Contract Manufacturing & Turnkey Projects¶
Contract Manufacturing (Outsourcing)¶
Contract manufacturing, also known as outsourcing, is a practice where companies delegate part or all of their production to external firms, focusing instead on aspects like marketing and design.
Advantages¶
- Focus on Core Competencies: Allows businesses to concentrate on their strengths, such as R&D or marketing.
- Cost Reduction: Production costs can be lowered by leveraging the host country’s cost advantages.
- Development of SMEs: Supports the growth of small and medium enterprises in the host country through production partnerships.
- Locational Advantages: The international company benefits from the host country's locational advantages in production.
Disadvantages¶
- Potential for Market Entry by Producers: Host country companies might enter the market themselves, competing with the international company.
- Quality and Standards Issues: Risks of not adhering to the specified production designs and quality standards.
- Negative Impact on Company Image: Poor working conditions at the host country’s production sites can damage the international company's reputation, as seen with Nike in Vietnam.
Turnkey Projects¶
Turnkey projects involve a contract where a firm agrees to fully design, construct, equip, and then hand over a fully operational facility to the purchaser at a set price or on a cost-plus basis.
Example: Sugar Factory in Indonesia (1974)¶
The Indonesian Government awarded a Japanese company a turnkey project to build a sugar factory. The project encompassed field development, construction of facilities, training, and plans for surplus sugar export, emphasizing the comprehensive solution offered by turnkey contracts.
International Turnkey Projects Include¶
- Nuclear Power Plants
- Airports
- Oil Refineries
- National Highways
- Railway Lines
Financing¶
Turnkey projects often seek financial assistance from the host country's government or international financial institutions due to the significant capital required.
Recent Trends¶
The Build, Operate, and Transfer (B-O-T) model is a modern approach to turnkey projects, where the company builds and operates the facility before transferring ownership to the host country’s government.
Contract Manufacturing and Turnkey Projects offer distinct pathways for companies to engage in international markets, each with unique benefits and challenges, from operational focus and cost management to comprehensive project delivery and operational transition.
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