Research Proposal

Title: FOREIGN FIRMS IN CHINA UNDER THREAT: LOCAL SUPPLIERS TURN INTO COMPETITORS AFTER UPGRADING

Contents

A general overview of the area of the study. 2

A contextual summary of research in this area. 2

The key findings of researchers working on this topic. 3

An initial current framework on which to base the research. 4

What your proposal will address in terms of key research questions. 4

Context and gap in the literature. 4

The qualitative method and description of research tasks. 5

A prediction of the expected outcomes of the research. 5

How will the research make an original contribution to knowledge?. 5

Potential problems and how to overcome them.. 6

References. 7

A general overview of the area of the study

The situation in China is one where anonymous contract manufacturers and suppliers are increasingly turning into competitors (Yu & Liao, 2006). They are pushing the brands they used to make aside and replacing them with their own products (Brandt & Thun, 2010). Yet original equipment manufacturers (OEMs) are compelled by circumstances to outsource certain manufacturing processes as a way of reducing costs. This strategy also enables them to improve worker productivity while at the same time free up a lot of capital (Brandt & Thun, 2010). It also enables OEMs to dedicate all their efforts to activities that add more value to the product such as design, research and development (R&D), and marketing. To achieve these gains, most manufacturing activities are outsourced to contract manufacturers in low-wage countries.

            China is one of the low-wage countries where many foreign companies are turning to for the manufacture and supply of vital components required in the assembly of various products (Yu & Liao, 2006). Other than low-wage benefits, OEMs also hope to benefit from economies of scale as well as exposure to the technologies used to manufacture products for other OEMs (Brandt & Thun, 2010). This relationship with contract manufacturers creates a situation where they are even able to recommend changes to the OEM’s products.

            However, foreign companies outsourcing some of their manufacturing processes to China face a threatening scenario where their technologies are being exposed to competitors (Brandt & Thun, 2010). Worse still, the suppliers are increasingly upgrading their manufacturing activities to a point of becoming direct competitors. Such suppliers easily take advantage of the benefits that they provide to the OEMs. Therefore, foreign firms must not underestimate domestic suppliers in China; they are quickly upgrading their business models to a point of emerging as competitors.

A contextual summary of research in this area

Researchers acknowledge the existence of the problem of suppliers of components who turn into competitors (Arrunada & Vazquez, 2006; Ghemawat & Hout, 2008; Bair, 2005; Brown & Hagel, 2005; Brandt & Thun, 2010). Arrunada & Vazquez (2006) uses the terms “promiscuity”, “infidelity”, and “betrayal” to refer to instances where contract manufacturers turn into competitors to OEMs. In the case of promiscuity, contract manufacturers pursue liaisons with numerous OEMs. In infidelity, distributors and retailers shift their business to a supplier of the foreign company. On the other hand, betrayal occurs when contract manufacturers choose to keep the foreign company’s intellectual property to themselves or worse still, to transmit it to OEM’s competitors.

However, not all researchers see foreign linkages domestic suppliers from a negative perspective. In this regard, Foreign Invested Enterprises (FIEs) in China are viewed as an important source of competition for local firms, thereby forcing them to pursue efficiency in their use of resources as well as the adoption of upgrading capabilities (Gadiesh, Leung & Vestring, 2007). The general feeling is that although there is an extensive link between Chinese enterprises and the global economy, their involvement remains very shallow (Steinfeld, 2004). Their activities are undifferentiated, they are preoccupied with commodity manufacturing, competition is built around cost-cutting measures, and innovation is lacking (Steinfeld, 2004).

In the debate on the interaction between domestic firms and FIEs in China, protectionism theory is being used (Kennedy, 2005; Brandt & Thun, 2010). The competence-based growth model is also being used especially in discussions on how suppliers and contract manufacturers operate (Lee & Chen, 2000). The concept of protectionism arises because FIEs tend to be highly regulated in China. Moreover, the avenues through which they can make profits tend to be highly limited. Yet as China continues to be integrated into the global economy, there is growing awareness of the important role that external factors play in the ongoing process of diversification of interests both within China and around the world. The competence-based growth model is being promoted because many contract manufacturers tend to be resource-constrained on the one hand and global outsourcing activities in many vertically de-integrated industries have become dominant industrial practices (Lee & Chen, 2000).

The key findings of researchers working on this topic

Many researchers point out that China is increasingly being integrated into contemporary economic institutions at the international level (Kennedy, 2005; Yang, 2006; Saxenian, 2002). One of the ways through which this integration is taking shape is through the emergence of production links bringing together foreign firms and domestic suppliers and contract manufacturers. In such relationships, foreign firms operate as OEMs. Researchers also highlight the threat of contract manufacturers who turn into competitors of OEMs (Yu & Liao, 2006; Brown & Hagel, 2005; Bair, 2005; Brandt & Thun, 2010). Chinese suppliers operate in an evolving business environment that motivates them to develop their own brands (Yu & Liao, 2006). In these efforts, they end up exploiting the intellectual property rights of foreign OEMs (Brandt & Thun, 2010).

The need to forge these relationships arises from the fact that numerous changes have been occurring in the world of manufacturing at the global level. In these changes, there is a shift from traditional mass production networks to the rise of vertically integrated corporations that specialize in product design and development. In this context, the production process has become a transnational phenomenon. In this context, many foreign companies are increasingly turning to Chinese suppliers through outsourcing arrangements.

Researchers argue that outsourcing arrangements cannot be evaded since manufacturing companies need to form production links with low-cost countries especially China to establish competitive advantage, lower production costs, and maximize profitability (Jiang, 2002; Lo & Chung, 2007; Gadiesh, Leung & Vestring, 2007). Moreover, in today’s corporate practice, very few companies consider manufacturing an essential component of their businesses (Arrunada & Vazquez, 2006). Such companies must look for ways of dealing with the threat posed by suppliers who turn into competitors. Other challenges in the case of foreign companies that deal with Chinese suppliers include underdeveloped physical infrastructure, state-owned distribution that lack the necessary expertise, regional protectionism, and an enormous distribution sector that is highly fragmented (Jiang, 2002). Foreign companies outsourcing some of their processes to China have to deal with bureaucratic restrictions, such that they are unable to import, sell, and service goods and services through transparent processes (Jiang, 2002).

An initial current framework on which to base the research

This research will be based on the competence-based growth model. According to Lee & Chen (2010), the competence-based growth model is appropriate for studies focusing on contract manufacturers who operate in an environment of resource constraints, vertically de-integrated industries, and growing popularity of global outsourcing practices. This model is ideal in situations where there is a need to highlight the various ways in which suppliers can upgrade and leverage their operations to be able to undertake value-adding manufacturing activities in a manner that satisfies the needs of various outsourcing buyers.

The core undertaking in this model entails an in-depth analysis of leveraging and competence-building initiatives that are a reflection of conscious efforts by manufacturers to learn and navigate the delicate dynamics of contemporary buyer-supplier linkages (Brandt & Thun, 2010). On this basis, it is possible for a researcher to explain the various ways through which contract manufacturers can upgrade their activities without violating terms and conditions relating to intellectual property rights, unfair competition, and disclosure of the buyer’s technologies to competitors. Moreover, the competence-based growth model was selected because of its appropriateness in explaining the high rate of growth being experienced in outsourcing and contract manufacturing despite the business hazards involved.

The theoretical strand to which the competence-based growth model belongs is based on the notion that differential firm performance occurs because a firm possesses rare, valuable, difficult to imitate, non-substitutable resources (Lee & Chen, 2010; Ravichandran, Lertwongsatien & Lertwongsatien, 2005; Liu, 2008; Palpacuer & Parisotto, 2003; Matthyssens, Vandenbempt, & Weyns, 2009). Once contract manufacturers turn into competitors, they join the sector as latecomers. To compete effectively in knowledge-intensive industries, they are compelled to embrace resource leverage, linkage-formation, and learning strategies (Mathews, 2002). In other words, there are compelled to embrace new competencies in order to continue growing.

What your proposal will address in terms of key research questions

The aim of the research paper will be to answer the following research questions:

  1. What measures should Chinese contract manufacturers embrace to leverage on competence without posing a threat of competition buyers (OEMs)?
  2. How can Chinese contract manufacturers and suppliers engage in multiple activities aimed at building their own brands without posing a threat of competition to foreign buyers (OEMs)?
  3. What strategy can an OEM eyeing outsourcing prospects in China employ to avoid conflict of interest and future change of fortunes as a result of “supplier-turned-competitor” situations?

Context and gap in the literature

            In many studies that focus on the rapidly growing low-end segments of the Chinese market, a major objective is to investigate whether the suppliers and contract manufacturers operating in these segments are upgrading and leveraging their activities in the right way (Brandt & Thun, 2010; Steinfeld, 2004), Humphrey & Schmitz, 2002). The issue of how contract manufacturers operating in these low-end segments are likely to turn into competitors of foreign buyers has been neglected (Brandt & Thun, 2010). Similarly, the issue of how these firms respond to the advanced survival strategies of established knowledge-intensive industries after upgrading their operations has also not been examined (Mathews, 2002). Moreover, dearth of literature on areas of competence, multiple activities, and strategies of foreign companies in relation to the growing assertiveness and ambition of low-end Chinese suppliers make this study very important.

The qualitative method and description of research tasks

            This paper will be based on a qualitative analysis of the strategies being adopted by Chinese contract manufacturers and suppliers as well as foreign FIEs that have outsourced some of their operations. The descriptive approach will be adopted in the review of journal articles relating to the aforementioned research questions. The first research task will involve an analysis and interpretation of the findings of journal articles and authoritative publications highlighting the measures Chinese contract manufacturers ought to adopt to leverage on competence. The second task will involve an assessment of similar sources of data to assess the prospects of the introduction of multiple activities on the part of Chinese suppliers in an effort to build their own brands. Lastly, using similar sources of data, the paper will examine the strategy that foreign buyers outsourcing manufacturing processes in China are likely to adopt to mitigate the hazards that come with the tendency by suppliers to turn into fierce competitors.

A prediction of the expected outcomes of the research

            This paper will prove that Chinese contract manufacturers and suppliers pose a serious threat to foreign buyers. This threat arises from the aggressive nature of these suppliers’ business activities. These low-level businesses are ambitious in terms of the approaches they adopt in order to achieve new levels of competitiveness. It is expected that above all other things, these companies are keen to leverage on competence particularly in the contemporary world of globalization. They are also keen to survive the cut-throat competition that exists at the lower levels of business activities. At the same time, they are keen to take advantage of the new opportunities provided by foreign buyers and MOEs. The research paper will also demonstrate that it is possible for suppliers to build their own brands and serve multiple buyers without posing a threat of competition to these buyers or infringing into their intellectual property rights. To avoid “supplier-turned-competitor” scenarios, the suppliers will have to go through an elaborate learning and unlearning process that will enable them embrace innovation and best practices at the global level.

How will the research make an original contribution to knowledge?

            This research will make a unique contribution to the discourse on the threat that Chinese suppliers pose to foreign MOEs. No other study on the efforts by Chinese suppliers’ efforts to leverage on competence with a view to emerge victorious in the buyers’ marketplace has been done. Therefore, this research will trigger a flurry of interest in the competence-based growth model and its applicability to the upgrading efforts being undertaken by Chinese contract manufacturers and suppliers. The main contribution will be on how Chinese suppliers can relate with FIEs to avoid needless friction arising from perceptions of betrayal.

The paper will establish a platform through which the conflicting goals of suppliers can be reconciled with those of foreign buyers. It will prove that although efforts by suppliers to upgrade their operations may have a negative impact on the buyers’ goals of reducing costs and increasing global competitiveness, this problem can be mitigated through an elaborate process of learning and adoption of unique competencies on the part of suppliers. This will enable these suppliers establish new competitive advantages to facilitate their survival in a world that is dominated by many successful knowledge-intensive industries.

Potential problems and how to overcome them

            The main problems that I expect to encounter include access to data, conflicting information from different quarters, and time constraints. Access of some of the necessary data may be limited because of the authoritative nature of the Chinese government, media, and state-owned institutions. I hope to overcome this problem by seeking clarifications whenever possible through personal contacts in the China’s corporate world and government. I also hope to use this approach in solving the problem of conflicting information from various quarters. This problem might also be solved by consulting as many different sources as possible as well as verifying the reliability, credibility, and authenticity of sources before citing them. Lastly, I hope to I will deal with time constraints by starting the research work as soon as possible as well as requesting for the extension of deadlines whenever need arises.

References

Arrunada, B & Vazquez, X (2006), ‘When your contract manufacturer becomes your competitor’, Harvard Business Review, vol. 84, no. 9, pp. 135–145.

Bair, J (2005), ‘Global capitalism and commodity chains: Looking back and going forward’, Competition & Change, vol. 9, no. 2, pp. 153–180.

Brandt, L & Thun, E (2010), ‘The Fight for the Middle: Upgrading, Competition, and Industrial Development in China’, World Development, vol. 38, no. 11, pp. 1555–1574. 

Brown, J & Hagel, J (2005), ‘Innovation blowback: Disruptive management practices from Asia’, The McKinsey Quarterly, vol. 1, no. 34, pp. 35–45.

Gadiesh, O, Leung, P & Vestring, T (2007), ‘The battle for China’s good-enough market’, Harvard Business Review, vol. 85no. 9, pp. 81–89.

Gadiesh, O, Leung, P & Vestring, T (2007), ‘The battle for China’s good-enough market’, Harvard Business Review, vol. 85, no. 9, pp. 81–89.

Ghemawat, P & Hout, T (2008), ‘Tomorrow’s global giants? Not the usual suspects. Harvard Business Review, vol. 86, no. 11, pp. 80–88.

Humphrey, J & Schmitz, H (2002). ‘How does insertion in global value chains affect upgrading in industrial clusters?’ Regional Studies, vol. 36, no. 9, pp. 1017–1027.

Jiang, B (2002), ‘How international firms are coping with supply chain issues in China’, Supply Chain Management: An International Journal, vol. 7, no. 4, pp. 184 – 188.

Kennedy, S (2005), ‘China’s porous protectionism: The changing political economy of trade policy’, Political Science Quarterly, vol. 120, no. 3, pp. 407–432.

Lee, J & Chen, J (2000), ‘Dynamic synergy creation with multiple business activities: Toward a competence-based business model for contract manufacturers’, Research in Competence-Based Management in Advances in Applied Business Strategy, vol. 6, p. 209–228.

Liu, F (2008), ‘The competence and constraints of brand building for contract manufacturers’, Journal of Brand Management, vol. 15, pp. 412–432.

Lo, L & Chung, W (2007), ‘A study of outsourcing relationship in strategic partnership for production in China’, International Journal of Logistics Systems and Management, vol. 3, no. 3, pp. 288-304.

Mathews, J (2002), ‘Competitive Advantages of the Latecomer Firm: A Resource-Based Account of Industrial Catch-Up Strategies’, Asia Pacific Journal of Management, vol. 19, no. 4, pp. 467-488.

Matthyssens, P, Vandenbempt, K & Weyns, S (2009), ‘Transitioning and co-evolving to upgrade value offerings: A competence-based marketing view’, Industrial Marketing Management, vol. 38, no. 5, pp. 504–512.

Palpacuer, F & Parisotto, A (2003), ‘Global production and local jobs: Can global enterprise networks be used as levers for local development?’ Global Networks, vol. 3, no. 2, pp. 97–120.

Ravichandran, T. Lertwongsatien, C & Lertwongsatien, C (2005), ‘Effect of Information Systems Resources and Capabilities on Firm Performance: A Resource-Based Perspective’, Journal of Management Information Systems, vol. 21, no. 4, pp. 237-276.

Saxenian, A (2002), ‘Transnational Communities and the Evolution of Global Production Networks: The Cases of Taiwan, China and India’, Industry and Innovation, vol. 9, no. 3, pp. 183-202.

Steinfeld, E (2004), ‘China’s shallow integration: Networked production and the new challenges for late industrialization’, World Development, vol. 32, no. 11, pp. 1971–1987.

Yang, Y (2006), ‘China’s Integration into the World Economy: Implications for developing countries’, Asian-Pacific Economic Literature, vol. 20, no. 1, pp. 40–56.

Yu, C & Liao, T (2006), ‘Formal governance mechanisms, relational governance mechanisms, and transaction-specific investments in supplier–manufacturer relationships’, Industrial Marketing Management, vol. 35, no. 2, pp. 128–139.

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