International Production Network
International fragmentation of production by multinational companies has become an increasing crucial facet in the globalizing economy. It entails splitting of production into separate activities, which are then assigned to different countries. Some of the most fragmented products include vehicles, aircrafts, office equipment and electronics where different components are manufactured in different countries (Andreff, 2009). A good example is the automotive production in East and South East Asia where different countries produce different parts and import others for their assembly lines. Thailand produces press parts, frame panels, interior parts, electronic parts and engine parts. Philippines produces fuel system, emission dress parts, manual transmission and suspension parts while Malaysia produces instrumental panel assembly, bumper and drive shifts. Indonesia produces cylinder head assembly, cylinder block, engine valve, automatic valve and steering handle. These components are brought together for assembling into a final product. Several reasons have driven multinational companies within Asia into this strategy (Anukoonwattaka, 2011). These reasons are divided into several categories such as organizational drivers, improvement, financial, cost and revenue factors.
Some of organizational driven reasons include; effectiveness enhancement through focusing on what one does best, increasing flexibility, transforming the organization, increasing product and services value, as well as customer and shareholder satisfaction. Improvement motive seeks to enhance the operating performance, obtaining expertise, risk management and acquiring innovative ideas. Financial reasons include reduction of investment in equipment and physical assets and generation of cash through transfer to the provider. Revenue motive includes gaining access to diverse markets, expanding through tapping from the provider’s capacity and expanding sales (Borrus, Ernst, & Haggard, 2001). Cost driven reasons include reducing the overhead expenditure such as labor.
All the reasons within these categories can be discussed under four main reasons that see multinational companies within Asia outsource production of different products to different countries. The main reason for outsourcing is cost reduction. For multinational companies that engage in diverse and specialized operations, cost of holding all the activities can be too expensive considering the amount of assets required for manufacturing. In addition, “… some intermediate inputs are cheaper to produce in some countries,” (Anukoonwattaka, 2011, 56). Multinational companies find it easier to outsource production of some components of a final product in the country where it is cheaper to produce. This depends on the level of skilled labor, as well as availability of raw materials and lower trade barriers (Adler, Goldoftas & Levine, 2000). Other factors include wage differences where in some countries it maybe cheaper. For instance, China is known for its cheaper labor although it is changing to rapid industrialization. This makes it cheaper for the multinational company because overhead costs of production are reduced (Anukoonwattaka, 2011). After outsourcing, a company can generate revenue from the selling of machinery and equipment that will no longer be needed. It can also save the company from having to purchase new equipment. This reduces the costs of the organization. However, outsourcing under this reason is only viable when the cost of buying from suppliers is cheaper.
The other main reason is seeking to excel in key operations. Because of many activities in multinational companies, focusing on a specific operation can become hard for the management. In contrast, outsourcing allows such companies to delegate some activities to other companies that have fewer operations. In addition, outsourcing allows a company to focus on the key operations within the organization because the burden of too many activities is reduced. Therefore, a company can devote more time for one task, which is easier to manage. With more focus on specific activities, excellence is achieved. Some of the key activities that outsourcing companies can focus on include new product development and improvement, as well as marketing.
Another main reason is the lack of sufficient capacity to engage in many operations and mass production. Although multinational companies invest heavily in assets, some products require additional capacity at different times. When a company does not have enough capacity, delegating some activities to another firm is the only viable reason apart from increasing output (Athukorala, 2011). Insufficient capacity could be caused by an increased demand of a product. For example, a product may be on high demand in one country while production is in another country. China is yet another example of countries that are driving mass production because of high demand caused by its vast population (Anukoonwattaka, 2011). The capacity to produce for both countries on a timely manner can be hard. Delegating production to a company based in the country with increased demand allows a firm to increase its capacity.
Another factor is
specialization of different operations within different countries. Some
countries have better and specialized equipment and production plants than
others in different areas. To ensure quality and increased value of products
and services, multinational companies seek to delegate or setup production in
countries where specialization is readily available. It makes it possible to
have better products than a company would have if it were to engage in all the specialized
operations. This is especially so in highly specialized products such as
vehicles and electronics (Palacios, 2008).
One of the multinational corporations in Asia is Toyota Corporation that is known worldwide for the production of vehicles. Toyota is one of the multinational companies that are making proper use of international fragmentation of production. It has production of different parts in different countries within the Asia and other regions. Some countries are assigned with the task of making spare parts available for every customer while others design and assemble the vehicles (Kuroiwa & Heng, 2008). Most of the countries where these parts are made have assembling plants that make final products. Additionally, Toyota allows different countries to design diverse models of vehicles that satisfy the consumers within that region. It is normal to find different models in several countries. Toyota had several reasons for fragmenting its production to different countries. Additionally, several trade growth and investments have enabled such fragmentation.
One of the main reasons that led Toyota to establish production in different countries is cost saving. Through the production of its vehicles in other countries, Toyota does not have to incur huge export costs of finished products. For instance, Toyota auto parts are produced in Thailand where the adjacent countries can import at a cheaper price considering that land travel is less expensive (Dent, 2008). Another reason that led to this decision by Toyota is the difference in wages. Being a developed nation, Japan is faced by high labor costs. Thailand has lower labor costs, which makes it possible to produce at a cheaper price (Dent, 2008). In addition to these reasons, increasing trade among the countries has allowed the reduction in barriers at borders. Countries within the same region are allowed to trade freely, which allows cheaper exports and imports. This is the major driver of international production networks within Asia (Dent, 2008).
Another company headquarter in Asia that uses international production network is Samsung, which is among the leading electronics companies in the world. It focuses on mobile phones, Smartphones, television sets, music systems and home appliance products amongst others. Just like Toyota, it has several international production networks where parts and final products are made in different countries. Within Asia, Samsung has production networks in countries such as Indonesia, Malaysia, China, India, South Korea and others. For India, majority of the components used in assembling final products are imported from Korea, Singapore and China. All the countries produce different products and parts.
Several reasons were considered in making a decision on location of such production. One of the reasons is cost reduction. China has the most production plants for Samsung. The main reason is the availability of cheap and skilled labor. China is one of the countries with cheap labor. In addition to cheap labor, industrialization has increased living conditions of people in the country that has seen an increase in consumer products including electronics (Kuroiwa & Heng, 2008).
The main reason that Asian multinational corporations have been able to engage in such strategic production is reduced trading barriers and tariffs (Youngsoo, 2008). This ensures that such companies can engage in production, in other countries at a cheap price. Free trading between these countries allows corporations to establish long-term relations with foreign companies where contracts are established. In addition to decreased trade barriers, the proximity of these countries geographically makes it quite easy to transport goods from one country to another (Athukorala & Australian National University, 2006). Service industries especially transport and communications have played an important role in the development of the complex production networks. Such services allow easy supplying of goods between the countries that cannot be achieved with overseas trading (Youngsoo, 2008).
conclusion, growth of trade and investment links among these countries has seen
the development of international production networks. Without improved trading
between the countries, it would be impossible to engage in such a production
strategy where parts come from different countries to make a final product (Kuroiwa
& Heng, 2008). Therefore, development and growth of fragmented production
is dependent on proper trade, as well as investment links between the countries
involved (Kornkarun, Cheewatrakoolpoong, Sabhasri & Nath, 2013). In
addition, geographical proximity is most crucial because it allows easy access
of goods from one country to another.
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