In today's dynamic global environment, companies often need to implement new strategies to remain competitive. For many manufacturers, production sharing is part of the answer.

Also referred to as co-production, cross-border manufacturing and outward processing, production sharing occurs when producers in different countries share in the manufacturing of a product. For example, a Detroit auto parts manufacturer may team up with a Mexican company to produce high quality and competitively priced products.

Production Sharing Benefits Are Vast

Cross-border manufacturing allows companies to:

  1. Complement each others’ strengths in order to create greater value;
  2. Gain access to unique technology, raw materials, and specialized intermediate inputs;
  3. Reduce overall costs;
  4. Provide an important market for a company's component exports;
  5. Retain higher wage jobs, product development and design, capital-intensive manufacturing, and marketing-related activities in the United States; and sometimes
  6. Provide the only means to keep companies in business.

Cross-Border Manufacturing Is Growing Worldwide

Production sharing is not unique to the United States. For example, companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines with a focus on computer hardware, telecommunications equipment, electronic components and appliances.

In the European Union (EU), most co-production involves apparel, auto parts and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production also is taking place in Northern Africa.

How big is production sharing? According to The World Bank, production sharing involves more than $800 billion or 30% of total manufacturing trade annually.

U.S. Tariff Code 9802

U.S. exports of components are co-produced abroad and often re-imported by the U.S. as finished goods. In most cases, these imports are entered into the United States under section 9802 of the U.S. tariff code.

Under 9802, U.S. materials assembled, processed or improved abroad can be shipped back to the United States, incurring duty only on the foreign labor and non-U.S.-made materials. As a result, these imports — which often contain substantial U.S. content — can be more price competitive than other imports with no U.S. content.

Outward Processing Advanced in the Auto Industry

Revolutionary technologies combined with production sharing have transformed the U.S. manufacturing industry. As such, levels of productivity and competitiveness during the 1990s increased significantly.

The U.S. auto industry is no exception. As global competition continues to increase, production sharing is one strategy employed by U.S. and foreign auto producers to stay ahead of the curve. This may involve, for example, the capital, technology and engineering skill of a U.S. producers with precision assembly provided by a Chinese partner. The result: an attractive top quality product.

In 2002, U.S. imports under 9802 of automobiles, trucks, buses, bodies, and chassis from Japan reached $18.6 billion. Germany followed with $9.3 billion; the U.K., $1.8 billion; Sweden, $1.8 billion; and South Korea with $1.5 billion.

North American Auto Industry Is Highly Integrated

Since vehicles assembled in Canada and Mexico are eligible for U.S. duty-free treatment under the North American Free Trade Agreement (NAFTA), only a small percent enters the U.S. under the 9802 tariff code.

For example, according to the U.S. International Trade Commission (ITC), in 2002, U.S. imports of automobiles, trucks, buses, bodies, and chassis from Mexico and Canada under 9802 were $618 million and $36 million, respectively. However, in 2002, co-produced U.S. imports of motor vehicles from Mexico not entered under 9802 are estimated at $19.5 billion. Co-production data from Canada outside 9802 is not available.

How Important Is Production Sharing?

In the late 1980s, the ITC conducted a survey of 900 U.S. firms that co-produced utilizing Chapter 98. When asked what they would do if this Customs provision was eliminated, the firms said they would:

  • Turn to foreign suppliers of components;
  • Drop labor-intensive products and import them from East Asia;
  • Move all manufacturing to Asia;
  • Cut back U.S. production and target a market niche not threatened by imports; or
  • Go out of business.

Since then, production sharing has become vastly more important to U.S. companies and workers. According to the ITC, it has been responsible for generating new jobs and retaining those that would have been lost due to intense foreign competition.

Consider the Pros and Cons

Sharing manufacturing strengths with high and low-wage countries has become an important strategy for many companies. However, while co-production has been beneficial for many firms, some have invested in foreign-based production sharing facilities only to find unexpectedly low levels of productivity, excessively high turnover, poor infrastructure, and a corrupt legal system. Consequently, several firms have abandoned their efforts.

Co-production can be a means to achieve a higher level of global competitiveness. However, before engaging in production sharing, it’s essential to fully understand your needs, in addition to the needs of your partners, their culture and their environment.

This article appeared in Crain's Detroit Business, June 2003. (CO)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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