Global supply chains

Definition:• Global supply chains (GSCs) are the connective tissue

that allows fractionalized and dispersed stages of production to operate as a harmonious whole. Business model based on highly competitive settings. Cost min – Profit max

Win-Win. Advantageous for everybody participating, but for some more than others. Not participating may not be an option anymore.

Two main implications for developing countries:• GSCs allow poor nations to join supply chains rather than

investing decades in building up their own industrialization.

• GSC offshoring of labor-intensive manufacturing stages brought with it technical and managerial know-how. Some of which is inevitably transferred to local firms.

GSCs – Why increasingly important?

Main cause of production fragmentation was Lower Trade Costs, now is: TECHNOLOGY

…someone figured out that combining high technology with low labor cost was a profitable strategy!

Technology is become far more mobile internationally.

Technology has become more mobile due to: – Lower IT costs– Still, know-how can be retained by firms (Patents):

Technology/know-how is one of the most valuable advantages of GSCs and thus GSCs actively protect their technology.

Key Factors in Shaping Value Chain Decision

GSC relocation processes driven by: cost-minimization of all production processes (from idea to consumers)

GSC Cost function depends on: • Human Capital

– Productivity - Labor Costs• Infrastructure

– IT, Transport, Energy, Reliability of trade routes• Policy Environment

– Rule of Law, Intellectual property rights– Favorable business environment, Trade related policies

• Operational Costs– Labor costs – Taxes/Incentives

• Local Market– Local demand (large market), Local suppliers (clusters)

• Risk Management– Diversification of suppliers

GSC Shaping: Distance still matters a lot!

Importers Europe Germany Canada USA MexicoLatin

AmericaEast Asia China Japan Korea

Australia and New Zealand

South Asia

India

West, Central

Asia and North Africa

Sub Saharan

Africa

15.8% 6.4% 1.7% 0.6% 1.1% 1.8% 0.7% 1.1%-(2.1%) -(0.7%) -(0.2%) -(0.1%) -(0.2%) (0.4%) -(0.1%) (0.1%)5.3% 0.5% 0.5%

-(0.4%) -(0.1%) (0.2%)1.5%

-(0.4%)1.9% 0.6% 1.6% 1.1% 0.6% 0.9% 1.5% 0.8%

-(0.5%) -(0.1%) -(0.7%) -(0.1%) -(0.2%) -(0.2%) (0.0%) -(0.3%)1.3% 0.4%

-(0.2%) (0.2%)0.6% 0.9% 0.9% 0.5%

(0.1%) (0.1%) (0.1%) (0.3%)1.2% 1.2% 3.8% 3.0% 2.2% 1.0% 0.4%

(0.1%) -(0.1%) -(0.2%) (0.4%) -(0.1%) (0.1%) (0.1%)1.0% 0.5% 0.7% 0.4% 2.8% 1.8% 1.5% 0.3%

(0.3%) (0.2%) (0.1%) (0.2%) (0.3%) (0.2%) (0.3%) (0.1%)0.5% 1.1% 0.9%

-(0.1%) (0.0%) (0.1%)0.6% 0.7% 0.7%

(0.1%) (0.1%) (0.0%)

0.2%(0.1%)

0.6% 0.4% 0.4% 0.5%(0.3%) (0.2%) (0.2%) (0.3%)2.0% 0.6% 0.8%

-(0.1%) (0.2%) (0.1%)0.3%

(0.1%)

Europe

Germany

Canada

USA

Mexico

Latin America

East Asia

China

Japan

Korea

Australia and New Zealand

South Asia

India

West, Central Asia and North Africa

Sub Saharan Africa

Policy implications for Developing CountriesThe rise of GSCs affect DEVELOPMENT STRATEGIES:

• …Past: economic development need an industrial base – Developed throught export led growth… a lengthy process!

• Developed an industrial base thru Industrial policy (Import substitution)

– Industrialization = sophisticated exports = value added = development

• Countries slowly developed and owned “industrialization skill”• Profits (Value added) stays within the country…

• …Present: is industrialization enough?

– Industrialization is much easier and faster (technology is imported!). • Sophisticated exports do not need a deep nor broad industrial

base– but no free lunch! Exports sophistication not = development

• Many countries do not own “industrialization skill” (it is imported!)

• Profits are linked to the technological skills, so they may not stay within the country.

Advantages of participating in GSCs?

Labor increases employment • …but not necessarily better employment. Higher wages(?)

Value Added …Profit sharing• …Apple’s story tells how it works. Suppliers do not profit

much. • …Why work for Apple? endorsement of manufacturing

quality.

Know-how…knowledge transfer• …but GSCs wants to retain know-how. Technology lending• … still “Incentives” to innovate, Who gains? (Wal-Mart)

Externalities… spillovers to local economy• …GSCs help establishing industrial clusters• …GSCs related infrastructure development

Smiley Face – Balance of Power

Moving up the value chain?

• Very difficult to rise along the supply chain– Requires large investments– Requires the acquisition of technology– Requires competitive edge in the segment.

• Moving up / creating another supply chain– Samsung supplies Apple– Samsung leads its own supply chain.

• Different profit sharing depending on the chain. – Supplying leading companies: low profit but signal firm

efficiency• Gets more favorable terms with other firms.

Some Policy Implications

– Export led growth still viable strategy… but GSC export sectors need to produce spillovers to the domestic economy.

– Industrial policy may no longer be viable… Import substitution strategy is not cost minimizing. GSC need lowest cost suppliers.

– Export diversification is a bad indicator of development…diversification does not really matter if you don’t own the

skills. – Trade costs are still important (Trade Policy / Trade

Facilitations). • NTM, tariffs on intermediates (Imports are also exports)• Market segmentation (preferences, standards)

Negotiating Issues

• Global vs Regional Trade Negotiations– GSCs are regional, Regional Policy is key

• Market segmentations

• Importance of Intellectual Property Rights– Guarantee leading firms– Allow for some transfers

• Trade Policy: Market access is only part of the story, liberal policies on intermediates inputs are key. – Export Processing Zones– Smaller economies need more access to low cost

input

Summary: Key points

• GSC participation does not imply development

• Rising along the value chain is difficult, moving up in lower level chain is easier.

• Most GSCs are regional -> regional policies are prominent

• Trade costs remain important, but not low trade costs are not sufficient as GSC have multiple and diverse costs sources.

• Low labor cost is not enough, and competing on labor cost is not a viable development strategy.