Manufacturing Outside the U.S. Essay

With the rapid advancement of international economic activities, especially from the greatest contributor such as multinational companies in local economies, it has become increasingly important for enterprises to analyze the industrialization process in other countries as well as relevant changes that influence how business operate outside their homeland. Many advantages have been attributed to the globalization movement of many countries.

In a country like Chile these advantages could be seen in the constant decrease of their unemployment and poverty rates, the increase of GDP rates, the economic status compared to its neighbor countries, the increase in educational standards that allowed technology to flourish, and many more benefits. In this paper I will analyze how these benefits paired with other factors like political and cultural conditions positions Chile in a good place to be the country of choice for possible manufacturing operations outside the U. S.

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When evaluating Chile as a future host for creating manufacturing operations outside the U. S. it easy to find many positive advantages that the country has created in order to attract businesses from outside its geographical borders. Companies need to consider many factors that are relevant to the business by gathering information through intellectual talent or otherwise by creating a network of contacts within their industry. These factors are called externalities and “can play an important role in deciding where to locate manufacturing activities” (Hill, 2011). Externalities that a company should consider when looking to outsource their productions are: political, economics, and cultural conditions.

Chile has been successful in creating “a global web of value creation activities” (Hill, 2011). When outsourcing manufacturing operations to foreign destinations it is relevant to consider the economy of the country that will be hosting the operations. Chile has demonstrated through the last couple of years to have a solid economy with the prospect of a prosperous economic future. Chile has managed to increase their GDP over the years, registering GDP growth to 4. 7% as reported on Economist. com. “With a gross national income of $173. billion and a per capita income of $10,120 (2010), Chile is classified by the World Bank as an upper-middle-income developing country” (International, 2010). Along with the economy of the country, companies should evaluate the value of the foreign currency compared to local currency. In comparing the currency between the U. S. and Chile it is important to keep the exchange rate in mind. “Currency appreciation can transform a low-cost location into a high-cost location” (Hill, 2011). This is an additional factor to consider when evaluating Chile as a host for goods and services production.

As of December 8, 2012 the U. S. Dollar was worth 476 Chilean Peso (CLP). The lower value of the CLP compared to a USD makes Chile an attractive destination for manufacturing outside the U. S. considering that according to TuSalario. org, an official Chilean website dedicated to provide labor information, the minimum wages in Chile are 193,000 CLP with a yearly increase of 4 percent minimum per year. The Chilean monthly minimum wage is 405 USD compared to that of the U. S. median of 1,051 USD according to minimum-wage. org. Another area to consider prior to manufacturing outside the U. S. s technology and the human resources capacity to keep up with the manufacturing processes. In Chile “primary education is now almost universal and secondary and tertiary attainment rates have increased rapidly. Whereas only 16. 6% of Chileans aged 55-64 have completed a tertiary degree, 34. 9% of those aged 25-34 have done so” (Meyer, 2012). Chile has made strides as far as getting its citizens educated and advancing its technologies. Chile has liaisons with other countries with the hopes to further develop its technological infrastructure of the country. Chile maintains partnering relationships with the U. S. and other countries with the purpose of developing different technologies more specifically geothermal energy that will aid them with the power deficiency that the country currently faces. Being able to support the technology needed for business to operate in Chile and considering the lower fixed cost required for the production of optimal product quality.

Chile has been selected by many companies for manufacturing operations as a host due to mainly their open trade policies, the technological advancements, economy and the ease of setting up business in their market. Incorporating in Chile is not expensive and takes about three weeks. The direct costs are approximately US$1,500 for legal fees and US$250 for expenses such as notary public, commerce registry and official gazette” (U. S. Commercial Service, 2012). The franchising sector with American companies like Best Western, Avis, Polo, H2O Plus, etc. and other countries have been successful in entering and maintaining business ventures in the Chilean market. Most of these franchises have realized that in the Chilean business customs it is best to invest in business as the demand requires. Companies have opted for using just-in-time manufacturing.

The use of just-in-time manufacturing for companies is beneficial for maintaining and capitalizing their investments. “Just-in-time (JIT) in inventory systems is economized on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process and not before” (Hill, 2011), thus just-in-time manufacturing refers to the creating goods only when needed and not to maintain surplus inventory in stock. The advantages of this type of manufacturing operations systems is that companies can maintain their capital and invest it in other more important projects while make the most of their capital.

Conversely, this type manufacturing system could leave the company at risk of running into a shortage of goods to supply the demand. Still many other companies have been successful at operating in Chile. Many American and foreign companies have decided to open plants in Chile and have been extremely successful in their ventures. Due to the variety of production activities that range from mining to food processing and packaging sectors concentrating mostly in the agricultural sector available in Chile a myriad of companies from different industries have set their operations in this country.

Nestle is one of those companies that have opened a plant in the outskirts of Santiago, the capital of Chile. This plant is set to produce milk products not only for Chile but also for South and Central America, the United States, the Middle East and Asia. “One of the most technologically advanced dairy factories of its kind in the world, it will provide 300 direct jobs and 1,500 indirect jobs” (N. A. , 2012). Companies like Nestle create a boost in Chile’s economy and the job markets, thus the government nd citizens of Chile continue to make progress in making their country attractive to foreign business. Very little to no companies have been documented as failing in their innovative foreign manufacturing ventures. As a consultant for a company considering outsourcing its manufacturing operations conducting a research for countries externalities I will consider Chile’s political, social, and economical status. Based on the findings I will recommend this country as a host for outsourcing operations depending on the industry and the needs for the company I work for.

As stated before the agricultural sector is highly recommendable in this country, thus any company that will need to manufacture agricultural goods will be highly successful outsourcing to Chile. For other companies it will be best to dedicate extra research that will customize the findings to the needs of the business. However, general questions will be highly helpful in making the right decision when selecting a foreign country.

A company should consider the answers to following questions as relevant to the success of the foreign manufacturing initiative: Is the country politically and financially stable? What are the overhead and operational costs to manufacture? How is the industry performing in this country? Is the technology and human resources up to par for the needs of the business? Are the competitors outsourcing? Where are the competitors outsourcing? What are the risks involved in the venture? With the answers to these questions in hand it is easier to decide if the transition will be beneficial or not.

Still, I will highly recommend considering Chile to be the host for manufacturing in different industries as the government and its people have already made great progress towards become a prime location for hosting international business. So, with all the prior information and comparisons of the different externalities, the final question remains…Why not outsource to Chile?

Reference:

“Debt – external by country – Thematic Map – South America. ” Index Mundi – Country Facts. N. p. , 1 Jan. 2012. Web. 9 Dec. 2012. <http://www. indexmundi. com/map/? t=0&v=94&r=sa&l=en>. Hill, C. L. (2011). Global Business Today 7th E. New York, NY: McGraw-Hill Irwin. International, T. W. (2010). Chile: Like Fine Wine and Burnished Copper. Chicago, IL: Thomas White International, Ltd. Meyer, P. (2012, April 6). Chile: Political and Economic Conditions and U. S. Relation FAS. org. Retrieved December 2, 2012, from www. fas. org/sgp/crs/row/R40126 N. A. (2012, April 5). Nestle continues to develp its operations in Chile with CHF 127 million investment. Retrieved 12 10, 2012, from Nestle. com: www. Nestle. com “TuSalario. org/Chile. Salario minimo. ” Tusalario. org/USA – Portada. N. p. , 11 June 2012. Web. 9 Dec. 2012. <http://www. tusalario. rg/chile/main/salario/salario-minimo>. “United States Minimum Wage By State 2012 | Minimum-Wage. org. ” Minimum Wage Rates, History, and Labor Law Info. N. p. , n. d. Web. 9 Dec. 2012. <http://www. minimum-wage. org/wage-by-state. asp>. U. S. Commercial Service. (2012). Doing Business in Chile: 2012 Country Commercial Guide fo U. S Companies. Washington, DC: Department of Commerce. “World in figures: Countries: Chile | The Economist. ” The Economist – World News, Politics, Economics, Business & Finance. N. p. , 21 Nov. 2012. Web. 10 Dec. 2012. <http://www. economist. com/news/21566492-chile? zid=305&ah=417bd5664dc76da5d98af4f7a640fd8a>.