The placement of production capacities in new territories in conditions of high demand for products in most cases is beneficial for modern enterprises. This increases the competitiveness of goods and allows you to optimize logistics costs associated primarily with the organization of transport networks. Thus, localization of production is carried out - this is the consolidation of the company's facilities in the territory of another state.
The concept of localization
In the field of production activities, localization should be understood as the transfer or expansion of an enterprise in the territory of another country. The key determining factor will be adaptation to the particularities of the region in which the organization of business is planned. In this context, we can say that the localization of production is a list of technological and organizational measures, thanks to which the enterprise is integrated into specific economic, political and social working conditions. Moreover, the degree of adaptation may vary depending on specific conditions and capabilities. For example, components for assembling industrial equipment can be supplied from the country hosting the production. That is, a partial process of manufacturing part-time products is organized.
Participants in the localization process
A distinction should be made between the company hosting the production and its partners (often represented by the federal government of the host country). In the first case, we are talking about the so-called extender, and in the second - about the recipient. From the point of view of the extender, the localization of production is an expansion of positions in the world market by simplifying the processes of marketing products. Again, this is achieved due to the territorial approximation of the place of production to the consumer and lower transportation costs. Costs are reduced by an average of 25%. In turn, the recipient considers localization as an increase in the level of employment and an increase in investment attractiveness with an increase in tax revenues.
The most promising areas of localization
Theoretically, localization methods can be applied to any industry. The success of the project will depend on local conditions for conducting this or that activity, resources and other factors of the organization of the enterprise. In practice, the most active expansion of production can be attributed to the automotive, pharmaceutical, food and IT industries. As a rule, the more technologically advanced the company and the higher the demand for its products in developed countries, the more successfully they yield to cross-border movements of its capacity. So, among specific examples of global localization of car production, we can note the expansion of the brands Volkswagen, Ford, Hyundai and a number of Chinese budget companies, which, thanks to cheap components, are flexible in adaptation. The situation is more complicated in the chemical and metallurgical industries, since they largely depend on raw materials, which must be supplied in large volumes, passing through several stages of processing.
Development of an enterprise localization project
At the design stage, a full-fledged business model is created, and a plan for the implementation of cross-border movement of the enterprise is prepared. Among the key organizational aspects that should be disclosed in the project, the following can be distinguished:
- What will be the procedure for the search and registration of land in the ownership of the company.
- Construction and equipment of the production facility.
- Legal registration of activity.
- Creation of a management system.
- Calculation of opportunities for local expansion of production capacities on the resources of the created infrastructure.
At the next stage of development of a production localization project, logistics tasks, distribution and marketing issues are calculated. The business model should evaluate the average annual production capacity, as well as the reserve potential. For more accurate calculations, the statistical results of research centers are used, which provide information on the investment climate, consumer activity, the economic situation in the local market, etc.
Production Localization Criteria
At the design stage, sufficient conditions are also calculated for organizing production activities in a particular territory. To evaluate the conditions, the following criteria apply:
- Sufficiency of technological capabilities for processing materials required by production.
- Availability of technical capabilities for the organization of production processes.
- Compliance with the ad valorem rule. In essence, it means the potential profitability of the new site relative to the capacity of the extender company.
- Opportunities for increasing capacity and complicating production, which also involve the abandonment of simple technological operations. For example, in the localization of automobile production, a smooth transition from the manual assembly of certain parts to an automated layout is possible. The most developed assembly lines of this type realize a full cycle using robotic technology.
Also, at each stage, requirements are set for quality control of products on the way from raw materials to the final product. Designers must evaluate how in principle quality control is possible in accordance with the requirements of the extender.
Production localization action plan
After the approval of the design decision, a roadmap or a program for its direct implementation is drawn up. The plan is based on a priority scale with the parameters necessary for the localization of a particular production. A typical scenario for the implementation of localization can be represented as follows:
- Assessment of the market potential of target products.
- Modeling of the organization of production.
- Drawing up a financial plan for the most promising option for localization.
- Equipping the site for production.
- Staff training.
- Organization of assembly production.
- Preparation of technical documentation.
- Product Certification.
- Production optimization.
Each industry may have its own specifics of this process. For example, the localization of production of industrial equipment is largely dependent on components. In this case, you will need a separate program for determining priorities for each of the categories of assembly elements. So, it will be advisable to supply components with one set of properties from an extensor, and with other characteristics it will be completely manufactured at our own facilities.
Degree of localization
Like the manufacturing process of a product, the localization as a whole can be incomplete. For example, it is often implemented at 50% or 70%, that is, partially. The degree of localization of production is understood as the completeness of the working cycle provided by the enterprise, and its independence from raw materials and technological support of the extender. Assessing the independence of the enterprise and the completeness of its production cycle is given by special calculation systems, which are also incorporated into the design decisions individually. For example, a point system may operate in which a certain number of points is awarded for each product element. As a result, they are summarized and compared with the 100 percent production site of the extenser.
Localization levels
In this case, a broader view of localization is understood, based on common coefficients that are used in the global market. This allows you to compare the characteristics of localized enterprises of the extender, not only among themselves, but also in a natural competitive environment. Criteria such as high technology and technological sophistication may be used. That is, the level of production localization is a complex of aspects of the enterprise’s activity that allow it to produce products of one or another quality. Moreover, the level can also be quantitative and percentage, if the appropriate methodology is applied, which can also be different depending on the specifics of the market.
Localization Level Coefficients
The main factors that give an idea of the levels of localization of various industries include the following:
- Cost ratio of products.
- The ratio of the intellectual component of the enterprise. For example, the same localization of automobile production can be estimated by the degree of robotization and this will be an indicator of the intellectual component. Factories where only 10 people serve 50-meter assembly lines are considered high-tech.
- The ratio of expenses and depreciation costs.
- The coefficient in which the availability of service points and centers for customer service is calculated.
Modern problems of localization
The main difficulties of the localization processes in the industrial sector are due to the tightening of regulatory requirements for production. These include a high level of technological development, autonomy, flexibility in equipment placement, and logistics efficiency. Not every country or regional sites can fully provide the necessary level of such conditions. In addition, the localization of production is also strict adherence to schedules for the delivery of raw materials with components, which, even if the requirements are met, is not always justified as beneficial from a financial point of view. To this it is worth adding the responsibilities of the extender to the recipient, which may vary, but in any case, the partner of the expanding company should have its own benefit from providing the site.
Features of localization in Russia
Domestic industry is no exception in the global investment market, but has its own distinctive features. On the one hand, experts note a lag in the strategies for applying localization in Russia, which is caused by flaws in the business climate and management in general. But at the same time, a conservative approach to the distribution of financial resources and targeted support of the regions by the federal government are bearing fruit. So, the localization of car production in Russia is actively developing, which is especially evident in the Ulyanovsk, Kaluga and Leningrad regions. State support, coupled with preferential car loans, opened up great opportunities for Italian manufacturers to deploy their capacities. Not so long ago, the Dutch auto giant DAF, as well as the Chinese corporation Dalian, placed their production.
Localization preferences
States provide new investors and extenders with a range of preferences that guarantee at least stable conditions for doing business. Among the most effective and common benefits of this type can be noted:
- Lowering premium rates.
- Tax relief (at least for the period of formation of the enterprise).
- Technical support in modernization processes.
- Stability of economic conditions at the time of the contract.
- Creation of special conditions for customs policy for certain industries, in the development of which the business entity is particularly interested.
Conclusion
The concept of localization of large enterprises gives positive effects to both participants in the process and the economic system as a whole. It should be noted that with the development of technology, the methods of transboundary movement of industries are becoming less and less costly. The range of tools is expanding, allowing more precisely control the localization of production. Plans and strategies for the implementation of these processes are also becoming more complicated, requiring ever-deeper calculations involving huge amounts of primary information. The experience of many countries shows that the key factor for successful localization is still the policy of the host state. It can influence both the favorable economic environment for specific projects and the predictability of the investment climate, which is important for the future development of the enterprise.