Introduction

Having so far considered market entry strategies that have been based upon the development, manufacture and supply of products and services from the firms’ domestic operations, we now turn our attention to strategies which involve production and service supply from overseas plants. 

Having emphasized that a move into overseas manufacturing and service operations involves high cost and risk, firms can choose between different levels of financial commitment. They can, e.g., embark upon foreign manufacturing strategies which do not involve direct investment. It includes:

1. Licensing

2. Franchising

3. Contract manufacture

4. Turnkey operations

5. Management Contracts and

6. Original Equipment Manufacturing

1. Licensing

Under a licensing agreement, a company (the licensor) grants rights to intangible property to another company (the licensee) for a specified period; in exchange, the licensee ordinarily pays a royalty to the licensor. The rights may be exclusive (monopoly within a given territory) or nonexclusive.

Licensing agreements are most common on the use of patents, trademarks, copyrights and unpatented technology. The licensor does not have to risk placing tangible assets, such as plant and equipment, abroad. The licensee may find that the cost of the arrangement is less than if it developed the intangible property on its own.

It permits a foreign company to use industrial property (i.e., patents, trademarks, and copyrights), technical know-how and skills (e.g., feasibility studies, manuals, technical advice, etc.), architectural and engineering designs, or any combination of these in a foreign market. Essentially, a licensor allows a foreign company to manufacture a product for sale in the licensee’s country and sometimes in other specified markets.

The essence of an international licensing agreement is the transfer of industrial property rights (patents, trademarks, and/or proprietary know- how) from a licensor in one country to a licensee in a second country. Industrial property rights are seldom assigned or sold outright to a foreign company. The usual practice is for the licensor to allow the licensee to use the rights for a specified period of time in return for a royalty compensation.

Manufacturers may license foreign companies for reasons that have little or nothing to do with foreign-market entry. Licensing may be viewed as simply a way of obtaining incremental income on “shelf’ technology that has already been written off against domestic sales. Or a manufacturer may agree to exchange technology with a foreign counterpart, a practice known as cross-licensing. Again, manufacturers may license abroad to get legal protection for their patents and trademarks in countries where they must be “worked” to remain valid or to guard against infringement.

Multinational companies commonly license their own foreign subsidiaries to establish legal ownership of industrial property, to facilitate repatriation of income, or to satisfy home and host governments.

Following diagram illustrates the nature of the licensing agreement between the licensor and the licensee. 

Upon signing a licensing contract, the licensee pays the licensor a fixed amount upfront and an ongoing royalty of typically 2 to 5 per cent on gross sales generated from using the licensed asset. The fixed amount covers the licensor’s initial costs of transferring the licensed asset to the licensee, including consultation, training in how to deploy the asset, engineering, or adaptation. However, certain types of licensable assets such as copyrights and trademarks have much lower transfer costs. 

The licensing contract typically runs from 5 to 7 years and is renewable at the option of the parties. While the licensor usually must provide technical information and assistance to the licensee, once the relationship is established and the licensee fully understands its role, the licensor has little or no additional role. The licensor typically plays an advisory role, but has no direct involvement in the market and provides no ongoing managerial guidance. Most firms enter into exclusive agreements, implying that the licensee is not permitted to share the licensed asset with any other company within a prescribed territory. In addition to operating in its domestic market, the licensee may also be permitted to export to third countries.

If the licensor is an MNE, it may enter a licensing arrangement with its own wholly-or partly-owned foreign affiliate. In this case, licensing is an efficient way to compensate the foreign affiliate and transfer intellectual property to it within a format legal framework. Typically, the firm uses this form of licensing when the foreign affiliate is a separate legal entity, a common scenario in many countries. Multinational firms often use licensing as an innovative way to compensate or transfer intellectual property to their foreign subsidiaries or affiliates. Some firms view licensing as a supplementary strategy to other entry strategies, such as exporting or FDI.

Many Indian firms can use licensing or franchising of the overseas market, particularly the developing countries. For example, Ranbaxy has licensing arrangement in countries like Indonesia and Jordan.

Reasons for Licensing

1. Granting of licensing protects the company’s patent and trademark against cancellation for non-use.

2. Licensing helps in overcoming trade barriers.

3. Licensing works well when transportation cost is high, especially relative to product value.

4. By licensing, company extends its brand into newer product categories.

5. In some countries, government prefer licensing mode of entry.

6. Some company use licensing as a means of preventing competitive technology from achieving market success.

7. Companies prefer licensing as it is not very demanding on company resources. It is specifically appealing to small companies that lack the resources.

8. Companies that use licensing as part of international expansion strategy lower their exposure to political or economic instabilities in their foreign markets.

9. In highly competitive markets, rapid penetration of global markets allows the licensor to define the leading technology standards and to rapidly amortize research and development expenditure.

10. In industries with high visibility, local government buyers often prefer to purchase from local manufacturer which result in formation of a club whereby foreign competitors find it difficult to gain any market share.

Advantages of Licensing

1. Licensing offers a small business many advantages, such as rapid entry into foreign markets and virtually no capital requirements to establish manufacturing operations.

2. Returns are usually realized more quickly than for manufacturing ventures.

3. Licensing mode carries relatively low investment on the part of licensor.

4. Licensor can investigate the foreign market without much effort on his part.

5. Licensee gets the benefits with less investment on research & development.

6. Licensee escapes himself from the risk of product failure. For example, Nintendo game designers have the relatively safety of knowing millions of game system units.

7. Compared to export entry, the most evident advantage of licensing is the circumvention of import restrictions and transportation costs in penetrating foreign markets

8. International licensing is most commonly combined with other entry modes.

9. It does not require capital investment or presence of the licensor in the foreign market.

10. Ability to generate royally income from existing intellectual property.

11. Useful when trade barriers reduce the viability of exporting or when governments restrict ownership of local operations by foreign firms.

12. Useful for testing a foreign market prior to entry via FDI.

13. Useful as a strategy to preemptively enter a market before rivals.

Disadvantages of Licensing

1. The most critical disadvantage of licensing as an entry mode is the licensor’s lack of control over the licensee’s marketing program.

2. Another disadvantage is the lower absolute size of returns from licensing compared to returns from export or investment.

3. The licensee may become a competitor if too much knowledge and know-how is transferred. Care should be taken to protect trademarks and intellectual property.

4. Licensing agreements reduce the market opportunities for both the licensor and licensee. Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola.

5. Risk of losing control of important intellectual property or dissipating it to competitors.

6. There is scope for misunderstanding between the parties despite the effectiveness of the agreement. The best example is Oleg Casing and Jovan.

7. There is a problem of leakage of the trade secrets of the licensor.

8. Quality control may be difficult to achieve.

9. Difficult to maintain control over how the licensed asset is used.

10. The licensee may infringe the licensor’s intellectual property and become a competitor.

11. Does not guarantee a basis for future expansion in the market.

12. Not ideal for products, services, or knowledge that are highly complex.

13. Dispute resolution is complex and may not produce satisfactory results.

2. Franchising

Franchising is a means of marketing goods and services in which the franchiser grants the legal right to use branding, trademarks and products and the method of operation is transferred to third party – the franchisee – in return for a franchise fee. The franchiser provides assistance, training and help with sourcing components and exercises significant control over the franchisee’s method of operation.

It is considered to be relatively less risky business start-up for the franchisee but still harnesses the motivation, time and energy of the people who are investing their own capital in the business. For the franchiser it has a number of advantages, including the opportunity to build greater market coverage and obtain a steady, predictable stream of income without requiring excessive investment.

Chan identifies two types of franchise. With product/trade franchises, e.g., car dealerships, petrol service stations and soft drinks bottlers, the franchisees are granted the right to distribute a manufacturer’s product in a specified territory. Business format franchise is the growing sector and includes many types of businesses, including restaurants, convenience stores and hotels. This type of franchise includes the licensing of trademark and the system for operating the business and the appearance of the location.

Franchising can take the form of single-unit franchising in which the arrangement is made with a single franchisee or multi-unit in which the franchisee operates more than one unit. The multi-unit franchisee may be given the responsibility for developing a territory and opening a specified number of units alone or, as is common in international markets, operating a master franchise, in which the master franchisee can sub-franchise to others. In this case the master franchisee is responsible for collecting the fees, enforcing the agreement and providing the necessary services, such as training and advice.

There are also differences in the way local culture affects operations and one of the main problems for franchisers is deciding to what extent the franchise format should be modified to take account of local demands and expectations; e.g., McDonald’s has added spaghetti to the menu to compete more effectively with Jollibee in the Philippines, Pizza Hut find that corn and not pepperoni sells well in Japan and KFC find that gravy and pumpkin are popular in Australia.

Types of Franchising System

1. Product Franchise

The first and simplest category is the product franchise. Here, a franchisor is a distributor who supplies goods to a retailer with the understanding that the retailer will have the exclusive right to sell goods in a particular area of the market. This market is usually, but not always, defined in geographic terms. Gas stations, car dealerships, and some clothing companies are examples of this category. Early examples of franchising were product franchises, such as the beer franchises in England and Germany that began in the 1800s, some of which still persist today.

2. Manufacturing Franchise

The second category of a franchise system, sometimes collapsed into the first, is the processing or manufacturing franchise. Here, the franchisor provides the particular specifications or a specific element which the franchisee uses in producing the product. Soft drinks are a good example of the manufacturing franchise. Other examples include companies who manufacture private label goods that have a retailer’s label on them and firms that manufacture fashion apparel under license to a designer label. The Callanen Watch Company (now a division of Timex, Inc.) had a license to manufacture watches under the Guess label.

3. Business-Format Franchise

The third type, the business-format franchise, developed in the post-war period from the mid 1950s. In a business-format franchise arrangement the franchisor provides franchisees with a comprehensive, often extensive, operating system. Each franchisee must comply with the requirements of the system or risk losing the franchise.

Many fast food restaurants, hotel chains, video rental, and travel agents are examples of this category. For example, Burger King and McDonald’s fast-food outlets, Pizza Hut and Dairy Queen restaurants, Holiday Inn and Best Western hotels, 7-Eleven convenience stores, and Hertz and Avis car rentals. In Australia, where franchising is a mature sector, business format franchising is the most common form of franchise. Of a total of about 708 franchise systems reported in Australia in 1999, 677 were business format franchises. It is the most utilized format of franchising format in the current era and includes following forms:

a) Manufacturer-Retailer Franchise

In this form, the manufac­turer gives the franchisee the right to sell its product through a retail outlet. Examples of this form include gasoline stations, most automobile dealerships, and many businesses found in shopping malls.

b) Wholesaler-Retailer Franchise

Here, the wholesaler gives the retailer the right to carry products distributed by the wholesaler. For example, Radio Shack (which also manufactures some of its products), Agway Stores, Health Mart, and other franchised drug stores.’

c) Service Sponsor Retailer Franchise

It operates when a service firm licenses individual retailers to let them offer specific service packages to consumers. For example, VLCC, India’s leading chain of health beauty, and fitness centres, is managed and operated by its parent company.

Advantages of Franchising

1. Proven Market for the Product or Service

Except for newly established franchises, a known market exists for the franchiser’s product or service. Information about the performance of existing franchises is normally supplied or can be obtained by the franchisee. Such a track record makes it much easier to make projections for future operations.

This instant pulling power of the product also greatly helps the small business owner shorten the duration of the initial stage of the business when the market is being developed and resulting revenues are low.

2. Services that the Franchisor may provide

A franchising company typically provides many valuable services to a franchisee. A description of some of these franchiser services follows:

a) Selection of Location

Assistance in selecting the location can be very important, especially if location is critical to the success of the business, such as off-reserve businesses in retailing and in the service industry. Often a franchiser has considerable site selection expertise that can be used in establishing a business.

b) Purchase or Construction of Site, Buildings, and Equipment

The franchiser’s experience and financial resources in this area may mean considerable savings of time and money. In addition to providing expertise, the franchiser may even purchase or construct the facilities for the franchisee.

c) Provision of Financing

Some franchisers will provide financing for franchisees, and their association with the franchisees often helps obtain financing. For example, the Royal Bank, through its Franchise Assistance Program, allows favourable interest rates on franchisee loans because of a franchisee’s association with a well-known franchiser. A franchise organisation may also successfully deal with the financing difficulties experienced by aboriginal businesses located on reserves.

d) Standardized Methods of Operating

Standard operating procedures and manuals are often part of the service the franchiser provides in the areas of cost accounting, control systems, and customer service standards. Such methods can result in considerable savings for the small business.

e) Advertising

Most franchisers will provide national advertising that may benefit the franchisee. Such a level of promotion may be difficult and costly for the franchisee to develop unassisted.

3. Purchasing Advantages

Because the franchising company purchases large volumes of inventories for its franchisees, it can pass resulting cost savings on to the franchisees on purchases made from the franchiser.

4. Training

Most franchisers provide training to new franchisees. This may take the form of an instruction manual or thorough training at a franchiser’s school. For example, a McDonald’s franchisee receives training at Hamburger University and can even receive a bachelor’s degree in Hamburger-ology! Because of the extra training provided, franchising (as opposed to organising or buying) may be suited to someone who lacks experience in the industry.

Because of these advantages, a franchisee’s chance of success in the business is higher than that of an entrepreneur who organises or buys his or her small business. The franchising industry advertises a failure rate from only 4 to 8%, which is much lower than the rate for non-franchised businesses.

5. Marketing and Management Benefits

Individuals across the country continue to use McDonald’s, Burger King, Kentucky Fried Chicken, and Wendy’s because of their expectation of reliable food products. Consumers have a tendency to utilize franchising organisations because of their name, decor, logo, or perceived quality of their standardized product or service. Franchising provides a proven successful business product and/or service identification.

Probably, one of the greatest advantages of choosing a franchising method of doing business is the opportunity to have access to the marketing and promotional image of the franchise business. Most franchisors promote, advertise, and market their name, logo, product, and service with the greatest of abilities and focus their efforts on name recognition.

Through the repeated use of advertisements, billboards, and jingles, top-of-the-mind awareness is quite high for many franchised businesses. The franchisee acquires the right to use the franchisor’s nationally advertised trademark or brand name. This allows, e.g., market recognition both locally, as well as with travelling customers.

6. Quality Control Standards

Each franchisor imposes certain quality control standards on the franchisee. These standards allow the franchise system to achieve consistency and positive service or product uniformity throughout the entire system. By developing and maintaining high standards, the franchisor does the franchisee a tremendous business service.

Franchisees appreciate high standards and learn that these standards of operations and performance are necessary and generally the major reasons for success. The quality standards present a consistent patronage image, help to ensure return business, develop employee morale, and pride in work, and allow the employees to feel the value of teamwork. These standards, while apparently dictatorial, serve to help both the franchisor and franchisee. Because the franchisees learn to courteously and efficiently serve an appealing meal in an attractive and comfortable atmosphere, they have a better chance to attract and maintain a large clientele which provides increased benefits and profits to them and larger royalties to the franchisor.

7. Less Operating Capital Requirement

Another major advantage for franchisees is that generally their start-up costs require less initial operating capital because of lower initial costs in starting the business. Most franchisees do not have to pay for architectural designs because these are often provided at a nominal fee by the franchisor. The franchisees also generally pay lower inventory fees because they already know generally what will and will not sell.

New franchisees may also be able to receive trade credit from different suppliers because of their association with the franchising system rather than being an independent person. Franchisees also receive the benefit of knowledge relative to store layout, design, and floor space utilization which allows them to save countless hours and dollars in developing the new business.

8. Opportunities for Growth

Many franchisors provide new franchisees the opportunity to grow, not just with the initial franchise unit, but also by later on purchasing additional franchise locations. A territorial franchise guarantees no competition from other franchisees or corporate stores within the specific geographic boundary. The area development agreement allows the franchisee the possibility of developing new stores within the specified territory during the specific period of time. The franchisee has the opportunity to develop the first store and to allow it to grow and expand throughout its system.

Disadvantages of Franchising

1. Lack of Independence

In signing a franchise contract the franchisee can expect to receive a certain amount of assistance from the franchiser. The franchiser will monitor the business, however, to ensure that the conditions of the contract are being met. This condition restricts the franchisee’s freedom and independence.

2.Cost of the Franchise

Most franchises have a price consisting of an initial fee and continuing royalties based on operations. To enter most franchise organisations, individuals will have to accumulate a certain amount of capital to either pay the fee or provide the facilities.

3. Promises not fulfilled

Most franchising companies indicate they will provide such services as training and advertising. In some cases, however, this assistance does not materialize or is inadequate.

4. Restrictions of the Contract

The franchise contract may contain some restrictions that inhibit a franchisee’s freedom. Such restrictions include the following:

a) Product or Service Offered

The franchisee may not be allowed to offer for sale any products not procured by the franchiser.

b) Line Forcing

The franchisee may be required to offer the franchiser’s complete line of products for sale, even if some are not profitable in his or her market area.

c) Termination

The franchisee may not be able to terminate the franchise contract without incurring a penalty. The franchisee may be prohibited from selling the business or passing it on to family members.

d) Saturation of the Market

In some industries, franchising companies have allowed over saturation to occur in a particular geographic market This puts financial pressure on those franchisees operating within that market. If a franchiser has a large initial fee and no royalties, its major concern may be the selling of franchises rather than the ongoing success of Individual franchises.

e) Lack of Security

A franchiser may elect not to renew a franchise contract once it has expired or may terminate a contract prior to its expiry if the franchisee has violated the terms or conditions.

f) Cost of Merchandise

The cost of merchandise purchased from the franchiser may exceed the price that the franchisee can obtain elsewhere. However, the contract may require the franchisee to purchase from the franchiser.

3. Contract Manufacture

A firm which markets and sells products into international markets might arrange for a local manufacturer to produce the product for them under contract. Examples include Nike and Gap, both of whom use contract clothing and shoe manufacturers in lower labour-cost countries. The advantage of arranging contract manufacture is that it allows the firm to concentrate upon its sales and marketing activities and, because investment is kept to a minimum, it makes withdrawal relatively easy and less costly if the product proves to be unsuccessful.

Contract manufacture might be necessary in order to overcome trade barriers and sometimes it is the only way to gain entry to a country in which the government attempts to secure local employment by insisting on local production. If political instability makes foreign investment unwise, this may be the best way of achieving a marketing presence without having the risk of a large investment in manufacturing.

The disadvantage of contract manufacture as an entry method is that it does not allow the buyer control over the manufacturer’s activities. In the brewing industry there are a variety of arrangements where brewers contract the manufacture of beer brands but other market entry methods are used by the beer brand owners to increase market share.

India’s contract manufacturing business is expected to nearly triple in revenue over the next five years, according to a new study. Revenue generated by electronics manufacturing services (EMS) providers and original design manufacturers (ODMs) in India will rise from $774 million in 2004 to $2.03 billion in 2009.

The growth of the EMS/ODM industry in India will contribute to India’s overall electronics industry growth. The Indian electronics industry will grow from $11.5 billion in 2004 to $40 billion in 2010.

Over the next five years, the Indian contract manufacturing industry will not threaten China’s position as the epicenter of electronics manufacturing. India’s contract manufacturing activities primarily serve the nation’s indigenous demand. OEMs primarily outsource manufacturing to cater to the Indian domestic market, although export of Indian-assembled electronic goods does occur.

Advantages of Contract Manufacturing

1. The company does not have to commit resources for setting up production facilities.

2. It frees the company from the risks of investing in foreign countries.

3. If idle production capacity is readily available in the foreign country, it enables the marketer to get started immediately.

4. In many cases, the cost of the product obtained by contract manufacturing is lower than if it were manufactured by the international firm.

5. Contract manufacturing also has the advantage that it is a less risky way to start with. If the business does not pick up sufficiently, dropping it is easy; but if the company had established its own production facilities, the exit would be difficult.

6. Moreover, contact manufacturing may enable the international firm to enlist national support.

Disadvantages of Contract Manufacturing

1. In some cases, there will be the loss of potential profits from manufacturing.

2. Less control over the manufacturing process.

3. Contract manufacturing also has the risk of developing potential competitors.

4. It would not be suitable in cases of high-tech products and cases whicli involve technical secrets, etc.

4. Turnkey Projects

Turnkey projects or contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants, etc.; construction projects as well as franchising agreements.

Indonesian Government during 1974 invited global tenders for construction of a sugar factory in the country. Indonesia Government received the tenders from the companies of USA, UK, France, Germany and Japan. One of the Japanese Company quoted highest price compared to all other companies.

Indonesian Government studied the quotation of this Japanese company. This quotation includes: development of the fields for growing sugarcane, development of seedlings, construction of sugar factory, roads, communication, power, water etc., connecting the factory, train the local people, development of the distribution channels in Indonesia, production of by-products and their market, plans for the export of surplus sugar etc. it also made a provision for the transfer of the factory along with the total package to the Indonesian Government and follow- up the activities after it is transferred to the Indonesian Government.

Indonesian Government was very much satisfied with the total package and invited the Japanese company to implement the project. The Japanese company and Indonesian Government entered an agreement for implantation of this project by the Japanese company for a price. This project is called ‘Turnkey Project.’

A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration. The form of remuneration includes:

1) A fixed price (firm plans to implement the project below this price)

2) Payment on cost plus basis (i.e., total cost incurred plus profit)

This form of pricing allows the company to shift the risk of inflation/enhanced costs to the purchaser.

Larsen and Toubro, and Mumbai’s Jyoti Structures Ltd and KEC International Ltd are the three Indian companies that have been shortlisted from nearly a dozen for turnkey operations including laying transmission lines and building a substation for the 456 MW Upper Tamakoshi Hydroelectric Project, Nepal’s biggest hydel project being built with domestic funding.

Advantages of Turnkey Contracts

The benefits arising from turnkey contracts include

1. The opportunity at sell both components and other intangible assets,

2. Host government patronage which ensures that payments are made promptly and may also lead to mutually beneficial relationship in other areas, and

3. For the host nation, the opportunity to build industrial complexes and train local personnel.

These advantages must, however, be balance against the disadvantages which include the fact that by building an industrial complex in a host country, the possibility of exporting to or making other forms of investment in the market is effectively lost, and that turnkey contracts may result in the purchase of inappropriate technology. Designing and building complex and advanced industrial facilities in a host country may require the permanent attention of the suppliers, thus, perpetuating management and other contractual arrangements to the detriment of the owner/purchaser.

Disadvantages of Turnkey Contracts

1. Lack of client control and participation.

2. Higher overall cost than traditional approach.

3. Limited flexibility to incorporate change.

4. A firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor.

5. Management Contracts

The companies with low level technology and managerial expertise may seek the assistance of a foreign company. Then the foreign company may agree to provide technical assistance and managerial expertise. This agreement between these two companies is called the management contract.

A management contract is an agreement between two companies, whereby one company provides managerial assistance, technical expertise and specialized services to the second company of the argument for a certain agreed period in return for monetary compensation. Monetary compensation may be in the form of:

1. A flat fee or

2. Percentage over sales and

3. Performance bonus based on profitability, sales growth, production or quality measures.

Management contracts emphasize the growing importance of services, business skills and management expertise as saleable commodities in international trade. Normally the contracts undertaken are concerned with installing management operating and control systems and training local staff 10 take over when the contract is completed. Many construction projects, such as the rebuilding of Afghanistan and Iraq, were undertaken in this way.

Management contract could, sometimes, bring in additional benefits for the managing company. It may obtain the business of exporting or selling otherwise of the products of the managed company or supplying the inputs required by the managed company. Some Indian companies – Tata Tea, Harrisons Malayalam and AVT – have contracts to manage a number of plantations in Sri Lanka. Tata Tea also has a joint venture in Sri Lanka namely Estate Management Services Pvt. Ltd.

Advantages of Management Contracts

1. Foreign company earns additional income without any additional investment, risks and obligations.

2. This arrangement and additional income allows the company to enhance its image in the investors and mobilize the funds for expansion.

3. Management contract helps the companies to enter other business areas in the host country.

4. The companies can act as dealer for the business of the host country‘s business in the home country.

5. The expropriation or nationalization of a subsidiary where the parent company’s commercial expertise is still required;

6. The development of a consultancy or technical aid contract into a” total management contract.

7. Fees for management services may be easier to transfer, and subject to less tax, than royalties or dividends.

8. Under-employed skills and resources are a common factor in deciding to opt for management contracts. The licensing specialist may be in a position to negotiate the contracts and employ a number of the other experts available at head office on the project. The contracts provide a useful contribution to a global strategy. They are particularly appropriate to the more difficult markets in the less developed and the socialist countries; but they are also used in Europe.

9. Management contracts can provide support to other business arrangements like technical agreements and joint ventures; and general support for existing markets where indigenization or expropriation are likely. Minority equity holdings are also safeguarded in this way.

10. Technologies are transferred very quickly.

11. Clients have new systems installed to a predetermined specification known to have succeeded in other places.

Disadvantages of Management Contracts

1. Sometimes the companies allow the companies in the host country even to use their trade marks and brand name. The host country’s companies spoil the brand name, if they do not keep up the quality of product service.

2. The host country’s companies may leak the secrets of technology.

3. Increase in potential competition as capacity is increased by new facilities.

6. Original Equipment Manufacturing (OEM)

In original equipment manufacturing (OEM) a company start selling an unbranded product or component to another company in global market. The purchasing company markets the final product under its own brand name. In other words it can be defined as “A company that buys a product and incorporates or re-brands it into a new product under its own name”. For example, a maker of refrigerators like Frigidaire might sell its refrigerators to a retailer like Sears to resell under a brand name owned by Sears.

The supplying party of the product incurs a small or no amount in marketing their product globally and the buyer gets a product ready to use and to market. The supplier needs to give his effort in marketing the product overseas and if needed, change their strategies later if they have strong overseas market for their products.

An OEM may make complete devices or just certain components, either of which can then be configured by the reseller. For example, the relationship would be a large automobile manufacturer that uses an OEM’s components in the production of the cars it make and sells. OEMs have begun in recent years to sell their products more widely and in some cases, directly to the public.

Developments within the computer industry have played a role in this expansion. As people choose to upgrade their PCs with new parts, they often wish to do so by purchasing replacement parts that have been produced by the same manufacturer that made the originally installed item. The assumption in this case is that components and other processed items may work better or lit better if they, come from the OEM. They are more likely to meet the original standards and product specifications, established for the product OEM parts can be contrasted to other replacement parts that may be referred to as “functionally equivalent” or “of like kind and quality”.

It is the rebranding of equipment and selling it. The term initially referred to the company that made the products (the original” manufacturer), but eventually became widely used to refer to the Organisation that buys the products and resells them. However the OEM reseller is often fee designer of the equipment, which is .made to order.

Problems Solved Through OEM

There are several problems of the business which are being solved by the help of OEM, the problems are as follows:

1. Branding

As OEM helps in selling the unbranded products and help those manufacturing companies to have their own name which earlier do not globally known. It helps the customers to get the product by the brand names.

2. Budget Constraint

The budget problem is also another problem before the manufacturers of the unbranded products. By the help of OEM they get relief from the budget constraints. The business doesn’t pay until the 100% custom manufactured solution rolls off the factory floor saving the manufacturer on all associated design, engineering, and testing costs.

3. Eliminate Bottlenecks and Improve Efficiency

It helps the manufacturers more efficiently (and profitably) by delivering the services or products to their customers via a custom manufactured solution.

Key Aspect of Working with OEM

Several companies try, few succeed, and most fail, but even those that fail become better companies because of that experience. So, if one have ever wanted to sell direct to OEM’s, and knew there were better companies out there, but simply don’t want to fail on the first try, then here are some key aspects of working directly with OEM’s.

1. OEM’s Expect Quality – Above Anything Else

Do not bother trying to tout the quality. The fact is, OEM’s expect quality is a guaranteed part of the equation. Company’s ability to meet their strict quality requirements is a prerequisite to getting started. Quality is a given with OEM’s. They expect nothing less than perfection, and rightly so. They cannot afford any issues with their own production because of sub-par product from their suppliers.

2. OEM’s Need Manufacturers Who Use Best Business Practices

The companies simply are not interested in companies that are not able to keep-up. They do not have the time, or inclination, to train and teach the company the how and why of properly servicing customers. Therefore, first and foremost, company must have that level of professionalism that set the people apart from competition and one must adopt best business practices. People must have that dynamic sales and customer service team, the ability to respond to any delays, and the inventory, and production capability, to respond to increase demand, at a moment’s notice.

3. OEM’s Need Corrective Action Taken

Essential to making relationship work with an OEM, is company’s ability to provide corrective action reports to resolve mistakes, and the internal process with your quality control department to implement those corrective actions.

4. Most OEM’s want ISO-Certified Vendors

Most people are unaware of the impact or importance of being ISO-certified. The fact is, all ISO certification does, is to establish a set of norms and practices by which the company will always follow. OEM’s need this because it guarantees that when one provide them with that previously mentioned corrective action report, that something will actually come of it. Companies set their own procedures and policies in ISO.

5. OEM’s Need Competitive Prices and Top Tier Manufacturers

A number of people assume that an excellent quality product equals higher prices. In some cases, it might, but OEM’s work under the game market forces as any other company, and simply cannot afford to have suppliers/partners who are not competitive, and are not top tier manufacturers. One must not only provide products on time, and in the volume they need, but at competitive prices.

6. OEM’s Need Shrewd Negotiators who will protect their Own Interests

This is often forgotten by a number of companies. They think that they should capitulate on each and every request made by that OEM. For some companies, they see giving the customer everything they need, as a sign of good customer management. It is OEM’s expect the company to be strong negotiators who will i sure the agreements one reach with them, will be successful.

Significance of OEM

1. Law prototype costs,

2. Short lead times once mould is procured

3. Minimum stock levels

4. Can be supplied finished for fast build-up

5. No need for costly post-cast machining

6. Highly damped structure

7. High dynamic, static stiffness

8. Totally stable machine structure

9. High dimensional accuracy

10. Good technical design service

11. Excellent supplier – customer relationship

Reasons for Setting up Overseas Manufacture and Service Operations

The benefits of overseas manufacturing and service operations are:

1. Product

Avoiding problems due to the nature of the product, such as perishability.

2. Services

Services that is dependent for success on local intellectual property, knowledge and sensitivity to the local markets.

3. Transporting and Warehousing

The cost of transporting heavy, bulky components and finished products over long distances is reduced.

4. Tariff Barriers/Quotas

Barriers to trade, which make the market inaccessible, are reduced.

5. Government Regulations

Entry to some markets, such as Central and Eastern Europe are difficult unless accompanied by investment in local operations.

6. Market

Local manufacture and service operations may be viewed more favourably by customers.

7. Government Contacts

Firms are likely to be viewed more ‘ favourably if they contribute more to the local economy.

8. Information

A strong local presence improves the quality of market feedback.

9. International Culture

Local presence encourages a more international outlook and ensures greater commitment by the firm to international markets.

10. Delivery

Local manufacture and service operation can facilitate faster response and just-in-time delivery.

11. Labour Cost

Production, distribution and service centres can be moved to lower labour cost markets provided there are appropriate skills and adequate information technology infrastructure to maintain satisfactory quality.