Producing Abroad (AQA A Level Business): Revision Note

Reasons for producing abroad

• Many UK businesses choose to base some or all of their production overseas rather than manufacturing everything domestically

  • UK companies' total investment in operations abroad, stood at £1,856 billion at the end of 2024

  • Around 90% of the clothing sold in the UK is imported from overseas factories

    • Countries such as Bangladesh and China supply a large share of this production

• Deciding whether, and where, to produce abroad involves weighing up significant benefits against some serious risks

  • Choosing the right location requires far more thought than simply finding the cheapest option

Why do UK businesses produce abroad?

Lower labour costs

• Significant wage differences between countries can substantially reduce production costs, particularly for labour-intensive industries

Example

Next and Marks & Spencer both manufacture a significant proportion of their clothing ranges in Vietnam, taking advantage of considerably lower labour costs than UK-based production

Access to raw materials

• Producing close to the source of key materials can reduce transport costs and secure a more reliable supply

Example

Cargill operates cocoa processing facilities in Côte d'Ivoire and Ghana, close to where cocoa is actually grown, reducing transport costs and helping secure a more reliable supply than importing raw cocoa beans over long distances

Avoiding trade barriers

• Establishing production within a target market can help a business avoid the tariffs that would apply to goods imported from elsewhere

Example

LG and Samsung both built washing machine factories in the United States in 2018, specifically to avoid new tariffs that had been placed on washing machines imported from overseas

Access to specialist skills or expertise

• Some countries have developed particular clusters of skilled labour or industry expertise that make them well suited to certain types of production

Example

Much of the world's most advanced semiconductor manufacturing is concentrated in Taiwan, particularly through the company TSMC

Major technology firms such as Apple and Nvidia rely on production there because equivalent specialist expertise is not easily available elsewhere

Government incentives

• Many countries offer tax breaks, grants or subsidies to attract foreign investment and production facilities

Example

Many major technology and pharmaceutical companies, including Apple and Pfizer, have based significant operations in Ireland

They are attracted partly by its low 12.5% rate of corporation tax and other government incentives to invest there

Proximity to target markets

• Locating production closer to where products will actually be sold reduces transport costs and time, and allows a faster response to local demand

Example

Unilever operates factories within Brazil to supply its large South American consumer base directly, rather than exporting products from Europe

This reduces delivery times and transport costs to its customers there

Challenges of producing abroad

Quality control difficulties

• Maintaining consistent standards is harder when production is managed at a distance, especially when different countries' laws differ

Ethical and reputational risks

• Labour standards and working conditions abroad may not match expectations at home

• Businesses producing abroad risk serious reputational damage if poor practices are exposed

Supply chain complexity and risk

• Longer, more complex international supply chains are more vulnerable to disruption

Example

When the container ship Ever Given blocked the vital Suez Canal in 2021, it delayed a huge volume of goods being shipped from production sites in Asia to markets in Europe

Political and economic instability

• Producing abroad exposes a business to risks such as political unrest, currency fluctuations or sudden changes in government policy

Cultural and communication barriers

• Managing an overseas workforce or supplier relationship requires understanding different working practices and communication styles

• This can slow down decision-making

Loss of direct control

• Producing abroad, particularly through an external supplier, reduces a business's direct oversight of day-to-day operations compared with in-house domestic production

Attractiveness of global production locations

• Businesses assess potential production locations against several factors

Why are different production locations attractive to UK businesses?

Vietnam

• Vietnam is attractive for its low labour costs, a large and increasingly skilled textile manufacturing workforce, and improving infrastructure

• There is also a UK-Vietnam trade agreement that reduces tariffs on finished goods

Example

Next manufactures a significant share of its clothing range in Vietnam, taking advantage of these lower production costs while maintaining reasonable delivery times to the UK

Poland

• Poland is also attractive for its lower labour costs relative to Western Europe

• It also has a skilled industrial workforce, strong transport links across the EU and is close to major Western European markets such as Germany

Example

The British confectionery brand Cadbury, now owned by Mondelez, produces chocolate at a large factory in Poland, benefiting from lower production costs while remaining close to its major European markets

Mexico

• Mexico is attractive due to relatively low labour costs and its trade agreement with the United States and Canada (USMCA), removing tariffs on many goods

• It is also located in close proximity to the huge US market, reducing transport costs

Example

GKN Automotive, a British engineering business, operates manufacturing plants in Mexico, benefiting from lower costs and tariff-free access to supply major US car manufacturers