The Industrial Performance Center

Transcript The Industrial Performance Center

The Governance of Global Value Chains; Implications for Industrial Upgrading

Timothy J. Sturgeon, Ph.D.

Industrial Performance Center Massachusetts Institute of Technology http://web.mit.edu/ipc/www

SEMINAR ON GLOBALIZATION, KNOWLEDGE, AND DEVELOPMENT Universidad Nacional Autonoma de Mexico (UNAM) March 13-17, 2006 Mexico City

Frame of Reference — Key Trends for Firm-level Analysis of Globalization

• Increased outsourcing • Computerization of product design • Computerization of process technology • Formalization and segmentation of work tasks (services offshoring) • Increasing market volatility and industry clock-speed (Fine) • Increasing geographic scope of production systems • Better integration of geographically dispersed production systems • The rise of a new, global-scale supply-base 

The

global value chains framework

to tie these trends together is an overarching rubric that can help



New features are

global suppliers, global buyers,

and

modularity

, which eases coordination between the two.

value chain

From Vertical Integration to Value Chain Modularity A) Vertical Integration

Traditional Manufacturing Firm Market Channel Admin.

Product strategy

Product R&D Process R&D Functional design Form design Prototype fab.

Parts purchasing Manufacturing Testing Packaging Marketing Dist.

Sales Reps.

System Int.

Retail End User

Firm boundary

B) Value Chain Modularity

Lead Firms (Brands and Retailers) Admin.

Full Package Supplier Market Channel

Product strategy

Product R&D Functional design Form design Prototype fab.

Marketing Admin.

Process R&D Design for mfg.

Parts purchasing Manufacturing Testing Packaging Marketing Dist.

Sales Reps.

System Int.

Retail End User

Codifiable transfer of specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link.

What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.

Elements of Modularity

• Modular product designs (e.g., the PC) • Modular value chain linkages (the hand-off) • Modular value chains (internal) • Modular value chains (external)



Only modularity in external value chains leads to capacity pooling and external economies of scale



Modular product designs make value chain modularity easier, but only one break point is needed — full product design modularity is not required

Elements of Value Chain Modularity

• Codification of complex information eases the hand-off at the inter-firm link— information technology and widely recognized standards are key.

• Highly competent suppliers with multiple locations and customers • An adequate number of suppliers to allow lead firms to switch • Generic capacity – Allows lead firms to add and subtract capacity on short notice – Allows large suppliers to substitute locations  

Benefits for lead firms: lower costs and risk Risks for lead firms: IP leakage, creation of competitors, attenuated learning by manufacturing, forecasting and inventory distortions, de-codification with technological change, ceding of value to suppliers

Performance Benefits of Modular Production Networks

Preconditions

Information Technology Standards Suppliers Provide Base Processes Generic Capacity Capacity

Codified Network Linkages Network Characteristics

Attenuated Interdependence Open Character of Network Lower Barriers to Network Entry and Exit Greater Organizational Flexibility Greater Geographic Flexibility Product/Customer Flexibility

Network Performance

Lower Factor Costs Higher Capacity Utilization Lower Total Cost and Risk

Value Chain

Lead firms with captive supply bases

End users

Competition Lead firm A Lead firm B Co-evolution

Supply Chain

Supply base A

First tier Second tier Materials

Supply base B Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Lead firms with shared, modular suppliers

Co-evolution (including competition) Co-evolution (including competition) Lead firm A Lead firm” n” Shared supply base

Codifiable transfer of specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link.

What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.

Value chain modularity with supplier consolidation

Co-evolution (including competition) Lead firm A Lead firm” n” Co-evolution (including competition) Global suppliers

Global Supplier Examples:

Electronics contract manufacturing: Flextronics, Solectron, Sanmina-SCI, Celestica, Jabil, Hon Hai, Quanta, Compal Auto parts: Magna, Delphi, Visteon, Bosch, Denso, Yazaki, Lear, Johnson Controls, TRW, Continental Call Center Servvices: Accenture, SNT Group, Atento, Convergys, SR Teleperformance, Wipro BPO, Bertelsmann Clinical Trials and Contract Medical Research: Quintiles, Covance, IMS Health, Parexel IT Services and Enterprise Computing: IBM, Accenture, PriceWaterhouseCoopers, McKinsey, Cognizant Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Revenue Growth at the Top Five Electronics Contract Manufacturers, 1994 through 2001, $M

Flextronics Solectron Sanmina-SCI Celestica Jabil Circuit Top 5 Top 100

1994

$211 $1,642 $2,364 $1,989 $404

1999

$1,808 $13,615 $8,391 $12,261 $8,624 $10,168 $5,297 $2,400

2002

$8,272 $3,729 $6,610 $26,520 $48,045 NA $46,029 $68,149

CAGR ’ 94 ‘ 02

68% 29% 20% 20% 32% 28% NA Note: All Celestica revenues in 1994 were from IBM.

Sources: Company annual and quarterly reports; Electronic Business Top 100 Contract Manufacturers, 2003.

Share of Top 100, 2002

20% 18% 15% 12% 5% 70% 100% Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Top Five EMS Contract Manufacturers Revenues, Employment, and Facilities, and Location, 1999 and 2002; Compound Annual Growth Rate 1999-2002; and Top Five Share of Top 100, 2002 Revenues ($M) Employment Worldwide Facilities Facilities Outside N. America

1999

$26,520 123,580 244 131

2002

$48,045 280,030 420 257

CAGR ’ 99 ‘ 02

22% 31% 20% 25% Source: Electronic Business Top 100 Contract Manufacturers, 2000 and 2003.

Notes: Flextronics facility figures are for 2000; growth rates have been adjusted accordingly.

Solectron facility figures are for 2001; growth rates have been adjusted accordingly.

Share of Top 100, 2002

70% 63% 69% 82% Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Product Mix for the Largest Five EMS Contract Manufacturers, 2001

Consumer 8% Military 4% Medical 6% Industrial 5% Other 9% Computers and peripherals 28% Communications 40% Source:

Electronic Business Top 100 Contract Manufacturers

, 2002.

The new global supply-base; Celestica’s global footprint

1997 2001 Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Global suppliers offer “total geographic flexibility” in a shared global supply-base; coordination is internalized

Regional production systems are nested within global production systems Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Upgrading at an Electronics Contract Manufacturing Plant in Guadalajara, Mexico, February, 2001 – July, 2004 (Jabil Circuit)

Emp loyme nt Number of customers served Number of products made Number of parts used Emp loyee turnover rate (mo nthly)

Februar y 2001 - July, 2002

3,500 dow n to 1,750 5 215 5,000 5%

March, 2004

3,900 17 600 12,000 2% Average prod uction run Number of engineering changes Represe ntative products    Long Few perso nal comp uters video game consoles mob ile phone handsets Short Many  comm unications switches  spec ialized hand-held credit card processing mac hines  Internet firewa lls  electronic controls for was hing mac hines Source: Luhnow, David. “As Jobs Move East, Plants in Mexico Retool to Compete.” Wall Street Journal.com. March 5, 2004.

The Role of “Proximate Production Platforms” (Mexico, East Europe) in GVCs

• Rapid order fulfillment for “lean retailing” • Last minute customization for pull-through ordering • Medium technology products and processes that require moderate degree of design/prodcution co-location • Product categories that require in-region production (autos, medical, military and security-related) • Pass through production location as newer products shift from US to China  

Competition is with developed country plants, not with China Regional integration needs to move beyond trade, to the integration of production, innovation, and security regimes

The governance of global value chains: an analytic framework

Based on a paper by:

Gary Gereffi, Duke University John Humphrey, IDS Timothy Sturgeon, MIT

Published in:

Review of International Political Economy, 12(1) 2005

Summary of approach with related literature can be found at the Global Value Chains Initiative website: www.globalvaluechains.org

Theoretical Underpinnings

(starting point: industrial organization)

1. Transaction Costs Economics Key concept: Asset specificity

Academic field: Institutional economics

Production Network Theory Key concepts: Trust, reputation, repeat transactions, social networks, geographic proximity, power

Academic fields: Economic sociology, economic geography

Complementary Competencies Key concepts: Resource view of the firm, learning, core competence, co-evolution (buyer-supplier and industry)

Academic fields: Strategic management, operations management, evolutionary economics

Five GVC Governance Types

Gove rnance Type

Market Modular Network org. forms Relational Captive Hie rarchy

Complexity of transactions Ability to codify transactions Capabilities in the supply -base

Degree of explicit coordination and power asym metry

Low High High

Low

High High High High High High Low High Low High Low Low

High

Some Dynamics in Global Value Chain Governance

Governance Type Complexity of transactions Abili ty to codify transactions Capabilities in the suppl y-base

Market Modula r Relation al  Low High  High  High High  Low  High High High  Captive Hierarchy High High High Low Low Low       increasing complexity of transactions (harder to codify transactions; effective decrease in supplier competence) decreasing complexity of transactions (easier to codify transactions; effective increase in supplier competence) better codification of transactions (open or

de facto

standards, computerization) de-codification of transactions (technological change, new products, new processes) increasing supplier competence (decreased complexity, better codification, learning) decreasing supplier competence.(increased complexity, new technologies, new entrants) Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

Supplier Upgrading (and Downgrading) in Global Value Chains

Few customers Few capabilities

CAPTIVE

More customers •Product upgrading •Inter-sectoral upgrading •Base process focus

MODULAR RELATIONAL

De-codification and reduced competence through technological change, new requirements, and new competitors More capabilities •Process upgrading •Functional upgrading •Functional bundling

FULL PACKAGE SUPPLIER

Many customers Many capabilities Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006

GVC Governance Types Links to Policy Governance Type Market Modular Relational Captive Hierarchy Linkage mechanism

Arms-length exports Buyer-supplier complimentary specialization in cross border value chains Collaboration with co location or in cross-border value chains with lots of air travel Foreign direct investment Foreign direct investment

Firm roles and competencies

Branded exporter and importer of standardized goods and services “Deverticalized” lead firms and full package suppliers with generic, base process competencies, and a global footprint

Policy emphasis

Brand and product development, market research and access, import substitution and export promotion Knowledge of global standards, process- and information technology upgrading Clusters of specialists buyers and suppliers with process and/or domain-specific competencies Competence building, support of clusters and districts, focus on building tacit domain knowledge Dependent supplier, customer-specific competencies Lower tier supplier Recruitment of MNC affiliates and suppliers, local content rules Recruitment of MNC affiliates , education and training, infrastructure development, local content rules Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006