Organizational agreements between OEMs and subcontractors range from one-off contracts to more interdependent agreements that may or may not be renewed. The following table can help companies determine the level of engagement and therefore the level of risk they want to take when hiring outsourcing partners. The strategic challenges of contract manufacturing challenge the truism that specialization trumps diversification. Traditionally, large companies maintain patent portfolios that are much more diversified than their portfolios of production activities. In other words, a good OEM will likely have intellectual property that doesn`t just relate to its commodities. A car door manufacturer, for example, needs to know the plastics, airbags, electronics and glass that go into them, and might even hold patents for devices they invented as part of researching and developing improvements in their core technologies. OEMs may want to take advantage of this excess or random knowledge by opening up new product markets. Such market entry could be facilitated by cm hired by OEMs – just as competitors use contract manufacturing to enter OEM origin markets. Here, OEMs would use the very resource with which they have been tormented to their own advantage.
OEMs would achieve this by doing the same to incumbents in another market than what was previously done to them – at low cost and low risk, thanks to the characteristics of contract manufacturing. These new products would advantageously be based on new proprietary technologies. For example, Royal Philips, an electronics company, already designs and sells a number of products – computers, photographic equipment, records, refrigerators. Similarly, automakers would have the credibility and technological capabilities of the brand to diversify into fuel cells, alloys, batteries, filters, mirrors, glass coatings, electric motors, safety devices and safety systems. With enthusiastic CMs in the starting blocks, these and other companies would only have to start with enough production know-how to assemble high-quality, limited-edition prototypes and products. Toyota has already diversified into telecommunications, prefabricated homes and pleasure boats – something it did opportunistically, not because some CMs were putting pressure on the company`s margins. Processes that are part of an OEM`s core competencies or embody critical business resources should not be outsourced at all. Sony Ericsson, for example, only outsources the production of its aging and therefore already copied products.
Cisco Systems has its own manufacturing capability for its state-of-the-art routers and switches and their prototypes. Although Alcatel began selling most of its roughly 100 factories in 2000 – including some to CMs like Solectron and Sanmina – it retained half a dozen to make new products as well as high-tech items that can only be manufactured on proprietary devices. The most powerful retailers and distributors can hire the largest and most efficient CMs to produce items (under retailers` or distributors` own name labels) 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 expertise as part of its work for IBM, Hewlett-Packard and Mitsubishi. Later, distributor Ingram Micro asked Solectron to adapt PCs, servers, and other computing devices under its own brands and retailers. 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 from the fact that 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. Another potentially effective strategy is to file a trademark application that describes the products associated with the trademark as an “ingredient.” A contracted manufacturer could then enter into a contract with the retailer or distributor to list the brand among the ingredients on the product label. In this scenario, the end-user`s product could be used to meet the USPTO usage requirements.
In this paper, the authors explore the double-edged relationships that original equipment manufacturers (OEMs) establish with their contract manufacturers (CM). On the one hand, an OEM can reduce labor costs, free up capital, and improve employee productivity by outsourcing the entire manufacturing of a product. The company can then focus on value-added activities – for example, research and development, product design and marketing. On the other hand, an OEM who retains a subcontractor can enter into a melodrama full of promiscuity (the ambitious CM seeks connections with other OEMs), infidelity (the OEM`s retailers and distributors move their business to the emerging CM) and betrayal (the brazen CM transfers the OEM`s intellectual property to the OEM`s competitors or keeps it for itself, at the expiry of the contract) sank. Appreciating each party`s contribution can lead to conflicts, as this often determines the balance of power between the parties. Contract manufacturing agreements should detail each party`s contribution and how each party is compensated for its efforts. Payments can be made in the form of upfront payments, milestone payments or ongoing royalties. Once the agreement is in place, a party usually provides funds to cover the initial costs. Alternatively, payments can be made when milestones are reached in order to minimize the risk associated with upfront payments. Copyrights, trademarks and patents are the most important ways to protect intellectual property that others know or may know. Copyrights and trademarks are created by performing a specific action: you get copyright protection immediately after you register or write an original work, and you get trademark protection when you start using it in commerce. On the other hand, the patent application is not optional.
Contract manufacturing involves outsourcing a complete manufacturing process to the point where, in many cases, none of an OEM`s employees have physically touched the product they market and sell. The practice began in 1981 with the production of the first IBM PCs, but it spent a decade before reaching everyday products such as toys, clothing, shoes, beer and pharmaceuticals. Today, even some sectors of the automotive industry have adopted it: the Finnish Valmet Automotive assembles the Porsche Boxster, and the Austrian Magna Steyr assembles cars for Mercedes, BMW and Saab. UsPTO requires that anyone who wishes to obtain a valid trademark must first prove the use of the trademark. For most retailers and distributors of consumer goods, this requirement is easy to meet when manufacturing a product with a name. It may be enough to simply submit an image of a branded product or a screenshot of a web page. .