Variety of foreign manufacturing

Foreign manufacturing is a matter of international trade, alliancing and even foreign investment depending on ownership and business model. Production and assembly abroad are usually considered one of the manifestations of FDI realization, if the organization itself decides to build or acquire the production assets. Organizations can produce or assemble abroad both by means of contact production and by their own controlled companies. Setting up organization abroad provides significantly more control and protection of intellectual property than hiring a contract manufacturer, but the liabilities and risk levels are also significantly higher (Hijzen et al., 2010).

The main advantages of manufacturing and assembling in controlled subsidiary:

• Full or at least very strong control and protection of intellectual property to compare to contract manufacturing.
• Due to cheaper labor and cheaper resources, lower production and assembly costs are achieved, which allows to compete in the market based on pricing.
• If production and assembly are developed in a country with a very large labor capacities, very large-scale production is ensured, also known as mega-factories or giga-factories.

The main disadvantages of production and assembly abroad:

• Organizations have to send reliable and experienced employees from domestic country to management positions, often they and their families need to ensure a living in another country.
• The risk of copying and industrial espionage remains, but it is much lower than in the case of contract manufacturing.

Co-production and assembling is an another option of international cooperation (Ietto-Gillies G., 2002). When the product is very complex, for example an aircraft, it is very often necessary to purchase components or order them to be manufactured according to an individual order. An aircraft is made up of several million parts and components including smallest ones. Aircraft production is very strongly dominated by international vertical alliances, in which hundreds or thousands of organizations in different countries produce some component or part. So, it can be said that many countries are involved in the production of the plane. However, it is common, perhaps the final assembly of the aircraft, the assembly of different components and parts is carried out by the manufacturer himself domestically. Passenger planes of the two most popular brands are assembled in the USA and France, so those planes often are considered as American or French. Thus, the aircraft manufacturer imports very large quantities of different parts and components from vertical alliance partners, or in other words strategic suppliers. Airplanes have very high safety requirements, and a small mistake during assembly can lead to a catastrophe, which is why the local production base and personnel are used usually for a final assembly. Of course, this does not mean that there are no quality and safety requirements for parts or components, but it is neither rational nor experienced for the manufacturer to produce such a large number of components and parts himself, so it is transferred to specialized alliance partners which become strategic for the aircraft manufacturer.

A slightly different principle is applied in the production of computers or smart phones. Assembling a computer is usually done in a country with cheap and abundant labor, but parts and components are sent from specialized countries, and often the brand owner himself produces some very important component. So, while most computers and smart phones are assembled in mainland China, a large proportion of their components are sourced from the US, Japan, Germany, Singapore and Taiwan.

The main advantages of co-production are:

• The manufacturer of each component is a highly specialized organization, usually a global leader in this field. This ensures the best quality of the component, and at the same time, due to economies of scale, the price of the component is affordable and does not harm the price competitiveness of the final product.
• The main manufacturer can find and choose the best supplier of components or parts from the entire world supply (Kim & Schoenherr, 2018).
• Cooperation of components and parts manufacturer with a large brand of the final product secure to them stable long-term orders.
• The product brand owner does not need to invest in the production of components and parts, so reduces the risk.
• A component supplier can be changed if the component is not needed anymore, or another supplier makes better price offer or better quality and characteristics of a component.

The main disadvantages of co-production are:

• Dependence of the owner of the main brand on suppliers, especially if there is an oligopoly of such suppliers in the global market, or even in some cases a monopoly.
• Supply chain disruptions due to adverse factors such as pandemics, trade restrictions, military conflicts, pirate attacks, can significantly affect negatively a final product assembly schedule, or stop production, as it happened during the COVID-19 pandemic.
• Dependence of component and parts manufacturers on their customer – if the customer refuses the components or change supplier, it can be very difficult to find a new customer.

Foreign manufacturing is often reason of strategic investment for an organization that is expanding its operations globally (Cheng et al., 2012). This alternative is often used when an organization is looking for speed of expansion and control. This alternative is much faster than setting up a new organization and building a new factory. Buying an existing factory and adapting it to the needs is usually faster than building a new one. This alternative is also better than offshore contract manufacturing because it allows for better control, management and protection against espionage and illegal copying of products and know-how, but at the same time it is a more expensive and more involved alternative than contract manufacturing (Mazzola et al. 2019). After acquisition of shares of an organization operating in another country, the available experienced employees are usually sent to management positions. Quite often, such investments are made not in a completely unknown and newly found organization abroad, but in a former long-term partner of a vertical alliance (Frésard et al., 2020). So sometimes non-equity vertical partnership is prelude of the later acquisition.

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