Posted By Paul Tate, May 17, 2012 at 11:20 AM, in Category: Global Value Networks
Want to sell your products into fast-expanding markets like Brazil or India? It could cost you well over 40% of the product cost in import duties if you don’t manufacture in the country. Does that make you want to set up a factory there?
Avoiding a sudden spring shower just beyond the inspiring academic spires of Cambridge University in the U.K. earlier this week, one senior global executive of a major clothing and food retail group confided to me, “It’s true. A lot of our manufacturing footprint around the world is now being determined by national import duties. It’s becoming a real problem.”
Inside Cambridge University’s Institute for Manufacturing (IfM), where the academic team was holding its annual briefing day for senior manufacturing executives from across Europe, Jag Srai, Head of the Institute’s Center for International Manufacturing, added: “I’ve seen factories located right next to a border where they are making almost complete cars – but just leaving the wheels off so they can avoid import duties when they ship them into the neighboring country.”
Germany’s Mercedes-Benz, meanwhile, this week announced plans to start assembling eight or nine of its luxury car models in India to avoid high import duties so it can price its vehicles more competitively in local markets. Currently, import taxes on finished European-made vehicles can be as high as 60%-70% in India, compared to a factory gate tax of 12%-27% on locally built cars. Proposals to slash these import duties significantly as part of an Indian/EU free trade agreement are meeting strong local automaker opposition.
Of course, global manufacturing footprint strategies are rarely based on open decisions anyway. Very few established companies have the luxury of starting from scratch. Instead, they tend to optimize what they’ve got, often the result of legacy decisions, multiple acquisitions, or simply commercial accident.
Besides, traditional decision strategies are becoming increasingly outdated. “Lean, outsourcing, and offshoring are simply not enough to guide today’s global planners anymore,” argues Paul Christodoulou, Principal Industrial Fellow at Cambridge’s IfM and a member of Manufacturing Executive’s Board of Governors.
For example, Christodoulou adds, gaining a strategic position in the most exciting world markets is often a more important consideration than just costs, and the ground rules for choosing the right locations are constantly changing as a result of macro-economic trends and complex trade legislation.
In his view, there will be an increasing move toward the localization of manufacturing factory and supply networks anyway, as a result of both rising fuel and transportation costs and the increasing flexibility of manufacturing processes and technologies that make it easier and more economically viable for companies to “go local.”
Clearly, negotiating the increasingly complex web of import duties is also becoming an ever more important part of that global production equation.
So, how much are import duties in emerging markets determining your manufacturing footprint around the world?
Is this resulting in a more regional or localized production strategy to help you gain access to potentially lucrative new markets?
And if import duty barriers weren’t there, would you still make the same location decisions about setting up production facilities in the region?
For more insights into creating a successful global manufacturing footprint, see “Why Lean, Outsourcing, and Offshoring Are Not Enough” in the March 2011 issue of the Manufacturing Executive Leadership Journal.
Paul Tate is Executive Editor of Manufacturing Executive.
Written by Paul Tate
Paul Tate is Research Director and Executive Editor with Frost & Sullivan's Manufacturing Leadership Council. He also directs the Manufacturing Leadership Council's Board of Governors, the Council's annual Critical Issues Agenda, and the Manufacturing Leadership Research Panel. Follow us on Twitter: @MfgExecutive