International Competitiveness

Companies often have manufacturing facilities in more countries than pure technical optimization (i.e. optimal plant size and output vs. global market size). Why do firms have plants in more countries than needed to supply the worldwide demand?

Why firms have plants in more countries than needed to supply the worldwide demand? I would like to view this from several perspectives such as supply, government, tax, customer, currency, and quality. In considering these factors, I would like to think about an example of Hyundai Motor Company that established its manufacturing plants in the U.S. and other E.U. countries even they have enough capacity in South Korea and China in terms of technical optimization.

First, the company needs to secure consistent supply for car manufacturing. There can be operational interruption by labor or any other local supplier’s problems. For example, if Korean plants’ workers strike on in a long period, it will seriously affect to the order delivery for the U.S. or E.U. market. Or, there can be any shipping problems in South Korea either from technical or political reasons. Therefore, the company needs to think potential risks which can affect consistent supply in car manufacturing, and parallel production facilities in more countries can be one of solutions to avoid the issues. Second, in strategic viewpoints, governments like the U.S. or E.U. sometimes impose higher tariffs on imported cars than those made in locals. To avoid high tariffs and leverage local tax benefits which can help companies to maintain competitive prices in different countries, firms consider operating facilities in core regions or countries. For example, Hyundai Motor operates its manufacturing facilities in Alabama State, Turkey, and Slovakia to avoid possible trade related issues with the U.S. or E.U., and also to leverage tax benefits. Moreover,