Advantages and Disadvantages of Opening a Production Facility in a Foreign Country

When entrepreneurs launch a company, low sales volumes and overhead costs should allow him to make products in-house. As the number of units a business needs to make and ship increases, each unit must absorb more of the business’s increasing administrative and sales costs, leading to the need to outsource production. If you’re considering this option, understanding the pros and cons of using a foreign supplier will help you decide if this choice is right for you.

One of the main advantages of opening a production facility in another country is the reduction in manufacturing costs. Labor is often one of the biggest manufacturing costs, and foreign labor can be extremely cheap compared to U.S. workers. Lower utility, real estate, tax and materials expenses can also help reduce the cost of production outside the U.S.

To maintain quality control over your product, you might need to spend more on management, including hiring one or more managers to live near the production facility. The other option to monitor quality is to increase your travel expense by sending managers to the facility on a regular basis. This can reduce the savings you achieve by moving production overseas. If you’re locating in an area where other manufacturers have clustered, you might have access to a trained manufacturing workforce and suppliers who know how to produce high-quality goods.

When you produce goods outside the country, you introduce a host of costs and issues with shipping and distribution, including customs, taxes, logistics and time delays. Despite these issues, producing your product overseas might still be a more cost-effective option because of significantly lower manufacturing costs. Depending on where you sell your product, producing in a foreign country might actually make shipping easier than distributing it from a central facility located in the U.S.

When you do business overseas, you might not be able to expect the same stability you find in the U.S., such as in the areas of utilities and governmental policies. Political instability can rear its head in the form of a coup, revolution or terrorism. You might also have to deal with a culture of bribery and organized crime, with little or no law enforcement able to help you.

As more and more American businesses ship jobs overseas, consumer groups and unions are targeting more U.S. companies for boycotts. If word gets out that your product is not made in the U.S., the media might report this, social media campaigns might damage your reputation or your competitors might use this fact in their advertising to take market share from you. On the other hand, if you are opening a production facility in a country or region where you sell your product, you might gain increased sales from the positive public relations you receive, not to mention decreased import and business regulations.