You are on the executive team of a medium-sized Australia-based company specializing in designing and manufacturing electric
Question:
You are on the executive team of a medium-sized Australia-based company specializing in designing and manufacturing electric motors used by large multinational firms such as Dyson and LG to make home electrical appliances such as hairdryers, air purifiers, and vacuum cleaners. The company has a good reputation for continuously investing in its technological expertise in designing high-quality new generations of electric motors that are smaller, lighter, and more power-efficient than electric motors produced by many competitors. Until now, the company conducts almost the entire value chain from R&D to manufacturing in Australia and then exports the products to more than 20 countries in Asia, Europe, and North America. The company’s major customers include global brand names such as Black & Decker, Dyson, LG, Mitsubishi Electric, as well as some local home appliances manufacturers in Asia and Europe.
Assuming a decision (good or bad) was made in the recent executive meeting that the company should move manufacturing to a developing country (using Vietnam as an example), where the costs of labor are lower. Due to the lack of capital and experience in managing FDI overseas, the company ruled out the strategy of FDI through WOS or JVs. Further assuming the company has found an electric motor manufacturer in Vietnam as a potential business partner, there are three options left on the table:
[a] The Australian company can approach the Vietnamese company to negotiate a pure market-based contract, which would require the Australian company to provide 6 the Vietnamese company with the necessary technologies, and in turn, the Vietnamese company will produce small electric motors made from such technologies. The two companies will work together to market and sell the products around the world and share the profits (or losses) based on the terms and conditions stipulated in such a contract.
[b] The Australian company can try to negotiate an OEM (original equipment manufacturing) agreement with the Vietnamese firm (i.e., allow the Vietnamese firm to use the Australian company’s product design to produce electric motors in Vietnam and then buy back all finished products and re-sell around the world under the Australian company’s own brand).
[c] The Australian company can try to negotiate a licensing agreement with the Vietnamese company. In such an agreement, the Vietnamese company will be allowed to use the Australian company’s technologies to produce and sell products while the Australian company will receive a loyalty fee every year during the licensing agreement (and it is also possible to re-negotiate the loyalty fee every year after the initial agreement).
Which of the above three strategies is most likely to be successfully implemented through negotiation between the Australian and the Vietnamese companies? And why?
*Note: “successfully implemented” refers to that how likely the two parties will be able to reach an agreement successfully, it does not necessarily mean the partnership will produce a successful financial outcome for each or both sides after reaching the agreement, as there will be many other factors which may contribute to the financial outcome.
