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[Lee Jae-min] Outsourcing and quality control

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Published : 2012-05-03 18:57
Updated : 2012-05-03 18:57

In an age of globalization, states and corporations are struggling to strike a balance between traditional purity and cost reduction. On the one hand, they are desperate to maintain the supremacy of their crown-jewel national brands (and geographical indications) by imposing requirements that certain portions of products be manufactured domestically, or products be produced in a certain way to be eligible to carry the brands. With tightened quality control, they try to serve the traditional customer base and to solicit new customers.

At the same time, they relentlessly pursue various cost-reduction measures, often times going beyond the borders to find cheaper labor and parts. The multi-sourcing from many different countries, however, has made it more difficult for states and corporations to maintain the purity of the brands and control the quality of the products associated with the brand names.

The concern over the diluting of traditional elements in Japanese restaurants overseas owned and managed by foreigners prompted the Japanese government to explore a sushi-certificate system to certify those who can serve authentic Japanese cuisine. Although this 2007 attempt fizzled out due to the cold response from other countries, and quality policing has largely been delegated to private bodies and associations, it does show concern over quality control is sometimes a national issue.

Likewise, to many, the words “SWISS MADE” printed in capital letters on a watch convey an important message in terms of the quality of the product. Swiss law thus imposes a minimum “Swissness” threshold for a watch to qualify for this labeling: more than 50 percent of the value and movement should come from Switzerland. Except for luxury brand manufacturers that produce watches entirely within Switzerland by hand, increasingly Swiss watch manufacturers outsource their watch components within the 50 percent ceiling, allowing them to carry the coveted SWISS MADE logo. Not surprisingly, China takes up the bulk of this outsourcing.

Believing that this threshold is so low that it may jeopardize the quality attached to the national brand, the Swiss government, mainly prodded by the Swiss watch industry, is now considering a new law which will raise the threshold to as high as 80 percent. The bill passed one of the two chambers of the Swiss bicameral parliament and is expected to be enacted as early as by the end of this year.

Of course, not everyone is happy about this “enhanced Swissness” effort because it means that some of the watch manufacturers would have to give up the option of using cheaper parts from other countries if they want to keep the signature inscription on their watches. So, the tension between the pursuit of the purity of a national brand and the desire to enhance economic efficiency presents itself here as well.

Though not necessarily in terms of quality control, commingling of multi-sourced parts has suddenly become a major source of concern for Korean corporations, mainly small and medium exporters, in recent days. Determining the nationality (i.e., country of origin) of such a multi-sourced product is painstakingly complex as a web of different rules applies in accordance with a number of free trade agreements.

Depending on the country of origin, different tariff treatment is accorded to the product by an importing country. Consequently, companies are supposed to make careful calculations to come up with the exact amount and value of the components they outsource from other countries if they wish to maintain the country of origin they prefer, just like a Swiss company wishing to maintain both the SWISS MADE logo and low-cost parts at the same time.

Outsourcing decisions are usually driven by efforts to slash costs. But the truth is, cost reduction is just one dimension of outsourcing, and there are other potentially important dimensions implicated by outsourcing as well. Globalization is adding a new layer of complexity for business entities.

By Lee Jae-min 

Lee Jae-min is a professor of law at the School of Law, Hanyang University, in Seoul. Formerly he practiced law as an associate attorney with Willkie Farr & Gallagher LLP. ― Ed.

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