The Globalization Process: Advancing Capabilities in Chinese and Indian Manufacturing

The Globalization Process: The Globalization Process: Advancing Capabilities in Advancing Capabilities in

Chinese and Indian Chinese and Indian ManufacturingManufacturing

SourcesSources

Sutton, Quality,Trade and the Sutton, Quality,Trade and the ‘Moving Window’, Economic Journal , ‘Moving Window’, Economic Journal , Nov 2007Nov 2007

Brandt, Rawski, Sutton, China’s Brandt, Rawski, Sutton, China’s Industrial Development, in pressIndustrial Development, in press

Sutton, The auto-component industry Sutton, The auto-component industry in China and India: A Benchmarking in China and India: A Benchmarking Study Study

The “Capability” ConceptThe “Capability” Concept

At one level, this is a straightforward At one level, this is a straightforward generalisation of the standard generalisation of the standard concept of productivity.concept of productivity.

The “Capability” ConceptThe “Capability” Concept

At a deeper level it involvesAt a deeper level it involves

(a) relating the capability of the firm (a) relating the capability of the firm to the know-how of individual to the know-how of individual workers.workers.

(b) Analysing the decision of the firm (b) Analysing the decision of the firm to invest in capability building …… to invest in capability building …… what is of central interest here is that what is of central interest here is that this decision takes place in a climate this decision takes place in a climate of true (Knightian) uncertainty.of true (Knightian) uncertainty.

Capabilitiesd

dc

u c = ‘productivity’

u = ‘quality’

Capability is a pair (c, u) for each technical trajectory (submarket)

xu

(Quality)

1/c (Productivity)

x

u/c = bu/c = ax

Competing in Capabilities

Key feature:Key feature:

The consumers choose products offering the The consumers choose products offering the best u/pbest u/p

Implication: if u>v, the market share of a firm Implication: if u>v, the market share of a firm offering u cannot be eroded to zero by any offering u cannot be eroded to zero by any number of firms offering v number of firms offering v

Proposition 1

- given any configuration of capabilities

(c1,u1), (c2,u2) . . (cn,un)

there is a lower bound in (c,u) space below which a firm cannot achieve positive sales at equilibrium

(ex. Cournot equilibrium)

c

ucuF ),(

Proposition 2

Suppose one element in building capability is the expenditure of fixed outlays (“sunk costs”)

- Then competition in ‘capability building’ will lead to a bound on the number of firms ‘in the window’.

Two Polar Patterns

PROLIFERATION

Flowmeters

ESCALATION

Aircraft

σLinkages Across Submarkets

β

Effectiveness of Capability

Building

Flow meters

Large Commercial Jets

Numerical controls

Machine Tools

Cement

σ Linkages Across Submarkets

Low concentrationWide Window

Low R&D intensity

Low Concentration

Wide Window

High R&D intensity

High Concentration

Narrow Window High R&D

intensity

β

Effectiveness of Capability

Building

Capabilities and TradeCapabilities and Trade

Key Point: BKey Point: Breakdown of equivalence reakdown of equivalence between productivity and qualitybetween productivity and quality

(Sutton EJ 2007)(Sutton EJ 2007) Idea: once a tradeable input Idea: once a tradeable input

(Component, Raw material, etc.) is (Component, Raw material, etc.) is used, it sets a lower bound to used, it sets a lower bound to price, so low wages can offset low price, so low wages can offset low productivity, but not low qualityproductivity, but not low quality

The Globalization ProcessThe Globalization Process

Phase I: Impact phase…Capabilities Phase I: Impact phase…Capabilities givengiven

Phase II: Transfer phasePhase II: Transfer phase

Phase III: Re-investment (escalation) Phase III: Re-investment (escalation) phasephase

Main substantive argumentMain substantive argument

The case for globalisation should rest The case for globalisation should rest primarily on the transfer and growth of primarily on the transfer and growth of capabilities it inducescapabilities it induces

A fundamental set of mechanisms are A fundamental set of mechanisms are driven by the coexistence of high driven by the coexistence of high capabilities and low wagescapabilities and low wages

These mechanisms include, inter alia, These mechanisms include, inter alia, ---self help driven by new incentives---self help driven by new incentives ---Transfers via FDI/ Supply chains, etc.---Transfers via FDI/ Supply chains, etc.

Going it AloneGoing it Alone

The Bharat Forge storyThe Bharat Forge story

Increasingly difficult as we move Increasingly difficult as we move across industrial spectrumacross industrial spectrum

The Speed of TransferThe Speed of Transfer

- Delicately dependent on industry Delicately dependent on industry characteristicscharacteristics

- Key channels differ by industryKey channels differ by industry

(a) Buyer search channel: Textiles(a) Buyer search channel: Textiles

(b) Trade Fairs: Ubiquitous(b) Trade Fairs: Ubiquitous

(c) Supply chains: Vertical Transfers(c) Supply chains: Vertical Transfers

The Evidence on “FDI Spillovers”The Evidence on “FDI Spillovers”

Speed of TransmissionSpeed of Transmission

FASTFASTAuto components: Vertical relations Auto components: Vertical relations

with shared technology; with shared technology; standardization and standardization and

codification of working codification of working practices. practices.Domestic Appliances: Horizontal JVs – here Domestic Appliances: Horizontal JVs – here

incentives of senior incentives of senior partner are critical (cf. partner are critical (cf. China). China).

Machine Tools:Machine Tools: Licencing;Public sector Licencing;Public sector bodies .bodies .

SLOW SLOW

Industry Specific influencesIndustry Specific influences

Textiles and apparel..Contact with Textiles and apparel..Contact with Buyers(Ever Glory)Buyers(Ever Glory)

Steel: Equipment Steel: Equipment Suppliers(Shougang)Suppliers(Shougang)

Changing Market StructuresChanging Market Structures

Escalation and Shakeout : Chinese Escalation and Shakeout : Chinese White Goods ; Beer White Goods ; Beer

Market Share VolatilityMarket Share Volatility

Changing Leadership : Chinese TVsChanging Leadership : Chinese TVs

A Tale of Two Industries :I Auto A Tale of Two Industries :I Auto ComponentsComponents

… …Globally integratedGlobally integrated … … Capabilities codifiedCapabilities codified ...Supply Chain aligns incentives ...Supply Chain aligns incentives

Figure 16. Car Production in India and China 1993-2001

Note: Indian figures for fiscal year ’93-’94 are shown here as ’93, etc.

Car Production

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

93 94 95 96 97 98 99 00 01

mill

ion

/yr

India

China

Component Suppliers to Multi-National Car Makers

0

0.1

0.2

0.3

0.4

0.5

0.6

India

China

Component Suppliers to Steering Gear Firms

0

0.2

0.4

0.6

0.8

1

<1% 1-10% 10-20% 20-40% >40%

India

China

A Timescale for Capability A Timescale for Capability BuildingBuilding

A multinational seat maker on a A multinational seat maker on a greenfield site in India drops from greenfield site in India drops from initial 2,085 ppm to 65 ppm in year initial 2,085 ppm to 65 ppm in year 3.3.

A domestic Indian seat maker drops A domestic Indian seat maker drops from 20,000 ppm to 200 ppm over 5 from 20,000 ppm to 200 ppm over 5 years.years.

Greenfield vs. Joint VentureGreenfield vs. Joint Venture

The Mahindra Story

II : Machine ToolsII : Machine Tools

Globally FragmentedGlobally Fragmented Supply Chain plays no roleSupply Chain plays no role Bilateral licencing deals Bilateral licencing deals Some successful collaborationsSome successful collaborations Huge loss of position by Indian Huge loss of position by Indian

leadersleaders Chinese experience mixedChinese experience mixed

CNC Machine ToolsCNC Machine Tools

The Invidious Trade-Off

controls

ball-screws

15% wages

Bought-in Components

Materials, Energy costs,

etc.

15%

15%

55%

A typical cost breakdown

Gross Labour Productivity

3-axis, 15 kW

7.5 kW,165mm

11 kW,350mm

0.25 1 4

size

& c

om

ple

xity

Japan

India Taiwan

Design staff (% of employees) Design staff (no. of employees)

5 10 15 20

India*

Taiwan

Japan

10 100 1000

India*

Taiwan

Japan

Figure 3. The size of design teams as a proportion of total firm employment (Panel a) and in terms of the number of employees (Panel b).

*For India the HMT company is excluded from this comparison.

0

5

10

15

20

25

-3 -2 -1 0 1 2 3

Figure 5. Difference in general satisfaction with machine (1-5 rating) (Indian-Foreign). In this and subsequent figures, outcomes favourable to the Indian Machine are shown in green, and those favourable to the foreign machine re shown in red.

0

5

10

15

20

25

30

>-8 -8 -6 -4 -2 0 2 4 6 8 10 <10

Figure 7. Difference in % lost hours due to breakdown/no of machine hours booked. (Indian-Foreign)

ACE Designers ACE Designers

Small new entrantSmall new entrant Understands importance of quality/ Understands importance of quality/

price nexusprice nexus Focus on building capability in one Focus on building capability in one

core productcore product

China in Machine ToolsChina in Machine Tools

Now exporting basic CNC machinesNow exporting basic CNC machines

Serious challenges to capability Serious challenges to capability buildingbuilding

OECD PerspectivesOECD Perspectives

The Bernard – Schott EvidenceThe Bernard – Schott Evidence

Survival and FlexibilitySurvival and Flexibility

The European Debate and ‘Social The European Debate and ‘Social Europe’Europe’

Unfortunate ConfusionsUnfortunate Confusions