Why the World Suddenly Cares about Global Supply Chains
Why the World Suddenly Cares about Global Supply Chains
By Gary Gereffi and Joonkoo Lee1
Global supply chains have been a familiar part of the international business landscape for decades. From a management perspective, there are always issues connected with the efficient and timely distribution of goods that flow across supply chains. From an industry perspective, there are questions about how the industry is organized in terms of the size and ownership of major manufacturers and their suppliers, and where these companies are located. From a national competitiveness perspective, countries are concerned about whether they can gain and maintain the production, sales and research capabilities needed to develop and make low-cost, high-quality or high-tech products.2 Finally, global supply chains matter for international development as well, since the ability of countries to prosper depends on their participation in the global economy, which is largely a story about their role in global supply chains.
The Governance of Global Value Chains (GVCs)
Globalization has given rise to a new era of international competition that is reshaping global production and trade and thereby altering the organization of industries.3 Since the mid-1960s, US companies have been slicing up their supply chains in search of low-cost and capable suppliers offshore. This process of “global outsourcing” initially focused on the simple assembly of parts supplied by US manufacturers, typified by the US production-sharing or “twin plant” programme with Mexico, but the pace of offshore production soon accelerated dramatically.4 In the 1970s and 1980s, US retailers and brand name companies joined manufacturers in the search for offshore suppliers of most categories of consumer goods, which led to a fundamental shift from what had been “producer-driven” supply chains to “buyer-driven” chains. The geography of these chains expanded from regional production-sharing arrangements to full-fledged global supply chains, with a growing emphasis on East Asia.5 In the 1990s and 2000s, the industries and activities encompassed by global supply chains grew exponentially, covering not only finished goods but also components and sub-assemblies, and affecting not just manufacturing industries, but also energy, food production and all kinds of services.6
As supply chains go global, more intermediate goods are traded across borders, and more parts and components are imported for use in exports.7 In 2009, world exports of intermediate goods exceeded the combined export values of final and capital goods, representing 51% of non-fuel merchandise exports.8 Governments and international organizations are taking notice of this emerging pattern of global trade, which is being called a shift from “trade in goods” to “trade in value added” and “trade in tasks”.910
The GVC framework focuses on globally expanding supply chains and how value is created and captured therein. By analysing “the full range of activities that firms and workers perform to bring a specific product from its conception to its end use and beyond”,11 the GVC approach provides a holistic view of global industries from two contrasting vantage points: top down and bottom up. The key concept for the top-down view is the “governance” of global value chains, which focuses mainly on lead firms and the organization of global industries; the main concept for the bottom-up perspective is “upgrading”, which focuses on the strategies used by countries, regions and other economic stakeholders to maintain or improve their positions in the global economy.12
GVC Consolidation and the New Math of Value-added Trade
Over the past decade, many global value chains have experienced a shift in production from North to South in the global economy, and large emerging economies are playing very prominent roles in these industries as exporters and also new markets.13 While most intermediate goods are still traded within large regional economic blocks like the European Union rather than across them,14 Asia’s linkages to the European Union and North America represented the two highest inter-regional import flows of intermediate goods in 2008. Asia imported more intermediate goods than it exported, indicating the region’s high level of integration with global supply chains.15 In electronics, manufacturing is concentrated to a handful of contract manufacturers (e.g. Hon Hai/Foxconn, Flextronics and Quanta), whose factories are also clustered in China.16
China has benefited greatly from this high level of concentration in global supply chains.17 China’s “supply chain cities” are a perfect illustration of how China is turning scale-driven specialization into a persistent competitive advantage for the country. From foreign direct investment-driven clusters in Guangdong to single-product clusters in Zhejiang, China’s sheer size has allowed it to develop broad manufacturing clusters at the regional level. These specialized clusters are linked, on the one hand, to East Asian suppliers of key parts and components and, on the other hand, to global buyers to bring Chinese products to the world market.18
Paradoxically, however, China does not create or capture most of the value generated through its value chain exports. In fact, as more types of intermediate goods are traded within global supply chains, the discrepancy is growing between where final goods are produced and exported and where value is created and captured. For example, Apple’s iPhones are entirely assembled in China by a Taiwanese contract manufacturer (Foxconn) and exported to the United States. When a traditional measure that assigns the gross export value of the product to the exporting country is used, China is charged the total factory gate price (US$ 194.04) in its entirety for exporting one unit of an iPhone4, and it incurs a US$ 169.41 trade deficit with the United States for each unit shipped – i.e. the final good factory price (US$ 194.04) minus US inputs sent to China (US$ 24.63) and the value added by assembly costs in China (US$ 6.54) (see Figure 12).
In value-added terms, however, most of the value for the iPhone4 is created in Korea (US$ 80.05), which supplies the two most expensive components – display panels and memory chips – for the product,19 while China contributed only US$ 6.54 to the assembly of the iPhone4. Thus, the largest portion of the US trade deficit from its iPhone4 imports is incurred not with China, but via indirect exports from Korea and other high-value component suppliers. This is not an exception for the world’s largest manufacturing country. Domestic content only accounts for about half of China’s manufacturing exports and it is even smaller (18%) in its processing exports, mostly done by foreign-owned firms.20
Shifting End Markets and Regional Supply Chains
As world trade is bouncing back from the 2008-2009 economic crises, developing economies are becoming the main engine of world economic recovery. Stagnant growth in demand in the global North since the mid-1980s was exacerbated by the latest crisis, whereas demand is quickly growing in the global South, particularly large emerging economies like China, India and Brazil.21 Over the period of 2005-2010, the merchandise imports of the European Union and the United States increased by 27% and 14%, respectively, while emerging economies expanded their merchandise imports much faster: Brazil (147%), India (129%), China (111%) and South Africa (51%).
From a GVC perspective, this shift highlights the growing and distinctive roles of lead firms from developing country vis-à-vis global buyers in reorganizing their supply chains. In sub-Saharan Africa, for instance, the recent entry of South African clothing manufacturers into neighbouring countries (such as Lesotho and Swaziland) has led to the rise of regional value chains driven by South African retailers. Compared to the US retailer-driven chain, these regional chains focus on shorter production runs and quick response with higher fashion content, and are based on direct relationships to large South African clothing retailers.22
The GVC literature shows that value chains oriented to different end markets often entail distinct upgrading opportunities,2324 For example, the demand in lower-income countries for less sophisticated products with regard to quality and variety can have major upgrading implications.25 On the one hand, lower entry barriers and less stringent product and process standards in emerging markets can facilitate the participation of developing country firms in global supply chains. They can engage in higher value-added activities, such as product development and design, which they would have little chance to do in the global chains. With more intimate knowledge of local and regional markets vis-à-vis multinational firms, they can generate “frugal” innovations that are suitable to resource-poor environments.26 On the other hand, solely focusing on low-income markets could lock suppliers into slimmer margins and cut-throat competition. Their knowledge advantage in local markets often quickly evaporates when multinational firms catch up in learning the markets, as found in the Chinese mobile phone industry.27
Beyond Business Strategies
The GVC paradigm links scholarly research on globalization with the concerns of both policy-makers and social activists, who are trying to harness the potential gains of globalization to the pragmatic concerns of specific countries and social constituencies that feel increasingly marginalized in the international economic arena. Recently, there is a growing concern in both developed and developing countries that the economic gains of participating in global supply chains do not necessarily translate into good jobs or stable employment, and in the worst case, economic upgrading may be linked to a significant deterioration of labour conditions, or social downgrading.2829 Research is now being carried out to determine under what conditions participation in global value chains can contribute to both economic and social upgrading in developing countries.30
A propitious development for policy-relevant research is the major advance in GVC metrics related to value creation and value capture.3132 As showcased by the iPhone study, existing trade statistics are not sensitive to changing patterns of global production and trade. This is also the area where GVC analysis and supply chain management research can be mutually beneficial.33 Sophisticated value chain data disaggregated by business functions can complement existing country-level trade statistics and industry-level input-output data, providing a clear picture of who is gaining and losing in global value chains.34 When combined with data on employment, they will greatly advance our understanding of both economic and social development opportunities in the global economy.
Gary Gereffi (Ph.D., Yale University) is a professor in the Department of Sociology at Duke University. He also serves as the Director of the University’s Center on Globalization, Governance & Competitiveness.
Joonkoo Lee (Ph.D., Duke University) is an assistant professor in the School of Business at Hanyang University, Seoul, South Korea.
Source: OCED (2011, p. 40)