Channel Structure and Decarbonization Innovation in Contract Manufacturing

Abstract

Electric vehicle startups often rely on established automakers for mass production, yet this reliance is contentious due to concerns about product cannibalization and technology spillovers. This article examines whether an original equipment manufacturer (OEM) should outsource production to a contract manufacturer (CM) that directly sells substitutable products to customers or to an alternative contract manufacturer (ACM) that specializes exclusively in production, as well as whether investing in product decarbonization is mutually beneficial. We develop models for various channel structures and investment strategies. Analysis of the equilibrium outcomes shows that if the OEM's advantage in product greenness over the CM is strong (weak), the equilibrium is characterized by the coopetitive (competitive) channel with (without) decarbonization innovation. Otherwise, there exist some thresholds below which the equilibrium is the competitive channel with decarbonization innovation, and above which it shifts to the coopetitive channel without such innovation. We elucidate the emergence of these equilibrium strategies by highlighting the decarbonization effect, the channel effect, and the synergy effect, while also clarifying how they vary with changes in product differentiation and technology spillovers. Finally, we validate the robustness of our key findings in scenarios where production costs increase due to product decarbonization, the CM and the ACM compete on wholesale prices, and decarbonization outcomes are uncertain because of innovation failures.