WHAT IS INTERNATIONAL BUSINESS? – ENTERING OVERSEAS MARKETS part 12

Entering international markets part 12
CONTRACT MANUFACTURING: a firm contracts with a local manufacturer to produce its products to the firm’s specifications. An example of this is when Gates Rubber licensed one of its belt technologies to General Tire’s Chilean plant. Or the case of Peace Frogs T-shirts who exports T-shirts directly to some countries, but in Spain per capita income is lower, competition from domestic producers is stronger, and tariffs are high, so they license a Barcelona-based company the rights to manufacture their product.
ADVANTAGEOUS WHEN: risks of investing in a foreign country are high, when there are stringent import barriers, when high political risks exist, lack of raw materials at home.

PROS:
1) Frequently importation of like products is halted but the firm contracting manufacturing would earn a royalty on the now locally produced product, would have belts made to their specifications without the expense of investing in production facilities, and competition of other importers would be eliminated;
2) Generates employment and foreign exchange for the host county.
3) Usually easy access to entry as host country knows laws, politics, customs, etc.; can begin to build a relationship with the host country.

CONS:
1) Could lose control of quality; possible low quality workers;
2) Not in control of pricing or marketing;
3) No equity in the subcontractor.
4) Your competition may be a customer!

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