Making the Amazon Kindle When online retailer Amazon.com invented its revolution

Question

Making the Amazon Kindle

When online retailer Amazon.com invented its revolutionary e-book reader, the Kindle, the company had to decide where to have it made. Guiding the decision was an understanding that if the Kindle was going to be successful, it had to have that magic combination of low price, high functionality, high reliability, and design elegance. Over time, this has only become more important as competitors have emerged. These have included Sony with various readers, Barnes & Noble with its Nook, and, most notably, Apple with its multipurpose iPad, which can function as a digital reader among other things. Amazon's goal has been to aggressively reduce the price of the Kindle so that it both has an edge over competitors and becomes feasible to have a couple Kindles lying around the house as a sort of digital library.

Amazon designed the Kindle in a lab in California, precisely because this is where the key R&D expertise was located. One of the Kindle's crucial components, the “ink” (the tiny microcapsule beads used in its display) were designed and are made by E Ink, a company based in Cambridge, Massachusetts. Much of the rest of the value of the Kindle, however, is outsourced to manufacturing enterprises in Asia.

The market research firm iSuppli estimates that when it was introduced in 2009, the total manufacturing cost for the Kindle 2 ran about $185. The most expensive single component was the display, which cost about $60. Although the display used E Ink's technology, there were no American firms with the expertise required to manufacture a bistable electrophoretic display that will show an image even when it is not drawing on battery power. This technology is central to the Kindle because it allows very long battery life. Ultimately, Amazon contracted with a Taiwanese firm, Prime View International, to make the display. Prime View had considerable expertise in the manufacture of LCDs and was known as an efficient and reliable manufacturer. Estimates suggest that 40 to 50 percent of the value of the display is captured by E Ink, with the rest going to Prime View.

After the display, the next most expensive component is the wireless card that allows the Kindle to connect to Amazon's digital bookstore through a wireless link. The card Page 534costs about $40. Novatel Wireless, a South Korean enterprise that has developed considerable expertise in making wireless chipsets for cell phone manufacturers, produces this component. The card includes a $13 chip that was designed by Qualcomm of San Diego. This too is manufactured in Asia. The brain of the Kindle is an $8.64 microprocessor chip designed by Texas-based Freescale Semiconductor. Freescale outsources its chip making to foundries in Taiwan and China. Another key component, the lithium polymer battery, costs about $7.50 and is manufactured in China. In sum, out of a total manufacturing cost of about $185, perhaps $40 to $50 is accounted for by activities undertaken in the United States by E Ink, Qualcomm, and Freescale, with the remainder being outsourced to manufacturers in Taiwan, China, and South Korea.40

Case Discussion Questions

1-What criteria drove Amazon's decision of where to produce the different components that go into the Kindle? Were these the right criteria?

2-Some have argued that the fact that only $40–$50 of the value associated with manufacturing the Kindle goes to U.S. companies is a sign of the decline of American competitiveness. Do you agree with this assessment?

3-If Amazon had decided to design and manufacture the Kindle and all its components in the United States, what do you think the consequences would have been for Amazon?

Explanation / Answer

1. The cost factor is the only guiding decision that drove Amazon's decision of producing different components that goes into Kindle. Yes, these are the right decisions since the manufacturing costs will add upto the total cost of the product, they wanted to keep it low by maintaining good quality. In order to compete in the fierce competition, Kindle had to offer the product at low price and high functionality which Asian countries lead at. Hence Amazon's decision of producing different component at different places are right decisions.

2. The fact that only $40–$50 of the value associated with manufacturing the Kindle goes to U.S. companies is definitely not a sign of decline of American competitiveness, There are many manufacturers in US and Germany, but since the mission of Kindly was to offer products at low price, they were left with no other option. This fact only indicates the high value of the American Dollar.

3. If Amazon had manufactured all the required components for Kindle then the cost of the product would have raised. This would have made it difficult for Kindle to enter the market. The competition would have been tough, making the company to decide on several other strategies in order to penetrate into market.

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