Synergies of export and non-equity vertical alliancing

Contract manufacturing is an international business model, which has partially characteristics of an export and alliance partnership.  When it comes to contract manufacturing, the owner of the brand and product manufacturing process and ingredients, raw materials, or components often tends to transfer the production itself or the assembly of the final product, as it creates a relatively low added value, to the country where the production costs are the lowest, or at least lower than their own domestically. US, Western European textile and electronics manufacturers often outsource physical production to Asian countries, where labor is cheaper and environmental and occupational safety standards are lower. Recently, increasing pressure from the market to choose responsible business, organic production, not to use child labor encourages companies to review their contract production strategy, but the boom of manufacturing abroad that has begun three decades ago is still alive. Apart from contract manufacturing abroad there are two alternatives – to manufacture in the home country or to establish and control a factory in a foreign country. In the case of investment in foreign country things like labor ethics, transparency, ecology can be ensured and controlled much easier, and the possibility of illegal copying and industrial espionage is much less. However, foreign investment means long-term commitment, while contract production and meeting a specific production need in the short term without investment and risk. In addition to espionage risk, in the case of contract manufacturing, the risk is limited to the value of raw materials or output that is the size of one or more orders. In the case of FDI, the risk is significantly higher, because the value is not only the production, but also the entire factory and the investments made. In the case of contract manufacturing, the production terms are usually from several months to years, so if the product is not demanded in the market, or there are other circumstances, the contract production can be stopped. If there is something happening negative in foreign country and it causes a need to transfer manufacturing to another country abroad, it can be easily arranged simply by changing a contract manufacturer. Having own factory abroad, when something happens with business environment int that country, things don’t get resolved so quickly.

Contract manufacturers often specialize and work on orders from many foreign clients (Kim & Schoenherr, 2018). For example, an independent manufacturer may produce the soles of sports shoes even for competing brands in the same factory. A manufacturer with tablet pressing, blasting and pill filling equipment can perform contract manufacturing for many foreign pharmaceutical brand owners. If a small manufacturer has own brand, overcapacity of production facilities is often solved by employment those to serve other brands by making contract manufacturing on casual basis. So, such manufacturer often considered as partly contractual, partly own-branded.

Another tendency that appears is related to the balance of negotiating power between brand owner and contract manufacturer of some parts of components. For instance, in automotive industry with the changes from internal combustion engines toward electric vehicle the situation is happening when former contract manufacturers of electric components have begun dictate some technical parameters for European car manufacturers. Having a lot of orders from American and Asian new car brands they imply policy take it or leave it towards European manufacturers. As electric components are becoming standardized for many cars, manufacturers dictate to car brands what technicalities of equipment to be installed into vehicle. Some American and Asian electric vehicles producers from very beginning design cars by using standardized parts, as they actually started business from zero point. For Europeans car manufacturers to shift from old style conventional internal combustion engine vehicle to the electric was much more difficult. This shift empowered parts manufacturer to be decision makers, on what technicalities of parts to be.

The main advantages of contract manufacturing:

• It does not need to invest abroad, but still possible to move production to a country with cheaper resources.
• It is possible to order production of relatively small scale of the product.
• There is no long-term commitment, and the risk is assumed by contracts with the contract manufacturer.
• A contract manufacturer is usually specialized and thus has the advantage of economies of scale and specialization.

The main disadvantages of contract manufacturing:

• The contract manufacturer receives information about the product, its composition, components and technological secrets of the production process, so from a technical point of view it is very easy to copy the product.
• A contract manufacturer can become a competitor if is copying the product.
• If the order size is small, then the contract manufacturer may give priority to larger orders and produce the products for some customers earlier, but with delays for an another.

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