The Governance of Global Value Chains; Implications for Industrial Upgrading Timothy J. Sturgeon,...

The Governance of Global Value Chains; Implications for Industrial

Upgrading

Timothy J. Sturgeon, Ph.D.Industrial Performance Center

Massachusetts Institute of Technologyhttp://web.mit.edu/ipc/www

SEMINAR ON GLOBALIZATION, KNOWLEDGE, AND DEVELOPMENTUniversidad Nacional Autonoma de Mexico (UNAM)

March 13-17, 2006Mexico City

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

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 is an overarching rubric

that can help to tie these trends together New features are global suppliers, global buyers, and

value chain modularity, which eases coordination between the two.


Market Channel

End

User

Product R&D

Process R&D

Product strategy

Functional design

Form design

Dist.

Sales Reps.

System Int.

Retail

Market Channel

MarketingAdmin.

Traditional Manufacturing Firm

A) Vertical Integration

B) Value Chain Modularity

Lead Firms (Brands and Retailers)

End

User

Dist.

Sales Reps.

System Int.

Retail

Codifiable transferof specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link.What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.

Full Package Supplier

Prototype fab.

Parts purchasing

Manufacturing

Testing

Packaging

Admin.

Product strategyProduct R&D

Functional design

Form design

Prototype fab.

Marketing Admin.

Firm boundary

Parts purchasing

Process R&D

Design for mfg.

Manufacturing

Testing

Packaging

Marketing

From Vertical Integration to Value Chain Modularity


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 Information Technology

Open Character of Network

Lower Barriers to Network Entry and Exit

Standards

Codified Network Linkages

Greater Geographic Flexibility

Product/Customer Flexibility

Lower Factor

Costs

Network Characteristics

Network Performance

Greater Organizational Flexibility

Higher Capacity Utilization

Suppliers Provide Base

Processes

Generic Capacity Capacity

Attenuated Interdependence

Lower Total Cost and Risk

Preconditions


Lead firms with captive supply bases

Lead firm A

Supply base A

Lead firm B

Supply base B

Co-evolution

Competition

Supply Chain

End users

Value Chain

First tier

Second tier

Materials


Lead firms with shared, modular suppliers

Lead firm A Lead firm” n”

Shared supply base

Co-evolution(including

competition)


competition)

Codifiable transferof 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

Lead firm A Lead firm” n”


competition)


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


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

1994 1999 2002CAGR’94-‘02

Share of Top100, 2002

Flextronics $211 $1,808 $13,615 68% 20%Solectron $1,642 $8,391 $12,261 29% 18%Sanmina-SCI $2,364 $8,624 $10,168 20% 15%Celestica $1,989 $5,297 $8,272 20% 12%Jabil Circuit $404 $2,400 $3,729 32% 5%Top 5 $6,610 $26,520 $48,045 28% 70%Top 100 NA $46,029 $68,149 NA 100%Note: All Celestica revenues in 1994 were from IBM.Sources: Company annual and quarterly reports; Electronic Business Top 100 Contract Manufacturers, 2003.


Top Five EMS Contract ManufacturersRevenues, Employment, and Facilities, and Location, 1999 and 2002; Compound Annual Growth Rate 1999-2002; and Top Five Share of Top 100, 2002

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.

1999 2002CAGR’99-‘02

Share of Top100, 2002

Revenues ($M) $26,520 $48,045 22% 70%Employment 123,580 280,030 31% 63%Worldwide Facilities 244 420 20% 69%Facilities Outside N. America 131 257 25% 82%


Product Mix for the Largest Five EMS Contract Manufacturers, 2001

Computers and peripherals

28%

Communications40%

Industrial5%

Medical6%

Military4%

Consumer8%

Other9%

Source: Electronic Business Top 100 Contract Manufacturers, 2002.


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

1997 2001


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

Regional production systems are nested within global production systems


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

February 2001- July, 2002

March, 2004

Employment 3,500 down to 1,750 3,900 Number of customers served

5 17

Number of products made

215 600

Number of parts used

5,000 12,000

Employee turnover rate (monthly)

5% 2%

Average production run

Long Short

Number of engineering changes

Few Many

Representative products

• personal computers

• video gameconsoles

• mobile phon ehandsets

• communication sswitches

• specialized hand-held credit card processin gmachines

• Internet firewalls • electronic control s for

washing machines 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, IDSTimothy 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 EconomicsKey concept: Asset specificityAcademic field: Institutional economics

2. Production Network Theory Key concepts: Trust, reputation, repeat transactions, social networks,

geographic proximity, powerAcademic fields: Economic sociology, economic geography

3. Complementary CompetenciesKey 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

Governance Type

Complexity of transactions

Ability to codify transactions

Capabilities in the supply-base

Degree of explicit

coordination and power

asymmetry

Market Low High High

Modular High High High

Relational High Low High

Captive High High Low

Hierarchy High Low Low

Low

High

Network org. forms


Some Dynamics in Global Value Chain Governance

GovernanceType

Complexity oftransactions

Ability to codifytransactions

Capabilities in thesupply-base

Market Low High High

Modular Å High Ç High Ñ

High

Relational High É Low Ö High Ü

Captive High High Low

Hierarchy High 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)


Supplier Upgrading (and Downgrading) in Global Value Chains

More customers•Product upgrading

•Inter-sectoral upgrading

•Base process focus

More capabilities•Process upgrading

•Functional upgrading

•Functional bundling

Many customers

Many capabilities

Few customers

Few capabilities

CAPTIVE

FULL PACKAGE SUPPLIER

RELATIONAL

MODULARDe-codification and reduced competence

through technological change, new requirements, and new competitors


GVC Governance TypesLinks to Policy

Governance Type Linkage mechanism Firm roles and competencies

Policy emphasis

Market Arms-length exports Branded exporter and importer of standardized

goods and services

Brand and product development, market research and access, import substitution

and export promotion

Modular Buyer-supplier complimentary

specialization in cross-border value chains

“Deverticalized” lead firms and full package suppliers with generic, base process competencies, and a global

footprint

Knowledge of global standards, process- and information technology upgrading

Relational Collaboration with co-location or in cross-border value chains with lots of air

travel

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

Captive Foreign direct investment Dependent supplier, customer-specific

competencies

Recruitment of MNC affiliates and suppliers, local content rules

Hierarchy Foreign direct investment Lower tier supplier Recruitment of MNC affiliates, education and training, infrastructure development,

local content rules

The Governance of Global Value Chains; Implications for Industrial Upgrading Timothy J. Sturgeon,...

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