International subcontracting first, originated among the industrial countries. The USA for long has been having subcontracting arrangements with Japan and West Germany. For example, the Ford Motor Company (USA) engaged the Tokyo Shibanka Electric Company (Japan) as a subcontractor for the manufacturer of generators for 1971 models. The German engineering industry also engaged in subcontracting production for US firms. Sometimes, the West German subcontractors themselves place subcontracting orders with UK firms. Nordic countries have long cooperated among themselves on this field by maintaining a subcontracting register.
This subcontracting business became an important segment of the East West trade. For example Poland supplied certain components for Volkswagen cars. East Germany delivered components of machine tools to Switzerland. On the basis of a scrutiny of 116 industrial cooperation contracts, one UNCTAD report showed that as many as 20 contracts involved subcontracting arrangement.
Subcontracting arrangements between the developed and the developing countries are also increasing. Countries like Singapore, South Korea, Taiwan and Thailand have attracted substantial business. For example, Signetic Corporation (USA) subcontracts the assembly of integrated circuits for computers to South Korea and the Fair Child Camera and instruments has subcontracting agreements with firms in Singapore. Cheap labor, which basically encouraged such agreements, has recently prompted the western companies to move one step ahead i.e. shifting of the entire plant.
Canon Inc, Tokyo has moved its production of medium priced cameras to Taiwan where Taiwan Canon, a Canon subsidiary has taken up this line.
Available data indicate that exports under international subcontracting arrangements are increasing at a rapid pace in the electronic Sector. Two factors behind the growth of such exports in the electronic industry are:
1. there is a nucleus of manufacturing capacity in a number of developing countries; and
2. the production of electronic items involves considerable assembly operations, which make international subcontracting a commercially viable proposition
With the increasingly fierce price competitiveness in international markets, large manufacturers are now following more vigorously the scientific procurement practices viz purchase from the cheaper and the best sources of supply from any part of the world. For example, both Raleigh of Britain and Peugot of France have bicycle factories in Canada. These factories get many components like variable speed gears from Japan assemble them with other components and bring out the final product. Some leading US metal tableware manufacturers have their products made in Japan and S.Korea and sell them in third market under their own brand name. Even Swiss watch manufacturers are now engaged in such long term supply arrangements from overseas. Well known world manufactures including Omega and Tissot place orders in Japan and Hong Kong for metal watch bands of their own design. These bands are then imported and attached to domestically produced watches.
At the Hanover Fair held in 1998, there was a good demand for sub-contacting skills. Indian exhibitors were satisfied with the high level of orders.
However, encouragements of simple type of subcontracting should not be a long term policy as it would perpetuate an economic / industrial situation where the enterprises in the developing countries would remain dependent on the principals in the developed countries Thus, careful note has to be taken to determine the areas where international subcontracting arrangements would be beneficial to the country in the long run.
If there is unutilized capacity in certain sectors a situation too common in the developing countries – subcontracting arrangements should be encouraged to attain optimum utilization of the installed capacity. Secondly, if the items to be manufactured under subcontracting arrangements are not too firm specific and process specific so that if the principal does not renew the contract the items can be sold to other parties, the problem of dependence will not be acute and sub-contracting arrangements should be encouraged.
For larger economies with a moderate level of industrialization simple subcontracting arrangements may be extended to include other areas of co-operation to make the ventures economically more beneficial. The industrial arrangements between the developed market economies and the centrally planned economies illustrate how far such agreements can go. These agreements may take the form of co-production joint or production-sharing schemes.