High Profits vs. Trade Secrets
Trade secrets, by definition, give companies a competitive advantage over their competition. They represent that certain "something" that sets the company's products or services apart from all the other similar products or services on the market. These "somethings", if marketed properly, create brand recognition and customer loyalty and make us, the customers, need and want to purchase the products or services over and over again. Very easily, as customers, when we are choosing one product over another, we are unconsciously choosing the product's feature that differentiates it from another product that could be very similar to our choice. Without even knowing, that preferred feature could be the effect of one portion of that company's trade secret in regards to that product.
But from the company's point of view, the process of revealing the appropriate amount of information without revealing a trade secret is not so easy. Imagine having a company whose Research and Development department discovered a new formula to make a certain fragrance. This new formula becomes the company's trade secret. When the Board of Directors decides to mass produce and market that fragrance, the first question they'll ask themselves is: Who should produce this fragrance so that we can increase our profit margin and possible keep the formula a trade secret for as long as possible? Of course, there are two options: 1. Have their own manufacturing facility; 2. Outsource the manufacturing to a low wage manufacturer in a country like China or India. Even if the trade secret will not be protected for long, the company could earn high profits if manufacturing the product in one of these countries. If the company decides to follow the first option, the total overhead expenses incurred from maintenance and utility costs, production equipment, indirect labor costs and the payroll expenses and taxes, will be too high and the profit margin will remain low to keep the product marketable from the price point of view. Unless the company already has a manufacturing facility that has been in operations for many years, the only viable option to keep a high profit margin is to outsource the manufacturing to a low income country.
If the company decides to follow the second option, how can they trust that country's Intellectual Property laws with the company's trade secret without being afraid that the formula will be sold to competitors or will be used by that manufacturer for their own purposes? How much of the trade secret can be divulged to make sure that the product is being produced at the company's standards and how little to divulge to still keep it a trade "secret"? Due to Chinese piracy, the United States companies lost between $2.5 and $3.5 billion in 2004.
With this in mind, how high should the cost reduction be to determine the executive management to take the risk of the company's trade secret to be stolen and used by other manufacturers? If a US company would manufacture its products in the US, the minimum monthly salary would be $1,048, while in China it would be $96. Additionally, the abundance of labor force willing to work for these low incomes is considerable. China has the largest manufacturing work force equal to 100 million people. Together with the decreased cost of raw materials, the overhead expenses incurred if products were manufactured in the US, many US companies find these factors convincing when deciding to take the risk and produce the product in China, although the company's Intellectual Property is protected at a minimum level by the Chinese laws.
Sources:
1. China - Piracy of U.S. products published by the US House of Representatives on December 13, 2005
2. List of Minimum Wages per Country posted on Wikipedia.com
3. Minimum Wage Law posted on Wikipedia.com
4. An Evaluation of American Companies that Outsource Manufacturing to China: Decision-Making and Performance by Michael K. Favreau
5. Protecting Your Intellectual Property Rights (IPR) in China - A Practical Guide for U.S. Companies published by the US Department of Commerce in January 2003
Copyright 2008 by Daniela Pavel.
But from the company's point of view, the process of revealing the appropriate amount of information without revealing a trade secret is not so easy. Imagine having a company whose Research and Development department discovered a new formula to make a certain fragrance. This new formula becomes the company's trade secret. When the Board of Directors decides to mass produce and market that fragrance, the first question they'll ask themselves is: Who should produce this fragrance so that we can increase our profit margin and possible keep the formula a trade secret for as long as possible? Of course, there are two options: 1. Have their own manufacturing facility; 2. Outsource the manufacturing to a low wage manufacturer in a country like China or India. Even if the trade secret will not be protected for long, the company could earn high profits if manufacturing the product in one of these countries. If the company decides to follow the first option, the total overhead expenses incurred from maintenance and utility costs, production equipment, indirect labor costs and the payroll expenses and taxes, will be too high and the profit margin will remain low to keep the product marketable from the price point of view. Unless the company already has a manufacturing facility that has been in operations for many years, the only viable option to keep a high profit margin is to outsource the manufacturing to a low income country.
If the company decides to follow the second option, how can they trust that country's Intellectual Property laws with the company's trade secret without being afraid that the formula will be sold to competitors or will be used by that manufacturer for their own purposes? How much of the trade secret can be divulged to make sure that the product is being produced at the company's standards and how little to divulge to still keep it a trade "secret"? Due to Chinese piracy, the United States companies lost between $2.5 and $3.5 billion in 2004.
With this in mind, how high should the cost reduction be to determine the executive management to take the risk of the company's trade secret to be stolen and used by other manufacturers? If a US company would manufacture its products in the US, the minimum monthly salary would be $1,048, while in China it would be $96. Additionally, the abundance of labor force willing to work for these low incomes is considerable. China has the largest manufacturing work force equal to 100 million people. Together with the decreased cost of raw materials, the overhead expenses incurred if products were manufactured in the US, many US companies find these factors convincing when deciding to take the risk and produce the product in China, although the company's Intellectual Property is protected at a minimum level by the Chinese laws.
Sources:
1. China - Piracy of U.S. products published by the US House of Representatives on December 13, 2005
2. List of Minimum Wages per Country posted on Wikipedia.com
3. Minimum Wage Law posted on Wikipedia.com
4. An Evaluation of American Companies that Outsource Manufacturing to China: Decision-Making and Performance by Michael K. Favreau
5. Protecting Your Intellectual Property Rights (IPR) in China - A Practical Guide for U.S. Companies published by the US Department of Commerce in January 2003
Copyright 2008 by Daniela Pavel.
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