A multinational firm’s global manufacturing location and outsourcing strategies

Abstract

Due to rising labor costs in China and trade friction, many multinational firms (MNFs) consider moving manufacturing outside China to Southeast Asian Countries. Based on observations in real world, we build a three-tier supply chain model consisting of one component supplier, two contract manufacturers (CMs), an MNF, and a local original equipment manufacturer (OEM). The MNF monopolizes the market in country 1 (e.g., U.S.), but competes in country 2 (e.g., China) with the local OEM. The component supplier and one CM are located in country 2, and the other CM is located in country 3 (e.g., a country in Southeast Asia). We investigate the MNF’s global manufacturing location and procurement outsourcing strategies with considerations of tariffs and market environments. Currently, the MNF outsources its manufacturing to the CM in country 2, and decides whether to continue the cooperation with the current CM or develop a new CM in country 3. The MNF also considers whether to outsource its component procurement to the corresponding CM. Our study reveals that the MNF’s optimal strategy depends on the relative market sizes, the fixed cost of developing a new CM, as well as the manufacturing cost and tariff disadvantages in country 2. Interestingly, we find that the tariff disadvantage in country 2 does not always motivate the MNF to cooperate with the CM in country 3. Instead, an appropriate tariff may be beneficial to the MNF that manufactures in country 2. In addition, the MNF’s preferred procurement strategy is related to its manufacturing location. When cooperating with the CM in country 2, the MNF would switch from direct procurement to outsourced procurement as the market size of country 1 increases.