporate office. The town of Khota Bharu is an isolated village on the East shore that is not easily accessed internationally.

• Skilled workers: Khota Bharu has very little to offer as far as skilled labor force. An essential part starting a new facility. Even more so in Malaysia, because to receive the tax holiday benefit Teleleader must hire 200 or more local employees just to qualify for the first tier of the tax holiday.

Risks associated with manufacturing in Malaysia:

• Inflation & Foreign Exchange rate risk: Inherently when dealing with other countries you deal the risk of inflation and fluctuating foreign exchange rates. Within in the financial market there are instruments that have been developed to deal with these inherent risks; however; it is important to note that Teleleader