Thursday, July 26, 2007

Global Value Chain and China

The global value chain includes such tasks as design, production,
marketing, distribution and support for the customer after delivery of
the final product. In the case of foreign nations, many have
experienced heavy growth in certain industries due to their efficient
use of the value chain and ability to exploit buyer-driven chains.
Foreign companies have used their efficient sources of work and labour
(and subsequent lower prices) to force American companies to do the

This was able to occur because many developing nations have reached a
point economically where they are able to take on the more advanced
tasks needed for some jobs that previously only wealthier nations had

Buyer-driven chains of goods which are intended for export and
regulated by free market prices are now overwhelmingly produced in
foreign economies such as China and Thailand rather than in the United
States, which has a high minimum wage and many laws protecting
workers. The best example of this is found in apparel-- rarely will
clothing found in American stores actually be manufactured in America.
Compared to producer-driven value chains such as oil or agriculture,
these industries can easily be transported from country to country and
so are easily outsourced. As communications, transport and overall
technologies have improved in the 1990s, meanwhile, "outsourcing" in
this way has become more and more common in not just textile
industries but more advanced and skilled industries such as software
development. By relegating the hardest part of the job-- making or
developing the product-- to the place with the most and cheapest
workers, companies can cut down on their production costs greatly.

Some of the best markets to see these value chains are footwear,
consumer electronics and toys. Places that are close to large
international ports and transport zones attract these industries, to
further cut down on costs. The system has the effect of stimulating
competition among companies from developed countries who make the same
products, seeing (1.) who can make the product the best and cheapest,
and (2.) whose product has the best brand recognition and will sell to
consumers best. This sort of competition has stimulated an increase in
importance of global brands-- names such as Sony, Nike and Reebok are
trusted and will sell well, no matter where they are made or by whom.
Since many of these products are cobbled together by unskilled labour,
the brand is what sells them, not the actual product. Foreign
companies can have an advantage and be more trusted than American
brands, even if the two products were made next to the same port from
the same group of workers. Anyone can make a pair of shoes, but only
Nike can make Nikes. Nike has the advantage over the competition,
despite the fact that their product might not actually be any better
or less expensive. It has the name, and sometimes that's all that

In addition, to follow through with the example, because anyone can
make that pair of shoes, many, many more companies have opened shoe
factories to compete with Nike, and they've been able to do so because
of the abundance of inexpensive labour and materials. The barriers to
entry for small start-ups have been reduced by reductions in upfront
manufacturing costs.

In order for American companies to remain competitive against foreign
competition, they have to move their base of production out of America
and into a country such as China which has a less expensive labour
force. Chinese manufacturing workers make 25 percent of what a
Mexican manufacturing worker would. Foreign companies which are
transnational, with many locations around the globe, certainly do this
to make themselves more productive, and America must follow. Many
times, companies already based in these foreign companies can keep
their production costs lower, as a company doing business in its
already-established base of business, than an American company could.
In some cases, these foreign companies are also able to accept lower
cost margins than an American company establishing itself in foreign
markets would be able to do. This theory is posited in this Chinese

These companies have access to the same range of technologies as the
Americans do, but they are locals rather than foreigners and in some
cases might be more accepted. They can often create the same cutting
edge technologies that Americans can for the same price.

A good example of this is in cars. Already, Japanese cars have
overtaken American cars in America for price and quality. Chinese
cars will inevitably make it to American shores, and they might take
over from the Japanese as Americans' preferred autombile makers. They
don't have to be located in the United States, and they don't have the
health care and worker costs and union frustrations that American
carmakers have. Their cars will be less expensive to make and so less
expensive to buy.

Many companies which are already the leaders in their fields, such as
Nokia, will continue to provide competition for Americans due to their
superior branding. They can sell their product for more based on their
name brand, and new start-ups can't compete. In addition, when
software developers and customer service personnel can be easily hired
in India or other places, companies' costs can be even further cut. A
software developer in India makes a fraction of what a similarly
titled position would garner in America.

In coming years, as China's economy increases in size, Chinese
companies will have an advantage selling to the Chinese customer base.
They don't have to pay tariffs and don't need as much advertising or
to build as much infrastructure in China, because they did that when
they started their business. Companies, even those that do business
abroad, often find that their biggest customers are those of their
home country. Large economies such as the United States only export
10 percent of GDP, whereas for smaller countries and markets like
Switzerland, 28 percent of GDP is composed of exports. China's
companies will benefit from the huge market right in their backyard.
China already has 10 percent of the FDI (foreign direct investment) in
the world and that will continue to grow-- it replaced the US at the
top of FDI measures.

In addition, when Indian and its billion residents are added to those
billion residents of China, one third or more of the world's market
will exist in these countries. Companies conveniently located on the
inside will have a strategic advantage. For many years, the United
States and Europe have been the world's top markets, but soon China
and India will be. China is already the world's biggest market for
personal computers, and the GDP per capita is an average of only $900.
As that figure doubles in the next few years, the Chinese market will
become more and more important to the world's businesses. A local
business would better understand potential employees and potential
customers in a market that differs so much culturally from Western
nations. In addition, businesses already located in China would not
suffer as foreign companies would from any protectionist regulations
enacted by the Chinese government against foreign companies. This is
why so many American companies are rushing to insert themselves in
China now, rather than later. America is the world's current biggest
economy and it often passes tariffs and tries to favor American
businesses over foreign-owned ones, so it is sensible that when China
overtakes America as the world's largest economy, it will follow suit.
China has already proven to be an adversary to foreign investment,
especially from the U.S., in many ways--"the Chinese government not
only can ‘say no’ but does so on a
regular basis."
--MIT report, cited below

Another factor in this situation is that China when China imports, it
takes much of its imports from close neighbours such as Japan and
Taiwan, rather than the United States. Japan is China's biggest
trading partner, and in 2002 China took $55 billion of imports from
Japan. The United States is only China's sixth largest trading
partner. Japan, the European Union, Taiwan and South Korea are all
competitors for American sales when China has the largest economy.

New technologies that have been developed and are only manufactured in
these countries, such as the pureplay fabrication model in Taiwan,
also give Asian businesses a leg up on American businesses. If the
country can develop their own technologies and manufacture them too,
they don't have to allow American businesses to edge in on those
markets and can keep them all to themselves.

Some Congressional leaders have called for laws banning American
companies' outsourcing, and many trade unions and other groups boycott
companies that choose to do so. This opposition to outsourcing can
only hurt American businesses, as they try to keep whatever jobs in
America they can rather than face the wrath of anti-outsourcing groups
by moving the jobs offland. Foreign companies are often already in
those developing markets, and they might be better suited in the long
run to take advantage of the benefits of that than America is. On a
global scale, every company, for example, using software developers
must outsource or they will be at a huge financial disadvantage.

In sum, here is a rundown of the ways that the value chain helps
competitors against American businesses:

1. Global brand recognition

-- in cases such as Nokia and Samsung-- the product might not be any
better but it is well-known

2. Acceptance of lower cost margins

3. The Incumbents' Advantage in China
-- protectionist tariffs might arise

4. Opposition to outsourcing in USA

5. China will import here.

6. China imports from other nations rather than the US.

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