Intellectual Property Risks in Moving Manufacturing Outside of America

25/10/2011

This is probably the least understood risk that a manufacturing company faces when locating the plant, or outsourcing, outside of America. Most of the developing countries while boost many of the low wage benefits of locating the plant there also lack strong intellectual property laws. A manufacturer, who has achieved certain degree of sophistication in producing technologically complex products or manufacturing processes, this could be a substantial risk. Need less to say that these intellectual property risks do not apply to a manufacturer who is making technologically simple products or uses simple or well known manufacturing or supply chain processes.

This risk could stem from multiple sources. Some structural and some operational.

Consider a case where the country (you want to locate the plant to) requires joint-ownership with a local company. Irrespective of which company owns what percentage of the shares, a transfer of technology takes place naturally. In more cases than the other this technology transfer would be from US company to the local partner. In essence, you are creating your competitor. It may not be immediate but a strong possibility exists for that in future.

In another case, a competitor could easily break away your work force that you have trained and create a competing product. Often at a lower price point as they do not have to invest in R&D. This easily happens when the local laws may not as strong as at home. You may be thinking that people can easily copy the product anyway so what is the problem. Well, there is more than just the product design. It’s manufacturing processes, plant layout, organizational structure, quality control, supply chain know how etc. that would be hard to copy if the competition can not get hold of your trained work force.

It’s hard to avoid the loss of intellectual property when you are locating the plant in many of the low wage countries. You may none-the-less want to locate the plant there for other strategic reasons like capturing the local demand.

So, what can be done?

There are no 100% good strategies. However, you could take some precautionary measures like manufacturing only the products which are near the end of their technology life-cycle or shifting only a part of manufacturing and not the whole product or shift manufacturing for the products or components where you can leverage local technologies.

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