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When Your Contract Manufacturer Becomes Your Competitor

The most powerful retailers and distributors can hire the largest and most efficient CMs to produce (under retailers` or distributors` own nameplates) items that match the quality of the best OEMs. These products share shelf space with OEM products, but charge half the price. Subcontractor Solectron developed its manufacturing know-how as part of its work for IBM, Hewlett-Packard and Mitsubishi. Later, distributor Ingram asked Micro Solectron to build PCs, servers, and other computer equipment under its own brands and retail ones individually. Retailers such as Best Buy, Carrefour, Sears and Wal-Mart also sell electronics under their own brands, diluting the marketing power of OEMs. Contract manufacturers who have established their own brands also suffer because their products struggle to improve retailers` quality, innovation and prices. However, if an enterprising CM threatened to stop making items for one retailer, it would only push their customer into the arms of another CM – a CM that could translate the extra activity into improved or even greater economies of scale. How, then, can an OEM promote a CM`s good faith and commitment to the alliance when the CM also has other masters? An OEM can start by getting an idea of the long-term prospects for trust. The best way to do this is to study the past behavior of a CM.

This could mean talking to other OEMs, representatives of trade associations, and cm suppliers. An OEM may also review the CM`s records of trade disputes. If a CM is trying to convince you to maintain its services by offering to share trade secrets or the intellectual property of other customers, it is fair to assume that the CM will do the same with your intellectual property at some point on the street. Needless to say, legal protection is probably still the most important as it discourages the parties from violating the agreement/contract. Wu says the « apprentice » approach is not widely used at the moment. In addition, the supplier may choose not to shoulder the burden of building their own brand, with all the uncertainties that come with these efforts. Nevertheless, parties to a manufacturing contract have the opportunity to think creatively about the nature of their business in the long run. Not all relationships should end in tears. As a result, an OEM must have a close relationship with a CM that already has relationships with other OEMs.

In fact, some companies may expect and even encourage their CMs to find other customers. Subcontractor Flextronics bought a plant from Swedish equipment manufacturer Ericsson in 1999 after receiving an order from that company. Only a third of the plant`s production capacity is dedicated to Ericsson products. A larger proportion is dedicated to the manufacture of Motorola cordless phones, two-way pagers and other devices. By selling its plant to Flextronics, Ericsson has fostered a closer relationship between Flextronics and one of its main competitors, which it wants to take advantage of. It`s also unlikely that Microsoft has set up a wireless research center in Sweden to be close to this node of manufacturing know-how. If Ericsson had wanted an exclusive relationship with his CM, he could certainly have found one willing to accept his terms – although it is probably a second-rate CM. The only thing the company should definitely do is register your trademark in the country of the contracted manufacturer. Before using any of your trade names (think trademarks/logos or product names) or trademarks in that country, you need to register them or someone else will almost do it, and you won`t be able to use your name even if you`re just exporting your product from that country. Therefore, the registration of patents, logos, etc. is very important. This article describes the remedies available if your subcontractor becomes your competitor.

It was written by Vivek Chandar, who is pursuing a Master of Business Law from NUJS, Kolkata. Wu recently partnered with Zhixi Wan, an assistant professor at the University of Oregon, for research that explores the phenomenon of climbing in the value chain. They provide original equipment manufacturers (OEMs) with advice on how to deal with it. « This is a very dynamic situation, and any response to value creation must be seen in a full context – in the industry, in your situation and in the situation of the supplier, » Wu said. Few industrial companies still consider manufacturing to be an essential part of their business. Traditional brand owners – what we know today as OEMs – prefer to focus now on researching, designing and selling products and leaving production to the new specialists: contract manufacturers. Organizational arrangements between OEMs and CMs range from one-off contracts – called market agreements – to more interdependent and ongoing pacts such as framework agreements, joint ventures, and other types of partnerships. For example, a renewable or non-renewable market agreement would involve the production of a particular type of MP3 player, and the pact would contain very precise technical and constructive details.

On the other hand, a framework agreement could require the CM to produce several models of an MP3 player in a given year. However, a partnership agreement could commit the CM to be the long-term exclusive supplier of an OEM`s MP3 players. OEMs should implement this strategy to tap into markets outside of their core offerings where their brands can have some influence. For OEMs, the direct use of their patents – with the help of their CMs – is a better alternative to deal with a dormant intellectual property buildup than licensing would be. Without contract manufacturing, most OEMs would probably never attempt to enter the market directly. • • • Depending on the type of work/services that are to be performed by the contract manufacturer, you will need to design the contract/contract. For example, if you are working with a manufacturer to develop a new product, you will need a specific product development agreement. These should be formulated in such a way as to ensure that property rights in the final product are clearly defined. Since both can make you lose the edge in the market. To protect your intellectual property and competitive advantage, it may be necessary to use a multi-pronged strategy. Wu and Wan believe that there is a natural life cycle for every manufacturing contract. « Our model shows that it`s not a question of whether [the supplier] should be disposed of or housed, but when, » Wu explains.

The key questions: « What are the market conditions and when is the right time? » However, as IBM and other companies have learned, contract manufacturing is a double-edged sword. On the one hand, a CM is aware of an OEM`s intellectual property (IP), which it can pass on or arrange to other customers. On the other hand, an ambitious and promising CM can claim exactly the benefits it offers to an OEM. Once the CM has fully manufactured an OEM`s product, they can decide to build their own brand and build their own relationships with retailers and distributors, including those of the OEM. If these things happen, the OEM could face not only more dangerous incumbents, but also a competitor of a new type: the once-underestimated CM. If the OEM had not sold his business to the manufacturer under treacherous contract, the CM`s income and knowledge could have remained so meagre that he would not be able to enter his customer`s market. Contract manufacturing is essentially outsourcing part of the manufacturing process to a third party. Specifically, a company subcontracts certain production activities previously carried out by the manufacturer to a third party (subcontractor). You can outsource the manufacture of specific components for the product or outsource the assembly of the product. Some subcontractors design, produce, assemble and distribute as well, that is, they more or less cover the entire range of the company. For OEMs, this is a risky trade-off – finding cheap labor in exchange for the possibility of being mined by the entrepreneur.

Of course, this doesn`t always happen. Many contract manufacturers – Foxconn Technology Group, Jabil Circuit, Flextronics International and Celestica Inc., to name just a few of the largest – are content to stay in this role and maintain the businesses of the world`s leading high-tech brands. Conversely, if the OEM can easily change CMs because the product is easy to manufacture or has been around long enough to become generic, a shorter-term contract would be convenient for the OEM – even beneficial. .