When Your Contract Manufacturer Becomes Your Competitor

Manufacturing has been the core of industrial firms for more than a century. Nowadays, however, an increasing number of companies are contracting out their production with specialists. In some of them not even a single worker touches physically the products it sells. Technological change is not only fostering specialization through the use of robots and flexible factories, but also reducing coordination costs by applying new standards and using the Internet. This is the reason why this “contract manufacturing” might well become the rule in the near future. Unfortunately, managers’ incentives encourage a wholesale, uncritical approach to decisions about whether to outsource, which products to outsource, which CMs to engage, and in what form—a market agreement, a strategic alliance, or something in between. When OEMs share sensitive intellectual property with CMs, it is important that the relationship be trusting and close—but not so close that CMs lose touch with the market and other OEMs’ contributions.