Production line location strategy for foreign manufacturer when selling in a market lag behind in manufacturing

Abstract

It is a prevalent practice for foreign manufacturers to market their products in regions with lower manufacturing capabilities. However, the manufacturer’s choice of production line location strategy is significantly influenced by tariffs and negative brand effects caused by localized production. In this paper, we build a game-theoretical model considering a supply chain composed of a foreign manufacturer and a local retailer. The foreign manufacturer initially produces both high-end and low-end products at the oversea (with higher manufacturing capabilities), selling them in the local market through a local retailer. We explore various production line location strategies for the foreign manufacturer, including both location at the oversea, both location at the local market (with lower manufacturing capabilities), and separate location, and analyze the impacts of tariffs and negative brand effects. By comparing equilibrium results in different strategies, we discover that as tariffs rise, both location at the oversea may be the best choice for the foreign manufacturer instead of separate location strategy, which challenges the prevalent practice where many foreign manufacturers opt to produce high-end products overseas to uphold brand influence while localizing low-end products to minimize tariff costs. Overall, there is no singularly dominant production line location strategy for the foreign manufacturer, and each strategy holds the potential to yield the highest overall supply chain profit. In addition, as tariffs rise, customer surplus will increase under separate location, and only the separate location strategy or both location at the local market strategy is likely to yield the highest consumer surplus.