Iomega and Malaysia*

Iomega Corporation (Iomega) is a manufacturer of computer peripherals, specifically of data storage devices like the popular Zip drive, an easy to use and relatively inexpensive portable unit that uses high capacity floppy disks and other selected media permitting increased capacity and flexibility in transfering or protecting computerised data.

The company is headquartered in the United States (just outside Provo, Utah), with current production facilities in both the U.S. and Malaysia. Because of competitive pressures from other peripheral companies, Iomega announced its intention to close down its higher cost production plant in Utah. It would prefer to move all its production operations to an expanded Malaysian facility, but in any case it plans to move off-shore and closer to its component suppliers in Southeast Asia. This would mean increased investment overseas, and a loss of nearly 700 jobs at the U.S. site.

Iomega is in a strong financial condition, and the current financial crisis throughout East Asia accompanying the strength of the U.S. dollar contributes to the company's sense that the timing is right for expanding its presence in the region. It continues to hold the #1 market spot for portable storage peripherals with nearly 58% of U.S. market share for PC-level units, and lesser though still high levels of market penetration in Europe. Nonetheless, it would like to expand its range of products before the data storage market becomes a commodity business with ever decreasing margins. Costs for materials and labour could hardly be lower at the moment, and new investment would come at significant discounts. But to implement its long term strategy, Iomega needs assurance that it can find and use the best talent available to design and produce its current and future lines of computer devices and services.

Since Iomega has a production facility already in operation in Penang, its first option is to expand there by increasing plant capacity and employment. For all the anti-foreign investment sentiment one might find in the news, Iomega is convinced the Malaysian government would welcome its investment and employment proposals. But there are several sticking points: when Iomega first came to Penang, it was agreed they would adhere to the government's announced policy and operational guidelines concerning employment of ethnic Malay workers in the first instance for all jobs at the facility. They were to pass over other applicants (such as ethnic Chinese and Indians) unless explicit permission was received on grounds of necessary specialised skills. This presented little problem in the beginning, but the new investment strategy could be jeopardised if these hiring practices were followed in a new expanded facility. Too, the range of capital controls could make new investments difficult to manage; Iomega fears trouble at a later date if it needs to review its commitments or seeks to increase levels of profits repatriated to Utah.

For its part, the Malaysian government is concerned that recent downturns in economic activity could ignite ethnic tensions, and so remains committed to keeping preferential hiring policies in place. While this may make the country appear in a less competitive light, it is also convinced that long term social and economic stability requires this response, and is hopeful current agreements will be maintained by foreign companies like Iomega, for whom exit costs would likely be relatively high. In addition, the government is concerned that wage and benefit levels not be greatly eroded during this time of economic hardship, and that foreign companies will abide by the spirit as well as the law of its capital control regime.

Another, and increasingly important regional competitive issue for Malaysia is successful establishment of the planned Multimedia Super Corridor (MSC). It would like to steer new and expanded investment ventures into the MSC, and so might be expected to request companies like Iomega to move its current Penang facility to new quarters within the MSC.

Iomega approaches the government for talks about its proposed expansion plans. You are members of the negotiating teams for Iomega and Malaysia. Can you work out an agreement to settle these matters for the parties?

1. permission for Iomega to employ the highest skilled production workers, designers, and managers at the Penang facility, without regard to the workers' ethnic identities;
2. permission to expand the Penang (MSC?) facility by 400 workers;
3. permission to expand the Penang (MSC?) facility's plant and equipment base by 50% with renewed tax holidays;
4. designation of appropriate levels of wages and other benefits covering all workers.
5. free movement of capital from Provo to Penang, and from Penang to Provo.