Assume you are the marketing manager for a leading U.S. manufacturer of earth-moving equipment. Your company would like to become heavily involved in global marketing (especially in India) but has some capital limitations. Your job is to evaluate whether it should use contract manufacturing or direct investment. Compare and contrast these two options and make a recommendation.
What will be an ideal response?
CONTRACT MANUFACTURING is private-label manufacturing by a foreign company. The foreign company produces a certain volume of products to specification, with the domestic firm's brand name affixed to the goods. The domestic company usually handles the marketing. This method carries medium levels of risk and return.
DIRECT FOREIGN INVESTMENT is complete or majority ownership of manufacturing and marketing subsidiaries in foreign countries. This option offers the greatest potential rewards but carries the highest risk.
The U.S. manufacturer should consider contract manufacturing for two reasons: (1) the company has a well-established brand name that would be easily recognized on the foreign goods and (2) contract manufacturing will enable the firm to broaden its global marketing base without direct investment of limited capital in plant and equipment.
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